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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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 0-27417
E-STAMP CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 76-0518563
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
2051 Stierlin Court
Mountain View, California, 94043
(Address of principal executive office and zip code)
(650) 919-7500
(Registrant's telephone number, including area code)
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
filing requirements for the past 90 days.
YES [X] NO [ ]
As of April 30, 2001, 37,919,959 shares of the Registrant's common stock
were outstanding.
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E-STAMP CORPORATION
FORM 10-Q
March 31, 2001
INDEX
PAGE
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements:
a. Condensed Balance Sheets as of March 31, 2001 (Unaudited)
and December 31, 2000......................................... 3
b. Condensed Statements of Operations for the three months
ended March 31, 2001 and 2000 (Unaudited)..................... 4
c. Condensed Statements of Cash Flows for the three months
ended March 31, 2001 and 2000 (Unaudited)..................... 5
d. Notes to Condensed Financial Statements (Unaudited)........... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 11
Risk Factors................................................... 13
Item 3. Qualitative and Quantitative Disclosure About Market Risk.......... 14
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 15
Item 2. Changes In Securities and Use of Proceeds.......................... 16
Item 6. Exhibits and Reports on Form 8-K................................... 16
Signature.......................................................... 17
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
E-STAMP CORPORATION
CONDENSED BALANCE SHEETS
(In thousands)
Mar. 31, Dec. 31,
2001 2000
--------- ---------
(Unaudited) *
ASSETS
Current assets:
Cash and cash equivalents ................... $ 15,153 $ 25,233
Restricted cash ............................. 3,750 3,750
Accounts receivable, net .................... 183 369
Other receivables ........................... 1,448 847
Prepaid expenses and other current assets ... 1,283 1,274
--------- ---------
Total current assets ...................... 21,817 31,473
Property and equipment, net .................... 3,524 5,493
Goodwill and intangible assets, net ............ -- 4,741
Deposits and other assets ...................... 1,200 1,200
--------- ---------
Total assets .............................. $ 26,541 $ 42,907
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................ $ 3,969 $ 3,529
Accrued liabilities ......................... 1,593 2,140
Accrued restructuring costs ................. 2,380 5,933
Deferred revenue ............................ 243 328
--------- ---------
Total current liabilities ................. 8,185 11,930
Commitments and contingencies
Stockholders' equity:
Common stock ................................ 38 38
Additional paid-in capital .................. 224,852 224,878
Notes receivable from employees and officers (596) (664)
Deferred stock compensation ................. (3,432) (4,622)
Accumulated deficit ......................... (202,506) (188,653)
--------- ---------
Total stockholders' equity ................ 18,356 30,977
--------- ---------
Total liabilities and stockholders' equity $ 26,541 $ 42,907
========= =========
* The condensed balance sheet at December 31, 2000 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
See accompanying notes.
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E-STAMP CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)
Three Months Ended
March 31,
-----------------------
2001 2000
-------- --------
General corporate expenses ........................ $ (1,823) $ (2,049)
Interest income ................................... 478 1,437
Interest expense .................................. (21) (32)
-------- --------
Loss from continuing operations ................... (1,366) (644)
Loss from discontinued operations ................. (12,487) (29,044)
-------- --------
Net loss .......................................... $(13,853) $(29,688)
======== ========
Basic and diluted loss per common share:
Continuing operations .......................... $ (0.04) $ (0.02)
Discontinued operations ........................ (0.33) (0.80)
-------- --------
Net loss ....................................... $ (0.37) $ (0.82)
======== ========
Shares used in computing basic and diluted loss per
common share ................................... 37,539 36,086
======== ========
See accompanying notes.
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E-STAMP CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
March 31,
-------------------------
2001 2000
--------- ---------
Operating activities:
Net loss ............................................ $ (13,853) $ (29,688)
Adjustments to reconcile net loss to net cash used in
operations:
Depreciation and amortization .................... 991 406
Loss on disposal of assets ....................... 85 --
Amortization of deferred stock compensation ...... 1,190 3,434
Impairment of long-lived assets .................. 5,709 --
Amortization of deferred distribution costs ...... -- 950
Stock based compensation ......................... 42 --
Changes in operating assets and liabilities:
Accounts receivable ............................ 186 (694)
Other receivables .............................. (601) 232
Prepaid marketing expense ...................... -- (1,066)
Prepaid expenses and other current assets ...... (9) 3,677
Inventory ...................................... -- (238)
Accounts payable and accrued liabilities ....... (107) 254
Accrued restructuring .......................... (3,553) --
Deferred revenue ............................... (85) --
--------- ---------
Net cash used in operating activities ............... (10,005) (22,733)
--------- ---------
Investing activities:
Purchase of property and equipment .................. (75) (1,772)
Deposits and other assets ........................... -- (2,829)
--------- ---------
Net cash used in investing activities ............... (75) (4,601)
--------- ---------
Financing activities:
Repayments of lease obligations ..................... -- (9)
Proceeds from issuance of common stock, net of
repurchases ...................................... -- (85)
--------- ---------
Net cash used in financing activities ............... -- (94)
--------- ---------
Net decrease in cash and cash equivalents ........... (10,080) (27,428)
Cash and cash equivalents at beginning of period .... 25,233 118,689
--------- ---------
Cash and cash equivalents at end of period .......... $ 15,153 $ 91,261
========= =========
Non-cash investing and financing activities:
Common stock repurchased from employees upon
termination by forgiveness of notes receivable .... $ (68) $ --
========= =========
See accompanying notes.
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E-STAMP CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Background and Basis of Presentation
E-Stamp Corporation, a Delaware corporation, was formed on August 23, 1996. The
Company originally provided an Internet postage service that enabled users to
purchase, download and print Internet postage directly from their personal
computers without the need to maintain a persistent Internet connection.
In May 2000, the Company acquired two companies, Infinity Logistics Corporation
("Infinity Logistics") and Automated Logistics Corp. ("Automated Logistics"),
providers of transportation management and warehouse management solutions that
allowed enterprise customers to review carrier rates and shipping options,
select a carrier, print shipping labels, track shipments and create shipping
reports.
In July 2000, the Company restructured its organization to focus on the
development, marketing and sales of its transportation management solutions and
reduce its emphasis on the Internet postage business. In November 2000, the
Company further restructured its organization and announced that it would
phase-out its Internet postage service by the end of 2000.
On April 19, 2001, the Company entered into a merger agreement with Learn2.com,
Inc., a provider of e-learning solutions. Pursuant to the merger agreement,
Learn2 will merge with the Company, with the Company remaining as the surviving
corporation. The merger is subject to certain conditions set forth in the merger
agreement, including a minimum net cash requirement, as defined in the merger
agreement, at the closing date and the approval of the stockholders of the
Company and Learn2. The Company also announced that it would discontinue its
remaining transportation management solutions business prior to completion of
the merger. Because the plans to discontinue its businesses were finalized
before the Company's Form 10-Q was filed for the first quarter, the Company's
condensed consolidated financial statements and notes included herein reflect
its businesses as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30. The results of discontinued operations do not
include any interest income, interest expense or allocation of corporate
expenses. In the event that the merger is completed, the Company intends to
conduct the e-learning solutions business of Learn2.
The accompanying condensed financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has incurred
significant net losses and negative cash flows from operations since its
inception. At March 31, 2001, the Company had an accumulated deficit of $202.5
million. There can be no assurance that the Company will be able to close the
merger, and the Company's announcement that it will cease its remaining
operations raises substantial doubt about the Company's ability to continue as a
going concern in the event that the merger with Learn2.com is not completed.
The condensed financial statements of the Company as of and for the three month
periods ended March 31, 2001 and 2000 included herein are unaudited, but include
all adjustments, including the non-recurring $5.7 million adjustment for the
impairment of long-lived assets, that the management of the Company believes
necessary for a fair presentation of the financial position as of the reported
dates and the results of operations for the respective periods presented.
Interim financial results are not necessarily indicative of results for a full
year. The condensed financial statements should be read in conjunction with the
audited financial statements and related notes for the year ended December 31,
2000 included in the Company's Form 10-K for the year ended December 31, 2000.
Other Comprehensive Loss
Comprehensive loss includes all changes in stockholders' equity during a period,
except those resulting from investments by owners and distributions to owners.
Other comprehensive loss comprises unrealized gains and losses on cash
equivalents, which
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have been immaterial to date. As a result, comprehensive loss approximates net
loss for all periods presented.
Loss Per Share
Loss per share has been computed in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"), which requires
disclosure of basic and diluted earnings per share. Basic earnings per share
excludes any dilutive effects of options, shares subject to repurchase,
warrants, and convertible securities. The Company's potentially dilutive
securities were antidilutive and therefore were not included in the computation
of weighted-average shares used in computing diluted loss per share. Therefore,
the Company's basic and diluted loss per share are the same.
The following table presents the calculation of basic and diluted loss per share
(in thousands, except per share amounts):
Three Months Ended
March 31,
-----------------------
2001 2000
-------- --------
Basic and diluted:
Loss from continuing operations ......... $ (1,366) $ (644)
Loss from discontinued operations ....... (12,487) (29,044)
-------- --------
Net loss ................................ $(13,853) $(29,688)
======== ========
Weighted average shares of common
stock outstanding ....................... 37,953 39,118
Less: Weighted average shares
subject to repurchase ................... (414) (3,032)
-------- --------
Shares used in computing basic and
diluted loss per common share ........... 37,539 36,086
======== ========
Basic and diluted loss per common share:
Continuing operations ................... $ (0.04) $ (0.02)
Discontinued operations ................. (0.33) (0.80)
-------- --------
Net loss ................................ $ (0.37) $ (0.82)
======== ========
2. Discontinued Operations
On April 19, 2001, the Company entered into a merger agreement under which it
will merge with Learn2.com, an e-learning services provider. The Company also
announced it would phase-out its existing transportation management solutions
business prior to the completion of the merger. Historically, the Company
operated under a single reportable segment consisting of two product lines,
Internet postage and transportation management solutions. Because the plans to
discontinue its businesses were finalized before the Company's Form 10-Q was
filed for the first quarter, the Company's condensed financial statements and
notes included herein reflect its businesses as discontinued operations in
accordance with Accounting Principles Board Opinion No. 30. The results of
discontinued operations do not include any interest income, interest expense or
allocation of general corporate expenses.
Summary operating results of discontinued operations are as follows:
THREE MONTHS ENDED
MARCH 31,
-----------------------
2001 2000
-------- --------
(In thousands)
Net revenues .................... $ 317 $ 1,490
-------- --------
Impairment of long-lived assets . 5,709 --
Other costs and expenses ........ 7,095 30,534
-------- --------
Loss from discontinued operations $(12,487) $(29,044)
======== ========
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All revenues for the three months ended March 31, 2001 were derived from the
transportation management solutions business and all revenues for the three
months ended March 31, 2000 were derived from the Internet postage business.
The Company expects that the cost of the discontinuance of its business will be
less than the proceeds to be realized from the discontinuance, primarily as a
result of the sale of its intellectual property in April 2001. See Note 7.
3. Impairment of Long-Lived Assets
During the three months ended March 31, 2001, Company management identified
indicators of possible impairment of long-lived assets, principally goodwill and
other intangible assets initially recorded in connection with the Company's
acquisition of Infinity Logistics and Automated Logistics. These indicators
included deterioration in the business climate for technology companies,
significant declines in the market values of companies operating in the
technology sector and recent changes in the Company's operating results and cash
flow projections for the transportation management solutions business.
Company management reviewed the projected operations and cash flows for the
transportation management solutions business and compared projected undiscounted
cash flows to the carrying amount of goodwill and other intangible assets. Based
on the result of this review, management determined that these assets were
impaired and had a fair value of zero. Accordingly, an impairment write-down was
recorded during the three months ended March 31, 2001, consisting of $2.7
million of goodwill and $1.6 million of other intangible assets.
In addition, as a result of a significant decrease in the Company's employee
headcount during the three months ended March 31, 2001, Company management
performed an inventory of computers, office furniture and other equipment held
for disposal as of March 31, 2001. A write-down of $1.4 million was recorded
during the three months ended March 31, 2001 to reduce the carrying amount of
property and equipment held for disposal to its estimated fair value less cost
to sell.
4. Restructuring Costs
During 2000, the Company undertook two corporate restructurings and recorded
restructuring charges totaling $20.3 million. In July 2000, the Company
restructured its organization to focus on the development, marketing and sales
of its transportation management solutions and reduce emphasis on its Internet
postage business. In November 2000, the Company restructured the organization to
phase out its Internet postage business. In connection with these
restructurings, the Company terminated 52 employees, of which 48 left the
Company by March 31, 2001 and the remaining four left by April 30, 2001. The
windup of the Internet postage business was substantially completed by April 30,
2001.
The following table sets forth the activity in accrued restructuring costs
during the three months ended March 31, 2001.
BALANCE BALANCE
DECEMBER 31, MARCH 31,
2000 CASH PAID 2001
--------------------------------
(IN THOUSANDS)
Employee termination costs ... $ 824 $ 632 $ 192
Contract terminations ........ 2,687 1,388 1,299
Operations shut-down ......... 1,805 1,179 626
Reserve for sales returns .... 617 354 263
------ ------ ------
Total ........................ $5,933 $3,553 $2,380
====== ====== ======
In February 2001, the Company announced a further reduction in force and the
elimination of 45 employees and contractors from its workforce. In connection
with this action, the Company incurred severance expense of $392,000. This
expense is included in loss from discontinued operations for the three months
ended March 31, 2001.
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5. Stockholders' Equity
Stock Subject to Rescission
Shares issued under the Company's 1996 Employee Plan, 1996 Director Plan and
1999 Stock Plan (the "Plans") prior to October 14, 1999 may not have qualified
for exemption from registration or qualification under federal and state
securities laws and therefore may be subject to rescission.
On February 2, 2000, the Company filed a rescission offer for 5,682,341 shares
of common stock pursuant to a registration statement filed under the Securities
Act of 1933, as amended, covering shares of common stock issued under the Plans.
The Company currently intends to file a request to withdraw the registration
statement. Because the Act does not provide that a rescission offer will
terminate a purchaser's right to rescind a sale of stock and a significant
portion of the shares have been resold for a price in excess of the original
purchase price paid by the optionees, the Company does not intend to extend the
rescission offer to the optionees. Management believes that the Company does not
have a contingent liability resulting from the issuance of stock to these
optionees that would materially and adversely impact the results of operations
or financial position of the Company.
Shares subject to rescission have been included in stockholders' equity in the
accompanying balance sheets.
6. Contingencies
Pitney Bowes Litigation
On June 10, 1999, Pitney Bowes filed suit against the Company in the U.S.
District Court for the District of Delaware alleging infringement of Pitney
Bowes patents. The suit alleges that the Company is infringing seven patents
held by Pitney Bowes related to postage application systems and seeks treble
damages, a preliminary and permanent injunction from further alleged
infringement, attorneys' fees and other unspecified damages. On July 30, 1999,
the Company filed its answer to Pitney Bowes' complaint in which the Company
denies all allegations of patent infringement and asserts affirmative and other
defenses based on statutory and common law grounds, including inequitable
conduct on the part of Pitney Bowes in its procurement of patents in proceedings
before the U.S. Patent and Trademark Office. As part of the answer, the Company
also brought various counterclaims against Pitney Bowes claiming Pitney Bowes'
violation of Section 2 of the Sherman Act and intentional and tortious
interference with E-Stamp's business relations based, in part, upon the
Company's allegations that Pitney Bowes has unlawfully maintained its monopoly
power in the postage metering market through a scheme to defraud the U.S. Patent
and Trademark Office and its efforts to discourage potential investors and
businesses from investing and entering into agreements with E-Stamp. The
Company's suit seeks compensatory and treble damages, injunctive relief and
recovery of attorney's fees. On September 21, 1999, Pitney Bowes filed a motion
to strike or dismiss certain of E-Stamp's affirmative defenses and counterclaims
or, in the alternative, to bifurcate discovery and trial of those counterclaims.
On July 28, 2000, the U.S. District Court for the District of Delaware granted
Pitney Bowes' motion to bifurcate discovery and trial of certain of our defenses
and counterclaims. On April 14, 2000, Pitney Bowes filed a motion to amend their
original complaint seeking to assert one additional patent held by Pitney Bowes
and to remove one of the seven originally asserted patents held by Pitney Bowes.
On July 28, 2000, the U.S. District Court for the District of Delaware granted
Pitney Bowes' motion to amend. The Company is continuing to investigate the
claims against it as well as infringement by Pitney Bowes of its patents, and
may assert additional defenses or pursue additional counterclaims or independent
claims against Pitney Bowes in the future.
Pendency of the litigation can be expected to result in significant expenses to
the Company and the diversion of management time and other resources. Management
believes that the Company will not suffer a material adverse impact on its
results of operations or its financial position as a result of this litigation.
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Consumer Class Action Suit
On March 16, 2001, a plaintiff filed a purported consumer class action suit
against the Company in the Supreme Court of the State of New York, County of
Kings. The suit alleges that the Company breached its contracts with the
plaintiff and other customers. The plaintiff seeks compensatory damages and
disgorgement of monies received in connection with the sale of Internet postage
products. The Company is currently investigating the claims against it and
intends to vigorously defend this action. Pendancy of these legal proceedings
can be expected to result in expenses to the Company and the diversion of
management time and other resources.
7. Subsequent Events
On November 9, 2000, the Company received a notice from The Nasdaq Stock Market
that its common stock had failed to maintain a minimum bid price of $1.00 over
the past 30 consecutive trading days as required for continued listing on The
Nasdaq National Market. On March 23, 2001, the Company attended a hearing before
the Nasdaq Qualifications Hearing Panel to determine if its common stock should
continue to be listed on The Nasdaq National Market and the Company has
continued to correspond with officials at Nasdaq since its hearing. On April 23,
2001, the Nasdaq Listing Qualification Panel notified the Company that it would
continue listing the Company's common stock on The Nasdaq National Market
pursuant to an exception that requires the Company's completion of specified
milestones by specified dates. These milestones include completion of the merger
with Learn2 by July 23, 2001 and compliance with all of the Nasdaq National
Market listing requirements after the closing. In the event that E-Stamp or the
combined company fails to meet Nasdaq's conditions the exception may be revoked.
In addition, the exception is subject to the further review and modification or
reversal by the Nasdaq Listing and Hearing Review Council.
On April 19, 2001, the Company entered into a merger agreement with Learn2.com,
Inc., a provider of e-learning solutions. Pursuant to the merger agreement, the
Company and Learn2 will merge, with the Company remaining as the surviving
corporation. The merger is subject to certain conditions set forth in the merger
agreement, including a minimum net cash requirement, as defined in the merger
agreement, at the closing date and the approval of the stockholders of the
Company and Learn2. In connection with the merger, the Company also announced
that it would discontinue its remaining transportation management solutions
business prior to the completion of the merger.
On April 25, 2001, Learn2 issued to the Company a convertible promissory note in
exchange for $2,000,000. The promissory note is convertible into 2,000 shares of
Learn2 Series E preferred stock. The purchase and sale of the promissory note
was a material term of the merger agreement between the Company and Learn2.
On April 27, 2001, the Company sold all of its patent and patent applications
and certain trademarks and domain names related to its Internet postage business
to Stamps.com, Inc. for $7.5 million.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report on Form 10-Q contains forward-looking statements, including, but not
limited to, those specifically identified as such, that involve risks and
uncertainties. The statements contained in this report on Form 10-Q that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including without limitation statements
regarding our expectations, beliefs, intentions or strategies regarding the
future. All forward-looking statements included in this report on Form 10-Q are
based on information available to us on the date hereof, and we assume no
obligation to update any such forward-looking statements. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors, including, but not limited to,
those set forth in the "Risk Factors" contained in this management's discussion
and analysis of financial condition and results of operations and elsewhere in
this report on Form 10-Q.
Overview
We originally provided an Internet postage service that enabled users to
purchase, download and print Internet postage directly from their personal
computers without the need to maintain a persistent Internet connection. In May
2000, we acquired two companies, Infinity Logistics Corporation and Automated
Logistics Corp. These companies offered transportation management and warehouse
management solutions that allowed enterprise customers to review carrier rates
and shipping options, select a carrier, print shipping labels, track shipments
and create shipping reports.
During 2000, we undertook two corporate restructurings. In July 2000, we
restructured our organization to focus on the development, marketing and sales
of our transportation management solutions and reduce our emphasis on our
Internet postage business. In November 2000, we restructured the organization to
phase out our Internet postage business. We incurred charges of approximately
$20.3 million related to these restructurings.
On April 19, 2001, we entered into a merger agreement with Learn2.com, Inc., a
provider of e-learning solutions. Pursuant to the merger agreement, Learn2 will
merge with E-Stamp, with E-Stamp remaining as the surviving corporation. The
merger is subject to certain conditions set forth in the merger agreement,
including a minimum net cash requirement, as defined in the merger agreement, at
the closing date and the approval of the stockholders of E-Stamp and Learn2. We
also announced that we would discontinue our remaining transportation management
solutions business prior to completion of the merger. Because the plans to
discontinue our businesses were finalized before our Form 10-Q was filed for the
first quarter, our condensed consolidated financial statements and notes
included herein reflect our businesses as discontinued operations in accordance
with Accounting Principles Board Opinion No. 30. The results of discontinued
operations do not include any interest income, interest expense or allocation of
corporate expenses. In the event that the merger is completed, we intend to
conduct the e-learning solutions business of Learn2.
Results of Operations
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
General corporate expenses. General corporate expenses include overhead expenses
associated with the general responsibilities of a public company and exclude
those costs associated with our transportation management solutions and Internet
postage businesses. These expenses include salaries and related costs for
certain administrative functions, professional services, including legal and
accounting services, insurance and an allocation of facilities costs. The
decrease in these expenses in the three months ended March 31, 2001 compared to
the three months ended March 31, 2000 is primarily due to lower amortization of
deferred stock compensation, which is recorded using the graded vesting method,
partially offset by higher professional services costs, including legal and
accounting services.
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Interest income, net. Interest income, net, consists primarily of earnings on
our cash and cash equivalents, net of interest expense. Interest income, net,
was $0.5 million for the quarter ended March 31, 2001, compared to $1.4 million
for the quarter ended March 31, 2000. The decrease in interest income, net, was
due to decreased interest earned as a result of decreased cash balances
resulting from our continued use of cash to fund our operations.
Loss from discontinued operations. For the three months ended March 31, 2001,
loss from discontinued operations reflects the operating expenses related to our
transportation management solutions business net of revenues from that business
of $0.3 million. For the three months ended March 31, 2000, loss from
discontinued operations reflects the operating expenses related to our Internet
postage business net of revenues from that business of $1.5 million. Operating
expenses for the three months ended March 31, 2001 were significantly reduced
from operating expenses for the three months ended March 31, 2000 primarily due
to reduced headcount resulting from our restructuring efforts in 2000. In
addition, we significantly reduced our advertising and promotional activities in
the first quarter of 2001 compared to the first quarter of 2000. Amortization of
deferred stock compensation, which is recorded using the graded vesting method,
decreased by $2.2 million in the three months ended March 31, 2001 from the
three months ended March 31, 2000.
These decreases in operating expenses were partially offset by charges totaling
$4.7 million related to the amortization and write off of goodwill and other
intangible assets related to our transportation management solutions business.
During the three months ended March 31, 2001, we identified possible indicators
of impairment of these assets and determined that these assets had a fair value
of zero. In addition, we wrote off property and equipment held for disposal as a
result of reduced employee headcount totaling $1.4 million.
We expect that the cost of the discontinuance of our business will be less than
the proceeds to be realized from the discontinuance, primarily as a result of
the sale of our Internet postage intellectual property in April 2001 to
Stamps.com for $7.5 million.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private and
public sales of equity securities. We have received net proceeds of
approximately $73.9 million in private placements of our equity securities and
net proceeds of $125.4 million from the initial public offering of our common
stock. As of March 31, 2001, we had cash and cash equivalents totaling $15.1
million and restricted cash of $3.8 million.
Net cash used in operating activities totaled $10.0 million for the three months
ended March 31, 2001 and $22.7 million for the three months ended March 31,
2000. Cash used in operating activities for the periods presented resulted
primarily from net operating losses during those periods partially offset by
non-cash charges.
Net cash used in investing activities totaled $0.1 million for the three months
ended March 31, 2001 and $4.6 million for the three months ended March 31, 2000.
In April 2001, we sold all of our patents and patent applications and certain
trademarks and domain names related to our Internet postage business to
Stamps.com, Inc. for $7.5 million.
The accompanying financial statements have been prepared assuming that we will
continue as a going concern. We have incurred significant net losses and
negative cash flows from operations since our inception. At March 31, 2001, we
had an accumulated deficit of $202.5 million. There can be no assurance that we
will be able to close the merger. Our announcement that we will cease our
remaining operations raises substantial doubt about our ability to continue as a
going concern if we are unable to complete our merger with Learn2.
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RISK FACTORS
If the conditions to the merger with Learn2 are not met, the merger may not
occur.
Certain conditions must be satisfied or waived to complete the merger with
Learn2. These conditions are described in detail in the merger agreement. We
cannot assure you that each of the conditions will be satisfied. If the
conditions are not satisfied or waived, the merger will not occur or will be
delayed, and the intended benefits of the merger may not occur. In particular,
if we do not have net cash of at least $13 million as of the closing of the
merger, Learn2 is not required to close. If the merger is not completed, we will
have no ongoing operations and will be unlikely to continue as a going concern.
We may not be able to implement successfully a new restructuring plan if the
merger does not occur.
Based on our current plan to discontinue our transportation management solutions
business, we will be unable to generate revenues going forward as a standalone
entity. Upon consummation of the merger, E-Stamp intends to continue and grow
Learn2's business as a means of generating revenue. If the merger is not
completed, E-Stamp may not be able to implement successfully a new restructuring
plan capable of generating sufficient revenues to support E-Stamp as a going
concern.
Failure to complete the proposed merger could adversely affect our stock price
and future business and operations.
The merger is subject to the approval of E-Stamp's and Learn2's stockholders and
specified closing conditions. In the event that the merger is not successfully
completed, we may be subject to a number of material risks, including the
following:
o the price of our common stock may decline to the extent that the current
market price for its common stock reflects a market assumption that the
proposed merger will be completed; and
o we must pay costs related to the proposed merger, such as legal,
accounting, and financial advisory fees, even if the merger is not
completed.
In addition, in the event that the merger is not completed, our board of
directors may not be able to secure a similar strategic transaction to provide
us with a continuing business.
The merger will result in substantial costs whether or not completed.
The merger will result in significant costs to us. Direct transaction costs are
estimated at approximately $3.6 million, of which E-Stamp will incur a
substantial portion. These costs are expected to consist primarily of fees for
investment bankers, attorneys, accountants, filing fees and financial printers.
A substantial amount of these costs will be incurred whether or not the merger
is completed.
We may lose our listing on the Nasdaq stock market.
E-Stamp has received letters from the Nasdaq Stock Market, Inc. concerning the
continued listing of its common stock on the Nasdaq National Market. Our stock
has failed to maintain a closing price of greater than or equal to $1.00 in
accordance with Nasdaq's rules. If we are unable to regain compliance with
Nasdaq's rules, our securities, including the E-Stamp common stock after the
merger, could be delisted. In addition, if our securities are delisted the
liquidity and trading price of our securities may be impacted adversely.
We have a history of losses and an accumulated deficit; we may continue to
experience losses.
For the year ended December 31, 2000, we incurred a net loss of $112.8 million
and for the three months ended March 31, 2001, we incurred a net loss of $13.9
million. At March 31, 2001, we had an accumulated deficit of approximately
$202.5 million. Learn2 has also incurred substantial losses to date. We expect
to continue to incur losses for the foreseeable future. In addition, in
connection with the acquisition
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of Learn2, we will incur significant accounting charges. These losses will be
substantial, and we may not ever become profitable.
We may be liable for infringing the intellectual property rights of others.
Third parties may assert infringement claims against us. From time to time in
the ordinary course of business we have been and we expect to continue to be,
subject to claims alleging infringement of the intellectual property rights of
third parties. These claims and any resulting litigation, if it occurs, could
subject us to significant liability for damages. In addition, even if we
prevail, litigation could be time-consuming and expensive and could result in
the diversion of our time and attention. Any claims from third parties may also
result in limitations on our ability to use the intellectual property subject to
these claims unless we are able to enter into agreements with the third parties
making these claims.
E-Stamp may not be able to successfully phase out its current business.
In November 2000, we announced that we would phase out our Internet postage
business and focus on our transportation management solutions business. In April
2001, we announced our plan to discontinue our current transportation management
solutions business. We can provide no assurance that we will be able to
successfully discontinue our business or transition our customers to third party
providers. We may incur additional liabilities and expenses in connection with
the winding down of our Internet postage and transportation management solutions
businesses, including liabilities and expenses arising from the termination of
existing contracts and other commitments, that could have a material adverse
effect upon our financial condition and results of operations.
Claims, including claims asserted by Pitney Bowes against E-Stamp, could
adversely affect our financial condition.
Pitney Bowes filed a patent infringement lawsuit against us in U.S. District
Court in June 1999. The suit alleges infringement of seven patents owned by
Pitney Bowes related to postage application systems and seeks treble damages, a
preliminary and permanent injunction, attorneys' fees and other unspecified
damages. Pendency of the litigation can be expected to result in significant
expenses to us and the diversion of management time and other resources, the
extent of which we cannot quantify with any reasonable accuracy. If Pitney Bowes
is successful in its claims against us, then we may be required to pay damages
to Pitney Bowes.
ITEM 3. Qualitative and Quantitative Disclosure about Market Risk
Disclosures About Market Risk
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially as a result of a number of
factors, including those set forth under the caption "Risk Factors."
Interest Rate Risk
As of March 31, 2001, the Company had cash and cash equivalents of approximately
$12.7 million invested in short term investments. Due to the short-term nature
of these investments and the Company's investment policies and procedures, the
Company has determined that the risk associated with interest rate fluctuations
related to these financial instruments does not pose a material risk to the
Company.
As of March 31, 2001, we did not have any outstanding short or long-term debt.
Increases in interest rates could, however, increase the interest expense
associated with our future borrowings, if any. We do not hedge against interest
rate increases.
Equity Price Risk
As of March 31, 2001, we did not hold any equity investments.
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Foreign Currency Exchange Rate Risk
We realize all of our revenues in U.S. dollars, and as of March 31, 2001, all of
our revenues were derived from customers in the United States. Therefore, we do
not believe we have any significant direct foreign currency exchange rate risk.
We do not hedge against foreign currency exchange rate changes.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Pitney Bowes Litigation
On June 10, 1999, Pitney Bowes filed suit against us in the U.S. District Court
for the District of Delaware alleging infringement of Pitney Bowes patents. The
suit alleges that we are infringing seven patents held by Pitney Bowes related
to postage application systems and seeks treble damages, a preliminary and
permanent injunction from further alleged infringement, attorneys' fees and
other unspecified damages. On July 30, 1999, we filed our answer to Pitney
Bowes' complaint in which we deny all allegations of patent infringement and
assert affirmative and other defenses based on statutory and common law grounds,
including inequitable conduct on the part of Pitney Bowes in its procurement of
patents in proceedings before the U.S. Patent and Trademark Office. As part of
the answer, we also brought various counterclaims against Pitney Bowes claiming
Pitney Bowes' violation of Section 2 of the Sherman Act and intentional and
tortious interference with our business relations based, in part, upon our
allegations that Pitney Bowes has unlawfully maintained its monopoly power in
the postage metering market through a scheme to defraud the U.S. Patent and
Trademark Office and its efforts to discourage potential investors and
businesses from investing and entering into agreements with us. Our suit seeks
compensatory and treble damages, injunctive relief and recovery of attorney's
fees. On September 21, 1999, Pitney Bowes filed a motion to strike or dismiss
certain of our affirmative defenses and counterclaims or, in the alternative, to
bifurcate discovery and trial of those counterclaims. On July 28, 2000, the U.S.
District Court for the District of Delaware granted Pitney Bowes' motion to
bifurcate discovery and trial of certain of our defenses and counterclaims. On
April 14, 2000, Pitney Bowes filed a motion to amend their original complaint
seeking to assert one additional patent held by Pitney Bowes and to remove one
of the seven originally asserted patents held by Pitney Bowes. On July 28, 2000,
the U.S. District Court for the District of Delaware granted Pitney Bowes'
motion to amend. We are continuing to investigate the claims against us as well
as infringement by Pitney Bowes of its patents, and may assert additional
defenses or pursue additional counterclaims or independent claims against Pitney
Bowes in the future.
Consumer Class Action Suit
On March 16, 2001, a plaintiff filed a purported consumer class action suit
against us in the Supreme Court of the State of New York, County of Kings. The
suit alleges that we breached our contracts with the plaintiff and other
customers. The plaintiff seeks compensatory damages and disgorgement of monies
received in connection with the sale of Internet postage products. We are
currently investigating the claim against us and intend to vigorously defend
this action.
Pendency of these legal proceedings can be expected to result in significant
expenses to E-Stamp and the diversion of management time and other resources.
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Item 2. Changes In Securities and Use of Proceeds
From October 8, 1999, the effective date of the Registration Statement, to March
31, 2001, the ending date of the reporting period, the approximate amount of the
net offering proceeds used were $120.0 million for general business operations
including funding of operating losses generated in the three months ended March
31, 2001.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three months ended
March 31, 2001.
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 18, 2001
/s/ Edward F. Malysz
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Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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