The following table sets forth our results of operationoperations as a percentage of total revenue for the periods indicated:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended March 31, | |
| | | 2007 | | 2006 | | 2007 | | 2006 | | | 2008 | | 2007 | |
Total Revenues | | | | | | | | | | | | | | | | |
| Service | | | 63 | % | | 68 | % | | 66 | % | | 66 | % | | | 72 | % | | 68 | % |
Product | | | | 12 | % | | 12 | % |
Insurance | | | | 2 | % | | 2 | % |
PhotoStamps | | | 22 | % | | 19 | % | | 19 | % | | 19 | % | | | 14 | % | | 16 | % |
Products | | | 11 | % | | 9 | % | | 11 | % | | 11 | % | |
| Other | | | 4 | % | | 4 | % | | 4 | % | | 4 | % | | | 0 | % | | 2 | % |
| Total revenues | | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | | 100 | % | | 100 | % |
Cost of revenues | | | | | | | | | | | | | | | | | | | | |
| Service | | | 11 | % | | 11 | % | | 11 | % | | 12 | % | | | 13 | % | | 12 | % |
Product | | | | 4 | % | | 4 | % |
Insurance | | | | 1 | % | | 1 | % |
PhotoStamps | | | 14 | % | | 12 | % | | 12 | % | | 12 | % | | | 10 | % | | 10 | % |
Products | | | 4 | % | | 3 | % | | 4 | % | | 3 | % | |
| Other | | | 1 | % | | 1 | % | | 1 | % | | 1 | % | | | 0 | % | | 0 | % |
Total cost of revenues | | | 30 | % | | 27 | % | | 28 | % | | 28 | % | | | 28 | % | | 27 | % |
Gross profit | | | 70 | % | | 73 | % | | 72 | % | | 72 | % | | | 72 | % | | 73 | % |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | |
| Sales and marketing | | | 37 | % | | 32 | % | | 38 | % | | 32 | % | | | 41 | % | | 39 | % |
Research and development | | | 10 | % | | 11 | % | | 10 | % | | 11 | % | | | 9 | % | | 11 | % |
General and administrative | | | 15 | % | | 16 | % | | 15 | % | | 16 | % | | | 19 | % | | 14 | % |
Total operating expenses | | | 62 | % | | 59 | % | | 63 | % | | 59 | % | | | 69 | % | | 64 | % |
Income from operations | | | 8 | % | | 14 | % | | 9 | % | | 13 | % | | | 3 | % | | 10 | % |
| Other income (expense), net | | | 5 | % | | 7 | % | | 6 | % | | 6 | % | | | 5 | % | | 6 | % |
| Income before income taxes | | | 13 | % | | 21 | % | | 15 | % | | 19 | % | | | 8 | % | | 16 | % |
| Provision for income taxes | | | 1 | % | | 0 | % | | 0 | % | | 0 | % | |
| Income tax (benefit) expense | | | | (17 | )% | | 1 | % |
Net income | | | 12 | % | | 21 | % | | 15 | % | | 19 | % | | | 25 | % | | 15 | % |
| | | | | | | | | | | | | | | |
Revenue.Revenue Revenue
Our revenue is derived primarily from fourfive sources: (1) service fees charged to customers for use of our PC Postage service; (2) PhotoStamps revenue from the sale of PhotoStamps; (3) product sales consisting of Supplies Store revenue from the direct sale of consumables and supplies; and (4) other revenue consisting of advertising revenue from controlled access advertising tosupplies through our existing customer base,Supplies Store (3) insurance revenue from our branded insurance offering,offering; (4) PhotoStamps revenue from our PhotoStamps business; and (5) other revenue, consisting of licensing revenue.revenue and advertising revenue derived from advertising programs with our existing customers. Total revenue increased 5% from $20.2$20.0 million in the secondfirst quarter 2006of 2007 to $21.4$21.1 million in the secondfirst quarter 2007, an increase of 6%. Total revenue increased from $40.7 million during the six months ended June 30, 2006 to $41.4 million during the six months ended June 30, 2007, an increase of 2%.2008.
Service fee revenue decreasedincreased 11% from $13.6$13.7 million in the secondfirst quarter 2006of 2007 to $13.5$15.2 million in the secondfirst quarter 2007 whileof 2008. The increase in service fee revenue increased from $27.1 million duringis primarily due to the six months ended June 30, 2006 to $27.2 million during the six months ended June 30, 2007. Service fee revenue was constant during the quarter and six months ended June 30, 2006 and 2007increase in our successfully billed customers as a result of the stabilitygrowth in the number of successfully billed customers during these periods. We successfully billed approximately 324,000 customers during the first quarter 2006 and 2007 and successfully billed approximately 327,000 and 326,000 customers during the second quarter 2006 and 2007, respectively.our customer base. As a percentage of total revenue, service fee revenue decreased fiveincreased four percentage points to 63%72% in the secondfirst quarter 2007 as compared toof 2008 from 68% in secondthe first quarter 2006.of 2007, primarily as a result of the decrease in revenue from our PhotoStamps product. As a percentage of revenue, service fee revenue may continue to increase over future periods as we may experience a lower total volume of PhotoStamps corresponding to our reduction in consumer PhotoStamps marketing spending. Further, we plan to continue to increase our level of spending on PC Postage customer acquisition in order to grow our service fee revenue in future periods.
Product revenue increased 5% from $2.4 million in the first quarter of 2007 to $2.5 million in the first quarter of 2008. The increase was primarily attributable to the following: (1) growth in our paid customer base; (2) marketing the store to our existing customer base; (3) the additional SKUs we added to our store; and (4) growth in postage printed, which helps drive sales of consumable supplies such as labels. Total postage printed by customers using our service during the first quarter of 2008 was $78 million, a 25% increase from the $63 million printed during the first quarter of 2007. We expect product revenue to increase in future periods as we expect continued growth in paid customers and in the volume of postage printed.
Insurance revenue increased 4% from $374,000 in the first quarter of 2007 to $388,000 in the first quarter of 2008, primarily as a result of an increase in the average of dollar value insured per transaction. As a percentage of total revenue, service freeinsurance revenue remained at 66%2% during each of the six months ended June 30, 2007 and 2006. The decrease in service feefirst quarters of 2008 2007. We expect insurance revenue as a percentage of total revenue during the second quarter 2007 is primarily attributable to the increase in revenue fromfuture periods as we expect continued growth in our PhotoStamps and Supplies Store products.
paid customer base.
PhotoStamps revenue increaseddecreased 5% from $3.7$3.2 million in the secondfirst quarter 2006of 2007 to $4.6$3.0 million in the secondfirst quarter 2007, an increase of 24%.2008. As a percentage of total revenue, PhotoStamps revenue increased threedecreased two percentage points to 22%14% in the secondfirst quarter 2007 as compared to 19%of 2008 from 16% in the secondfirst quarter 2006. The increase, both on an absolute basis and as a percentage of total revenue is primarily attributable to business-related PhotoStamps sales.2007. Total PhotoStamps sheets shipped during the secondfirst quarter 2007of 2008 was approximately 291,000 as178,000, a 6% decrease compared to 210,000189,000 in the secondfirst quarter 2006.of 2007. Average revenue per sheet shipped for the first quarter of 2008 was $16.85 compared to $16.80 for the first quarter of 2007. The decrease in sheets shipped was primarily attributable to a decrease in consumer PhotoStamps revenue increased from $7.6 millionorders. We reduced our PhotoStamps sales and marketing spending during the six months ended June 30, 2006 to $7.8 million duringfirst quarter of 2008 compared with the six months ended June 30, 2007, an increasefirst quarter of 3%. As a percentage of total revenue, PhotoStamps revenue during the six months ended June 30, 2007 and 2006 was 19%. In addition, average revenue perplan to continue to reduce our sales and marketing spending on PhotoStamps sheet declined duein future periods to a higher mix of businessimprove profitability in that business. We expect that the reduction will result in lower PhotoStamps orders, which carry a lower per sheet price. PhotoStamps revenue may grow both on an absolute basis and as a percentage of total revenue in future periods if our level of marketing activity for PhotoStamps increases. PhotoStamps marketing activity during the second quarter 2007 was comparable to the second quarter 2006.
Product revenue increased from $2.0 million in the second quarter 2006 to $2.5 million in the second quarter 2007, an increase of 24%. Product revenue increased from $4.4 million during the six months ended June 30, 2006 to $4.8 million during the six months ended June 30, 2007, an increase of 10%. The increase is primarily due to the expansion of our consumable and supplies sales through our Supplies Store as a result of our continued effort to market these offerings to our existing and new customers. In addition, we experienced increased sales in our consumable supplies as a result of the increase in postal rate by the USPS during the second quarter 2007. As a percentage of total revenue, product revenue increased two percentage points to 11% in the second quarter 2007 as compared to 9% in the second quarter 2006. This increase is primarily due to the increase in product revenue as a result of the increase in product orders shipped to our existing customers. As a percentage of total revenue, product revenue remained at 11% during the six months ended June 30, 2007 and 2006. We expect product revenue to continue to increase on an absolute basis as we add additional products to our Supplies Store, and as we continue to market these products to our customers.periods.
Other revenue was $805,000 and $809,000decreased 100% from $453,000 in the secondfirst quarter 2006 andof 2007 respectively. Other revenue was $1.6 millionto $0 in eachthe first quarter of the six months ended June 30, 2006 and 2007. As a percentage of total revenue, other revenue was 4% during the three and six months ended June 30, 2006 and 2007. Included2008. The decrease in other revenue is our branded insurance program which was approximately $355,000 and $730,000 formainly attributable to the three and six months endedexpiration of a licensing agreement in June 30, 2007, respectively, or approximately 2% of total revenue. We expect other revenue to decrease both on an absolute basis and as a percentage of total revenue in future periods as we focus our marketing efforts on service fee and PhotoStamps revenue.2007.
Cost of Revenue. Revenue
Cost of revenue principally consists of the cost of customer service, certain promotional expenses, system operating costs, credit card processing fees, the cost of postage for PhotoStamps, image review, printing and fulfillment costs for PhotoStamps, parcel insurance offering costs, customer misprints and products sold through our Supplies Store and the related costs of shipping and handling. Cost of revenue increased 9% from $5.5$5.4 million in the secondfirst quarter 2006of 2007 to $6.4$5.9 million in the secondfirst quarter 2007, an increase of 17%. Cost of revenue increased from $11.5 million during the six months ended June 30, 2006 to $11.8 million during the six months ended June 30, 2007, an increase of 3%.2008. As a percentage of total revenue, cost of revenue wasincreased one percentage point to 28% in the first quarter of 2008 as compared to 27% and 30% duringin the secondfirst quarter June 30, 2006 and 2007, respectively. As a percentage of total revenue, cost of revenue was 28% during each of the six months ended June 30, 2006 and 2007.
Cost of service revenue was $2.4increased 17% from $2.3 million in each of the secondfirst quarter 2007 to $2.7 million in the first quarter of 2006 and 2007. Cost of service revenue decreased from $4.9 million during the six months ended June 30, 2006 to $4.8 million during the six months ended June 30, 2007, a decrease of 4%.2008. As a percentage of total revenue, cost of service revenue remained at 11% during the second quarter 2006 and 2007, and decreased byincreased one percentage point to 11% during six months ended June 30, 200713% in the first quarter of 2008 as compared to the six months ended June 30, 2006. The decrease, both on an absolute basis and as a percentage of total revenue is mainly attributable to the decrease12% in the redemption ratefirst quarter of promotional items.
Included2007. Promotional expenses are included in cost of service revenue are promotional expenses.revenue. This includes free postage and a free digital scale offered to new customers, and was approximately $384,000$408,000 and $570,000$464,000 in the secondfirst quarter of 2007 and 2006, respectively, and $791,000 and $1.3 million during the six months ended June 30, 2007 and 2006,first quarter of 2008, respectively. Promotional expense, which represents a material portion of totalThe increase in cost of service revenue, is expensed in the period in which a customer qualifies for the promotion. However, the revenue associated with the acquired customer is earned over the customer's lifetime. Therefore, promotional expense for newly acquired customers may be higher than the revenue earned from those customers in that period.
Cost of PhotoStamps revenue increased from $2.4 million in the second quarter 2006 to $3.1 million in the second quarter 2007, an increase of 29%. Cost of PhotoStamps revenue increased from $4.8 million during the six months ended June 30, 2006 to $5.1 million during the six months ended June 30, 2007, an increase of 7%. As a percentage of total revenue, cost of PhotoStamps increased two percentage points to 14% in the second quarter 2007 as compared to the second quarter 2006 and remained at 12% during six months ended June 30, 2006 and 2007. The increase, both on an absolute basis and as a percentage of total revenue, is primarily due to higher Customer Support related expenses resulting from expanding retention programs and efforts to improve the overall customer experience.
Cost of product revenue increased 10% from $799,000 in the first quarter 2007 to $880,000 in the first quarter of 2008. As a percentage of total revenue, cost of product revenue was 4% in each of the first quarters of 2007 and 2008. The increase, on an absolute basis, is mainly attributable to the increase in customer ordersproduct sales. See “Product Revenue” in Results of Operation above for further discussion. We expect the cost of product sales to increase in future periods, which is consistent with our expectation that product sales will increase in future periods.
Cost of insurance revenue increased 3% from $116,000 in the first quarter of 2007 to $120,000 in the first quarter of 2008. The increase is mainly attributable to the increase in insurance sales as a result of marketing efforts.the increase in the average of dollar value insured per transaction. As a percentage of total revenue, cost of insurance revenue was 1% in each of the first quarter of 2007 and the first quarter of 2008. We expect the cost of insurance to increase in future periods, which is consistent with our expectation that insurance revenue will increase in future periods.
Cost of PhotoStamps revenue increased 2% from $2.1 million in the first quarter of 2007 to $2.1 million in the first quarter of 2008, primarily due to the increase in high volume business orders. As a percentage of total revenue, cost of PhotoStamps revenue was 10% in each of the first quarter of 2008 and first quarter of 2007. Additionally, the gross margin from PhotoStamps revenue is significantly lower than that of our other sources of revenue because we include the stated value of US Postal ServiceUSPS postage as part of our cost of PhotoStamps revenue. As a result, future increases in PhotoStamps sales would further increase the overall cost of PhotostampsPhotoStamps revenue as a percentage of total revenue. Costrevenue, but would not affect our profitability. While we expect PhotoStamps revenue to decrease in future periods, cost of PhotoStamps revenue may grow both on an absolute basis and asin future periods if high volume business PhotoStamps orders, which carry a lower gross margin compared with PhotoStamps website orders, compose a higher percentage of total revenue in future periods.
orders.
Cost of product revenue increased from $628,000 in the second quarter 2006 to $839,000 in the second quarter 2007, an increase of 34%. Cost of product revenue increased from $1.4 million during the six months ended June 30, 2006 to $1.6 million during the six months ended June 30, 2007, an increase of 19%. The increase is primarily attributable to the increase in our shipping and handling cost. As a percentage of total revenue, cost of product revenue increased by one percentage point to 4% during each of the three and six months ended June 30, 2007, as compared to the three and six months ended June 30, 2006. We expect the cost of product sales to increase in future periods, which is consistent with our expectation that product sales may also increase in future periods.
Cost of other revenue was $169,000 and $137,000decreased 100% from $25,000 in the secondfirst quarter 2006 andof 2007 respectively. Costto $0 in the first quarter of other revenue was $339,000 and $278,000 during2008, primarily due to the six months endedexpiration of one of our licensing agreements in June 30, 2006 and 2007, respectively. As a percentage of total revenue, cost of other revenue remained at 1% during each of the three and six months ended June 30, 2006 and 2007.
Sales and Marketing. Marketing
Sales and marketing expense principally consists of costs associated with strategic partnership relationships, advertising,spending to acquire new customers and compensation and related expenses for personnel engaged in sales, marketing and business development activities. Sales and marketing expense increased 10% from $6.4$7.8 million in the secondfirst quarter 20062007 to $7.9$8.6 million in the secondfirst quarter 2007, an increase of 23%. Sales and marketing expense increased from $13.3 million during the six months ended June 30, 2006 to $15.8 million during the six months ended June 30, 2007, an increase of 19%.2008. As a percentage of total revenue, sales and marketing expenseexpenses increased fivetwo percentage points to 37%41% in the secondfirst quarter 2007 as compared toof 2008 from 39% in the secondfirst quarter 2006 and increased six percentage points to 38% during six months ended June 30, 2007 as compared to the six months ended June 30, 2006.of 2007. The increase, during the six months ended June 30, 2007, both on an absolute basis and as a percentage of total revenue, is primarily due to the increase in various marketing program expenditures relating to the acquisition of customers for our PC Postage business, partially offset by a decrease in marketing expenditures related to PhotoStamps. During the second quarter 2007,our PhotoStamps marketing expenditure was comparable to the second quarter 2006.business. Ongoing marketing programs include the following: traditional advertising, partnerships, customer referral programs, customer re-marketing efforts, telemarketing, direct mail and online advertising. We currently expect to increase our sales and marketing expenses in our PC Postage business throughout 2008, and to increase significantlydecrease sales and marketing expenses in fiscal 2007 as compared to fiscal 2006our PhotoStamps business as we plan to increase our direct mail activity.focus on profitability in that business.
Research and Development. Development
Research and development expense principally consists of compensation for personnel involved in the development of our services, depreciation of equipment and software and expenditures for consulting services and third party software. Research and development expenseexpenses decreased 9% from $2.2 million in the second quarter of 2006 to $2.1 million in the secondfirst quarter of 2007 a decreaseto $1.9 million in the first quarter of 4%. Research and development expense decreased from $4.5 million during the six months ended June 30, 2006 to $4.2 million during the six months ended June 30, 2007, a decrease of 6%.2008. This decrease is primarily due to the decrease in SFAS 123R stock-based compensation and temporary laborlower headcount related expenses. As a percentage of total revenue, research and development expense decreased by onetwo percentage pointpoints from 11% in the first quarter of 2007 to 10% during each9% in the first quarter of the three and six months ended June 30, 2007 as compared to the three and six months ended June 30, 2006.2008. We currently expect research and development expensesexpense to increase in fiscal 2007 as comparedfuture periods due to fiscal 2006 as we plan to hire additional employeesexpected increase in this area.headcount related expenses.
General and Administrative. Administrative
General and administrative expense principally consists of compensation and related costs for executive and administrative personnel, fees for legal and other professional services, depreciation of equipment and software used for general corporate purposes and amortization of intangible assets. General and administrative expense was $3.2increased 44% from $2.7 million in eachthe first quarter of 2007 to $3.9 million in the secondfirst quarter 2006 and 2007. General and administrative expense decreased from $6.4 million during the six months ended June 30, 2006 to $6.0 million during the six months ended June 30, 2007, a decrease of 6%. The decrease in general and administrative expense is primarily due to the decrease in legal expense.2008. As a percentage of total revenue, general and administrative expense decreased oneincreased five percentage pointpoints to 15%19% in the secondfirst quarter 2007of 2008 from 14% in the first quarter of 2007. The first quarter of 2008 general and during the six months ended June 30, 2007administrative expense included $445,000 for an asset write-off of packaging material primarily relating to PhotoStamps. The increase, both on an absolute basis and as compareda percentage of total revenue, is primarily due to the second quarter 2006increase in legal expenses relating to existing litigation and the six months ended June 30, 2006.asset write-off. We currently expect general and administrative expenses to continue to increase in fiscal 2007 as compared2008 primarily due to fiscal 2006 as we expect an increase in legal spending as a result of increased activity in existing litigation.
Other Income, Net. Net
Other income, net consists of interest income from cash equivalents and short-term and long-term investments. Other income, net decreased 23% from $1.4 million in the second quarter 2006 to $1.2 million in the secondfirst quarter of 2007 a decreaseto $938,000 in the first quarter of 16%. Other income, net decreased from $2.5 million during the six months ended June 30, 2006 to $2.4 million during the six months ended June 30, 2007, a decrease of 4%.2008. As a percentage of total revenue, other income, net decreased twoone percentage pointspoint to 5% in the secondfirst quarter 2007of 2008 as compared to 6% in the secondfirst quarter 2006 and remained at 6% during six months ended June 30, 2007 and 2006, respectively.of 2007. The decrease, both on an absolute basis and as a percentage of total revenue, is primarily attributabledue to lower rates and lower investment balances as we continuesold certain investments and used the cash to buy backrepurchase shares of our common stock under our current stock repurchase program.stock. We expect other income to decrease in future periods as a result of lower invested cash balance and lower interest rates.
Liquidity and Capital Resources
As of June 30, 2007March 31, 2008 and December 31, 20062007 we had approximately $94$90.3 million and $106$90.8 million, respectively, in cash, restricted cash and short-term and long-term investments. We invest available funds in short and long-term securities including money market funds, commercial paper, corporate notesbonds, asset backed securities, and municipal securitiesgovernment and agency bonds, and do not engage in hedging or speculative activities.
In November 2003, we entered into a facility lease agreement commencing in March 2004 for our new corporate headquarters with aggregate lease payments of approximately $4 million through February 2010.
The following table is a schedule of our contractual obligations and commercial commitments, which is comprised of the future minimum lease payments under operating leases at June 30, 2007March 31, 2008 (in thousands):
| | | Operating | | | Operating | |
| Six months ending December 31, 2007 | | $ | 357 | | |
| Nine months ending December 31, 2008 | | | $ | 568 | |
| Years ending December 31: | | | | | | | | |
2008 | | | 751 | | |
2009 | | | 794 | | | | 794 | |
2010 | | | 134 | | | | 134 | |
2011 | | | - | | | | - | |
| | | $ | 2,036 | | | $ | 1,496 | |
| | | | | | |
During the first and second quartersquarter of 20072008, we repurchased approximately 1.4 million484,000 shares of common stock for approximately $19.3$4.5 million. We will consider repurchasing stock throughout our current repurchase program by evaluating such factors as the price of the stock, the daily trading volume and the availability of large blocks and any additional constraints because of material inside information we may possess.
Net cash provided by operating activities was $6.7$4.3 million and $8.7$2.5 million during the sixthree months ended June 30,March 31, 2008 and 2007, and 2006, respectively. The decreaseincrease in net cash provided by operating activities resulted primarily from the payment of marketing expenses which principally consist of costs associated with direct mail and online marketing.increase in service revenue.
Net cash provided by investing activities was $15.6$7.8 million and $5.8 million during the sixthree months ended June 30, 2007. Net cash used in investing activities was $17.7 million during the six months ended June 30, 2006.March 31, 2008 and 2007, respectively. The decreaseincrease in net cash used inprovided by investing activities resulted primarily from the sale of investments to fund the repurchase of stock, as noted above.
Net cash used in financing activities was $18.3$4.3 million and $4.8 million during the sixthree months ended June 30, 2007. Net cash provided by financing activities was $7.0 million during the six months ended June 30, 2006.March 31, 2008 and 2007, respectively. The decrease in net cash provided byused in financing activities resulted primarily from the repurchase oflower average price paid per share for our stock repurchase in the first quarter of 2008 as noted above.compared to the first quarter of 2007.
We believe our available cash and marketable securities, together with the cash flow from operations, will be sufficient to fund our business for the foreseeable future.
ITEM 3. 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 cash equivalents and investments are comprised of money market, U.S. government obligations and public corporate debt securities with weighted average maturities of 300139 days at June 30, 2007.March 31, 2008. Our cash equivalents and investments, net of restricted cash, approximated $93.6$89.7 million and had a related weighted average interest rate of approximately 5.3%3.6%. Interest rate fluctuations can impact the carrying value of theour portfolio. We do not believe that the future market risks related to the above securities will have a material adverse impact on our financial position, results of operations or liquidity.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
OurWe maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
As of the end of the period covered by this Report, our management evaluated, with the participation of the Chiefour Principal Executive Officer and ChiefPrincipal Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chiefour Principal Executive Officer and ChiefPrincipal Financial Officer have concluded, as of that time, that our disclosure controls and procedures were effective as ofin ensuring that information required to be disclosed by us in reports filed or submitted under the end ofExchange Act (i) is recorded, processed, summarized and reported within the period covered by this report.time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management including our Principal Executive Officer and our Principal Financial Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Controls
During the secondthird quarter ended June 30, 2007,March 31, 2008, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II -– OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 22, 2004, Kara Technology Incorporated filed suit against us in the United States District Court for the Southern District of New York, alleging, among other claims, that Stamps.comwe infringed certain Kara Technology patents and that Stamps.comwe misappropriated trade secrets owned by Kara Technology, most particularly with respect to our NetStamps feature. Kara Technology seeks an injunction, unspecified damages, and attorneys’ fees. On February 9, 2005, the court granted our motion to transfer this suit to the United States District Court for the Central District of California. On August 23, 2006, the court granted our summary judgment motions on the trade secret and other non-patent claims. The court heldissued a “Markman” hearing to construeruling, construing the terms of the Kara Technology patents on May 31, 2007, but hasSeptember 10, 2007. On April 3, 2008, the court granted our summary judgment motion that PhotoStamps does not yet ruled.infringe and denied our summary judgment motions that NetStamps does not infringe and the patents are invalid. The Court has scheduled a trial commencement date of November 13, 2007. We dispute Kara Technology’s claims and intend to defend the lawsuit vigorously.June 10, 2008.
On November 22, 2006, we filed a lawsuit against Endicia, Inc. and PSI Systems, Inc. in the United States District Court for the Central District of California for infringement of eleven Stamps.comof our patents covering, among other things, Internet postage technology. On January 8, 2007, Endicia, Inc. and PSI Systems, Inc. filed counterclaims asking for a declaratory judgment that all eleven patents are invalid, unenforceable and not infringed. The Court has scheduled a trial commencement date of March 25, 2008. We dispute the counterclaims and intend to prosecute the lawsuit vigorously.January 6, 2009.
In May and June 2001, we were named, together with certain of our current and former board members and/or officers, as a defendant in 11 purported class-action lawsuits, filed in the U.S. District Court for the Southern District of New York. The lawsuits allege violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 in connection with our initial public offering and a secondary offering of our common stock. The lawsuits also name as defendants the principal underwriters in connection with our public offerings, and allege that the underwriters engaged in improper commission practices and stock price manipulations in connection with the sale of our common stock. The lawsuits allege that we and/or certain of our officers or directors knew of or recklessly disregarded these practices by the underwriter defendants, and failed to disclose them in our public filings. Plaintiffs seek damages and statutory compensation, including interest, costs and expenses (including attorneys’ fees). Over 1,000 similar lawsuits have been brought against over 250 companies which issued stock to the public in 1998-2000, and their underwriters. All of these lawsuits have been consolidated for pretrial purposes before U.S. District Court Judge Shira Scheindlin.
In October 2002, pursuant to a stipulation and tolling agreement with plaintiffs, our current and former board members and/or officers were dismissed without prejudice. That agreement was extended as to those individuals by an addendum dated as of September 2007. In June 2003, we approved a proposed Memorandum of Understanding among the plaintiffs, issuers and insurers as to terms for a settlement of the litigation against us, which was further documented in a Stipulation and Agreement of Settlement filed with the court. The proposed settlement, which would not require Stamps.comhave required us to make any payments, was preliminarily approved by the court in February 2005 and was the subject of a fairness hearing in April 2006.
In October 2004, however, the court issued an order regarding class certification in certain related matters. In December 2006, the U.S. Court of Appeals for the Second Circuit vacated that order, and determined that the related matters could not be certified as a class as currently defined. That appellate decision rendered uncertain whether our proposed settlement could be finally approved and consummated, and, in June 2007, the proposed settlement was terminated. As a result, it is expected that plaintiffs will filehave filed an amended complaint and proposeproposed an alternative class definition.definition in related litigation. If such a class definition does not receive final court approval and/or a later settlement is not consummated for any reason, we intend to defend the lawsuits vigorously because wevigorously.
On August 30, 2007, Sterling Realty Organization Co. filed suit against us in the Superior Court for the State of Washington for King County, alleging they are entitled under the doctrine of equitable subrogation to recover a $575,929 sales tax related payment for improvements under a lease related to our discontinued iShip business. The lawsuit also seeks pre-judgment interest and costs. On March 7, 2008, the Court granted our motion for summary judgment under the doctrine of equitable subrogation, but also granted the plaintiff’s motion to amend the complaint to allege indemnification and breach of the lease.
We are subject to various other routine legal proceedings and claims incidental to our business, or which involve primarily a claim for damages that does not exceed 10% of our consolidated assets. We believe that the claims against us andultimate results from these actions will not have a material adverse effect on our officers and directors are without merit.
We are not currently involved in any other material legal proceedings, nor are we aware of any other material legal proceedings pending against us.
ITEM 1A.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,financial position, results of operations or financial condition would likely suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.cash flows.
This Report contains forward-looking statements based on the current expectations, assumptions, estimates and projections about Stamps.com and the Internet. 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 many factors, including those 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
We may not successfully implement strategies to increase the adoption of our services and products which would limit our growth, adversely affect our business and cause the price of our common stock to decline.
Our continuing profitability depends on our ability to successfully implement our strategy of increasing the adoption of our services and products. Factors that might cause our revenues, margins and operating results to fluctuate include the factors described in the subheadings below as well as:
· | The costs of our marketing programs to establish and promote the Stamps.com brands; |
· | The demand for our services and products; |
· | Our ability to develop and maintain strategic distribution relationships; |
· | The number, timing and significance of new products or services introduced by us and by our competitors; |
· | Our ability to develop, market and introduce new and enhanced products and services on a timely basis; |
· | The level of service and price competition; |
· | Our operating expenses; |
· | US Postal Service regulation and policies relating to PC Postage and PhotoStamps; and |
· | General economic factors. |
We implemented pricing plans that may adversely affect our future revenues and margins.
Our ability to generate gross margins depends upon the ability to generate significant revenues from a large base of active customers. In order to attract customers in the future, we may run special promotions and offers such as trial periods, discounts on fees, postage and supplies, and other promotions. We cannot be sure that customers will be receptive to future fee structures and special promotions that we may implement. Even though we have established a sizeable base of users, we still may not generate sufficient gross margins to remain profitable. In addition, our ability to generate revenues or sustain profitability could be adversely affected by the special promotions or additional changes to our pricing plans.
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.ITEM 1A.RISK FACTORS
Our success depends largely onThere have been no material changes from the skills, experience and performance of the membersrisk factors disclosed in Part 1, Item 1A, 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 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 largely2007 Annual Report 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 qualified personnel to replace those key employees that may depart. The failure to attract and retain the necessary personnel could seriously harm our business, financial condition and results of operations.
The success of our business will depend upon the continued acceptance by customers of our service.
We must minimize the rate of loss of existing customers while adding new customers. Customers cancel their subscription to our service for many reasons, including a perception that they do not use the service sufficiently. Also customers may feel the costs for service are too high, they may be going out of business, or they may have other issues that are not satisfactorily resolved. We must continually add new customers both to replace customers who cancel and to continue to grow our business beyond our current customer base. If too many of our customers cancel our service, or if we are unable to attract new customers in numbers sufficient to grow our business, our operating results will be adversely affected. Further, if excessive numbers of customers cancel our service, we may be required to incur significantly higher marketing expenditures than we currently anticipate to replace these customers with new customers.
If we fail to effectively market and sell our services and products, our business will be substantially harmed and could fail.
In order to acquire customers and achieve widespread distribution and use of our services and products, we must develop and execute cost-effective marketing campaigns and sales programs. We currently rely on a combination of marketing techniques to attract new customers including direct mail, online marketing and business partnerships. We may be unable to continue marketing our services and products in a cost-effective manner. If we fail to acquire customers in a cost-effective manner, our results of operations will be adversely affected.
If we fail to meet the demands of our customers, our business will be substantially harmed and could fail.
Our services and products must meet the commercial demands of our customers, which include home businesses, small businesses, corporations and individuals. We cannot be sure that our services will appeal to or be adopted by an ever-growing range of customers. If we are unable to ship products such as items from our Supplies Store or PhotoStamps in a timely manner to our customers, our business may be harmed. Moreover, our ability to obtain and retain customers depends, in part, on our customer service capabilities. If we are unable at any time to address customer service issues adequately or to provide a satisfactory customer experience for current or potential customers, our business and reputation may be harmed. If we fail to meet the demands of our customers our results of operations will be adversely affected.
A failure to further develop and upgrade our services and products could adversely affect our business.
Any delays or failures in developing our services and products, including upgrades of current services and products, may have a harmful impact on our results of operations. The need to extend our core technologies into new features and services and to anticipate or respond to technological changes could affect our ability to develop these services and features. Delays in features or upgrade introductions could cause a decline in our revenue, earnings or stock price. We cannot determine the ultimate effect these delays or the introduction of new features or upgrades will have on our revenue or results of operations.
Increases in payment processing fees would increase our operating expenses and adversely affect our results of operations.
Our customers pay for our services predominately using credit cards and debit cards and, to a lesser extent, by use of automated clearing house, (“ACH”). Our acceptance of these payment methods requires our payment of certain fees. From time to time, these fees may increase, either as a result of rate changes by the payment processing companies or as a result in a change in our business practices which increase the fees on a cost-per-transaction basis. If these fees for accepting payment methods increase in future periods, it may adversely affect our results of operations.
A decline in our ability to effectively bill our customers by credit card and debit card would adversely affect our results of operations.
Our ability to effectively charge our customers through credit cards and debit cards is subject to many variables, including our own billing technology and practices, the practices and rules of payment processing companies, and the practices and rules of issuing financial institutions. If we do not effectively charge and bill our customers in future periods through credit cards and debit cards, it would adversely affect our results of operations.
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 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. 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 or fail. Any loss resulting from intellectual property litigation could severely limit our operations, cause us to pay license fees, or prevent us from doing business.
A failure to protect our own intellectual property could harm our competitive position.
We rely on a combination of patent, trade secret, copyright and trademark laws and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our rights in our products, services, know-how and information. We have 68 issued US patents, 82 pending US patent applications, 9 international patents and 19 pending international patent applications. We also have a number of registered and unregistered trademarks. We plan to apply for more patents in the future. We may not receive patents for any of our patent applications. Even if patents are issued to us, claims issued in these patents may not protect our technology. In addition, 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.
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. Our Internet host provider 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 not presently have a full disaster recovery plan in effect to cover the 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 from within our own infrastructure 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.
Risks Related to Our Industry
US Postal Service regulations or fee assessments may cause disruptions or discontinuance of our business.
We are subject to continued US Postal Service scrutiny and other government regulations. The availability of our services 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 PC Postage or revoke or suspend the approval of one or more of our services at any time. If at any time our 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 or terminate our approval or offer services which compete against us, any of which could stop or negatively impact the commercial adoption of our service. Any changes in requirements or specifications for PC Postage could adversely affect our pricing, cost of revenues, operating results and margins by increasing the cost of providing our service.
The US Postal Service could also decide that PC 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 services to any new requirements or specifications or if the US Postal Service were to discontinue PC Postage as an approved postage method. Alternatively, the US Postal Service could introduce competitive programs or amend PC Postage requirements to make certification easier to obtain, which could lead to more competition from third parties or the US Postal Service itself. If we are unable to compete successfully, particularly against large, traditional providers of postage products like Pitney Bowes who enter the online postage market, our revenues and operating results will suffer.
The US Postal Service could decide to suspend or cancel the current market test of PhotoStamps, and may do so in the event that there is sufficient cause to believe that the market test presents unacceptable risk to US Postal Service revenues, degrades the ability of the US Postal Service to process or deliver mail produced by the test participants, exposes the US Postal Service or its customers to legal liability, or causes public or political embarrassment or harm to the US Postal Service in any way. If the US Postal Service decides to suspend or cancel the market test of PhotoStamps, our revenues and operating results will likely suffer.
Additionally, the US Postal Service could decide to amend, renegotiate or terminate our credit card cost sharing agreement, which is a key agreement that governs the allocation of credit card fees paid by the US Postal Service and us for the postage purchased by our customers. If the US Postal Service decides to amend, renegotiate or terminate our credit card cost sharing agreement, our revenues and operating results will likely 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, our revenues and operating results will suffer.
The PC Postage segment of the market for postage is relatively new and is competitive. At present, Pitney Bowes and Endicia.com are authorized PC Postage providers with commercially available software and Zazzle.com and FujiFilm offer a competitive product to PhotoStamps using Pitney Bowes technology. If any more providers become authorized, or if Pitney Bowes or Endicia.com provide enhanced offerings, our operations could be adversely impacted. We also compete with other forms of postage, including traditional postage meters provided by companies such as Pitney Bowes, postage stamps and permit mail.
We may not be able to establish or maintain a competitive position against current or future competitors as they enter the market. Many of our competitors have longer operating histories, larger customer bases, greater brand recognition, greater financial, marketing, service, support, technical, intellectual property and other resources than us. As a result, our competitors may be able to devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing policies and devote substantially more resources to web site and systems development than us. This increased competition may result in reduced operating margins, loss of market share and a diminished brand. We may from time to time make pricing, service or marketing decisions or acquisitions as a strategic response to changes in the competitive environment. These actions could result in reduced margins and seriously harm our business.
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. In addition, changes in postal regulations could adversely affect our service and significantly impact our competitive position. We may be unable to compete successfully against current and future competitors, and the competitive pressures we face could seriously harm our business.
If we do not respond effectively to technological change, our services and products could become obsolete and our business will suffer.
The development of our services, products 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 postage 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.
Our operating results could be impaired if we or the Internet become subject to additional government regulation and legal uncertainties.
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.
Risks Related to Our Stock
Changes in stock option accounting rules will have an adverse affect on our operating results.
We use options to acquire our common stock to attract, incentivize and retain our employees in a competitive marketplace. Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” allowed companies the choice of either using a fair value method of accounting for options that would result in expense recognition for all options granted, or using an intrinsic value method, as prescribed by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees”, with a pro forma disclosure of the impact on net income (loss) of using the fair value option expense recognition method. Prior to our adoption of SFAS No. 123 (revised 2004), “Share Based Payment,” or Statement 123R, on January 1, 2006, we had elected to apply APB No. 25 and accordingly we generally did not recognize any expense with respect to employee options to acquire our common stock in periods ended on or prior to December 31, 2005 as long as such options were granted at exercise prices equal to the fair value of our common stock on the date of grant.
Statement 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. This cost will be measured based on the fair value of the equity instruments issued. We adopted Statement 123R on January 1, 2006, which is the first day of our 2006 fiscal year. We expect the adoption of Statement 123R to have an adverse effect on our operating results, as we continue to use options to attract, incentivize and retain our employees.
The tax value of our net operating losses could be impaired if we trigger a change of control pursuant to Section 382 of the Internal Revenue Code.
Under Internal Revenue Code Section 382 rules, a change in ownership can occur whenever there is a shift in ownership by more than 50 percentage points by one or more five-percent shareholders within a three-year period. When a change of ownership is triggered, the NOLs may be impaired. We estimate that, as of June 30, 2007 we were approximately at 30% compared with the 50% level that would trigger impairment of our NOL asset. As part of our ongoing program to preserve future use of our NOL assets, Stamps.com requests that all of our investors contact us prior to allowing their ownership interest to reach a five-percent level.
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 certificate of incorporation, bylaws and Delaware law could make it difficult for a third party to acquire us, even if 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.
The US Postal Service may object to a change of control of our common stock.
The US Postal Service may raise national security or similar concerns to prevent foreign persons from acquiring significant ownership of our common stock or of Stamps.com. The US Postal Service also has regulations regarding the change of control of approved PC Postage providers. These concerns may prohibit or delay a merger or other takeover of our Company. Our competitors may also seek to have the US Postal Service block the acquisition by a foreign person of our common stock or our Company in order to prevent the combined company from becoming a more effective competitor in the market for PC Postage.
Our stock price is volatile
The price at which our common stock has traded since our initial public offering in June 1999 has fluctuated significantly. The price may continue to be volatile due to a number of factors, including the following, some of which are beyond our control:
· | variations in our operating results, |
· | variations between our actual operating results and the expectations of securities analysts, |
· | investors and the financial community, |
· | announcements of developments affecting our business, systems or expansion plans by us or others, |
· | and market volatility in general. |
As a result of these and other factors, investors in our common stock may not be able to resell their shares at or above their original purchase price. In the past, securities class action litigation often has been instituted against companies following periods of volatility in the market price of their securities. This type of litigation, if directed at us, could result in substantial costs and a diversion of management’s attention and resources.
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.Form 10-K.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We did not have any unregistered sales of common stock during the first quarter ended June 30, 2007.March 31, 2008.
Issuer Purchases of Equity Securities
| Period | Total Number of shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs |
| January 1, 2007 - January 31, 2007 | 368,357 | $14.41 | 368,357 | $ 7,997,000 |
| February 1, 2007 - February 28, 2007 | — | — | — | $ 27,997,000 |
| March 1, 2007 - March 31, 2007 | 1,800 | $14.00 | 1,800 | $ 27,972,000 |
April 1, 2007 - April 30, 2007 | 265,226 | $13.49 | 265,226 | $ 24,393,000 |
May 1, 2007 - May 31, 2007 | 605,154 | $13.87 | 605,154 | $ 15,998,000 |
June 1, 2007 - June 30, 2007 | 140,312 | $14.25 | 140,312 | $ 13,998,000 |
During the first quarter of 2008, we purchased our common stock as described in the following table: 26
| Period | | Total Number of shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs (in 000’s) | |
| January 1, 2008 - January 31, 2008 | | | — | | | — | | | — | | | — | |
| February 1, 2008 - February 29, 2008 | | | — | | | — | | | — | | | — | |
| March 1, 2008 - March 31, 2008 | | | 484,000 | | $ | 9.30 | | | 484,000 | | $ | 6,659 | |
Not applicable.
None.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.