10-Q 1 d10q.txt QUARTERLY REPORT ENDED 03/31/2001 ================================================================================ 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 March 31, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to Commission file number 000-26427 ___________________________ Stamps.com Inc. (Exact Name of Registrant as Specified in Its Charter) Delaware 77-0454966 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.)
Address of Principal Executive Offices: 3420 Ocean Park Boulevard, Suite 1040 Santa Monica, California 90405 Registrant's Telephone Number, Including Area Code: (310) 581-7200 Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report: N/A ___________________________ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] The registrant does not have different classes of common stock. As of May 4, 2001, there were approximately 50,241,851 shares of the registrant's common stock issued and outstanding. STAMPS.COM INC. FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED MARCH 31, 2001 TABLE OF CONTENTS
Page ---- PART I. FINANCIAL INFORMATION................................................................................. 2 ITEM 1. FINANCIAL STATEMENTS........................................................................ 2 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....... 8 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................. 24 PART II. OTHER INFORMATION.................................................................................... 25 ITEM 1. LEGAL PROCEEDINGS........................................................................... 25 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS................................................... 26 ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................................................. 27 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................... 27 ITEM 5. OTHER INFORMATION........................................................................... 27 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................ 27
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS STAMPS.COM INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, December 31, 2001 2000 ------------- --------------- (unaudited) (In thousands) ASSETS Current assets: Cash and short-term investments............................................... $ 209,050 $ 243,929 Restricted cash............................................................... 4,038 4,010 Accounts receivable........................................................... 1,991 2,546 Note Receivable from former officer, net of allowance......................... 3,181 3,181 Prepaid expenses.............................................................. 1,429 5,185 --------- --------- Total current assets....................................................... 219,689 258,851 Property and equipment, net......................................................... 29,788 45,585 Goodwill and other intangible assets, net........................................... 2,721 166,450 Other assets........................................................................ 6,221 16,052 --------- --------- Total assets............................................................ $ 258,419 $ 486,938 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.............................................................. $ 916 3,656 Accrued expenses.............................................................. 8,445 14,913 Deferred revenue.............................................................. 862 1,809 Current portion of long-term debt and capital leases.......................... 277 3,828 --------- --------- Total current liabilities........................................................... 10,500 24,206 Long-term debt and capital leases, less current portion............................. -- Commitments and contingencies....................................................... 5,286 Minority interest in consolidated subsidiary........................................ -- 34,765 Stockholders' equity: Common stock.................................................................. 50 49 Additional paid-in capital.................................................. 708,005 708,007 Notes receivable from stock sales......................................... (101) (101) Deferred compensation....................................................... (9,671) (11,642) Accumulated deficit......................................................... (450,364) (273,632) --------- --------- Total stockholders' equity................................................. 247,919 422,681 --------- --------- Total liabilities and stockholders' equity............................... $ 258,419 $ 486,938 ========= =========
The accompanying notes are an integral part of these financial statements. 2 STAMPS.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31, --------------------------------------- 2001 2000 ----------------- ----------------- (in thousands, except per share data) Revenues..................................................... $ 5,259 $ 2,036 Cost of revenues............................................. 3,187 5,733 --------- -------- Gross profit.......................................... 2,072 (3,697) Operating expenses: Sales and marketing................................... 4,288 20,500 Research and development.............................. 4,082 3,395 General and administrative............................ 6,802 5,304 Amortization and write-off of goodwill and other intangibles.......................................... 172,817 4,625 Restructuring and writedown charges................ 11,021 -- Acquired in-process research and development....... -- 2,000 Deferred compensation amortization................. 1,445 1,753 Loss from EncrypTix................................ 5,601 390 --------- -------- Total operating expenses........................... 206,056 37,967 --------- -------- Loss from operations......................................... (203,984) (41,664) Other income (expense): Interest expense...................................... (12) (46) Interest income....................................... 4,069 4,822 Gain from shut down of EncrypTix...................... 23,195 -- --------- -------- Net loss..................................................... $(176,732) $(36,888) ========= ======== Basic and diluted net loss per share......................... $(3.60) $(0.86) ========= ======== Weighted average shares outstanding used in basic and diluted per-share calculation........................ 49,117 43,021 ========= ========
The accompanying notes are an integral part of these financial statements. 3 STAMPS.COM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months ended March 31, ----------------------------------- 2001 2000 --------------- ------------ (In thousands) Operating activities: Net Loss....................................................... $(176,732) $(36,888) Adjustments to reconcile net loss to net cash used in operating activities: Provision for doubtful accounts........................... 373 -- Depreciation and amortization............................. 1,390 5,791 Amortization and write-off of goodwill and other intangibles............................................... 172,817 -- Amortization of deferred compensation..................... 1,445 1,753 Charge for acquired in-process research and development............................................... -- 2,000 Loss on disposal and writedown of assets.................. 16,080 -- Net gain on shut down of EncrypTix........................ (23,195) -- Changes in operating assets and liabilities, net of effects of acquisition: Accounts receivable.................................... 182 (1,316) Prepaid expenses....................................... 3,756 5,236 Other assets........................................... 733 -- Accounts payable....................................... (2,740) (2,169) Accrued expenses....................................... (6,468) (863) Deferred revenue....................................... (947) (39) Minority interest...................................... (11,570) -- --------- -------- Net cash used in operating activities............................ (24,876) (26,495) Investing activities: Purchase of short-term investments, net........................ -- (50,268) Purchase of restricted cash investments........................ (28) -- Sale of short-term investments, net............................ 111,148 -- Acquisition of property and equipment.......................... (1,663) (6,250) Acquisition of iShip.com, net of cash acquired................. -- (2,111) Other.......................................................... -- (1,520) --------- -------- Net cash provided by (used in) investing activities.............. 109,457 (60,149) Financing activities: Repayment of long-term debt and capital leases................. (8,837) (389) Issuance of redeemable preferred stock of subsidiary, net................................................ -- 29,260 Issuance of common stock under ESPP............................ 175 -- Proceeds from exercise of stock options........................ 350 1,048 --------- -------- Net cash provided by (used in) financing activities.............. (8,312) 29,919 --------- -------- Net increase (decrease) in cash and cash equivalents............. 76,269 (56,725) Cash and cash equivalents at beginning of period................. 69,536 326,820 --------- -------- Cash and cash equivalents at end of period....................... 145,805 270,095 Short term investments........................................... 63,245 98,194 --------- -------- Cash and short term investments.................................. $ 209,050 $368,289 ========= ========
The accompanying notes are an integral part of these financial statements. 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ALL INFORMATION WITH RESPECT TO March 31, 2001 AND 2000 IS UNAUDITED) 1. Summary of Significant Accounting Policies Basis of Presentation The financial statements are unaudited, other than the balance sheet at December 31, 2000, and, in the opinion of management, reflect all adjustments that are necessary for a fair presentation of the results for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. These financial statements should be read in conjunction with the financial statements as of December 31, 2000 and related notes included in the Company's Annual Report on Form 10-K/A filed with the Securities and Exchange Commission (the "SEC") on April 27, 2001. Principles of Consolidation The consolidated financial statements include the accounts of Stamps.com Inc. (the "Company") and its wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates and such differences may be material to the financial statements. Reclassifications Certain prior period balances have been reclassified to conform to current period presentation. 2. Writedown of Intangible Assets related to iShip.com On March 7, 2000, the Company completed the acquisition of iShip.com, Inc.("iShip"), a development stage enterprise that developed Internet-based shipping technology. The acquisition was accounted for as a purchase in accordance with the provisions of Accounting Principles Board Opinion ("APB") No. 16. Under the purchase method of accounting, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. On March 2, 2001, United Parcel Service and Mail Boxes Etc. USA, Inc. jointly announced that United Parcel Service would acquire Mail Boxes Etc. USA, Inc. Mail Boxes Etc. USA, Inc. represented a significant future source of revenue and market leverage for the Company's enterprise shipping services that were acquired in the iShip acquisition. United Parcel Service also informed the Company that it is unlikely to have Mail Boxes Etc. USA, Inc. continue to use the Company's enterprise shipping services in the future. The Company is in discussions with United Parcel Service to find a resolution. As a result of the March 2001 events, the Company has reduced goodwill and other intangibles associated with the purchase of iShip to reflect the present value of future cash flows, net of estimated transaction costs. This resulted in a non-cash charge of $163.6 million in the first quarter of 2001. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ALL INFORMATION WITH RESPECT TO March 31, 2001 AND 2000 IS UNAUDITED) 3. EncrypTix Ceases Operations On November 16, 1999, the Company announced the formation of a subsidiary, EncrypTix, Inc., to develop secure printing opportunities in the events, travel and financial services industries. In February 2000, the Company invested $1.0 million and granted EncrypTix a license to its technology in those three specific fields of use. EncrypTix raised approximately $35 million in private financing. On March 12, 2001, EncrypTix ceased operations and effected a general assignment of its assets for the benefit of its creditors. EncrypTix took this action due to the inability to secure additional funding. The Company does not expect to be impacted by any of EncrypTix's resulting liabilities. Additionally, the Company terminated its license agreement with EncrypTix and maintains limited licenses to various EncrypTix intellectual property. Due to this cessation in business, the Company has written off the invested $1.0 million and taken a one-time gain to eliminate the cumulative loss from EncrypTix in the amount of $23.2 million in the first quarter of 2001. 4. Reduction in Workforce and Restructuring In February 2001, in an effort to more rapidly decrease its operating losses and enhance its ability to achieve profitability sooner, the Company reduced its total number of employees by approximately 50% to 150 employees, including full time, part time and contract employees. The Company also continued other cost cutting efforts, including the termination of fixed-cost marketing deals and the redeployment of sales and marketing expenditures to programs that have a higher return on investment. The Company took a one-time charge of $11.0 million in the first quarter of 2001 consisting of $7.7 million related to restructuring, employee severance and fixed asset write-offs, $2.3 million related to the termination of certain contractual arrangements and $1.0 million related to the write-off of an investment in EncrypTix. 5. Legal Proceedings Please refer to "Part II--Other Information--Item 1--Legal Proceedings" of this report for a discussion of legal proceedings. 6. Computation Of Historical Net Loss Per Share Basic earnings per share is computed by dividing the net earnings available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing the net earnings for the period by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares, consisting of unvested restricted common stock and incremental common shares issuable upon the exercise of stock options and warrants and upon conversion of convertible preferred stock, are excluded from the diluted earnings per share calculation if their effect is anti-dilutive. 7. Related Party Transactions In February 2000, Mr. Payne (former Chairman of the Board, Chief Executive Officer and director) purchased 187,000 shares of the Company's common stock on the open market for an aggregate purchase price of approximately $6.0 million. Mr. Payne purchased the shares on margin and the margin account was secured by a pledge of 1,467,500 shares of the Company's common stock held by Mr. Payne, of which approximately 593,750 shares are subject to repurchase by the Company. As of October 31, 2000, Mr. Payne's total indebtedness under the margin account was approximately $6.7 million, which amount consists of the purchase price of the 187,000 shares, accrued interest on the purchase price and other fees and indebtedness incurred by Mr. Payne, less the proceeds from his sale of the Company's common stock during the third quarter. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ALL INFORMATION WITH RESPECT TO March 31, 2001 AND 2000 IS UNAUDITED) 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, Mr. Payne sold 7,500 shares at a price of $4.50 per share and 95,500 shares at a price of $4.3125 per share on August 29, 2000. Mr. Payne also sold 15,000 shares at a price of $2.94 per share on November 15, 2000 and 85,000 shares at a price of $3.02 per share on November 17, 2000. The sale of these 200,000 shares during the third and fourth fiscal quarters resulted in aggregate repayment of indebtedness in the amount of approximately $730,000. In November 2000, Mr. Payne executed a promissory note in favor of the Company in the amount of $6.6 million. The payment of the note was secured by a pledge of all shares of the Company's common stock and all shares of EncrypTix, Inc. held by Mr. Payne. The entire principal balance and all accrued and unpaid interest is due and payable on June 30, 2001, subject to certain acceleration provisions that are triggered upon, among other things, a change of control or the delisting of the Company's common stock by NASDAQ. The company has established a reserve of $3,346,000 related to the note receivable from Mr. Payne. The reserve is calculated as the difference between the note's carrying value, $6,527,000, and the underlying value of the stock on December 31, 2000, $3,181,000 (2 25/32 per share). 8. Subsequent Events Acquisition of E-Stamp Corporation Assets On April 27, 2001, the Company acquired 31 patents and other intellectual property rights from E-Stamp Corporation, including the E-Stamp name and rights to the E-Stamp.com Internet domain for $7.5 million. Intuit, Inc. Lawsuit On April 18, 2001, Intuit, Inc. filed a suit against the Company for alleged breach of contract in the California Superior Court for the County of Santa Clara. The suit alleges that the Company improperly terminated its contract with Intuit and seeks damages of $4 million plus interest and costs associated with the lawsuit. The Company believes that the agreement was terminated on March 1, 2001 due to Intuit's failure to perform adequately under the contract, among other reasons. The Company is currently evaluating the claims against it as well as potential counterclaims. The Company has not responded to the suit and is uncertain of the outcome of the suit. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to expectations concerning matters that are not historical facts. Words such as "projects," "believes," "anticipates," "estimates," "plans," "expects," "intends," and similar words and expressions are intended to identify forward-looking statements. Although Stamps.com believes that such forward-looking statements are reasonable, we cannot assure you that such expectations will prove to be correct. Important language regarding factors that could cause actual results to differ materially from such expectations are disclosed herein including, without limitation, in the "Risk Factors" beginning on page 12. All forward-looking statements attributable to Stamps.com are expressly qualified in their entirety by such language. Stamps.com does not undertake any obligation to update any forward-looking statements. You are also urged to carefully review and consider the various disclosures we have made which describe certain factors which affect our business, including the risk factors set forth at the end of Part I, Item 2 of this Report. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes thereto. Stamps.com, iShip.com/(TM)/, Stamps.com Internet Postage and the Stamps.com logo are our trademarks. This Report also includes trademarks of entities other than Stamps.com. Overview Stamps.com/(TM)/ provides easy, convenient and cost-effective Internet- based services for mailing or shipping letters, packages or parcels anytime and anywhere in the United States. 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. Recent Developments In the quarter ended March 31, 2001, we have continued to implement our new business strategy begun in October 2000 to enhance our ability to achieve profitability by focusing on our core business of Internet postage and shipping. In February 2001, in an effort to more rapidly decrease our operating losses, we reduced the total number of employees by approximately 50% to 150 employees, including full time, part time and contract employees. We also continued other cost cutting efforts, including the termination of fixed-cost marketing arrangements, and the redeployment of sales and marketing expenditures to programs that have a higher return on investment. We took a one-time charge in the first quarter of 2001 of $11.0 million consisting of $7.7 million related to restructuring, employee severance and fixed asset write-offs, $2.3 million related to the termination of certain contractual arrangements and $1.0 million related to the write-off of an investment in EncrypTix. Concurrently with the implementation of our new business strategy, we are also considering other strategic alternatives that may be available to us, including the possible sale of all or part of our business. In October 2000, we stopped making contractual payments on, and subsequently in February 2001, we signed an agreement exiting, our marketing agreement with America Online, Inc. We expect this to result in savings of $27 million over the next two years. In February 2001, we experienced another significant change in personnel at the senior management level, including the resignations of our Senior Vice President and General Manager, Enterprise Business Unit, David N. Duckwitz, our Vice President, Sales, Enterprise Business Unit, Blake Karpe, and our Senior Vice President and General Manager, Small Business Unit, Douglas Walner. We do not currently have any plans to replace any of these senior management positions. In March 2001, David Bohnett resigned from our Board of Directors. We expect to continue to experience changes in personnel at the senior management and Board level as part of our restructuring process. Bruce Coleman remains as our interim Chief Executive Officer, and we have not yet found a permanent replacement. If we fail to attract and retain a qualified individual as our Chief Executive Officer, our business, financial condition and results of operations will be adversely affected. If our new business strategy is not successful, we will not achieve profitability as currently planned, if at all. On November 16, 1999, we announced the formation of a subsidiary, EncrypTix, Inc., to develop secure printing opportunities in the events, travel and financial services industries. In February 2000, we invested $1.0 million and granted EncrypTix a license to our technology in those three specific fields of use. EncrypTix raised 8 approximately $35 million in private financing. On March 12, 2001, EncrypTix ceased operations and effected a general assignment of its assets for the benefit of its creditors. EncrypTix took this action due to the inability to secure additional funding. We do not expect to be impacted by any of EncrypTix's resulting liabilities. Additionally, we terminated our license agreement with EncrypTix and maintain limited licenses to various EncrypTix intellectual property. On March 7, 2000, we completed the acquisition of iShip.com, Inc. pursuant to which iShip.com, Inc. became our wholly-owned subsidiary. iShip.com, Inc. was a development stage enterprise developing Internet-based shipping technology. In connection with the acquisition, we issued approximately 5.6 million shares of our common stock in exchange for all outstanding shares of iShip.com, Inc. capital stock and reserved an additional 1.6 million shares of our common stock for issuance upon the exercise of iShip.com, Inc. options and warrants we assumed in connection with the acquisition. The acquisition was accounted for as a purchase. In connection with the iShip.com, Inc. acquisition, we recorded a significant amount of goodwill and intangibles. At December 31, 2000, the un- amortized intangibles related to the iShip.com, Inc. acquisition was $175.3 million. iShip.com, Inc. On March 2, 2001, United Parcel Service and Mail Boxes Etc. USA, Inc. jointly announced that United Parcel Service would acquire Mail Boxes Etc. USA, Inc. Mail Boxes Etc. USA, Inc. represented a significant future source of revenue and market leverage for our enterprise shipping services that were acquired in the iShip acquisition. United Parcel Service also informed us that it is unlikely to have Mail Boxes Etc. USA, Inc. continue to use the Company's enterprise shipping services in the future. We are in discussions with United Parcel Service to find a resolution. As a result of the March, 2001 events, the Company has reduced goodwill and other intangibles associated with the purchase of iShip to reflect the present value of future cash flows, net of estimated transaction costs. This resulted in a non-cash charge of $163.6 million in the first quarter of 2001. On April 27, 2001, we acquired certain intellectual property assets relating to Internet-based postage printing and management from E-Stamp Corporation, one of our former competitors for a purchase price of $7.5 million. The portfolio of 31 patents and trademarks that we acquired from E-Stamp Corporation include the E-Stamp name and rights to the E-Stamp.com Internet domain. We plan to use these intellectual property assets to expand the services available to our existing customer base and to target the larger market of small businesses and home offices. However, certain of the intellectual property rights we acquired from E-Stamp Corporation are the subject of a lawsuit brought by Pitney Bowes and could be determined by a court to be invalid or unenforceable. Such a determination could make the intellectual property rights we acquired worthless. Internet Postage Services We offer an Internet Postage service targeted at consumers and small businesses with less than 100 employees. Service fee revenues for our Internet Postage service are generated from the two service plans that we are currently offering to our users, the Simple Plan and the Power Plan. Under the Simple Plan, a user purchases postage at face value for a monthly convenience fee of 10% of the value of postage printed. Prior to November 2000, there was a monthly minimum fee of $1.99 and a monthly maximum fee of $19.99 under the Simple Plan. Beginning in November 2000, the monthly minimum fee was increased to $4.49 for new customers and the monthly maximum fee was discontinued. All customers who existed at the time of the price increase remain at the $1.99 minimum pricing level. The Power Plan was introduced at the beginning of our second quarter of 2000 in response to customer requests for a fixed monthly pricing plan with unlimited usage. Under the Power Plan, a customer may purchase and use unlimited postage at face value, for a flat monthly fee that ranges from $15.99 to $18.99. For the first quarter of 2001, over 50% of our service fee revenue was generated from Power Plan customers. Service fees are calculated and charged at the end of a monthly billing cycle. We also generate revenues from controlled access advertising to our existing customer base, and revenue share and bounty arrangements. In the first quarter of 2001, we grew our customer base for the Internet Postage service by 15 thousand customers to 322 thousand customers, and saw a 220% increase in our Internet Postage revenues to $4.8 million as compared to our Internet Postage revenues of $1.5 million in the first quarter of 2000. 9 Internet Shipping Services We offer an Internet-based, multi-carrier mailing and shipping service that is targeted both at small businesses with less than 100 employees and at large companies with more than 100 employees. We believe that our enterprise service for corporations with 100 or more employees will enable them 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 1,400 Mail Boxes Etc. USA, Inc. franchises utilizing our services. During the first quarter of 2001, we received $500,000 in service fee revenue from Mail Boxes Etc. USA, Inc. as compared to $500,000 in service fees during the first quarter of 2000. Under our 2000 agreement with Mail Boxes Etc. USA, Inc., we were entitled to receive a fixed monthly service fee of $500,000 until December 31, 2000. Starting on January 1, 2001, our fixed monthly service fee was replaced by a per package transaction fee. As of March 31, 2001, we had not received payment of $1.5 million of fees for services provided in 2000, nor any transaction fees for services provided in 2001, due to a dispute relating to certain product features. We have not recognized any revenue related to this agreement for the service or transaction fees that have not been collected. We are currently working with Mail Boxes Etc. USA, Inc. in an effort to resolve the dispute. Results of Operations Revenue. Revenue is derived primarily from two sources: (1) service fees charged to customers for the ability to print postage directly from their printer, and (2) revenue received from Mail Boxes Etc. USA, Inc., for shipping tools used by Mail Boxes Etc. USA, Inc. franchise locations. Total revenue increased from $2.0 million to $5.3 million for the three months ended March 31, 2000 and 2001, respectively. The increase in revenue is primarily due to a growth in the customer base from approximately 188,000 at March 31, 2000 to 322,000 at March 31, 2001, and to an increase in the mix of higher revenue Power Plan customers. [Other revenue consists primarily of bounties and commissions on sales of products to our customers by third parties.] Cost of Revenues. Cost of revenues principally consists of customer service, promotional expenses, and system operating costs. Cost of revenues was $3.2 million for the three months ended March 31, 2001, compared to $5.7 million for the three months ended March 31, 2000. During the first quarter of 2001, our cost of revenues decreased primarily due to increased automation and reduced labor costs in our customer support operations. We also reduced promotional expenses as we decreased the amount of free postage given to each customer. We also implemented a new type of free postage that expires after a period of 30 days, resulting in less postage used by each individual customer. Sales and Marketing. Sales and marketing expenses principally consist of costs associated with strategic partnership relationships and compensation and related expenses for personnel engaged in marketing and business development activities. Sales and marketing expenses were approximately $4.3 million compared to $20.5 million for the three months ended March 31, 2001 and 2000, respectively. The decrease in sales and marketing expenses resulted from fewer sales and marketing personnel, as well as a more focused spend of discretionary marketing dollars on programs that provide a higher return on investment. Research and Development. Research and development expenses principally consist of compensation for personnel involved in the development of the Internet Postage and enterprise shipping service, expenditures for consulting services and third-party. Research and development expenses for the three months ended March 31, 2001 were $4.1 million compared to $3.4 million for the three months ended March 31, 2000. The increase is primarily due to the fact that the results for the quarter ended March 31, 2000 only include the research and development expenses associated with the iShip.com, Inc. operations after that acquisition was completed on March 7, 2000. General and Administrative. General and administrative expenses principally consist of compensation and related costs for executive and administrative personnel, fees for legal and other professional services, and depreciation of equipment and software used for general corporate purposes. General and administrative expenses for the three months ended March 31, 2001 and 2000 were $6.8 million and $5.3 million, respectively. The increase is primarily due to the fact that the results for the quarter ended March 31, 2000 only include the general and 10 administrative expenses associated with the iShip.com, Inc. operations after that acquisition was completed on March 7, 2000. The increase is also due to increased depreciation expense associated with the investments made during 2000 in equipment and software for general corporate purposes. Restructuring and Write-down Charges. In February 2001, in an effort to more rapidly decrease our operating losses and enhance our ability to achieve profitability sooner, we reduced our total number of employees by approximately 50% to 150 employees, including full time, part time and contract employees. We also continued other cost cutting efforts, including the termination of fixed- cost marketing deals, and the redeployment of sales and marketing expenditures to programs that have a higher return on investment. We took a one-time charge in the first quarter of 2001 of $11.0 million consisting of $7.7 million related to restructuring, employee severance and fixed asset write-offs, $2.3 million related to the termination of certain contractual arrangements and $1.0 million related to the write-off of an investment in EncrypTix. Deferred Compensation Amortization. During 1998 and 1999, we granted stock options with exercise prices that were less than the estimated fair value of the underlying shares of common stock for accounting purposes on the date of grant. This results in amortization expenses of deferred compensation over the period that these options vest, which ranges from three to four years from the date of grant. Deferred compensation amortization for the three months ended March 31, 2001 and 2000 was $1.4 million and $1.8 million, respectively. This decrease was a result of fewer personnel at Stamps.com following our October 2000 and February 2001 reductions in force. Loss from EncrypTix. For the three months ended March 31, 2001 and 2000, the losses associated with the operation of our EncrypTix subsidiary were $5.6 million and $0.4 million, respectively. This increase was primarily a result of growth in personnel employed in the EncrypTix subsidiary. Other Income (Expense). Other income (expense) consisted of income from cash equivalents and short-term investments, plus a gain from the shutdown of our EncrypTix subsidiary, less interest expense related to financing obligations. Other income (expense) for the three months ended March 31, 2001 and 2000 was $27.3 million and $4.8 million, respectively. This increase is due to a one-time gain from the shutdown of our EncypTix subsidiary of $23.2 million that we recognized during the first quarter of 2001. The increase was offset by lower interest income in the first quarter of 2001 as compared to the first quarter of 2000, and was a result of a lower cash balance. Liquidity and Capital Resources As of March 31, 2001 we had approximately $213 million cash and short term investments. We regularly invest excess funds in short-term money market funds and commercial paper and do not engage in hedging or speculative activities. In the first quarter of 2000, our majority-owned subsidiary, EncrypTix, raised approximately $34.8 million in private financing from a group of financial and strategic investors. The proceeds of this financing were used by EncrypTix for research and development, sales and marketing and general working capital purposes. On March 12, 2001, EncrypTix ceased operations and effected a general assignment of its assets for the benefit of its creditors. EncrypTix took this action due to the inability to secure additional funding. We do not expect to be impacted by any of EncrypTix's resulting liabilities. Additionally, we terminated our license agreement with EncrypTix and maintain limited licenses to various EncrypTix intellectual property. In May 1999, we entered into a facility lease agreement for the corporate headquarters with aggregate lease payments of approximately $4.8 million through May 2004. Also, in March 2000 we entered into a facility lease agreement for a Bellevue, Washington facility with aggregate lease payments of approximately $17 million. For all excess space that resulted from our October 2000 and February 2001 restructurings, we are actively marketing the space for sublet. Net cash used in operating activities was $24.9 million and $26.5 million for the three months ended March 31, 2001 and 2000, respectively. The decrease in net cash used in operating activities resulted primarily from cost-cutting activities, including the restructuring that took place in the fourth quarter of 2000 and in the first quarter of 2001. 11 Net cash provided by investing activities was $109.5 million for the three months ended March 31, 2001 as compared to net cash used by investing activities of $60.1 million for the three months ended March 31, 2000. The increase in net cash provided by investing activities resulted primarily from the sale of short- term investments during the first quarter of 2001. Net cash used by financing activities was $8.3 million for the three months ended March 31, 2001 as compared to net cash provided by financing activities of $29.9 million for the three months ended March 31, 2000. The difference resulted primarily from cash raised by the EncrypTix subsidiary during the three months ended March 31, 2000. We anticipate that our current cash balances will be sufficient to fund our operations through June 2002. We may require additional capital to fund our business, and we cannot be certain that additional funds will be available on satisfactory terms when needed, if at all. See "Risk Factors--We may need to raise additional capital in the future through the issuance of additional equity or convertible debt securities or by borrowing money, and additional funds may not be available on terms acceptable to us." RISK FACTORS You should carefully consider the following risks and the other information in this Report and our other filings with the SEC before you decide to invest in our company or to maintain or increase your investment. The risks and uncertainties described below are not the only ones facing Stamps.com. Additional risks and uncertainties may also adversely impact and impair our business. If any of the following risks actually occur, our business, results of operations or financial condition would likely suffer. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment. This Report contains forward-looking statements based on the current expectations, assumptions, estimates and projections about Stamps.com and the Internet industry. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those discussed in these forward-looking statements as a result of certain factors, as more fully described in this section and elsewhere in this Report. Stamps.com does not undertake to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. Risks Related to Our Business Because we have a limited operating history, there is limited information upon which you can evaluate our business. We are still in the early stages of our development, and our limited operating history makes it difficult to evaluate our business and prospects. Our Internet Postage service has only been available since October 22, 1999 and our enterprise shipping services have yet to be released on a widespread basis. Due to our limited operating history, it is difficult or impossible to predict future results of operations, including operating expenses and revenues. Moreover, due to our limited operating history, any evaluation of our business and prospects must be made in light of the risks and uncertainties often encountered by early-stage companies in Internet-related markets. Many of these risks are discussed in the subheadings below, and include our (a) ability to meet and maintain government specifications for our Internet Postage service, specifically US Postal Service requirements; (b) complete dependence on Internet Postage and shipping services that currently do not have substantial market acceptance; (c) potential need to expand our sales and support organizations; (d) ability to establish and promote our brand name; (e) ability to expand our operations to meet the commercial demand for our services, when it arises; (f) development of and reliance on strategic and distribution relationships; (g) ability to prevent and respond quickly to service interruptions; (h) ability to minimize fraud and other security risks; and (i) ability to compete with companies with greater capital resources and brand awareness. If we are unsuccessful in addressing these risks or in executing our new business strategy, our business, results of operations and financial condition would be materially and adversely affected. 12 Our revenues and operating results may fluctuate in future periods and we may fail to meet expectations, which may cause the price of our common stock to decline. Given our limited operating history, we have not generated any significant revenues from our operations. Our revenues and operating results are difficult to predict and may fluctuate significantly from period-to-period particularly because our Internet Postage and shipping services are new and our prospects uncertain. If revenues or operating results fall below the expectations of investors or public market analysts, the price of our common stock could decline substantially. Factors that might cause our revenues, margins and operating results to fluctuate include the factors described in the subheadings below as well as: (a) the success of our Internet Postage and shipping services; (b) the costs of defending ourselves in litigation; (c) the costs of our marketing programs to establish and promote the Stamps.com brand name; (d) the demand for our Internet Postage and shipping services; (e) our ability to develop and maintain strategic distribution relationships; (f) the number, timing and significance of new products or services introduced by both us and our competitors; (g) our ability to develop, market and introduce new and enhanced services on a timely basis; (h) the level of service and price competition; (i) the increases in our operating expenses; (j) US Postal Service regulation and policies; (k) the success of implementing our new business strategy and of reducing expenses; and (l) general economic factors. Our cost of revenues includes costs for systems operations, customer service, Internet connection and security services; all of these costs will fluctuate depending upon the demand for our services. In addition, a substantial portion of our operating expenses is related to personnel costs, marketing programs and overhead, which cannot be adjusted quickly and are therefore relatively fixed in the short term. Our operating expense levels are based, in significant part, on our expectations of future revenues. If our expenses precede increased revenues, both gross margins and results of operations would be materially and adversely affected. Moreover, our new business strategy of reducing expenses may directly and correspondingly cause our revenues to substantially decline. Due to the foregoing factors and the other risks discussed in this annual report, you should not rely on period-to-period comparisons of our operating results as an indication of future performance. We have a history of losses, expect to incur losses in the future and may never achieve profitability, which may reduce the trading price of our common stock. Since we began operations in 1998, we have incurred substantial operating losses in every period. As a result of accumulated operating losses, we have an accumulated deficit of $450.4 million as of March 31, 2001. Since inception, we have funded our business through selling our stock, not from cash generated by our business. We expect to continue to incur significant sales and marketing, research and development, and administrative expenses and therefore could continue to experience net losses and negative cash flows for several years, and perhaps for the duration of our corporate existence. For the quarter ended March 31, 2001, we only generated $5.3 million in revenues. Even if sales of our products and services begin to grow, we may not generate sufficient revenues to achieve profitability in the future. In addition, as a result of our acquisition of iShip.com, Inc. in March 2000, our losses have increased, and our losses could continue to increase, because of additional costs and expenses related to: amortization of goodwill and other intangibles and deferred compensation resulting from the acquisition; an increase in the number of employees; an increase in sales and marketing activities; additional facilities and infrastructure; and assimilation of operations and personnel. In connection with the iShip.com, Inc. acquisition, we recorded a significant amount of intangibles, the amortization of which will significantly and adversely affect our operating results. On March 2, 2001, United Parcel Service and Mail Boxes Etc. USA, Inc. jointly announced that United Parcel Service would acquire Mail Boxes Etc. USA, Inc. Mail Boxes Etc. USA, Inc. represented a significant future source of revenue and market leverage for our enterprise shipping services. Mail Boxes Etc. USA, Inc. was also a significant customer of United Parcel Service. United Parcel Service has informed us that it is unlikely to have Mail Boxes Etc. USA, Inc. continue to use our online shipping services in the future. In light of the March 2001 events, we recorded a reduction to the remaining goodwill in the first quarter of 2001 in the amount of $159.0 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 13 Overall, we will need to generate significant revenues and successfully implement our new business strategy to achieve and maintain profitability. We recently implemented new pricing plans that may adversely affect our future revenues and profitability. Our ability to generate gross margins depends upon the ability to generate significant revenues from a large base of active customers. We recently changed our pricing plans for our Internet Postage service. In order to attract customers in the future, we may run special promotions and offer discounts on fees, postage and supplies. We cannot be sure that customers will be receptive to the new fee structure for our Internet Postage service or to the fee structure that we will implement for our Internet shipping services. Even if we are able to establish a sizeable base of users, we still may not generate sufficient gross margins to become profitable. In addition, our ability to generate revenues or achieve profitability could be adversely affected by special promotions or additional changes to our pricing plans. The change in payment terms associated with a significant contract or the termination of that contract could adversely affect our financial condition and results of operations. During the first quarter of 2001, we received $500,000, or approximately 10% of our total revenue for the quarter, from Mail Boxes Etc. USA, Inc. Under our 2000 agreement with Mail Boxes Etc. USA, Inc., we were entitled to receive a fixed monthly service fee of $500,000 until December 31, 2000. Starting on January 1, 2001, our fixed monthly service fee was replaced by a per package transaction fee. As of March 31, 2001, we had not received payment of $1.5 million of fees for services provided in 2000, nor any transaction fees for services provided in 2001, due to a dispute relating to certain product features. We have not recognized any revenue related to this agreement for the service or transaction fees that have not been collected. We are currently working with Mail Boxes Etc. USA, Inc. in an effort to amicably resolve this dispute. On March 2, 2001, United Parcel Service and Mail Boxes Etc. USA, Inc. jointly announced that United Parcel Service would acquire Mail Boxes Etc. USA, Inc. Mail Boxes Etc. USA, Inc. represented a significant future source of revenue and market leverage for our online shipping services. United Parcel Service has informed us that it is unlikely to have Mail Boxes Etc. USA, Inc. continue to use our online shipping services, which would adversely affect our financial condition and results of operations. Even if Mail Boxes Etc. USA, Inc. continues to use our online shipping services, the transaction-based fee structure will yield lower revenues than the fixed monthly fee structure for the foreseeable future. If our new business strategy is not successfully implemented, our financial condition and results of operations will be adversely affected. In the quarter ended March 31, 2001, we have continued to implement our new business strategy begun in October 2000 to enhance our ability to achieve profitability by focusing on our core business of Internet postage and shipping. In February 2001, in an effort to more rapidly decrease our operating losses, we reduced the total number of employees by approximately 50% to 150 employees, including full time, part time and contract employees. We also continued other cost cutting efforts, including the termination of fixed-cost marketing arrangements, and the redeployment of sales and marketing expenditures to programs that have a higher return on investment. Our new strategy entails risks relating to our ability to attract our targeted customers to offset potential customer losses in other areas and the ability of our new management team to implement this strategy. There is no guarantee our new management team will be able to effectively or efficiently implement our new business strategy or that, if effectively implemented, our business strategy will benefit us or help us achieve profitability. Failure to execute our plan to significantly reduce expenses or to attract new customers in high margin lines of business in significant numbers will adversely effect our financial condition and results of operations. In addition, our new business strategy could result in a substantial loss of customers which would have an adverse impact on our financial condition and results of operations. 14 We may not be able to successfully identify and consummate viable strategic alternatives. Concurrently with the implementation of our new business strategy, we are considering other strategic alternatives that may be available to us, including the possible sale of all or part of our business. However, there can be no assurance that we will be able to find a buyer, or that a buyer would be willing to acquire all or part of our business at an acceptable price or on acceptable terms. Recent personnel changes may interfere with our operations. In February 2001, we experienced another significant change in personnel at the senior management level, including the resignations of our Senior Vice President and General Manager, Enterprise Business Unit, David N. Duckwitz, our Vice President, Sales, Enterprise Business Unit, Blake Karpe, and our Senior Vice President and General Manager, Small Business Unit, Douglas Walner. We do not currently have any plans to replace any of these senior management positions. In March 2001, David Bohnett resigned from our Board of Directors. We expect to continue to experience changes in personnel at the senior management and Board level as part of our restructuring process. Bruce Coleman remains as our interim Chief Executive Officer, and we have not yet found a permanent replacement. If we fail to attract and retain a qualified individual as our Chief Executive Officer, our business, financial condition and results of operations will be adversely affected. If our new business strategy is not successful, we will not achieve profitability as currently planned, if at all. In February 2001, we reduced the total number of our employees by approximately 50% to 150 employees, which included full time, part time and contract employees. These transitions have resulted and will continue to result in some disruption to our ongoing operations. If we do not successfully attract and retain skilled personnel for permanent management and other key personnel positions, we may not be able to effectively implement our business plan. Our success depends largely on the skills, experience and performance of the members of our senior management and other key personnel. Any of the individuals can terminate his or her employment with us at any time. If we lose additional key employees and are unable to replace them with qualified individuals, our business and operating results could be seriously harmed. In addition, our future success will depend largely on our ability to continue attracting and retaining highly skilled personnel. As a result, we may be unable to successfully attract, assimilate or retain qualified personnel. Further, we may be unable to retain the employees we currently employ or attract additional personnel. The failure to attract and retain the necessary personnel could seriously harm our business, financial condition and results of operations. We can not predict the value of our acquisition of certain intellectual property assets of E-Stamp Corporation. As described under "Recent Developments," we acquired certain intellectual property assets relating to Internet-based postage printing and management from E-Stamp Corporation, one of our former competitors. There can be no assurance that the intellectual property assets we acquired will provide value to our company or will help us to achieve profitability as currently planned, if at all. In addition, certain of the intellectual property rights we acquired from E-Stamp Corporation are the subject of a lawsuit brought by Pitney Bowes and could be determined by a court to be invalid or unenforceable. Such a determination could make the intellectual property rights we acquired worthless. See "Legal Proceedings." The success of our business will depend upon acceptance by customers of our Internet Postage and shipping services. We expect that our Internet Postage and enterprise Internet shipping services will generate a significant portion of our near-term future revenues. Accordingly, we depend heavily on the commercial acceptance of our Internet Postage and enterprise Internet shipping services. If we fail to successfully gain commercial acceptance of our Internet Postage and enterprise Internet shipping services, we will be unable to generate significant revenues. To date, a substantial market for Internet Postage and enterprise Internet shipping services has not developed, and we cannot assure you that it will develop. More specifically, we cannot predict if our target customers will choose the Internet as a means of purchasing postage or of facilitating their mailing and shipping transactions, if customers will 15 be willing to pay a fee to use our service, or if potential users will select our system over our competitors' or over alternative methods such as online invoicing, bill payment and financial transactions. The success of our business will depend upon our ability to make our Internet Postage and shipping services widely available, and to achieve widespread adoption of our services. We face numerous risks in conjunction with the introduction, sale and commercial availability of our services because of our very limited experience with the commercial rollout and use of our services. Specifically, our Internet Postage service was introduced on October 22, 1999 and our enterprise Internet shipping services have yet to be deployed. As a result, we cannot be sure that our services will be widely available or adopted, that they will successfully process large numbers of user transactions or that our services will contain features that appeal to the broad range of customers that we target. If we experience problems with the availability, adoption, scalability or functionality of our services or if we are unable to offer attractive service enhancements in a timely manner, our ability to attract and retain customers and our results of operations will be adversely impacted. If we do not achieve the brand recognition necessary to succeed in the Internet postage and shipping markets, our business will suffer. We must quickly build our Stamps.com brand to gain market acceptance for our services. We believe it is imperative to our long-term success that we obtain significant market share for our services before our competitors do. We must make substantial expenditures on product development, strategic relationships and marketing initiatives in an effort to establish our brand awareness. In addition, we must devote significant resources to ensure that our users are provided with a high quality online experience supported by a high level of customer service. We cannot be certain that we will have sufficient resources to build our brand and realize commercial acceptance of our services. In addition, our new business strategy of reducing expenses could limit our ability to establish our brand awareness. If we fail to gain market acceptance for our services, our business will suffer dramatically or may fail. If we fail to effectively market and sell our Internet Postage and shipping services, we may never achieve profitability and our business will be substantially harmed and could fail. In order to acquire customers and achieve wide distribution and use of our services, we must develop and execute cost-effective marketing campaigns and sales programs. Given the limited amount of time that our services have been commercially available, if at all, we have very limited experience conducting marketing campaigns. In addition, we have recently increased our emphasis on direct selling efforts and have only recently retained the resources necessary to support a direct sales channel. However, we have very limited experience regarding our ability to acquire customers through a direct sales channel. In connection with our new business strategy, we have significantly reduced our marketing budget, which could prevent us from pursuing certain marketing campaigns and sales programs. As a result of these limited marketing and sales experiences, and our reduced marketing budget, we cannot predict our ability to attract customers for our services, and we may fail to generate significant interest in any of our services. Furthermore, we may be unable to generate significant interest in our services in a cost-effective manner. If we fail to generate interest in our services or to acquire customers in a cost-effective manner, our results of operations will be adversely affected and we may never achieve profitability. If we fail to meet the demands of our customers, our business will be substantially harmed and could fail. Our Internet Postage 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 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. Our technology also may not be capable of servicing the needs of these large enterprise customers. Moreover, our ability to obtain and retain customers depends on our customer service capabilities. As part of our new business strategy, we have significantly reduced our support offerings. If we are unable at any time to address customer service issues adequately or to provide a satisfactory customer experience for current or potential customers, our business and reputation may be harmed. If we experience extensive interest in our services, we may fail to meet the expectations of customers due to limited experience in operating our services and the strains this demand will place on our Web 16 site, customer service operations, professional services group, network infrastructure or systems. If we fail to meet the demands of our customers or if our customers implement and employ our services more slowly than we expect, our business, results of operation and ability to achieve profitability will be negatively affected. If we cannot grow our business, and effectively manage that growth, our business will be adversely affected and could fail. Our new business strategy of significantly reducing expenses could have a substantial impact on our ability to develop and introduce new products and services; attract, serve and retain new customers; reliably improve our Web site, network infrastructure and systems; implement new systems, procedures and controls; and increase brand awareness. If our business begins to grow, we may not be able to manage our growth effectively. A period of business expansion could place a significant strain on our managerial, operational and financial resources. Our personnel, systems, procedures and controls may be inadequate to support our future operations. If we are unable to manage our growth effectively or experience disruptions during periods of expansion, our business will suffer and our financial condition and operating results will be seriously affected. Success by Pitney Bowes in its suits against us alleging patent infringement could prevent us from offering our Internet Postage and shipping services and severely harm our business or cause it to fail. On June 16, 1999, Pitney Bowes sued us for alleged patent infringement in the United States District Court for the District of Delaware. The suit originally alleged that we are infringing two patents held by Pitney Bowes related to postage application systems and electronic indicia. The suit seeks treble damages, a preliminary and permanent injunction from further alleged infringement, attorneys' fees and other unspecified damages. We answered the complaint on August 6, 1999, denying the allegations of patent infringement and asserting a number of affirmative defenses. Pitney Bowes filed a similar complaint in early June 1999 against one of our competitors, E-Stamp Corporation, alleging infringement of seven Pitney Bowes patents. On April 13, 2000, Pitney Bowes asked the court for permission to amend its complaint to drop allegations of patent infringement with respect to one patent and to add allegations of patent infringement with respect to three other patents. On July 28, 2000 the court entered Pitney Bowes' amended complaint. On 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. We answered the complaint on December 1, 2000, denying the allegations of patent infringement and asserting a number of affirmative defenses. 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 suits against us. See "Legal Proceedings." If Pitney Bowes prevails in its suits against us, we may be prevented from selling postage on the Internet. Alternatively, the Pitney Bowes suits could result in limitations on how we implement our service, delays and costs associated with redesigning our service and payments of license fees and other payments. Thus, if Pitney Bowes prevails in its suits against us, our business could be severely harmed or fail. In addition, the litigation could result in significant expenses and diversion of management time and other resources. On August 17, 1998, Pitney Bowes issued a press release stating that it holds dozens of US patents related to computer-based postage metering and that it intended to engage in discussions with other marketers of computer-based postal products to license Pitney Bowes technology. Prior to Pitney Bowes filing a lawsuit against us, we were in license discussions with Pitney Bowes. We intend to continue these discussions; however, we cannot predict whether these discussions will continue, the outcome of these discussions or the impact of Pitney Bowes' intellectual property claims on our business or the Internet postage market. If Pitney Bowes is able to prevail in its claims against us and if we do not enter into a license relationship with Pitney Bowes, our business could be impacted severely or fail. In addition, as described above, Pitney Bowes could obtain monetary and injunctive relief against us. 17 Success by Cybershop in its suit against us seeking damages and recognition of its ownership of the domain name "stamps.com" could prevent us from using the domain name "stamps.com" and could require a change of name of the Company, severely harming our business or causing it to fail. On December 13, 2000, Cybershop (a British Columbia, Canada partnership) and its general partners filed suit against us in the U.S. District Court for the Southern District of Texas, alleging that in 1998 a third party fraudulently transferred ownership of the Internet domain name "stamps.com" away from Cybershop and subsequently transferred it to us. The third party is also a named defendant in the suit. The complaint seeks legal resolution and recognition of Cybershop's ownership of the "stamps.com" domain name and seeks unspecified monetary damages against the third party. On January 9, 2001, we filed a motion to dismiss the suit. On February 16, 2001, Cybershop filed an amended complaint, alleging new causes of action, including conversion, invasion of privacy, trespass, and private nuisance, and seeking declaratory judgment for return of the domain name registration to Cybershop. On March 5, 2001, we filed a motion to dismiss the amended complaint. The outcome of the litigation is uncertain, and we can give no assurance that Cybershop will not prevail in the suit against us. If Cybershop prevails in its claims against us, we may be liable for monetary damages. Additionally, if Cybershop is successful in the lawsuit, we may be required to relinquish the domain name "stamps.com" and transfer the domain name registration to Cybershop. Relinquishing ownership of the "stamps.com" domain name would require us to use a different domain name as the primary Internet address and web page for our company, and we may need to change the name of our company itself from "Stamps.com Inc." as well. Changing the name of our company, and using a new Internet domain name, could significantly and negatively affect our brand recognition and customer acquisition and retention. Furthermore, a change in our company name or Internet domain name could result in significant costs in seeking to build new brand recognition. Thus, if Cybershop prevails in its suit against us, our business could be severely harmed or even fail. See "Legal Proceedings." Even if Cybershop's claim is unsuccessful, the Cybershop litigation could result in significant expenses and diversion of management time and other resources that could negatively affect our business. Third party assertions of violations of their intellectual property rights could adversely affect our business. Substantial litigation regarding intellectual property rights exists in our industry. Third parties may currently have, or may eventually be issued, patents upon which our products or technology infringe. Any of these third parties might make a claim of infringement against us. We may become increasingly aware of, or we may increasingly receive correspondence claiming, potential infringement of other parties' intellectual property rights. We could incur significant costs and diversion of management time and resources to defend claims against us regardless of their validity. We may not have adequate resources to defend against these claims and any associated costs and distractions could have a material adverse effect on our business, financial condition and results of operations. In addition, litigation in which we are accused of infringement might cause product development delays, require us to develop non-infringing technology or require us to enter into royalty or license agreements, which might not be available on acceptable terms, or at all. If a successful claim of infringement were made against us and we could not develop non-infringing technology or license the infringed or similar technology on a timely and cost- effective basis, our business could be significantly harmed. Any loss resulting from intellectual property litigation could severely limit our operations, cause us to pay license fees, or prevent us from doing business. See "Legal Proceedings." A failure to protect our own intellectual property could harm our competitive position. We rely on a combination of patent, trade secret, copyright and trademark laws and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our rights in our products, services, know- how and information. We have 34 issued United States patents and 10 issued international patents, and have filed 63 United States patent applications and 18 international patent applications, inclusive of those recently acquired from E-Stamp Corporation. We have also applied to register a number of trademarks and service marks. We plan to apply for other patents, trademarks and service marks in the future. We may not receive patents for any of our patent applications. Even if patents are issued to us, claims issued in these patents may not protect our technology. In addition, a court might hold any of our patents, trademarks or service marks invalid or unenforceable. Even if our patents are upheld or are not challenged, third parties may develop alternative technologies or products without infringing our patents. If our 18 patents fail to protect our technology or our trademarks and service marks are successfully challenged, our competitive position could be harmed. We also generally enter into confidentiality agreements with our employees, consultants and other third parties to control and limit access and disclosure of our confidential information. These contractual arrangements or other steps taken to protect our intellectual property may not prove to be sufficient to prevent misappropriation of technology or deter independent third party development of similar technologies. Additionally, the laws of foreign countries may not protect our services or intellectual property rights to the same extent as do the laws of the United States. See "Risk Factors--Success by Cybershop in its suit against us seeking damages and recognition of its ownership of the domain name "stamps.com" could prevent us from using the domain name "stamps.com" and could require a change of name of our Company, severely harming our business or causing it to fail." If we are unable to maintain and develop our strategic relationships and distribution arrangements, our Internet Postage and shipping 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 shipping services have not yet been commercially released. As a result, our strategic partners may not view their relationships with us as significant or vital to their businesses and, consequently, may not perform according to our expectations. We have little ability to control the efforts of our strategic partners and, even if we are successful in establishing strategic relationships, these relationships may not be successful. System and online security failures could harm our business and operating results. Our services depend on the efficient and uninterrupted operation of our computer and communications hardware systems. In addition, we must provide a high level of security for the transactions we execute. We rely on internally- developed and third-party technology to provide secure transmission of postage and other confidential information. Any breach of these security measures would severely impact our business and reputation and would likely result in the loss of customers. Furthermore, if we are unable to provide adequate security, the US Postal Service could prohibit us from selling postage over the Internet. Our systems and operations are vulnerable to damage or interruption from a number of sources, including fire, flood, power loss, telecommunications failure, break-ins, earthquakes and similar events. We have entered into an Internet hosting agreement with Exodus Communications, Inc. to maintain our Internet Postage servers at Exodus' data center in Southern California. Our operations depend on Exodus' ability to protect its and our systems in its data center against damage or interruption. Exodus does not guarantee that our Internet access will be uninterrupted, error-free or secure. Our servers are also vulnerable to computer viruses, physical, electrical or electronic break- ins and similar disruptions. We have experienced minor system interruptions in the past and may experience them again in the future. Any substantial interruptions in the future could result in the loss of data and could completely impair our ability to generate revenues from our service. We do have a business interruption plan that we continue to refine and update; however, we do not presently have a full disaster recovery plan in effect to cover loss of facilities and equipment. In addition, we do not have a "fail-over" site that mirrors our infrastructure to allow us to operate from a second location. We have business interruption insurance; however, we cannot be certain that our coverage will be sufficient to compensate us for losses that may occur as a result of business interruptions. A significant barrier to electronic commerce and communications is the secure transmission of confidential information over public networks. Anyone who is able to circumvent our security measures could misappropriate 19 confidential information or cause interruptions in our operations. We may be required to expend significant capital and other resources to protect against potential security breaches or to alleviate problems caused by any breach. We rely on specialized technology, both within our own infrastructure and that provided by Exodus, to provide the security necessary for secure transmission of postage and other confidential information. Advances in computer capabilities, new discoveries in security technology, or other events or developments may result in a compromise or breach of the algorithms we use to protect customer transaction data. Should someone circumvent our security measures, our reputation, business, financial condition and results of operations could be seriously harmed. Security breaches could also expose us to a risk of loss or litigation and possible liability for failing to secure confidential customer information. As a result, we may be required to expend a significant amount of financial and other resources to protect against security breaches or to alleviate any problems that they may cause. The effects of expansion may adversely affect our financial condition, results of operations and existing stockholders. We may establish subsidiaries, enter into joint ventures or pursue the acquisition of new or complementary businesses, products or technologies in an effort to enter into new business areas, diversify our sources of revenue and expand our product and service offerings outside the Internet postage market. Although we have no commitments or agreements and are not currently engaged in discussions for any material acquisitions or investments, we continue to evaluate incremental revenue opportunities and derivative applications of our technology and may pursue and develop those opportunities with strategic partners and investors, both domestically and internationally. To the extent we pursue new or complementary businesses, we may not be able to expand our service offerings and related operations in a cost-effective or timely manner. We may experience increased costs, delays and diversions of management's attention when integrating any new businesses or service. We may lose key personnel from our operations or those of any acquired business. Furthermore, any new business or service we launch that is not favorably received by users could damage our reputation and brand name in the Internet postage 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 incurring of additional debt, the assumption of known and unknown liabilities, and the amortization of expenses related to goodwill and other intangible assets, all of which could have a material adverse effect on our business, financial condition and operating results. New issuances of securities may also have rights, preferences and privileges senior to those of our common stock. We may need to raise additional capital in the future through the issuance of additional equity or convertible debt securities or by borrowing money, and additional funds may not be available on terms acceptable to us. If our cost-cutting program associated with our new business strategy is successfully implemented, we believe that our current cash balances will allow us to fund our operations 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 Postage 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. 20 Risks Related to Our Industry US Postal Service regulations and fee assessments may cause disruptions or discontinuance of our business, may increase the cost of our service and may affect the adoption of Internet postage as a new method of mailing. We are subject to continued US Postal Service scrutiny and other government regulations. The continued availability of our Internet Postage service is dependent upon our service continuing to meet US Postal Service performance specifications and regulations. The US Postal Service could change its certification requirements or specifications for Internet postage or revoke the approval of our service at any time. If at any time our Internet Postage service fails to meet US Postal Service requirements, we may be prohibited from offering this service and our business would be severely and negatively impacted. In addition, the US Postal Service could suspend, terminate or offer services which compete against Internet postage, any of which could stop or negatively impact the commercial adoption of our Internet Postage service. Any changes in requirements or specifications for Internet postage could adversely affect our pricing, cost of revenues, operating results and margins by increasing the cost of providing our Internet Postage service. For example, the US Postal Service could decide to charge Internet postage vendors fees for the enrollment of each unique customer of the Internet postage product, which would be a cost that we would either absorb or pass through to customers. The US Postal Service has in fact invoiced each Internet postage vendor $8 for each digital certificate required for each consumer of Internet postage to securely print postage. We are currently discussing the necessity of this charge with the US Postal Service. If we are required to pay this per customer charge, the cost of our service could increase and the adoption of Internet postage as a new method of mailing could be adversely affected. The US Postal Service could also decide that Internet postage should no longer be an approved postage service due to security concerns or other issues. Our business would suffer dramatically if we are unable to adapt our Internet Postage 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. 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, Pitney Bowes has a software-based product commercially available and has a hardware-based product in beta testing. Neopost Industrie has hardware and software products in beta testing. If any of our competitors, including Pitney Bowes, provide the same or similar service as we provide, our operations could be adversely impacted. See "Business-- Competition." Internet postage may not be adopted by customers. These customers may continue to use traditional means to purchase postage, including purchasing postage from their local post office. If Internet postage becomes a viable market, we may not be able to establish or maintain a competitive position against current or future competitors as they enter the market. Many of our competitors have longer operating histories, larger customer bases, greater brand recognition, greater financial, marketing, service, support, technical, intellectual property and other resources than us. As a result, our competitors may be able to devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing policies and devote substantially more resources to Web site and systems development than us. This increased competition may result in reduced operating margins, loss of market share and 21 a diminished brand. We may from time to time make pricing, service or marketing decisions or acquisitions as a strategic response to changes in the competitive environment. These actions could result in reduced margins and seriously harm our business. If the market for Internet postage develops, we could face competitive pressures from new technologies or the expansion of existing technologies approved for use by the US Postal Service. We may also face competition from a number of indirect competitors that specialize in electronic commerce and other companies with substantial customer bases in the computer and other technical fields. Additionally, companies that control access to transactions through a network or Web browsers could also promote our competitors or charge us a substantial fee for inclusion. Our competitors may also be acquired by, receive investments from or enter into other commercial relationships with larger, better-established and better-financed companies as use of the Internet and other online services increases. In addition, changes in postal regulations could adversely affect our service and significantly impact our competitive position. We may be unable to compete successfully against current and future competitors, and the competitive pressures we face could seriously harm our business. 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, United Parcel Service, FedEx and other major shippers, 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 ours, 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. On March 2, 2001, United Parcel Service and Mail Boxes Etc. USA, Inc. jointly announced that United Parcel Service would acquire Mail Boxes Etc. USA, Inc. Mail Boxes Etc. USA, Inc. represented a significant future source of revenue and market leverage for our online shipping services. United Parcel Service has informed us that it is unlikely to have Mail Boxes Etc. USA, Inc. continue to use our online shipping services. If we do not respond effectively to technological change, our services could become obsolete and our business will suffer. The development of our services and other technology entails significant technical and business risks. To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our online operations. The Internet and the electronic commerce industry are characterized by rapid technological change; changes in user and customer requirements and preferences; frequent new product and service introductions embodying new technologies; and the emergence of new industry standards and practices. The evolving nature of the Internet or the Internet postage 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. 22 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 large 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. Our operating results could be impaired if we or the Internet become subject to additional government regulation and legal uncertainties. With the exception of US Postal Service and Department of Commerce regulations, we are not currently subject to direct regulation by any domestic or foreign governmental agency, other than regulations applicable to businesses generally, and laws or regulations directly applicable to electronic commerce. However, due to the increasing popularity and use of the Internet, it is possible that a number of laws and regulations may be adopted with respect to the Internet, relating to user privacy; pricing; content; copyrights; distribution; characteristics and quality of products and services; and export controls. The adoption of any additional laws or regulations may hinder the expansion of the Internet. A decline in the growth of the Internet could decrease demand for our products and services and increase our cost of doing business. Moreover, the applicability of existing laws to the Internet is uncertain with regard to many issues, including property ownership, export of specialized technology, sales tax, libel and personal privacy. Our business, financial condition and results of operations could be seriously harmed by any new legislation or regulation. The application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and other online services could also harm our business. We have employees and offer our services in multiple states, and we may in the future expand internationally. These jurisdictions may claim that we are required to qualify to do business as a foreign corporation in each state or foreign country. Our failure to qualify as a foreign corporation in a jurisdiction where we are required to do so could subject us to taxes and penalties. Other states and foreign countries may also attempt to regulate our services or prosecute us for violations of their laws. Further, we might unintentionally violate the laws of foreign jurisdictions and those laws may be modified and new laws may be enacted in the future. If we market our services internationally, government regulation could disrupt our operations. We may in the future begin to provide services in international markets. Our ability to provide our Internet Postage 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 23 predict when, or if, international markets will become a viable source of revenues for a postage service similar to ours. Our ability to provide service in international markets may also be impacted by the export control laws of the United States. Our software technology makes us subject to stronger export controls, and may prevent us from being able to export our products and services. Regulations and standards of the Universal Postal Union and other international bodies may also limit our ability to provide international mail services. If we enter the international market, our business activities will be subject to a variety of potential risks, including the adoption of laws and regulatory requirements, political and economic conditions, difficulties protecting our intellectual property rights and actions by third parties that would restrict or eliminate our ability to do business in these jurisdictions. If we begin to transact business in foreign currencies, we will become subject to the risks attendant to transacting in foreign currencies, including the potential adverse effects of exchange rate fluctuations. Risks Related to Our Stock Our charter documents could deter a takeover effort, which could inhibit your ability to receive an acquisition premium for your shares. The provisions of our Amended and Restated Certificate of Incorporation, Bylaws and Delaware law could make it difficult for a third party to acquire us, even it would be beneficial to our stockholders. In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which could prohibit or delay a merger or other takeover of our company, and discourage attempts to acquire us. Shares of our common stock held by existing stockholders may be sold into the public market, which could cause the price of our common stock to decline. If our stockholders sell into the public market substantial amounts of our common stock purchased in private financings prior to our initial public offering, or purchased upon the exercise of stock options or warrants, or if there is a perception that these sales could occur, the market price of our common stock could decline. All of these shares are available for immediate sale, subject to the volume and other restrictions under Rule 144 of the Securities Act of 1933. These sales also could impair our future ability to raise capital through the sale of equity or equity-related securities at a time and price that we deem appropriate. Our stock price may be highly volatile and could drop, particularly because our business depends on the Internet. The trading price of our common stock has fluctuated widely in the past, and is expected to continue to do so in the future, as a result of a number of factors, many of which are outside our control. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market prices of many technology and Internet-related companies and that have often been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations and the perception of the valuation of the Internet company sector could adversely affect the market price of our common stock. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We have not used derivative financial instruments in our investment portfolio. Our short-term investments are comprised of U.S. government obligations and public corporate debt securities with maturities of less than one year at the date of purchase. At March 31, 2001, our short-term investments approximated $63 million and had a related weighted average interest rate of 6.19%. Interest rate fluctuations impact the carrying value of the portfolio. We do not believe that the future market risks related to the above securities will have material adverse impact on our financial position, results of operations or liquidity. 24 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. We answered the complaint on December 1, 2000, denying the allegations of patent infringement and asserting a number of affirmative defenses. 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 suits against us alleging patent infringement could prevent us from offering our Internet Postage and iShip services and severely harm our business or cause it to fail." On or about December 29, 1999, three individual plaintiffs filed a lawsuit against us 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. Plaintiffs asserted claims for breach of oral contract, quantum meruit, fraud and negligent misrepresentation. The plaintiffs alleged that they had an oral contract with Stamp Master, who allegedly was one of our predecessors, pursuant to which Stamp Master agreed to pay them "cash for cash compensation" for their services in securing investments for Stamp Master or in finding individuals to serve as board members. They further alleged that after successfully placing an individual on our board of directors and after that board member successfully obtained financing on our behalf, they were entitled to cash compensation for those efforts. The plaintiffs sought $13.3 million in compensatory damages, plus other unspecified compensatory damages, punitive and exemplary damages and attorneys' fees and costs incurred. On January 23, 2001, the Court granted a summary judgment motion filed by us and Mr. Ananda. Accordingly, judgment has been granted in favor of us and Mr. Ananda and the case has been dismissed. However, the plaintiffs have notified the court that they intend to appeal the judgment against them to an appellate court. 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 alleged that we improperly terminated our contract with DraftWorldwide and sought damages of approximately $3.9 million plus interest and costs associated with the lawsuit. We denied the allegations contained in the complaint, and filed our own counterclaim, alleging that DraftWorldwide had breached the contract by failing to adequately perform under the contract and had acted in bad faith in negotiating an adjustment to the terms of the contract, as provided for in the contract. The parties recently reached a mutually acceptable resolution of the suit, and an order of dismissal was entered on March 19, 2001, resulting in both parties' dismissal, with prejudice, of their respective claims against each other. On December 13, 2000, Cybershop (a British Columbia, Canada partnership) and its general partners filed suit against us in the U.S. District Court for the Southern District of Texas, alleging that in 1998 a third party fraudulently transferred ownership of the Internet domain name "stamps.com" away from Cybershop and 25 subsequently transferred it to us. The third party is also a named defendant in the suit. The complaint seeks legal resolution and recognition of Cybershop's ownership of the "stamps.com" domain name and seeks unspecified monetary damages against the third party. On January 9, 2001, we filed a motion to dismiss the suit. On February 16, 2001, Cybershop filed an amended complaint, alleging new causes of action, including conversion, invasion of privacy, trespass, and private nuisance, and seeking declaratory judgment for return of the domain name registration to Cybershop. On March 5, 2001, we filed a motion to dismiss the amended complaint. The outcome of the litigation is uncertain, and we can give no assurance that Cybershop will not prevail. See "Risk Factors--Success by Cybershop in its suit against us seeking damages and recognition of its ownership of the domain name "stamps.com" could prevent us from using the domain name "stamps.com" and could require a change of name of the Company, severely harming our business or causing it to fail." On or about April 6, 2000, Metro Fulfillment, Inc. filed a lawsuit against Weigh-Tronix, Inc. for breach of contract, fraud, negligent misrepresentation, intentional inference with contract, negligent interference, breach of implied warranty and breach of express warranty. Metro Fulfillment, Inc. alleges that pursuant to its agreement with Weigh-Tronix, Inc., Metro Fulfillment, Inc. was not required to pay for postal scales that were purchased from Weigh-Tronix, Inc. until Metro Fulfillment, Inc. had actually sold those scales to end users. These scales were supposed to be sold through our Web site. Metro Fulfillment, Inc. further alleged that Weigh-Tronix, Inc. breached the agreement by seeking payment before the scales were actually sold to customers in breach of the agreement. Weigh-Tronix, Inc. in turn filed a third party complaint against us and Metro Fulfillment, Inc. for breach of contract and several common counts. The third party complaint seeks approximately $700,000.00 in compensatory damages, plus interest and attorney's fees. We have filed an answer to the third party complaint denying the allegations of the lawsuit. On February 28, 2001, Metro Fulfillment, Inc. filed a lawsuit against us stemming from services allegedly performed by Metro Fulfillment, Inc. under a Fulfillment Services Agreement. The complaint alleges claims for breach of contract, common counts and negligent misrepresentation. The complaint seeks damages of approximately $1.3 million. We have filed an answer to the complaint denying the allegations in the lawsuit. On April 18, 2001, Intuit, Inc. filed a suit against us for alleged breach of contract in the California Superior Court for the County of Santa Clara. The suit alleges that we improperly terminated our contract with Intuit and seeks damages of $4 million plus interest and costs associated with the lawsuit. We believe that the agreement was terminated on March 1, 2001 due to Intuit's failure to perform adequately under the contract, among other reasons. 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 Intuit will not prevail. 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 January 31, 2001, we issued Cydcor a warrant to purchase 2,281 shares of our common stock at a price per share of $3.906; on February 28, 2001, we issued Cydcor a warrant to purchase 4,846 shares of our common stock at a price per share of $2.970; and on March 31, 2001, we issued Cydcor a warrant to purchase 4,389 shares of our common stock at a price per share of $3.000. 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. 26 ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended March 31, 2001. ITEM 5. OTHER INFORMATION On April 27, 2001, we acquired certain intellectual property assets relating to Internet-based postage printing and management from E-Stamp Corporation, one of our former competitors. The assets that we acquired from E- Stamp Corporation include a portfolio of 31 patents and trademarks, including the E-Stamp name, and the E-Stamp.com Internet domain. We plan to use these intellectual property assets to expand the services available to our existing customer base and to target the larger market of small businesses and home offices. However, certain of the intellectual property rights we acquired from E-Stamp Corporation are the subject of a lawsuit brought by Pitney Bowes and could be determined by a court to be invalid or unenforceable. Such a determination could make the intellectual property rights we acquired worthless. See "Legal Proceedings." ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. Exhibit ------- Number Description ------ ----------- 10.63+ Asset Purchase Agreement dated April 27, 2001 by and between the Company and E-Stamp Corporation. 99.32 Press Release, dated April 30, 2001, announcing the acquisition by the Company of certain assets of E-Stamp Corporation. _____________ + Confidential treatment has been requested for certain confidential portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, 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. (b) Reports on Form 8-K: On March 12, 2001, the Company filed a report on Form 8-K relating to the cessation of EncrypTix, Inc.'s operations and the effectuation of a general assignment for the benefit of its creditors. 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STAMPS.COM INC. (Registrant) May 14, 2001 By: /s/ KENNETH MCBRIDE ------------------------ Kenneth McBride Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) INDEX TO EXHIBITS Exhibit ------- Number Description ------ ----------- 10.63+ Asset Purchase Agreement dated April 27, 2001 by and between the Company and E-Stamp Corporation. 99.32 Press Release, dated April 30, 2001, announcing the acquisition by the Company of certain assets of E-Stamp Corporation. __________ + Confidential treatment has been requested for certain confidential portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, 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.