-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WDtc1xwC8ZMOTfw+lfbfC73wGuSYxrT/QlBBzrCQGbLoPhnx7ofxVW70C6udTkUr vU9veJ0+B4fZYH+UtB1aOA== /in/edgar/work/0001017062-00-002336/0001017062-00-002336.txt : 20001115 0001017062-00-002336.hdr.sgml : 20001115 ACCESSION NUMBER: 0001017062-00-002336 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STAMPS COM INC CENTRAL INDEX KEY: 0001082923 STANDARD INDUSTRIAL CLASSIFICATION: [5961 ] IRS NUMBER: 770454966 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26427 FILM NUMBER: 767049 BUSINESS ADDRESS: STREET 1: 3420 OCEAN PARK BOULEVARD STREET 2: SUITE 1040 CITY: SANTA MONICA STATE: CA ZIP: 90405 BUSINESS PHONE: 3105817200 MAIL ADDRESS: STREET 1: 2900 31ST STREET SUITE 150 CITY: SANTA MONICA STATE: CA ZIP: 90405 10-Q 1 0001.txt 3RD QUARTER REPORT FOR PERIOD ENDING 09/30/2000 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 ------------------------------------------- or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________________ to _________________ Commission file number: ______________________________________________________ Stamps.com Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 77-0454966 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3420 Ocean Park Boulevard, Suite 1040, Santa Monica, California 90405 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (310) 581-7200 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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. [X] Yes [_] No The number of shares of the registrant's common stock, $0.001 par value, issued and outstanding as of November 8, 2000 was 49,359,729. - -------------------------------------------------------------------------------- 1 STAMPS.COM INC. QUARTERLY REPORT ON FORM 10-Q THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Unaudited Consolidated Balance Sheets at September 30, 2000 and December 31, 1999 Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2000 and 1999 Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999 Notes to Unaudited Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk 26 PART II OTHER INFORMATION 27 Item 1. Legal Proceedings 27 Item 2. Change in Securities and Use of Proceeds 28 Item 3. Defaults Upon Senior Securities 28 Item 4. Submission of Matters to a Vote of Security Holders 28 Item 5. Other Information 28 Item 6. Exhibits and Reports on Form 8-K 28 Signatures 29 2 PART I FINANCIAL INFORMATION Item 1. Financial Statements. STAMPS.COM INC. CONSOLIDATED BALANCE SHEETS
September 30, December 31, 2000 1999 ----------------------------- (unaudited) ASSETS (In thousands) Current assets: Cash and short-term investments........................ $ 290,090 $ 374,746 Accounts receivable.................................... 1,879 134 Prepaid expenses....................................... 13,535 23,883 ------------ ----------- Total current assets........................................ 305,504 398,763 Property and equipment, net................................. 49,184 9,702 Goodwill and other intangible assets, net................... 188,461 -- Other assets................................................ 6,063 1,977 ------------ ----------- Total assets................................................ $ 549,212 $ 410,442 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Line of credit......................................... $ 1,917 $ 1,000 Accounts payable....................................... 6,509 2,707 Accrued expenses....................................... 7,196 4,004 Deferred revenue....................................... 2,546 182 Current portion of long-term debt and capital leases... 3,833 513 ------------ ----------- Total current liabilities................................... 22,001 8,406 Long-term debt and capital leases, less current portion..... 4,109 438 Commitments and contingencies Minority interest in consolidated subsidiary .......... 34,784 -- Stockholders' equity: Common stock........................................... 49 42 Additional paid-in capital............................. 718,658 472,714 Notes receivable from stock sales...................... (101) (101) Deferred compensation.................................. (25,075) (9,435) Accumulated deficit.................................... (205,213) (60,683) Treasury stock at cost................................. -- (939) ------------ ----------- Total stockholders' equity.................................. 488,318 401,598 ------------ ----------- Total liabilities and stockholders' equity.................. $ 549,212 $ 410,442 ============ ===========
The accompanying notes are an integral part of these financial statements. 3 STAMPS.COM INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2000 1999 2000 1999 ---- ---- ---- ---- (In thousands, except per share data) Revenues ................................................... $ 4,201 $ -- $ 9,911 $ -- Cost of revenues ........................................... 5,644 -- 19,131 -- ----------- --------- ------------ ---------- Gross profit...................................... (1,443) -- (9,220) -- Operating expenses: Sales and marketing.................................... 20,573 7,640 59,537 10,856 Research and development............................... 10,269 2,371 21,689 5,049 General and administrative............................. 11,436 3,363 25,817 5,766 Amortization of goodwill and other intangibles......... 13,772 -- 32,175 -- Acquired in-process research and development........... -- -- 2,000 -- Deferred compensation amortization..................... 3,123 1,050 9,022 2,510 ----------- --------- ------------ ---------- 59,173 14,424 150,240 24,181 ----------- --------- ------------ ---------- Loss from operations ....................................... (60,616) (14,424) (159,460) (24,181) Other income (expense): Interest expense....................................... (213) (40) (377) (122) Interest income........................................ 5,482 766 15,307 1,200 ----------- --------- ------------ ---------- Net loss.................................................... $ (55,347) $ (13,698) $ (144,530) $ (23,103) =========== ========= ============ ========== Basic and diluted net loss per share........................ $ (1.15) $ (0.40) $ (3.11) $ (1.59) =========== ======== ============ ========== Weighted average shares outstanding used in basic and diluted per-share calculation ...................................... 48,259 34,102 46,418 14,496 =========== ======== =========== =========
The accompanying notes are an integral part of these financial statements. 4 STAMPS.COM INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, ------------- 2000 1999 ----------- --------- (In thousands) Operating activities: Net loss............................................................. $ (144,530) $ (23,103) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................. 37,952 555 Amortization of deferred compensation..................... 9,022 2,510 Charge for acquired in-process research and development... 2,000 -- Changes in operating assets and liabilities, net of effects of acquisition: Accounts receivable................................. (1,738) -- Prepaid expenses.................................... 10,825 (7,167) Accounts payable.................................... 1,422 1,939 Accrued expenses.................................... 2,944 2,696 Deferred revenue.................................... 2,363 -- ---------- --------- Net cash used in operating activities................................. (79,740) (22,570) Investing activities: Purchase of short-term investments, net......................... (119,576) (19,640) Acquisition of property and equipment........................... (33,296) (4,562) Acquisition of iShip.com, net of cash acquired.................. (2,111) -- Other........................................................... (5,495) (198) ---------- --------- Net cash used in investing activities................................ (160,478) (24,400) Financing activities: Repayment of long-term debt and capital leases ................. 12 (150) Repayment of line of credit .................................... (949) -- Issuance of redeemable preferred stock of subsidiary, net....... 34,784 -- Issuance of redeemable preferred stock, net..................... -- 28,299 Issuance of common stock........................................ 1,200 57,842 Repurchase of common stock...................................... 939 (939) Proceeds from exercise of stock options......................... -- 6 ---------- --------- Net cash provided by financing activities............................. 35,986 85,058 Net (decrease) increase in cash and cash equivalents.................. (204,232) 38,088 Cash and cash equivalents at beginning of period...................... 326,820 1,966 ---------- --------- Cash and cash equivalents at end of period............................ 122,588 40,054 Short-term investments................................................ 167,502 21,144 ---------- --------- Cash and short-term investments....................................... $ 290,090 $ 61,198 ========== =========
The accompanying notes are an integral part of these financial statements. 5 STAMPS.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ALL INFORMATION WITH RESPECT TO SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED) 1. Summary of Significant Accounting Policies Basis of Presentation The financial statements are unaudited, other than the balance sheet at December 31, 1999, 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, 1999 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 28, 2000. The Company formerly reported as a development stage company. 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. Cash and Short-term Investments The Company considers all highly liquid investments with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents. The Company's short-term investments are comprised of U.S. government obligations and public corporate debt securities with maturities of less than one year at the date of purchase. All short-term investments are classified as available for sale and are recorded at market using the specific identification method. Realized gains and losses are reflected in other income and expense while unrealized gains and losses, which to date have not been material, are included as a separate component of stockholders' equity. Reclassifications Certain prior period balances have been reclassified to conform to current period presentation. 2. Acquisition of iShip.com On March 7, 2000, the Company completed the acquisition of iShip.com, Inc. ("iShip"), a development stage enterprise developing Internet-based shipping technology. In connection with the acquisition, approximately 5.6 million shares of Stamps.com common stock were issued in exchange for all outstanding iShip stock. An additional 1.6 million shares of Stamps.com common stock have been reserved for issuance upon exercise of options and warrants assumed in the transaction. Finally, 800,000 shares of Stamps.com common stock have been deposited 6 into an escrow account. The escrow amount is intended to compensate the Company for any inaccuracy or breach of any representation, warranty, covenant or agreement of iShip as contained in the merger agreement. The shares must remain in the escrow fund for a period of one year from the close of the acquisition. The parties are currently not aware of any inaccuracy or breach of any representation, warranty, covenant or agreement of iShip as contained in the merger agreement. The acquisition was accounted for as a purchase in accordance with the provisions of Accounting Principles Board Opinion ("APB") No. 16. Under the purchase method of accounting, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The Company recorded intangible assets of $220.4 million and deferred compensation of $24.7 million, which will be amortized over periods ranging from three to four years. Results of operations for iShip have been included with those of the Company for periods subsequent to the acquisition date. The purchase price was allocated as follows (in thousands): Goodwill $209,188 Deferred compensation 24,662 Purchased technology 11,200 In-process research and development 2,000 Tangible assets acquired 8,931 Liabilities assumed (7,232) -------- Purchase price $248,749 ======== Presented below is unaudited selected pro forma financial information, presenting the results of operations of the Company as if the acquisition had taken place on January 1 (in thousands, except per share amounts):
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Revenues $4,201 $-- $9,911 $-- Net loss $(55,347) $(13,698) $(157,541) $(29,294) Basic and diluted net loss per share $(1.15) $(0.40) $(3.03) $(1.31) Shares used in per share calculation - basic 48,259 34,102 51,990 22,412 and diluted
The unaudited pro forma information is not necessarily indicative of the actual results of operations had the acquisition occurred at the beginning of the periods indicated, nor should it be indicative of operations for any future date or period. 3. Change in Subsidiary Ownership During the first half of this year, the Company sold approximately 42% of EncrypTix, Inc., until then a wholly owned subsidiary, in a private financing of approximately $35.8 million. The financing was completed in April 2000. The Company includes EncrypTix's balances and results in its consolidated financial statements. The minority interest reflected in the attached consolidated balance sheet represents the investment received in the private financing. 4. Segment Information The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" in the second quarter of fiscal year 2000. SFAS 131 establishes standards of reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. 7 As of the beginning of the second quarter, the Company operates in three specialized strategic business units (SBUs) focused on the enterprise, e- commerce and small business market segments of mailing and shipping services. The Small Business SBU provides small businesses and consumers with Internet Postage and shipping services. The Enterprise SBU will offer companies with more than 100 employees an Internet-based, multi-carrier mailing and shipping service. The E-commerce SBU addresses the shipping needs of e-tailers and other online businesses, including auctioneers. There are no intersegment revenues between the three reportable segments. Shared support service functions such as human resources, facilities management and other infrastructure support groups are consolidated in general & administrative and allocated to the three operating segments based on usage or headcount, where practical. The information available to the chief operating decision makers of the Company does not include allocations of assets and liabilities to the Company's segments. As of September 30, 2000, revenues and operating losses by reportable segment were as follows (in thousands):
Three Months Ended September 30, 2000 Nine Months Ended September 30, 2000 ------------------------------------------------------------------------------------------------------- Small Small ----- ----- Business Enterprise E-Commerce Business Enterprise E-Commerce -------- ---------- ---------- -------- ---------- ---------- Revenues $ 3,701 $ 500 $ -- $ 7,411 $ 2,500 $ -- Operating (32,947) (7,701) (2,281) (94,724) (18,106) (4,866) expenses
A reconciliation of combined operating losses for the reportable segments to consolidated net loss is as follows:
Three Months Ended Nine Months Ended September 30 September 30 --------------------------------------------------------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Operating Revenues $4,201 $ --- $9,911 $ --- Total operating expenses for (42,929) $(13,374) (117,696) $(21,671) reportable segments Other losses /1/ (21,888) (1,050) (51,675) (2,510) --------- -------- ---------- -------- Operating loss $ (60,616) $(14,424) $ (159,460) $(24,181) ========= ======== ========== ========
1. For the three months ended September 30, 2000, Other Losses include EncrypTix operating losses of $5.0 million, deferred compensation of $3.1 million and amortization of goodwill of $13.8 million. For the nine months ended September 30, 2000, Other Losses include EncrypTix operating losses of $8.5 million, deferred compensation amortization of $9.0 million, amortization of goodwill of $32.2 million and in- process research and development charges of $2 million. Other Losses also includes $1.1 million and $2.5 million of deferred compensation for the three and nine month periods ended September 30, 1999, respectively. 5. Legal Proceedings Please refer to "Part II--Other Information--Item 1" 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 8 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. 7. Related Party Transactions In February 2000, Mr. Payne (former Chairman of the Board and Chief Executive Officer, and current director) purchased 187,000 shares of the Company's common stock on the open market for an aggregate purchase price of approximately $6.0 million. The shares were purchased on margin by Mr. Payne and the margin account was secured by a pledge of 1,467,500 shares of the Company's common stock held by Mr. Payne, of which approximately 593,750 shares are subject to repurchase by the Company. As of October 31, 2000, Mr. Payne's total indebtedness under the margin account was approximately $6.7 million, which amount consists of the purchase price of the 187,000 shares, accrued interest on the purchase price and other fees and indebtedness incurred by Mr. Payne, less the proceeds from his sale of the Company's common stock during the third quarter. In April 2000, the Company agreed to guarantee Mr. Payne's margin account in the event the value of the shares pledged is insufficient collateral to secure the indebtedness outstanding under the margin account. The guarantee is in the form of a single-purpose line of credit extended to Mr. Payne which will have a balance due to the Company to the extent the value of the pledged shares is insufficient collateral to secure indebtedness outstanding under the margin account. This line of credit is secured by all of Mr. Payne's assets. In addition, the Company has entered into a loan repayment agreement with Mr. Payne and the brokerage firm where he maintains his margin account. Under the terms of that agreement, the Company agrees to guarantee Mr. Payne's margin account. The agreement further provides that, without previous notice to or consent from Mr. Payne, the Company may require the sale of any or all shares of Stamps.com stock held by Mr. Payne in order to satisfy any balances due under the terms of Mr. Payne's margin account. More specifically, the Company may require such sales in the event the closing price of Stamps.com on Nasdaq is below $6 per share for three consecutive trading days or if the closing price of Stamps.com on Nasdaq is greater than $30 per share on any trading day. The loan repayment agreement also provides that the brokerage firm may not extend Mr. Payne any additional credit, except to allow for the accrual of interest against the outstanding balance of the margin account. Mr. Payne agreed to sell a minimum of 100,000 shares of common stock during each fiscal quarter (beginning the third fiscal quarter of 2000) in order to pay down the indebtedness outstanding under the margin account. Pursuant to this agreement, on August 29, 2000, Mr. Payne sold 7,500 shares at a price of $4.50 per share and 92,500 shares at a price of $4.3125 per share, which resulted in aggregate repayment of indebtedness in the amount of approximately $430,000. 8. Subsequent Event In October 2000, the Company experienced significant personnel changes at the senior management level including the resignation of its Chief Executive Officer and Chairman of the Board, its President and Chief Operating Officer, its Chief Financial Officer and its Controller. Additionally, the Company's Chief Marketing Officer departed in connection with the Company's recent restructuring. Although the Board has appointed Bruce Coleman as interim Chief Executive Officer and Kenneth McBride, the Company's previous Senior Director of Finance, as the Company's acting Chief Financial Officer, permanent replacements have not been appointed and the position of Controller remains open. The Company does not currently anticipate that it will hire a new Chief Marketing Officer. In October 2000, the Company implemented a new business strategy in an effort to more rapidly decrease its operating losses and enhance its ability to achieve profitability. This strategy involved a restructuring that reduced the Company's total headcount by approximately 40%, which included full time, part time and contract employees. The Company also announced that it would implement other cost-cutting programs, including a significant reduction in and redeployment of its sales and marketing expenses to those programs that have demonstrated higher returns on investment. Finally, the Company is combining its Enterprise and E-Commerce Business Units to reduce duplication of costs and effort. The Company expects to take a one-time charge in the fourth quarter of 2000 relating to this restructuring. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Cautionary Statement This report on Form 10-Q contains forward-looking statements based on our current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by us. Words such as "anticipates," "expects," "intends," "plans," "believes," "may," "will" or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward- looking statements. Such statements include, but are not limited to, statements concerning the uncertainty of the Internet mailing and shipping markets; our ability to make our services widely available and the uncertainty of the commercial adoption of our services; our ability to implement our new business strategy; our ability to achieve profitability; pending litigation regarding intellectual property infringement allegations; recent changes in our business strategy and executive management; regulation of our business; projected operating losses; strategic relationships, direct sales and distribution arrangements; the security of our mailing and shipping services; competition; the need for additional capital; and the commercial acceptance of our services. Such statements are not guarantees of future performance and are subject to certain risks, 9 uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. The section entitled "Risk Factors" set forth in this Form 10-Q and similar discussions in our Annual Report on Form 10-K/A filed with the Securities and Exchange Commission ("SEC") on April 28, 2000, discuss some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in addition to the other information in this report and in our other filings with the SEC, before deciding to invest in our company or to maintain or increase your investment. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. The information contained in this Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC, including our 10-K/A filed with the SEC on April 28, 2000, that discuss our business in greater detail and advise interested parties of certain risks, uncertainties and other factors that may affect our business, results of operations or financial condition. Overview Stamps.com provides easy, convenient and cost-effective Internet-based services for mailing or shipping letters, packages or parcels anywhere and at anytime. Our core mailing and shipping services are designed to allow individual consumers or employees of small businesses or larger enterprises to select a carrier, print US postage or shipping labels from multiple carriers, schedule a pick-up, track a package and apply enterprise-wide business rules to manage and account for mailing and shipping costs. With all of our services, no additional hardware is required; a customer can access our services through an existing Internet connection and print postage or shipping labels with ordinary laser or inkjet printers. In October 2000, we experienced significant personnel changes at the senior management level including the resignation of our Chief Executive Officer and Chairman of the Board, our President and Chief Operating Officer, our Chief Financial Officer and our Controller. Additionally, our Chief Marketing Officer departed in connection with our recent restructuring. Although the Board has appointed Bruce Coleman as interim Chief Executive Officer and Kenneth McBride, our previous Senior Director of Finance, as our acting Chief Financial Officer, permanent replacements have not been appointed and the position of Controller remains open. We do not currently anticipate that we will hire a new Chief Marketing Officer. We cannot predict how these changes in management will affect our business. However, if we fail to attract and retain qualified individuals for these senior management positions, our business, financial condition and results of operations will be seriously harmed. In October 2000, we implemented a new business strategy in an effort to more rapidly decrease our operating losses and enhance our ability to achieve profitability. This strategy involved a restructuring that reduced our total headcount by approximately 40%, which included full time, part time and contract employees. We also announced that we would implement other cost-cutting programs, including a significant reduction in and redeployment of our sales and marketing to those programs that have demonstrated higher returns on investment. Finally, we are combining our Enterprise and E-Commerce Business Units to reduce duplication of costs and effort. We expect to take a one-time charge in the fourth quarter of 2000 relating to this restructuring. If our new business strategy is not successful, we will not achieve profitability as currently planned, if at all. Our majority-owned subsidiary, EncrypTix, Inc., will leverage many of the proprietary, Internet-based technologies developed by Stamps.com in the events, travel and financial services industries. EncrypTix will enable sellers and distributors of tickets and financial instruments to deliver value-bearing instruments such as tickets, vouchers, boarding passes and gift certificates over the Internet. Small Business Services: Our small business services include our traditional business of serving small businesses and consumers with our easy, convenient and cost-effective Internet Postage service as well as offering multi-carrier document and package shipping to companies with less than 100 employees. The revenues from our small business services consist primarily of fees for our Internet Postage Service and commission fees from our online store operated by a third-party. Service fee revenues are generated from the two service plans that we are currently offering to our users: Simple Plan and Power Plan. Under the Simple Plan, a user purchases postage at cost and is charged a monthly convenience fee of 10% of the value of postage printed during a month. There is a monthly minimum fee of $1.99 and a monthly maximum fee of $19.99. Beginning in November 10 2000, the monthly minimum fee will be increased to $4.49. 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. Under the Power Plan, a user purchases postage at cost and pays $15.99 per month for unlimited use of our service. For the third quarter of 2000, approximately 50% of our service fee revenues was generated from Power Plan customers and the remaining 50% was from Simple Plan customers. Service fees are calculated and charged at the end of a monthly billing cycle. The revenues from our Internet-based shipping services are primarily generated from recurring, transaction-based service fees. Also, we generate revenues from advertising and revenue share arrangements. We expect revenues to increase in 2000 as we continue to grow our customer base in the Internet Postage service and as we fully rollout our Internet-based shipping services. Enterprise Services: We offer companies with more than 100 employees an Internet-based, multi-carrier mailing and shipping service. The enterprise service will allow corporations to centrally manage and control costs from mailing and shipping activities across multiple carriers and can be distributed to thousands of corporate desktops using only a Web browser. The largest customer to date of the enterprise service is Mail Boxes Etc. USA, Inc., a retail business, communication and postal services franchiser. There are currently over 1,100 Mail Boxes Etc. franchises utilizing our services. Under our current agreement with Mail Boxes Etc., we are to receive a fixed service fee of $500,000 per month. Due to delays in delivering our products and a dispute with Mail Boxes Etc. relating to certain product features, we have not received payment under this contract since July 2000. We are currently working with Mail Boxes Etc. in an effort to resolve this dispute and have taken a reserve for unpaid amounts. On January 1, 2001, the fixed monthly service fee converts to a per transaction fee. Given current transaction volume being produced by Mail Boxes Etc. franchises, we do not expect in the short term to achieve the level of monthly revenue that has been produced under the current fixed monthly service fee arrangement. Furthermore, if transaction volumes do not increase or if we are unable to resolve our current disputes with Mail Boxes Etc., we can provide no assurances that our agreement will provide historical levels of revenue or significant revenues at all. E-commerce Services: Our e-commerce services strategic business unit will be combined with our enterprise services strategic business unit as part of our new business strategy. Although we currently have no plans to deploy e-commerce services independent of our enterprise services, we may deploy e-commerce services in the future. If we choose to apply our technologies to e-commerce services our objective will be to address the growing shipping needs of e- tailers and other online businesses, including auctioneers. These services could be embedded in auction Web sites, e-tailer "shopping carts" and other points-of- purchase on various Web sites, enabling buyers and sellers to select precise pricing and delivery terms from among a variety of carrier choices. Revenues from our e-commerce services, if any, will likely be primarily generated from recurring, transaction-based service fees. The markets for our Internet postage and shipping are new, and their development is subject to substantial uncertainty. Our success and financial results are highly contingent upon our ability to address and develop these markets. We cannot assure you that these markets will fully develop, if at all. If a significant market for any of our services fails to develop or develops slower than we expect, our business will fail. Additionally, if we do not effectively manage, market and sell our Internet mailing and shipping services, we may never achieve profitability and our business will be substantially harmed and could fail. More specifically, we cannot be sure that our services will be widely available in a timely manner 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 would be adversely impacted. See "Risk Factors--The Internet postage and shipping markets are new and uncertain and our business may not develop" and "-If we do not effectively manage, market and sell our Internet mailing and shipping services or if we fail to make our services widely available, we may never achieve profitability and our business will be substantially harmed and could fail." From time to time, we may offer special promotions to attract new customers to our mailing and shipping services. Currently, these promotions involve waiving or discounting service fees, discounts on supplies offered through our online store, or free postage, supplies or services. We cannot predict the impact of any promotion or pricing plan changes and our ability to generate revenues or achieve profitability could be adversely affected by special promotions or changes to the pricing plans. Furthermore, given the lack of an established or proven commercial market for our services, we are unable to quantify the total impact of these promotions on revenue and profitability. See "Risk Factors--We have a history of losses and expect to incur losses in the future, and we may never achieve profitability." 11 Results of Operations Revenues Small Business. Revenues from small business were approximately $3.7 million and $7.4 million for the three-month and nine-month periods ended September 30, 2000, respectively. There were no revenues during the three-month or nine-month periods ended September 30, 1999 as we launched our first service, Internet Postage, on October 22, 1999. The increase for both periods was due primarily to the acquisition of new customers and recurring revenue from existing customers. The increase in the current quarter was due also to the success of the Power Plan, which was introduced in the second quarter and generates eight times the monthly revenue of a Simple Plan customer that incurs the minimum Simple Plan monthly fee. We expect revenues to increase as we continue to add new customers from both service plans. Enterprise. Revenues from the enterprise segment were $0.5 million and $2.5 million for the three-month and nine-month periods ended September 30, 2000, respectively. There were no revenues during the three-month or nine-month periods ended September 30, 1999 as we did not have any shipping service offerings until March 2000. Enterprise revenues were generated from Mail Boxes, Etc., our largest customer to date of the enterprise service. Under our current agreement with Mail Boxes Etc., we are to receive a fixed service fee of $500,000 per month. On January 1, 2001, this fixed monthly service fee converts to a per transaction fee under the terms of the agreement. We did not recognize $1.0 million in revenue from Mail Boxes Etc. during the third quarter due to delays in delivering our products and a dispute over certain product features. The service is currently deployed at other customer sites on a free trial basis. We expect that revenues will decrease as service fees from Mail Boxes Etc. convert from a fixed monthly service fee to a transaction-based fee structure pursuant to the terms of our agreement with them, and will thereafter increase as we roll out our services on a commercial scale and attract more customers to use our enterprise services to ship significant volumes of postage. E-commerce. There were no revenues from the e-commerce segment for the three-month or nine-month periods ended September 30, 2000 or 1999. In future reports, revenue from e-commerce services, if any, will be reported as part of the enterprise segment. Cost of Revenues. Cost of revenues primarily consist of costs related to customer service activities and network operations and, to a lesser extent, bank processing charges for customer fees paid by credit card, Internet connection charges, depreciation of server and network equipment, allocation of overhead and costs related to promotional items, such as free postage and scales. Costs of revenues were $5.6 million and $19.1 million for the three-month and nine- month periods ended September 30, 2000, respectively. As of September 30, 1999, there were no costs of revenues because we had not recognized any revenues to date. In accordance with EITF 00-14, "Accounting for Certain Sales Incentives," the Company reclassified from sales and marketing expense to cost of revenues costs related to free postage and free scales given as promotional items to new customers. The total reclassification was approximately $1.2 million and $5.3 million for the three and nine-month periods ended September 30, 2000, respectively. We expect costs of revenues to increase as we continue to add new customers and expand our service offerings in the enterprise segment. Sales and Marketing Expenses. Sales and marketing expenses include costs to acquire and retain customers, including costs associated with strategic relationships, advertising and promotions and compensation and related expenses for personnel engaged in marketing, sales or business development activities. Sales and marketing expenses were $20.6 million and $59.5 million for the three- month and nine-month periods ended September 30, 2000, respectively, compared to $7.6 and $10.9 for the corresponding periods in 1999. The increase in sales and marketing is principally due to our marketing campaigns and advertising of our Internet-based services. We expect sales and marketing expenses to decrease significantly as a result of our new business strategy. Research and Development Expenses. Research and development expenses principally consist of compensation for personnel involved in the development of our Internet mailing and shipping services and expenditures for consulting services and third-party software. Research and development expenses for the three-month and nine-month periods ended September 30, 2000 were $10.3 million and $21.7 million, respectively, compared to $2.4 million and $5.0 million for the corresponding periods in 1999. The increase is due to higher personnel and consulting costs associated with the ongoing development of our Internet-based mailing and shipping services. Although we expect a reduced level of spending on research and development activity, we believe that significant investments in research and development are required to remain competitive and expect to continue incurring significant research and development expenses. 12 General and Administrative Expenses. General and administrative expenses primarily consist of compensation and related costs for executive and administrative personnel, facility costs, and fees for legal and other professional services. General and administrative expenses for the three-month and nine-month periods ended September 30, 2000 were $11.4 million and $25.8 million, respectively, compared to $3.4 million and $5.8 million for the corresponding periods in 1999. The increase is principally due to increased headcount and the expansion of our facilities related to the growth of our business, as well as legal fees related to the Pitney Bowes patent infringement claim. Amortization of Goodwill and Other Intangibles. Amortization of goodwill and other intangibles is principally due to the goodwill resulting from the acquisition of iShip.com in March 2000. Amortization expense is expected to increase significantly as the goodwill and other intangibles resulting from our acquisition are amortized over useful lives ranging from three to four years. Acquired In-Process Research and Development. We incurred a charge of $2.0 million in acquired in-process research and development in March 2000 related to our acquisition of iShip.com. Deferred Compensation. 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 will result 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. Interest Income (Expense), Net. Interest income (expense), net consists of income from our cash and cash equivalents net of interest expense related to financing our obligations. Interest income (expense), net for the three-month and nine-month periods ended September 30, 2000 was $5.3 million and $14.9 million, respectively, compared to $0.7 million and $1.1 million for the three-month and nine-month periods ended September 30, 1999, respectively. The increase is due to earnings on a higher average cash equivalent balance that resulted from our initial public offering in June 1999 and our follow-on public offering in December 1999. Liquidity and Capital Resources As of September 30, 2000, the Company had approximately $290.1 million in cash and short-term investments. In June 1999, we completed our initial public offering, which resulted in net proceeds of $57.8 million. In December 1999, we completed a follow-on public offering, which resulted in net proceeds of $355.5 million. We regularly invest excess funds in short-term money market funds and commercial paper and do not engage in hedging or speculative activities. Through April 2000, our majority-owned subsidiary, EncrypTix, raised approximately $35.8 million in private financing from a group of financial and strategic investors. The proceeds of this financing are being used by EncrypTix for research and development, sales and marketing and general working capital purposes. EncrypTix has entered into four agreements to provide lease financing in the aggregate amount of $9.7 million. Net cash used in operating activities was $79.7 million and $22.6 million for the nine months ended September 30, 2000 and 1999, respectively. The increase in net cash used in operating activities resulted primarily from increases in net loss, principally due to higher sales and marketing expenses. Net cash used in investing activities was $160.5 million for the nine months ended September 30, 2000 compared to $24.4 million for the corresponding period in 1999. The increase in net cash used in investing activities resulted primarily from net purchases of short-term investments and increased capital expenditures for computer equipment, purchased software and office equipment. Net cash provided by financing activities was $36.0 million and $85.1 million for the nine months ended September 30, 2000 and 1999, respectively. The difference in net cash provided by financing activities is primarily attributed to our receipt of cash proceeds of approximately $57.8 million from our initial public offering in June 1999. 13 If our current cost-cutting programs associated with our new business strategy are implemented successfully, we anticipate that our current cash balances will be sufficient to fund our operations through June 2002. However, we may require substantial working capital to fund our business and may need to raise additional capital. We cannot be certain that additional funds will be available on satisfactory terms when needed, if at all. See "Risk Factors--Our growth and operating results could be impaired if we are unable to meet our future capital requirements." 14 RISK FACTORS BEFORE DECIDING TO INVEST IN OUR COMPANY OR TO MAINTAIN OR INCREASE YOUR INVESTMENT, YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT AND OUR OTHER FILINGS WITH THE SEC. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO AFFECT OUR BUSINESS OPERATIONS. THE OCCURRENCE OF ANY OF THE FOLLOWING RISKS COULD SERIOUSLY HARM OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS. IN SUCH CASE, THE MARKET PRICE FOR OUR COMMON STOCK COULD DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. We face risks associated with our operations The Internet postage and shipping markets are new and uncertain and our business may not develop. The markets for Internet postage and shipping are new, and their development is subject to substantial uncertainty. Our success and financial results are highly contingent upon our ability to address and develop these markets. We cannot assure you that these markets will fully develop, if at all. We depend heavily on the commercial acceptance of our Internet Postage service. We cannot predict if our target customers will choose the Internet as a means of purchasing postage, if customers will be willing to pay a fee to use our service, or if potential users will select our services over services offered by our competitors. Our target customers often have alternatives to the US Postal Service and shipping services, including online invoicing, bill payment and financial transactions. The General Accounting Office, in a report issued on October 21, 1999, stated that competition from these alternatives could lead to substantial declines in the US Postal Service's First Class Mail volume in the next decade. These trends could limit the market opportunity for our Internet Postage service. In addition, the US Postal Service could suspend, terminate or offer services that compete against Internet postage, any of which could stop or negatively impact the commercial adoption of our Internet Postage service. While Internet postage is extremely important to our business, we also depend heavily on the commercial acceptance of our enterprise Internet mailing and shipping services. There can be no assurance that we will succeed in these businesses. Similar to Internet postage, Internet mailing and shipping services are at a very early stage and the market for these services has yet to develop. We have not released these services on a commercial scale and we cannot be sure that our services or that a substantial market for Internet mailing and shipping services will develop, if at all. If a significant market for any of our services fails to develop or develops slower than we expect, our business will fail. If we do not successfully attract and retain skilled personnel for permanent management positions, we may not be able to effectively implement our business plan. In October 2000, we experienced significant personnel changes at the senior management level including the resignation of our Chief Executive Officer and Chairman of the Board, our President and Chief Operating Officer, our Chief Financial Officer and our Controller. Additionally, our Chief Marketing Officer departed in connection with our recent restructuring. Although the Board has appointed Bruce Coleman as interim Chief Executive Officer and Kenneth McBride, our previous Senior Director of Finance, as our an acting Chief Financial Officer, permanent replacements have not been appointed and the positions of Chief Operating Officer and Controller remain open. We do not currently anticipate that we will have a new Chief Marketing Officer. On November 13, 2000, the Board appointed Bruce Coleman to the Board, filling the vacancy created by Thomas H. Bruggere, who resigned on September 30, 2000. We cannot predict how these changes in management will effect our business. However, if we fail to attract and retain qualified individuals for these senior management positions, our business, financial condition and results of operations will be seriously harmed. 15 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. Like other companies in the Internet and high technology industries, we face intense competition for qualified personnel. As a result, we may be unable to successfully attract, assimilate or retain qualified personnel. The failure to attract and retain the necessary personnel could seriously harm our business, financial condition and results of operations. If our new business strategy is not successfully implemented, our financial condition and results of operations will be adversely affected. In October 2000, we implemented a new business strategy that involved refocusing our resources on the most productive areas of our business in order to more effectively capture the highest margin customer base. This new strategy was accompanied by the appointment of a new management team, a 40% reduction in our headcount, a plan to significantly reduce other expenditures, including sales and marketing expense, and an increase in monthly service fees for our Internet postage service. 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, a substantial loss of customers resulting from our new business strategy could have an adverse impact on our financial condition and results of operations. If we do not effectively manage, market and sell our Internet mailing and shipping services or if we fail to make our services widely available, we may never achieve profitability and our business will be substantially harmed and could fail. We face numerous risks coincident 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, our enterprise services have yet to be deployed on any significant commercial scale, and our e-commerce services are not yet, and may never be, available for commercial use. 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. On the other hand, 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. In order to acquire customers and achieve wide distribution and use of our services, we must develop and execute cost-effective marketing campaigns and sales programs. Given the limited amount of time that our services have been commercially available, we have very limited experience conducting marketing campaigns. In addition, we have recently increased our emphasis on direct selling efforts and have only recently retained the resources necessary to support a direct sales channel. However, we have very limited experience regarding our ability to acquire customers through a direct sales channel. As a result of these limited marketing and sales experiences, 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. The continued availability of our Internet Postage service is dependent upon our service continuing to meet US Postal Service performance specifications and regulations. 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 negatively impacted. Meanwhile, our Internet mailing and shipping services must meet the commercial demands of our customers, which are expected to range from small businesses to large enterprises. We cannot be sure that our 16 services will appeal to or be adopted by such a wide range of customers. In addition, given our limited experience selling our services to and implementing our services with enterprise customers, we cannot predict the length of enterprise sales cycles, the implementation times for our services or the extent to which an enterprise will employ our services. If we fail to meet the demands of our customers or if our customers implement and employ our services slower than we expect, our business, results of operation and ability to achieve profitability will be negatively affected. Finally, our ability to obtain and retain customers depends on our customer service capabilities. As part of our new business strategy, we are planning to cut back some of 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. Success by Pitney Bowes in its suits against us alleging patent infringement could prevent us from offering our Internet Postage service and severely harm our business or cause it to fail. On June 16, 1999, Pitney Bowes filed a patent infringement lawsuit against us 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 against us to drop allegations of patent infringement with respect to one patent and to add allegations of patent infringement with respect to three other patents. On July 28, 2000 the court entered Pitney Bowes' amended complaint. On September 18, 2000, Pitney Bowes filed another patent infringement lawsuit against us in the United States District Court for the Eastern District of Texas, alleging that we are infringing four patents owned by Pitney Bowes related to shipping. The suit seeks unspecified damages and a permanent injunction from further alleged infringement. The outcome of the litigation that Pitney Bowes has brought against us is uncertain. Therefore, we can give no assurance that Pitney Bowes will not prevail against us. If Pitney Bowes prevails in one or both of its suits against us, we may be prevented from selling our mailing or shipping services on the Internet. Additionally, the Pitney Bowes suits could result in limitations on how we implement our services, delays and costs associated with redesigning our services and payments of license fees, damages and other payments. Thus, if Pitney Bowes prevails in either of 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 on June 16, 1999, 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. 17 We have a history of losses and expect to incur losses in the future, and we may never achieve profitability. As of September 30, 2000, we had an accumulated deficit of $205.2 million. For the nine months ended September 30, 2000, we only generated $9.9 million of revenue and had a negative gross profit of $9.2 million. This minimal revenue amount can be attributed primarily to the fact that our Internet Postage service has only been available since October 22, 1999 and that our enterprise and e- commerce services have yet to be released on a commercial scale. Although we have announced a new business strategy aimed at achieving positive gross margins and eventual profitability, we expect to continue to incur significant sales and marketing, research and development, and administrative expenses and therefore could continue to incur net losses for several years. As a result of the iShip.com acquisition in March 2000, our losses have increased because of additional costs and expenses related to amortization of goodwill, other intangibles and deferred compensation resulting from this acquisition; to an increase in the number of employees; an increase in sales and marketing activities; additional facilities and infrastructure; and assimilation of operations and personnel. Overall, we will need to generate significant revenues and successfully implement our new business strategy to achieve and maintain profitability. In connection with the iShip.com acquisition that we completed in March 2000, we recorded a significant amount of intangibles, the amortization of which will significantly and adversely affect our operating results. To the extent we do not generate sufficient cash flow to recover the amount of the investment recorded, the investment may be considered impaired and could be subject to an immediate write-down of up to the full amount of the investment. In this event, our net loss in any given period could be greater than anticipated and the market price of our stock could decline. Our ability to generate gross margins generally assumes that if a market for our services develops, we must generate significant revenues from a large base of active customers and a consistent stream of transactions through our shipping services. We currently charge our customers a fee to use our Internet Postage service. Similarly, we 18 expect to charge transaction fees for our enterprise services. In order to attract customers, we may run special promotions and offer discounts on fees, postage and supplies. However, given the lack of an established or proven commercial market for our services, we cannot be sure that customers will be receptive to our fee structures. 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 changes to our pricing plans. The change in payment terms associated with a significant contract could adversely affect our financial condition and results of operations. In the three month and nine month periods ending September 30, 2000, we derived 12% and 20% of our revenue, respectively, from Mail Boxes Etc. Currently, under the terms of our contract with Mail Boxes Etc., we receive fixed monthly service fees of $500,000 from Mail Boxes Etc. until December 31, 2000. Thereafter, our contract with Mail Boxes Etc. calls for a transaction- based fee structure. We expect the amount of monthly revenue that we will receive from Mail Boxes Etc. under a transaction-based fee structure to initially be lower than the fixed fee structure. If we fail to increase our customer base or our transaction-based fee structure with Mail Boxes Etc. yields lower than expected revenues, our financial condition and results of operations will be seriously affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." Third party assertions of violations of their intellectual property rights could adversely affect our business. In addition to the Pitney Bowes claims described above, as is customary with technology companies, we may receive or become aware of 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. As an alternative to litigation, we may seek licenses for other parties' intellectual property rights. We may not be successful in obtaining all of the necessary licenses on commercially reasonable terms, if at all. Any loss resulting from intellectual property litigation could severely limit our operations, cause us to pay license fees, or prevent us from doing business. A failure to protect our own intellectual property could harm our competitive position. We rely on a combination of patent, trade secret, copyright and trademark laws and contractual restrictions to establish and protect our rights in our products, services, know-how and information. We have three issued US patents and have filed 61 patent applications in the United States, and 13 international patent applications. We have also applied to register a number of trademarks and service marks. We plan to apply for other patents, trademarks and service marks in the future. We may not receive patents for any of our patent applications. Even if patents are issued to us, claims issued in these patents may not protect our technology. In addition, a court might hold any of our patents, trademarks or service marks invalid or unenforceable. If our patents fail to protect our technology or our trademarks and service marks are successfully challenged, our competitive position could be harmed. Even if our patents are upheld or are not challenged, third parties may develop alternative technologies or products without infringing our patents. We 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. If we cannot effectively manage our growth, our ability to provide services will suffer. Our reputation and ability to attract, serve and retain our customers depend upon the reliable performance of our Web site, network infrastructure and systems. We have a limited basis upon which to evaluate the capability of our systems to handle controlled or full commercial availability of our Internet Postage service or our enterprise mailing and shipping services. Prior to the recent restructuring related to our new business strategy, we had expanded our operations significantly, and additional expansion may be required to address the anticipated growth in our user base and market opportunities. To manage any growth of operations, we may need to improve existing, and implement new, systems, procedures and controls. In addition, we have substantially reduced our rate of hiring; however, we may need to expand, train and manage an increasing employee base. We may also need to expand our finance, administrative and operations staff. 19 We may not be able to manage our growth effectively. Our prior expansion has placed, and our current restructuring will place, a significant strain on our managerial, operational and financial resources. Our current and planned 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 our expansion, our business will suffer and our financial condition and results of operations will be seriously affected. If we are unable to maintain and develop our strategic relationships and distribution arrangements, our services may not achieve commercial acceptance. We have established strategic relationships with a number of third parties. To date, our strategic relationships generally involve the promotion and distribution of our services through our partners' products, services and Web sites. Recently, we have increased our focus on the direct sales channel and have entered into arrangements to have a third party direct sales force offer our services. In return for promoting or selling our services, our partners may receive revenue-sharing opportunities or per customer bounties. In order to achieve wide distribution of our services, we believe we must establish additional strategic relationships to market our services effectively. If one or more of our partners terminates or limits its relationship with us, our business could be severely harmed or fail. We have limited experience in establishing and maintaining strategic relationships, and we may fail in our efforts to establish and maintain these relationships. Our current strategic relationships have not yet resulted in significant revenues, primarily because we have only recently commercially released our Internet Postage service and our enterprise services have yet to be released on a commercial scale. 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. We face risks typical of early stage companies and of new and rapidly changing markets. You should consider our prospects in light of the risks and difficulties frequently encountered by early stage companies and those in new and rapidly evolving markets. These risks include, among other things, our (a) complete dependence on Internet mailing and shipping services that currently do not have broad market acceptance; (b) need to effectively deploy our sales and support organizations; (c) ability to establish and promote our brand name; (d) ability to manage our operations to meet the commercial demand for our services; (e) development of and reliance on strategic and distribution relationships; (f) ability to prevent and respond quickly to service interruptions; (g) ability to minimize fraud and other security risks; (h) ability to compete with companies with greater capital resources and brand awareness; (i) the effectiveness of our new management team and its ability to successfully implement our new business strategy, and (j) ability to maximize return on investment and manage our expenditures. If we do not achieve the brand recognition necessary to succeed in the Internet mailing and shipping markets, our business will suffer. We must quickly build our brands for our mailing and shipping service in order 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 other competitors enter the Internet postage and shipping markets. We must make substantial expenditures on product development, strategic relationships and marketing and sales initiatives in an effort to establish our brand awareness and services. We cannot be certain that we will effectively deploy or have sufficient resources to build our brands and realize commercial acceptance of our services. If we fail to gain market acceptance for our services, our business will suffer dramatically or may fail. 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 and our enterprise customers could discontinue use of our mailing and shipping services. Our systems and operations are vulnerable to damage or interruption from a number of sources, including fire, flood, power loss, telecommunications failure, break-ins, earthquakes and similar events. We have entered into an Internet hosting agreement with Exodus Communications, Inc. to maintain our Internet postage servers at Exodus' data centers 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 obtained insurance for some of these disruptions; however, we cannot be certain that our coverage will be sufficient to compensate us for losses that may occur due to these types of disruptions. We have experienced unplanned system interruptions in the past and may experience them again in the future. Unplanned interruptions that we have had in the past have resulted in instances where current customers could not access their accounts or purchase postage or supplies from our online store and potential customers could not register for our services. Some of these past interruptions have lasted several hours. Any substantial interruptions in the future could result in the loss of data and could completely impair our ability to process transactions, register new customers and generate revenues from our services and our online store. 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 20 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. Although we have no commitments or agreements and are not currently engaged in discussions for any material acquisitions or investments, we continue to evaluate strategic alternatives, incremental revenue opportunities and derivative applications of our technology and may pursue and develop those opportunities with strategic partners and investors, both domestically and internationally. To the extent we pursue new or complementary businesses, we may not be able to expand our service offerings and related operations in a cost- effective or timely manner. We may experience increased costs, delays and diversions of management's attention when integrating any new businesses or service. We may lose key personnel from our operations or those of any acquired business. Furthermore, any new business or service we launch that is not favorably received by users could damage our reputation and brand name in the Internet postage and shipping or other markets that we enter. We also cannot be certain that we will generate satisfactory revenues 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 incurrence 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. Fluctuations in our operating results could cause our stock price to fall. Given our limited operating history, we have not generated any significant revenues from our operations. In addition, the market for Internet mailing and shipping services is very new and uncertain. Accordingly, we have a limited basis upon which to predict future operating results. We expect that our revenues, margins and operating results will fluctuate significantly due to a variety of factors, many of which are outside of our control. These factors include: (a) the success of the commercial release of services; (b) the costs of defending ourselves in the Pitney Bowes litigation or against other intellectual property claims; (c) the costs of our marketing and sales programs to establish, promote and distribute our brand names and services; (d) the demand for our services; (e) our ability to develop and maintain strategic distribution relationships and a direct sales channel; (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 as we expand operations; (j) US Postal Service regulation and policies and (k) general economic factors. Our cost of revenues includes costs for systems operations, free postage and other promotional items, 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. 21 Due to the foregoing factors and the other risks discussed in this report, you should not rely on period-to-period comparisons of our results of operations as an indication of future performance. It is possible that in some future periods our results of operations will be below the expectations of public market analysts and investors. In this event, the market price of our common stock is likely to decline. We may need to raise additional capital in the future through the issuance of additional equity or convertible debt securities or by borrowing money, and additional funds may not be available on terms acceptable to us. If our cost-cutting program associated with our new business strategy is successfully implemented, we believe that our current cash balances will allow us to fund our operations through June 2002. However, we may require substantial working capital to fund our business and we may need to raise additional capital. Our future capital needs depend on many factors, including market acceptance of our postage and shipping services; the level of promotion and advertising of our postage and shipping services; the level of our development efforts; our rate of customer acquisition and retention for our Internet mailing and shipping services; and changes in technology. In addition, the various elements of our business and growth strategies, including our plans to support fully the commercial release of our services, our introduction of new products and services and our investments in infrastructure will require additional capital. We cannot be certain that additional funds will be available on satisfactory terms when needed, if at all. If we are unable to raise additional necessary capital in the future or generate sufficient working capital, we may be required to curtail our operations significantly or obtain funding through the relinquishment of significant technology or markets. Raising additional capital through the sale of equity or convertible debt securities would have a dilutive effect on existing stockholders, and securities we issue may have rights superior to our common stock. We could be required to register as an investment company and become subject to substantial regulation that would interfere with our ability to conduct our business. We invest in short-term instruments consistent with prudent cash management and not primarily for the purpose of achieving investment returns. This could result in our being treated as an investment company under the Investment Company Act of 1940 and therefore being required to register as an investment company under the Investment Company Act. The Investment Company Act requires the registration of companies which are engaged primarily in the business of investing, reinvesting or trading in securities or which are engaged in investing, reinvesting, owning, holding or trading in securities and over 40% of whose assets on an unconsolidated basis (other than government securities and cash) consist of investment securities. While we do not believe that we are engaged primarily in the business of investing, reinvesting or trading in securities, we may invest our cash and cash equivalents in government securities to the extent necessary to avoid having over 40% of our assets consist of investment securities. Government securities are defined as securities issued by the U.S. government and certain federal agencies. These securities generally yield lower rates of income than other short-term instruments in which we have invested to date. Accordingly, investing substantially all of our cash and cash equivalents in government securities could result in lower levels of interest income, which could cause our losses to increase. If we were required to register as an investment company under the Investment Company Act, we would become subject to substantial regulation with respect to our capital structure, management, operations, transactions with affiliated persons, if any, and other matters, incur substantial costs and experience a disruption of our business. Application of the provisions of the Investment Company Act to us would materially and adversely affect our business, prospects, financial condition and results of operations. If the software, hardware, computer technology and other systems and services we use are not Year 2000 compliant, our operations could suffer and we could lose customers. Many existing computer systems and software products are coded to accept only two digit entries in the date code field and cannot distinguish 21st century dates from 20th century dates. If these systems have not been properly corrected, there could be system failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in normal business activities. As a result, many companies' software and computer systems may need to be upgraded or replaced to become "Year 2000" compliant. In addition, despite the fact that many computer systems are currently processing 21st century dates correctly, these companies, including us, could experience latent Year 2000 problems. 22 We use and depend on third party equipment and software that may not be Year 2000 compliant. If Year 2000 issues prevent our customers from accessing the Internet or our Web site, processing transactions or using their credit cards, our business will suffer. Any failure of our third party equipment, software or services to operate properly could require us to incur unanticipated expenses, which could seriously harm our business and operating results. We face risks associated with our markets 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 mailing and shipping markets could render our existing technology and systems obsolete. Our success will depend, in part, on our ability to license or acquire leading technologies useful in our business; enhance our existing services; develop new services or features and technology that address the increasingly sophisticated and varied needs of our current and prospective users; and respond to technological advances and emerging industry and regulatory standards and practices in a cost- effective and timely manner. Future advances in technology may not be beneficial to, or compatible with, our business. Furthermore, we may not be successful in using new technologies effectively or adapting our technology and systems to user requirements or emerging industry standards on a timely basis. Our ability to remain technologically competitive may require substantial expenditures and lead-time. If we are unable to adapt in a timely manner to changing market conditions or user requirements, our business, financial condition and results of operations could be seriously harmed. If we are unable to compete successfully, particularly against large, traditional providers of postage products such as Pitney Bowes who enter the online postage and shipping markets, our revenues and operating results will suffer. The market for Internet postage products and services is new and is intensely competitive. At present, E-Stamp has a hardware-based product commercially available and has announced that it begun testing a Web-based product through the Information Based Indicia Program. Pitney Bowes has a software-based product commercially available and has a hardware-based product in beta testing. Neopost Industrie has received commercial approval for a software-based product and has a hardware-based product in beta testing. Envelope Manager has a software product 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. Internet postage may not be widely 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. 23 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. As a result of the iShip.com acquisition in March 2000, we also compete with companies that provide shipping solutions to businesses. Customers may continue using the direct services (including online services) of the US Postal Service, UPS, FedEx and other major carriers, instead of adopting our multi- carrier, online service. Successful adoption of our shipping solutions may also be impeded by insufficient cooperation from major carriers that we need to provide our online services. Alternatively, traditional and/or potential competitors with greater resources than us, like Pitney Bowes, may develop more successful Internet solutions or deter acceptance of our service offerings. In addition, companies including TanData Corporation, GoShip.com, BITS, Inc./Intershipper.net, Kewill Systems, Accuship, Neopost Industrie, Virtan, Inc./SmartShip, Return.com and ClickReturns.com are competing in shipping services and/or offering their services through alliances with traditional major shippers. We also face a significant risk that large shipping companies will collaborate in the development and operation of an online shipping system that could make our Internet shipping services obsolete. The success of our business will depend on the continued growth of the Internet and the acceptance by customers of the Internet as a means for purchasing postage and shipping services. Our success depends in part on widespread acceptance and use of the Internet as a way to purchase postage and shipping services. This practice is at an early stage of development, and market acceptance of Internet postage and shipping services is uncertain. We cannot predict the extent to which customers will be willing to shift their purchasing habits from traditional to online postage and/or shipping services. To be successful, our customers must accept and utilize electronic commerce to satisfy their product needs. Our future revenues and profits, if any, substantially depend upon the acceptance and use of the Internet and other online services as an effective medium of commerce by our target users. The Internet may not become a viable long-term commercial marketplace due to potentially inadequate development of the necessary network infrastructure or delayed development of enabling technologies and performance improvements. The commercial acceptance and use of the Internet may not continue to develop at historical rates. Our business, financial condition and results of operations would be seriously harmed if use of the Internet and other online services does not continue to increase or increases more slowly than expected; the infrastructure for the Internet and other online services does not effectively support future expansion of electronic commerce or our services; concerns over security and privacy inhibit the growth of the Internet; or the Internet and other online services do not become a viable commercial marketplace. US Postal Service regulation may cause disruptions or the discontinuance of our business. Additionally, the US Postal Service could assess fees that would increase the cost of our service and possibly 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 US Postal Service could change its certification requirements or specifications for Internet postage or revoke the approval of our service at any time. 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 24 our service could increase and the adoption of Internet postage as a new method of mailing could be adversely affected. The US Postal Service could also decide that Internet postage should no longer be an approved postage service due to security concerns or other issues. Our business would suffer dramatically if we are unable to adapt our Internet Postage service to any new requirements or specifications or if the US Postal Service were to discontinue Internet postage as an approved postage method. Alternatively, the US Postal Service could introduce competitive programs or amend Internet postage requirements to make certification easier to obtain, which could lead to more competition from third parties or the US Postal Service itself. See "Risk Factors-If we are unable to compete successfully, particularly against large, traditional providers of postage products like Pitney Bowes who enter the online postage and shipping markets, our revenues and operating results will suffer." In addition, US Postal Service regulations may require that our personnel with access to postal information or resources receive security clearance prior to doing relevant work. We may experience delays or disruptions if our personnel cannot receive necessary security clearances in a timely manner, if at all. The regulations may limit our ability to hire qualified personnel. For example, sensitive clearance may only be provided to US citizens or aliens who are specifically approved to work on US Postal Service projects. Our operating results could be impaired if our business 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 plan to expand both domestically and 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 as those laws may be modified or as new laws may be enacted in the future. If we market our services internationally, government regulation could disrupt our operations. One element of our strategy is to provide services in international markets. Our ability to provide our Internet Postage service in international markets would likely be subject to rigorous governmental approval and certification requirements similar to those imposed by the US Postal Service. For example, our Internet Postage service cannot currently be used for international mail because foreign postal authorities do not currently recognize information-based indicia postage. If foreign postal authorities accept postage generated by our service in the future, and if we obtain the necessary foreign certification or approvals, we would be subject to ongoing regulation by foreign governments and agencies. To date, efforts to create a certification process in Europe and other foreign markets are in a preliminary stage and these markets may not prove to be a viable opportunity for us. As a result, we cannot predict when, or if, international markets will become a viable source of revenues for a postage service similar to ours. 25 Even though the US government has recently adopted more flexible export rules for software, our ability to provide service in international markets may still be impacted by the export control laws of the United States. Our software technology may make us subject to stronger export controls in some instances, 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 achieve significant international acceptance of our services, our business activities will be subject to a variety of potential risks, including the adoption of laws and regulatory requirements, political and economic conditions, difficulties protecting our intellectual property rights and actions by third parties that would restrict or eliminate our ability to do business in these jurisdictions. If we begin to transact business in foreign currencies, we will become subject to the risks attendant to transacting in foreign currencies, including the potential adverse effects of exchange rate fluctuations. 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. Additional shares held by existing stockholders may be sold into the public market, which could cause our stock price to decline. Public sales of substantial amounts of common stock purchased in private financings prior to our initial public offering or upon the exercise of stock options or warrants could adversely affect the prevailing market price of our common stock. 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. Sales of substantial amounts of common stock in the public market, or the perception that these sales could occur, could adversely affect the prevailing market price for our common stock and could impair our ability to raise capital through a public offering of equity securities. Item 3. Quantitative and Qualitative Disclosures About Market Risk. We are exposed to interest rate risk from the short-term investments and line of credit. At September 30, 2000, the short-term investments, which consist principally of corporate debt and commercial paper, approximated $167.5 million and had a related weighted average interest rate of 6.6%. At September 30, 2000, the line of credit balance totaled $1.9 million and the related interest rate was 10.5 % (the bank's prime rate plus 1%). If market interest rates continue to rise, the value of the short-term investments will continue to decrease. We currently hold no derivative instruments and do not earn foreign-source income. We expect to invest only in short-term, investment grade and interest-bearing instruments. 26 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 September 18, 2000, Pitney Bowes filed another patent infringement lawsuit against us in the United States District Court for the Eastern District of Texas, alleging that we are infringing four patents owned by Pitney Bowes related to shipping. The suit seeks unspecified damages and a permanent injunction from further alleged infringement. The outcome of the litigation that Pitney Bowes has brought against us is uncertain. Therefore, we can give no assurance that Pitney Bowes will not prevail in its suit against us. See "Risk Factors-Success by Pitney Bowes in its suit against us alleging patent infringement could prevent us from offering our Internet Postage service 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 on the entire action in favor of us and Mr. Ananda. While the plaintiffs may appeal the grant of summary judgment, we believe that the grant of summary judgment will be upheld in the event of appeal. Nevertheless, the outcome of this litigation is uncertain and we can give no assurance that the plaintiffs will not prevail. On August 23, 2000, DraftWorldwide, Inc., which formerly served as one of our advertising and promotions agencies, filed a suit against us for alleged breach of contract in the Circuit Court of Cook County, Illinois. The suit alleges that we improperly terminated our contract with DraftWorldwide and seeks damages of approximately $3.9 million plus interest and costs associated with the lawsuit. The alleged damages consist primarily of monthly retainers that DraftWorldwide claims to be due and owing as a result of the alleged improper termination for the seven month period beginning June 2000 and ending December 2000. We believe that the agreement was terminated effective June 1, 2000, which termination resulted from our belief that DraftWorldwide failed to perform adequately under the contract, among other reasons. We are currently evaluating the claims against us as well as potential counterclaims, and have not responded to the suit. The outcome of this litigation is uncertain and we can give no assurance that DraftWorldwide will not prevail. 27 We are not currently involved in any other material legal proceedings, nor have we been involved in any such proceeding that has had or may have a significant effect on our company. We are not aware of any other material legal proceedings pending against us. Item 2. Changes in Securities and Use of Proceeds. 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 service. 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 September 30, 2000, we issued Cydcor a warrant to purchase 5,281 shares of our common stock at a price per share of $3.844. The Warrant Issuance Agreement and form of warrant are filed as Exhibits 4.1 and 10.49 and to this Form 10-Q. 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. Not applicable. Item 5. Other Information. In October 2000, we experienced significant personnel changes at the senior management level including the resignation of our Chief Executive Officer and Chairman of the Board, our President and Chief Operating Officer, our Chief Financial Officer and our Controller. Additionally, our Chief Marketing Officer departed in connection with our recent restructuring. Although the Board has appointed Bruce Coleman as interim Chief Executive Officer and Kenneth McBride, our previous Senior Director of Finance, as our acting Chief Financial Officer, permanent replacements have not been appointed and the positions of Chief Operating Officer and Controller remain open. We do not currently anticipate that we will hire a Chief Marketing Officer. On November 13, 2000, the Board appointed Bruce Coleman to the Board, filling the vacancy created by Thomas H. Bruggere, who resigned on September 30, 2000. We cannot predict how these changes in management will affect our business. However, if we fail to attract and retain qualified individuals for these senior management positions, our business, financial condition and results of operations will be seriously harmed. In October 2000, we implemented a new business strategy in an effort to more rapidly decrease our operating losses and enhance our ability to achieve profitability. This strategy involved a restructuring that reduced our total headcount by approximately 40%, which included full time, part time and contract employees. We also announced that we would implement other cost-cutting programs, including a significant reduction in and redeployment of our sales and marketing efforts to those programs that have demonstrated higher returns on investment. Finally, we are combining our Enterprise and E-Commerce Business Units to reduce duplication of costs and effort. We expect to take a one-time charge in the fourth quarter of 2000 relating to this restructuring. If our new business strategy is not successful, we will not achieve profitability as currently planned, if at all. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 4.1 Form of Common Stock Purchase Warrant between the Company and Cydcor Limited. 10.47 + Manifest System Services and Co-Branding Agreement, dated as of April 27, 1999, by and between iShip.com, Inc. and Mail Boxes Etc. USA, Inc. 10.48+ Amendment No. 1 to Manifest System Services and Co-Branding Agreement, dated as of March 7, 2000, by and between iShip.com, Inc. and Mail Boxes, Etc. USA, Inc. 10.49 Warrant Issuance Agreement, dated as of August 1, 2000 between the Company and Cydcor Limited. _______________________ + Confidential treatment has been requested for certain portions of this exhibit pursuant to 24b-2 under the Securities and Exchange Act, as amended. In accordance with Rule 24b-2, these confidential portions have been omitted from this exhibit and filed separately with the Securities and Exchange Commission. 28 27.1 Financial Data Schedule. 99.1* Press Release issued October 12, 2000 relating to resignation of John M. Payne from position of Chairman of the Board of Directors and Chief Executive Officer. 99.2 Press Release issued October 23, 2000 relating to the Company's headcount reduction. 99.3 Press Release issued October 31, 2000 relating to appointment of Bruce Coleman as interim Chief Executive Officer. 99.4 Press Release issued October 31, 2000 relating to the Company's financial results for the third quarter of 2000 and cost-cutting measures. - ---------------- * Incorporated by reference to Exhibit 99.2 on the Form 8-K filed by the Company on October 13, 2000. (b) Reports on Form 8-K. On September 25, 2000, the Company filed a report on Form 8-K relating to (1) an action filed against the Company by DraftWorldwide, Inc. alleging breach of contract and (2) an action filed against the Company by Pitney Bowes alleging patent infringement. 29 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) November 14, 2000 /s/ Bruce Coleman - ---------------------------- --------------------------------------- Date Bruce Coleman Chief Executive Officer November 14, 2000 /s/ Kenneth McBride - ---------------------------- --------------------------------------- Date Kenneth McBride Chief Financial Officer (Principal Financial Officer) 30 EX-4.1 2 0002.txt FORM OF COMMON STOCK PURCHASE WARRANT EXHIBIT 4.1 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO STAMPS.COM THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. - ------------------------------------------------------------------------------- Date of Issuance: _______________________ Expiration Date: _________________________ Number of Shares of Common Stock: _______________ STAMPS.COM INC. Common Stock Purchase Warrant ----------------------------- Stamps.com Inc., a Delaware corporation ("Stamps.com"), hereby certifies ---------- that CYDCOR LIMITED ("Cydcor"), or its registered assigns (collectively with ------ Cydcor, the "Registered Holder"), is entitled, upon the terms and subject to the ----------------- conditions set forth below, to purchase from Stamps.com, as set forth in Section 1, at a purchase price of $__________ per share, subject to adjustment in accordance with the terms hereof, up to ______________ shares of Common Stock of Stamps.com ("Common Stock") subject to adjustment in accordance with the terms ------------ hereof. The shares of Common Stock purchasable upon exercise of this Warrant and the purchase price per share, as adjusted from time to time pursuant to the provisions of this Warrant, are hereinafter referred to as the "Warrant Stock" ------------- and the "Purchase Price," respectively. -------------- This Warrant is issued pursuant to that certain Warrant Issuance Agreement dated as of August 1, 2000 between Stamps.com and Cydcor. 1. Exercise. -------- (a) Manner of Exercise. This Warrant may be exercised by the ------------------ Registered Holder, in whole or in part, at any time or times during the period commencing on the Date of Issuance and ending on the Expiration Date by surrendering this Warrant, with the purchase form appended hereto as Exhibit A --------- duly executed by such Registered Holder or by such Registered Holder's duly authorized attorney, at the principal office of Stamps.com, or at such other office or agency as Stamps.com may designate, accompanied by payment in full of the Purchase Price payable in respect of the number of shares of Warrant Stock purchased upon such exercise. The Purchase Price may be paid by cash, check, wire transfer or by the surrender of promissory notes or other instruments representing indebtedness of Stamps.com to the Registered Holder. (b) Effective Time of Exercise. Each exercise of this Warrant shall -------------------------- be deemed to have been effected immediately prior to the close of business on the day on which this Warrant shall have been surrendered to Stamps.com as provided in Section 1(a) above. At such time, the person or persons in whose name or names any certificates for Warrant Stock shall be issuable upon such exercise as provided in Section 1(d) below shall be deemed to have become the holder or holders of record of the Warrant Stock represented by such certificates. (c) Net Issue Exercise. ------------------ (i) In lieu of exercising this Warrant in the manner provided above in Section 1(a), the Registered Holder may elect to receive shares equal to the value of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of Stamps.com together with notice of such election in which event Stamps.com shall issue to such Holder a number of shares of Warrant Stock computed using the following formula: X = Y (A - B) --------- A Where X = The number of shares of Warrant Stock to be issued to the Registered Holder. Y = The number of shares of Warrant Stock purchasable under this Warrant (at the date of such calculation). A = The fair market value of one share of Warrant Stock (at the date of such calculation). B = The Purchase Price (as adjusted to the date of such calculation). (ii) For purposes of this Section 1(c), the fair market value of Warrant Stock on the date of calculation shall mean with respect to each share of Warrant Stock: (A) if Stamps.com's Common Stock is traded on a securities exchange or The Nasdaq Stock Market or actively traded over-the-counter: (1) if Stamps.com's Common Stock is traded on a securities exchange or The Nasdaq Stock Market, the fair market value shall be deemed to be the product of (x) the average of the closing prices over a ten (10) trading day period, which period shall begin twelve (12) trading days prior to the effective time of exercise of this Warrant and end three (3) trading days prior to the effective day of exercise of this Warrant and (y) the number of shares of Common Stock into which each share of Warrant Stock is convertible on such date; or (2) if Stamps.com's Common Stock is actively traded over- the-counter, the fair market value shall be deemed to be the product of (x) the average of the closing bid or sales price (whichever is applicable) over a ten (10) trading day period, which period shall begin twelve (12) trading days prior to the effective time of exercise of this Warrant and end three (3) trading days prior to the effective day of exercise of this Warrant and (y) the -2- number of shares of Common Stock into which each share of Warrant Stock is convertible on such date; or (B) if (A)(1) nor (A)(2) is applicable, the fair market value of Warrant Stock shall be at the highest price per share which Stamps.com could obtain on the date of calculation from a willing buyer (not a current employee or director) for shares of Warrant Stock sold by Stamps.com, from authorized but unissued shares, as agreed by Stamps.com and the holders of a majority of the Warrant Stock issuable upon exercise of this Warrant, unless Stamps.com is at such time subject to an acquisition, in which case the fair market value of Warrant Stock shall be deemed to be the value received by the holders of such stock pursuant to such acquisition and shall be valued on a basis consistent with such acquisition consideration. (d) Delivery to Holder. As soon as practicable after the exercise of ------------------ this Warrant in whole or in part, and in any event within ten (10) days thereafter, Stamps.com at its expense will cause to be issued in the name of, and delivered to, the Registered Holder, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct: (i) a certificate or certificates for the number of shares of Warrant Stock to which such Registered Holder shall be entitled, and (ii) in case such exercise is in part only, a new warrant or warrants (dated the date hereof) of like tenor, calling in the aggregate on the face or faces thereof for the number of shares of Warrant Stock equal (without giving effect to any adjustment therein) to the number of such shares called for in the introductory paragraph to this Warrant minus the number of such shares purchased by the Registered Holder upon such exercise as provided in Section 1(a) or 1(c) above. 2. Adjustments. ----------- (a) Stock Splits and Dividends. If outstanding shares of Stamps.com's -------------------------- Common Stock shall be subdivided into a greater number of shares or a dividend in Common Stock shall be paid in respect of Common Stock, the Purchase Price in effect immediately prior to such subdivision or at the record date of such dividend shall simultaneously with the effectiveness of such subdivision or immediately after the record date of such dividend be proportionately reduced. If outstanding shares of Common Stock shall be combined into a smaller number of shares, the Purchase Price in effect immediately prior to such combination shall, simultaneously with the effectiveness of such combination, be proportionately increased. When any adjustment is required to be made in the Purchase Price, the number of shares of Warrant Stock purchasable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Purchase Price in effect immediately prior to such adjustment, by (ii) the Purchase Price in effect immediately after such adjustment. (b) Reclassification, Consolidation, Merger Etc. In case at any time ------------------------------------------- or from time to time, Stamps.com shall (i) effect a reorganization (other than a combination, -3- reclassification, exchange or subdivision of shares, as otherwise provided for herein), (ii) consolidate with or merge into any other entity or person, or (iii) transfer all or substantially all of its properties or assets to any other entity or person including under any plan or arrangement contemplating the dissolution of Stamps.com, then, in each such case, as a part of such reorganization, merger, consolidation, sale or transfer, lawful provision shall be made so that the Registered Holder, on the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation, merger, sale or transfer or the effective date of such reorganization, consolidation, merger, sale or transfer, as the case may be, shall be entitled to receive, in lieu of the Common Stock (or other securities) issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which the Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if the Holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in this Section 2. Upon any reorganization, consolidation, merger, or other such transaction referred to in this Section 2(b) (collectively, a "Corporate Transaction"), this Warrant shall, immediately after such Corporate --------------------- Transaction, be appropriately adjusted to apply and pertain to the number and class of securities which would have been issued to the Holder in the consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the Purchase Price, provided the aggregate Purchase Price payable hereunder shall remain the same. (c) Adjustment Certificate. When any adjustment is required to be ---------------------- made in the Warrant Stock or the Purchase Price pursuant to this Section 2, Stamps.com shall promptly mail to the Registered Holder a certificate setting forth (i) a brief statement of the facts requiring such adjustment, (ii) the Purchase Price after such adjustment and (iii) the kind and amount of stock or other securities or property into which this Warrant shall be exercisable after such adjustment. 3. Transfers. --------- (a) Unregistered Security. Each holder of this Warrant acknowledges --------------------- that this Warrant has not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and agrees not to sell, pledge, distribute, -------------- offer for sale, transfer or otherwise dispose of this Warrant, any Warrant Stock issued upon its exercise or any Common Stock issued upon conversion of the Warrant Stock in the absence of (i) an effective registration statement under the Act as to this Warrant, such Warrant Stock or such Common Stock and registration or qualification of this Warrant, such Warrant Stock or such Common Stock under any applicable U.S. federal or state securities law then in effect, or (ii) an opinion of counsel, reasonably satisfactory to Stamps.com, that such registration and qualification are not required. Each certificate or other instrument for Warrant Stock issued upon the exercise of this Warrant shall bear a legend substantially to the foregoing effect. (b) Transferability. This Warrant may not be transferred or assigned, --------------- in whole or in part, by the Registered Holder except (i) to an affiliate of the Registered Holder -4- (provided that such affiliate agrees in writing with Stamps.com and/or iShip.com to comply with Section 17 of the Agreement, as amended) or (ii) where the Registered Holder has provided the Company with written notice of its intent to assign or transfer the Warrant and the Company has consented to such assignment or transfer in writing. Any transfer in accordance with the immediately preceding sentence shall be effected upon surrender of the Warrant with a properly executed assignment (in the form of Exhibit B hereto) at the principal --------- office of Stamps.com. (c) Warrant Register. Stamps.com will maintain a register containing ---------------- the names and addresses of the Registered Holders of this Warrant. Until any transfer of this Warrant is made in the warrant register, Stamps.com may treat the Registered Holder of this Warrant as the absolute owner hereof for all purposes; provided, however, that if this Warrant is properly assigned in blank, -------- ------- Stamps.com may (but shall not be required to) treat the bearer hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. Any Registered Holder may change such Registered Holder's address as shown on the warrant register by written notice to Stamps.com requesting such change. 4. No Impairment. Stamps.com will not, by amendment of its charter or ------------- through reorganization, consolidation, merger, dissolution, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. 5. Termination. ----------- This Warrant (and the right to purchase securities upon exercise hereof) shall terminate on the Expiration Date stated on the first page of this Warrant. 6. Notices of Certain Transactions. In case: ------------------------------- (a) Stamps.com shall take a record of the holders of its Common Stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right, to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right, or (b) of any capital reorganization of Stamps.com, any reclassification of the capital stock of Stamps.com, any consolidation or merger of Stamps.com, any consolidation or merger of Stamps.com with or into another corporation (other than a consolidation or merger in which Stamps.com is the surviving entity), or any transfer of all or substantially all of the assets of Stamps.com, or any other Corporate Transaction, or (c) of the voluntary or involuntary dissolution, liquidation or winding-up of Stamps.com, -5- then, and in each such case, Stamps.com will mail or cause to be mailed to the Registered Holder of this Warrant a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation, winding-up, redemption or conversion is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other stock or securities at the time deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation, winding-up, redemption or conversion) are to be determined. Such notice shall be mailed at least twenty (20) days prior to the record date or effective date for the event specified in such notice. 7. Reservation of Stock. Stamps.com will at all times reserve and keep -------------------- available, solely for the issuance and delivery upon the exercise of this Warrant, such shares of Warrant Stock and other stock, securities and property, as from time to time shall be issuable upon the exercise of this Warrant. 8. Exchange of Warrants. Upon the surrender by the Registered Holder of -------------------- any Warrant or Warrants, properly endorsed, to Stamps.com at the principal office of Stamps.com, Stamps.com will, subject to the provisions of Section 3 hereof, issue and deliver to or upon the order of such Holder, at Stamps.com's expense, a new Warrant or Warrants of like tenor, in the name of such Registered Holder or as such Registered Holder (upon payment by such Registered Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 9. Replacement of Warrants. Upon receipt of evidence reasonably ----------------------- satisfactory to Stamps.com of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required) in an amount reasonably satisfactory to Stamps.com, or (in the case of mutilation) upon surrender and cancellation of this Warrant, Stamps.com will issue, in lieu thereof, a new Warrant of like tenor. 10. Mailing of Notices. Any notice required or permitted pursuant to this ------------------ Warrant shall be in writing and shall be deemed sufficient upon receipt, when delivered personally or sent by courier, overnight delivery service or confirmed facsimile, or forty-eight (48) hours after being deposited in the regular mail, as certified or registered mail (airmail if sent internationally), with postage prepaid, addressed (a) if to the Registered Holder, to the address of the Registered Holder most recently furnished in writing to Stamps.com and (b) if to Stamps.com, to the address set forth below or subsequently modified by written notice to the Registered Holder. 11. No Rights as Shareholder. Until the exercise of this Warrant, the ------------------------ Registered Holder of this Warrant shall not have or exercise any rights by virtue hereof as a shareholder of Stamps.com. 12. No Fractional Shares. No fractional shares of Common Stock will be -------------------- issued in connection with any exercise hereunder. In lieu of any fractional shares which would otherwise -6- be issuable, Stamps.com shall pay cash equal to the product of such fraction multiplied by the fair market value of one share of Common Stock on the date of exercise, as determined in good faith by Stamps.com's Board of Directors. 13. Amendment or Waiver. Any term of this Warrant may be amended or waived ------------------- only by an instrument in writing signed by the party against which enforcement of the amendment or waiver is sought. 14. Headings. The headings in this Warrant are for purposes of reference -------- only and shall not limit or otherwise affect the meaning of any provision of this Warrant. 15. Governing Law. This Warrant shall be governed, construed and ------------- interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. STAMPS.COM INC. By:__________________________________________ Name: Address: 3420 Ocean Park Blvd. Suite 1040 Santa Monica, CA 90405 Attn: Corporate Secretary Fax Number: (310) 314-8523 Agreed to and Accepted: CYDCOR LIMITED By:_________________________________ Name:_______________________________ Title:______________________________ -7- EXHIBIT A --------- PURCHASE FORM ------------- To: Stamps.com Inc. Dated: ________________ The undersigned, pursuant to the provisions set forth in the attached Warrant, hereby irrevocably elects to purchase ___________ shares of Common Stock of Stamps.com Inc., a Delaware corporation, covered by such Warrant and herewith makes payment of $_________________, representing the full purchase price for such shares at the price per share provided for in such Warrant. _________________________________________ Name of Registered Holder _________________________________________ By: _________________________________________ Name: _________________________________________ Title: EXHIBIT B --------- ASSIGNMENT FORM --------------- FOR VALUE RECEIVED, _________________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant with respect to the number of shares of Common Stock of Stamps.com Inc., a Delaware corporation, covered thereby set forth below, unto: Name of Assignee Address/Fax Number No. of Shares ---------------- ------------------ ------------- Dated: _________________ _____________________________________________ Name of Registered Holder By:____________________________________________ Name:__________________________________________ Title:_________________________________________ Witness:_______________________________________ EX-10.47 3 0003.txt MANIFEST SYSTEM AGREEMENT EXHIBIT 10.47 MANIFEST SYSTEM SERVICES AND CO-BRANDING AGREEMENT -------------------------------------------------- This Manifest System Services and Co-Branding Agreement ("Agreement") is --------- made and entered into as of April 27, 1999 (the "Effective Date"), by and -------------- between iShip.com, Inc., a Washington corporation (the "Company"), and Mail ------- Boxes Etc. USA, Inc., a California corporation ("MBE"). --- RECITALS -------- A. The Company has developed an Internet-based shipping system. B. MBE wishes to have the Company provide an Internet-based service based on the Company's Internet-based shipping system and the MBE retail manifest system to the MBE Centers (as defined below) for use in manifesting and shipping customer packages, all subject to the terms and conditions set forth in this Agreement. C. The Company and MBE desire to engage in certain co-branding activities on the Internet so as to allow customers of MBE Centers to use the Company's Internet-based shipping system in a convenient manner and to list the MBE Centers as drop-off locations and retail shipping centers. D. In connection with the services to be provided hereunder, the Company desires to issue to MBE a warrant to purchase up to One million three hundred thirty three thousand three hundred thirty three (1,333,333) shares (as determined pursuant to the terms of the Warrant) of Series B Preferred Stock of the Company substantially in the form attached hereto as Exhibit A (the --------- "Warrant"). ------- AGREEMENT --------- 1. Definitions. ----------- The following terms are defined for the purposes of this Agreement as follows: (a) "Acceptance" shall mean MBE's acknowledgment pursuant to Section 2 ---------- below that (i) access to the Service has been granted, and (ii) the Service functions in accordance with the Specifications. (b) "Authorized Equipment" shall mean the particular type of computer -------------------- equipment and the specifications thereof set forth in Exhibit B attached hereto --------- on which the Service is intended to be accessed and used by the MBE Centers. (c) "Brand Features" means each party's respective trademarks, trade names, -------------- service marks, service names and distinct brand elements that appear from time to time in each party's properties, ventures and services worldwide and are protected under U.S. copyright law or as to which each party has established trademarks or trade dress rights and any modifications to the foregoing that may be created during the term of this Agreement. (d) "Brand Guidelines" means the guidelines, if any, for use of the Brand ---------------- Features, which may be prescribed by each party from time to time during the term of this Agreement. (e) "Bounty Customer" shall mean any Company Internet Customer or Third --------------- Party/Company Customer. (f) "Company Internet Customer" shall have the meaning set forth on Exhibit ------------------------- ------- C attached hereto. - - (g) "Company Site" shall mean the web site or sites of the Company on the ------------ Internet, one of which is currently located at www.iship.com. ------------- (h) "Company Technology" shall mean the Internet-based manifest system of ------------------ the Company that allows users to, among other things, compare various shipping services, print shipping labels and/or track shipments using the Internet. (i) "Confidential Information" shall mean the Service Documentation, the ------------------------ Specifications and any information disclosed by one party to the other pursuant to this Agreement that is in written, graphic, machine readable or other tangible form and is marked "Confidential," "Proprietary" or in some other manner to indicate its confidential nature, including but not limited to information related to the respective parties' business, products, proposed new products, customers or related information. Confidential Information may also include oral information disclosed by one party to the other pursuant to this Agreement, provided that such information is designated as confidential at the time of disclosure and is reduced to writing by the disclosing party within a reasonable time (not to exceed thirty (30) days) after its oral disclosure, and such writing is marked in a manner to indicate its confidential nature and delivered to the receiving party. (j) "eBay Customer" shall have the meaning set forth on Exhibit C. ------------- --------- (k) "In-Center Customer" shall have the meaning set forth on Exhibit C. ------------------ --------- (l) "Intellectual Property Rights" means all rights in and to trade ---------------------------- secrets, patents, copyrights, trademarks, know-how, as well as moral rights and similar rights of any type under the laws of any governmental authority, domestic or foreign, including rights in and to all applications and registrations relating to any of the foregoing. (m) "Link" means a URL hidden behind a formatting option that may take the ---- form of a colored item of text (such as a URL description), logo or image, and which allows a user to automatically move to or between web pages or web sites. (n) "Listings" shall mean the listing of the names, addresses, pricing and -------- other identifying information of each MBE Center which is a party to a Subscription Agreement (as defined in Section 3(b)). (o) "Manifest" means the exclusive MBE retail manifest system to be -------- developed by the parties hereto in accordance with the Specifications. -2- (p) "MBE Center" shall mean each franchise of MBE operating a franchise ---------- retail outlet within the United States which enters into a Subscription Agreement. (q) "MBE-Generated Customer" shall mean any In-Center Customer, Remote ---------------------- Self-Service Customer or MBE Internet Customer. (r) "MBE Internet Customer" shall have the meaning set forth on Exhibit C. --------------------- --------- (s) "MBE Sites" shall mean the web sites operated by MBE on the Internet --------- during the term of this Agreement, including but not limited to the websites currently located at www.mbe.com and www.mbeonline.com. (t) "Remote Self-Service Customer" shall have the meaning set forth on ---------------------------- Exhibit C. - --------- (u) "Specifications" shall mean the specifications for the Manifest set -------------- forth on Exhibit D, as updated from time to time during the term of this --------- Agreement in accordance with the terms of this Agreement. (v) "Stations" shall mean the retail manifest shipping stations within each -------- MBE Center and the remote off-site manifest shipping stations, in each case within the United States, of any MBE Center utilizing Authorized Equipment. (w) "Service" shall mean the combination of the Company Technology and the ------- Manifest. (x) "Service Documentation" shall mean all manuals, instructions or other --------------------- information provided by the Company to MBE or MBE Centers which directly relate to the functionality and operation of the Service. (y) "Third Party/Company Customer" shall have the meaning set forth on ---------------------------- Exhibit C. - --------- (z) "Third Party/MBE Customer" shall have the meaning set forth on ------------------------ Exhibit C. - --------- (aa) "Update" shall mean any and all bug fixes, error corrections, and ------ maintenance updates of the Service. 2. Development, Delivery and Acceptance. ------------------------------------ (a) Development License. Each party hereby grants to the other party a ------------------- [***]* (except as provided in Section 18(b)("Assignment")), [***]* (with no --- --- right to sublicense except as set forth below) under all of its Intellectual Property Rights to use, reproduce, modify, and create derivative works of each party's preexisting Intellectual Property Rights solely as is reasonably and actually necessary to complete the development of the Service. Each party may grant sublicenses to contractors or subcontractors it engages to work on the Service, provided - ---------- * Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. -3- that any such subcontractor has entered into an enforceable agreement reasonably acceptable to the other party relating to the assignment of Intellectual Property Rights. (b) Delivery. The Company shall use its commercially reasonable best -------- efforts to complete the design of the Manifest and the Service in a timely and professional manner consistent with commercial software industry standards on or before August 1, 1999 and deliver the URL and the access codes or passwords necessary to use the Service to MBE and each subscribing MBE Center on or before September 1, 1999. MBE and MBE Centers shall provide any assistance reasonably requested by the Company in connection with completing such design and effecting such delivery. The parties shall cooperate to implement a beta roll-out of the Service in approximately 100 Designated Locations of MBE Centers selected by mutual agreement of the Company and MBE on or before September 1, 1999, and thereafter shall mutually agree on a plan to make the Service available to all MBE Centers by no later than October 1, 1999. (c) Inspection. Following the completion of the beta roll-out and testing ---------- of the Service, MBE shall have a period of twenty (20) business days to undertake inspection and testing of the Manifest to determine conformance with applicable Specifications. The Company shall provide any assistance reasonably requested by MBE in assessing such conformance. If MBE finds that any part of the Manifest does not conform with the applicable Specifications, MBE shall, within the inspection period, notify the Company and provide a detailed written description of such nonconformance. Following confirmation by the Company of such nonconformance, the Company will alter the Manifest within a reasonable time to correct such nonconformance. (d) Acceptance. Upon verification by MBE that the Manifest conform with the ---------- Specifications in all material respects, or if MBE fails to notify the Company within the twenty (20) business day inspection period, the Service shall be deemed Accepted. MBE's sole remedy for correction of problems after Acceptance shall be under the Warranties set forth in Section 11. 3. Provision of Service. -------------------- (a) Scope of Agreement. Any Service Documentation provided to MBE and/or ------------------ MBE Centers by the Company shall be subject to all terms and conditions of this Agreement. All use of and access to the Service by MBE and all MBE Centers shall also be subject to all terms and conditions of this Agreement. (b) Service. The Company will operate the Service at its network operating ------- center. The Company shall bear all costs associated with the network operating center, including without limitation hardware and software, networking equipment and bandwidth charges, redundant storage and/or mirroring across multiple geographic locations, and maintenance; provided, however, that Company and MBE -------- ------- shall each pay one-half of the costs and expenses associated with transmitting information and data from the servers maintained or used by the Company to the VSAT network hub, including hardware and backhaul circuits. The Company will make the Service available to MBE Centers via one or more secure Internet sites. Each MBE Center approved by MBE that wishes to participate in the Service shall enter into a Subscription Agreement with the Company in a form to be mutually agreed upon by the parties, which form -4- shall include appropriate obligations of the MBE Centers as set forth in this Agreement (the "Subscription Agreement"). MBE agrees to use its commercially ---------------------- reasonable best efforts to facilitate the execution of a Subscription Agreement by each participating MBE Center within a reasonable amount of time after the Effective Date. The Company hereby grants the MBE Centers a [***]* under all of --- Company's Intellectual Property Rights solely to access and use the Service in accordance with the terms and conditions of this Agreement and the Subscription Agreement. (c) Authorized Equipment. Each MBE Center shall be responsible for -------------------- obtaining, installing and maintaining the Authorized Equipment at its sole cost and expense. The Subscription Agreement shall provide that an MBE Center that accesses or uses the Service on any hardware or other equipment, or in conjunction with any software, that does not constitute Authorized Equipment does so as its own risk, and the Company shall not be liable for any failure of the Service on hardware or other equipment, or in conjunction with any software, that does not constitute Authorized Equipment. (d) Exclusivity ----------- (i) The Company shall not enter into any agreement or arrangement, including without limitation any sale, license, service agreement, co-branding agreement, co-marketing agreement or linking agreement with any provider of manifesting or shipping services through non-carrier retail shipping locations; provided, however, that: (A) the Company may provide listings of carrier drop-boxes or carrier-owned counter drop-off locations specific to a particular carrier (including, without limitation, locations within retail establishments) on the Company Site, provided that such listings do not include retail shipping locations, including UPS authorized shipping outlets, FedEx authorized shipping centers and other commercial mail receiving agencies; and (B) the Company may enter into any such agreement or arrangement so long as MBE is given advance written notice of such agreement or arrangement and such agreement or arrangement prohibits the use of the Manifest or any Company Technology to manifest or ship packages for retail customers and provided further that Company terminates service to any such entity that uses the Manifest or any Company Technology to serve retail customers. (ii) MBE shall not enter into any agreement or arrangement with any provider of an online or Internet-based manifest system other than the Company. (iii) The Company may, at its option, terminate the exclusivity provisions set forth in this Section 3(d) upon the occurrence of any of the following events: (A) MBE - ---------- * Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. -5- and all MBE Centers together fail to ship at least [***]* packages --- manifested by the Service in any period of three (3) full months commencing on the earlier of (x) March 1, 2000, and (y) the use of the Service to manifest packages by at least [***]* MBE Centers (other than any such --- failure which is directly caused by an event of force majeure (as set forth in Section 18(e) or by the failure of the Service to operate in accordance with the Specifications or by the Company's breach of any of its obligations hereunder), or (B) MBE ceases to own at least [***]* shares of --- common stock of the Company (calculated on an as-converted basis and as adjusted for any stock split, stock dividend, recapitalization or similar transaction). (iv) Beginning 18 months after the Effective Date, MBE may, at its option, terminate the exclusivity provisions set forth in this Section 3(d) if (A) MBE and all MBE Centers together fail to ship at least [***]* --- packages manifested by the Service in any three (3) full month period ending 18 months after the Effective Date and (B) such failure to meet the volume requirements set forth above is related to the unsatisfactory performance of the Service as evidenced by written communications from a commercially significant number of MBE Centers. 4. Support; Training. ----------------- (a) Updates and Service Revisions. The Company will make Updates to the ----------------------------- Service in accordance with the requirements set forth in the Specifications at no charge for the entire term of this Agreement. Without limiting the foregoing, the Service shall be updated from time to time during the term of this Agreement to include accurate and current (i) Listings and (ii) pricing and service descriptions for each carrier supported by the Manifest, in each case as soon as reasonably practicable following the receipt by the Company of such Listings, pricing and service descriptions. As reasonably necessary, the Company shall update the Specifications to reflect such Updates and shall provide a copy of same to MBE at least once per calendar quarter. If the Company develops additional Intellectual Property Rights that are made available without development charge to other customers of the Company, the Company will also make such Intellectual Property Rights available to MBE without development charge. (b) MBE Center Support. MBE shall have the right to designate in writing up ------------------ to five (5) second-level support personnel individuals and alternates to such individuals as contact persons (the "Contact Persons") (although the parties may --------------- mutually agree to increase such number of Contact Persons to ensure adequate support exists for the MBE Centers) Such Contact Persons shall interface with the MBE Centers with respect to matters relating to the Service and may transmit request assistance and descriptions of problems encountered with the Service to the Company via electronic mail, fax, or overnight mail. The Company will provide telephone support to the Contact Persons at a level and in such a manner as the parties mutually agree to be adequate. The Company shall use reasonable efforts to provide the Contact Persons with answers and solutions to problems encountered by MBE or the MBE Center in the course of MBE's or MBE Centers' normal and proper use of the Service in accordance with the terms and - ---------- * Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. -6- conditions of this Agreement. Only the Contact Persons may contact the Company in connection with matters relating to technical support, and the Company shall have no obligation to answer questions or assist MBE or MBE Centers' personnel other than the Contact Persons. The Company shall provide a reasonable amount of training and training materials to the Contact Persons to provide the Contact Persons with information concerning the Service and to assist the Contact Persons in providing support to the MBE Centers and other personnel of MBE. MBE shall take reasonable steps to ensure that MBE Centers and personnel of MBE other than the Contact Persons do not contact the Company directly with respect to issues relating to support of the Service. The Company shall take reasonable steps to provide adequate industry standard support of all Internet users of the Company Site and other sites using the Company Technology. MBE and MBE Centers may refer all support questions relating directly to the Company Site or the Company Technology to the Company in accordance with the foregoing. 5. Records; Audits. --------------- The Company shall maintain complete and accurate records of the number of packages shipped by the MBE Centers using the Service and all payments due or accrued to the Company by MBE Centers hereunder. MBE shall, at any time during the term of this Agreement, be entitled to audit all such records upon ten (10) days written notice to the Company, in order to confirm the accuracy of such records and conformance with the terms and conditions of this Agreement; provided, however, that no more than one (1) such audit may be conducted in any - -------- ------- ninety (90)-day period. Any such audit shall be performed at MBE's expense during the Company's normal business hours; provided, however, that in the event -------- ------- that such audit reveals any non-compliance with any term of this Agreement by the Company, the Company shall bear the cost of such audit. 6. Additional Development. ---------------------- (a) Request for Proposal. From time to time, MBE may request additional -------------------- custom software or other custom development to be provided by the Company under this Agreement. If MBE has a requirement for a specific enhancement or modification of the Service, MBE will identify to the Company in writing a summary of such requirement (the "Request for Proposal"). Such Request for -------------------- Proposal will provide a description sufficient to enable the Company to determine the general demand for and its plans, if any, to develop the same or similar enhancements or modifications. (b) Terms and Conditions. If the Company decides that it has the technical -------------------- ability to fulfill the Request for Proposal, then the Company will respond to MBE within forty-five (45) days of receiving the Request for Proposal, stating the terms and conditions upon which the Company would be able to undertake such development, including, but not limited to, changes to the Specifications, custom development charges, and a proposed delivery schedule. (c) Development and Billing Rates. The Company shall perform such ----------------------------- development in accordance with the highest professional standards. The cost of such development shall be the Company's standard billing rates then in effect (in addition to reimbursement of any expenses, in accordance with the Company's standard practices), which shall be paid by MBE within thirty (30) days of receipt of an invoice therfor. No additional fees or bounties shall be owed or -7- payable in connection with such development, unless such development results in a revenue-generating feature or functionality of the Service which is outside of the scope of the Specifications, in which case the parties shall negotiate in good faith to mutually agree upon a reasonable fee mechanism therefor and/or reimbursement of development expenses. Upon completion of such additional development, the Company shall update the Specifications to reflect such additional development and shall provide a copy of same to MBE. (d) Credit. MBE shall receive a credit applicable to such billing rates ------ (but not to reimbursement of expenses) for any development performed by the Company under this Section 6 equal to [***]* of the total fees paid by MBE and --- all MBE Centers, which credit shall be reflected on a monthly statement by the Company to MBE. Any such credit must be used within twelve (12) months of receipt of payment by the Company. 7. Ownership. --------- (a) General. The Company will have full and exclusive right, title and ------- ownership interest in and to the Service and the Specifications and the Intellectual Property Rights therein. The Company is, and shall be, the sole owner of all inventions, discoveries and/or enhancements relating to the Service and the Specifications, including all copies, translations, compilations, partial copies, derivative works and updated works, whether partial or complete and whether or not merged into other program materials and whether in written or unwritten form. Except as authorized by this Agreement (including MBE's right to use the Specifications as set forth in Section 15(d)(iv)) or as otherwise agreed in writing, MBE and MBE Centers may not, directly, or through any person or entity, in any form or manner, copy, distribute, reproduce, incorporate, use or allow access to the Service or the Specifications, or modify, prepare derivative works of, decompile, reverse engineer, disassemble or otherwise attempt to derive source code or object code from the Service or the Specifications. (b) Proprietary Notices. MBE will ensure that all copies of Service ------------------- Documentation made in accordance with this Agreement will incorporate copyright and other proprietary notices in the same manner that the Company incorporates such notices in the Service or in any manner reasonably requested by the Company, and MBE agree not to delete or modify any such notices incorporated in the Service Documentation in any respect. MBE will also permit the Company to enter any of MBE's premises during regular business hours to inspect the use of the Service in any reasonable manner. The Subscription Agreement shall provide that MBE Centers will comply with the terms of this Section 7(b). (c) List of Trademarks. Each party (the "Granting Party") hereby grants the ------------------ -------------- other party (the "Using Party") a limited license to use its Brand Features in ----------- connection with the marketing, distribution, provision of access to, and support of the Service. The Using Party agrees that such Brand Features are the exclusive property of the Granting Party and that all usage of such marks and any goodwill established by the use of such marks shall inure to the benefit of the Granting Party and that this Agreement does not confer any goodwill or other - ---------- * Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. -8- interests in such marks on the Using Party The Using Party will comply with the Granting Party's Brand Guidelines. The Using Party shall provide to the Granting Party examples of any use of the Brand Features of the Granting Party prior to use. The Using Party shall modify or discontinue such use if requested by the Granting Party. Neither party shall adopt or attempt to register any trademark, trade name, or service mark which is confusingly similar to the other party's Brand Features such as "Ship Mailboxes" (and the like). (d) Customer Information. The Company and MBE shall jointly own (without -------------------- duty to account) all customer lists and related customer data gathered through the use of the Service by customers of MBE and MBE Centers ("Customer Data"). ------------- During the term of this Agreement, neither party shall provide any Customer Data to any third party (other than MBE Centers or an affiliate of MBE or the Company) without the prior written consent of the other party The Company shall initially provide the Customer Data to MBE in acceptable electronic format as soon as practicable following the reasonable request of MBE, and, once MBE (at its sole cost and expense) has implemented an appropriate means to warehouse the Customer Data, the parties shall take reasonable steps to transfer all existing Customer Data to MBE and implement a system whereby the Customer Data is automatically downloaded and provided to MBE on a periodic basis. The Company agrees to retain the Customer Data in accordance with the Company's own data retention policies, and in any case for no less than 13 months from the creation of such Customer Data. The Company, MBE, affiliates of the Company and MBE, and the MBE Centers may each use the Customer Data for marketing and other purposes in accordance with a mutually agreed upon privacy policy and in accordance with any mutually agreed upon privacy policy displayed to customers in connection with the Service. Notwithstanding the foregoing, the Company agrees not to use any Customer Data to solicit any MBE-Generated Customers with respect to any services offered by the Company; provided, however, that the Company may use Customer Data to solicit such customers who have a shipping account with a carrier or with respect to services not offered by MBE and the MBE Centers. Notwithstanding the foregoing, MBE agrees not to use any Customer Data in any manner which would reasonably be expected to eliminate any Bounty Package payment to the Company hereunder. (e) Reserved Rights. Without limitation of the foregoing, each party --------------- reserves all rights other than those expressly granted in this Agreement, and no licenses are granted except as expressly set forth herein. (f) Notices. Each party agrees to display mutually agreeable trademark and ------- copyright notices or legends of the other party when using such other party's Brand Features. Each party shall in advance submit to the other party the proposed placement of such notices or legends (including, without limitation, the place and manner of incorporation into electronic media or transmissions), and such other party shall have the right, acting reasonably, to approve the same. 8. Payments; Taxes. --------------- (a) Basic Fee. In consideration for the Service provided hereunder, for --------- each package shipped utilizing the Service (other than a package which is shipped first class by the U.S. Postal -9- Service), the Company shall be entitled to receive the amount of [***]* (the --- "Basic Fee"). MBE agrees to use its commercially reasonable efforts to execute --------- agreements, or to facilitate the execution of agreements among the appropriate parties, so that such Basic Fee is paid to the Company directly from the carrier which ships such package no later than fifteen (15) days following the end of the month in which such package was shipped. If MBE is unable, despite its commercially reasonable efforts, to facilitate the execution of such an agreement with one or more carriers, the Basic Fee shall be paid by each MBE Center directly pursuant to the terms of the Subscription Agreement. (b) Bounty Fee. In further consideration for the Service and the other ---------- obligations of the Company hereunder, for each package shipped by or through an MBE Center by a Bounty Customer who pays the shipping rates charged by such MBE Center, ("Bounty Package"), the Company shall be entitled to receive the -------------- following amounts (the "Bounty Fee") from each such MBE Center, for Bounty ---------- Packages shipped during each calendar month: (i) in the event that less than [***]* Bounty Packages shall have --- been shipped by the MBE Centers during the twelve (12) full months prior to the shipping of such Bounty Package (or, if such information is not yet available for the month prior to the month in which such Bounty Package is shipped, the most recent twelve (12) full months for which such information is available) (the "Measurement Period"), the amount of [***]* per Bounty Package shipped via ------------------ --- air transportation and the amount of [***]* per Bounty Package shipped via --- ground transportation; (ii) in the event that at least [***]* but less than [***]* Bounty --- --- Packages have been shipped by the MBE Centers during the Measurement Period, the amount of [***]* per Bounty Package shipped via air transportation and the --- amount of [***]* per Bounty Package shipped via ground transportation; --- (iii) in the event that at least [***]* but less than [***]* Bounty --- --- Packages shall have been shipped by the MBE Centers during the Measurement Period, the amount of [***]* per Bounty Package shipped via air transportation --- and the amount of [***]* per Bounty Package shipped via ground transportation; --- and (iv) in the event that at least [***]* Bounty Packages shall have been --- shipped by the MBE Centers during the Measurement Period, the amount of [***]* --- per Bounty Package shipped via air transportation and the amount of [***]* per --- Bounty Package shipped via ground transportation. (c) eBay Fee. In further consideration for the Service and the other -------- obligations of the Company hereunder, for each package shipped by or through an MBE Center by an eBay Customer ("eBay Package"), the Company shall be entitled ------------ to receive the following amounts from such MBE Center for eBay Packages shipped during each calendar month, in each case - ---------- * Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. -10- after deduction of the lesser of (x) [***]* and (y) the amount paid or to be --- paid by such eBay Customer directly to the Company with respect to the shipment of such package (the "eBay Fee"): -------- (i) in the event that at least [***]* but less than [***]* eBay --- --- Packages have been shipped by MBE and the MBE Centers during the Measurement Period, the amount of [***]* per eBay Package shipped via air transportation and --- the amount of [***]* per eBay Package shipped via ground transportation; --- (ii) in the event that at least [***]* but less than [***]* eBay --- --- Packages shall have been shipped by the MBE Centers during the Measurement Period, the amount of [***]* per eBay Package shipped via air transportation and --- the amount of [***]* per eBay Package shipped via ground transportation; and --- (iii) in the event that at least [***]* eBay Packages shall have been --- shipped by the MBE Centers during the Measurement Period, the amount of [***]* --- per eBay Package shipped via air transportation and the amount of [***]* per --- eBay Package shipped via ground transportation. (d) Payment Cycle. The Company shall bill and collect all amounts due to ------------- the MBE Centers for Bounty Packages and eBay Packages from each Bounty Customer or eBay Customer, as the case may be, by processing credit card transactions over the Internet. The Company shall pay such amounts, less the relevant Bounty Fee or eBay Fee then in effect, to MBE on the next business day or as soon as reasonably practicable (but in any event within one week) following the shipment date of each package, and MBE agrees to distribute such amounts to the MBE Centers. At the Company's option, Bounty Customers or eBay Customers may also be entitled to pay directly for the shipment of such Bounty Package or eBay Package at MBE Centers, and the Company shall be entitled to deduct the relevant Bounty Fee or eBay Fee then in effect from any payments due to such MBE Center for shipment of Bounty Packages, eBay Packages or otherwise. (e) Right of Offset. In the event of any default in payment by an MBE --------------- Center under this Section 8 which continues uncured for a period of thirty (30) days, in addition to any rights or remedies which the Company may have at law or equity or pursuant to this Agreement, the Company shall have the right (but not the obligation) to (i) terminate providing the Service to such MBE Center and (ii) offset any amounts owed to the Company by such MBE Center from any payments owed to such MBE Center by the Company. (f) Taxes. MBE shall pay or reimburse the Company for all taxes, duties and ----- assessments imposed on MBE or the Company in connection with the license or use of the Service by MBE under this Agreement, including without limitation all sales, use, excise and other taxes and duties, excluding only taxes based upon the Company's net income. MBE shall - ---------- * Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. -11- hold the Company harmless from all claims and liability arising from MBE's failure to report or pay any such taxes, duties and assessments. (g) [***]* --- (h) Independent MBE Centers. Notwithstanding any other provision of this ----------------------- Agreement, Company acknowledges and agrees that each participating MBE Center is an independently owned and operated franchise and that MBE is not responsible for any debts or acts or omissions of its franchisees. Each use by an MBE Center of the Service shall be pursuant to the terms and conditions of a Subscription Agreement and each participating MBE Center shall be responsible for paying to Company any charges incurred. Company further acknowledges that each participating MBE Center may choose to make the Service (or some portion thereof) available to customers of MBE Centers. 9. Co-Marketing Obligations. ------------------------ (a) Listings. MBE shall supply and regularly update the Listings, and the -------- Company shall include the Listings in the Company Site and shall use commercially reasonable best efforts to include such Listings on other third party web sites utilizing the Company Technology. (b) Mutual Links. During the term of this Agreement, each party will ensure ------------ that the relevant pages in each party's website will include Links to the other party's site(s). Without limiting the foregoing, and within the first three (3) months following the Effective Date, the Company shall assist MBE at no additional charge in developing a series of Links between the MBE Site and the Company Site. The purpose of such Links shall be to allow MBE Internet Customers to access certain agreed-upon features provided by the Company Site. At a minimum, such functionality shall be equivalent to that provided by the Company Site to public Internet users. As mutually agreed upon by the parties, the parties may place advertising banners promoting their products and services on appropriate pages of the other party's website. (c) Marketing and Public Relations. So long as such activities are in ------------------------------ compliance with MBE Brand Guidelines then in effect (i) the Company shall display the logo of MBE on the Company Site and identify MBE as the exclusive retail shipping partner of the Company, (ii) to the extent reasonably practicable, the Company shall include the logo of MBE on every carrier or shipping label generated pursuant to this Agreement and (iii) the parties agree to use reasonable efforts to cooperate to develop a co-branded Company/MBE logo to display on Internet-generated shipping labels generated pursuant to this Agreement. 10. Confidential Information. ------------------------ (a) Limited Access. MBE and MBE Centers agree not to provide or otherwise -------------- make available any Service Documentation or other Confidential Information of the Company to any person other than employees, consultants, contractors or agents of MBE and MBE Centers with a - ---------- * Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. -12- need to use such Service Documentation or Confidential Information in accordance with the terms of this Agreement. (b) Confidentiality. Each party shall treat as confidential all --------------- Confidential Information of the other party, shall not use such Confidential Information except as set forth in this Agreement, and shall use reasonable efforts not to disclose such Confidential Information to any third party. Without limiting the foregoing, each of the parties shall use at least the same degree of care which it uses to prevent the disclosure of its own confidential information of like importance to prevent the disclosure of Confidential Information disclosed to it by the other party under this Agreement. Each party shall promptly notify the other party of any actual or suspected misuse or unauthorized disclosure of the other party's Confidential Information. (c) Exceptions. Each party agrees not to disclose or otherwise make such ---------- Confidential Information available to third parties without the other party's prior written consent except to the extent that the Confidential Information (i) was in the public domain at the time it was disclosed or has entered the public domain through no fault of such party, (ii) was known to such party, without restriction, at the time of disclosure, as demonstrated by files in existence at the time of disclosure, (iii) is disclosed with the prior written approval of the other party, (iv) was independently developed by such party without any use of Confidential Information, (v) became known to such party, without restriction, from a source other than the other party without breach of this Agreement by such party and otherwise not in violation of the other party's rights, (vi) is required to be disclosed under securities laws or (vii) is disclosed pursuant to the order or requirement of a court, administrative agency, or other governmental body; provided, however, that such party shall use -------- ------- all reasonable efforts to provide prompt, written, and sufficient advance notice thereof to the other party to enable the other party to seek a protective order or otherwise prevent or restrict such disclosure. Each party agrees that to take appropriate action by instruction, agreement, or otherwise with its employees, agents and representatives to satisfy such party's obligations under this Agreement with respect to use, copying, modification, protection and security of Confidential Information. (d) Return of Confidential Information. Upon expiration or termination of ---------------------------------- this Agreement, each party shall return all Confidential Information received from the other party. (e) Confidentiality of Agreement. Each party shall be entitled to disclose ---------------------------- the existence of this Agreement, but agrees that the terms and conditions of this Agreement shall be treated as Confidential Information and shall not be disclosed to any third party; provided, however, that each party may disclose -------- ------- the terms and conditions of this Agreement; (i) as required by any court or other governmental body; (ii) as otherwise required by law, (iii) to legal counsel of the parties; (iv) in confidence, to accountants, banks, and financing sources and their advisors; (v) in connection with the enforcement of this Agreement or rights under this Agreement; or (vi) in confidence, in connection with an actual or proposed merger, acquisition, or similar transaction. 11. Representations, Warranties and Covenants. ----------------------------------------- (a) Warranty. Company represents and warrants that during the term of this -------- Agreement the Service shall confirm to its specifications and the Specifications in all material -13- respects, provided that the Service is properly used in accordance with the terms of this Agreement and the Subscription Agreement, and shall not contain a higher number of, or more serious errors, than would be expected by a reasonable commercial user of a service similar to the Service. (b) Outages. After Acceptance and during the term of this Agreement, ------- Company will use its best efforts to make the Service available to the MBE Centers from 4 a.m. to 9 p.m. PST every day. Scheduled maintenance which may result in an interruption to the Service shall be performed outside of these hours. Each party shall provide the other party with reasonable and prompt notification of all known failures of the Service to be operational during these hours ("Outages"). The Company shall make qualified personnel available to MBE personnel by telephone, e-mail or pager (response within twenty (20) minutes) for the reporting of Outages at no additional charge. Company will then use its best efforts to resolve the Outage as soon as possible. Within six months of the Effective Date, the Company and MBE will jointly develop a disaster recovery plan outlining plans to respond to Outages. (c) No Conflicts. The Company is not currently subject and throughout the ------------ term will not be subject to any obligations or disabilities that will or might prevent or interfere with fully keeping and performing all of the agreements, covenants and conditions to be kept or performed hereunder, and the Company has not made nor will make any agreement, commitment, grant or assignment, and will not do, or omit to do, any act or thing that could or might interfere or impair the complete enjoyment of the rights granted and the Services to be provided hereunder. (d) Originality. The Company represents and warrants that it currently has ----------- and throughout the term will have full title to and ownership of (or licenses to) the Service and all Intellectual Property Rights embodied in or used in connection therewith, free and clear of liens, claims and encumbrances, and that it has full power and authority to grant the rights provided herein. (e) Year 2000. Company represents, warrants and covenants that the Service --------- includes design, performance and functionality such that the Service will not generate any invalid and/or incorrect date-related results when used during any year prior to, during or after the calendar year 2000. (f) Remedies. The Company's sole and exclusive liability and MBE's sole and -------- exclusive remedy for breach of the representations and warranties set forth in this Section 11 shall be, at the Company's election, to either (i) use its best efforts to make the Service perform in accordance with the Specifications in all material respects as soon as reasonably practicable, or (ii) return the Fees paid by MBE and MBE Centers for the Service in which case MBE would have the right to either terminate the entire Agreement or the portions of the Agreement affected by breach of the representation and warranties. In the event that the Company elects (i) of this sub-section in accordance with the terms and conditions set forth herein and is unable to make the Service perform in accordance with the Specifications in all material respects within twenty one (21) days after such election, MBE may then elect to continue to proceed under (i) or MBE may elect to proceed under (ii) of this sub-section. -14- (g) Disclaimer. EXCEPT FOR THE EXPRESS WARRANTIES STATED ABOVE, NEITHER ---------- PARTY MAKES ANY PROMISES, REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS, IMPLIED, STATUTORY, OR OTHERWISE, WITH RESPECT TO THE SYSTEM OR THE MANIFEST, INCLUDING ITS CONDITION, ITS CONFORMITY TO ANY REPRESENTATION OR DESCRIPTION, OR THE EXISTENCE OF ANY LATENT OR PATENT DEFECTS, AND EACH PARTY SPECIFICALLY DISCLAIMS ALL IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS. 12. Indemnity for Patent or Copyright Infringement. ---------------------------------------------- (a) Indemnity. The Company will defend, at its expense, any action brought --------- against MBE and its directors, officers, employees, agents, affiliates, successors, assigns or franchisees ("Indemnitees") based upon a claim that the Service used properly in accordance with the terms of this Agreement and the Subscription Agreement infringes a U.S. patent or copyright or misappropriates a trade secret under U.S. law (a "Claim"). The Company further agrees to pay all damages and costs (including reasonable attorneys' fee and expert witness fees) incurred by any Indemnitee in connection with such Claim. The Company shall have sole control of any such action or settlement negotiations. Without the consent of MBE, which shall not be unreasonably withheld, the Company shall not settle any such Claim in a manner that (i) imposes damages or costs on any Indemnitee not covered by the Company hereunder or (b) imposes any injunctive or other non-monetary relief on any Indemnitee. MBE shall notify the Company promptly in writing of each such Claim and gives the Company all authority, information and assistance, at the Company's expense, reasonably necessary to settle or defend such claim. (b) Remedy Options. If the Service becomes, or in the opinion of the -------------- Company may become, the subject of a claim of infringement of any U.S. patent or copyright, the Company shall notify MBE, and the Company may, at its option: (i) procure for MBE and MBE Centers the right to use the Service free of any liability or (ii) replace or modify the Service to make it non-infringing. (c) Sole and Exclusive Liability. THIS SECTION 12 SETS FORTH THE SOLE AND ---------------------------- EXCLUSIVE LIABILITY OF THE COMPANY FOR INFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS. (d) Exclusions from Indemnification. The Company assumes no liability, and ------------------------------- shall have no obligation to defend or pay any amounts to any Indemnitee hereunder for (i) any method or process in which the Service may be used by MBE or any MBE Center which is not set forth in the Specifications, (ii) any improper use of the Service by an Indemnitee or (iii) the combination, operation or use of the Service with non-Company software or data, if such infringement could have been avoided but for the combination, operation or use of the Service with such programs or data. 13. Indemnification. --------------- (a) Indemnification by the Company. The Company, at its own expense, will ------------------------------ indemnify, defend and hold harmless MBE, and its employees, franchisees, representatives and -15- agents, against any claim, suit, action, or other proceeding brought against MBE or such party, to the extent that such claim, suit, action or other proceeding is based on or arises from. (i) any misrepresentation or breach or representation or warranty of the Company contained herein; or (ii) any breach of any covenant or agreement to be performed by the Company hereunder. The Company will pay all costs, damages, and expenses, including, but not limited to, reasonable attorneys' fees and costs awarded against or otherwise incurred by MBE in connection with or arising from any such claim, suit, action or proceeding attributable to any such claim. (b) Indemnification by MBE. MBE, at its own expense, will indemnify, defend ---------------------- and hold harmless the Company, and its employees, representatives and agents, against any claim, suit, action, or other proceeding brought against the Company or such party, to the extent that such claim, suit, action or other proceeding is based on or arises from: (i) any misrepresentation or breach of representation or warranty of MBE contained herein; or (ii) any breach of any covenant or agreement to be performed by MBE hereunder. MBE will pay all costs, damages, and expenses, including, but not limited to, reasonable attorneys' fees and costs awarded against or otherwise incurred by the Company in connection with or arising from any such claim, suit, action or proceeding attributable to any such claim. (c) Procedures. Each party's obligation to indemnify the other hereunder ---------- shall be conditioned upon (i) the indemnified party providing the indemnifying party with prompt notice of any claim that could lead to a claim for indemnification, (ii) the indemnified party permitting the indemnifying party to assume and control the defense of such action, with counsel chosen by the indemnifying party (who shall be reasonably acceptable to the indemnified party) and (iii) the indemnified party not entering into any settlement or compromise of any such claim without the indemnifying party's prior written consent, which shall not be unreasonably withheld or delayed. -16- 14. Limitation of Liability. Notwithstanding anything to the contrary in ----------------------- this Agreement, in no event shall either party's liability under any provision of this Agreement or otherwise arising out of or related to this Agreement (other than payments due or accrued under Section 8, exceed the amounts paid by MBE and the MBE Centers to the Company pursuant to this Agreement. The parties further agree that NEITHER PARTY WILL BE LIABLE FOR ANY LOST PROFITS, FOR COSTS OF PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES OR FOR ANY CLAIM OR DEMAND AGAINST A PARTY BY ANY OTHER PARTY. IN NO EVENT WILL EITHER PARTY BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL, SPECIAL, INDIRECT, OR EXEMPLARY DAMAGES ARISING OUT OF THIS AGREEMENT, EVEN IF A PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, AND UNDER ANY CAUSE OF ACTION, INCLUDING NEGLIGENCE. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. 15. Term and Termination. -------------------- (a) Term and Renewal Option. The initial term of this Agreement shall ----------------------- commence on the Effective Date and end on the fifth anniversary of the Effective Date. MBE shall have the right to elect by written notice to the Company at any time between two (2) and six (6) months prior to the end of such initial term or any subsequent Renewal Period (as defined below), to notify the Company that MBE elects to seek to extend such term for additional two (2)-year periods (each a "Renewal Period") In the event of such election, MBE and the Company shall have -------------- a period of sixty (60) days in which to negotiate commercially reasonable Basic Fees, Bounty Fees and eBay Fees (and other applicable fees) ("Fee Schedule") ------------ under which the Company would be willing to renew this Agreement for such Renewal Period. If the parties are unable to reach agreement during such sixty (60) day period, either party may request that the Fee Schedule be submitted to arbitration pursuant to Section 18(m). If MBE notifies the Company of its intent to so renew prior to the end of such initial term or such Renewal Period, the term of this Agreement shall automatically be extended for the Renewal Period and, other than the Fee Schedule, all of the terms and conditions of this Agreement shall remain in full force and effect. (b) Termination. ----------- (i) Either party may, at its option, terminate this Agreement upon notice to the other party if (A) the other party materially fails to comply with any of the material terms and conditions of this Agreement and (B) if such default has not been cured within thirty (30) days (forty five (45) days if required by the nature of the breach) after written notice to the other party or, if such breach is not curable within thirty (30) days (forty five (45) days if required by the nature of the breach), reasonable efforts and progress are not being made to cure such breach. (ii) This Agreement shall terminate, without notice, (A) upon the institution by or against either party of insolvency, receivership or bankruptcy proceedings or any other proceedings for the settlement of such party's debts, (B) upon either party's making an assignment for the benefit of creditors, or (C) upon either party's dissolution or ceasing to do business. -17- (c) Termination Period. ------------------ (i) If this Agreement is terminated or expires in accordance with this Section 15 (other than termination by the Company in the event of an uncured material breach by MBE), then MBE shall have a period of up to twenty-four (24) months from and after the date of such termination, to make arrangements with respect to the conversion of the Service to a non-Company manifest system (the "Termination Period"). The date when the Service shall have ------------------ been converted to a non-Company manifest system shall hereinafter be referred to as the "Termination Completion Date" and shall be the effective date of -------------------------- termination of this Agreement, in such event. During the Termination Period each party will continue to perform its obligations hereunder, and MBE and MBE Centers will continue to pay any applicable fees and payments hereunder to the Company. MBE shall keep the Company informed as reasonably necessary with respect to such conversion. MBE also shall give the Company written notice of the estimated Termination Completion Date promptly after a reasonably definitive projected Termination Completion Date is known by MBE, and shall give written notice to the Company promptly after any change in such estimated Termination Completion Date. (ii) During the Termination Period, the Company will give reasonable cooperation and support to MBE to assure an orderly and efficient transition and, without limiting the generality of the foregoing, at MBE's expense, the Company shall be obligated to provide MBE with data reasonably necessary for MBE to convert or implement the non-Company systems, procedures and practices. (d) Effect of Termination. ---------------------- (i) Sections 1, 7, 10, 13, 14, 15, 16 and 18, as well as any payments accrued prior to termination of this Agreement, shall survive any termination or expiration of this Agreement. (ii) Within thirty (30) days after the Termination Completion Date, each party shall, at its own expense, destroy or return to the Company and make no further use of, any property, materials or other items of the other party and shall certify, in writing that it has done so (iii) Nothing contained herein shall limit any other remedies that either party may have for the default of the other party under this Agreement nor relieve either party of any of their obligations incurred prior to termination of this Agreement. (iv) During the Termination Period and thereafter, and notwithstanding any other provision of this Agreement, MBE will be free to use its own personnel, and/or engage or contract with any third party to use the Specifications to design, develop and market an Internet-based manifest system similar to the Manifest (including products that contain functionality similar to the Service and which have a "look and feel" similar or identical to the Manifest), in each case solely for the benefit of MBE and the MBE Centers and international franchisees or licensees of MBE. MBE shall not use the object code or source code of the Manifest in the course of such development. Subject to MBE's compliance with the provisions of this subsection (iv), the Company shall not -18- assert any claim against MBE under the Company's Intellectual Property Rights in the Specifications or the Manifest in connection with such development, other than for use of the Company's trademarks, trade names, service marks and service names. Neither party shall have the right to retain or use the specific software implementation of the Manifest developed by the parties hereunder; provided, however, that the Company may retain one (1) copy of the software implementation of the Manifest solely for archival and evidentiary purposes. 16. Publicity. Upon execution of this Agreement, the parties will jointly --------- prepare a mutually acceptable description of their business relationship as contemplated by this Agreement which may be used by either party in press releases and other marketing materials from time to time during the term of this Agreement. Additional press releases or publicity materials shall be approved by each party in writing prior to release. 17. Warrant. On the Effective Date, the Company shall issue the Warrant to ------- MBE, upon the terms and subject to the conditions set forth therein. 18. Miscellaneous. ------------- (a) Amendments and Waivers. Any term of this Agreement may be amended or ---------------------- waived only with the written consent of the parties or their respective successors and assigns. Any amendment or waiver effected in accordance with this Section 18(a) shall be binding upon the parties and their respective successors and assigns. (b) Assignment. Each party shall have the right to assign its rights, ---------- obligations and privileges hereunder to an assignee in connection with any merger, acquisition or sale of all or substantially all of the business to which this Agreement relates. Each MBE Center shall have the right to assign its rights and obligations and privileges under a Subscription Agreement in connection with any merger, acquisition or sale of all or substantially all of such MBE Center's assets. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective permitted successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. (c) Entire Agreement. This Agreement is the product of both of the parties ---------------- hereto, and constitutes the entire agreement between such parties pertaining to the subject matter hereof, and merges all prior negotiations and drafts of the parties with regard to the transactions contemplated herein. Any and all other written or oral agreements existing between the parties hereto regarding such transactions are expressly canceled. (d) Independent Contractor. Neither party shall, for any purpose, be deemed ---------------------- to be an agent of the other party and the relationship between the parties shall only be that of independent contractors. Neither party shall have any right or authority to assume or create any obligations or to make any representations or warranties on behalf of any other party, whether express or implied, or to bind the other party in any respect whatsoever. -19- (e) Force Majeure. In the event that either party is prevented from ------------- performing or is unable to perform any of its obligations under this Agreement (other than a payment obligation) due to any Act of God, fire, casualty, flood, earthquake, war, strike, lockout, epidemic, destruction of production facilities, riot, insurrection, material unavailability, or any other cause beyond the reasonable control of the party invoking this section, and if such party shall have used its best efforts to mitigate its effects, such party shall give prompt written notice to the other party, its performance shall be excused, and the time for the performance shall be extended for the period of delay or inability to perform due to such occurrences. If a force majeure event causes the Company to allocate limited resources among all of its customers, [***]*. --- The Company shall resume operation of the Service as soon as reasonably practicable upon conclusion of any force majeure event. Notwithstanding the foregoing, if such party is not able to perform within sixty (60) days after the event giving rise to the excuse of force majeure, the other party may terminate the Agreement. (f) Governing Law. This Agreement and all acts and transactions pursuant ------------- hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. (g) Severability. If one or more provisions of this Agreement are held to ------------ be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith, in order to maintain the economic position enjoyed by each party as close as possible to that under the provision rendered unenforceable. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) such provision shall be excluded from this Agreement, (ii) the balance of the Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of the Agreement shall be enforceable in accordance with its terms. (h) Waiver. The waiver of any particular breach or default or any delay in ------ exercising any rights shall not constitute a waiver of any subsequent breach or default. (i) Notices. Any notice required or permitted by this Agreement shall be in ------- writing and shall be deemed sufficient upon receipt, when delivered personally or by courier, overnight delivery service or confirmed facsimile, or forty-eight (48) hours after being deposited in the regular mail as certified or registered mail (airmail if sent internationally) with postage prepaid, if such notice is addressed to the party to be notified at such party's address or facsimile number as set forth below, or as subsequently modified by written notice. - ---------- * Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. -20- If to the Company: iShip.com, Inc. 2515 - 140th Ave. NE Suite E-110 Attn: President Bellevue, WA 98005 Facsimile Number: 425/602-5025 With a Copy To: Craig E. Sherman Venture Law Group 4750 Carillon Point Kirkland, WA 98033 Facsimile Number: 425/739-8750 If to MBE: Mail Boxes Etc. USA, Inc. 6060 Cornerstone Court West San Diego, CA 92121 Attn: Thomas K. Herskowitz Facsimile Number: 619/546-7499 (j) Headings. The headings of the several sections of this Agreement are -------- intended for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. (k) Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original and all of which together shall constitute one instrument. (l) Advice of Legal Counsel. Each party acknowledges and represents that, ----------------------- in executing this Agreement, it has had the opportunity to seek advice as to its legal rights from legal counsel and that the person signing on its behalf has read and understood all of the terms and provisions of this Agreement. This Agreement shall not be construed against any party by reason of the drafting or preparation thereof. (m) Arbitration. ----------- (i) Every claim or dispute arising out of or relating to the negotiation, performance or non-performance of this Agreement shall be determined by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"), or as otherwise agreed by the parties. The place of arbitration shall be San Diego, California. (ii) In the event of any such claim or dispute, the parties shall first attempt to resolve the matter through good faith, informal negotiations, including non-binding mediation. In the event that the parties are unable to resolve the dispute, either party hereto may demand arbitration by written notice to the other party and to the AAA in San Diego. The parties shall mutually agree on one arbitrator. If the parties cannot so agree, the single arbitrator shall be selected by the AAA. The costs of arbitration are to be shared equally by the parties. Each party shall be responsible for its own costs and attorneys' fees. -21- (iii) The arbitrator shall not have any power to alter, modify or change any of the terms of this Agreement or to grant any remedy which is either inconsistent with or prohibited by the terms of this Agreement, or not available in a court of law. The arbitrator shall not have the authority to commit errors of law or errors of legal reasoning. In addition, the arbitrator shall have no power or authority to award punitive, consequential or incidental damages. (iv) The arbitrator shall, within thirty (30) days after the matter has finally been submitted to him or her, render a written decision making specific findings of fact and setting forth the reasons for the decision which shall be consistent with the terms of this Agreement. The parties intend that this agreement to arbitrate be valid, binding, enforceable, and irrevocable. The terms of this Section shall survive the termination or expiration of this Agreement. Judgement on any award of the arbitrator shall be binding and may be entered in any court having jurisdiction thereof. [Signature page follows] -22- The parties have executed this Agreement as of the date first set forth above.
COMPANY: LICENSEE: ISHIP.COM, INC. MAILBOXES ETC. USA, INC. /s/ Stephen M. Teglovic /s/ Charles Lynn Lowder - --------------------------------------- ---------------------------------------- (Signature) (Signature) Stephen M. Teglovic Charles Lynn Lowder - --------------------------------------- ---------------------------------------- (Print Name) (Print Name) CEO/Pres Executive Vice President/General Counsel - --------------------------------------- ---------------------------------------- (Title) (Title)
SIGNATURE PAGE TO MANIFEST SYSTEM LICENSE AND CO-BRANDING AGREEMENT EXHIBIT A FORM OF WARRANT EXHIBIT B AUTHORIZED EQUIPMENT: - --------------------- A PC reasonably adequate to access and use the Service for manifesting and shipping packages, with the following minimum specifications: . a reasonably adequate scale and a label printer . An internet/network connection of at least 256k bits/sec . Processor: P5-233 . Ports: 2 Com ports, 1 Parallel port . RM: 64 Megs . HDD: 1.2 GB . Video. 4 MB . OS: Win 98/OSR2 . Browser: IE 5 SP1 EXHIBIT C POTENTIAL CUSTOMERS
======================================================================================================================= TYPE DEFINITION - ---------------------------------------------------------------------------------------------------------------------- I A customer physically present in the retail store-front or remote off-site locations of MBE Centers for a In-Center Customer transaction in which they do not utilize an LMS or MBEX (as such terms are defined below). - ---------------------------------------------------------------------------------------------------------------------- A customer utilizing a self-service lobby manifest II system in a MBE Center ("LMS") or a self-service --- Remote Self-Service Customer MBE-branded remote manifest system ("MBEX") for a ---- transaction. - ---------------------------------------------------------------------------------------------------------------------- A customer shipping a PLD-compliant and ramp-ready III A package* through a MBE Center that is manifested MBE Internet Customer through the MBE Sites. - ---------------------------------------------------------------------------------------------------------------------- A customer shipping a PLD-compliant and ramp-ready III B package through a MBE Center, which package is Company Internet Customer manifested through the Company site. - ---------------------------------------------------------------------------------------------------------------------- A customer shipping a PLD-compliant and ramp-ready package through a MBE Center, which package is III C (1) manifested through the Internet web site of a third Third Party/MBE Customer party that is con-branded or otherwise affiliated with MBE. - ---------------------------------------------------------------------------------------------------------------------- A customer shipping a PLD-compliant and ramp-ready package through a MBE Center, which package is III C (2) manifested through the Internet web site of a third Third Party/Company Customer party that is co-branded or otherwise affiliated with the Company or the Service. - ---------------------------------------------------------------------------------------------------------------------- A customer shipping a PLD-compliant and ramp-ready package through a MBE Center, which package is III C (3) manifested through an Internet web site operated by eBay Customer eBay Incorporated or in connection with an auction or sale conducted on such web site. - ---------------------------------------------------------------------------------------------------------------------- IV A customer that utilizes the Service and/or the Company Customer Company's products and services other than in connection with a MBE Center. - ----------------------------------------------------------------------------------------------------------------------
- ---------- * "PLD-compliant and ramp-ready" shall mean compliance with the electronic data requirements of each carrier supported by the Service. EXHIBIT D SYSTEM SPECIFICATIONS The Service will enable MBE and MBE Centers to process packages for domestic shipment, weigh these packages, and create shipping labels. The Service will export data to a given MBE Center's Point-of-Sale (POS) station, and will support ARS/BIN packages, consignee billing, freight insurance, MBE proprietary or designated transit declared value, and customer address book access. All carrier rating information will be maintained by the Company from its central database management system (DBMS). MBE Centers will be allowed to create or modify their own mark-ups for shipping, and, at its expense, the Company will update and/or adjust its pricing information for each MBE Center for each carrier to reflect such modifications. This Exhibit D may be modified from time to time by mutual agreement of the parties. The maximum amount of information downloaded from the Company's server to the counter manifest station will be 15 kilobytes or less per package processed. The following carriers and services will be supported: UPS - --- Domestic: - -------- Ground Three Day Select Second Day Air Second Day Air AM, Next Day Air Saver Next Day Air Next Day Air Early AM International: - ------------- Canada Standard Worldwide Expedited (including Canada/Mexico as set forth in the Specifications) Worldwide Express (including Canada/Mexico as set forth in the Specifications) FedEx - ----- Domestic: - -------- Express Saver 2 Day Standard Overnight Priority Overnight First Overnight International: - ------------- International Economy International Priority USPS - ---- Domestic: - -------- Parcel Post Priority Mail Express Mail First Class International: - ------------- Parcel Post Air Parcel Post Surface Small Parcel Air Small Parcel Surface Express Mail Global Priority Mail - -------------------------------------------------------------------------------- The Service will include the following features, the more detailed functionality of which will be agreed to from time to time by the parties as the Service is developed: 1. Table of Contents 2. Table of Illustrations 3. Introduction 3.1. Purpose 3.2. Scope 3.3. Introduction 4. Implementation 4.1 Organization 4.1.1. Opening the Counter Manifest System 4.1.2. Main Screen Organization 4.1.3. Menu Structure 4.2. General Functionality 4.2.1. Keyboard & Mouse Behavior 4.2.2. Sortable List Boxes 4.2.3. Find Package/Transaction Dialogs 4.2.4. Find Manifest Dialogs 4.2.5. Find Dialog Search Behavior 4.3. Process Menu 4.3.1. Process Package 4.3.2. Find Package 4.3.3. Find Customer 4.3.4. Customer Address Dialog 4.3.5. Recipient Address Dialog 4.3.6. Address Book Dialog 4.3.7. City/State/Postal Verification Dialog 4.3.8. Region Locator Dialog 4.3.9. Transaction Complete Dialog 4.3.10. Point of Sale (POS) Export Records 4.3.11. Enter ARS/BIN Package 4.3.12. Process Consignee Billed 4.3.13. Freight Insurance 4.3.14. Reprint Last label 4.3.15. Reprint label 4.3.16. Edit Transaction 4.3.17. Void Transaction 4.3.18. Recall Voided Transaction 4.4. Estimate 4.4.1. Price a Package 4.4.2. Create Estimate 4.4.3. Edit Estimate 4.4.4. Delete Estimate 4.5. Manifest 4.5.1. Perform End of Day 4.5.2. Track a Package 4.5.3. View Manifests 4.5.4. View Transaction 4.5.5. Reprint Manifest 4.6. Reports 4.6.1. Manifest Reports 4.6.2. Rate Reports 4.6.3. Management Reports 4.7. Administration 4.7.1. Preferences 4.7.2. Center Information 4.7.3. Taxable Items 4.7.4. Scales and Printers 4.7.5. Modify Rates Dialog 4.7.6. Modify Rates for Zone Based Services 4.7.7. Modify Rates for Weight Based/Single Zone Services 4.7.8. Modify FedEx Service Option Rates Dialog 4.7.9. Modify UPS Service Option Rates Dialog 4.7.10. Modify USPS Service Option Rates Dialog 4.7.11. Copy Rates 4.7.12. Alternate Insurance Rates 4.8. About 4.8.1. Rate Effective Dates 4.8.2. Version 5. Services and Services Options 5.1. Services 5.1.1. UPS 5.1.2. FedEx 5.1.3. USPS 5.2 Service Options 5.2.1. Declared Value 5.2.2. Delivery Notification 5.2.3. Proof of Delivery 5.2.4. COD 5.2.5. Call Tag 5.2.6. Earliest Delivery Time 5.2.7. Deliver Without Signature 5.2.8. Certified Mail EX-10.48 4 0004.txt AMENDMENT NO. 1 TO MANIFEST SYSTEM Exhibit 10.48 AMENDMENT NO. 1 TO ------------------ MANIFEST SYSTEM SERVICES AND CO-BRANDING AGREEMENT -------------------------------------------------- This Amendment No. 1 ("Amendment No. 1") dated as of March 7, 2000 (the --------------- "Amendment Date"), is made to the Manifest Services and Co-Branding Agreement - --------------- (the "Agreement") dated as of April 27, 1999 between iShip.com, Inc., a --------- Washington corporation (the "Company") and Mail Boxes Etc. USA, Inc., a ------- California corporation ("MBE"). --- Terms used herein and not otherwise defined shall have the meaning originally ascribed to them in the Agreement. BACKGROUND WHEREAS, pursuant to a merger of a wholly owned subsidiary of Stamps.com Inc., a Delaware corporation ("Stamps.com") with and into the Company on March ---------- 7, 2000, the Company was acquired by Stamps.com and is now a wholly owned subsidiary of Stamps.com (the "Acquisition"); ----------- WHEREAS, under the terms of the Agreement, the Company provides MBE and MBE Centers with an Internet-based shipping system service for use in manifesting and shipping customer packages, all subject to the terms and conditions of the Agreement; WHEREAS, the Agreement provides for payment of a fee at a per package rate; WHEREAS, the Agreement contains exclusivity provisions pursuant to which the Company will not enter into any agreement to provide services through non- carrier retail shipping locations with any party other than MBE, provided that the Company has the right to terminate the exclusivity provisions if MBE and the MBE Centers fail to meet certain targets for volume of packages shipped using the services provided by the Company or if MBE ceases to own a certain number of shares of Stamps.com common stock; WHEREAS, in connection with the services under the Agreement, the Company issued to MBE a warrant to purchase shares of Series B Preferred Stock of the Company (the "Warrant"); ------- WHEREAS, the parties desire to modify the fee and exclusivity arrangements in the Agreement and the terms of the Warrant (as attached hereto as Exhibit A) --------- to reduce uncertainty in their respective rights and obligations under the existing terms of the Agreement and the Warrant; and WHEREAS, Section 18(a) of the Agreement provides that the parties may amend the Agreement by written consent. NOW, THEREFORE, in consideration of the mutual promises set forth below, the parties agree as follows: 1. AMENDMENT TO THE AGREEMENT a. Section 3(d)(iii) of the Agreement is hereby amended and restated in its entirety to read as follows: "(iii) The Company may, at its option, terminate the exclusivity provisions set forth in this Section 3(d) upon the occurrence of any of the following events: (A) if MBE and all MBE Centers together fail to ship at least [***]* packages manifested by the Service in any period --- of three (3) full months, with measurement commencing on January 1, 2001 (other than any such failure which is directly caused by an event of force majeure (as set forth in Section 18(e)) or by the failure of the Service to operate in accordance with the Specifications or by the Company's breach of any of its obligations hereunder); or (B) MBE ceases to own at least 490,000 shares of common stock of Stamps.com, including shares that MBE has the right to acquire under the Warrant (all as adjusted for any stock split, stock dividend, recapitalization or similar transaction). For purposes of this Section 3(d)(iii), MBE shall be deemed to own Stamps.com shares pledged as collateral to secure bank loans to MBE or to MBE's corporate parent. Stamps.com understands that all such shares and the Warrant are currently so pledged." b. Section 8(a) of the Agreement is hereby amended by redesignating the existing text (following the heading "Basic Fee") as subsection (i) and by adding the following text to the end of the existing text: "Through December 31, 2000, the Company shall deem the payment by MBE of the "Service Fee" (as defined in subsection (ii) below) to be made in satisfaction of, and in substitution for, the Basic Fee, and the Company agrees that it shall not be entitled to receive (and shall not seek to collect) the Basic Fee during the "Service Fee Period" (as defined in subsection (ii) below), as and to the extent the Service Fee is paid." c. A new subsection (ii) shall be added to Section 8(a) of the Agreement, to read in its entirety as follows: "(ii) In consideration for the Service provided hereunder and the other obligations of the Company hereunder, the Company shall be entitled to receive from MBE a fixed monthly service fee of $500,000 (the "Service Fee") for the period of time commencing on the Amendment Date and ending on December 31, 2000 (the "Service Fee Period"). Such Service Fee will be due and payable without regard to the volume of packages shipped utilizing the Service and is in satisfaction of, and in substitution for, the Basic Fee during the Service Fee Period. Payment of the Service Fee shall be due and payable on or before the 20th day of each month during the Service Fee Period (i.e., March 20, April 20, etc.). MBE's obligations under this subsection (ii) shall be secured by the - ---------------------------- * Confidential treatment is requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 2 Warrant, and, in the event that after any exercise of the Warrant the value of the unexercised portion of the Warrant ("Warrant Value") is less than the then-remaining unpaid balance of the [***]* aggregate --- Service Fees payable over the course of the Service Fee Period, then MBE shall prepay that portion of the then-unpaid balance of such Service Fee by an amount sufficient to reduce such then-unpaid balance to an amount that is equal to or less than the Warrant Value." d. Section 17 of the Agreement is hereby amended and restated in full as follows: "17. Warrant. On the Effective Date, the Company shall issue ------- the Warrant to MBE, upon the terms and subject to the conditions set forth therein. On the Amendment Date, the Warrant (which was assumed by Stamps.com in connection with the closing of the Acquisition) shall be amended and restated in the form attached to Amendment No. 1 of the Agreement as Exhibit A." e. Notices under Section 18(i) of the Agreement should be sent to the Company c/o Stamps.com Inc., 3420 Ocean Park Boulevard, Suite 1040, Santa Monica, California, Attn: President (w/copy to Corporate Secretary), Facsimile Number: 310/314-8523. Copies of notices should no longer be sent to Craig E. Sherman at Venture Law Group. 2. EFFECT ON THE AGREEMENT Except as specifically amended above, the Agreement shall remain in full force and effect and is hereby ratified and confirmed. 3. COUNTERPARTS This Amendment No. 1 may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same instrument. [REMAINDER OF PAGE INTENTIONALLY BLANK] - ---------------------------- * Confidential treatment is requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 3 IN WITNESS WHEREOF, each party hereto has executed, or caused its duly authorized officer to execute, this Amendment No. 1 as of the date first written above. ISHIP.COM, INC. MAILBOXES ETC. USA, INC. By: /s/ John M. Payne By: /s/ Thomas K. Herskowitz ------------------------------ ------------------------------- Name: John M. Payne Name: Thomas K. Herskowitz ---------------------------- ----------------------------- Title: CEO Title: EVP --------------------------- ---------------------------- 4 EXHIBIT A WARRANT 5 EX-10.49 5 0005.txt WARRANT ISSUANCE AGREEMENT EXHIBIT 10.49 WARRANT ISSUANCE AGREEMENT THIS WARRANT ISSUANCE AGREEMENT (this "Agreement") is made on the 1st day of August, 2000, by and between Stamps.com Inc., a Delaware corporation (the "Company") and Cydcor Limited, an Ontario, Canada company ("Cydcor"). WHEREAS, the Company and Cydcor desire to extend their strategic relationship by amending that certain Market Agreement dated May 15, 2000 (the "Market Agreement"); WHEREAS, as an incentive to extend this strategic relationship, the Company desires to issue to Cydcor warrants to purchase shares of the Company's Common Stock in accordance with the terms and conditions set forth herein; and NOW, THEREFORE, the parties hereby agree as follows: 1. Issuance of Warrants. -------------------- 1.1 Issuance of Warrants. Beginning August 1, 2000 and subject to the -------------------- terms and conditions of this Agreement and the Market Agreement, the Company agrees to issue to Cydcor as of the Calculation Date a warrant in the form attached hereto as Exhibit A. Each warrant shall remain exercisable for a period --------- of two (2) years from the Calculation Date. For purposes of this Agreement, "Calculation Date" shall mean the last business day of the month following a month in which warrants are earned by Cydcor under this Agreement (i.e., for the period August 1, 2000 through August 31, 2000, the Calculation Date shall be September 29, 2000). 1.2 Number of Shares. Each warrant issued by the Company under this ---------------- Agreement shall entitle Cydcor to purchase a number of shares of the Company's Common Stock equal to the Number of New Customers as of a Calculation Date. The total number of shares of Common Stock authorized for issuance upon exercise of warrants issued under this Agreement shall not exceed 500,000 (the "Share Limit"). For purposes of this Agreement, "Number of New Customers" shall mean the actual number of New Customers (as defined in the Market Agreement) added during a calendar month that have an active account on the applicable Calculation Date for that calendar month; provided, however, that the calculation of the Number of New Customers shall be subject to Section 1.5 below. 1.3 Exercise Price of Warrants. The exercise price for each warrant -------------------------- issued hereunder shall be equal to the closing price of the Company's Common Stock on the Nasdaq National Market on the Calculation Date. 1.4 Termination. This Agreement shall terminate on the earlier of (i) one ----------- calendar month following the termination of the Market Agreement; or (ii) the issuance by the Company of an aggregate number of warrants that allow Cydcor to purchase a number of shares up to the Share Limit. 1.5 Power Plan Churn. At each Calculation Date, the Company will ---------------- determine how many new customers out of the total Number of New Customers initially 1 registered under the Company's Power Plan (or such other successor pricing plan as Company may designate from time to time) (the "Power Plan Users"). If on such Calculation Date more than 7.5% of these Power Plan Users have switched to the Company's Simple Plan (or other lesser priced service offered by the Company, together with the Simple Plan), Cydcor shall have until the next Calculation Date to reduce the percentage to 7.5% or below. If the total percentage exceeds 7.5% on that subsequent Calculation Date, the total number of Power Plan Users who have downgraded their service on or prior to that Calculation Date will be subtracted from the Number of New Customers for the applicable month. This adjustment will continue in effect for each subsequent month until the total percentage for a month is 7.5% or less, at which time the cure provisions in the preceding two sentences shall again become applicable. In the event the Company at some time in the future offers only a single pricing plan, this Section 1.5 shall be inapplicable with regard to customers added in the month prior to the pricing plan revision. 1.6 Example. Assume 100 New Customers sign up during August 2000 and that ------- 95 of those New Customers have active accounts on September 29, 2000, the applicable Calculation Date for August 2000. Cydcor will receive a warrant to purchase 95 shares of Common Stock with an exercise price equal to the closing price of Stamps.com on Nasdaq on September 29, 2000. The warrants will remain exercisable until September 29, 2002. If on September 29, 2000 the Company determines that more than 7.5% of the Power Plan Users who signed up during August 2000 have switched to a lesser-priced plan, Cydcor will have until the next Calculation Date (here, October 31, 2000) to reduce the percentage to 7.5% or below. If October 31, 2000, more than 7.5% of the Power Plan Users who signed up in September 2000 have switched to a lesser-priced plan, that number of switched customers will be subtracted from the number of New Customers for September 2000. 2. Representations and Warranties of the Company. The Company hereby --------------------------------------------- represents and warrants to Cydcor that: 2.1 Organization, Good Standing and Qualification. The Company is a --------------------------------------------- corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have a material adverse effect on its business or properties. 2.2 Authorization. All corporate action on the part of the Company, its ------------- officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement, the performance of all obligations of the Company hereunder, and the authorization, issuance, sale and delivery of the Common Stock and the warrants being offered hereunder has been taken. This Agreement constitutes a valid and legally binding obligation of the Company, enforceable in accordance with their respective terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally, and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies. 2.3 Valid Issuance of Common Stock. The Common Stock issuable upon ------------------------------ exercise of any warrant, when issued, sold and delivered in accordance with the terms of the 2 warrants for the consideration set forth therein, will be duly and validly issued, fully paid and nonassessable and will be free of restrictions on transfer, other than restrictions on transfer under the Warrant and under applicable state and federal securities laws. 3. Representations and Warranties of Cydcor. Cydcor hereby represents and ---------------------------------------- warrants that: 3.1 Authorization. Cydcor has full power and authority to enter into this ------------- Agreement and such agreement constitutes its valid and legally binding obligation, enforceable in accordance with its terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally and, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies. 3.2 Purchase Entirely for Own Account. This Agreement is made with Cydcor --------------------------------- in reliance upon Cydcor's representation to the Company, which by Cydcor's execution of this Agreement Cydcor hereby confirms, that the Common Stock and the warrants to be received by Cydcor will be acquired for investment for Cydcor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that Cydcor has no present intention of selling, granting any participation in or otherwise distributing the same. By executing this Agreement, Cydcor further represents that Cydcor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to the person or to any third person, with respect to any of the Common Stock. 3.3 Investment Experience. Cydcor acknowledges that it is able to fend --------------------- for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Common Stock. Cydcor also represents it has not been organized for the purpose of acquiring the Common Stock or the Warrant. 3.4 Accredited Investor. Cydcor is an "accredited investor" within the ------------------- meaning of Securities and Exchange Commission ("SEC") Rule 501 of Regulation D, as presently in effect. 3.5 Restricted Securities. Cydcor understands that the Common Stock and --------------------- the warrants it is receiving are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such Common Stock or Warrant may be resold without registration under the Securities Act of 1933, as amended (the "Act") only in certain limited circumstances. In the absence of an effective registration statement covering the Common Stock or warrants or an available exemption from registration under the Act, the Common Stock and the warrants must be held indefinitely. In this regard, Cydcor represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Act. 3.6 Further Limitations on Disposition. Without in any way limiting the ---------------------------------- representations set forth above, Cydcor further agrees not to make any disposition of all or any of 3 the warrants or all or any portion of the Common Stock issuable upon exercise of the warrants unless: (a) There is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (b) Cydcor shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and if requested by the Company, Cydcor shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company that such disposition will not require registration of such shares under the Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. 3.7 Legends. It is understood that the certificates evidencing the shares ------- of Common Stock or the Warrant may bear the following legends: (a) THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, (THE "ACT"), OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND QUALIFICATION UNDER APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY TO THE EFFECT THAT SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED UNLESS SOLD PURSUANT TO RULE 144 UNDER THE ACT. (b) Any legend required under applicable state securities laws. 4. California Commissioner of Corporations. --------------------------------------- 4.1 Corporate Securities Law. THE SALE OF THE SECURITIES THAT ARE THE ------------------------ SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. 4 5. Conditions of the Company's Obligations. The obligations of the --------------------------------------- Company to Cydcor under this Agreement are subject to the fulfillment on or before the issuance of any warrants hereunder of each of the following conditions: 5.1 Representations and Warranties. The representations and warranties of ------------------------------ Cydcor contained in Section 3 shall be true on and as of each warrant issuance date with the same effect as though such representations and warranties had been made on and as of such date. 5.2 Qualifications. All authorizations, approvals or permits, if any, of -------------- any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the warrants upon pursuant to this Agreement or the Common Stock issuable upon exercise of such warrants shall be duly obtained and effective as of the Closing. 5.3 Market Agreement. The Market Agreement shall be in full force ---------------- and effect on and as of each warrant issuance date and there shall not at such time exist any breach or alleged or threatened breach of any representation or covenant of the Market Agreement by Cydcor. In addition, no notice of termination of the Market Agreement shall have been delivered by Cydcor on or prior to a warrant issuance date. 6. Miscellaneous. ------------- 6.1 Survival. The warranties, representations and covenants of the -------- Company and Cydcor contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of Cydcor or the Company. 6.2 Successors and Assigns. Except as otherwise provided herein, the ---------------------- terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any of the Common Stock). Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto or their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 6.3 Governing Law. This Agreement shall be governed by and construed ------------- under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 6.4 Titles and Subtitles. The titles and subtitles used in this Agreement -------------------- are used for convenience only and are not to be considered in construing or interpreting this Agreement. 6.5 Notices. All notices required or permitted hereunder shall be in ------- writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified; (ii) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient, if not, then on the next business day; (iii) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (iv) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of 5 receipt. All communications shall be sent to the address as set forth on the signature page hereof or at such other address as such party may designate by written notice to the other party. 6.6 Expenses. Each party to this Agreement shall bear and pay all costs -------- and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 6.7 Amendments and Waivers. Any term of this Agreement may be amended and ---------------------- the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Cydcor. 6.8 Severability. If one or more provisions of this Agreement are held to ------------ be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 6.9 Entire Agreement. This Agreement and the documents referred to herein ---------------- constitute the entire agreement among the parties and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. 6.10 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Execution and delivery of this Agreement by exchange of facsimile copies bearing the facsimile signature of a party hereto shall constitute a valid and binding execution and delivery of this Agreement by such party. [SIGNATURE PAGE FOLLOWS] 6 IN WITNESS WHEREOF, the parties have executed this Warrant Issuance Agreement as of the date first above written. STAMPS.COM INC. By: /s/ Douglas Walner ----------------------------- Name: Douglas Walner Title: Senior Vice President Address: 3240 Ocean Park Blvd., Suite 1040 Santa Monica, CA 90405 Attention: Chief Financial Officer Facsimile No.: (310) 581-7500 CYDCOR LIMITED By: /s/ Avie Roth ----------------------------- Name: Avie Roth Title: Vice President Address: 250 Granton Drive Richmond Hill, ON L4B 1H7 Canada Attention: ____________ Facsimile No.: (905) 764-1570 i EXHIBIT A WARRANT ii EX-27 6 0006.txt FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-2000 JUL-01-2000 SEP-30-2000 290,090 0 1,879 0 0 305,504 49,184 7,909 549,212 22,001 0 0 0 49 488,270 549,212 4,201 4,201 5,644 59,173 0 0 213 (55,347) 0 (55,347) 0 0 0 (55,347) (1.15) (1.15)
EX-99.2 7 0007.txt PRESS RELEASE Monday October 23, 8:37 am Eastern Time Press Release SOURCE: Stamps.com Stamps.com Reduces Headcount by 40 Percent; Cost-Cutting Measures Aimed at Reaching Target Profitability SANTA MONICA, Calif., Oct. 23 /PRNewswire/--Stamps.com(TM) (Nasdaq: STMP) today announced that it has reduced its headcount by approximately 240 full-time, part-time and contract employees across all locations, including Santa Monica, Calif., and Bellevue, Wash. The move is part of Stamps.com's plan to streamline operations and reinforce its position as a market leader in Internet mailing and shipping solutions. ''Although we have nearly $300 million in cash reserves, today's competitive environment demands that we operate our business at maximum efficiency,'' said Stamps.com Chairman Marvin Runyon. ''These moves will strengthen our ability to attain our profitability goals, while adding value to the company. They will further enable us to acutely focus on building Stamps.com's leading market position in the Internet Postage category, deploying the iShip service to large corporate customers, and growing our family of successful subsidiaries.'' About Stamps.com Stamps.com(TM) provides the easiest, smartest way to mail or ship letters, packages or parcels anywhere, anytime. Stamps.com provides valuable e-services allowing small businesses, large corporations and e-commerce companies to control costs and efficiently manage their mailing, shipping and returns operations. its business is anchored in key relationships with the U.S. Postal Service and United Parcel Service (UPS) and other carriers, including FedEx, Airborne Express, DHL and Yellow Freight. Stamps.com's subsidiary, EncrypTix, Inc., leverages its highly secure, patented technologies enabling companies to provide value-bearing documents like tickets, coupons and certificates over the Internet to consumers. Stamps.com International will extend the company's reach into markets outside the U.S. Visit www.stamps.com for more information. ''Safe Harbor'' Statement under the Private Securities Litigation Reform Act of 1995: this release may contain forward-looking statements that involve risks and uncertainties. Important factors including the company's ability to achieve profitability, which could cause actual results to differ materially from those in the forward-looking statements, and are detailed in filings with the Securities and Exchange Commission made from time to time by Stamps.com, including its annual report on Form 10-K/A for the fiscal year ended December 31, 1999, its quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2000, and its Current Reports on Form 8-K. Stamps.com undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events. Stamps.com and iShip and the Stamps.com, iShip logos are trademarks of Stamps.com Inc. All other brands and names are property of their respective owners. For further information please contact: media, Seth Oster, Vice President, Corporate Communications, 310-581-7875, pr@stamps.com, or investors, Ken McBride, Acting Chief Financial Officer, 310-581-7552, ir@stamps.com, both of Stamps.com. EX-99.3 8 0008.txt PRESS RELEASE ISSUED 10/31/2000 RE: BRUCE COLEMAN EXHIBIT 99.3 FOR IMMEDIATE RELEASE Stamps.com Media Contacts: Stamps.com Investor Contacts: - -------------------------- ----------------------------- Seth Oster Ken McBride Vice President, Corporate Communications Acting Chief Financial Officer (310) 581-7542 (310) 581-7552 pr@stamps.com ir@stamps.com Heather Meeker Asst. Manager, Corporate Communications (310) 581-7548 pr@stamps.com STAMPS.COM APPOINTS INTERIM CEO SANTA MONICA, Calif. - October 31, 2000 - Stamps.com(TM) (Nasdaq: STMP), the leading provider of Internet mailing and shipping services, today announced that it has selected Bruce Coleman as interim chief executive officer. The announcement was made prior to the release of the company's third quarter 2000 financial results, scheduled for later today, October 31, at 5 p.m. EST. "Bruce Coleman has a proven record at successfully leading companies through transformations and putting them on the right path toward growth and profitability," said Stamps.com Chairman Marvin Runyon. "With strong financial resources and a growing customer base, Stamps.com is well-prepared to meet its business objectives. We believe Bruce is the right leader to take us forward." "My immediate goals are to help Stamps.com regain its focus and to put together the right senior team for the future," said Coleman. "This company has enormous potential to continue to lead the Internet postage market, grow its shipping business, and take advantage of its sound financial standing to provide shareholder value. We have a skilled executive team and a solid long-term business model. I'm excited by this opportunity and the challenge of leveraging the company's significant strengths in the marketplace." Coleman has extensive experience running both publicly and privately held companies. He was CEO of Boole & Babbage, Inc., Information Sciences, Inc. and Walker Interactive Products. He has also taken on a number of interim CEO assignments, including Computer Network Technology, Websense and Rogue Wave. Coleman is currently a director of Websense, Printronix and Infantelligence. He received his MBA from Harvard University and his bachelor's degree in economics from Trinity College. -more- Interim CEO Appointed Page 2-2-2 Coleman was appointed interim CEO by the Stamps.com Board of Directors following the resignation of former CEO John Payne on October 12. The company's earnings conference call today will be broadcast live at www.stamps.com. For those unable to listen in at the designated time, an - -------------- archived Webcast of the conference call will be available approximately one hour following the live call and will remain on the site until December 1, 2000. About Stamps.com Stamps.com(TM) provides the easiest, smartest way to mail or ship letters, packages or parcels anywhere, anytime. Stamps.com focuses on providing valuable e-services allowing small businesses, large corporations and e-commerce companies to control costs and efficiently manage their mailing, shipping and returns operations. Its business is anchored in key relationships with the U.S. Postal Service and United Parcel Service (UPS) and other carriers, including FedEx, Airborne Express, DHL and Yellow Freight. Stamps.com's subsidiary, EncrypTix, Inc., leverages its highly secure, patented technologies enabling companies to provide value-bearing documents like tickets, coupons and certificates over the Internet to consumers. Stamps.com International will extend the company's reach into markets outside the U.S. Visit www.stamps.com -------------- for more information. ### "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: This release may contain forward-looking statements that involve risks and uncertainties. Important factors, which could cause actual results to differ materially from those in the forward-looking statements, are detailed in filings with the Securities and Exchange Commission made from time to time by Stamps.com, including its annual report on Form 10-K/A for the fiscal year ended December 31, 1999, its quarterly report on Form10-Q for the fiscal quarter ended June 30, 2000, and its Current Reports on Form 8-K. Stamps.com undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Stamps.com, iShip, iReturn and the Stamps.com, iShip and iReturn logos are trademarks of Stamps.com Inc. All other brands and names are property of their respective owners. EX-99.4 9 0009.txt PRESS RELEASE ISSUED 10/31/2000 RE: FINANCIAL RESULTS EXHIBIT 99.4 FOR IMMEDIATE RELEASE Stamps.com Media Contacts: Stamps.com Investor Contacts: - -------------------------- ----------------------------- Seth Oster Ken McBride Vice President, Corporate Communications Acting Chief Financial Officer (310) 581-7875 (310) 581-7552 pr@stamps.com ir@stamps.com - ------------- ------------- STAMPS.COM REPORTS THIRD QUARTER 2000 FINANCIAL RESULTS Company Makes Significant Cost Cuts; Expects to Save $30 Million Annually Through Recent Headcount Reduction SANTA MONICA, Calif. - October 31, 2000 - Stamps.com(TM) (Nasdaq: STMP) today announced that third quarter revenue was $4.2 million, an increase of 14 percent over second quarter revenue. Third quarter net loss applicable to common shareholders excluding non-cash charges was $38.5 million, or $0.80 per share based on the 48.3 million weighted average common shares outstanding. Cash and short-term investments ended the third quarter at $290.1 million, or $6 per share. Stamps.com expects to lower its quarterly cash burn through the recent reduction in its headcount, more focused marketing and other cost-cutting programs. The 40 percent reduction in headcount is expected to result in cost savings of approximately $30 million annually. Stamps.com expects to take a one-time charge related to the restructuring during the fourth quarter of 2000. In addition, the company currently expects to cut its expected 2001 sales and marketing expenditures by half or more from current expectations. The Small Business Unit revenues for the quarter were $3.7 million, or 88 percent of total revenue. In addition to decreasing the marketing costs for this business unit, Stamps.com plans to raise the minimum price for its Internet Postage(TM) service. Beginning in November 2000, new Simple Plan customers will be charged a minimum of $4.50 per month, up $2.51 per customer from the previous pricing structure. Power Plan fees will remain at a monthly flat rate of $15.99 for unlimited use of the service. -more- Stamps.com Third Quarter Financial Results 2-2-2 The Enterprise Business Unit revenues for the quarter were $500,000, or approximately 12 percent of total revenue. The company combined its E-Commerce and Enterprise Business Units to reduce duplication of costs and effort. The Enterprise Business Unit has 17 customers committed to deploying the iShip(TM) service, which represents a total potential annual shipping transaction volume of four million packages. "We have taken aggressive steps to reduce expenses and focus on building a profitable business," said interim CEO Bruce Coleman. "Although we have implemented some extensive reductions in headcount, we plan to continue to provide excellent customer support and integrated, easy-to-use Internet Postage service. While we support our existing service lines, we will focus the bulk of our marketing efforts on the Enterprise Business Unit, which we believe has the potential for greatest growth. This very focused approach will enable the company to build its customer base, albeit at a slightly slower pace." Summary of Recent Events - ------------------------ October 23, 2000 - Stamps.com announced that it reduced its headcount by approximately 240 full-time, part-time and contract employees across all locations, including Santa Monica, Calif., and Bellevue, Wash. The move is part of Stamps.com's plan to streamline operations and reinforce its position as a market leader in Internet mailing and shipping solutions. Included in the restructure was the departure of chief marketing officer and executive vice president David Shoenfeld. October 12, 2000 - Stamps.com announced that John Payne, who served as the company's chairman and chief executive officer, stepped down. Former U.S. Postmaster General Marvin Runyon is acting as chairman until a permanent replacement is found. Payne served at the company since May 1998. October 9, 2000 - Stamps.com announced that Loren Smith, who served as president and chief operating officer during a critical period of growth for the company, returned to his primary role as a director on the Stamps.com Board of Directors. Additionally, it was announced that Chief Financial Officer John LaValle and Controller Candelario Andalon left the company to pursue other endeavors. -more- Stamps.com Third Quarter Financial Results 3-3-3 September 19, 2000 - Stamps.com announced that its Internet Postage service will be integrated into Microsoft Works 6.0 and Works Suite 2001. Users are able to print postage from their computer to mail letters, cards, newsletters, and other Internet applications they create with Works. August 31, 2000 - Stamps.com and Office Depot, the world's largest seller of office products, announced the expansion of their existing partnership. The extended agreement makes Stamps.com Internet Postage available through Office Depot's numerous business channels, including its nationwide chain of retail stores, direct sales force, office supply catalogues, as well as the www.officedepot.com site. August 23, 2000 - Stamps.com and e-finance leader Intuit, Inc. announced the Stamps.com Internet Postage service is integrated into the 2001 versions of Quicken Basic, Quicken Deluxe, and Quicken Home & Business. Stamps.com's service is available to all Quicken 2001 personal and small business software customers, providing them with the convenience of printing U.S. Postal Service-approved postage in a few easy steps. July 20, 2000 - Stamps.com announced its addition to the Russell 3000(R) and Russell 2000(R) Indices. July 18, 2000 - Stamps.com gained U.S. Postal Service approval and launched the next generation of its Internet Postage service, developed with significant feature enhancements based on feedback from its customer base. About Stamps.com Stamps.com(TM) provides the easiest, smartest way to mail or ship letters, packages or parcels anywhere, anytime. Stamps.com provides valuable e-services allowing small businesses, large corporations and e-commerce companies to control costs and efficiently manage their mailing, shipping and returns operations. Its business is anchored in key relationships with the U.S. Postal Service and United Parcel Service (UPS) and other carriers, including FedEx, Airborne Express, DHL and Yellow Freight. Stamps.com's subsidiary, EncrypTix, Inc., leverages its highly secure, patented technologies enabling companies to provide value-bearing documents like tickets, coupons and certificates over the Internet to consumers. Stamps.com International will extend the company's reach into markets outside the U.S. Visit www.stamps.com for more information. -------------- ### "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: This release contains forward-looking statements that involve risks and uncertainties. Important factors which could cause actual results to differ materially from those in the forward-looking statements include the fact that it may prove more difficult to operate the business with the reduced work force and other spending reductions outlined in this release and accordingly achieving the anticipated cost savings may not be possible. In addition, while we believe that the Enterprise Business Unit offers the greatest potential for growth, our business model is relatively new and we may face difficulties achieving profitability because of a number of factors including competition. Other factors which may cause actual results to differ are detailed in filings with the Securities and Exchange Commission made from time to time by Stamps.com, including its annual report on Form 10-K/A for the fiscal year ended December 31, 1999, its quarterly report on Form10-Q for the fiscal quarter ended June 30, 2000, and its Current Reports on Form 8-K. Stamps.com undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Stamps.com and iShip and the Stamps.com, iShip logos are trademarks of Stamps.com Inc. All other brands and names are property of their respective owners. -----END PRIVACY-ENHANCED MESSAGE-----