-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OMQdO/KjuKk1uZ9qGSH3BV1yFYk7Z7GvA9oWGS+XUkqbo5DwQK9raCXMHXK73KQW sDCGFj2yPsx0BZSYuGtcWA== 0001017062-01-500846.txt : 20010815 0001017062-01-500846.hdr.sgml : 20010815 ACCESSION NUMBER: 0001017062-01-500846 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STAMPS COM INC CENTRAL INDEX KEY: 0001082923 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 770454966 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26427 FILM NUMBER: 1712051 BUSINESS ADDRESS: STREET 1: 3420 OCEAN PARK BOULEVARD STREET 2: SUITE 1040 CITY: SANTA MONICA STATE: CA ZIP: 90405 BUSINESS PHONE: 3105817200 MAIL ADDRESS: STREET 1: 2900 31ST STREET SUITE 150 CITY: SANTA MONICA STATE: CA ZIP: 90405 10-Q 1 d10q.txt STAMPS.COM QUARTERLY REPORT ENDED 06/30/2001 ================================================================================ 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 June 30, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ________________ to ________________ Commission file number 000-26427 --------------- 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 August 9, 2001, there were approximately 50,425,733 shares of the registrant's common stock issued and outstanding. ================================================================================ STAMPS.COM INC. FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED JUNE 30, 2001 TABLE OF CONTENTS Page ---- PART I. FINANCIAL INFORMATION........................................... 2 ITEM 1. FINANCIAL STATEMENTS........................................ 2 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................... 8 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.. 22 PART II. OTHER INFORMATION.............................................. 23 ITEM 1. LEGAL PROCEEDINGS........................................... 23 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS................... 25 ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................. 25 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 25 ITEM 5. OTHER INFORMATION........................................... 25 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 25 1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS STAMPS.COM INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2001 2000 --------- ------------ (unaudited) (In thousands) ASSETS Current assets: Cash and short-term investments.......................... $ 193,692 $ 243,929 Restricted cash.......................................... 3,889 4,010 Accounts receivable...................................... 1,740 2,546 Note Receivable from former officer, net of allowance.... 3,181 3,181 Prepaid expenses......................................... 1,211 5,185 --------- --------- Total current assets.................................... 203,713 258,851 Property and equipment, net.................................. 14,932 45,585 Goodwill and other intangible assets, net.................... 7,505 166,450 Other assets................................................. 6,570 16,052 --------- --------- Total assets............................................ $ 232,720 $ 486,938 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable......................................... 385 3,656 Accrued expenses......................................... 14,096 14,913 Deferred revenue......................................... -- 1,809 Current portion of long-term debt and capital leases..... 256 3,828 --------- --------- Total current liabilities.................................... 14,737 24,206 Long-term debt and capital leases, less current portion...... -- -- Commitments and contingencies................................ -- 5,286 Minority interest in consolidated subsidiary................. -- 34,765 Stockholders' equity: Common stock............................................. 50 49 Additional paid-in capital............................. 700,309 708,007 Notes receivable from stock sales..................... (101) (101) Deferred compensation.................................... (1,153) (11,642) Accumulated deficit...................................... (481,122) (273,632) --------- --------- Total stockholders' equity............................ 217,983 422,681 --------- --------- Total liabilities and stockholders' equity.......... $ 232,720 $ 486,938 ========= =========
The accompanying notes are an integral part of these financial statements. 2 STAMPS.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months ended June 30, Six Months ended June 30, ------------------------------------ ------------------------------------- 2001 2000 2001 2000 ---------------- ---------------- ---------------- --------------- (in thousands, except per share data) (in thousands, except per share data) Revenues............................... $ 5,069 $ 3,674 $ 10,328 $ 5,710 Cost of revenues....................... 1,772 5,719 4,958 9,453 ---------------- ---------------- ---------------- --------------- Gross profit...................... 3,297 (2,045) 5,370 (3,743) Operating expenses: Sales and marketing............... 2,916 20,498 7,204 42,998 Research and development.......... 2,192 8,025 6,274 11,420 General and administrative........ 5,700 8,541 12,502 14,381 Amortization and write-off of goodwill and other intangibles... -- 13,778 172,817 18,403 Restructuring and writedown charges.......................... 15,834 -- 26,855 -- Acquired in-process research and development.................. -- -- -- 2,000 Deferred compensation expense..... 692 4,146 2,137 5,899 Loss from EncrypTix............... -- 5,601 -- Loss from sale of iShip........... 9,076 -- 9,076 -- ---------------- ---------------- ---------------- --------------- Total operating expenses...... 36,410 54,988 242,466 95,101 ---------------- ---------------- ---------------- --------------- Loss from operations................... (33,113) (57,033) (237,096) (98,844) Other income (expense): Interest expense.................. (7) (118) (20) (164) Interest income................... 2,362 4,857 6,431 9,825 Gain from shut down of EncrypTix.. -- -- 23,195 -- ---------------- ---------------- ---------------- --------------- Total other income (expense), net.. 2,355 4,739 29,606 9,661 ---------------- ---------------- ---------------- --------------- Net loss............................... $(30,758) $(52,294) $(207,490) $(89,183) ================ ================ ================ =============== Basic and diluted net loss per share... $ (0.62) $ (1.09) $ (4.22) $ (1.96) ================ ================ ================ =============== Weighted average shares outstanding used in basic and diluted per-share calculation........................... 49,354 47,956 49,168 45,488 ================ ================ ================ ===============
The accompanying notes are an integral part of these financial statements. 3 STAMPS.COM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months ended June 30, ------------------------- 2001 2000 --------- -------- (In thousands) Operating activities: Net loss.................................................... $(207,490) $(89,183) Adjustments to reconcile net loss to net cash used in operating activities: Provision for doubtful accounts.......................... 373 Depreciation and amortization............................ 12,353 21,267 Write-down of goodwill and other intangibles............. 163,634 Amortization of deferred compensation.................... 2,137 5,899 Charge for acquired in-process research and development.. 2,000 Loss on disposal and writedown of assets................. 31,914 -- Loss on sale of iShip.................................... 9,076 -- Net gain on shut down of EncrypTix....................... (23,195) -- Changes in operating assets and liabilities, net of effects of acquisition: Accounts receivable..................................... 433 (1,246) Prepaid expenses........................................ 3,750 7,199 Other assets............................................ 384 -- Accounts payable........................................ (3,271) (2,662) Minority interest....................................... (11,570) -- Accrued expenses........................................ (10,237) 3,101 Deferred revenue........................................ (1,809) 3,146 --------- -------- Net cash used in operating activities......................... (33,518) (50,479) Investing activities Sale (purchase) of short-term investments, net.............. 98,743 (40,316) Sale of restricted cash investments......................... 121 Goodwill and other intangible assets........................ 2,800 -- Purchase of intellectual property........................... (7,500) Acquisition of property and equipment....................... (3,938) (20,018) Acquisition of iShip.com, net of cash acquired................ (2,111) Other....................................................... (2,471) --------- -------- Net cash provided by (used in) investing activities........... 90,226 (64,916) Financing activities Repayment of long-term debt and capital leases.............. (8,858) (1,054) Repayment of line of credit................................. (1,333) Issuance of redeemable preferred stock of subsidiary, net... 34,784 Issuance of common stock under ESPP......................... 175 -- Issuance of common stock.................................... 481 630 Repurchase of common stock.................................. -- 939 --------- -------- Net cash (used in) provided by financing activities........... (8,202) 33,966 --------- -------- Net increase (decrease) in cash and cash equivalents.......... 48,506 (81,429) Cash and cash equivalents at beginning of period.............. 69,536 326,820 --------- -------- Cash and cash equivalents at end of period.................... 118,042 245,391 Short term investments........................................ 75,650 88,242 --------- -------- Cash and short term investments............................... $ 193,692 $333,633 ========= ========
The accompanying notes are an integral part of these financial statements. 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ALL INFORMATION WITH RESPECT TO June 30, 2001 AND 2000 IS UNAUDITED) 1. Summary of Significant Accounting Policies Basis of Presentation The financial statements are unaudited, other than the balance sheet at December 31, 2000, and, in the opinion of management, reflect all adjustments that are necessary for a fair presentation of the results for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. These financial statements should be read in conjunction with the financial statements as of December 31, 2000 and related notes included in the Company's Annual Report on Form 10-K/A filed with the Securities and Exchange Commission (the "SEC") on April 27, 2001. Principles of Consolidation The consolidated financial statements include the accounts of Stamps.com Inc. (the "Company") and its wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates and such differences may be material to the financial statements. Reclassifications Certain prior period balances have been reclassified to conform to current period presentation. 2. Writedown of Intangible Assets related to iShip.com On March 7, 2000, the Company completed the acquisition of iShip.com, Inc.("iShip"), a development stage enterprise that developed Internet-based shipping technology. The acquisition was accounted for as a purchase in accordance with the provisions of Accounting Principles Board Opinion ("APB") No. 16. Under the purchase method of accounting, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. On March 2, 2001, United Parcel Service and Mail Boxes Etc. USA, Inc. jointly announced that United Parcel Service would acquire Mail Boxes Etc. USA, Inc. Mail Boxes Etc. USA, Inc. represented a significant future source of revenue and market leverage for the Company's enterprise shipping services that were acquired in the iShip acquisition. United Parcel Service also informed the Company that it is unlikely to have Mail Boxes Etc. USA, Inc. continue to use the Company's enterprise shipping services in the future. As a result of the March 2001 events, the Company reduced goodwill and other intangibles associated with the purchase of iShip to reflect the present value of future cash flows, net of estimated transaction costs. This resulted in a non-cash charge of $163.6 million in the first quarter of 2001. On May 18, 2001, the Company completed the sale of its iShip multi-carrier shipping service assets to United Parcel Service for $2.8 million. The difference between the sale price of iShip and the assets value attributed to iShip by the Company resulted in a non-cash charge of $9.1 million in the second quarter of 2001. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ALL INFORMATION WITH RESPECT TO June 30, 2001 AND 2000 IS UNAUDITED) 3. EncrypTix Ceases Operations On November 16, 1999, the Company announced the formation of a subsidiary, EncrypTix, Inc., to develop secure printing opportunities in the events, travel and financial services industries. In February 2000, the Company invested $1.0 million and granted EncrypTix a license to its technology in those three specific fields of use. EncrypTix raised approximately $35 million in private financing. On March 12, 2001, EncrypTix ceased operations and effected a general assignment of its assets for the benefit of its creditors. EncrypTix took this action due to the inability to secure additional funding. The Company does not expect to be impacted by any of EncrypTix's resulting liabilities. Additionally, the Company terminated its license agreement with EncrypTix and maintains limited licenses to various EncrypTix intellectual property. Due to this cessation in business, the Company has written off the invested $1.0 million and taken a one time gain to eliminate the cumulative loss from EncrypTix in the amount of $23.2 million in the first quarter of 2001. 4. Work Force Restructuring In February 2001, in an effort to more rapidly decrease its operating losses and enhance its ability to achieve profitability sooner, the Company reduced its total number of employees by approximately 50% to 150 employees, including full time, part time and contract employees. The Company also continued other cost cutting efforts, including the termination of fixed-cost marketing deals and the redeployment of sales and marketing expenditures to programs that have a higher return on investment. The Company took a one-time charge of $11.0 million in the first quarter of 2001 consisting of $7.7 million related to restructuring employee severance and fixed asset write-offs, $2.3 million related to the termination of certain contractual arrangements, $1.0 million related to the write-off of an investment in EncrypTix. In the quarter ended June 30, 2001, the Company continued with its cost cutting efforts resulting in a one-time charge of $15.8 million consisting of $14.7 million in restructuring employee severance, fixed asset write-offs and lease obligations for discontinued office space, and $1.1 million related to the termination of certain contractual arrangements and additional fixed asset write-offs. 5. Legal Proceedings Please refer to "Part II--Other Information--Item 1--Legal Proceedings" of this report for a discussion of legal proceedings. 6. Computation Of Historical Net Loss Per Share Basic earnings per share is computed by dividing the net earnings available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing the net earnings for the period by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares, consisting of unvested restricted common stock and incremental common shares issuable upon the exercise of stock options and warrants and upon conversion of convertible preferred stock, are excluded from the diluted earnings per share calculation if their effect is anti-dilutive. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ALL INFORMATION WITH RESPECT TO June 30, 2001 AND 2000 IS UNAUDITED) 7. Related Party Transactions In February 2000, John M. Payne (former Chairman of the Board, Chief Executive Officer and director) purchased 187,000 shares of the Company's common stock on the open market for an aggregate purchase price of approximately $6.0 million. Mr. Payne purchased the shares on margin and the margin account was secured by a pledge of 1,467,500 shares of the Company's common stock held by Mr. Payne, of which approximately 593,750 shares are subject to repurchase by the Company. As of October 31, 2000, Mr. Payne's total indebtedness under the margin account was approximately $6.7 million, which amount consists of the purchase price of the 187,000 shares, accrued interest on the purchase price and other fees and indebtedness incurred by Mr. Payne, less the proceeds from his sale of the Company's common stock during the third quarter. In April 2000, the Company agreed to guarantee Mr. Payne's margin account in the event the value of the shares pledged was insufficient collateral to secure the indebtedness outstanding under the margin account. The guarantee was in the form of a single-purpose line of credit extended to Mr. Payne which would have a balance due to the Company to the extent the value of the pledged shares is insufficient collateral to secure indebtedness outstanding under the margin account. This line of credit was secured by all of Mr. Payne's assets. Mr. Payne agreed to sell a minimum of 100,000 shares of common stock during each fiscal quarter (beginning the third fiscal quarter of 2000) in order to pay down the indebtedness outstanding under the margin account. Pursuant to this agreement, Mr. Payne sold 7,500 shares at a price of $4.50 per share and 95,500 shares at a price of $4.3125 per share on August 29, 2000. Mr. Payne also sold 15,000 shares at a price of $2.94 per share on November 15, 2000 and 85,000 shares at a price of $3.02 per share on November 17, 2000. The sale of these 200,000 shares during the third and fourth fiscal quarters resulted in aggregate repayment of indebtedness in the amount of approximately $730,000. In November 2000, Mr. Payne executed a promissory note in favor of the Company in the amount of $6.6 million. The payment of the note was secured by a pledge of all shares of the Company's common stock and all shares of EncrypTix, Inc. held by Mr. Payne. The entire principal balance and all accrued and unpaid interest was due and payable on June 30, 2001. Mr. Payne is currently in default. The Company and Mr. Payne are currently in negotiations to agree on payment terms for the amount due the Company as of June 30, 2001. The company has established a reserve of $3,346,000 related to the note receivable from Mr. Payne. The reserve is calculated as the difference between the note's carrying value, $6,527,000, and the underlying value of the stock on December 31, 2000, $3,181,000 (based on a price of $2 25/32 per share). 8. Acquisition of E-Stamp Corporation Assets On April 27, 2001, the Company acquired 31 patents and other intellectual property rights from E-Stamp Corporation, including the E-Stamp name and rights to the E-Stamp.com Internet domain for $7.5 million. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to expectations concerning matters that are not historical facts. Words such as "projects," "believes," "anticipates," "estimates," "plans," "expects," "intends," and similar words and expressions are intended to identify forward-looking statements. Although Stamps.com believes that such forward-looking statements are reasonable, we cannot assure you that such expectations will prove to be correct. Factors that could cause actual results to differ materially from such expectations are disclosed herein including, without limitation, in the "Risk Factors" beginning on page 11. All forward-looking statements attributable to Stamps.com are expressly qualified in their entirety by such language. Stamps.com does not undertake any obligation to update any forward-looking statements. You are also urged to carefully review and consider the various disclosures we have made which describe certain factors which affect our business, including the risk factors set forth at the end of Part I, Item 2 of this Report. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes thereto. Stamps.com, Stamps.com Internet postage(TM) and the Stamps.com logo are our trademarks. This Report also includes trademarks of entities other than Stamps.com. Overview Stamps.com(TM) provides easy, convenient and cost-effective Internet-based services for mailing letters, packages or parcels anytime and anywhere in the United States. Our core postage services are designed to allow individual consumers or employees of small businesses to print US postage or shipping labels, schedule a pick-up, track a package and apply enterprise-wide business rules to manage and account for mailing and shipping costs. With all of our services, no additional hardware is required; a customer can access our services through an existing Internet connection and print postage or shipping labels with ordinary laser or inkjet printers. Recent Developments In the quarter ended June 30, 2001, we have continued to implement our new business strategy begun in October 2000 to enhance our ability to achieve profitability by focusing on our core business of Internet postage. In May 2001, in an effort to focus on our postage services for small business and home offices, we sold the iShip multi-carrier shipping service assets to United Parcel Service for $2.8 million. We also continued our cost cutting efforts, including the termination of fixed-cost marketing arrangements, and the redeployment of sales and marketing expenditures to programs that have a higher return on investment. In May, 2001, we terminated our marketing relationship with Cydcor Limited following our evaluation of our relationship. We expect to continue our current marketing efforts and focus the Company on its core mailing and shipping services for small business and home offices. In the quarter ended June 30, 2001, we experienced significant changes at the senior management level. Following the sale of the Company's iShip assets in May 2001, John A. Duffy and Stephen M. Teglovic, who served on the Board of Directors after the acquisition of iShip, resigned from our Board of Directors. In June 2001, Carolyn M. Ticknor and Thomas N. Clancy resigned from the Board of Directors. We do not, at this time, intend to fill the vacancies created by the board resignations. We expect to continue to experience changes in personnel at the senior management and Board level as part of our restructuring process. Bruce Coleman remains as our interim Chief Executive Officer, and we have not yet found a permanent replacement. On April 27, 2001, we acquired certain intellectual property assets relating to Internet-based postage printing and management from E-Stamp Corporation, one of our former competitors for a purchase price of $7.5 million. The portfolio of 31 patents and trademarks that we acquired from E-Stamp Corporation include the E-Stamp name and rights to the E-Stamp.com Internet domain. We plan to use these intellectual property assets to expand the services available to our existing customer base and to target the larger market of small businesses and 8 home offices. However, certain of the intellectual property rights we acquired from E-Stamp Corporation are the subject of a lawsuit brought by Pitney Bowes and could be determined by a court to be invalid or unenforceable. Such a determination could make the intellectual property rights we acquired worthless. Internet Postage Services We offer an Internet postage services targeted at consumers and small businesses with less than 100 employees. Service fee revenues for our Internet postage services are generated from the two service plans that we are currently offering to our users, the Simple Plan and the Power Plan. Under the Simple Plan, a user purchases postage at face value for a monthly convenience fee of 10% of the value of postage printed. Prior to November 2000, there was a monthly minimum fee of $1.99 and a monthly maximum fee of $19.99 under the Simple Plan. Beginning in November 2000, the monthly minimum fee was increased to $4.49 for new customers and the monthly maximum fee was discontinued. All $1.99 customers who existed at the time of the price increase have been converted to the new price. The Power Plan was introduced at the beginning of our second quarter of 2000 in response to customer requests for a fixed monthly pricing plan with unlimited usage. Under the Power Plan, a customer may purchase and use unlimited postage at face value, for a flat monthly fee that ranges from $15.99 to $18.99. For the second quarter of 2001, over 50% of our service fee revenue was generated from Power Plan customers. Revenues are also generated from controlled access advertising to our existing customer base, and revenue share and bounty arrangements. During the second quarter of 2001, we acquired 43,000 gross customers and ended the quarter at 307,000 active customers, down from 323,000 customers at the end of the first quarter. Results of Operations Revenue. Revenue for the three months ended June 30, 2001 was exclusively from the Internet postage business due to the divestiture of the shipping operation. As such, revenue from the Internet postage business was up 132% year over year to $5.1 million from $2.2 million in the second quarter ending June 30, 2000, while total revenue was up 38% year over year to $5.1 million from $3.7 million in the second quarter ending June 30, 2000. Revenue for the six months ended June 30, 2001 was $10.3 million, compared to $5.7 million for the six months ended June 30, 2000. Increase in Revenue is primarily due to the increased customer count. Cost of Revenues. Cost of revenues principally consists of customer service, promotional expenses, and system operating costs. Cost of revenues was $1.8 million for the three months ended June 30, 2001, compared to $5.7 million for the three months ended June 30, 2000. Cost of revenues was $5.0 million for the six months ended June 30, 2001, compared to $9.5 million for the six months ended June 30, 2000. During 2001, our cost of revenues decreased primarily due to increased automation and reduced labor costs in our customer support operations. We also reduced promotional expenses as we decreased the amount of free postage given to each customer. We also implemented a new type of free postage that expires after a period of 30 days, resulting in less postage used by each individual customer. Sales and Marketing. Sales and marketing expenses principally consist of costs associated with strategic partnership relationships and compensation and related expenses for personnel engaged in marketing and business development activities. Sales and marketing expenses were $2.9 million compared to $20.5 million for the three months ended June 30, 2001 and 2000, respectively. Sales and marketing expenses were $7.2 million compared to $43.0 million for the six months ended June 30, 2001 and 2000, respectively. The decrease in sales and marketing expenses resulted from fewer sales and marketing personnel, as well as a more focused spend of discretionary marketing dollars on programs that provide a higher return on investment. Research and Development. Research and development expenses principally consist of compensation for personnel involved in the development of the Internet postage services, expenditures for consulting services and third-party. Research and development expenses for the three months ended June 30, 2001 were $2.2 million compared to $8.0 million for the three months ended June 30, 2000. Research and development expenses for the six months ended June 30, 2001 were $6.3 million compared to $11.4 million for the six months ended June 30, 2000. The decrease is primarily due to increased cost control efforts and the reduction in headcount. 9 General and Administrative. General and administrative expenses principally consist of compensation and related costs for executive and administrative personnel, fees for legal and other professional services, and depreciation of equipment and software used for general corporate purposes. General and administrative expenses for the three months ended June 30, 2001 and 2000 were $5.7 million and $8.5 million, respectively. General and administrative expenses for the six months ended June 30, 2001 and 2000 were $12.5 million and $14.4 million, respectively. The decrease is primarily due to increased cost control efforts and the reduction in headcount. Restructuring and Write-down Charges. We continued our cost cutting efforts, including the termination of fixed-cost marketing deals, and the redeployment of sales and marketing expenditures to programs that have a higher return on investment. In addition the $11.0 million charge taken in the first quarter of 2001, we took a charge in the second quarter of 2001 of $15.8 million consisting of $14.7 million in restructuring employee severance, fixed asset write-offs and lease obligations for discontinued office space, and $1.1 million related to the termination of certain contractual arrangements and additional fixed asset write-offs. Deferred Compensation Amortization. During 1998 and 1999, we granted stock options with exercise prices that were less than the estimated fair value of the underlying shares of common stock for accounting purposes on the date of grant. This results in amortization expenses of deferred compensation over the period that these options vest, which ranges from three to four years from the date of grant. Deferred compensation amortization for the three months ended June 30, 2001 and 2000 was $692,000 and $4.1 million, respectively. Deferred compensation amortization for the six months ended June 30, 2001 and 2000 was $2.1 million and $5.9 million, respectively. This decrease was a result of fewer personnel at Stamps.com following our October 2000 and February 2001 reductions in force. Loss from Sale of iShip. On May 18, 2001, the Company completed the sale of its iShip multi-carrier shipping service assets to United Parcel Service for $2.8 million. The difference between the sale price of iShip and the assets value attributed to iShip by the Company resulted in a non-cash charge of $9.1 million in the second quarter of 2001. The second quarter charge of $9.1 million was in addition to the non-cash charge of $163.6 million recorded in the first quarter of 2001 related to our reduction of goodwill and other intangibles associated with the purchase of iShip. Other Income (Expense). Other income (expense) consisted of income from cash equivalents and short term investments, less interest expense related to financing obligations. Other income (expense) for the three months ended June 30, 2001 and 2000 was $2.4 million and $4.7 million, respectively. This decrease is due to declining interest rates and a reduction in the amount of capital invested. Other income (expense) for the six months ended June 30, 2001 and 2000 was 29.6 million and 9.7 respectively. This increase is due to a one-time gain related to the shutdown of Encryptix in the first quarter of 2001. Liquidity and Capital Resources As of June 30, 2001 we had approximately $194 million cash and short term investments, down from $244 million as of December 31, 2000 due to our operating losses. We regularly invest excess funds in short-term money market funds and commercial paper and do not engage in hedging or speculative activities. In the first quarter of 2000, our majority-owned subsidiary, EncrypTix, raised approximately $34.8 million in private financing from a group of financial and strategic investors. The proceeds of this financing were used by EncrypTix for research and development, sales and marketing and general working capital purposes. On March 12, 2001, EncrypTix ceased operations and effected a general assignment of its assets for the benefit of its creditors. EncrypTix took this action due to the inability to secure additional funding. We do not expect to be impacted by any of EncrypTix's resulting liabilities. Additionally, we terminated our license agreement with EncrypTix and maintain limited licenses to various EncrypTix intellectual property. In May 1999, we entered into a facility lease agreement for the corporate headquarters with aggregate lease payments of approximately $4.8 million through May 2004. Also, in March 2000 we entered into a facility lease agreement for a Bellevue, Washington facility with aggregate lease payments of approximately $17 million. We are actively marketing to sublet the excess space that resulted from our October 2000 and February 2001 restructurings. 10 Net cash used in operating activities was $33.5 million and $50.5 million for the six months ended June 30, 2001 and 2000, respectively. The decrease in net cash used in operating activities resulted primarily from cost-cutting activities, including the restructuring that took place in the fourth quarter of 2000 and in the first quarter of 2001. Net cash provided by investing activities was $90.2 million for the six months ended June 30, 2001 and net cash used in investing activities was $64.9 million for the six months ended June 30, 2000. The increase in net cash provided by investing activities resulted primarily from the sale of short-term investments during the first quarter of 2001. Net cash used by financing activities was $8.2 million for the six months ended June 30, 2001 as compared to net cash provided by financing activities of $34.0 million for the six months ended June 30, 2000. The difference resulted primarily from the issuance of redeemable preferred stock of a subsidiary during the first quarter of 2000. We anticipate that our current cash balances will be sufficient to fund our operations beyond 2002. We may require additional capital to fund our business, and we cannot be certain that additional funds will be available on satisfactory terms when needed, if at all. See "Risk Factors--We may need to raise additional capital in the future through the issuance of additional equity or convertible debt securities or by borrowing money, and additional funds may not be available on terms acceptable to us." RISK FACTORS You should carefully consider the following risks and the other information in this Report and our other filings with the SEC before you decide to invest in our company or to maintain or increase your investment. The risks and uncertainties described below are not the only ones facing Stamps.com. Additional risks and uncertainties may also adversely impact and impair our business. If any of the following risks actually occur, our business, results of operations or financial condition would likely suffer. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment. This Report contains forward-looking statements based on the current expectations, assumptions, estimates and projections about Stamps.com and the Internet industry. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those discussed in these forward-looking statements as a result of certain factors, as more fully described in this section and elsewhere in this Report. Stamps.com does not undertake to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. Risks Related to Our Business Because we have a limited operating history, there is limited information upon which you can evaluate our business. We are still in the early stages of our development, and our limited operating history makes it difficult to evaluate our business and prospects. Our Internet postage services have only been available since October 22, 1999. Due to our limited operating history, it is difficult or impossible to predict future results of operations, including operating expenses and revenues. Moreover, due to our limited operating history, any evaluation of our business and prospects must be made in light of the risks and uncertainties often encountered by early-stage companies in Internet-related markets. Many of these risks are discussed in the subheadings below, and include our (a) ability to meet and maintain government specifications for our Internet postage services, specifically US Postal Service requirements; (b) complete dependence on Internet postage services that currently do not have substantial market acceptance; (c) potential need to expand our sales and support organizations; (d) ability to establish and promote our brand name; (e) ability to expand our operations to meet the commercial demand for our services, when it arises; (f) development of and reliance on strategic and distribution relationships; (g) ability to prevent and respond quickly to service interruptions; (h) ability to minimize fraud and other security risks; and (i) ability to compete with companies with greater capital resources and brand awareness. 11 If we are unsuccessful in addressing these risks or in executing our new business strategy, our business, results of operations and financial condition would be materially and adversely affected. Our revenues and operating results may fluctuate in future periods and we may fail to meet expectations, which may cause the price of our common stock to decline. Given our limited operating history, we have not generated any significant revenues from our operations. Our revenues and operating results are difficult to predict and may fluctuate significantly from period-to-period particularly because our Internet postage services is new and our prospects uncertain. If revenues or operating results fall below the expectations of investors or public market analysts, the price of our common stock could decline substantially. Factors that might cause our revenues, margins and operating results to fluctuate include the factors described in the subheadings below as well as: (a) the success of our Internet postage services; (b) the costs of defending ourselves in litigation; (c) the costs of our marketing programs to establish and promote the Stamps.com brand name; (d) the demand for our Internet postage services; (e) our ability to develop and maintain strategic distribution relationships; (f) the number, timing and significance of new products or services introduced by both us and our competitors; (g) our ability to develop, market and introduce new and enhanced services on a timely basis; (h) the level of service and price competition; (i) the increases in our operating expenses; (j) US Postal Service regulation and policies; (k) the success of implementing our new business strategy and of reducing expenses; and (l) general economic factors. Our cost of revenues includes costs for systems operations, customer service, Internet connection and security services; all of these costs will fluctuate depending upon the demand for our services. In addition, a substantial portion of our operating expenses is related to personnel costs, marketing programs and overhead, which cannot be adjusted quickly and are therefore relatively fixed in the short term. Our operating expense levels are based, in significant part, on our expectations of future revenues. If our expenses precede increased revenues, both gross margins and results of operations would be materially and adversely affected. Moreover, our new business strategy of reducing expenses may directly and correspondingly cause our revenues to substantially decline. Due to the foregoing factors and the other risks discussed in this annual report, you should not rely on period-to-period comparisons of our operating results as an indication of future performance. We have a history of losses, expect to incur losses in the future and may never achieve profitability, which may reduce the trading price of our common stock. Since we began operations in 1998, we have incurred substantial operating losses in every period. As a result of accumulated operating losses, we have an accumulated deficit of $481 million as of June 30, 2001. Since inception, we have funded our business through selling our stock, not from cash generated by our business. We expect to continue to incur significant sales and marketing, research and development, and administrative expenses and therefore could continue to experience net losses and negative cash flows for several years, and perhaps for the duration of our corporate existence. For the quarter ended June 30, 2001, we only generated $5.1 million in revenues. Even if sales of our products and services begin to grow, we may not generate sufficient revenues to achieve profitability in the future. Overall, we will need to generate significant revenues and successfully implement our new business strategy to achieve and maintain profitability. We recently implemented new pricing plans that may adversely affect our future revenues and profitability. Our ability to generate gross margins depends upon the ability to generate significant revenues from a large base of active customers. We recently changed our pricing plans for our Internet postage services. In order to attract customers in the future, we may run special promotions and offer discounts on fees, postage and supplies. We cannot be sure that customers will be receptive to the new fee structure for our Internet postage services or to the fee structure that we will implement. Even if we are able to establish a sizeable base of users, we still may not generate sufficient gross margins to become profitable. In addition, our ability to generate revenues or achieve profitability could be adversely affected by special promotions or additional changes to our pricing plans. 12 If our new business strategy is not successfully implemented, our financial condition and results of operations will be adversely affected. In the quarter ended June 30, 2001, we have continued to implement our new business strategy begun in October 2000 to enhance our ability to achieve profitability by focusing on our core business of Internet postage services. We have continued our cost cutting efforts, including the termination of fixed-cost marketing arrangements, and the redeployment of sales and marketing expenditures to programs that have a higher return on investment. Our new strategy entails risks relating to our ability to attract our targeted customers to offset potential customer losses in other areas and the ability of our new management team to implement this strategy. There is no guarantee our new management team will be able to effectively or efficiently implement our new business strategy or that, if effectively implemented, our business strategy will benefit us or help us achieve profitability. Failure to execute our plan to significantly reduce expenses or to attract new customers in high margin lines of business in significant numbers will adversely effect our financial condition and results of operations. In addition, our new business strategy could result in a substantial loss of customers which would have an adverse impact on our financial condition and results of operations. Recent personnel changes may interfere with our operations. In the quarter ended June 30, 2001, we experienced significant changes at the board of directors level. Following the sale of the Company's iShip assets in May 2001, John A. Duffy and Stephen M. Teglovic, who served on the Board of Directors after the acquisition of iShip, resigned from our Board of Directors. In June, 2001, Carolyn M. Ticknor and Thomas N. Clancy resigned from the Board of Directors. We do not, at this time, intend to fill the vacancies created by the board resignations. We expect to continue to experience changes in personnel at the senior management and Board level as part of our restructuring process. Bruce Coleman remains as our interim Chief Executive Officer, and we have not yet found a permanent replacement. If we fail to attract and retain a qualified individual as our Chief Executive Officer, our business, financial condition and results of operations will be adversely affected. If our new business strategy is not successful, we will not achieve profitability as currently planned, if at all. If we do not successfully attract and retain skilled personnel for permanent management and other key personnel positions, we may not be able to effectively implement our business plan. Our success depends largely on the skills, experience and performance of the members of our senior management and other key personnel. Any of the individuals can terminate his or her employment with us at any time. If we lose additional key employees and are unable to replace them with qualified individuals, our business and operating results could be seriously harmed. In addition, our future success will depend largely on our ability to continue attracting and retaining highly skilled personnel. As a result, we may be unable to successfully attract, assimilate or retain qualified personnel. Further, we may be unable to retain the employees we currently employ or attract additional personnel. The failure to attract and retain the necessary personnel could seriously harm our business, financial condition and results of operations. We can not predict the value of our acquisition of certain intellectual property assets of E-Stamp Corporation. As described under "Recent Developments," we acquired certain intellectual property assets relating to Internet-based postage printing and management from E-Stamp Corporation, one of our former competitors. There can be no assurance that the intellectual property assets we acquired will provide value to our company or will help us to achieve profitability as currently planned, if at all. In addition, certain of the intellectual property rights we acquired from E-Stamp Corporation are the subject of a lawsuit brought by Pitney Bowes and could be determined by a court to be invalid or unenforceable. Such a determination could make the intellectual property rights we acquired worthless. See "Legal Proceedings." 13 The success of our business will depend upon acceptance by customers of our Internet postage services. We expect that our Internet postage services will generate a significant portion of our near-term future revenues. Accordingly, we depend heavily on the commercial acceptance of our Internet postage services. If we fail to successfully gain commercial acceptance of our Internet postage services, we will be unable to generate significant revenues. To date, a substantial market for Internet postage has not developed, and we cannot assure you that it will develop. More specifically, we cannot predict if our target customers will choose the Internet as a means of purchasing postage, or if customers will be willing to pay a fee to use our service, or if potential users will select our system over our competitors' or over alternative methods such as online invoicing, bill payment and financial transactions. The success of our business will depend upon our ability to make our Internet postage services widely available, and to achieve widespread adoption of our services. We face numerous risks in conjunction with the introduction, sale and commercial availability of our services because of our very limited experience with the commercial rollout and use of our services. Specifically, our Internet postage service was introduced on October 22, 1999. As a result, we cannot be sure that our services will be widely available or adopted, that they will successfully process large numbers of user transactions or that our services will contain features that appeal to the broad range of customers that we target. If we experience problems with the availability, adoption, scalability or functionality of our services or if we are unable to offer attractive service enhancements in a timely manner, our ability to attract and retain customers and our results of operations will be adversely impacted. If we do not achieve the brand recognition necessary to succeed in the Internet postage markets, our business will suffer. We must quickly build our Stamps.com brand to gain market acceptance for our services. We believe it is imperative to our long-term success that we obtain significant market share for our services before our competitors do. We must make substantial expenditures on product development, strategic relationships and marketing initiatives in an effort to establish our brand awareness. In addition, we must devote significant resources to ensure that our users are provided with a high quality online experience supported by a high level of customer service. We cannot be certain that we will have sufficient resources to build our brand and realize commercial acceptance of our services. In addition, our new business strategy of reducing expenses could limit our ability to establish our brand awareness. If we fail to gain market acceptance for our services, our business will suffer dramatically or may fail. If we fail to effectively market and sell our Internet postage service, we may never achieve profitability and our business will be substantially harmed and could fail. In order to acquire customers and achieve wide distribution and use of our services, we must develop and execute cost-effective marketing campaigns and sales programs. Given the limited amount of time that our services have been commercially available, if at all, we have very limited experience conducting marketing campaigns. In addition, we have recently increased our emphasis on direct selling efforts and have only recently retained the resources necessary to support a direct sales channel. However, we have very limited experience regarding our ability to acquire customers through a direct sales channel. In connection with our new business strategy, we have significantly reduced our marketing budget, which could prevent us from pursuing certain marketing campaigns and sales programs. As a result of these limited marketing and sales experiences, and our reduced marketing budget, we cannot predict our ability to attract customers for our services, and we may fail to generate significant interest in any of our services. Furthermore, we may be unable to generate significant interest in our services in a cost-effective manner. If we fail to generate interest in our services or to acquire customers in a cost-effective manner, our results of operations will be adversely affected and we may never achieve profitability. If we fail to meet the demands of our customers, our business will be substantially harmed and could fail. Our Internet postage services must meet the commercial demands of our customers, which are expected to range from small businesses to large enterprises. We cannot be sure that our services will appeal to or be adopted by 14 such a wide range of customers. In addition, given our limited experience selling our services to and implementing our services with enterprise customers, we cannot predict the length of enterprise sales cycles, the implementation times for our services or the extent to which an enterprise will employ our services. Our technology also may not be capable of servicing the needs of these large enterprise customers. Moreover, our ability to obtain and retain customers depends on our customer service capabilities. As part of our new business strategy, we have significantly reduced our support offerings. If we are unable at any time to address customer service issues adequately or to provide a satisfactory customer experience for current or potential customers, our business and reputation may be harmed. If we experience extensive interest in our services, we may fail to meet the expectations of customers due to limited experience in operating our services and the strains this demand will place on our Web site, customer service operations, professional services group, network infrastructure or systems. If we fail to meet the demands of our customers or if our customers implement and employ our services more slowly than we expect, our business, results of operation and ability to achieve profitability will be negatively affected. If we cannot grow our business, and effectively manage that growth, our business will be adversely affected and could fail. Our new business strategy of significantly reducing expenses could have a substantial impact on our ability to develop and introduce new products and services; attract, serve and retain new customers; reliably improve our Web site, network infrastructure and systems; implement new systems, procedures and controls; and increase brand awareness. If our business begins to grow, we may not be able to manage our growth effectively. A period of business expansion could place a significant strain on our managerial, operational and financial resources. Our personnel, systems, procedures and controls may be inadequate to support our future operations. If we are unable to manage our growth effectively or experience disruptions during periods of expansion, our business will suffer and our financial condition and operating results will be seriously affected. Success by Pitney Bowes in its suits against us alleging patent infringement could prevent us from offering our Internet postage services and severely harm our business or cause it to fail. On June 16, 1999, Pitney Bowes sued us for alleged patent infringement in the United States District Court for the District of Delaware. The suit originally alleged that we are infringing two patents held by Pitney Bowes related to postage application systems and electronic indicia. The suit seeks treble damages, a preliminary and permanent injunction from further alleged infringement, attorneys' fees and other unspecified damages. We answered the complaint on August 6, 1999, denying the allegations of patent infringement and asserting a number of affirmative defenses. Pitney Bowes filed a similar complaint in early June 1999 against one of our competitors, E-Stamp Corporation, alleging infringement of seven Pitney Bowes patents. On April 13, 2000, Pitney Bowes asked the court for permission to amend its complaint to drop allegations of patent infringement with respect to one patent and to add allegations of patent infringement with respect to three other patents. On July 28, 2000 the court entered Pitney Bowes' amended complaint. On June 18, 2001, E- Stamp and Pitney Bowes agreed to settle their litigation. On September 18, 2000 Pitney Bowes filed another patent infringement lawsuit against us in the United States District Court for the Eastern District of Texas, alleging that we are infringing four patents owned by Pitney Bowes related to multi-carrier shipping. The suit seeks unspecified damages and a permanent injunction from further alleged infringement. We answered the complaint on December 1, 2000, denying the allegations of patent infringement and asserting a number of affirmative defenses. The United Parcel Service acquired our iShip multi-carrier shipping service assets on May 18, 2001. On June 14, 2001, we filed a patent infringement lawsuit against Pitney Bowes in the United States District Court for the Central District of California, alleging that Pitney Bowes ClickStamp Online service infringes four patents we own. The suit seeks treble damages, an injunction from further infringement, attorneys' fees and other damages. On August 8, 2001, Pitney Bowes answered the complaint, denying our allegations of patent infringement and asserting a number of affirmative defenses. The outcome of our litigation against Pitney Bowes is uncertain. Therefore, we can give no assurance that Pitney Bowes will not prevail in its suits against us. See "Legal Proceedings." If Pitney Bowes prevails in its suits against us, we may be prevented from selling postage on the Internet. Alternatively, the Pitney Bowes suits could result in limitations on how we implement our service, delays and costs 15 associated with redesigning our service and payments of license fees and other payments. Thus, if Pitney Bowes prevails in its suits against us, our business could be severely harmed or fail. In addition, the litigation could result in significant expenses and diversion of management time and other resources. On August 17, 1998, Pitney Bowes issued a press release stating that it holds dozens of US patents related to computer-based postage metering and that it intended to engage in discussions with other marketers of computer-based postal products to license Pitney Bowes technology. Prior to Pitney Bowes filing a lawsuit against us, we were in license discussions with Pitney Bowes. We intend to continue these discussions; however, we cannot predict whether these discussions will continue, the outcome of these discussions or the impact of Pitney Bowes' intellectual property claims on our business or the Internet postage market. If Pitney Bowes is able to prevail in its claims against us and if we do not enter into a license relationship with Pitney Bowes, our business could be impacted severely or fail. In addition, as described above, Pitney Bowes could obtain monetary and injunctive relief against us. Success by Cybershop in its suit against us seeking damages and recognition of its "ownership" of the domain name "stamps.com" could prevent us from using the domain name "stamps.com" and could require a change of name of the Company, severely harming our business or causing it to fail. On December 13, 2000, Cybershop (a British Columbia, Canada partnership) and its general partners filed suit against us in the U.S. District Court for the Southern District of Texas, alleging that in 1998 a third party fraudulently transferred ownership of the Internet domain name "stamps.com" away from Cybershop and subsequently transferred it to us. The third party is also a named defendant in the suit. The complaint sought legal resolution and recognition of Cybershop's "ownership" of the "stamps.com" domain name and sought unspecified monetary damages against the third party. On July 16, 2001, we filed a motion for summary judgment against all claims filed against us. Plaintiffs then filed a proposed fourth amended complaint, dropping some claims against us and adding others. On August 2, 2001, Plaintiffs filed their response to our motion for summary judgment, and filed their own motion for partial summary judgment. The court has not yet ruled on the motions for summary judgment, and has not ruled on whether to allow Plaintiffs' fourth amended complaint to proceed. The outcome of the litigation is uncertain, and we can give no assurance that Cybershop will not prevail in the suit against us. If Cybershop prevails in its claims against us, we may be liable for monetary damages. Additionally, if Cybershop is successful in the lawsuit, we may be required to relinquish the domain name "stamps.com" and transfer the domain name registration to Cybershop. Relinquishing ownership of the "stamps.com" domain name would require us to use a different domain name as the primary Internet address and web page for our company, and we may need to change the name of our company itself from "Stamps.com Inc." as well. Changing the name of our company, and using a new Internet domain name, could significantly and negatively affect our brand recognition and customer acquisition and retention. Furthermore, a change in our company name or Internet domain name could result in significant costs in seeking to build new brand recognition. Thus, if Cybershop prevails in its suit against us, our business could be severely harmed or even fail. See "Legal Proceedings." Even if Cybershop's claim is unsuccessful, the Cybershop litigation could result in significant expenses and diversion of management time and other resources that could negatively affect our business. Third party assertions of violations of their intellectual property rights could adversely affect our business. Substantial litigation regarding intellectual property rights exists in our industry. Third parties may currently have, or may eventually be issued, patents upon which our products or technology infringe. Any of these third parties might make a claim of infringement against us. We may become increasingly aware of, or we may increasingly receive correspondence claiming, potential infringement of other parties' intellectual property rights. We could incur significant costs and diversion of management time and resources to defend claims against us regardless of their validity. We may not have adequate resources to defend against these claims and any associated costs and distractions could have a material adverse effect on our business, financial condition and results of operations. In addition, litigation in which we are accused of infringement might cause product development delays, require us to develop non-infringing technology or require us to enter into royalty or license agreements, which might not be available on acceptable terms, or at all. If a successful claim of infringement were made against us and we could not develop non-infringing technology or license the infringed or similar technology on a timely and cost- 16 effective basis, our business could be significantly harmed. Any loss resulting from intellectual property litigation could severely limit our operations, cause us to pay license fees, or prevent us from doing business. See "Legal Proceedings." A failure to protect our own intellectual property could harm our competitive position. We rely on a combination of patent, trade secret, copyright and trademark laws and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our rights in our products, services, know- how and information. We have 37 issued United States patents and 10 issued international, and have filed 64 United States patent applications and 15 international patent applications, inclusive of those recently acquired from E- Stamp Corporation. We have also applied to register a number of trademarks and service marks. We plan to apply for other patents, trademarks and service marks in the future. We may not receive patents for any of our patent applications. Even if patents are issued to us, claims issued in these patents may not protect our technology. In addition, a court might hold any of our patents, trademarks or service marks invalid or unenforceable. Even if our patents are upheld or are not challenged, third parties may develop alternative technologies or products without infringing our patents. If our patents fail to protect our technology or our trademarks and service marks are successfully challenged, our competitive position could be harmed. We also generally enter into confidentiality agreements with our employees, consultants and other third parties to control and limit access and disclosure of our confidential information. These contractual arrangements or other steps taken to protect our intellectual property may not prove to be sufficient to prevent misappropriation of technology or deter independent third party development of similar technologies. Additionally, the laws of foreign countries may not protect our services or intellectual property rights to the same extent as do the laws of the United States. See "Risk Factors--Success by Cybershop in its suit against us seeking damages and recognition of its "ownership" of the domain name "stamps.com" could prevent us from using the domain name "stamps.com" and could require a change of name of our Company, severely harming our business or causing it to fail." If we are unable to maintain and develop our strategic relationships and distribution arrangements, our Internet postage services may not achieve commercial acceptance. We have established strategic relationships with a number of third parties. To date, our strategic relationships generally involve the promotion and distribution of our services through our partners' products, services and Web sites. Recently, we have increased our focus on the direct sales channel and have entered into arrangements to have a third party direct sales force offer our services. In return for promoting or selling our services, our partners may receive revenue-sharing opportunities or per-customer bounties. In order to achieve wide distribution of our services, we believe we must establish additional strategic relationships to market our services effectively. If one or more of our partners terminates or limits its relationship with us, our business could be severely harmed or fail. We have limited experience in establishing and maintaining strategic relationships, and we may fail in our efforts to establish and maintain these relationships. Our current strategic relationships have not yet resulted in significant revenues, primarily because we have only recently commercially released our Internet postage services. As a result, our strategic partners may not view their relationships with us as significant or vital to their businesses and, consequently, may not perform according to our expectations. We have little ability to control the efforts of our strategic partners and, even if we are successful in establishing strategic relationships, these relationships may not be successful. System and online security failures could harm our business and operating results. Our services depend on the efficient and uninterrupted operation of our computer and communications hardware systems. In addition, we must provide a high level of security for the transactions we execute. We rely on internally- developed and third-party technology to provide secure transmission of postage and other confidential information. Any breach of these security measures would severely impact our business and reputation and would likely result in the loss of customers. Furthermore, if we are unable to provide adequate security, the US Postal Service could prohibit us from selling postage over the Internet. Our systems and operations are vulnerable to damage or interruption from a number of sources, including fire, flood, power loss, telecommunications failure, break-ins, earthquakes and similar events. We have entered into 17 an Internet hosting agreement with Exodus Communications, Inc. to maintain our Internet postage servers at Exodus' data center in Southern California. Our operations depend on Exodus' ability to protect its and our systems in its data center against damage or interruption. Exodus does not guarantee that our Internet access will be uninterrupted, error-free or secure. Our servers are also vulnerable to computer viruses, physical, electrical or electronic break- ins and similar disruptions. We have experienced minor system interruptions in the past and may experience them again in the future. Any substantial interruptions in the future could result in the loss of data and could completely impair our ability to generate revenues from our service. We do have a business interruption plan that we continue to refine and update; however, we do not presently have a full disaster recovery plan in effect to cover loss of facilities and equipment. In addition, we do not have a "fail-over" site that mirrors our infrastructure to allow us to operate from a second location. We have business interruption insurance; however, we cannot be certain that our coverage will be sufficient to compensate us for losses that may occur as a result of business interruptions. A significant barrier to electronic commerce and communications is the secure transmission of confidential information over public networks. Anyone who is able to circumvent our security measures could misappropriate confidential information or cause interruptions in our operations. We may be required to expend significant capital and other resources to protect against potential security breaches or to alleviate problems caused by any breach. We rely on specialized technology, both within our own infrastructure and that provided by Exodus, to provide the security necessary for secure transmission of postage and other confidential information. Advances in computer capabilities, new discoveries in security technology, or other events or developments may result in a compromise or breach of the algorithms we use to protect customer transaction data. Should someone circumvent our security measures, our reputation, business, financial condition and results of operations could be seriously harmed. Security breaches could also expose us to a risk of loss or litigation and possible liability for failing to secure confidential customer information. As a result, we may be required to expend a significant amount of financial and other resources to protect against security breaches or to alleviate any problems that they may cause. The effects of expansion may adversely affect our financial condition, results of operations and existing stockholders. We may establish subsidiaries, enter into joint ventures or pursue the acquisition of new or complementary businesses, products or technologies in an effort to enter into new business areas, diversify our sources of revenue and expand our product and service offerings outside the Internet postage market. Although we have no commitments or agreements and are not currently engaged in discussions for any material acquisitions or investments, we continue to evaluate incremental revenue opportunities and derivative applications of our technology and may pursue and develop those opportunities with strategic partners and investors, both domestically and internationally. To the extent we pursue new or complementary businesses, we may not be able to expand our service offerings and related operations in a cost-effective or timely manner. We may experience increased costs, delays and diversions of management's attention when integrating any new businesses or service. We may lose key personnel from our operations or those of any acquired business. Furthermore, any new business or service we launch that is not favorably received by users could damage our reputation and brand name in the Internet postage or other markets that we enter. We also cannot be certain that we will generate satisfactory revenues from any expanded services or products to offset related costs. Any expansion of our operations would also require significant additional expenses, and these efforts may strain our management, financial and operational resources. Additionally, future acquisitions may also result in potentially dilutive issuances of equity securities, the incurring of additional debt, the assumption of known and unknown liabilities, and the amortization of expenses related to goodwill and other intangible assets, all of which could have a material adverse effect on our business, financial condition and operating results. New issuances of securities may also have rights, preferences and privileges senior to those of our common stock. We may need to raise additional capital in the future through the issuance of additional equity or convertible debt securities or by borrowing money, and additional funds may not be available on terms acceptable to us. If our cost-cutting program associated with our new business strategy is successfully implemented, we believe that our current cash balances will allow us to fund our operations beyond 2002. However, we may require substantial working capital to fund our business and we may need to raise additional capital. Our future capital needs depend on many factors, including market acceptance of our postage service, the level of promotion and advertising of our postage service; the level of our development efforts; our rate of customer acquisition and retention for our 18 Internet postage services; and changes in technology. In addition, the various elements of our business and growth strategies, including our plans to support fully the commercial release of our services, our introduction of new products and services and our investments in infrastructure will require additional capital. We cannot be certain that additional funds will be available on satisfactory terms when needed, if at all. If we are unable to raise additional necessary capital in the future or generate sufficient working capital, we may be required to curtail our operations significantly or obtain funding through the relinquishment of significant technology or markets. Raising additional capital through the sale of equity or convertible debt securities would have a dilutive effect on existing stockholders, and securities we issue may have rights superior to our common stock. Risks Related to Our Industry US Postal Service regulations and fee assessments may cause disruptions or discontinuance of our business, may increase the cost of our service and may affect the adoption of Internet postage as a new method of mailing. We are subject to continued US Postal Service scrutiny and other government regulations. The continued availability of our Internet postage services is dependent upon our service continuing to meet US Postal Service performance specifications and regulations. The US Postal Service could change its certification requirements or specifications for Internet postage or revoke the approval of our service at any time. If at any time our Internet postage service fails to meet US Postal Service requirements, we may be prohibited from offering this service and our business would be severely and negatively impacted. In addition, the US Postal Service could suspend, terminate or offer services which compete against Internet postage, any of which could stop or negatively impact the commercial adoption of our Internet postage services. Any changes in requirements or specifications for Internet postage could adversely affect our pricing, cost of revenues, operating results and margins by increasing the cost of providing our Internet postage service. For example, the US Postal Service could decide to charge Internet postage vendors fees for the enrollment of each unique customer of the Internet postage product, which would be a cost that we would either absorb or pass through to customers. The US Postal Service has in fact invoiced each Internet postage vendor $8 for each digital certificate required for each consumer of Internet postage to securely print postage. We are currently discussing the necessity of this charge with the US Postal Service. If we are required to pay this per customer charge, the cost of our service could increase and the adoption of Internet postage as a new method of mailing could be adversely affected. The US Postal Service could also decide that Internet postage should no longer be an approved postage service due to security concerns or other issues. Our business would suffer dramatically if we are unable to adapt our Internet postage services to any new requirements or specifications or if the US Postal Service were to discontinue Internet postage as an approved postage method. Alternatively, the US Postal Service could introduce competitive programs or amend Internet postage requirements to make certification easier to obtain, which could lead to more competition from third parties or the US Postal Service itself. See "Risk Factors--If we are unable to compete successfully, particularly against large, traditional providers of postage products like Pitney Bowes who enter the online postage market, our revenues and operating results will suffer." In addition, US Postal Service regulations may require that our personnel with access to postal information or resources receive security clearance prior to doing relevant work. We may experience delays or disruptions if our personnel cannot receive necessary security clearances in a timely manner, if at all. The regulations may limit our ability to hire qualified personnel. For example, sensitive clearance may only be provided to US citizens or aliens who are specifically approved to work on US Postal Service projects. If we are unable to compete successfully, particularly against large, traditional providers of postage products such as Pitney Bowes who enter the online postage markets, our revenues and operating results will suffer. The market for Internet postage products and services is new and is intensely competitive. At present, Pitney Bowes has a software-based product commercially available and has a hardware-based product in beta testing. Neopost Industrie has hardware and software products in beta testing. If any of our competitors, including Pitney Bowes, provide the same or similar service as we provide, our operations could be adversely impacted. See "Business-- Competition." 19 Internet postage may not be adopted by customers. These customers may continue to use traditional means to purchase postage, including purchasing postage from their local post office. If Internet postage becomes a viable market, we may not be able to establish or maintain a competitive position against current or future competitors as they enter the market. Many of our competitors have longer operating histories, larger customer bases, greater brand recognition, greater financial, marketing, service, support, technical, intellectual property and other resources than us. As a result, our competitors may be able to devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing policies and devote substantially more resources to Web site and systems development than us. This increased competition may result in reduced operating margins, loss of market share and a diminished brand. We may from time to time make pricing, service or marketing decisions or acquisitions as a strategic response to changes in the competitive environment. These actions could result in reduced margins and seriously harm our business. If the market for Internet postage develops, we could face competitive pressures from new technologies or the expansion of existing technologies approved for use by the US Postal Service. We may also face competition from a number of indirect competitors that specialize in electronic commerce and other companies with substantial customer bases in the computer and other technical fields. Additionally, companies that control access to transactions through a network or Web browsers could also promote our competitors or charge us a substantial fee for inclusion. Our competitors may also be acquired by, receive investments from or enter into other commercial relationships with larger, better-established and better-financed companies as use of the Internet and other online services increases. In addition, changes in postal regulations could adversely affect our service and significantly impact our competitive position. We may be unable to compete successfully against current and future competitors, and the competitive pressures we face could seriously harm our business. If we do not respond effectively to technological change, our services could become obsolete and our business will suffer. The development of our services and other technology entails significant technical and business risks. To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our online operations. The Internet and the electronic commerce industry are characterized by rapid technological change; changes in user and customer requirements and preferences; frequent new product and service introductions embodying new technologies; and the emergence of new industry standards and practices. The evolving nature of the Internet or the Internet postage markets could render our existing technology and systems obsolete. Our success will depend, in part, on our ability to license or acquire leading technologies useful in our business; enhance our existing services; develop new services or features and technology that address the increasingly sophisticated and varied needs of our current and prospective users; and respond to technological advances and emerging industry and regulatory standards and practices in a cost-effective and timely manner. Future advances in technology may not be beneficial to, or compatible with, our business. Furthermore, we may not be successful in using new technologies effectively or adapting our technology and systems to user requirements or emerging industry standards on a timely basis. Our ability to remain technologically competitive may require substantial expenditures and lead time. If we are unable to adapt in a timely manner to changing market conditions or user requirements, our business, financial condition and results of operations could be seriously harmed. The success of our business will depend on the continued growth of the Internet and the acceptance by customers of the Internet as a means for purchasing postage services. Our success depends in large part on widespread acceptance and use of the Internet as a way to purchase postage services. This practice is at an early stage of development, and market acceptance of Internet postage service is uncertain. We cannot predict the extent to which customers will be willing to shift their purchasing habits from traditional to online postage services. To be successful, our customers must accept and utilize electronic commerce to satisfy their product needs. Our future revenues and profits, if any, substantially depend upon the acceptance and use of the Internet and other online services as an effective medium of commerce by our target users. 20 The Internet may not become a viable long-term commercial marketplace due to potentially inadequate development of the necessary network infrastructure or delayed development of enabling technologies and performance improvements. The commercial acceptance and use of the Internet may not continue to develop at historical rates. Our business, financial condition and results of operations would be seriously harmed if use of the Internet and other online services does not continue to increase or increases more slowly than expected; the infrastructure for the Internet and other online services does not effectively support future expansion of electronic commerce or our services; concerns over security and privacy inhibit the growth of the Internet; or the Internet and other online services do not become a viable commercial marketplace. Our operating results could be impaired if we or the Internet become subject to additional government regulation and legal uncertainties. With the exception of US Postal Service and Department of Commerce regulations, we are not currently subject to direct regulation by any domestic or foreign governmental agency, other than regulations applicable to businesses generally, and laws or regulations directly applicable to electronic commerce. However, due to the increasing popularity and use of the Internet, it is possible that a number of laws and regulations may be adopted with respect to the Internet, relating to user privacy; pricing; content; copyrights; distribution; characteristics and quality of products and services; and export controls. The adoption of any additional laws or regulations may hinder the expansion of the Internet. A decline in the growth of the Internet could decrease demand for our products and services and increase our cost of doing business. Moreover, the applicability of existing laws to the Internet is uncertain with regard to many issues, including property ownership, export of specialized technology, sales tax, libel and personal privacy. Our business, financial condition and results of operations could be seriously harmed by any new legislation or regulation. The application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and other online services could also harm our business. We have employees and offer our services in multiple states, and we may in the future expand internationally. These jurisdictions may claim that we are required to qualify to do business as a foreign corporation in each state or foreign country. Our failure to qualify as a foreign corporation in a jurisdiction where we are required to do so could subject us to taxes and penalties. Other states and foreign countries may also attempt to regulate our services or prosecute us for violations of their laws. Further, we might unintentionally violate the laws of foreign jurisdictions and those laws may be modified and new laws may be enacted in the future. If we market our services internationally, government regulation could disrupt our operations. We may in the future begin to provide services in international markets. Our ability to provide our Internet postage services in international markets would likely be subject to rigorous governmental approval and certification requirements similar to those imposed by the US Postal Service. For example, our Internet postage services cannot currently be used for international mail because foreign postal authorities do not currently recognize information-based indicia postage. If foreign postal authorities accept postage generated by our service in the future, and if we obtain the necessary foreign certification or approvals, we would be subject to ongoing regulation by foreign governments and agencies. To date, efforts to create a certification process in Europe and other foreign markets are in a preliminary stage and these markets may not prove to be a viable opportunity for us. As a result, we cannot predict when, or if, international markets will become a viable source of revenues for a postage service similar to ours. Our ability to provide service in international markets may also be impacted by the export control laws of the United States. Our software technology makes us subject to stronger export controls, and may prevent us from being able to export our products and services. Regulations and standards of the Universal Postal Union and other international bodies may also limit our ability to provide international mail services. If we enter the international market, our business activities will be subject to a variety of potential risks, including the adoption of laws and regulatory requirements, political and economic conditions, difficulties protecting our intellectual property rights and actions by third parties that would restrict or eliminate our ability to do business in these jurisdictions. If we begin to transact business in foreign currencies, we will become subject to 21 the risks attendant to transacting in foreign currencies, including the potential adverse effects of exchange rate fluctuations. Risks Related to Our Stock Our charter documents could deter a takeover effort, which could inhibit your ability to receive an acquisition premium for your shares. The provisions of our Amended and Restated Certificate of Incorporation, Bylaws and Delaware law could make it difficult for a third party to acquire us, even it would be beneficial to our stockholders. In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which could prohibit or delay a merger or other takeover of our company, and discourage attempts to acquire us. Shares of our common stock held by existing stockholders may be sold into the public market, which could cause the price of our common stock to decline. If our stockholders sell into the public market substantial amounts of our common stock purchased in private financings prior to our initial public offering, or purchased upon the exercise of stock options or warrants, or if there is a perception that these sales could occur, the market price of our common stock could decline. All of these shares are available for immediate sale, subject to the volume and other restrictions under Rule 144 of the Securities Act of 1933. These sales also could impair our future ability to raise capital through the sale of equity or equity-related securities at a time and price that we deem appropriate. Our stock price may be highly volatile and could drop, particularly because our business depends on the Internet. The trading price of our common stock has fluctuated widely in the past, and is expected to continue to do so in the future, as a result of a number of factors, many of which are outside our control. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market prices of many technology and Internet-related companies and that have often been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations and the perception of the valuation of the Internet company sector could adversely affect the market price of our common stock. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We have not used derivative financial instruments in our investment portfolio. Our short-term investments are comprised of U.S. government obligations and public corporate debt securities with maturities of less than one year at the date of purchase. At June 30, 2001, our short-term investments approximated $75.6 million and had a related weighted average interest rate of 5.53%. Interest rate fluctuations impact the carrying value of the portfolio. We do not believe that the future market risks related to the above securities will have material adverse impact on our financial position, results of operations or liquidity. 22 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On June 16, 1999, Pitney Bowes sued us for alleged patent infringement in the United States District Court for the District of Delaware. The suit originally alleged that we are infringing two patents held by Pitney Bowes related to postage application systems and electronic indicia. The suit seeks treble damages, a preliminary and permanent injunction from further alleged infringement, attorneys' fees and other unspecified damages. We answered the complaint on August 6, 1999, denying the allegations of patent infringement and asserting a number of affirmative defenses. Pitney Bowes filed a similar complaint in early June 1999 against one of our competitors, E-Stamp Corporation, alleging infringement of seven Pitney Bowes patents. On April 13, 2000, Pitney Bowes asked the court for permission to amend its complaint to drop allegations of patent infringement with respect to one patent and to add allegations of patent infringement with respect to three other patents. On July 28, 2000 the court entered Pitney Bowes' amended complaint. On June 18, 2001, E-Stamp and Pitney Bowes agreed to settle their litigation. On September 18, 2000 Pitney Bowes filed another patent infringement lawsuit against us in the United States District Court for the Eastern District of Texas, alleging that we are infringing four patents owned by Pitney Bowes related to multi-carrier shipping. The suit seeks unspecified damages and a permanent injunction from further alleged infringement. We answered the complaint on December 1, 2000, denying the allegations of patent infringement and asserting a number of affirmative defenses. The United Parcel Service acquired our iShip multi-carrier shipping service assets on May 18, 2001. On June 14, 2001, we filed a patent infringement lawsuit against Pitney Bowes in the United States District Court for the Central District of California, alleging that Pitney Bowes ClickStamp Online service infringes four patents we own. The suit seeks treble damages, an injunction from further infringement, attorneys' fees and other damages. On August 8, 2001, Pitney Bowes answered the complaint, denying our allegations of patent infringement and asserting a number of affirmative defenses. The outcome of our litigation against Pitney Bowes is uncertain. Therefore, we can give no assurance that Pitney Bowes will not prevail in its suits against us. See "Risk Factors-Success by Pitney Bowes in its suits against us alleging patent infringement could prevent us from offering our Internet postage services and severely harm our business or cause it to fail." On December 29, 1999, three individual plaintiffs filed a suit against us for alleged breach of oral contract, quantum meruit, fraud and negligent representation in the California Superior Court for the County of Los Angeles. The complaint was amended on January 28, 2000 to add Mohan Ananda, one of our directors, as a defendant and to remove one of the plaintiffs from the suit. The suit alleges that the plaintiffs were due cash consideration in the amount of $13.3 million plus other unspecified compensatory damages, punitive and exemplary damages for securing a board member and investors for Stamps.com. On November 6, 2000, the trial court granted summary judgment of the entire action in favor of Stamps and Mr. Ananda. The plaintiffs have appealed the grant of summary judgment, and the appeal is currently pending. Although we believe that the grant of summary judgment will be upheld on appeal, the outcome of this litigation is uncertain and we can give no assurance that the plaintiffs will not prevail. On December 13, 2000, Cybershop (a British Columbia, Canada partnership) and its general partners filed suit against us in the U.S. District Court for the Southern District of Texas, alleging that in 1998 a third party fraudulently transferred ownership of the Internet domain name "stamps.com" away from Cybershop and subsequently transferred it to us. The third party is also a named defendant in the suit. The complaint sought legal resolution and recognition of Cybershop's "ownership" of the "stamps.com" domain name and sought unspecified monetary damages against the third party. In February 2001, Cybershop filed an amended complaint, alleging new causes of action, including conversion, invasion of privacy, trespass, and private nuisance, and seeking declaratory judgment for return of the domain name registration to Cybershop. On July 16, 2001 we filed a motion for summary judgment against all claims filed against us. Plaintiffs subsequently filed, and then withdrew, a proposed third amended complaint. Plaintiffs then filed a proposed fourth amended complaint, dropping some claims against us and adding others. On August 2, 2001, Plaintiffs filed their response to our motion for summary judgment, and filed their own motion for partial summary judgment. The court has not yet ruled on the motions for summary judgment, 23 and has not ruled on whether to grant leave to allow Plaintiffs' fourth amended complaint to proceed. The outcome of the litigation is uncertain, and we can give no assurance that Cybershop will not prevail. See "Risk Factors-Success by Cybershop in its suit against us seeking damages and recognition of its "ownership" of the domain name "stamps.com" could prevent us from using the domain name "stamps.com" and could require a change of name of the Company, severely harming our business or causing it to fail." On or about April 6, 2000, Metro Fulfillment, Inc. filed a lawsuit against Weigh-Tronix, Inc. for breach of contract, fraud, negligent misrepresentation, intentional inference with contract, negligent interference, breach of implied warranty and breach of express warranty. Metro Fulfillment, Inc. alleges that pursuant to its agreement with Weigh-Tronix, Inc., Metro Fulfillment, Inc. was not required to pay for postal scales that were purchased from Weigh-Tronix, Inc. until Metro Fulfillment, Inc. had actually sold those scales to end users. These scales were supposed to be sold through our Web site. Metro Fulfillment, Inc. further alleged that Weigh-Tronix, Inc. breached the agreement by seeking payment before the scales were actually sold to customers in breach of the agreement. Weigh-Tronix, Inc. in turn filed a third party complaint against us and Metro Fulfillment, Inc. for breach of contract and several common counts. The third party complaint seeks approximately $700,000.00 in compensatory damages, plus interest and attorney's fees. We have filed an answer to the third party complaint denying the allegations of the lawsuit. On February 28, 2001, Metro Fulfillment, Inc. filed a lawsuit against us stemming from services allegedly performed by Metro Fulfillment, Inc. under a Fulfillment Services Agreement. The complaint alleges claims for breach of contract, common counts and negligent misrepresentation. The complaint seeks damages of approximately $1.3 million. We have filed an answer to the complaint denying the allegations in the lawsuit. On April 18, 2001, Intuit, Inc. filed a suit against us for alleged breach of contract in the California Superior Court for the County of Santa Clara. The suit alleges that we improperly terminated our contract with Intuit and seeks damages of $4 million plus interest and costs associated with the lawsuit. We believe that the agreement was terminated on March 1, 2001 due to Intuit's failure to perform adequately under the contract, among other reasons. On June 1, 2001, we answered Intuit's Complaint, denied all material allegations and asserted certain affirmative defenses. Additionally, on June 1, 2001, we filed a Cross-Complaint against Intuit and asserted claims for breach of the implied covenant of good faith and fair dealing, violation of California Business & Professions Code Section 17200, rescission, and declaratory relief. We seek compensatory damages in an amount to be determined. On or about July 10, 2001, Intuit demurred to our Cross-Complaint. We will be opposing the demurrer, and the matter is set for hearing on August, 16, 2001. No trial date has been set in this case. We are vigorously defending Intuit's claims, however, litigation is uncertain and we cannot predict an outcome for this matter. In May, June and July, 2001, we were named, together with certain of our current or former board members and/or officers, as a defendant in eleven purported class-action lawsuits, filed in the United States District Court for the Southern District of New York. The lawsuits allege violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 in connection with our initial public offering and secondary offering of our common stock. The lawsuits arise out of certain investigations by U.S. regulatory and law enforcement authorities into alleged commission practices and other sales practices by certain underwriters. The lawsuits also name as defendants the principal underwriters in connection with our initial and secondary public offerings, including Goldman, Sachs & Co. (in some of the lawsuits sued as The Goldman Sachs Group Inc.) and BancBoston Robertson Stephens, Inc. The lawsuits allege that the underwriters engaged in allegedly improper commission practices and stock price manipulations in connection with the sale of our common stock. The lawsuits also allege that the we and/or certain of our officers or directors knew of or recklessly disregarded these practices by the underwriter defendants, and failed to disclose them in our public filings. Plaintiffs seek various damages and statutory compensation, including prejudgment and post-judgment interest, costs and expenses (including attorneys' fees), and rescissionary damages. We have placed the underwriters on notice of our claim to indemnification, pursuant to its agreements with the underwriters. We believe that the claims against us and our officers and directors are without merit, and intend to defend the lawsuits vigorously. We are not currently involved in any other material legal proceedings, nor have we been involved in any such proceeding that has had or may have a significant effect on our company. We are not aware of any other material legal proceedings pending against us. 24 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On August 1, 2000, we entered into a Warrant Issuance Agreement with Cydcor Limited ("Cydcor"). Under the terms of the agreement, we are obligated to issue warrants to purchase shares of our common stock on a monthly basis. The number of shares underlying each warrant is based upon a calculation that determines net new customers that Cydcor obtains from direct sales of our Internet postage services. The warrants issuable under the agreement are exercisable for a period of two years from the issuance date. Under the terms of this agreement, on April 30, 2001, we issued Cydcor a warrant to purchase 4,842 shares of our common stock at a price per share of $3.00; on May 31, 2001, we issued Cydcor a warrant to purchase 3,182 shares of our common stock at a price per share of $3.00; on June 30, 2001, we issued Cydcor a warrant to purchase 2,772 shares of our common stock at a price per share of $3.75; and on July 31, 2001, we issued Cydcor a warrant to purchase 97 shares of our common stock at a price per share of $2.36. The offer and sale of this warrant and the shares of common stock issuable upon conversion thereof is exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The 2001 Annual Meeting of the stockholders of Stamps.com was held on June 14, 2001 in Santa Monica, California. (b) The directors elected at the 2001 Annual Meeting were: Mohan P. Ananda, Thomas N. Clancy, John A. Duffy, and Marvin Runyon. Each of Messrs. Ananda and Runyon serve as Class II directors whose terms will expire at the 2004 annual meeting of stockholders. Each of Jeffrey Brown and Loren Smith serve as Class III directors whose terms will expire at the 2002 annual meeting of stockholders. Finally, each of Bruce Coleman and G. Bradford Jones serve as Class I directors whose terms will expire at the 2003 annual meeting of stockholders. (c) At the annual meeting, the stockholders: (1) Voted to elect four Class II directors named above, with the following vote: Mohan P. Ananda For 38,733,089 Abstain 233,299 Thomas N. Clancy For 38,733,774 Abstain 232,614 John A. Duffy For 38,740,181 Abstain 226,207 Marvin Runyon For 38,689,779 Abstain 276,609 (2) Voted to ratify the appointment of Arthur Andersen LLP as the Company's independent auditors for the fiscal year ending December 31, 2001, with the following vote: For 38,714,980 Against 79,703 Abstain 171,705. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K None. 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STAMPS.COM INC. (Registrant) August 14, 2001 By: /s/ KENNETH McBRIDE -------------------------------- Kenneth McBride Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----