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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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Commission file number 000-26427
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Stamps.com Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 77-0454966
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
Address of Principal Executive Offices:
3420 Ocean Park Boulevard, Suite 1040
Santa Monica, California 90405
Registrant's Telephone Number, Including Area Code: (310) 581-7200
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report: N/A
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The registrant does not have different classes of common stock. As of April
24, 2002, there were approximately 50,934,056 shares of the registrant's common
stock issued and outstanding.
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STAMPS.COM INC.
FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED MARCH 31, 2002
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION....................................................................................2
ITEM 1. FINANCIAL STATEMENTS..........................................................................2
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................................23
PART II. OTHER INFORMATION......................................................................................24
ITEM 1. LEGAL PROCEEDINGS ...........................................................................24
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS....................................................25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES..............................................................25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........................................26
ITEM 5. OTHER INFORMATION............................................................................26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................................................26
1
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STAMPS.COM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2002 2001
--------- ------------
(unaudited)
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 45,675 $ 101,703
Short-term investments.................................... 60,025 76,921
Restricted cash........................................... 4,895 6,767
Accounts receivable....................................... 1,510 2,000
Note receivable from former officer, net of allowance..... 3,181 3,181
Prepaid expenses.......................................... 1,143 541
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Total current assets................................... 116,429 191,113
Property and equipment, net.................................. 9,596 11,076
Patents, net................................................. 6,672 6,950
Long-term investments........................................ 81,536 7,533
Other assets................................................. 5,570 5,914
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Total assets.......................................... $ 219,803 $ 222,586
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... 2 64
Accrued expenses.......................................... 3,557 5,165
Current portion of long-term debt and capital leases...... -- 98
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Total current liabilities.................................... 3,559 5,327
Commitments and contingencies
Stockholders' equity:
Common stock.............................................. 51 50
Additional paid-in capital................................ 700,776 700,455
Notes receivable from stock sales......................... (101) (101)
Deferred compensation..................................... (263) (314)
Accumulated deficit....................................... (483,912) (483,205)
Other comprehensive income(loss).......................... (307) 374
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Total stockholders' equity............................. 216,244 217,259
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Total liabilities and stockholders' equity.......... $ 219,803 $ 222,586
========= =========
2
STAMPS.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months ended
March 31,
-------------------
2002 2001
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(in thousands, except per share data)
Revenues ................................................................... $ 4,111 $ 5,259
Cost of revenues ........................................................... 1,204 3,187
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Gross profit ............................................................ 2,907 2,072
Operating expenses:
Sales and marketing ..................................................... 507 4,288
Research and development ................................................ 1,138 4,082
General and administrative .............................................. 3,252 8,247
Amortization and write-off of goodwill and other intangibles ............ -- 172,817
Restructuring and writedown charges ..................................... -- 11,021
Loss from EncrypTix ..................................................... -- 5,601
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Total operating expenses ............................................. 4,897 206,056
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Loss from operations ....................................................... (1,990) (203,984)
Other income (expense):
Interest expense ........................................................ (9) (12)
Interest income ......................................................... 1,292 4,069
Gain from shut down of EncrypTix ........................................ -- 23,195
------- ---------
Net loss ................................................................... $ (707) $(176,732)
======= =========
Basic and diluted net loss per share........................................ $ (0.01) $ (3.60)
======= =========
Weighted average shares outstanding used in basic and diluted per-share
calculation ............................................................. 50,863 49,117
======= =========
The accompanying notes are an integral part of these financial statements.
3
STAMPS.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months ended March 31,
----------------------------
2002 2001
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(in thousands)
Operating activities:
Net Loss .................................................................... $ (707) $(176,732)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .......................................... 1,784 1,390
Amortization of deferred compensation .................................. 51 1,445
Provision for doubtful accts ........................................... -- 373
Write-down of goodwill and other intangibles ........................... -- 172,817
Loss on disposal and writedown of assets ............................... -- 16,080
Net gain on shut down of EncrypTix ..................................... -- (23,195)
Changes in operating assets and liabilities
Accounts receivable ................................................. 490 182
Other assets ........................................................ 344 733
Accounts payable .................................................... (62) (2,740)
Prepaid expenses .................................................... (602) 3,756
Accrued expenses .................................................... (1,608) (6,468)
Deferred revenue .................................................... -- (947)
Minority interest ................................................... -- (11,570)
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Net cash used in operating activities .......................................... (310) (24,876)
Investing activities
Sale (purchase) of short-term investments, net .............................. 16,215 111,148
Sale (purchase) of restricted cash investments .............................. 1,872 (28)
Acquisition of property and equipment ....................................... (26) (1,663)
Sale (purchase) of long-term investments, net ............................... (74,003) --
-------- ---------
Net cash provided by (used in) investing activities ............................ (55,942) 109,457
Financing activities
Proceeds from exercise of stock options ..................................... 294 350
Issuance of common stock under ESPP ......................................... 28 175
Repayment of capital lease obligation ....................................... (98) (8,837)
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Net cash (used in) provided by financing activities ............................ 224 (8,312)
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Net increase (decrease) in cash and cash equivalents ........................... (56,028) 76,269
Cash and cash equivalents at beginning of period ............................... 101,703 69,536
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Cash and cash equivalents at end of period ..................................... 45,675 145,805
Short-term investments ......................................................... 60,025 63,245
Long-term investments .......................................................... 81,536 --
Restricted cash ................................................................ 4,895 4,038
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Cash, restricted cash, short term and long term investments .................... $192,131 $ 213,088
======== =========
The accompanying notes are an integral part of these financial statements.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO MARCH 31, 2002 AND 2001 IS UNAUDITED)
1. Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these condensed financial
statements be read in conjunction with the consolidated financial statements and
the notes thereto included in the Company's latest annual report on Form 10-K.
In the opinion of the Company, these unaudited statements contain all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the financial position of Stamps.com Inc. and subsidiaries as of March
31, 2002, and the results of their operations and their cash flows for the three
months then ended.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of
Stamps.com Inc. and its subsidiaries, which include iShip.com, Inc. and
EncrypTix, Inc. During 2001, the Company sold its iShip subsidiary and EncrypTix
ceased operations and effected a general assignment of its assets for the
benefit of its creditors. The Company held approximately a 66 2/3% equity
interest and a greater than 90% voting interest in EncrypTix at December 31,
2000. Because of the voting control and liquidation preferences held by the
company, the Company had consolidated 100% of the losses of EncrypTix and the
Company experienced a one time gain in 2001 to eliminate the cumulative losses
allocated to the minority shareholders from EncrypTix, (see Note 3). All
significant intercompany accounts and transactions have been eliminated.
Use of Estimates and Risk Management
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ from those
estimates and such differences may be material to the financial statements.
The Company is involved in various litigation matters as a claimant and a
defendant. The Company records any amounts recovered in these matters when
received. The company records liabilities for claims against it when the loss is
probable and estimatable. Amounts recorded are based on reviews by outside
counsel, in-house counsel and management. Actual results could differ from
estimates.
Reclassifications
Certain prior period balances have been reclassified to conform to current
period presentation.
2. The Acquisition, Investment in and Sale of Subsidiary
On March 7, 2000, the Company completed the acquisition of iShip.com, Inc.
("iShip"), a development stage enterprise that developed Internet-based shipping
technology. The acquisition was accounted for as a purchase in accordance with
the provisions of Accounting Principles Board Opinion ("APB") No. 16. Under the
purchase method of accounting, the purchase price was allocated to the assets
acquired and liabilities assumed based on their estimated fair values at the
date of acquisition.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO MARCH 31, 2002 AND 2001 IS UNAUDITED)
On March 2, 2001, United Parcel Service, Inc. and Mail Boxes Etc. USA, Inc.
(MBE) jointly announced that United Parcel Service, Inc. would acquire MBE. MBE
represented a significant future source of revenue and market leverage for the
Company's enterprise shipping services that were acquired in the iShip
acquisition. United Parcel Service, Inc. also informed the Company that it is
unlikely to have MBE continue to use the Company's enterprise shipping services
in the future. As a result of the March 2001 events, the Company reduced
goodwill and other intangibles associated with the purchase of iShip to
estimated net realizable value. This resulted in a non-cash charge of $163.6
million in the first quarter of 2001.
On May 18, 2001, the Company completed the sale of its iShip multi-carrier
shipping service assets to United Parcel Service, Inc. for $2.8 million. The
difference between the sale price of iShip and the assets value attributed to
iShip by the Company resulted in non-cash charge of $9.1 million in the second
quarter of 2001. Additional legal costs associated with the sale of iShip in the
amount of $300,000 were charged in the third quarter of 2001 resulting in a
total charge of $9.4 million in 2001.
3. Change in Ownership and Shut-down of Subsidiary
On November 16, 1999, the Company announced the formation of a subsidiary,
EncrypTix, Inc. (EncrypTix), to develop secure printing opportunities in the
events, travel and financial services industries. In February 2000, the Company
invested $1.0 million and granted EncrypTix a license to its technology in those
three specific fields of use. During the first half of 2000, the Company sold
approximately 42% of EncrypTix until then a wholly owned subsidiary, in a
private financing of approximately $34.8 million. The financing was completed in
April 2000.
On March 12, 2001, EncrypTix ceased operations and effected a general
assignment of its assets for the benefit of its creditors. EncrypTix took this
action due to the inability to secure additional funding. The Company does not
expect to be impacted by any of EncrypTix's resulting liabilities. Additionally,
the Company terminated its license agreement with EncrypTix and maintains
limited licenses to various EncrypTix intellectual property. Due to this
cessation in business, the Company wrote off the invested $1.0 million and took
a one-time gain to eliminate the cumulative losses in excess of our investment
in EncrypTix in the amount of $23.2 million in the first quarter of 2001.
4. Restructuring
In October 2000, the Company's management approved and implemented a
restructuring plan as part of a move to streamline operations, reduce
infrastructure and overhead and eliminate excess and duplicative facilities. As
a result, the Company went through three rounds of workforce reductions which
reduced its total number of employees by approximately 400 from locations and
departments across the Company.
In addition to the reduction of employees, the Company's restructuring plan
includes costs associated with the termination of fixed-cost marketing deals and
the redeployment of sales and marketing expenditures to programs that have a
higher return on investment, losses on the disposition and discontinuation of
certain fixed assets, the estimated rent and expenses for unoccupied facilities
between the reduction in force date and the estimated date of occupancy by a
sublet tenant and the write-off of an investment in EncrypTix.
The remaining unutilized provision as of December 31, 2001 was $2.6 million
and was comprised of the remaining estimated rent and expenses for unoccupied
facilities between the reduction in force date and the estimated date of
occupancy by a sublet tenant. During the first quarter ended March 31, 2002, the
Company utilized $1.3 million of this provision for an ending balance of $1.3
million at March 31, 2002. The remaining provision of $1.3 million is included
in accrued expenses in the accompanying condensed consolidated balance sheet.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO MARCH 31, 2002 AND 2001 IS UNAUDITED)
5. Legal Proceedings
Please refer to "Part II--Other Information--Item 1--Legal Proceedings" of
this report for a discussion of legal proceedings.
6. Computation Of Historical Net Loss Per Share
Basic earnings per share is computed by dividing the net earnings available
to common stockholders for the period by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed by
dividing the net earnings for the period by the weighted average number of
common and common equivalent shares outstanding during the period.
Common equivalent shares, consisting of unvested restricted common stock
and incremental common shares issuable upon the exercise of stock options and
warrants and upon conversion of convertible preferred stock, are excluded from
the diluted earnings per share calculation as their effect is anti-dilutive.
7. Goodwill and Intangible Assets
During the first quarter of fiscal year 2002, the Company adopted Statement
of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets." In accordance with SFAS 142, the Company is required to
discontinue goodwill amortization. The Company wrote off all of their goodwill
in the first quarter of 2001. The Companies other intangible assets continue to
be amortized over their expected useful lives ranging from 4 to 17 years.
Goodwill was $2.5 million as of March 31, 2001, and was $0 as of March 31,
2002. The following sets forth the intangible assets by major asset class (in
thousands):
As of March 31, 2002
Gross Carrying Accumulated
Asset class Amount Amortization
Patents $7,757 ($ 1,085)
Trade name -- --
----------------------
Total $7,757 ($ 1,085)
----------------------
Aggregate amortization expense on intangible assets was approximately
$278,000 and $9,789 for the quarter ended March 31, 2002 and 2001, respectively.
Amortization expense is expected to be approximately $ 1.1 million in each of
the next five fiscal years.
The following table presents net income on a comparable basis, after
adjustment for goodwill amortization (in thousands, except per share amounts):
Three Months Ended March 31,
2002 2001
----------------------------
Reported net income $ (707) $(176,732)
Add back: goodwill amortization, net of tax effect -- 8,716
-------------------
Adjusted net income $ (707) $(168,016)
-------------------
Basic and diluted earnings per share
As reported (0.01) (3.60)
As adjusted (0.01) (3.42)
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO MARCH 31, 2002 AND 2001 IS UNAUDITED)
8. Comprehensive Income (Loss)
The following table provides the data required to calculate comprehensive
income (in thousands):
Accumulated other comprehensive Comprehensive Income
Income (loss) (loss)
------------------------------------------------------
Balance at December 31, 2001 $ 374
Unrealized gain (loss) on investments (681) $ (681)
Net loss (707)
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Balance at March 31, 2002 $(307) $(1,388)
======================================================
9. Related Party Transactions
In February 2000, John M. Payne (former Chairman of the Board, Chief
Executive Officer and director) purchased 187,000 shares of the Company's common
stock on the open market for an aggregate purchase price of approximately $6.0
million. Mr. Payne purchased the shares on margin and the margin account was
secured by a pledge of 1,467,500 shares of the Company's common stock held by
Mr. Payne, of which approximately 593,750 shares are subject to repurchase by
the Company. As of October 31, 2000, Mr. Payne's total indebtedness under the
margin account was approximately $6.7 million, which amount consists of the
purchase price of the 187,000 shares, accrued interest on the purchase price and
other fees and indebtedness incurred by Mr. Payne, less the proceeds from his
sale of the Company's common stock during the third quarter of 2000.
In April 2000, the Company agreed to guarantee Mr. Payne's margin account
in the event the value of the shares pledged was insufficient collateral to
secure the indebtedness outstanding under the margin account. The guarantee was
in the form of a single-purpose line of credit extended to Mr. Payne which would
have a balance due to the Company to the extent the value of the pledged shares
is insufficient collateral to secure indebtedness outstanding under the margin
account. This line of credit was secured by all of Mr. Payne's assets.
Mr. Payne agreed to sell a minimum of 100,000 shares of common stock during
each fiscal quarter (beginning the third fiscal quarter of 2000) in order to pay
down the indebtedness outstanding under the margin account. Pursuant to this
agreement, Mr. Payne sold 7,500 shares at a price of $4.50 per share and 95,500
shares at a price of $4.3125 per share on August 29, 2000. Mr. Payne also sold
15,000 shares at a price of $2.94 per share on November 15, 2000 and 85,000
shares at a price of $3.02 per share on November 17, 2000. The sale of these
200,000 shares during the third and fourth fiscal quarters resulted in aggregate
repayment of indebtedness in the amount of approximately $730,000.
In November 2000, Mr. Payne executed a promissory note in favor of the
Company in the amount of $6.6 million. The payment of the note was secured by a
pledge of all shares of the Company's common stock and all shares of EncrypTix,
Inc. held by Mr. Payne. The entire principal balance and all accrued and unpaid
interest was due and payable on June 30, 2001. Mr. Payne is currently in
default. The Company and Mr. Payne are currently in negotiations to agree on
payment terms for the amount due the Company.
The Company has established a reserve of $3,346,000 related to the note
receivable from Mr. Payne. The reserve is calculated as the difference between
the note's carrying value, $6,527,000, and the underlying value of the stock on
December 31, 2000, $3,181,000 (2.78 per share).
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO MARCH 31, 2002 AND 2001 IS UNAUDITED)
10. Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. SFAS No. 142 requires the use of a
non-amortization approach to account for purchased goodwill and certain
intangibles. Under a non-amortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead would be reviewed
for impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles is more
than its fair value. The adoption of SFAS No. 141 and SFAS No. 142 on January 1,
2002, did not have a material impact on the financial position or results of
operations of the Company.
The FASB also recently issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", applicable to financial statements issued for
fiscal years beginning after December 15, 2001. The FASB's new rules on asset
impairment supersede SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", and portions of Accounting
Principles Bulletin Opinion 30, "Reporting the Results of Operations". This
Standard provides a single accounting model for long-lived assets to be disposed
of and significantly changes the criteria that would have to be met to classify
an asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of
fair value and carrying amount. This Standard also requires expected future
operating losses from discontinued operations to be displayed in the period(s)
in which the losses are incurred, rather than as of the measurement date as
presently required. The adoption of the provision of this Standard on January 1,
2002 did not have a material impact on the Company's financial position or
operating results.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Quarterly Report on Form 10-Q contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These statements relate to expectations
concerning matters that are not historical facts. Words such as "projects,"
"believes," "anticipates," "estimates," "plans," "expects," "intends," and
similar words and expressions are intended to identify forward-looking
statements. Although Stamps.com believes that such forward-looking statements
are reasonable, we cannot assure you that such expectations will prove to be
correct. Factors that could cause actual results to differ materially from such
expectations are disclosed herein including, without limitation, in the "Risk
Factors" beginning on page 12. All forward-looking statements attributable to
Stamps.com are expressly qualified in their entirety by such language.
Stamps.com does not undertake any obligation to update any forward-looking
statements. You are also urged to carefully review and consider the various
disclosures we have made which describe certain factors which affect our
business, including the risk factors set forth at the end of Part I, Item 2 of
this Report. The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with our financial
statements and the related notes thereto.
Stamps.com, Stamps.com Internet postage(TM) and the Stamps.com logo are our
trademarks. This Report also includes trademarks of entities other than
Stamps.com.
Overview
Stamps.com(TM) provides easy, convenient and cost-effective Internet-based
services for mailing letters or shipping packages or parcels anywhere in the
United States and at anytime. Our core mailing and shipping service is designed
to allow individual consumers, home offices or small businesses to print US
postage or shipping labels using any ordinary PC, any ordinary inkjet or laser
printer, and an internet connection. Our enterprise shipping service, which we
divested in May of 2001, allowed customers to print shipping labels, schedule a
pick-up, track a package and apply enterprise-wide business rules to manage and
account for mailing and shipping costs.
Internet Postage Services
We offer an Internet postage service targeted at consumers, home offices
and small businesses. Service fee revenues for our Internet postage service are
generated from a monthly convenience fee that we charge our customers, under two
different pricing plans. Under the Simple Plan, a user purchases postage at face
value for a monthly convenience fee of 10% of the value of postage printed.
Prior to November 2000, there was a monthly minimum fee of $1.99 and a monthly
maximum fee of $19.99 under the Simple Plan. Beginning in November 2000, the
monthly minimum fee was increased to $4.49 for new customers and the monthly
maximum fee was discontinued. Beginning in June of 2001, all $1.99 customers who
existed at the time of the price increase were converted to the $4.49 minimum
price plan. The Power Plan was introduced at the beginning of our second quarter
of 2000 in response to customer requests for a fixed monthly pricing plan with
unlimited usage. Under the Power Plan, a customer may purchase and use unlimited
postage at face value, for a flat monthly fee that ranges from $15.99 to $18.99.
During the first quarter of 2002 and 2001, approximately 38% and 50%,
respectively, of our service fee revenue was generated from Power Plan
customers. Revenues are also generated from controlled access advertising to our
existing customer base, and revenue share and bounty arrangements. We ended the
first quarter of 2002 with approximately 279,000 active customers, down slightly
from 280,000 at the end of the fourth quarter of 2001 and down from 322,000
customers at the end of the first quarter of 2001. This slight decline in
customers during the first quarter of 2002 was a result of limited customer
acquisition spending due to focus on upcoming product launches. The year over
year decline in customers was an expected result of the increased Simple Plan
monthly minimum fee in June of 2001.
Recent Developments
In October 2001, we received preliminary approval from the United States
Postal Service to begin beta testing a technology that allows customers to print
sheets of generic postage on ordinary inkjet or laser printers that are not tied
to a destination address and have no expiration date. We launched a beta test
for this technology in
10
January 2002. If commercially approved, this product could have a positive
effect on future customer acquisition and customer retention, as the technology
removes two major inconveniences of our current service, the fact that the
postage must be tied to the destination address, and the fact that the postage
expires in 24 hours time. We believe that the generic postage technology is
important to our ability to grow our future revenue.
Critical Accounting Policies
We determined the critical principles by considering accounting policies
that involve the most complex or objective decisions or assessments. We
identified our most critical accounting policies to be related to risk
management, use of estimates and revenue recognition. We state these accounting
policies in the notes to the consolidated financials statements and at relevant
sections in this management's discussion and analysis.
Results of Operations
Revenue. Revenue for the quarter ended March 31, 2002 was solely generated
from the postage business due to the divestiture of the shipping operation in
May of 2001. Revenue from the postage business was down 14% year over year to
$4.1 million from $4.8 million in the first quarter ending March 31, 2001, and
down 9% sequentially from $4.5 million in the fourth quarter ending December 31,
2001 due to a decline in advertising and on-line store revenues. Total revenue
was down 22% year over year to $4.1 million from $5.3 million in the first
quarter ending March 31, 2001.
Cost of Revenues. Cost of revenues principally consists of customer
service, promotional expenses and system operating costs. Cost of revenues was
$1.2 million for the three months ended March 31, 2002, compared to $3.2 million
for the three months ended March 31, 2001. During the first quarter of 2002, our
cost of revenues decreased primarily due to increased automation and reduced
labor costs in our customer support operations. We also reduced promotional
expenses as we continued to decrease the average amount of free postage given to
each customer by offering free postage that expires after a period of 30 days,
resulting in less free postage used by each individual customer.
Sales and Marketing. Sales and marketing expenses principally consist of
costs associated with strategic partnership relationships and compensation and
related expenses for personnel engaged in marketing and business development
activities. Sales and marketing expenses were approximately $507,000 and $4.3
million for the three months ended March 31, 2002 and 2001, respectively. The
decrease in sales and marketing expenses resulted from fewer sales and marketing
personnel, as well as more focused spending of discretionary marketing dollars
on programs that provide a higher return on investment.
Research and Development. Research and development expenses principally
consist of compensation for personnel involved in the development of the
Internet postage and shipping, expenditures for consulting services and
third-party software. Research and development expenses for the three months
ended March 31, 2002 were $1.1 million compared to $4.1 million for the three
months ended March 31, 2001. The decrease is primarily due to increased cost
control efforts, the reduction in headcount and a more focused spend on our core
business technology.
General and Administrative. General and administrative expenses principally
consist of compensation and related costs for executive and administrative
personnel, fees for legal and other professional services, deferred compensation
for personnel and depreciation of equipment and software used for general
corporate purposes. General and administrative expenses for the three months
ended March 31, 2002 and 2001 were $3.3 million and $8.2 million, respectively.
The decrease is primarily due to increased cost control efforts and the
reduction in headcount resulting in decreased salary and deferred compensation
expense.
Amortization and write-off of goodwill and other intangibles. On March 2,
2001, United Parcel Service, Inc. and Mail Boxes Etc. USA, Inc. jointly
announced that United Parcel Service, Inc. would acquire Mail Boxes Etc. USA,
Inc. Mail Boxes Etc. USA, Inc. represented a significant future source of
revenue and market leverage for our enterprise shipping services that were
acquired in the iShip acquisition. United Parcel Service, Inc. also informed us
that it was unlikely to have Mail Boxes Etc. USA, Inc. continue to use the
Company's enterprise shipping services in the future. As a result of the March
2001 events, the Company reduced goodwill and other
11
intangibles associated with the purchase of iShip to reflect the estimated
present value of future cash flows, net of estimated transaction costs. This
resulted in a non-cash charge of $163.6 million in the first quarter of 2001.
Restructuring and Write-down Charges. In February 2001, in an effort to
more rapidly decrease our operating losses and enhance our ability to achieve
profitability sooner, we reduced our total number of employees by approximately
50% to 150 employees, including full time, part time and contract employees. We
also continued other cost cutting efforts, including the termination of fixed-
cost marketing deals, and the redeployment of sales and marketing expenditures
to programs that have a higher return on investment. We took a one-time charge
in the first quarter of 2001 of $11.0 million consisting of $7.7 million related
to restructuring, employee severance and fixed asset write-offs, $2.3 million
related to the termination of certain contractual arrangements and $1.0 million
related to the write-off of an investment in EncrypTix.
Deferred Compensation Amortization. During 1998 and 1999, we granted stock
options with exercise prices that were less than the estimated fair value of the
underlying shares of common stock for accounting purposes on the date of grant.
This results in amortization expenses of deferred compensation over the period
that these options vest, which ranges from three to four years from the date of
grant. Deferred compensation amortization for the three months ended March 31,
2002 and 2001 was $51,000 and $1.4 million, respectively. This decrease was a
result of fewer personnel at Stamps.com following our October 2000, February
2001 and August 2001 reductions in force as well as the sale of our iShip
multi-carrier shipping service on May 18, 2001.
Loss from EncrypTix. On March 12, 2001, EncrypTix ceased operations and
effected a general assignment of its assets for the benefit of its creditors.
EncrypTix took this action due to the inability to secure additional funding. We
have not and do not expect to be impacted by any of EncrypTix's resulting
liabilities. Additionally, we terminated our license agreement with EncrypTix
and maintain limited licenses to various EncrypTix intellectual property. For
the three months ended March 31, 2001, the losses associated with the operation
of our EncrypTix subsidiary was $5.6 million.
Other Income (Expense). Other income (expense) consisted of income from
cash equivalents and short-term investments, plus a gain from the shutdown of
our EncrypTix subsidiary, less interest expense related to financing
obligations. Other income (expense) for the three months ended March 31, 2002
and 2001 was $1.3 million and $27.3 million, respectively. This decrease is due
to a one-time gain from the shutdown of our EncypTix subsidiary of $23.2 million
that we recognized during the first quarter of 2001 and lower interest income in
the first quarter of 2002 as compared to the first quarter of 2001, as a result
of a lower invested balance and lower interest rates.
Liquidity and Capital Resources
As of March 31, 2002, we had approximately $192.1 million cash, restricted
cash, short-term and long-term investments. We regularly invest excess funds in
short-term and long-term money market funds and commercial paper and do not
engage in hedging or speculative activities.
In May 1999, we entered into a facility lease agreement for our corporate
headquarters with aggregate lease payments of approximately $4.8 million through
May 2004. In March 2000, we entered into a facility lease agreement for a
Bellevue, Washington facility with aggregate lease payments of approximately
$17.0 million. In January 2002, we exited the Bellevue, Washington facility
lease with exit payments of approximately $555,000 in December 2001 and $647,000
in January 2002. We are continuing to actively market all remaining excess space
that resulted from our restructuring in 2000 and 2001.
Net cash used in operating activities was $310,000 and $24.9 million for
the three months ended March 31, 2002 and 2001, respectively. The decrease in
net cash used in operating activities resulted primarily from cost-cutting
activities, including the restructuring that took place in 2001.
Net cash used in investing activities was $55.9 million for the three
months ended March 31, 2002 as compared to net cash provided by investing
activities of $109.5 million for the three months ended March 31, 2001. The
increase in net cash used in investing activities resulted primarily from the
purchase of long-term investments during the first quarter of 2002.
12
Net cash provided by financing activities was $224,000 for the three months
ended March 31, 2002 as compared to net cash used in financing activities of
$8.3 million for the three months ended March 31, 2001. The difference resulted
primarily from the completion of capital lease obligations during the first
quarter of 2002.
We anticipate that our current cash balances will be sufficient to fund our
operations through 2002. However, we may require substantial working capital to
fund our business and may need to raise additional capital. We cannot be certain
that additional funds will be available on satisfactory terms when needed, if at
all.
RISK FACTORS
You should carefully consider the following risks and the other information
in this report and our other filings with the SEC before you decide to invest in
our company or to maintain or increase your investment. The risks and
uncertainties described below are not the only ones facing Stamps.com.
Additional risks and uncertainties may also adversely impact and impair our
business. If any of the following risks actually occur, our business, results of
operations or financial condition would likely suffer. In that case, the trading
price of our common stock could decline, and you may lose all or part of your
investment.
This report contains forward-looking statements based on the current
expectations, assumptions, estimates and projections about Stamps.com and the
Internet industry. These forward-looking statements involve risks and
uncertainties. Our actual results could differ materially from those discussed
in these forward-looking statements as a result of 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
Because we have a limited operating history, there is limited information upon
which you can evaluate our business.
We are still in the early stages of our development, and our limited
operating history makes it difficult to evaluate our business and prospects. Our
Internet Postage service has only been available since October 22, 1999. Due to
our limited operating history, it is difficult to predict future results of
operations, including operating expenses and revenues. Moreover, due to our
limited operating history, any evaluation of our business and prospects must be
made in light of the risks and uncertainties often encountered by early-stage
companies in new and evolving markets, like the Internet. Many of these risks
are discussed in the subheadings below, and include our (a) ability to meet and
maintain government specifications for our Internet Postage service,
specifically US Postal Service requirements; (b) complete dependence on Internet
Postage that currently do not have substantial market acceptance; (c) ability to
establish and promote our brand name; (d) ability to expand our operations to
meet the commercial demand for our services, when it arises; (e) development of
and reliance on strategic and distribution relationships; (f) ability to prevent
and respond quickly to service interruptions; (g) ability to minimize fraud and
other security risks; and (h) ability to compete with companies with greater
capital resources and brand awareness.
If we are unsuccessful in addressing these risks or in executing our new
business strategy, our business, results of operations and financial condition
would be materially and adversely affected.
Our revenues and operating results may fluctuate in future periods and we may
fail to meet expectations, which may cause the price of our common stock to
decline.
Our revenues and operating results may fluctuate significantly from
period-to-period particularly because our Internet Postage and shipping services
are new and our prospects uncertain. If revenues or operating results fall below
the expectations of investors or public market analysts, the price of our common
stock could decline substantially. Factors that might cause our revenues,
margins and operating results to fluctuate include the factors described in the
subheadings below as well as: (a) the success of our Internet Postage and
shipping services; (b) the costs of defending ourselves in litigation; (c) the
costs of our marketing programs to establish and promote the Stamps.com brand
name; (d) the demand for our Internet Postage and shipping services; (e) our
ability to develop
13
and maintain strategic distribution relationships; (f) the number, timing and
significance of new products or services introduced by both us and our
competitors; (g) our ability to develop, market and introduce new and enhanced
services on a timely basis; (h) the level of service and price competition; (i)
the increases in our operating expenses; (j) US Postal Service regulation and
policies; (k) the success of implementing our new business strategy and of
reducing expenses; and (l) general economic factors.
Our cost of revenues includes costs for systems operations, customer
service, Internet connection and security services; all of these costs will
fluctuate depending upon the demand for our services. In addition, a substantial
portion of our operating expenses is related to personnel costs, marketing
programs and overhead, which cannot be adjusted quickly and are therefore
relatively fixed in the short term. Our operating expense levels are based, in
significant part, on our expectations of future revenues. If our expenses
precede increased revenues, both gross margins and results of operations would
be materially and adversely affected. Moreover, our new business strategy of
reducing expenses may directly and correspondingly cause our revenues to
substantially decline.
Due to the foregoing factors and the other risks discussed in this annual
report, you should not rely on period-to-period comparisons of our operating
results as an indication of future performance.
We have a history of losses, expect to incur losses in the future and may never
achieve profitability, which may reduce the trading price of our common stock.
Since we began operations in 1998, we have incurred substantial operating
losses in every period. As a result of accumulated operating losses, we had an
accumulated deficit of $483.9 million as of March 31, 2002. We expect to
continue to incur significant sales and marketing, research and development, and
administrative expenses and therefore could continue to experience net losses
and negative cash flows for several years, and perhaps for the duration of our
corporate existence. For the three months ended March 31, 2002, we generated
$4.1 million in revenues. There are no guarantees that we will reach or be able
to maintain profitability in the future.
Overall, we will need to generate significant revenues and successfully
implement our new business strategy to achieve and maintain profitability.
We implemented pricing plans that may adversely affect our future revenues and
profitability.
Our ability to generate gross margins depends upon the ability to generate
significant revenues from a large base of active customers. In November 2000, we
changed our pricing plans for our Internet postage services. In order to attract
customers in the future, we may run special promotions and offer discounts on
fees, postage and supplies. We cannot be sure that customers will be receptive
to this fee structure for our Internet postage services or to future fee
structures that we may implement. Even if we are able to establish a sizeable
base of users, we still may not generate sufficient gross margins to become
profitable. In addition, our ability to generate revenues or achieve
profitability could be adversely affected by special promotions or additional
changes to our pricing plans.
If our business strategy is not successfully implemented, our financial
condition and results of operations will be adversely affected.
We have continued to implement our business strategy begun in October 2000
to enhance our ability to achieve profitability by focusing on our core business
of Internet postage services. We have continued our cost cutting efforts,
including a reduction in headcount in August 2001 by 25%, the termination of
fixed-cost marketing arrangements, and the redeployment of sales and marketing
expenditures to programs that have a higher return on investment.
Our business strategy entails risks relating to our ability to attract our
targeted customers to offset potential customer losses in other areas and the
ability of our new management team to implement this strategy. There is no
guarantee our new management team will be able to effectively or efficiently
implement our business strategy or that, if effectively implemented, our
strategy will benefit us or help us achieve profitability. Failure to execute
our plan to significantly reduce expenses or to attract new customers in high
margin lines of business in significant numbers will adversely effect our
financial condition and results of operations. In addition, our business
strategy
14
could result in a substantial loss of customers which would have an adverse
impact on our financial condition and results of operations.
Recent personnel changes may interfere with our operations.
For the year ended December 31, 2001, we experienced significant changes at
the senior management level. In August 2001, Ken McBride was appointed as our
new President and Chief Executive Officer. Mr. McBride, who has also served as
our Chief Financial Officer since October 2000, replaced Bruce Coleman who held
the position of Chief Executive Officer on an interim basis. In August 2001,
Marvin Runyon resigned from our board of directors and Vice President of
Marketing Kathy Brush left Stamps.com. In September 2001, Seth Weisberg was
appointed as our new Secretary. In the quarter ended June 30, 2001, we
experienced significant changes at the board of directors level. Following the
sale of our iShip assets in May 2001, John A Duffy and Stephen M. Teglovic, who
served on our board of directors after the acquisition of iShip, resigned from
our board of directors. In June 2001, Carolyn M. Ticknor and Thomas N. Clancy
resigned from our board of directors. If we fail to attract members to, or
retain members on, our board of directors, our business, financial condition and
results of operations will be adversely affected.
If we do not successfully attract and retain skilled personnel for permanent
management and other key personnel positions, we may not be able to effectively
implement our business plan.
Our success depends largely on the skills, experience and performance of
the members of our senior management and other key personnel. Any of the
individuals can terminate his or her employment with us at any time. If we lose
additional key employees and are unable to replace them with qualified
individuals, our business and operating results could be seriously harmed. In
addition, our future success will depend largely on our ability to continue
attracting and retaining highly skilled personnel. As a result, we may be unable
to successfully attract, assimilate or retain qualified personnel. Further, we
may be unable to retain the employees we currently employ or attract additional
personnel. The failure to attract and retain the necessary personnel could
seriously harm our business, financial condition and results of operations.
We cannot predict the value of our acquisition of certain intellectual property
assets of E-Stamp Corporation.
We acquired intellectual property assets relating to Internet-based postage
printing and management from E-Stamp Corporation, one of our former competitors.
There can be no assurance that the intellectual property assets we acquired will
provide value or will help us to achieve profitability as currently planned, if
at all. In addition, a portion of the intellectual property rights we acquired
from E-Stamp Corporation are the subject of a lawsuit brought by Pitney Bowes
and could be determined by a court to be invalid or unenforceable. An invalidity
or unenforceability determination could make the intellectual property rights we
acquired worthless. See "Legal Proceedings".
The success of our business will depend upon acceptance by customers of our
Internet postage services.
We expect that our Internet postage services will generate a significant
portion of our future revenues. Accordingly, we depend heavily on the commercial
acceptance of our Internet postage services. If we fail to successfully gain
commercial acceptance of our Internet postage services, we will be unable to
generate significant revenues. To date, a substantial market for Internet
postage has not developed, and we cannot assure you that it will develop. More
specifically, we cannot predict if our target customers will choose the Internet
as a means of purchasing postage, or if customers will be willing to pay a fee
to use our service, or if potential users will select our system over our
competitors' systems or over alternative methods such as online invoicing, bill
payment and financial transactions.
The success of our business will depend upon our ability to make our Internet
postage services widely available, and to achieve widespread adoption of our
services.
We face numerous risks in conjunction with the introduction, sale and
commercial availability of our services because of our limited experience with
the commercial rollout and use of our services. Specifically, our
15
Internet postage service was introduced on October 22, 1999. As a result, we
cannot be sure that our services will be widely available or adopted, that they
will successfully process large numbers of user transactions or that our
services will contain features that appeal to the broad range of customers that
we target. If we experience problems with the availability, adoption,
scalability or functionality of our services or if we are unable to offer
attractive service enhancements in a timely manner, our ability to attract and
retain customers and our results of operations will be adversely impacted.
If we fail to effectively market and sell our Internet postage service, we may
never achieve profitability and our business will be substantially harmed and
could fail.
In order to acquire customers and achieve wide distribution and use of our
services, we must develop and execute cost-effective marketing campaigns and
sales programs. Given the limited amount of time that our services have been
commercially available, we have very limited experience conducting marketing
campaigns. In addition, we have recently increased our emphasis on direct
selling efforts and have only recently retained the resources necessary to
support a direct sales channel. However, we have very limited experience in
acquiring customers through a direct sales channel. In connection with our new
business strategy, we have significantly reduced our marketing budget. As a
result of these limited marketing and sales experiences, and our reduced
marketing budget, we cannot predict our ability to attract customers for our
services, and we may fail to generate significant interest in any of our
services. Furthermore, we may be unable to generate significant interest in our
services in a cost-effective manner. If we fail to generate interest in our
services or to acquire customers in a cost-effective manner, our results of
operations will be adversely affected and we may never achieve profitability.
If we fail to meet the demands of our customers, our business will be
substantially harmed and could fail.
Our Internet postage services must meet the commercial demands of our
customers, which range from individuals to small businesses. We cannot be sure
that our services will appeal to or be adopted by a wide range of customers.
Moreover, our ability to obtain and retain customers depends on our customer
service capabilities. As part of our new business strategy, we have
significantly reduced our support offerings. If we are unable at any time to
address customer service issues adequately or to provide a satisfactory customer
experience for current or potential customers, our business and reputation may
be harmed. If we experience extensive interest in our services, we may fail to
meet the expectations of customers due to limited experience in operating our
services and the strains this demand will place on our Web site, customer
service operations, professional services group, network infrastructure or
systems. If we fail to meet the demands of our customers or if our customers
implement and employ our services more slowly than we expect, our business,
results of operation and ability to achieve profitability will be negatively
affected.
Success by Pitney Bowes in its suits against us alleging patent infringement
could prevent us from offering our Internet postage services and severely harm
our business or cause it to fail.
On June 16, 1999, Pitney Bowes sued us for alleged patent infringement in
the United States District Court for the District of Delaware. The suit
originally alleged that we are infringing two patents held by Pitney Bowes
related to postage application systems and electronic indicia. The suit seeks
treble damages, a preliminary and permanent injunction from further alleged
infringement, attorneys' fees and other unspecified damages. We answered the
complaint on August 6, 1999, denying the allegations of patent infringement and
asserting a number of affirmative defenses. Pitney Bowes filed a similar
complaint in early June 1999 against one of our competitors, E-Stamp
Corporation, alleging infringement of seven Pitney Bowes patents. On April 13,
2000, Pitney Bowes asked the court for permission to amend its complaint to drop
allegations of patent infringement with respect to one patent and to add
allegations of patent infringement with respect to three other patents. On July
28, 2000 the court entered Pitney Bowes' amended complaint. On June 18, 2001,
E-Stamp and Pitney Bowes agreed to settle their litigation. On April 27, 2001 we
acquired certain of the E-Stamp patents.
On September 18, 2000, Pitney Bowes filed another patent infringement
lawsuit against us in the United States District Court for the Eastern District
of Texas, alleging that we are infringing four patents owned by Pitney Bowes
related to multi-carrier shipping. The suit seeks unspecified damages and a
permanent injunction from further alleged infringement. We answered the
complaint on December 1, 2000, denying the allegations of patent infringement
and asserting a number of affirmative defenses. United Parcel Service acquired
our iShip multi-carrier
16
shipping service assets on May 18, 2001. On September 4, 2001, the court granted
our motion to transfer the lawsuit to the United States District Court for the
District of Delaware. On April 18, 2002, the claim that we are infringing one of
the patents was dismissed with prejudice.
On June 14, 2001, we filed a patent infringement lawsuit against Pitney
Bowes in the United States District Court for the Central District of
California, alleging that Pitney Bowes infringes four patents we own. On January
7, 2002, the court granted Pitney Bowes' motion to transfer the lawsuit to the
United States District Court for the District of Delaware. Each of our patent
lawsuits against Pitney Bowes is in the discovery phase and is scheduled for
trial in January, 2003.
The outcome of our litigation against Pitney Bowes is uncertain. Therefore,
we can give no assurance that Pitney Bowes will not prevail. See "Legal
Proceedings" for a description of this litigation in which we are involved.
If Pitney Bowes prevails in its suits against us, we may be prevented from
selling postage on the Internet. Alternatively, the Pitney Bowes suits could
result in limitations on how we implement our service, delays and costs
associated with redesigning our service and payments of license fees and other
payments. Thus, if Pitney Bowes prevails in its suits against us, our business
could be severely harmed or fail. In addition, the litigation could result in
significant expenses and diversion of management time and other resources.
On August 17, 1998, Pitney Bowes issued a press release stating that it
holds dozens of US patents related to computer-based postage metering and that
it intends to engage in discussions with other marketers of computer-based
postal products to license Pitney Bowes technology. Prior to Pitney Bowes filing
a lawsuit against us, we were in license discussions with Pitney Bowes. We
intend to continue these discussions; however, we cannot predict whether these
discussions will continue, the outcome of these discussions or the impact of
Pitney Bowes' intellectual property claims on our business or the Internet
postage market. If Pitney Bowes is able to prevail in its claims against us and
if we do not enter into a license relationship with Pitney Bowes, our business
could be impacted severely or fail. In addition, as described above, Pitney
Bowes could obtain monetary and injunctive relief against us.
Success by Cybershop in its suit against us seeking damages and recognition of
its ownership of the domain name stamps.com could prevent us from using the
domain name stamps.com and could require a change of name of the Company,
severely harming our business or causing it to fail.
On December 13, 2000, Cybershop (a British Columbia, Canada partnership)
and its general partners filed suit against us in the U.S. District Court for
the Southern District of Texas, alleging that in 1998 a third party fraudulently
transferred ownership of the Internet domain name "stamps.com" away from
Cybershop and subsequently transferred it to us. The third party is also a named
defendant in the suit. The complaint seeks legal resolution and recognition of
Cybershop's ownership of the "stamps.com" domain name and seeks unspecified
monetary damages against the third party. On January 9, 2001, we filed a motion
to dismiss the suit. On February 16, 2001, Cybershop filed an amended complaint,
alleging new causes of action, including conversion, invasion of privacy,
trespass, and private nuisance, and seeking declaratory judgment for return of
the domain name registration to Cybershop. Cybershop later filed third and
fourth amended complaints. On February 13, 2002, the court granted our summary
judgment motion and dismissed all of Cybershop's pending claims against us with
prejudice. Cybershop has filed a motion asking the court to reconsider its
decision.
If Cybershop prevails in its claims against us, we may be liable for
monetary damages. Additionally, if Cybershop is successful in the lawsuit, we
may be required to relinquish the domain name stamps.com and transfer the domain
name registration to Cybershop. Relinquishing ownership of the stamps.com domain
name would require us to use a different domain name as the primary Internet
address and web page for our company, and we may need to change the name of our
company itself from Stamps.com Inc. as well. Changing the name of our company,
and using a new Internet domain name, could significantly and negatively affect
our brand recognition and customer acquisition and retention. Furthermore, a
change in our company name or Internet domain name could result in significant
costs in seeking to build new brand recognition. Thus, if Cybershop prevails in
its suit against us, our business could be severely harmed or even fail. See
"Legal Proceedings" for a description of litigation in which we are involved.
17
Third party assertions of violations of their intellectual property rights could
adversely affect our business.
Substantial litigation regarding intellectual property rights exists in our
industry. Third parties may currently have, or may eventually be issued, patents
upon which our products or technology infringe. Any of these third parties might
make a claim of infringement against us. We may become increasingly aware of, or
we may increasingly receive correspondence claiming, potential infringement of
other parties' intellectual property rights. We could incur significant costs
and diversion of management time and resources to defend claims against us
regardless of their validity. We may not have adequate resources to defend
against these claims and any associated costs and distractions could have a
material adverse effect on our business, financial condition and results of
operations. In addition, litigation in which we are accused of infringement
might cause product development delays, require us to develop non-infringing
technology or require us to enter into royalty or license agreements, which
might not be available on acceptable terms, or at all. If a successful claim of
infringement were made against us and we could not develop non-infringing
technology or license the infringed or similar technology on a timely and cost-
effective basis, our business could be significantly harmed 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. See
"Legal Proceedings".
A failure to protect our own intellectual property could harm our competitive
position.
We rely on a combination of patent, trade secret, copyright and trademark
laws and contractual restrictions, like confidentiality agreements and licenses,
to establish and protect our rights in our products, services, know-how and
information. We have 39 issued US patents, 62 pending US patent applications, 11
international patents and 26 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. After we complete the transfer of our web servers from its current
outsourced location to its new location inside our corporate headquarters, our
web site will no longer have the same connectivity infrastructure as available
through Exodus. 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 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.
18
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.
The effects of expansion may adversely affect our financial condition, results
of operations and existing stockholders.
We may establish subsidiaries, enter into joint ventures or pursue the
acquisition of new or complementary businesses, products or technologies in an
effort to enter into new business areas, diversify our sources of revenue and
expand our product and service offerings outside the Internet postage market.
Although we have no commitments or agreements and are not currently engaged in
discussions for any material acquisitions or investments, we continue to
evaluate incremental revenue opportunities and derivative applications of our
technology and may pursue and develop those opportunities with strategic
partners and investors, both domestically and internationally. To the extent we
pursue new or complementary businesses, we may not be able to expand our service
offerings and related operations in a cost-effective or timely manner. We may
experience increased costs, delays and diversions of management's attention when
integrating any new businesses or service. We may lose key personnel from our
operations or those of any acquired business. Furthermore, any new business or
service we launch that is not favorably received by users could damage our
reputation and brand name in the Internet postage or other markets that we
enter. We also cannot be certain that we will generate satisfactory revenues
from any expanded services or products to offset related costs. Any expansion of
our operations would also require significant additional expenses, and these
efforts may strain our management, financial and operational resources.
Additionally, future acquisitions may also result in potentially dilutive
issuances of equity securities, the incurring of additional debt, the assumption
of known and unknown liabilities, and the amortization of expenses related to
goodwill and other intangible assets, all of which could have a material adverse
effect on our business, financial condition and operating results. New issuances
of securities may also have rights, preferences and privileges senior to those
of our common stock.
Risks Related to Our Industry
US Postal Service regulations and fee assessments may cause disruptions or
discontinuance of our business, may increase the cost of our service and may
affect the adoption of Internet postage as a new method of mailing.
We are subject to continued US Postal Service scrutiny and other government
regulations. The continued availability of our Internet postage 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 Internet postage or revoke the
approval of our service at any time. If at any time our Internet postage service
fails to meet US Postal Service requirements, we may be prohibited from offering
this service and our business would be severely and negatively impacted. In
addition, the US Postal Service could suspend, terminate or offer services which
compete against Internet postage, any of which could stop or negatively impact
the commercial adoption of our Internet postage services. Any changes in
requirements or specifications for Internet postage could adversely affect our
pricing, cost of revenues, operating results and margins by increasing the cost
of providing our Internet postage service.
The US Postal Service could also decide that Internet postage should no
longer be an approved postage service due to security concerns or other issues.
Our business would suffer dramatically if we are unable to adapt our Internet
postage services to any new requirements or specifications or if the US Postal
Service were to discontinue
19
Internet postage as an approved postage method. Alternatively, the US Postal
Service could introduce competitive programs or amend Internet postage
requirements to make certification easier to obtain, which could lead to more
competition from third parties or the US Postal Service itself. See Risk
Factors--If we are unable to compete successfully, particularly against large,
traditional providers of postage products like Pitney Bowes who enter the online
postage market, our revenues and operating results will suffer.
In addition, US Postal Service regulations may require that our personnel
with access to postal information or resources receive security clearance prior
to doing relevant work. We may experience delays or disruptions if our personnel
cannot receive necessary security clearances in a timely manner, if at all. The
regulations may limit our ability to hire qualified personnel. For example,
sensitive clearance may only be provided to US citizens or aliens who are
specifically approved to work on US Postal Service projects.
If we are unable to compete successfully, particularly against large,
traditional providers of postage products such as Pitney Bowes who enter the
online postage markets, our revenues and operating results will suffer.
The market for Internet postage products and services is new and is
intensely competitive. At present, Pitney Bowes has a software-based product
commercially available. Neopost Industrie has a hardware product commercially
available. If any of our competitors, including Pitney Bowes, provide the same
or similar service as we provide, our operations could be adversely impacted.
See Business--Competition.
Internet postage may not be adopted by customers. These customers may
continue to use traditional means to purchase postage, including purchasing
postage from their local post office. If Internet postage becomes a viable
market, we may not be able to establish or maintain a competitive position
against current or future competitors as they enter the market. Many of our
competitors have longer operating histories, larger customer bases, greater
brand recognition, greater financial, marketing, service, support, technical,
intellectual property and other resources than us. As a result, our competitors
may be able to devote greater resources to marketing and promotional campaigns,
adopt more aggressive pricing policies and devote substantially more resources
to Web site and systems development than us. This increased competition may
result in reduced operating margins, loss of market share and a diminished
brand. We may from time to time make pricing, service or marketing decisions or
acquisitions as a strategic response to changes in the competitive environment.
These actions could result in reduced margins and seriously harm our business.
If the market for Internet postage develops, we could face competitive
pressures from new technologies or the expansion of existing technologies
approved for use by the US Postal Service. We may also face competition from a
number of indirect competitors that specialize in electronic commerce and other
companies with substantial customer bases in the computer and other technical
fields. Additionally, companies that control access to transactions through a
network or Web browsers could also promote our competitors or charge us a
substantial fee for inclusion. Our competitors may also be acquired by, receive
investments from or enter into other commercial relationships with larger,
better-established and better-financed companies as use of the Internet and
other online services increases. In addition, changes in postal regulations
could adversely affect our service and significantly impact our competitive
position. We may be unable to compete successfully against current and future
competitors, and the competitive pressures we face could seriously harm our
business.
If we do not respond effectively to technological change, our services could
become obsolete and our business will suffer.
The development of our services and other technology entails significant
technical and business risks. To remain competitive, we must continue to enhance
and improve the responsiveness, functionality and features of our online
operations. The Internet and the electronic commerce industry are characterized
by rapid technological change; changes in user and customer requirements and
preferences; frequent new product and service introductions embodying new
technologies; and the emergence of new industry standards and practices.
The evolving nature of the Internet or the Internet postage 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
20
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.
The success of our business will depend on the continued growth of the Internet
and the acceptance by customers of the Internet as a means for purchasing
postage services.
Our success depends in large part on widespread acceptance and use of the
Internet as a way to purchase postage services. This practice is at an early
stage of development, and market acceptance of Internet postage service is
uncertain. We cannot predict the extent to which customers will be willing to
shift their purchasing habits from traditional to online postage services. To be
successful, our customers must accept and utilize electronic commerce to satisfy
their product needs. Our future revenues and profits, if any, substantially
depend upon the acceptance and use of the Internet and other online services as
an effective medium of commerce by our target users.
The Internet may not become a viable long-term commercial marketplace due
to potentially inadequate development of the necessary network infrastructure or
delayed development of enabling technologies and performance improvements. The
commercial acceptance and use of the Internet may not continue to develop at
rates sufficient to sustain or grow our business. Our business, financial
condition and results of operations would be seriously harmed if use of the
Internet and other online services does not continue to increase or increases
more slowly than expected; the infrastructure for the Internet and other online
services does not effectively support future expansion of electronic commerce or
our services; concerns over security and privacy inhibit the growth of the
Internet; or the Internet and other online services do not become a viable
commercial marketplace.
Our operating results could be impaired if we or the Internet become subject to
additional government regulation and legal uncertainties.
With the exception of US Postal Service and Department of Commerce
regulations, we are not currently subject to direct regulation by any domestic
or foreign governmental agency, other than regulations applicable to businesses
generally, and laws or regulations directly applicable to electronic commerce.
However, due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet, relating to user privacy; pricing; content; copyrights;
distribution; characteristics and quality of products and services; and export
controls.
The adoption of any additional laws or regulations may hinder the expansion
of the Internet. A decline in the growth of the Internet could decrease demand
for our products and services and increase our cost of doing business. Moreover,
the applicability of existing laws to the Internet is uncertain with regard to
many issues, including property ownership, export of specialized technology,
sales tax, libel and personal privacy. Our business, financial condition and
results of operations could be seriously harmed by any new legislation or
regulation. The application of laws and regulations from jurisdictions whose
laws do not currently apply to our business, or the application of existing laws
and regulations to the Internet and other online services could also harm our
business.
We have employees and offer our services in multiple states, and we may in
the future expand internationally. These jurisdictions may claim that we are
required to qualify to do business as a foreign corporation in each state or
foreign country. Our failure to qualify as a foreign corporation in a
jurisdiction where we are required to do so could subject us to taxes and
penalties. Other states and foreign countries may also attempt to regulate our
services or prosecute us for violations of their laws. Further, we might
unintentionally violate the laws of foreign jurisdictions and those laws may be
modified and new laws may be enacted in the future.
21
If we market our services internationally, government regulation could disrupt
our operations.
We may in the future begin to provide services in international markets.
Our ability to provide our Internet postage services in international markets
would likely be subject to rigorous governmental approval and certification
requirements similar to those imposed by the US Postal Service. For example, our
Internet postage services cannot currently be used for international mail
because foreign postal authorities do not currently recognize information-based
indicia postage. If foreign postal authorities accept postage generated by our
service in the future, and if we obtain the necessary foreign certification or
approvals, we would be subject to ongoing regulation by foreign governments and
agencies. To date, efforts to create a certification process in Europe and other
foreign markets are in a preliminary stage and these markets may not prove to be
a viable opportunity for us. As a result, we cannot predict when, or if,
international markets will become a viable source of revenues for a postage
service similar to ours.
Our ability to provide service in international markets may also be
impacted by the export control laws of the United States. Our software
technology makes us subject to stronger export controls, and may prevent us from
being able to export our products and services. Regulations and standards of the
Universal Postal Union and other international bodies may also limit our ability
to provide international mail services.
If we enter the international market, our business activities will be
subject to a variety of potential risks, including the adoption of laws and
regulatory requirements, political and economic conditions, difficulties
protecting our intellectual property rights and actions by third parties that
would restrict or eliminate our ability to do business in these jurisdictions.
If we begin to transact business in foreign currencies, we will become subject
to the risks attendant to transacting in foreign currencies, including the
potential adverse effects of exchange rate fluctuations.
Risks Related to Our Stock
Our charter documents could deter a takeover effort, which could inhibit your
ability to receive an acquisition premium for your shares.
The provisions of our certificate of incorporation, bylaws and Delaware law
could make it difficult for a third party to acquire us, even it would be
beneficial to our stockholders. In addition, we are subject to the provisions of
Section 203 of the Delaware General Corporation Law, which could prohibit or
delay a merger or other takeover of our company, and discourage attempts to
acquire us.
The US Postal Service may object to control of our common stock being held by a
foreign person.
The US Postal Service may raise national security or similar concerns to
prevent foreign persons from acquiring significant ownership of our common stock
or ownership of Stamps.com. 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 Internet postage.
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.
22
Our stock price may be highly volatile and could drop, particularly because our
business depends on the Internet.
The trading price of our common stock has fluctuated widely in the past,
and is expected to continue to do so in the future, as a result of a number of
factors, many of which are outside our control. In addition, the stock market
has experienced extreme price and volume fluctuations that have affected the
market prices of many technology and Internet-related companies and that have
often been unrelated or disproportionate to the operating performance of these
companies. These broad market fluctuations and the perception of the valuation
of the Internet company sector could adversely affect the market price of our
common stock.
ITEM 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 less than 260 days at March
31, 2002. Our cash equivalents and investments, net of restricted cash,
approximated $187 million and had a related weighted average interest rate of
3.05%. Interest rate fluctuations impact the carrying value of the portfolio. We
do not believe that the future market risks related to the above securities will
have material adverse impact on our financial position, results of operations or
liquidity.
23
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 16, 1999, Pitney Bowes sued us for alleged patent infringement in
the United States District Court for the District of Delaware. The suit
originally alleged that we are infringing two patents held by Pitney Bowes
related to postage application systems and electronic indicia. The suit seeks
treble damages, a preliminary and permanent injunction from further alleged
infringement, attorneys' fees and other unspecified damages. We answered the
complaint on August 6, 1999, denying the allegations of patent infringement and
asserting a number of affirmative defenses. Pitney Bowes filed a similar
complaint in early June 1999 against E-Stamp Corporation, alleging infringement
of seven Pitney Bowes patents. On April 13, 2000, Pitney Bowes asked the court
for permission to amend its complaint to drop allegations of patent infringement
with respect to one patent and to add allegations of patent infringement with
respect to three other patents. On July 28, 2000 the court entered Pitney Bowes'
amended complaint. On June 18, 2001, E-Stamp and Pitney Bowes agreed to settle
their litigation.
On September 18, 2000 Pitney Bowes filed another patent infringement
lawsuit against us in the United States District Court for the Eastern District
of Texas, alleging that we are infringing four patents owned by Pitney Bowes
related to multi-carrier shipping. The suit seeks unspecified damages and a
permanent injunction from further alleged infringement. We answered the
complaint on December 1, 2000, denying the allegations of patent infringement
and asserting a number of affirmative defenses. The United Parcel Service
acquired our iShip multi-carrier shipping service assets on May 18, 2001. On
September 4, 2001, the court granted our motion to transfer the lawsuit to the
United States District Court for the District of Delaware. On April 18, 2002,
the claim that we are infringing one of the patents was dismissed with
prejudice.
On June 14, 2001, we filed a patent infringement lawsuit against Pitney
Bowes in the United States District Court for the Central District of
California, alleging that Pitney Bowes infringes four patents we own. On January
7, 2002, the court granted Pitney Bowes' motion to transfer the lawsuit to the
United States District Court for the District of Delaware. Each of our patent
lawsuits against Pitney Bowes is in the discovery phase and is scheduled for
trial in January, 2003.
The outcome of our litigation against Pitney Bowes is uncertain. Therefore,
we can give no assurance that Pitney Bowes will not prevail in its suits against
us. See Risk Factors-Success by Pitney Bowes in its suits against us alleging
patent infringement could prevent us from offering our Internet postage services
and severely harm our business or cause it to fail.
On December 13, 2000, Cybershop (a British Columbia, Canada partnership)
and its general partners filed suit against us in the U.S. District Court for
the Southern District of Texas, alleging that in 1998 a third party fraudulently
transferred ownership of the Internet domain name "stamps.com" away from
Cybershop and subsequently transferred it to us. The third party is also a named
defendant in the suit. The complaint seeks legal resolution and recognition of
Cybershop's ownership of the "stamps.com" domain name and seeks unspecified
monetary damages against the third party. On January 9, 2001, we filed a motion
to dismiss the suit. On February 16, 2001, Cybershop filed an amended complaint,
alleging new causes of action, including conversion, invasion of privacy,
trespass, and private nuisance, and seeking declaratory judgment for return of
the domain name registration to Cybershop. Cybershop later filed third and
fourth amended complaints. On February 13, 2002, the court granted our summary
judgment motion and dismissed all of Cybershop's pending claims against us with
prejudice. Cybershop has filed a motion asking the court to reconsider its
decision.
The final outcome of that litigation is uncertain, and we can give no
assurance that Cybershop and its general partners will not prevail. See Risk
Factors- Success by Cybershop in its suit against us seeking damages and
recognition of its ownership of the domain name stamps.com could prevent us from
using the domain name stamps.com and could require a change of name of the
Company, severely harming our business or causing it to fail.
On or about April 6, 2000, Metro Fulfillment, Inc. filed a lawsuit against
Weigh-Tronix, Inc. for breach of contract, fraud, negligent misrepresentation,
intentional inference with contract, negligent interference, breach of implied
warranty and breach of express warranty. Metro Fulfillment, Inc. alleges that
pursuant to its agreement with
24
Weigh-Tronix, Inc., Metro Fulfillment, Inc. was not required to pay for postal
scales that were purchased from Weigh-Tronix, Inc. until Metro Fulfillment, Inc.
had actually sold those scales to end users. These scales were supposed to be
sold through our Web site. Metro Fulfillment, Inc. further alleged that
Weigh-Tronix, Inc. breached the agreement by seeking payment before the scales
were actually sold to customers in breach of the agreement. Weigh-Tronix, Inc.
in turn filed a third party complaint against us and Metro Fulfillment, Inc. for
breach of contract and several common counts. The third party complaint seeks
approximately $700,000 in compensatory damages, plus interest and attorney's
fees. We have filed an answer to the third party complaint denying the
allegations of the lawsuit. The parties reached a tentative settlement
agreement, pursuant to which we would pay Weigh- Tronix, Inc. $200,000 and
Metrofulfillment, Inc. would pay Weigh-Tronix, Inc. $25,000, in return for
Weigh-Tronix, Inc. and Metrofulfillment, Inc. dismissing all of their claims in
this lawsuit. In addition, we would receive all of the postage scales that
Metrofulfillment, Inc. still has in its inventory, the amount of which are
unknown at this time. This settlement agreement is conditioned upon the parties
successfully reducing the settlement to a signed writing. On February 28, 2001,
Metro Fulfillment, Inc. filed a lawsuit against us stemming from services
allegedly performed by Metro Fulfillment, Inc. under a Fulfillment Services
Agreement. The complaint alleges claims for breach of contract, common counts
and negligent misrepresentation. The complaint seeks damages of approximately
$1.3 million. We have filed an answer to the complaint denying the allegations
in the lawsuit. Metro Fulfillment, Inc. filed for Bankruptcy protection on
December 18, 2001. On May 1, 2002, we filed a proof of claim against Metro
Fulfillment, Inc. for $4,589,835 in the bankruptcy court. Attempts to mediate
this case have been unsuccessful as of this date. It is not possible at this
time to predict the final outcome of this matter.
In May and June, 2001, we were named, together with certain of our current
or former board members and/or officers, as a defendant in eleven purported
class-action lawsuits, filed in the United States 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 secondary offering of our common stock. The lawsuits
also name as defendants the principal underwriters in connection with our
initial and secondary public offerings, including Goldman, Sachs & Co. (in some
of the lawsuits sued as The Goldman Sachs Group Inc.) and BancBoston Robertson
Stephens, Inc. The lawsuits allege that the underwriters engaged in allegedly
improper commission practices and stock price manipulations in connection with
the sale of our common stock. The lawsuits also 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 prejudgment and
post-judgment interest, costs and expenses (including attorneys' fees), and
rescissionary damages. In April 2002, plaintiffs filed a consolidated amended
class action complaint against us and certain of our current and former board
members and/or officers. The consolidated amended class action complaint
includes similar allegations to those described above and seeks similar relief.
In addition to the class action lawsuits against us, over 1,000 similar
lawsuits have also been brought against over 250 companies which issued stock to
the public in 1998, 1999, and 2000, and their underwriters. These lawsuits
(including those naming the Company) followed publicized reports that the SEC
was investigating the practice of certain underwriters in connection with
initial public offerings. All of these lawsuits have been consolidated for
pretrial purposes before Judge Scheindlin of the Southern District of New York.
We have placed our underwriters on notice of the Company's rights to
indemnification, pursuant to our agreements with the underwriters. We have also
provided notice to our directors and officers insurers, and believe that we have
insurance applicable to the lawsuits. We also believe that the claims against us
and our officers and directors are without merit, and intend to defend the
lawsuits vigorously.
We are not currently involved in any other material legal proceedings, nor
have we been involved in any such proceeding that has had or may have a
significant effect on our company. We are not aware of any other material legal
proceedings pending against us.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
STAMPS.COM INC.
(Registrant)
May 14, 2002 By: /s/ Kenneth McBride
--------------------------------------
Ken McBride
Chief Executive Officer and
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)