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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 June 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ________________ to ________________
Commission file number 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
August 9, 2001, there were approximately 50,425,733 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 JUNE 30, 2001
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION........................................... 2
ITEM 1. FINANCIAL STATEMENTS........................................ 2
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................... 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.. 22
PART II. OTHER INFORMATION.............................................. 23
ITEM 1. LEGAL PROCEEDINGS........................................... 23
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......... 25
ITEM 5. OTHER INFORMATION........................................... 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 25
1
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STAMPS.COM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2001 2000
--------- ------------
(unaudited)
(In thousands)
ASSETS
Current assets:
Cash and short-term investments.......................... $ 193,692 $ 243,929
Restricted cash.......................................... 3,889 4,010
Accounts receivable...................................... 1,740 2,546
Note Receivable from former officer, net of allowance.... 3,181 3,181
Prepaid expenses......................................... 1,211 5,185
--------- ---------
Total current assets.................................... 203,713 258,851
Property and equipment, net.................................. 14,932 45,585
Goodwill and other intangible assets, net.................... 7,505 166,450
Other assets................................................. 6,570 16,052
--------- ---------
Total assets............................................ $ 232,720 $ 486,938
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... 385 3,656
Accrued expenses......................................... 14,096 14,913
Deferred revenue......................................... -- 1,809
Current portion of long-term debt and capital leases..... 256 3,828
--------- ---------
Total current liabilities.................................... 14,737 24,206
Long-term debt and capital leases, less current portion...... -- --
Commitments and contingencies................................ -- 5,286
Minority interest in consolidated subsidiary................. -- 34,765
Stockholders' equity:
Common stock............................................. 50 49
Additional paid-in capital............................. 700,309 708,007
Notes receivable from stock sales..................... (101) (101)
Deferred compensation.................................... (1,153) (11,642)
Accumulated deficit...................................... (481,122) (273,632)
--------- ---------
Total stockholders' equity............................ 217,983 422,681
--------- ---------
Total liabilities and stockholders' equity.......... $ 232,720 $ 486,938
========= =========
The accompanying notes are an integral part of these financial statements.
2
STAMPS.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months ended June 30, Six Months ended June 30,
------------------------------------ -------------------------------------
2001 2000 2001 2000
---------------- ---------------- ---------------- ---------------
(in thousands, except per share data) (in thousands, except per share data)
Revenues............................... $ 5,069 $ 3,674 $ 10,328 $ 5,710
Cost of revenues....................... 1,772 5,719 4,958 9,453
---------------- ---------------- ---------------- ---------------
Gross profit...................... 3,297 (2,045) 5,370 (3,743)
Operating expenses:
Sales and marketing............... 2,916 20,498 7,204 42,998
Research and development.......... 2,192 8,025 6,274 11,420
General and administrative........ 5,700 8,541 12,502 14,381
Amortization and write-off of
goodwill and other intangibles... -- 13,778 172,817 18,403
Restructuring and writedown
charges.......................... 15,834 -- 26,855 --
Acquired in-process research
and development.................. -- -- -- 2,000
Deferred compensation expense..... 692 4,146 2,137 5,899
Loss from EncrypTix............... -- 5,601 --
Loss from sale of iShip........... 9,076 -- 9,076 --
---------------- ---------------- ---------------- ---------------
Total operating expenses...... 36,410 54,988 242,466 95,101
---------------- ---------------- ---------------- ---------------
Loss from operations................... (33,113) (57,033) (237,096) (98,844)
Other income (expense):
Interest expense.................. (7) (118) (20) (164)
Interest income................... 2,362 4,857 6,431 9,825
Gain from shut down of EncrypTix.. -- -- 23,195 --
---------------- ---------------- ---------------- ---------------
Total other income (expense), net.. 2,355 4,739 29,606 9,661
---------------- ---------------- ---------------- ---------------
Net loss............................... $(30,758) $(52,294) $(207,490) $(89,183)
================ ================ ================ ===============
Basic and diluted net loss per share... $ (0.62) $ (1.09) $ (4.22) $ (1.96)
================ ================ ================ ===============
Weighted average shares outstanding
used in basic and diluted per-share
calculation........................... 49,354 47,956 49,168 45,488
================ ================ ================ ===============
The accompanying notes are an integral part of these financial statements.
3
STAMPS.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months ended June 30,
-------------------------
2001 2000
--------- --------
(In thousands)
Operating activities:
Net loss.................................................... $(207,490) $(89,183)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for doubtful accounts.......................... 373
Depreciation and amortization............................ 12,353 21,267
Write-down of goodwill and other intangibles............. 163,634
Amortization of deferred compensation.................... 2,137 5,899
Charge for acquired in-process research and development.. 2,000
Loss on disposal and writedown of assets................. 31,914 --
Loss on sale of iShip.................................... 9,076 --
Net gain on shut down of EncrypTix....................... (23,195) --
Changes in operating assets and liabilities, net of
effects of acquisition:
Accounts receivable..................................... 433 (1,246)
Prepaid expenses........................................ 3,750 7,199
Other assets............................................ 384 --
Accounts payable........................................ (3,271) (2,662)
Minority interest....................................... (11,570) --
Accrued expenses........................................ (10,237) 3,101
Deferred revenue........................................ (1,809) 3,146
--------- --------
Net cash used in operating activities......................... (33,518) (50,479)
Investing activities
Sale (purchase) of short-term investments, net.............. 98,743 (40,316)
Sale of restricted cash investments......................... 121
Goodwill and other intangible assets........................ 2,800 --
Purchase of intellectual property........................... (7,500)
Acquisition of property and equipment....................... (3,938) (20,018)
Acquisition of iShip.com, net of cash acquired................ (2,111)
Other....................................................... (2,471)
--------- --------
Net cash provided by (used in) investing activities........... 90,226 (64,916)
Financing activities
Repayment of long-term debt and capital leases.............. (8,858) (1,054)
Repayment of line of credit................................. (1,333)
Issuance of redeemable preferred stock of subsidiary, net... 34,784
Issuance of common stock under ESPP......................... 175 --
Issuance of common stock.................................... 481 630
Repurchase of common stock.................................. -- 939
--------- --------
Net cash (used in) provided by financing activities........... (8,202) 33,966
--------- --------
Net increase (decrease) in cash and cash equivalents.......... 48,506 (81,429)
Cash and cash equivalents at beginning of period.............. 69,536 326,820
--------- --------
Cash and cash equivalents at end of period.................... 118,042 245,391
Short term investments........................................ 75,650 88,242
--------- --------
Cash and short term investments............................... $ 193,692 $333,633
========= ========
The accompanying notes are an integral part of these financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO June 30, 2001 AND 2000 IS UNAUDITED)
1. Summary of Significant Accounting Policies
Basis of Presentation
The financial statements are unaudited, other than the balance sheet at
December 31, 2000, and, in the opinion of management, reflect all adjustments
that are necessary for a fair presentation of the results for the periods shown.
The results of operations for such periods are not necessarily indicative of
the results expected for the full fiscal year or for any future period. These
financial statements should be read in conjunction with the financial statements
as of December 31, 2000 and related notes included in the Company's Annual
Report on Form 10-K/A filed with the Securities and Exchange Commission (the
"SEC") on April 27, 2001.
Principles of Consolidation
The consolidated financial statements include the accounts of Stamps.com
Inc. (the "Company") and its wholly-owned and majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates and such
differences may be material to the financial statements.
Reclassifications
Certain prior period balances have been reclassified to conform to current
period presentation.
2. Writedown of Intangible Assets related to iShip.com
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.
On March 2, 2001, United Parcel Service and Mail Boxes Etc. USA, Inc.
jointly announced that United Parcel Service would acquire Mail Boxes Etc. USA,
Inc. Mail Boxes Etc. USA, Inc. represented a significant future source of
revenue and market leverage for the Company's enterprise shipping services that
were acquired in the iShip acquisition. United Parcel Service also informed the
Company that it is 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 intangibles associated
with the purchase of iShip to reflect the 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.
On May 18, 2001, the Company completed the sale of its iShip multi-carrier
shipping service assets to United Parcel Service for $2.8 million. The
difference between the sale price of iShip and the assets value attributed to
iShip by the Company resulted in a non-cash charge of $9.1 million in the second
quarter of 2001.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO June 30, 2001 AND 2000 IS UNAUDITED)
3. EncrypTix Ceases Operations
On November 16, 1999, the Company announced the formation of a subsidiary,
EncrypTix, Inc., to develop secure printing opportunities in the events, travel
and financial services industries. In February 2000, the Company invested $1.0
million and granted EncrypTix a license to its technology in those three
specific fields of use. EncrypTix raised approximately $35 million in private
financing. On March 12, 2001, EncrypTix ceased operations and effected a general
assignment of its assets for the benefit of its creditors. EncrypTix took this
action due to the inability to secure additional funding. The Company does not
expect to be impacted by any of EncrypTix's resulting liabilities. Additionally,
the Company terminated its license agreement with EncrypTix and maintains
limited licenses to various EncrypTix intellectual property. Due to this
cessation in business, the Company has written off the invested $1.0 million and
taken a one time gain to eliminate the cumulative loss from EncrypTix in the
amount of $23.2 million in the first quarter of 2001.
4. Work Force Restructuring
In February 2001, in an effort to more rapidly decrease its operating losses
and enhance its ability to achieve profitability sooner, the Company reduced its
total number of employees by approximately 50% to 150 employees, including full
time, part time and contract employees. The Company 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. The Company took a one-time charge of $11.0 million in the
first quarter of 2001 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, $1.0 million related to the
write-off of an investment in EncrypTix.
In the quarter ended June 30, 2001, the Company continued with its cost
cutting efforts resulting in a one-time charge of $15.8 million consisting of
$14.7 million in restructuring employee severance, fixed asset write-offs and
lease obligations for discontinued office space, and $1.1 million related to the
termination of certain contractual arrangements and additional fixed asset
write-offs.
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 if their effect is anti-dilutive.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO June 30, 2001 AND 2000 IS UNAUDITED)
7. 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.
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 as of June 30, 2001.
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 (based on a price of $2 25/32 per share).
8. Acquisition of E-Stamp Corporation Assets
On April 27, 2001, the Company acquired 31 patents and other intellectual
property rights from E-Stamp Corporation, including the E-Stamp name and rights
to the E-Stamp.com Internet domain for $7.5 million.
7
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 11. All forward-looking statements attributable to
Stamps.com are expressly qualified in their entirety by such language.
Stamps.com does not undertake any obligation to update any forward-looking
statements. You are also urged to carefully review and consider the various
disclosures we have made which describe certain factors which affect our
business, including the risk factors set forth at the end of Part I, Item 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, packages or parcels anytime and anywhere in the
United States. Our core postage services are designed to allow individual
consumers or employees of small businesses to print US postage or shipping
labels, schedule a pick-up, track a package and apply enterprise-wide business
rules to manage and account for mailing and shipping costs. With all of our
services, no additional hardware is required; a customer can access our services
through an existing Internet connection and print postage or shipping labels
with ordinary laser or inkjet printers.
Recent Developments
In the quarter ended June 30, 2001, we have continued to implement our new
business strategy begun in October 2000 to enhance our ability to achieve
profitability by focusing on our core business of Internet postage. In May 2001,
in an effort to focus on our postage services for small business and home
offices, we sold the iShip multi-carrier shipping service assets to United
Parcel Service for $2.8 million. We also continued our cost cutting efforts,
including the termination of fixed-cost marketing arrangements, and the
redeployment of sales and marketing expenditures to programs that have a higher
return on investment.
In May, 2001, we terminated our marketing relationship with Cydcor Limited
following our evaluation of our relationship. We expect to continue our current
marketing efforts and focus the Company on its core mailing and shipping
services for small business and home offices.
In the quarter ended June 30, 2001, we experienced significant changes at
the senior management level. Following the sale of the Company's iShip assets in
May 2001, John A. Duffy and Stephen M. Teglovic, who served on the 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 the Board
of Directors. We do not, at this time, intend to fill the vacancies created by
the board resignations. We expect to continue to experience changes in personnel
at the senior management and Board level as part of our restructuring process.
Bruce Coleman remains as our interim Chief Executive Officer, and we have not
yet found a permanent replacement.
On April 27, 2001, we acquired certain intellectual property assets relating
to Internet-based postage printing and management from E-Stamp Corporation, one
of our former competitors for a purchase price of $7.5 million. The portfolio of
31 patents and trademarks that we acquired from E-Stamp Corporation include the
E-Stamp name and rights to the E-Stamp.com Internet domain. We plan to use these
intellectual property assets to expand the services available to our existing
customer base and to target the larger market of small businesses and
8
home offices. However, certain 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. Such a
determination could make the intellectual property rights we acquired worthless.
Internet Postage Services
We offer an Internet postage services targeted at consumers and small
businesses with less than 100 employees. Service fee revenues for our Internet
postage services are generated from the two service plans that we are currently
offering to our users, the Simple Plan and the Power Plan. Under the Simple
Plan, a user purchases postage at face value for a monthly convenience fee of
10% of the value of postage printed. Prior to November 2000, there was a monthly
minimum fee of $1.99 and a monthly maximum fee of $19.99 under the Simple Plan.
Beginning in November 2000, the monthly minimum fee was increased to $4.49 for
new customers and the monthly maximum fee was discontinued. All $1.99 customers
who existed at the time of the price increase have been converted to the new
price. 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.
For the second quarter of 2001, over 50% 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. During the second quarter of 2001, we acquired 43,000 gross
customers and ended the quarter at 307,000 active customers, down from 323,000
customers at the end of the first quarter.
Results of Operations
Revenue. Revenue for the three months ended June 30, 2001 was exclusively
from the Internet postage business due to the divestiture of the shipping
operation. As such, revenue from the Internet postage business was up 132% year
over year to $5.1 million from $2.2 million in the second quarter ending June
30, 2000, while total revenue was up 38% year over year to $5.1 million from
$3.7 million in the second quarter ending June 30, 2000. Revenue for the six
months ended June 30, 2001 was $10.3 million, compared to $5.7 million for the
six months ended June 30, 2000. Increase in Revenue is primarily due to the
increased customer count.
Cost of Revenues. Cost of revenues principally consists of customer
service, promotional expenses, and system operating costs. Cost of revenues was
$1.8 million for the three months ended June 30, 2001, compared to $5.7 million
for the three months ended June 30, 2000. Cost of revenues was $5.0 million for
the six months ended June 30, 2001, compared to $9.5 million for the six months
ended June 30, 2000. During 2001, 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 decreased the amount of
free postage given to each customer. We also implemented a new type of free
postage that expires after a period of 30 days, resulting in less 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 $2.9 million compared to $20.5
million for the three months ended June 30, 2001 and 2000, respectively. Sales
and marketing expenses were $7.2 million compared to $43.0 million for the six
months ended June 30, 2001 and 2000, respectively. The decrease in sales and
marketing expenses resulted from fewer sales and marketing personnel, as well as
a more focused spend 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 services, expenditures for consulting services and third-party.
Research and development expenses for the three months ended June 30, 2001 were
$2.2 million compared to $8.0 million for the three months ended June 30, 2000.
Research and development expenses for the six months ended June 30, 2001 were
$6.3 million compared to $11.4 million for the six months ended June 30, 2000.
The decrease is primarily due to increased cost control efforts and the
reduction in headcount.
9
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, and depreciation of
equipment and software used for general corporate purposes. General and
administrative expenses for the three months ended June 30, 2001 and 2000 were
$5.7 million and $8.5 million, respectively. General and administrative expenses
for the six months ended June 30, 2001 and 2000 were $12.5 million and $14.4
million, respectively. The decrease is primarily due to increased cost control
efforts and the reduction in headcount.
Restructuring and Write-down Charges. We continued our 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. In addition the $11.0 million charge taken in the first
quarter of 2001, we took a charge in the second quarter of 2001 of $15.8 million
consisting of $14.7 million in restructuring employee severance, fixed asset
write-offs and lease obligations for discontinued office space, and $1.1 million
related to the termination of certain contractual arrangements and additional
fixed asset write-offs.
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 June 30,
2001 and 2000 was $692,000 and $4.1 million, respectively. Deferred compensation
amortization for the six months ended June 30, 2001 and 2000 was $2.1 million
and $5.9 million, respectively. This decrease was a result of fewer personnel at
Stamps.com following our October 2000 and February 2001 reductions in force.
Loss from Sale of iShip. On May 18, 2001, the Company completed the sale of
its iShip multi-carrier shipping service assets to United Parcel Service for
$2.8 million. The difference between the sale price of iShip and the assets
value attributed to iShip by the Company resulted in a non-cash charge of $9.1
million in the second quarter of 2001. The second quarter charge of $9.1 million
was in addition to the non-cash charge of $163.6 million recorded in the first
quarter of 2001 related to our reduction of goodwill and other intangibles
associated with the purchase of iShip.
Other Income (Expense). Other income (expense) consisted of income from
cash equivalents and short term investments, less interest expense related to
financing obligations. Other income (expense) for the three months ended June
30, 2001 and 2000 was $2.4 million and $4.7 million, respectively. This decrease
is due to declining interest rates and a reduction in the amount of capital
invested. Other income (expense) for the six months ended June 30, 2001 and 2000
was 29.6 million and 9.7 respectively. This increase is due to a one-time gain
related to the shutdown of Encryptix in the first quarter of 2001.
Liquidity and Capital Resources
As of June 30, 2001 we had approximately $194 million cash and short term
investments, down from $244 million as of December 31, 2000 due to our operating
losses. We regularly invest excess funds in short-term money market funds and
commercial paper and do not engage in hedging or speculative activities.
In the first quarter of 2000, our majority-owned subsidiary, EncrypTix,
raised approximately $34.8 million in private financing from a group of
financial and strategic investors. The proceeds of this financing were used by
EncrypTix for research and development, sales and marketing and general working
capital purposes. On March 12, 2001, EncrypTix ceased operations and effected a
general assignment of its assets for the benefit of its creditors. EncrypTix
took this action due to the inability to secure additional funding. We do not
expect to be impacted by any of EncrypTix's resulting liabilities. Additionally,
we terminated our license agreement with EncrypTix and maintain limited licenses
to various EncrypTix intellectual property.
In May 1999, we entered into a facility lease agreement for the corporate
headquarters with aggregate lease payments of approximately $4.8 million through
May 2004. Also, in March 2000 we entered into a facility lease agreement for a
Bellevue, Washington facility with aggregate lease payments of approximately $17
million. We are actively marketing to sublet the excess space that resulted from
our October 2000 and February 2001 restructurings.
10
Net cash used in operating activities was $33.5 million and $50.5 million
for the six months ended June 30, 2001 and 2000, respectively. The decrease in
net cash used in operating activities resulted primarily from cost-cutting
activities, including the restructuring that took place in the fourth quarter of
2000 and in the first quarter of 2001.
Net cash provided by investing activities was $90.2 million for the six
months ended June 30, 2001 and net cash used in investing activities was $64.9
million for the six months ended June 30, 2000. The increase in net cash
provided by investing activities resulted primarily from the sale of short-term
investments during the first quarter of 2001.
Net cash used by financing activities was $8.2 million for the six months
ended June 30, 2001 as compared to net cash provided by financing activities of
$34.0 million for the six months ended June 30, 2000. The difference resulted
primarily from the issuance of redeemable preferred stock of a subsidiary during
the first quarter of 2000.
We anticipate that our current cash balances will be sufficient to fund our
operations beyond 2002. We may require additional capital to fund our business,
and we cannot be certain that additional funds will be available on satisfactory
terms when needed, if at all. See "Risk Factors--We may need to raise additional
capital in the future through the issuance of additional equity or convertible
debt securities or by borrowing money, and additional funds may not be available
on terms acceptable to us."
RISK FACTORS
You should carefully consider the following risks and the other information
in this Report and our other filings with the SEC before you decide to invest in
our company or to maintain or increase your investment. The risks and
uncertainties described below are not the only ones facing Stamps.com.
Additional risks and uncertainties may also adversely impact and impair our
business. If any of the following risks actually occur, our business, results of
operations or financial condition would likely suffer. In such case, the trading
price of our common stock could decline, and you may lose all or part of your
investment.
This Report contains forward-looking statements based on the current
expectations, assumptions, estimates and projections about Stamps.com and the
Internet industry. These forward-looking statements involve risks and
uncertainties. Our actual results could differ materially from those discussed
in these forward-looking statements as a result of certain factors, as more
fully described in this section and elsewhere in this Report. Stamps.com does
not undertake to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
Risks Related to Our Business
Because we have a limited operating history, there is limited information upon
which you can evaluate our business.
We are still in the early stages of our development, and our limited
operating history makes it difficult to evaluate our business and prospects. Our
Internet postage services have only been available since October 22, 1999. Due
to our limited operating history, it is difficult or impossible to predict
future results of operations, including operating expenses and revenues.
Moreover, due to our limited operating history, any evaluation of our business
and prospects must be made in light of the risks and uncertainties often
encountered by early-stage companies in Internet-related markets. Many of these
risks are discussed in the subheadings below, and include our (a) ability to
meet and maintain government specifications for our Internet postage services,
specifically US Postal Service requirements; (b) complete dependence on Internet
postage services that currently do not have substantial market acceptance; (c)
potential need to expand our sales and support organizations; (d) ability to
establish and promote our brand name; (e) ability to expand our operations to
meet the commercial demand for our services, when it arises; (f) development of
and reliance on strategic and distribution relationships; (g) ability to prevent
and respond quickly to service interruptions; (h) ability to minimize fraud and
other security risks; and (i) ability to compete with companies with greater
capital resources and brand awareness.
11
If we are unsuccessful in addressing these risks or in executing our new
business strategy, our business, results of operations and financial condition
would be materially and adversely affected.
Our revenues and operating results may fluctuate in future periods and we may
fail to meet expectations, which may cause the price of our common stock to
decline.
Given our limited operating history, we have not generated any significant
revenues from our operations. Our revenues and operating results are difficult
to predict and may fluctuate significantly from period-to-period particularly
because our Internet postage services is 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 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
services; (e) our ability to develop and maintain strategic distribution
relationships; (f) the number, timing and significance of new products or
services introduced by both us and our competitors; (g) our ability to develop,
market and introduce new and enhanced services on a timely basis; (h) the level
of service and price competition; (i) the increases in our operating expenses;
(j) US Postal Service regulation and policies; (k) the success of implementing
our new business strategy and of reducing expenses; and (l) general economic
factors.
Our cost of revenues includes costs for systems operations, customer
service, Internet connection and security services; all of these costs will
fluctuate depending upon the demand for our services. In addition, a substantial
portion of our operating expenses is related to personnel costs, marketing
programs and overhead, which cannot be adjusted quickly and are therefore
relatively fixed in the short term. Our operating expense levels are based, in
significant part, on our expectations of future revenues. If our expenses
precede increased revenues, both gross margins and results of operations would
be materially and adversely affected. Moreover, our new business strategy of
reducing expenses may directly and correspondingly cause our revenues to
substantially decline.
Due to the foregoing factors and the other risks discussed in this annual
report, you should not rely on period-to-period comparisons of our operating
results as an indication of future performance.
We have a history of losses, expect to incur losses in the future and may never
achieve profitability, which may reduce the trading price of our common stock.
Since we began operations in 1998, we have incurred substantial operating
losses in every period. As a result of accumulated operating losses, we have an
accumulated deficit of $481 million as of June 30, 2001. Since inception, we
have funded our business through selling our stock, not from cash generated by
our business. We expect to continue to incur significant sales and marketing,
research and development, and administrative expenses and therefore could
continue to experience net losses and negative cash flows for several years, and
perhaps for the duration of our corporate existence. For the quarter ended June
30, 2001, we only generated $5.1 million in revenues. Even if sales of our
products and services begin to grow, we may not generate sufficient revenues to
achieve profitability in the future.
Overall, we will need to generate significant revenues and successfully
implement our new business strategy to achieve and maintain profitability.
We recently implemented new pricing plans that may adversely affect our future
revenues and profitability.
Our ability to generate gross margins depends upon the ability to generate
significant revenues from a large base of active customers. We recently changed
our pricing plans for our Internet postage services. In order to attract
customers in the future, we may run special promotions and offer discounts on
fees, postage and supplies. We cannot be sure that customers will be receptive
to the new fee structure for our Internet postage services or to the fee
structure that we will 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.
12
If our new business strategy is not successfully implemented, our financial
condition and results of operations will be adversely affected.
In the quarter ended June 30, 2001, we have continued to implement our new
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 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 new strategy entails risks relating to our ability to attract our
targeted customers to offset potential customer losses in other areas and the
ability of our new management team to implement this strategy. There is no
guarantee our new management team will be able to effectively or efficiently
implement our new business strategy or that, if effectively implemented, our
business strategy will benefit us or help us achieve profitability. Failure to
execute our plan to significantly reduce expenses or to attract new customers in
high margin lines of business in significant numbers will adversely effect our
financial condition and results of operations. In addition, our new business
strategy could result in a substantial loss of customers which would have an
adverse impact on our financial condition and results of operations.
Recent personnel changes may interfere with our operations.
In the quarter ended June 30, 2001, we experienced significant changes at
the board of directors level. Following the sale of the Company's iShip assets
in May 2001, John A. Duffy and Stephen M. Teglovic, who served on the 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 the Board
of Directors. We do not, at this time, intend to fill the vacancies created by
the board resignations. We expect to continue to experience changes in personnel
at the senior management and Board level as part of our restructuring process.
Bruce Coleman remains as our interim Chief Executive Officer, and we have not
yet found a permanent replacement. If we fail to attract and retain a qualified
individual as our Chief Executive Officer, our business, financial condition and
results of operations will be adversely affected. If our new business strategy
is not successful, we will not achieve profitability as currently planned, if at
all.
If we do not successfully attract and retain skilled personnel for permanent
management and other key personnel positions, we may not be able to effectively
implement our business plan.
Our success depends largely on the skills, experience and performance of the
members of our senior management and other key personnel. Any of the individuals
can terminate his or her employment with us at any time. If we lose additional
key employees and are unable to replace them with qualified individuals, our
business and operating results could be seriously harmed. In addition, our
future success will depend largely on our ability to continue attracting and
retaining highly skilled personnel. As a result, we may be unable to
successfully attract, assimilate or retain qualified personnel. Further, we may
be unable to retain the employees we currently employ or attract additional
personnel. The failure to attract and retain the necessary personnel could
seriously harm our business, financial condition and results of operations.
We can not predict the value of our acquisition of certain intellectual property
assets of E-Stamp Corporation.
As described under "Recent Developments," we acquired certain 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 to our
company or will help us to achieve profitability as currently planned, if at
all. In addition, certain 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. Such a
determination could make the intellectual property rights we acquired worthless.
See "Legal Proceedings."
13
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 near-term 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' 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 very limited experience
with the commercial rollout and use of our services. Specifically, our 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 do not achieve the brand recognition necessary to succeed in the Internet
postage markets, our business will suffer.
We must quickly build our Stamps.com brand to gain market acceptance for our
services. We believe it is imperative to our long-term success that we obtain
significant market share for our services before our competitors do. We must
make substantial expenditures on product development, strategic relationships
and marketing initiatives in an effort to establish our brand awareness. In
addition, we must devote significant resources to ensure that our users are
provided with a high quality online experience supported by a high level of
customer service. We cannot be certain that we will have sufficient resources to
build our brand and realize commercial acceptance of our services. In addition,
our new business strategy of reducing expenses could limit our ability to
establish our brand awareness. If we fail to gain market acceptance for our
services, our business will suffer dramatically or may fail.
If we fail to effectively market and sell our Internet postage 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, if at all, we have very limited experience conducting
marketing campaigns. In addition, we have recently increased our emphasis on
direct selling efforts and have only recently retained the resources necessary
to support a direct sales channel. However, we have very limited experience
regarding our ability to acquire customers through a direct sales channel. In
connection with our new business strategy, we have significantly reduced our
marketing budget, which could prevent us from pursuing certain marketing
campaigns and sales programs. As a result of these limited marketing and sales
experiences, and our reduced marketing budget, we cannot predict our ability to
attract customers for our services, and we may fail to generate significant
interest in any of our services. Furthermore, we may be unable to generate
significant interest in our services in a cost-effective manner. If we fail to
generate interest in our services or to acquire customers in a cost-effective
manner, our results of operations will be adversely affected and we may never
achieve profitability.
If we fail to meet the demands of our customers, our business will be
substantially harmed and could fail.
Our Internet postage services must meet the commercial demands of our customers,
which are expected to range from small businesses to large enterprises. We
cannot be sure that our services will appeal to or be adopted by
14
such a wide range of customers. In addition, given our limited experience
selling our services to and implementing our services with enterprise customers,
we cannot predict the length of enterprise sales cycles, the implementation
times for our services or the extent to which an enterprise will employ our
services. Our technology also may not be capable of servicing the needs of these
large enterprise customers. Moreover, our ability to obtain and retain customers
depends on our customer service capabilities. As part of our new business
strategy, we have significantly reduced our support offerings. If we are unable
at any time to address customer service issues adequately or to provide a
satisfactory customer experience for current or potential customers, our
business and reputation may be harmed. If we experience extensive interest in
our services, we may fail to meet the expectations of customers due to limited
experience in operating our services and the strains this demand will place on
our Web site, customer service operations, professional services group, network
infrastructure or systems. If we fail to meet the demands of our customers or if
our customers implement and employ our services more slowly than we expect, our
business, results of operation and ability to achieve profitability will be
negatively affected.
If we cannot grow our business, and effectively manage that growth, our business
will be adversely affected and could fail.
Our new business strategy of significantly reducing expenses could have a
substantial impact on our ability to develop and introduce new products and
services; attract, serve and retain new customers; reliably improve our Web
site, network infrastructure and systems; implement new systems, procedures and
controls; and increase brand awareness. If our business begins to grow, we may
not be able to manage our growth effectively. A period of business expansion
could place a significant strain on our managerial, operational and financial
resources. Our personnel, systems, procedures and controls may be inadequate to
support our future operations. If we are unable to manage our growth effectively
or experience disruptions during periods of expansion, our business will suffer
and our financial condition and operating results will be seriously affected.
Success by Pitney Bowes in its suits against us alleging patent infringement
could prevent us from offering our Internet postage 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 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 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 ClickStamp Online service infringes four
patents we own. The suit seeks treble damages, an injunction from further
infringement, attorneys' fees and other damages. On August 8, 2001, Pitney Bowes
answered the complaint, denying our allegations of patent infringement and
asserting a number of affirmative defenses.
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 "Legal Proceedings."
If Pitney Bowes prevails in its suits against us, we may be prevented from
selling postage on the Internet. Alternatively, the Pitney Bowes suits could
result in limitations on how we implement our service, delays and costs
15
associated with redesigning our service and payments of license fees and other
payments. Thus, if Pitney Bowes prevails in its suits against us, our business
could be severely harmed or fail. In addition, the litigation could result in
significant expenses and diversion of management time and other resources.
On August 17, 1998, Pitney Bowes issued a press release stating that it
holds dozens of US patents related to computer-based postage metering and that
it intended to engage in discussions with other marketers of computer-based
postal products to license Pitney Bowes technology. Prior to Pitney Bowes filing
a lawsuit against us, we were in license discussions with Pitney Bowes. We
intend to continue these discussions; however, we cannot predict whether these
discussions will continue, the outcome of these discussions or the impact of
Pitney Bowes' intellectual property claims on our business or the Internet
postage market. If Pitney Bowes is able to prevail in its claims against us and
if we do not enter into a license relationship with Pitney Bowes, our business
could be impacted severely or fail. In addition, as described above, Pitney
Bowes could obtain monetary and injunctive relief against us.
Success by Cybershop in its suit against us seeking damages and recognition of
its "ownership" of the domain name "stamps.com" could prevent us from using the
domain name "stamps.com" and could require a change of name of the Company,
severely harming our business or causing it to fail.
On December 13, 2000, Cybershop (a British Columbia, Canada partnership) and
its general partners filed suit against us in the U.S. District Court for the
Southern District of Texas, alleging that in 1998 a third party fraudulently
transferred ownership of the Internet domain name "stamps.com" away from
Cybershop and subsequently transferred it to us. The third party is also a named
defendant in the suit. The complaint sought legal resolution and recognition of
Cybershop's "ownership" of the "stamps.com" domain name and sought unspecified
monetary damages against the third party. On July 16, 2001, we filed a motion
for summary judgment against all claims filed against us. Plaintiffs then filed
a proposed fourth amended complaint, dropping some claims against us and adding
others. On August 2, 2001, Plaintiffs filed their response to our motion for
summary judgment, and filed their own motion for partial summary judgment. The
court has not yet ruled on the motions for summary judgment, and has not ruled
on whether to allow Plaintiffs' fourth amended complaint to proceed. The outcome
of the litigation is uncertain, and we can give no assurance that Cybershop will
not prevail in the suit against us.
If Cybershop prevails in its claims against us, we may be liable for
monetary damages. Additionally, if Cybershop is successful in the lawsuit, we
may be required to relinquish the domain name "stamps.com" and transfer the
domain name registration to Cybershop. Relinquishing ownership of the
"stamps.com" domain name would require us to use a different domain name as the
primary Internet address and web page for our company, and we may need to change
the name of our company itself from "Stamps.com Inc." as well. Changing the name
of our company, and using a new Internet domain name, could significantly and
negatively affect our brand recognition and customer acquisition and retention.
Furthermore, a change in our company name or Internet domain name could result
in significant costs in seeking to build new brand recognition. Thus, if
Cybershop prevails in its suit against us, our business could be severely harmed
or even fail. See "Legal Proceedings."
Even if Cybershop's claim is unsuccessful, the Cybershop litigation could
result in significant expenses and diversion of management time and other
resources that could negatively affect our business.
Third party assertions of violations of their intellectual property rights could
adversely affect our business.
Substantial litigation regarding intellectual property rights exists in our
industry. Third parties may currently have, or may eventually be issued, patents
upon which our products or technology infringe. Any of these third parties might
make a claim of infringement against us. We may become increasingly aware of, or
we may increasingly receive correspondence claiming, potential infringement of
other parties' intellectual property rights. We could incur significant costs
and diversion of management time and resources to defend claims against us
regardless of their validity. We may not have adequate resources to defend
against these claims and any associated costs and distractions could have a
material adverse effect on our business, financial condition and results of
operations. In addition, litigation in which we are accused of infringement
might cause product development delays, require us to develop non-infringing
technology or require us to enter into royalty or license agreements, which
might not be available on acceptable terms, or at all. If a successful claim of
infringement were made against us and we could not develop non-infringing
technology or license the infringed or similar technology on a timely and cost-
16
effective basis, our business could be significantly harmed. Any loss resulting
from intellectual property litigation could severely limit our operations, cause
us to pay license fees, or prevent us from doing business. See "Legal
Proceedings."
A failure to protect our own intellectual property could harm our competitive
position.
We rely on a combination of patent, trade secret, copyright and trademark
laws and contractual restrictions, such as confidentiality agreements and
licenses, to establish and protect our rights in our products, services, know-
how and information. We have 37 issued United States patents and 10 issued
international, and have filed 64 United States patent applications and 15
international patent applications, inclusive of those recently acquired from E-
Stamp Corporation. We have also applied to register a number of trademarks and
service marks. We plan to apply for other patents, trademarks and service marks
in the future. We may not receive patents for any of our patent applications.
Even if patents are issued to us, claims issued in these patents may not protect
our technology. In addition, a court might hold any of our patents, trademarks
or service marks invalid or unenforceable. Even if our patents are upheld or are
not challenged, third parties may develop alternative technologies or products
without infringing our patents. If our patents fail to protect our technology or
our trademarks and service marks are successfully challenged, our competitive
position could be harmed. We also generally enter into confidentiality
agreements with our employees, consultants and other third parties to control
and limit access and disclosure of our confidential information. These
contractual arrangements or other steps taken to protect our intellectual
property may not prove to be sufficient to prevent misappropriation of
technology or deter independent third party development of similar technologies.
Additionally, the laws of foreign countries may not protect our services or
intellectual property rights to the same extent as do the laws of the United
States. See "Risk Factors--Success by Cybershop in its suit against us seeking
damages and recognition of its "ownership" of the domain name "stamps.com" could
prevent us from using the domain name "stamps.com" and could require a change of
name of our Company, severely harming our business or causing it to fail."
If we are unable to maintain and develop our strategic relationships and
distribution arrangements, our Internet postage services may not achieve
commercial acceptance.
We have established strategic relationships with a number of third parties.
To date, our strategic relationships generally involve the promotion and
distribution of our services through our partners' products, services and Web
sites. Recently, we have increased our focus on the direct sales channel and
have entered into arrangements to have a third party direct sales force offer
our services. In return for promoting or selling our services, our partners may
receive revenue-sharing opportunities or per-customer bounties. In order to
achieve wide distribution of our services, we believe we must establish
additional strategic relationships to market our services effectively. If one or
more of our partners terminates or limits its relationship with us, our business
could be severely harmed or fail. We have limited experience in establishing and
maintaining strategic relationships, and we may fail in our efforts to establish
and maintain these relationships.
Our current strategic relationships have not yet resulted in significant
revenues, primarily because we have only recently commercially released our
Internet postage services. As a result, our strategic partners may not view
their relationships with us as significant or vital to their businesses and,
consequently, may not perform according to our expectations. We have little
ability to control the efforts of our strategic partners and, even if we are
successful in establishing strategic relationships, these relationships may not
be successful.
System and online security failures could harm our business and operating
results.
Our services depend on the efficient and uninterrupted operation of our
computer and communications hardware systems. In addition, we must provide a
high level of security for the transactions we execute. We rely on internally-
developed and third-party technology to provide secure transmission of postage
and other confidential information. Any breach of these security measures would
severely impact our business and reputation and would likely result in the loss
of customers. Furthermore, if we are unable to provide adequate security, the US
Postal Service could prohibit us from selling postage over the Internet.
Our systems and operations are vulnerable to damage or interruption from a
number of sources, including fire, flood, power loss, telecommunications
failure, break-ins, earthquakes and similar events. We have entered into
17
an Internet hosting agreement with Exodus Communications, Inc. to maintain our
Internet postage servers at Exodus' data center in Southern California. Our
operations depend on Exodus' ability to protect its and our systems in its data
center against damage or interruption. Exodus does not guarantee that our
Internet access will be uninterrupted, error-free or secure. Our servers are
also vulnerable to computer viruses, physical, electrical or electronic break-
ins and similar disruptions. We have experienced minor system interruptions in
the past and may experience them again in the future. Any substantial
interruptions in the future could result in the loss of data and could
completely impair our ability to generate revenues from our service. We do have
a business interruption plan that we continue to refine and update; however, we
do not presently have a full disaster recovery plan in effect to cover loss of
facilities and equipment. In addition, we do not have a "fail-over" site that
mirrors our infrastructure to allow us to operate from a second location. We
have business interruption insurance; however, we cannot be certain that our
coverage will be sufficient to compensate us for losses that may occur as a
result of business interruptions.
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. Anyone who
is able to circumvent our security measures could misappropriate confidential
information or cause interruptions in our operations. We may be required to
expend significant capital and other resources to protect against potential
security breaches or to alleviate problems caused by any breach. We rely on
specialized technology, both within our own infrastructure and that provided by
Exodus, to provide the security necessary for secure transmission of postage and
other confidential information. Advances in computer capabilities, new
discoveries in security technology, or other events or developments may result
in a compromise or breach of the algorithms we use to protect customer
transaction data. Should someone circumvent our security measures, our
reputation, business, financial condition and results of operations could be
seriously harmed. Security breaches could also expose us to a risk of loss or
litigation and possible liability for failing to secure confidential customer
information. As a result, we may be required to expend a significant amount of
financial and other resources to protect against security breaches or to
alleviate any problems that they may cause.
The effects of expansion may adversely affect our financial condition, results
of operations and existing stockholders.
We may establish subsidiaries, enter into joint ventures or pursue the
acquisition of new or complementary businesses, products or technologies in an
effort to enter into new business areas, diversify our sources of revenue and
expand our product and service offerings outside the Internet postage market.
Although we have no commitments or agreements and are not currently engaged in
discussions for any material acquisitions or investments, we continue to
evaluate incremental revenue opportunities and derivative applications of our
technology and may pursue and develop those opportunities with strategic
partners and investors, both domestically and internationally. To the extent we
pursue new or complementary businesses, we may not be able to expand our service
offerings and related operations in a cost-effective or timely manner. We may
experience increased costs, delays and diversions of management's attention when
integrating any new businesses or service. We may lose key personnel from our
operations or those of any acquired business. Furthermore, any new business or
service we launch that is not favorably received by users could damage our
reputation and brand name in the Internet postage 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.
We may need to raise additional capital in the future through the issuance of
additional equity or convertible debt securities or by borrowing money, and
additional funds may not be available on terms acceptable to us.
If our cost-cutting program associated with our new business strategy is
successfully implemented, we believe that our current cash balances will allow
us to fund our operations beyond 2002. However, we may require substantial
working capital to fund our business and we may need to raise additional
capital. Our future capital needs depend on many factors, including market
acceptance of our postage service, the level of promotion and advertising of our
postage service; the level of our development efforts; our rate of customer
acquisition and retention for our
18
Internet postage services; and changes in technology. In addition, the various
elements of our business and growth strategies, including our plans to support
fully the commercial release of our services, our introduction of new products
and services and our investments in infrastructure will require additional
capital. We cannot be certain that additional funds will be available on
satisfactory terms when needed, if at all. If we are unable to raise additional
necessary capital in the future or generate sufficient working capital, we may
be required to curtail our operations significantly or obtain funding through
the relinquishment of significant technology or markets. Raising additional
capital through the sale of equity or convertible debt securities would have a
dilutive effect on existing stockholders, and securities we issue may have
rights superior to our common stock.
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. For example, the US Postal Service
could decide to charge Internet postage vendors fees for the enrollment of each
unique customer of the Internet postage product, which would be a cost that we
would either absorb or pass through to customers. The US Postal Service has in
fact invoiced each Internet postage vendor $8 for each digital certificate
required for each consumer of Internet postage to securely print postage. We are
currently discussing the necessity of this charge with the US Postal Service. If
we are required to pay this per customer charge, the cost of our service could
increase and the adoption of Internet postage as a new method of mailing could
be adversely affected.
The US Postal Service could also decide that Internet postage should no
longer be an approved postage service due to security concerns or other issues.
Our business would suffer dramatically if we are unable to adapt our Internet
postage services to any new requirements or specifications or if the US Postal
Service were to discontinue Internet postage as an approved postage method.
Alternatively, the US Postal Service could introduce competitive programs or
amend Internet postage requirements to make certification easier to obtain,
which could lead to more competition from third parties or the US Postal Service
itself. See "Risk Factors--If we are unable to compete successfully,
particularly against large, traditional providers of postage products like
Pitney Bowes who enter the online postage 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 and has a hardware-based product in beta testing. Neopost
Industrie has hardware and software products in beta testing. If any of our
competitors, including Pitney Bowes, provide the same or similar service as we
provide, our operations could be adversely impacted. See "Business--
Competition."
19
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 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.
20
The Internet may not become a viable long-term commercial marketplace due to
potentially inadequate development of the necessary network infrastructure or
delayed development of enabling technologies and performance improvements. The
commercial acceptance and use of the Internet may not continue to develop at
historical rates. Our business, financial condition and results of operations
would be seriously harmed if use of the Internet and other online services does
not continue to increase or increases more slowly than expected; the
infrastructure for the Internet and other online services does not effectively
support future expansion of electronic commerce or our services; concerns over
security and privacy inhibit the growth of the Internet; or the Internet and
other online services do not become a viable commercial marketplace.
Our operating results could be impaired if we or the Internet become subject to
additional government regulation and legal uncertainties.
With the exception of US Postal Service and Department of Commerce
regulations, we are not currently subject to direct regulation by any domestic
or foreign governmental agency, other than regulations applicable to businesses
generally, and laws or regulations directly applicable to electronic commerce.
However, due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet, relating to user privacy; pricing; content; copyrights;
distribution; characteristics and quality of products and services; and export
controls.
The adoption of any additional laws or regulations may hinder the expansion
of the Internet. A decline in the growth of the Internet could decrease demand
for our products and services and increase our cost of doing business. Moreover,
the applicability of existing laws to the Internet is uncertain with regard to
many issues, including property ownership, export of specialized technology,
sales tax, libel and personal privacy. Our business, financial condition and
results of operations could be seriously harmed by any new legislation or
regulation. The application of laws and regulations from jurisdictions whose
laws do not currently apply to our business, or the application of existing laws
and regulations to the Internet and other online services could also harm our
business.
We have employees and offer our services in multiple states, and we may in
the future expand internationally. These jurisdictions may claim that we are
required to qualify to do business as a foreign corporation in each state or
foreign country. Our failure to qualify as a foreign corporation in a
jurisdiction where we are required to do so could subject us to taxes and
penalties. Other states and foreign countries may also attempt to regulate our
services or prosecute us for violations of their laws. Further, we might
unintentionally violate the laws of foreign jurisdictions and those laws may be
modified and new laws may be enacted in the future.
If we market our services internationally, government regulation could disrupt
our operations.
We may in the future begin to provide services in international markets. Our
ability to provide our Internet postage 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
21
the risks attendant to transacting in foreign currencies, including the
potential adverse effects of exchange rate fluctuations.
Risks Related to Our Stock
Our charter documents could deter a takeover effort, which could inhibit your
ability to receive an acquisition premium for your shares.
The provisions of our Amended and Restated Certificate of Incorporation,
Bylaws and Delaware law could make it difficult for a third party to acquire us,
even it would be beneficial to our stockholders. In addition, we are subject to
the provisions of Section 203 of the Delaware General Corporation Law, which
could prohibit or delay a merger or other takeover of our company, and
discourage attempts to acquire us.
Shares of our common stock held by existing stockholders may be sold into the
public market, which could cause the price of our common stock to decline.
If our stockholders sell into the public market substantial amounts of our
common stock purchased in private financings prior to our initial public
offering, or purchased upon the exercise of stock options or warrants, or if
there is a perception that these sales could occur, the market price of our
common stock could decline. All of these shares are available for immediate
sale, subject to the volume and other restrictions under Rule 144 of the
Securities Act of 1933. These sales also could impair our future ability to
raise capital through the sale of equity or equity-related securities at a time
and price that we deem appropriate.
Our stock price may be highly volatile and could drop, particularly because our
business depends on the Internet.
The trading price of our common stock has fluctuated widely in the past, and
is expected to continue to do so in the future, as a result of a number of
factors, many of which are outside our control. In addition, the stock market
has experienced extreme price and volume fluctuations that have affected the
market prices of many technology and Internet-related companies and that have
often been unrelated or disproportionate to the operating performance of these
companies. These broad market fluctuations and the perception of the valuation
of the Internet company sector could adversely affect the market price of our
common stock.
ITEM 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 short-term investments are
comprised of U.S. government obligations and public corporate debt securities
with maturities of less than one year at the date of purchase. At June 30, 2001,
our short-term investments approximated $75.6 million and had a related weighted
average interest rate of 5.53%. 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.
22
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 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 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 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 ClickStamp Online service infringes four
patents we own. The suit seeks treble damages, an injunction from further
infringement, attorneys' fees and other damages. On August 8, 2001, Pitney Bowes
answered the complaint, denying our allegations of patent infringement and
asserting a number of affirmative defenses.
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 29, 1999, three individual plaintiffs filed a suit against us
for alleged breach of oral contract, quantum meruit, fraud and negligent
representation in the California Superior Court for the County of Los Angeles.
The complaint was amended on January 28, 2000 to add Mohan Ananda, one of our
directors, as a defendant and to remove one of the plaintiffs from the suit. The
suit alleges that the plaintiffs were due cash consideration in the amount of
$13.3 million plus other unspecified compensatory damages, punitive and
exemplary damages for securing a board member and investors for Stamps.com. On
November 6, 2000, the trial court granted summary judgment of the entire action
in favor of Stamps and Mr. Ananda. The plaintiffs have appealed the grant of
summary judgment, and the appeal is currently pending. Although we believe that
the grant of summary judgment will be upheld on appeal, the outcome of this
litigation is uncertain and we can give no assurance that the plaintiffs will
not prevail.
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 sought legal resolution and recognition of
Cybershop's "ownership" of the "stamps.com" domain name and sought unspecified
monetary damages against the third party. In February 2001, Cybershop filed an
amended complaint, alleging new causes of action, including conversion, invasion
of privacy, trespass, and private nuisance, and seeking declaratory judgment for
return of the domain name registration to Cybershop. On July 16, 2001 we filed a
motion for summary judgment against all claims filed against us. Plaintiffs
subsequently filed, and then withdrew, a proposed third amended complaint.
Plaintiffs then filed a proposed fourth amended complaint, dropping some claims
against us and adding others. On August 2, 2001, Plaintiffs filed their response
to our motion for summary judgment, and filed their own motion for partial
summary judgment. The court has not yet ruled on the motions for summary
judgment,
23
and has not ruled on whether to grant leave to allow Plaintiffs' fourth amended
complaint to proceed. The outcome of the litigation is uncertain, and we can
give no assurance that Cybershop will not prevail. See "Risk Factors-Success by
Cybershop in its suit against us seeking damages and recognition of its
"ownership" of the domain name "stamps.com" could prevent us from using the
domain name "stamps.com" and could require a change of name of the Company,
severely harming our business or causing it to fail."
On or about April 6, 2000, Metro Fulfillment, Inc. filed a lawsuit against
Weigh-Tronix, Inc. for breach of contract, fraud, negligent misrepresentation,
intentional inference with contract, negligent interference, breach of implied
warranty and breach of express warranty. Metro Fulfillment, Inc. alleges that
pursuant to its agreement with Weigh-Tronix, Inc., Metro Fulfillment, Inc. was
not required to pay for postal scales that were purchased from Weigh-Tronix,
Inc. until Metro Fulfillment, Inc. had actually sold those scales to end users.
These 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 $700,000.00 in compensatory
damages, plus interest and attorney's fees. We have filed an answer to the third
party complaint denying the allegations of the lawsuit.
On February 28, 2001, Metro Fulfillment, Inc. filed a lawsuit against us
stemming from services allegedly performed by Metro Fulfillment, Inc. under a
Fulfillment Services Agreement. The complaint alleges claims for breach of
contract, common counts and negligent misrepresentation. The complaint seeks
damages of approximately $1.3 million. We have filed an answer to the complaint
denying the allegations in the lawsuit.
On April 18, 2001, Intuit, Inc. filed a suit against us for alleged breach
of contract in the California Superior Court for the County of Santa Clara. The
suit alleges that we improperly terminated our contract with Intuit and seeks
damages of $4 million plus interest and costs associated with the lawsuit.
We believe that the agreement was terminated on March 1, 2001 due to Intuit's
failure to perform adequately under the contract, among other reasons. On June
1, 2001, we answered Intuit's Complaint, denied all material allegations and
asserted certain affirmative defenses. Additionally, on June 1, 2001, we filed a
Cross-Complaint against Intuit and asserted claims for breach of the implied
covenant of good faith and fair dealing, violation of California Business &
Professions Code Section 17200, rescission, and declaratory relief. We seek
compensatory damages in an amount to be determined. On or about July 10, 2001,
Intuit demurred to our Cross-Complaint. We will be opposing the demurrer, and
the matter is set for hearing on August, 16, 2001. No trial date has been set in
this case. We are vigorously defending Intuit's claims, however, litigation is
uncertain and we cannot predict an outcome for this matter.
In May, June and July, 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 arise out of certain investigations by U.S. regulatory and law
enforcement authorities into alleged commission practices and other sales
practices by certain underwriters. 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 the 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 various
damages and statutory compensation, including prejudgment and post-judgment
interest, costs and expenses (including attorneys' fees), and rescissionary
damages. We have placed the underwriters on notice of our claim to
indemnification, pursuant to its agreements with the underwriters. We 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.
24
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 1, 2000, we entered into a Warrant Issuance Agreement with Cydcor
Limited ("Cydcor"). Under the terms of the agreement, we are obligated to issue
warrants to purchase shares of our common stock on a monthly basis. The number
of shares underlying each warrant is based upon a calculation that determines
net new customers that Cydcor obtains from direct sales of our Internet postage
services. The warrants issuable under the agreement are exercisable for a period
of two years from the issuance date. Under the terms of this agreement, on April
30, 2001, we issued Cydcor a warrant to purchase 4,842 shares of our common
stock at a price per share of $3.00; on May 31, 2001, we issued Cydcor a warrant
to purchase 3,182 shares of our common stock at a price per share of $3.00; on
June 30, 2001, we issued Cydcor a warrant to purchase 2,772 shares of our common
stock at a price per share of $3.75; and on July 31, 2001, we issued Cydcor a
warrant to purchase 97 shares of our common stock at a price per share of $2.36.
The offer and sale of this warrant and the shares of common stock issuable upon
conversion thereof is exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The 2001 Annual Meeting of the stockholders of Stamps.com was held on
June 14, 2001 in Santa Monica, California.
(b) The directors elected at the 2001 Annual Meeting were: Mohan P.
Ananda, Thomas N. Clancy, John A. Duffy, and Marvin Runyon. Each of Messrs.
Ananda and Runyon serve as Class II directors whose terms will expire at the
2004 annual meeting of stockholders. Each of Jeffrey Brown and Loren Smith serve
as Class III directors whose terms will expire at the 2002 annual meeting of
stockholders. Finally, each of Bruce Coleman and G. Bradford Jones serve as
Class I directors whose terms will expire at the 2003 annual meeting of
stockholders.
(c) At the annual meeting, the stockholders:
(1) Voted to elect four Class II directors named above, with the
following vote:
Mohan P. Ananda
For 38,733,089
Abstain 233,299
Thomas N. Clancy
For 38,733,774
Abstain 232,614
John A. Duffy
For 38,740,181
Abstain 226,207
Marvin Runyon
For 38,689,779
Abstain 276,609
(2) Voted to ratify the appointment of Arthur Andersen LLP as the
Company's independent auditors for the fiscal year ending December 31,
2001, with the following vote:
For 38,714,980
Against 79,703
Abstain 171,705.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
25
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)
August 14, 2001 By: /s/ KENNETH McBRIDE
--------------------------------
Kenneth McBride
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)