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FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NUMBER 333-77025
[LOGO OF STAMPS.COM]
5,000,000 Shares
Common Stock
This is our initial public offering and no public market currently exists
for our shares. Our common stock has been approved for quotation on the Nasdaq
National Market under the symbol "STMP."
---------------
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 6.
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<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public Offering Price................................. $11.00 $55,000,000
Underwriting Discounts and Commissions................ $ 0.77 $ 3,850,000
Proceeds to Stamps.com................................ $10.23 $51,150,000
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
We have granted the underwriters a 30-day option to purchase up to an
additional 750,000 shares of common stock to cover any over-allotments. If the
underwriters exercise the right in full, the public offering price will total
$63,250,000, the underwriting discounts and commissions will total $4,427,500,
and our proceeds will total $58,822,500.
We have requested that the underwriters reserve up to ten percent of the
shares of common stock for sale at the initial public offering price to
directors, officers, employees and other individuals designated by Stamps.com.
BancBoston Robertson Stephens Inc. expects to deliver the shares of common
stock on June 30, 1999.
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BancBoston Robertson Stephens
Thomas Weisel Partners LLC
Volpe Brown Whelan & Company
Wit Capital Corporation
The date of this Prospectus is June 24, 1999.
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[DESCRIPTION OF ARTWORK]
Images of the different screens from Stamps.com.
INSIDE FRONT COVER
The inside front cover of the prospectus has the three steps a consumer
will use to obtain postage with Stamps.com. The following are the steps to be
taken:
1. Download Software and Sign-up: Start printing postage in a matter of
minutes. Simply download the free software from our web site, www.stamps.com,
register and you're ready to go.
2. Select your Address: Type in a new address or select from an existing
address book and Stamps.com corrects and formats your addresses online.
Stamps.com also integrates with the most popular contact managers and word
processors.
3. Print Postage: Just click print. Your postage, bar code and address is
printed from your inkjet or laser printer right onto envelopes, labels or
business forms. It's that easy.
INSIDE GATEFOLD (two pages)
The first page is a picture of a printer with an envelope with postage
coming out. Across the top of the page are the words INTERNET POSTAGE. The
picture is green and blue striped.
The second page is a picture of a keyboard with centered text which reads
POSTAGE FROM YOUR PRINTER.(TM) Across the bottom of the page are the following
words:
WE RUN SECURE POSTAGE SERVERS(TM) ON THE INTERNET CONNECTING THE U.S.
POSTAL SERVICE WITH CONSUMERS, SMALL BUSINESSES AND CORPORATE CUSTOMERS
ALLOWING THEIR ORDINARY LASER AND INKJET PRINTERS TO APPLY A NEW FORM OF
DIGITAL POSTAGE CALLED "INDICIUM".
Stamps.com offers a convenient, cost-effective and easy-to-use service for
purchasing and printing postage over the Internet. Our core service is
designed to enable users to print information based indicia, or electronic
stamps, directly onto envelopes, labels, or business documents using
ordinary laser or inkjet printers. No additional hardware is necessary for
a user to purchase and print our Internet Postage; the user's existing PC,
printer and Internet set-up are sufficient.
In the bottom right corner is the Stamps.com logo.
INSIDE BACK COVER
The inside back cover of the prospectus has an envelope with an enlarged
indicia. Each item of the indicia is explained in detail directly in the center
of the page. The explanation is as follows:
There is a vertical barcode called the FIM, or Facing Identification Mark.
The Post Office uses this to sort the mail. There is a postage amount in number
format with human readable information, including the postage value, mail
class, and date. There is a two-dimensional barcode. It contains information to
make this mailpiece unique, such as delivery and routing information, postage
value, and your digital signature. Under the barcode on the left side is the
licensing post office and on the right side is the unique meter number for the
mailpiece.
Across the bottom section of this page is an iconic list of Stamps.com
Current Partnerships which includes Office Depot.com; Quicken.com; America
Online; and Avery.
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our common stock only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
Until July 19, 1999, all dealers that buy, sell or trade our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This requirement is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotment or subscriptions.
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TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
Summary.................................................................. 4
Risk Factors............................................................. 6
Information Regarding Forward Looking Statements......................... 18
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Financial Data.................................................. 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 23
Business................................................................. 27
Management............................................................... 39
Related Party Transactions............................................... 51
Principal Stockholders................................................... 52
Description of Capital Stock............................................. 54
Shares Eligible for Future Sale.......................................... 57
Underwriting............................................................. 58
Legal Matters............................................................ 60
Experts.................................................................. 60
Where You Can Find Additional Information................................ 60
Index to Financial Statements............................................ F-1
</TABLE>
Except as otherwise noted, all information in this prospectus:
. reflects the automatic conversion of our outstanding preferred stock
into common stock immediately prior to the closing of this offering;
. reflects a three-for-two common stock dividend to our common
stockholders authorized by the Board of Directors on June 3, 1999; and
. assumes that the underwriters' over-allotment option will not be
exercised.
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SUMMARY
You should read the following summary together with the more detailed
information and financial statements and the notes to those statements
appearing elsewhere in this prospectus. This prospectus contains forward
looking statements that involve risks and uncertainties. Our actual results
could differ materially from the results anticipated in these forward looking
statements as a result of the factors set forth under "Risk Factors" and
elsewhere in this prospectus.
Stamps.com Inc.
We offer a convenient, cost effective and easy to use service for
purchasing and printing postage over the Internet. Our core service is designed
to enable users to print information based indicia, or electronic stamps,
directly onto envelopes, labels or business documents using ordinary laser or
inkjet printers. No additional hardware is necessary for a user to purchase and
print our Internet postage; the user's existing PC, printer and Internet set-up
are sufficient. Accessing our service is simple. A user will obtain our free
software either via a download from the Internet or through an install from a
CD-ROM. After installing the software and completing a brief registration
process, the user will connect via the Internet to our secure Postage Server
and purchase postage electronically 24 hours a day, seven days a week. We will
act as an ongoing intermediary between the US Postal Service and users by
offering the ability to purchase postage through our secure Postage Server. Our
technology works within rigorous US Postal Service requirements to provide
secure access to postage. Our Postage Server will be designed to interact with
word processing, contact and address management, accounting and corporate
applications to stamp letters, invoices, statements, checks and other business
documents automatically.
Our Strategy
Our objective is to be the leading provider of convenient, cost effective
and easy to use software-based Internet postage services. To achieve this
objective, our strategy includes the following key elements:
. Enhancing our brand name through a variety of marketing and promotional
techniques;
. Forming strategic partnerships with companies in the Internet,
software, original equipment manufacturer, office supply and media
industries;
. Establishing first-to-market advantages by becoming the first software-
based Internet postage solution approved for commercial release;
. Rapidly growing our customer base by enhancing our brand name, forming
strategic partnerships and establishing first-to-market advantages;
. Utilizing our software-based solution and technology to enhance our
service offering and expand the benefits of secure online transactions;
and
. Pursuing additional revenue opportunities, including postage related
products and insurance, the international Internet postage market, and
authenticated document delivery.
Corporate Information
In September 1996, our founders began to investigate the feasibility of
entering into the US Postal Service's Information Based Indicia Program and
initiated the certification process. In January 1998, we were incorporated in
Delaware as StampMaster, Inc. and changed our name to Stamps.com Inc. in
December 1998. Our executive offices are located at 3420 Ocean Park Boulevard,
Suite 1040, Santa Monica, California 90405, and our telephone number is (310)
581-7200. Information contained on our Web site does not constitute part of
this prospectus.
4
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The Offering
<TABLE>
<C> <S>
Common stock offered....................... 5,000,000 shares
Common stock to be outstanding after this
offering................................. 34,771,454 shares
Use of proceeds............................ To expand marketing and
distribution partnerships, for
further development our
technology and for working
capital and other general
corporate purposes.
Nasdaq National Market symbol.............. STMP
</TABLE>
The number of shares outstanding after this offering excludes, as of the
date of this prospectus:
. 1,914,141 shares of common stock that may, but have not yet been issued
under our stock option and stock purchase plans; and
. options and warrants to purchase a total of 5,383,909 shares of common
stock at a weighted average exercise price of $0.84 per share. See
"Capitalization."
Summary Financial Data
(in thousands, except share and per share data)
The following table should be read with the financial statements and notes
to those statements appearing elsewhere in this prospectus. The pro forma
calculations give effect to the conversion of all outstanding shares of our
preferred stock into common stock upon the closing of this offering as if the
conversion occurred at inception, or the date of original issuance, if later.
Our as adjusted column reflects the sale of 5,000,000 shares of common stock
offered by this prospectus at an initial public offering price of $11.00 per
share after deducting underwriter discounts and commissions and estimated
expenses payable by us.
<TABLE>
<CAPTION>
January 9, 1998 January 9, 1998
(inception) (inception) Three Months
through through Ended
December 31, 1998 March 31, 1998 March 31, 1999
----------------- --------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Statement of Operations Data:
Net revenues................. $ -- $ -- $ --
Loss from operations......... (4,180) (363) (3,688)
Net loss..................... (4,195) (363) (3,686)
----------- ---------- -----------
Basic and diluted net loss
per share.................. $ (0.85) $ (0.09) $ (0.53)
Pro forma basic and diluted
net loss per share......... $ (0.36) $ (0.05) $ (0.15)
Weighted shares outstanding
used in basic and diluted
net loss per share
calculations............... 4,955,913 4,240,518 6,900,975
Weighted shares outstanding
used in pro forma basic and
diluted net loss per share
calculation................ 11,593,380 6,863,917 25,057,782
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 1999
Actual As Adjusted
---------- ------------
(unaudited)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................. $ 28,524 $78,974
Working capital....................................... 26,090 76,540
Total assets.......................................... 29,872 80,322
Line of credit and capital lease obligations.......... 1,425 1,425
Redeemable preferred stock............................ 34,278 --
Total stockholders' equity (deficit).................. (7,227) 77,501
</TABLE>
5
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RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially adversely
affected, the value of our stock could decline, and you may lose all or part of
your investment.
We face risks associated with our operations
If our service is not approved for commercial release, our business will fail.
Our service for purchasing postage over the Internet has not been approved
by the US Postal Service. We depend entirely on US Postal Service approval of
our Internet postage service. We are currently in the pre-approval testing
stage of the US Postal Service's Information Based Indicia Program. We cannot
be certain that our service will successfully emerge from this testing phase or
that the US Postal Service will ever approve our service for commercial
release.
We believe that US Postal Service approval of our software-based service,
prior to approval of our competitors' software-based products, is critical to
our success. If we don't receive the required regulatory approval in a timely
manner, our business and ability to compete in the Internet postage market will
suffer dramatically.
Intellectual property infringement claims, including a June 1999 claim against
us by Pitney Bowes, could delay our development and harm our results of
operations.
We face substantial uncertainty regarding the impact that other parties'
intellectual property positions will have on the Internet postage market. For
example, on at least three occasions, Pitney Bowes sent formal comments to the
US Postal Service asserting that intellectual property of Pitney Bowes related
to postage metering products and systems would be infringed by products meeting
the Information Based Indicia Program requirements. Specifically, in a number
of letters, Pitney Bowes identified a total of 19 US patents and four US patent
applications that it contends would be infringed by postage metering systems
that meet the requirements of the Information Based Indicia Program. Our
Internet postage service is designed to meet these requirements, which has led
Pitney Bowes to sue us for alleged patent infringement.
Specifically, on June 16, 1999, Pitney Bowes filed a patent infringement
lawsuit against us. The suit alleges 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. 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. If Pitney Bowes successfully asserts its claims against us and E-
Stamp, then we and E-Stamp may be prevented or hindered in competing in the
Internet postage market. We are currently investigating the claims against us
and have not responded to the suit. In addition, the litigation could result in
significant expenses and diversion of management time and other resources.
Further, if Pitney Bowes successfully asserts an infringement claim against us,
our operations would be impacted severely. The Pitney Bowes suit could result
in limitations on how we implement our service, delays and costs associated
with redesigning our service and payments of license fees and other payments.
Any injunction could eliminate our ability to market critical products or
services.
On August 17, 1998, Pitney Bowes issued a press release stating that it
holds dozens of US patents related to computer-based postage metering and that
it intends to engage in discussions with other marketers of
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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
successfully assert claims against us and if we do not enter into a license
relationship with Pitney Bowes, our business could be impacted severely. As
described above, Pitney Bowes could obtain monetary and injunctive relief
against us.
As is customary with technology companies, we may receive or become aware
of correspondence claiming potential infringement of other parties'
intellectual property rights. We could incur significant costs and diversion of
management time and resources to defend claims regardless of the validity of
these claims. We may not have adequate resources to defend these claims, and
any associated costs and distractions could have a material adverse effect on
our business, financial condition and results of operations. As an alternative
to litigation, we may seek licenses for other parties' intellectual property
rights. We may not be successful in obtaining all of the necessary licenses on
commercially reasonable terms, if at all.
We rely on a combination of patent, trade secret, copyright and trademark
laws and contractual restrictions to establish and protect our rights in our
products, services, know-how and information. We have three issued US patents
and have filed four patent applications in the United States. We have also
applied for several trademarks and service marks. We plan to apply for other
patents in the future. We may not receive patents for any of our patent
applications. Even if patents are issued to us, claims issued in these patents
may not protect our technology. In addition, any of our patents might be held
invalid or unenforceable by a court. If our patents fail to protect our
technology, our competitive position could be harmed. Even if our patents are
upheld or are not challenged, third parties may develop alternative
technologies or products without infringing our patents. We generally enter
into confidentiality agreements with our employees, consultants and other third
parties to control and limit access and disclosure of our confidential
information. These contractual arrangements or other steps taken to protect our
intellectual property may not prove to be sufficient to prevent
misappropriation of technology or deter independent third party development of
similar technologies. Additionally, the laws of foreign countries may not
protect our services or intellectual property rights to the same extent as do
the laws of the United States.
Ongoing US Postal Service regulation may cause disruptions or the
discontinuance of our business.
If we achieve US Postal Service approval of our Internet postage service,
we will remain subject to continued US Postal Service scrutiny and other
government regulations. For example, US Postal Service regulations may require
that our personnel with access to postal information or resources receive a
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.
The US Postal Service could change its certification requirements or
specifications for Internet postage or revoke the approval of our service. The
US Postal Service could also decide that Internet postage should no longer be
an approved postage service due to security concerns or other issues. Our
business would suffer dramatically if we are unable to adapt our Internet
postage service to any new requirements or specifications or if the US Postal
Service were to discontinue Internet postage as an approved postage method.
Alternatively, the US Postal Service could amend its requirements to make
certification easier to obtain, which could lead to more competition from third
parties. See "--If we are unable to compete successfully, our revenues and
operating results will suffer."
The Internet postage market is new and uncertain and our business may not
develop.
The market for Internet postage has not developed, and its development is
subject to substantial uncertainty. We cannot assure you that the Internet
postage market will develop. We depend on the commercial
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acceptance of our service for purchasing postage over the Internet. We do not
know if our target customers will transition to the Internet as a means of
purchasing postage. If potential users choose the Internet to purchase postage,
we cannot be certain that these users will adopt our system. Additionally,
uncertainty surrounding intellectual property claims, such as those asserted by
Pitney Bowes against us and E-Stamp, could severely impact the development of
the Internet postage market and our business.
We have a history of losses and expect to incur losses in the future, and we
may never achieve profitability.
As of March 31, 1999, we had not generated any revenues and had a deficit
accumulated during the development stage of $7.9 million. Our lack of revenues
can be attributed primarily to the fact that Internet postage has not been
approved for commercial release. In the course of our pre-commercial
development activities, we have not achieved profitability and expect to
continue to incur net losses for at least the next several quarters. Due to the
need to establish our brand and service, we expect to incur increasing sales
and marketing, product development and administrative expenses. As a result, we
will need to generate significant revenues to achieve and maintain
profitability. In this regard, you should disregard our gross margin
projections of 85% contained in an online article published by a third party in
December 1998 and linked to our Web site. Our gross margins are very uncertain
given that our Internet postage service may never receive US Postal Service
approval, attain commercial acceptance or develop into a significant source of
revenues for us. We have additional uncertainty related to the lack of a proven
pricing model in the untested Internet postage market. It is likely that our
gross margins and pricing strategies will vary in the short and long term. In
addition, projections published by market analysts regarding our margins may
differ from our actual results.
Our ability to generate gross margins generally assumes that if a market
for Internet postage develops, we must generate significant revenues from a
large base of active consumers. Even if we are able to establish any sizable
base of users, we may still not generate significant gross margins. For
instance, you should not rely on published statements that indicate our
intention to generate revenues from a 10% convenience fee. One of our initial
service plans does contemplate a 10% service fee. See "Management Discussion
and Analysis of Financial Condition and Results of Operations--Overview."
However, given the current limited beta use of our service and the lack of a
commercial market for Internet postage, we cannot be sure that a percentage fee
will be our ultimate pricing approach or that a percentage fee would generate
significant customer use of our service. We continue to evaluate many different
pricing and fee structures, none of which have been tested on a commercial
basis. As a result, we cannot predict whether any contemplated pricing or fee
structure, including a percentage convenience fee, will ever generate revenues
or profits for us. Overall, you should not base your decision as to whether to
invest in shares of our common stock on any other published article or any
calculation of our gross margins, if any, or pricing strategies. Any projection
or other forward looking statements are subject to a great deal of uncertainty
and change. You should be aware that our future revenue and operating results
will be affected by a number of factors, including those discussed in this
section.
We must effectively manage our commercial release to achieve acceptance of our
service.
If we receive US Postal Service approval of our Internet postage service,
we will face numerous risks coincident with the introduction of our services.
We will be initially subject to a limited launch of 10,000 customers after our
commercial release. We intend to conduct a controlled national launch of our
service; however, we have very limited experience conducting marketing
campaigns, and we may fail to generate significant interest. On the other hand,
if we experience extensive interest in our services, we may fail to meet the
expectations of customers due to the strains this demand will place on our Web
site, network infrastructure and our systems.
Our ability to obtain and retain customers depends on our customer service
capabilities. We cannot predict whether the quantity or quality of our customer
service will be sufficient to address our customers' needs. If we are unable at
any time during and after our controlled national launch to appropriately
address customer service issues or provide a satisfactory customer experience
for current or potential customers, our business and reputation may be damaged.
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If we cannot effectively manage our growth, our ability to provide services
will suffer.
Our reputation and our ability to attract, retain and serve our customers
depend upon the reliable performance of our Web site, network infrastructure
and systems. We have a limited basis upon which to evaluate the capability of
our systems to handle controlled or full commercial availability of our
Internet postage service. We have recently expanded our operations
significantly, and further expansion will be required to address the
anticipated growth in our user base and market opportunities. To manage the
expected growth of operations and personnel, we will need to improve existing
and implement new systems, procedures and controls. In addition, we will need
to expand, train and manage an increasing employee base. We will also need to
expand our finance, administrative and operations staff. We may not be able to
effectively manage this growth. Our current expansion has placed and we expect
our future expansion to continue to place a significant strain on our
managerial, operational and financial resources. Our current and planned
personnel, systems, procedures and controls may be inadequate to support our
future operations. If we are unable to manage growth effectively or experience
disruptions during our expansion, our business will suffer and our financial
condition and results of operations will be seriously affected.
We have a limited operating history and cannot predict our ability to
successfully launch and maintain our Internet postage service.
In September 1996, our founders began to investigate the feasibility of
entering into the US Postal Service's Information Based Indicia Program and
initiated the certification process. In January 1998, we were incorporated in
Delaware and accordingly, we have a very limited operating history. As of March
31, 1999, we had generated no revenues and do not expect to generate any
significant revenues until the US Postal Service approves our Internet postage
service for commercial release. You should consider our prospects in light of
the risks and difficulties frequently encountered by early stage companies in
new and rapidly evolving markets. These risks include, among other things, our:
. ability to meet and maintain government specifications for our service,
specifically US Postal Service requirements;
. complete dependence on a service that currently has no market
acceptance;
. need to expand our sales and support organizations;
. ability to establish and expand our brand name;
. ability to expand our operations to meet the commercial demand for our
service;
. development of and reliance on strategic and distribution
relationships;
. ability to prevent and respond quickly to service interruptions;
. ability to minimize fraud and other security risks; and
. competition from competitors with greater capital resources and brand
awareness.
If we are unable to maintain and develop our strategic relationships and
distribution arrangements, our Internet postage service may not achieve
commercial acceptance.
We have established strategic relationships with a very limited number of
third parties. If we receive US Postal Service approval, our strategic
relationships will generally involve the promotion and distribution of our
service through our partners' Web sites. Additionally, some of our
relationships provide for the inclusion of our logo or promotional offers for
our service in packaging and marketing materials utilized by our partners. In
return for promoting our service, our partners may receive revenue sharing
opportunities. In order to achieve wide distribution of our service, we believe
we must establish additional similar relationships to effectively market our
service. We have limited experience in establishing and maintaining these
strategic relationships and we may fail in our efforts to establish and
maintain our strategic relationships. In addition to establishing
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and maintaining these relationships, our distribution agreements are dependent
upon US Postal Service approval of our Internet postage service. For example,
we regard our marketing and distribution agreement with America Online as one
of our most significant strategic relationships and it is subject to
termination at the option America Online if we do not receive US Postal Service
approval for our service by August 15, 1999.
None of our current strategic relationships have resulted in revenues,
primarily because the US Postal Service has not approved our Internet postage
service for commercial release. 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 strategic
relationships may not be successful.
If our Internet postage service does not achieve commercial acceptance, our
operating results will suffer.
Assuming we receive US Postal Service approval, we will rely on a single
service for our revenues for the foreseeable future. As a result, our ability
to gain commercial acceptance of our Internet postage service is critical to
our success. Any failure to successfully gain commercial acceptance of our
Internet postage service would not only have a material adverse effect on our
business and results of operations but also on our ability to seek any
additional revenue opportunities.
System and online security failures could harm our business and operating
results.
Our Internet postage service depends 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. For example, all of our
Internet postage processing hardware is located in our facility in Southern
California, a seismically active region. Our servers are also vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions. We
have experienced minor system interruptions in the past and may experience them
again in the future. Any substantial interruptions in the future could result
in the loss of data and could completely impair our ability to generate
revenues from our service. We do not presently have a formal disaster recovery
plan in effect. We are currently evaluating our business interruption insurance
to determine whether we have sufficient coverage to compensate us for losses
that may occur after our commercial launch.
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 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, it could seriously harm our reputation, business, financial condition
and results of operations. 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.
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If we do not expand our product and service offerings, our business may not
grow.
We may 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. At present, we have no commitments or agreements and
are not currently engaged in discussions for any material acquisitions or
investments. 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
services. 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 incurrence of additional debt, the assumption of known and
unknown liabilities, and the amortization of expenses related to goodwill and
other intangible assets, all of which could have a material adverse effect on
our business, financial condition and operating results. New issuances of
securities may also have rights, preferences and privileges senior to those of
our common stock.
We expect that fluctuations in our operating results could cause our stock
price to fall.
As of March 31, 1999, we had not generated any revenues from our
operations. Accordingly, we have a limited basis upon which to predict future
operating results. We expect that our revenues, margins and operating results
will fluctuate significantly due to a variety of factors, many of which are
outside of our control. These factors include:
. timing of the commercial release of our Internet postage service;
. the costs to defend ourselves against intellectual property claims;
. the costs of our marketing programs to establish the Stamps.com brand
name;
. demand for our Internet postage service;
. our ability to develop and maintain strategic and distribution
relationships;
. the number, timing and significance of new products or services
introduced by both us and our competitors;
. our ability to develop, market and introduce new and enhanced services
on a timely basis;
. the level of service and price competition;
. changes in our operating expenses as we expand operations; and
. 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 service. 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 because a relatively small amount of our
costs and expenses varies with our revenues in the short term.
Due to the foregoing factors and the other risks discussed in this
prospectus, you should not rely on period-to-period comparisons of our results
of operations as an indication of future performance. It is possible that in
some future periods our results of operations will be below the expectations of
public market analysts and investors. In this event, the market price of our
common stock is likely to fall.
11
<PAGE>
If we do not achieve brand recognition necessary to succeed in the Internet
postage market, our business will suffer.
We must quickly build our Stamps.com brand to gain market acceptance for
our service. We believe it is imperative to our long term success that we
obtain significant market share for our services before other competitors enter
the Internet postage market. 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 service. If we fail to gain market acceptance for
our service, our business will suffer dramatically.
If we are unable to compete successfully, particularly against large,
traditional providers of postage products such as Pitney Bowes who enter the
online postage market, our revenues and operating results will suffer.
The market for Internet postage products and services is new and we expect
it to be intensely competitive. At present, three other vendors seeking
certification through the Information Based Indicia Program have hardware
products available for beta testing. One of the hardware vendors also has a
software-based product in beta testing. Another of these hardware vendors,
Pitney Bowes, has made formal comments to the US Postal Service asserting that
it holds several patents and has patent applications pending which are
infringed by the product specifications that Information Based Indicia Program
participants are required to follow. To that end, Pitney Bowes filed two
separate lawsuits in June 1999 against us and E-Stamp alleging infringement of
Pitney Bowes patents. See "--Intellectual property infringement claims,
including a June 1999 claim against us by Pitney Bowes, could delay our
development and harm our results of operations." Given Pitney Bowes'
assertions, they may have the technology available to duplicate the products
and services offered by other Internet postage providers, including Stamps.com.
In a May 1999 press release, Pitney Bowes announced its intention to
demonstrate both a hardware and software-based Internet postage solution. If
any of our competitors, including Pitney Bowes, could provide the same or
similar service as us, our operations could be adversely impacted. Based on
current participants in the Information Based Indicia Program, we expect that
our competitors will initially include:
. traditional providers of postage products and services, including
Pitney Bowes and Neopost Industrie;
. potential providers of Internet postage products and services,
including Pitney Bowes, E-Stamp and Neopost;
Internet postage may not be adopted by postage consumers. These consumers
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
12
<PAGE>
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. See "Business--Our
Competition."
We rely on a relatively new management team and need additional personnel to
grow our business.
Our management team is relatively new and we intend to continue to hire key
management personnel, including a Chief Operating Officer. For example, our
Chief Executive Officer was hired in October 1998 and our Chief Financial
Officer was hired in September 1998. There can be no assurance that we will
successfully assimilate our recently hired managers or that we can successfully
locate, hire, assimilate and retain qualified key management personnel. Our
business is largely dependent on the personal efforts and abilities of our
senior management, including Mr. Payne, our Chief Executive Officer, Mr.
LaValle, our Chief Financial Officer, and other key personnel. Any of our
officers or employees can terminate his or her employment relationship at any
time. The loss of these key employees or our inability to attract or retain
other qualified employees could have a material adverse effect on our results
of operations and financial condition.
Our future success depends on our ability to attract, retain and motivate
highly skilled technical, managerial, editorial, merchandising, marketing and
customer service personnel. We plan to hire additional personnel in all areas
of our business. Competition for qualified personnel is intense, particularly
in the Internet and high technology industries. 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
technical personnel. The failure to retain and attract the necessary personnel
could seriously harm our business, financial condition and results of
operations.
If we do not respond effectively to technological change, our service could
become obsolete and our business will suffer.
The development of our service 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 market 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 service;
. develop new services 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 successfully use new technologies
effectively or adapt 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.
13
<PAGE>
If we market our Internet postage service internationally, foreign governments'
regulation could disrupt our operations.
One element of our strategy is to provide our service in international
markets. Our ability to provide our service in international markets would
likely be subject to rigorous governmental approval and certification
requirements similar to those imposed by the US Postal Service. For example,
our service cannot currently be used for international mail because foreign
postal authorities do not currently recognize information based indicia
postage. If foreign postal authorities in the future accept postage generated
by our service and if we obtain the necessary foreign certification or
approvals, we would likely be subject to ongoing regulation by international
governments and agencies. To date, efforts to create a certification process in
Europe and other foreign markets are in a very 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.
If we achieve significant international acceptance of our service, our
business activities will be subject to a variety of potential risks, including
the adoption of laws and regulatory requirements, political and economic
conditions, difficulties protecting our intellectual property rights and
actions by third parties that would restrict or eliminate our ability to do
business in these jurisdictions. If we begin to transact business in foreign
currencies, we will become subject to the risks attendant to transacting in
foreign currencies, including the potential adverse effects of exchange rate
fluctuations.
If the internal and third-party equipment and software that we use are not Year
2000 compliant, our operating results, brand and reputation could be impaired
and we could lose users.
Many existing computer systems and software products are coded to accept
only two digit entries in the date code field and cannot distinguish 21st
century dates from 20th century dates. If not corrected, there could be system
failures or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in normal
business activities. As a result, many companies' software and computer systems
may need to be upgraded or replaced to comply with these "Year 2000"
requirements.
We use and depend on third-party equipment and software that may not be
Year 2000 compliant. If Year 2000 issues prevent our users from accessing the
Internet or our service, purchasing postage or using their credit cards, our
business and operations will suffer. Any failure of our third-party equipment
or software to operate properly could result in system and online security
failures and require us to incur unanticipated expenses, resulting in serious
harm to our business, operating results and financial condition. For example,
we rely on the US Postal Service's secure postage accounting vault to purchase
postage credit for our customers. If the US Postal Service systems are not Year
2000 compliant, users of our service may not be able to purchase additional
postage.
Our failure to make our service Year 2000 compliant could result in:
. a decrease in sales of our service;
. an increase in the allocation of resources to address Year 2000
problems of our users without additional revenue commensurate with the
dedication of our resources; and
. an increase in litigation costs relating to losses suffered by our
users due to Year 2000 problems.
Furthermore, the purchasing patterns of users or potential users may be
affected by Year 2000 issues as companies expend significant resources to
correct their current systems. These expenditures may result in reduced funds
available to purchase our service, which could seriously harm our business,
operating results and financial condition. We have conducted a preliminary
review of our internal computer systems to identify the systems that could be
affected by the Year 2000 issue. Based on this preliminary review, we believe
that our internal software systems are Year 2000 compliant. However, we
continually evaluate our systems and intend
14
<PAGE>
to develop a contingency plan to address any Year 2000 issues we discover. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Our growth and operating results could be impaired if we are unable to meet our
future capital requirements.
We believe that our current cash balances together with the net proceeds of
this offering will allow us to fund our operations for at least the next 12
months. However, we may require substantial working capital to fund our
business and we may need to raise additional capital. We cannot be certain that
additional funds will be available on satisfactory terms when needed, if at
all. Our future capital needs depend on many factors, including:
. the timing of our development efforts and US Postal Service approval of
our service;
. market acceptance of Internet postage;
. the level of promotion and advertising required to launch our service;
and
. changes in technology.
The various elements of our business and growth strategies, including our
plans to support fully the commercial release of our service, our introduction
of new products and services and our investments in infrastructure will require
additional capital. If we are unable to raise additional necessary capital in
the future, we may be required to curtail our operations significantly or
obtain funding through the relinquishment of significant technology or markets.
Also, raising additional equity capital would have a dilutive effect on
existing stockholders.
We face risks related to the Internet industry
The success of our business will depend on the continued growth of the Internet
and the acceptance by consumers of the Internet as a means for purchasing
postage.
Our success depends in part on widespread acceptance and use of the
Internet as a way to purchase postage. This practice is at an early stage of
development, and market acceptance of Internet postage is uncertain. We cannot
predict the extent to which users will be willing to shift their purchasing
habits from traditional to online postage purchasing. To be successful, our
users must accept and utilize electronic commerce to satisfy their product
needs. Our future revenues and profits, if any, substantially depend upon the
acceptance and use of the Internet and other online services as an effective
medium of commerce by our target users.
The Internet may not become a viable long-term commercial marketplace due
to potentially inadequate development of the necessary network infrastructure
or delayed development of enabling technologies and performance improvements.
The commercial acceptance and use of the Internet may not continue to develop
at historical rates. Our business, financial condition and results of
operations would be seriously harmed if:
. use of the Internet and other online services does not continue to
increase or increases more slowly than expected;
. the infrastructure for the Internet and other online services does not
effectively support future expansion of electronic commerce or Internet
postage;
. 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 become subject to burdensome
government regulation and legal uncertainties.
With the exception of US Postal Service 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
15
<PAGE>
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; and
. characteristics and quality of products and services.
The adoption of any additional laws or regulations may decrease 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 plan to offer our service over the Internet in multiple states and
foreign countries. 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 Internet postage
service 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.
We are subject to risks related to the offering
We cannot be certain that an active trading market will develop for our common
stock.
Prior to this offering, there has been no public market for our common
stock and we cannot assure you that an active trading market for the common
stock will develop or continue as a result of this offering. If no active
trading market develops for our common stock, you may have difficulty
purchasing or selling our common stock, which could adversely affect the price
you are able to obtain for our common stock.
The rights of our stockholders could be adversely affected because of the
concentrated control of our stock.
After this offering, our executive officers, directors and 5% stockholders
will control approximately 80% of our voting stock. These stockholders will
have significant influence and ability to control most matters requiring board
and stockholder approval, including a significant corporate transaction like
the sale of our company, a change in control, or the terms of future equity
financings. These stockholders could use their control in ways that may not be
beneficial to our stockholders.
Our stock price could fluctuate dramatically which could result in substantial
losses to investors.
The trading price of our common stock is likely to be volatile and could
fluctuate dramatically in response to the following factors, some of which are
beyond our control:
. changes in expectations of our future financial performance, including
financial estimates by securities analysts and investors;
16
<PAGE>
. changes in operating and stock price performance of other Internet and
online companies similar to us;
. future sales of our common stock; or
. general economic factors.
Domestic and international stock markets often experience significant price
and volume fluctuations. These fluctuations, as well as general economic and
political conditions unrelated to our performance, may adversely affect the
price of our common stock. In particular, following initial public offerings,
the market prices for stocks of Internet and technology-related companies often
reach levels that bear no relationship to the operating performance of these
companies. These market prices are generally not sustainable and could vary
widely. The market prices of the securities of Internet-related and online
companies have been especially volatile. If our common stock trades to high
levels following this offering, it could eventually experience a significant
decline.
Our offering price does not necessarily relate to any established criteria of
value and our stock price may trade at prices below our offering price.
Through negotiations with the underwriters, we will determine the public
offering price of the shares of our common stock. This price will not
necessarily relate to our book value, assets, past operating results, financial
condition or any other established criteria of value. As a result, the shares
being offered may trade at market prices below the initial public offering
price.
Additional shares held by existing stockholders may be sold into the public
market in the near future, which could cause our stock price to decline.
Sales of substantial amounts of our common stock in the public market after
this offering could adversely affect the prevailing market price of our common
stock. Upon completion of this offering, we will have 34,771,454 shares of
common stock outstanding assuming no exercise of the underwriters over-
allotment option and no exercise of outstanding options after March 31, 1999.
Of those shares, a total of 5,000,000 shares will be freely tradable under the
Securities Act unless purchased or held by our "affiliates," as that term is
defined in Rule 144 under the Securities Act. As part of this offering, our
executive officers, directors and stockholders have agreed with the
underwriters that they will not offer or sell any shares of common stock for a
period of 180 days after the date of this prospectus without the prior written
consent of BancBoston Robertson Stephens Inc., except for options granted under
our stock incentive plan. BancBoston Robertson Stephens Inc. may, in its sole
discretion, at any time and without notice, release all of our portion of the
shares of common stock subject to these agreements. Sales of substantial
amounts of common stock in the public market, or the perception that these
sales could occur, could adversely affect the prevailing market price for our
common stock and could impair our ability to raise capital through a public
offering of equity securities.
Our management has broad discretion over use of the proceeds from this offering
and may not use the proceeds effectively.
The net proceeds of this offering will be approximately $50,450,000 at an
initial public offering price of $11.00 per share and after deducting the
underwriting discounts and estimated offering expenses. Our management will
retain broad discretion as to the allocation of the proceeds of this offering.
See "Use of Proceeds."
Our charter documents could deter a takeover effort, which could inhibit your
ability to receive an acquisition premium for your shares.
Provisions of our Amended and Restated Certificate of Incorporation, Bylaws
and Delaware law could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders. In addition, we are
subject to the provisions of Section 203 of the Delaware General Corporation
Law. This
17
<PAGE>
statute could prohibit or delay the accomplishment of mergers or other takeover
or change in control attempts with respect to us and, accordingly, may
discourage attempts to acquire us. See "Description of Capital Stock."
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
This prospectus contains forward looking statements that are based on our
current expectations, assumptions, estimates and projections about us and our
industry. When used in this prospectus, the words "expects," "anticipates,"
"estimates," "intends," "believes" and similar expressions are intended to
identify forward looking statements. These statements include, but are not
limited to, statements under the captions "Risk Factors," "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus. These forward looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. The cautionary statements
made in this prospectus should be read as being applicable to all related
forward looking statements wherever they appear in this prospectus.
---------------------
Stamps.com(TM) and Postage Server(TM) are our trademarks. This prospectus
also includes trademarks of entities other than Stamps.com.
18
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of the 5,000,000 shares of common stock
offered by this prospectus will be approximately $50,450,000 based upon an
initial offering price of $11.00 per share and after deducting underwriting
discounts and commissions and estimated offering expenses payable by us.
We currently estimate that the net proceeds of the offering will be used as
follows:
. 60% for expansion of our marketing and distribution partnerships;
. 5% to enhance our server and network infrastructure and the
functionality of our Web site; and
. 35% for working capital and other general corporate purposes.
Pending these uses, the net proceeds of the offering will be invested in
short-term, interest-bearing, investment-grade instruments. As of the date of
this prospectus, we can only estimate the particular uses for the net proceeds
to be received upon completion of the offering. As a result, the above
estimates and our use of proceeds are subject to change at our management's
discretion. The amounts actually expended for each of the purposes listed above
may vary significantly depending upon a number of factors, including the
progress of our marketing programs, capital spending requirements, and
developments in the Internet postage market and Internet commerce.
From time to time, in the ordinary course of business, we may 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. A portion of the net proceeds may be
used to fund acquisitions or investments. We currently have no arrangements,
agreements or understandings, and are not engaged in active negotiations for
any material acquisitions or investments.
DIVIDEND POLICY
We have never declared nor paid cash dividends on our capital stock. We
currently intend to retain all available funds for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future. Any future determination to pay dividends will be at
the discretion of our Board of Directors and will depend on our results of
operations, financial conditions, contractual and legal restrictions and other
factors it deems relevant.
19
<PAGE>
CAPITALIZATION
The following table indicates our capitalization as of March 31, 1999 on an
actual basis and on a pro forma as adjusted basis:
. to reflect the automatic conversion of all outstanding shares of
preferred stock into shares of common stock upon the closing of this
offering; and
. to give effect to the receipt of the net proceeds from the sale of
5,000,000 shares of common stock at an initial public offering price of
$11.00 per share.
<TABLE>
<CAPTION>
March 31, 1999
--------------------
(Unaudited)
Pro Forma
Actual As Adjusted
------- -----------
(in thousands,
except share data)
<S> <C> <C>
Line of credit and capital lease obligations ............. $ 1,425 $ 1,425
------- -------
Redeemable preferred stock, par value $0.001, (Series A, B
and C); 15,500,000 shares authorized; 15,246,986 shares
issued and outstanding, actual; 5,000,000 shares
authorized; no shares issued and outstanding, pro forma
as adjusted............................................. 34,278 --
Stockholders' equity (deficit):
Common stock, par value $0.001; 40,000,000 shares
authorized, 6,900,975 issued and outstanding, actual;
95,000,000 shares authorized, 34,771,454 issued and
outstanding, pro forma as adjusted..................... 7 35
Additional paid-in capital................................ 4,785 89,485
Notes receivable for stock sales.......................... (117) (117)
Deferred compensation..................................... (4,020) (4,020)
Accumulated deficit during development stage.............. (7,882) (7,882)
------- -------
Total stockholders' equity (deficit)..................... (7,227) 77,501
------- -------
Total capitalization.................................... $28,476 $78,926
======= =======
</TABLE>
The number of shares outstanding after this offering is 34,771,454
excluding, as of the date of this prospectus:
. 1,914,141 shares of common stock that may, but have not yet been issued
under our stock option and stock purchase plans; and
. options and warrants to purchase a total of 5,382,909 shares of common
stock at a weighted average exercise price of $0.84 per share.
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<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 1999 was
approximately $26,974,784, or $0.91 per share of common stock. Pro forma net
tangible book value per share represents the amount of our pro forma total
tangible assets less pro forma total liabilities divided by the pro forma
number of shares of common stock outstanding as of March 31, 1999. Without
taking into account any other changes in pro forma net tangible book value,
other than to give effect to our sale of the 5,000,000 shares of common stock
in this offering and the receipt and application of the net proceeds from this
offering, the pro forma net tangible book value of as of March 31, 1999 would
have been approximately $77,424,784, or $2.23 per share of common stock. This
represents an immediate increase in pro forma net tangible book value of $1.32
per share to existing stockholders and an immediate dilution in pro forma net
tangible book value of $8.77 per share to investors purchasing common stock in
this offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share....................... $11.00
Pro forma net tangible book value per share as of March 31,
1999....................................................... $ 0.91
Increase per share attributable to new investors............. 1.32
------
Pro forma net tangible book value per share after this
offering.................................................... 2.23
------
Dilution per share to new investors........................... $ 8.77
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1999,
the difference between the number of shares of common stock purchased from us,
the total consideration paid and the average price per share paid by existing
stockholders and by new investors, at an initial public offering price of
$11.00 per share and before deducting underwriting discounts and commissions
and estimated offering expenses payable by us:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount Percent per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 29,771,454 85.6% $36,214,788 39.7% $ 1.22
New investors.............. 5,000,000 14.4 55,000,000 60.3 $11.00
---------- ----- ----------- -----
Total.................... 34,771,454 100.0% $91,214,788 100.0%
========== ===== =========== =====
</TABLE>
The foregoing table assumes no exercise of the underwriters' over-allotment
option or shares underlying outstanding options and warrants. As of May 31,
1999, options and warrants to purchase 5,382,909 shares of common stock were
outstanding at a weighted average exercise price of $0.84 per share. To the
extent that these options are exercised, new investors will experience further
dilution.
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<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except per share data)
The following selected financial data should be read with our financial
statements and the notes to those statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this prospectus. The statement of operations data for the period from
inception through December 31, 1998 and the balance sheet data at December 31,
1998, are derived from our financial statements which have been audited by
Arthur Andersen LLP, our independent public accountants, and are included
elsewhere in this prospectus. The statements of operations data for the period
January 9, 1998 (inception) through March 31, 1998 and the three month period
ended March 31, 1999, and the balance sheet data at March 31, 1999, are derived
from our unaudited interim financial statements included elsewhere in this
prospectus. Our unaudited financial statements have been prepared on
substantially the same basis as the audited consolidated financial statements
and, in the opinion of our management, include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of the results
of operations for these periods. Please be advised that historical results are
not necessarily indicative of the results to be expected in the future, and
results of interim periods are not necessarily indicative of results for the
entire year.
<TABLE>
<CAPTION>
January 9, 1998 January 9, 1998
(inception) through (inception) through Three Months Ended
December 31, 1998 March 31, 1998 March 31, 1999
------------------- ------------------- ------------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $ -- $ -- $ --
Costs and expenses:
Research and
development.......... 1,532 83 1,160
General and
administrative....... 2,648 280 2,528
----------- ---------- -----------
Total costs and
expenses............ 4,180 363 3,688
----------- ---------- -----------
Loss from operations.... (4,180) (363) (3,688)
Interest expense, net... (16) -- 2
----------- ---------- -----------
Net loss................ $ (4,196) $ (363) $ (3,686)
=========== ========== ===========
Basic and diluted net
loss per share........ $ (0.85) $ (0.09) $ (0.53)
=========== ========== ===========
Pro forma basic and
diluted net loss per
share................. $ (0.36) $ (0.05) $ (0.15)
=========== ========== ===========
Weighted average shares
outstanding used in
basic and diluted net
loss per share
calculation........... 4,955,913 4,240,518 6,900,975
Weighted average shares
outstanding used in
pro forma basic and
diluted net loss per
share calculation..... 11,593,380 6,863,917 25,057,782
</TABLE>
<TABLE>
<CAPTION>
As of As of
December 31, 1998 March 31, 1999
----------------- --------------
(unaudited)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........... $3,470 $28,524
Working capital..................... 1,385 26,090
Total assets........................ 4,426 29,872
Line of credit and capital lease
obligations....................... 1,473 1,425
Redeemable preferred stock.......... 5,978 34,278
Total stockholders'
equity (deficit).................. (3,951) (7,227)
</TABLE>
Our statement of operations data for the period from inception through
December 31, 1998 includes approximately $35,000 of expenses incurred prior to
incorporation. Prior to incorporation, the founders primarily investigated the
feasibility of entering into the US Postal Service's Information Based Indicia
Program and initiated the certification process.
All expenses other than those related to research and development are
classified as general and administrative until we recognize revenue from our
principal business activities. In addition, the provision for income taxes
which consist solely of minimum state taxes is classified as general and
administrative.
Please refer to note 1 of the notes to our financial statements for a
description of the method used to compute basic and diluted loss per share and
pro forma basic and diluted loss per share. Our pro forma calculations give
effect to the conversion of all outstanding shares of our preferred stock into
common stock upon closing of this offering as if the conversion occurred on
January 9, 1998, or the date of original issuance, if later.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This prospectus contains forward looking statements that involve risks and
uncertainties. Actual events or results may differ materially from those
projected in these forward looking statements. See "Information Regarding
Forward Looking Statements." The following discussion of our financial
condition and results of operations also should be read in conjunction with the
financial statements and notes to those statements included elsewhere in this
prospectus.
Overview
We offer a convenient, cost effective and easy to use service for
purchasing and printing postage over the Internet. Beginning in September 1996,
our founders investigated the feasability of entering into the US Postal
Service Information Based Indicia Program and initiated the certification
process. We had no revenues and immaterial expenses prior to our incorporation
in Delaware on January 9, 1998. In February 1998, we raised $1.5 million in a
private placement transaction and commenced development of our Internet postage
service within the US Postal Service framework of specification and performance
requirements.
In August 1998, we received US Postal Service approval for Phase I beta
testing. Also in August 1998, we raised an additional $0.6 million in private
placements and commenced hiring key executives. In September 1998, we hired a
core technology team to continue development of our Internet postage service
and in October and November 1998, we closed another private placement
transaction for $3.9 million.
In December 1998, we changed our name from StampMaster, Inc. to Stamps.com
Inc. and received US Postal Service approval for Phase II beta testing, which
resulted in an increase to our user base for our service from 25 to 500 users.
From the end of December 1998 to the end of March 1999, we grew from 34
employees to 77 employees, including key executive hires. In February and March
1999, we also completed a private placement transaction that raised $30.0
million. We had deferred compensation of $6.7 million and we will amortize that
amount over four years.
To date, we have not recognized any revenue and do not expect to recognize
any revenues until after we receive US Postal Service approval for our Internet
postage service. If we receive US Postal Service approval for our service, we
intend to offer promotional programs to build our brand recognition and attract
a customer base. For example, as a part of several distributor agreements, we
plan to provide a promotional offer that allows our distributors to offer a
limited amount of free postage to their customers who purchase a set amount of
postage from our Internet postage service. The promotional offer can be
terminated at any time at our sole discretion. Costs associated with any "free
postage" promotion will be classified as sales and marketing expenses. We
cannot at this time predict whether the "free postage" promotional offer or any
other promotional offer will have a material impact on our results of
operations.
In late June 1999, we launched our new Web site which contains proposed
pricing plans upon our commercial release. We are currently contemplating
offering two different service plans to our users: a Business Plan and a
Personal Plan. Under each plan, a user purchases postage at cost and is charged
a monthly convenience fee based on how much postage he or she uses during the
month. The Business Plan, which is targeted at high volume users of mail such
as home offices and small offices and businesses, assesses a convenience fee
equal to 10% of the postage used during the month. This plan has a monthly
minimum fee of $3.99 and a monthly maximum fee of $19.99. The Personal Plan,
which is targeted at light volume personal users of mail, charges a flat rate
monthly convenience fee of $1.99 that allows a customer to use up to $25 of
postage per month. If a Personal Plan customer uses more than $25 postage in
any given month, a 15% convenience fee on the amount of additional postage used
over $25 will be added to the $1.99 flat rate. The maximum charge under the
Personal Plan is $19.99. The Personal Plan offers customers the ability to
pre-pay one year's worth of $1.99 fees at a discounted rate of $19.99 with all
other terms of the Personal Plan the same as described. Under both plans,
convenience fees are calculated and charged at the end of a monthly
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<PAGE>
billing cycle. Although we have established these initial pricing programs, the
current limited beta use of our service and the lack of a commercial market for
Internet postage may cause us to reconsider these plans. We cannot be sure that
these proposed fees will be our ultimate pricing approach or that these fees
will generate significant customer use of our service. As a result, we cannot
predict whether any contemplated pricing or fee structure will ever generate
revenues or profits for us. See "Risk Factors--We have a history of losses and
expect to incur losses in the future, and we may never achieve profitability."
Our Results of Operations
Revenues. We have recognized no revenues to date and we do not expect to
recognize revenues until after our Internet postage service is approved by the
US Postal Service for commercial release. If the US Postal Service approves our
Internet postage service for commercial release, we will offer service plans
that provide access to our Internet Postage Server and, as described above, we
plan to assess a convenience fee based on the customer's postage use.
Cost of Revenues. We currently have no cost of revenues because we have not
recognized any revenues to date. Once we begin to charge convenience fees, cost
of revenues will primarily consist of costs related to customer service
activities and server and network operations and, to a lesser extent, bank
processing charges for customer fees paid by credit card, Internet connection
charges, depreciation of server and network equipment and allocation of
overhead.
Sales and Marketing Expenses. Costs related to our sales and marketing
efforts, which to date have not been significant, are currently classified as
general and administrative expenses until we commence charging convenience
fees. Our sales and marketing expenses will consist of compensation for sales
and marketing personnel, advertising, creative development and promotional
costs and commissions. The majority of these costs will be directed to programs
designed to build brand name recognition, attract a customer base and retain
the anticipated customer base.
Research and Development Expenses. Our research and development expenses
principally consist of compensation for personnel involved in the development
effort of our Internet postage service, which includes our Web site and
systems, and expenditures for consulting services, third-party software and
other costs related to development. Our research and development expenses for
the year ended December 31, 1998 were $1.5 million. Our research and
development expenses increased to $1.2 million for the quarter ended March 31,
1999 from approximately $83,000 for the quarter ended March 31, 1998. The
increase is due to our expanded development efforts in the latest quarter,
including increased personnel and consulting costs. We believe that significant
investments in research and development are required to remain competitive. We
expect that we will continue to incur significant research and development
expenses.
General and Administrative Expenses. Our general and administrative
expenses consist primarily of salaries and related costs for general corporate
functions, including finance, accounting, facilities and fees for legal and
other professional services. Our general and administrative expenses for the
year ended December 31, 1998 were $2.6 million. Our general and administrative
expenses increased to $2.5 million for the quarter ended March 31, 1999 from
approximately $280,000 for the quarter ended March 31, 1998. The increase is
principally due to increase in personnel, facility costs, professional service
fees and the amortization of deferred compensation.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through the
private placement of equity securities, raising $36.0 million through March 31,
1999. At March 31, 1999, we had $28.5 million, in cash and cash equivalents,
and at March 31, 1998, we had $1.0 million in cash and cash equivalents. We
have had significant negative cash flows from operating activities in each
fiscal and quarterly period to date.
24
<PAGE>
In December 1998, we entered into a distribution and marketing agreement
with America Online that will require payments by us of $2.3 million through
February 2000. In May 1999, we entered into a facility lease agreement for our
corporate headquarters with minimum lease payments of approximately $4.8
million through May 2004. Also in May 1999, we entered into an agreement with
Intuit which requires payments by us of $3.3 million through 2000.
On June 16, 1999, Pitney Bowes filed a patent infringement lawsuit against
us. The suit seeks treble damages, a preliminary and permanent injunction from
further alleged infringement, attorneys' fees and other unspecified damages. If
Pitney Bowes successfully asserts an infringement claim against us or if we are
unable to obtain a license from Pitney Bowes, our business and operations would
be severely impacted. See "Risk Factors--Intellectual property infringement
claims, including a June 1999 claim against us by Pitney Bowes, could delay our
development and harm our results of operations" and "Business--Legal
Proceedings."
Net cash used in our operating activities was $2.9 million for the quarter
ended March 31, 1999, $0.3 million for the quarter ended March 31, 1998 and
$3.1 million for the year ended December 31, 1998. Cash used in operating
activities consisted primarily of net operating losses and increases in prepaid
expenses, which were partially offset by increases in accrued expenses and
accounts payable.
Net cash used in our investing activities was $0.3 million for the quarter
ended March 31, 1999, $0.1 million for the quarter ended March 31, 1998 and
$0.4 million for the year ended December 31, 1998. Net cash used in investing
activities in these periods consisted primarily of capital expenditures for
computer equipment, purchased software and office equipment.
Net cash provided by our financing activities was $28.3 million for the
quarter ended March 31, 1999, $1.5 million for the quarter ended March 31, 1998
and $6.9 million for the year ended December 31, 1998. Net cash provided by
financing activities was principally attributable to the private sale of
preferred stock and, to a lesser extent, to the proceeds from a line of credit.
We believe that our current cash balances together with the net proceeds of
this offering will allow us to fund our operations for at least the next 12
months. However, we may require substantial working capital to fund our
business and we may need to raise additional capital. We cannot be certain that
additional funds will be available on satisfactory terms when needed, if at
all. See "Risk Factors--Our growth and operating results could be impaired if
we are unable to meet our future capital requirements."
Year 2000
Many existing computer systems and software products are coded to accept
only two digit entries in the date code field and cannot distinguish 21st
century dates from 20th century dates. If not corrected, there could be system
failures or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in normal
business activities. As a result, many companies' software and computer systems
may need to be upgraded or replaced to comply with these "Year 2000"
requirements.
The US Postal Service requires participants in the Information Based
Indicia Program to maintain Year 2000 compliant systems and software. As a
result, we have reviewed the Year 2000 compliance of our systems. This review
has included testing to determine how our systems will function at and beyond
the Year 2000. Since inception, we have internally developed substantially all
of the systems for the operation of our Internet postage service. These systems
include the software used to provide customer interaction and transactional and
distribution functions to our service, as well as monitoring and back-up
capabilities. Based upon our assessment to date, we believe that our systems
are Year 2000 compliant and have submitted Year 2000 readiness disclosure
statements to the US Postal Service to indicate our Year 2000 compliance.
However, we cannot be sure how our software will integrate with other vendor-
provided software.
25
<PAGE>
We use and depend on third-party equipment and software, including systems
operated by the US Postal Service, that may not be Year 2000 compliant.
Consequently, our ability to address Year 2000 issues is, to a large extent,
dependent upon the Year 2000 readiness of these third parties' hardware and
software products. We are currently assessing the Year 2000 readiness of other
third-party supplied software, computer technology and other services and of
our vendors. We have initiated communications or obtained information from our
vendors and suppliers of third-party equipment and software to validate that
their products and systems are Year 2000 compliant. Based on the
representations that we have received and obtained from our third party vendors
and suppliers, we believe that their systems are Year 2000 compliant. We will
develop and implement, if necessary, a remediation plan with respect to third-
party software, third-party vendors and computer technology and service that
may fail to be Year 2000 compliant.
To date, the expenses associated with the assessment of our Year 2000
compliance have not been material and our potential remediation costs and
potential remediation plan cannot be determined at this time. If Year 2000
issues prevent our users from accessing the Internet or our service, purchasing
postage or using their credit cards, our business and operations will suffer.
Any failure of our third-party equipment or software to operate properly could
require us to incur unanticipated expenses, which could seriously harm our
business, operating results and financial condition. For example, we rely on
the US Postal Service's secure postage accounting vault to purchase postage
credit for our customers. If the US Postal Service systems are not Year 2000
compliant, users of our service may not be able to purchase additional postage.
The Year 2000 readiness of the general infrastructure necessary to support
our operations is difficult to assess. For instance, we depend on the integrity
and stability of the Internet to provide our services. We also depend on the
Year 2000 compliance of the computer systems and financial services used by
consumers. Thus, the infrastructure necessary to support our operations
consists of a network of computers and telecommunications systems located
throughout the world and operated by numerous unrelated entities and
individuals, none of which has the ability to control or manage the potential
Year 2000 issues that may impact the entire infrastructure. Our ability to
assess the reliability of this infrastructure is limited and relies solely on
generally available news reports, surveys and comparable industry data. Based
on these sources, we believe most entities and individuals that rely
significantly on the Internet are carefully reviewing and attempting to
remediate issues relating to Year 2000 compliance, but it is not possible to
predict whether these efforts will be successful in reducing or eliminating the
potential negative impact of Year 2000 issues. A significant disruption in the
ability of consumers to reliably access the Internet or to use their credit
cards or other electronic payment methods would have an adverse effect on
demand for our services and would harm our results of operations.
At this time, we have not yet developed a contingency plan to address
situations that may result if we or our vendors are unable to achieve Year 2000
compliance. The cost of developing and implementing this plan, if necessary,
could be material. Any failure of our material systems, our vendors' material
systems or the Internet to be Year 2000 compliant could have material adverse
consequences for us. These consequences could include difficulties in operating
our service effectively or conducting other fundamental parts of our business.
Recently Issued Accounting Pronouncements
The American Institute of Certified Public Accountants issued Statement of
Position No. 98-1, "Software for Internal Use," which provides guidance on
accounting for the costs of computer software developed or obtained for
internal use. Currently, we capitalize costs of computer software obtained for
internal use in our Web design and network operations. These capitalized costs
are amortized based on their estimated useful life. Payroll and related costs
are not capitalized, as the amounts are immaterial and principally relate to
maintenance. Purchased or leased computer software used in research and
development activities are accounted for in accordance with the provisions of
Statement of Financial Accounting Standards No. 2., "Accounting for Research
and Development Costs." Statement of Financial Accounting Standards No. 2
generally requires all research and development costs to be charged to expense
when incurred if no alternative future uses exist. Statement of Position No.
98-1 is effective for financial statements for fiscal years beginning after
December 15, 1998. We do not expect that the adoption of Statement of Position
No. 98-1 will have a material impact on our financial statements.
26
<PAGE>
BUSINESS
This prospectus contains forward looking statements that involve risks and
uncertainties. Actual results and the timing of events could differ materially
from those projected in the forward looking statements due to a number of
factors, including those set forth under "Risk Factors" and elsewhere in this
prospectus.
Our Company
We offer a convenient, cost effective and easy to use service for
purchasing and printing postage over the Internet. Our core service is designed
to enable users to print information based indicia, or electronic stamps,
directly onto envelopes, labels or business documents using ordinary laser or
inkjet printers. No additional hardware is necessary for a user to purchase and
print our Internet postage; the user's existing PC, printer and Internet set-up
are sufficient. Accessing our service is simple. A user will obtain our free
software either via a download from the Internet or through an install from a
CD-ROM. After installing the software and completing a brief registration
process, the user will connect via the Internet to our secure Postage Server
and purchase postage electronically 24 hours a day, seven days a week. We will
act as an ongoing intermediary between the US Postal Service and users by
offering the ability to purchase postage through our secure Postage Server. Our
technology works within rigorous US Postal Service requirements to provide
secure access to postage. Our Postage Server will be designed to interact with
word processing, contact and address management, accounting and corporate
applications to stamp letters, invoices, statements, checks and other business
documents automatically.
Overview of Our Industry
Growth of Internet Commerce
The Internet has emerged as a significant global communications medium,
enabling millions of people to share information and conduct business
electronically. A number of factors have contributed to the growth of the
Internet and its commercial use, including:
. the large and growing usage of personal computers in homes and
businesses;
. improvements in network infrastructure and bandwidth;
. easier and cheaper access to the Internet;
. increased awareness of the Internet among consumer and business users;
and
. the rapidly expanding availability of online content and commerce.
According to International Data Corporation, the number of Web users
worldwide will grow from an estimated 100 million in 1998 to 319 million by
2002. In addition, International Data Corporation estimates that the percentage
of Web users buying goods and services on the Internet will grow from 26% in
December 1997 to 40% in December 2002. International Data Corporation further
estimates that the total value of goods and services purchased over the Web
will increase from approximately $12.4 billion in 1997 to approximately $425.0
billion in 2002. Business-to-business commerce is expected to contribute
significantly to the future growth of Internet commerce. For example,
International Data Corporation estimates that business-to-consumer commerce on
the Internet will grow from approximately $5.0 billion in 1997 to approximately
$95.0 billion in 2002 while business-to-business commerce on the Internet will
grow from approximately $7.3 billion in 1997 to approximately $330.5 billion in
2002.
Rapid Growth in Internet Usage by Small Businesses
The small office/home office and small business markets represent a large
and growing customer segment. According to International Data Corporation,
there were a combined 44.7 million small businesses and home offices in the
United States in 1998, a number which International Data Corporation forecasts
will grow to 57.6 million by 2002. For 1998, International Data Corporation
reported that small businesses with less than 100 employees numbered 7.4
million of which 77% had fewer than 10 employees. In addition, home
27
<PAGE>
offices numbered 37.3 million, of which 22.2 million were income producing home
offices, and the remainder were home offices used for corporate after hours
work or telecommuting.
We believe that small businesses increasingly will rely on the
functionality and pervasiveness of the Internet to reach and serve a large and
global group of end users. The reduced cost of selling and marketing on the
Internet, the ability to build and serve a large base of customers
electronically and the potential for personalized low-cost customer interaction
provide significant economic advantages. These overall benefits, combined with
accessibility, have led to adoption of the Internet by small businesses and
home offices. According to International Data Corporation, there will be 30.2
million US home offices accessing the Internet by 2002. According to Cyber
Dialogue/FindSVP's 1999 US Small Business Internet Survey, 43% of businesses
with fewer than 100 employees are estimated to be online in 1999. Of those
small businesses that are currently online, 63% are already ordering products
online and are spending an average of $171 monthly on postage. The Cyber
Dialogue/FindSVP survey also found that 64% of online small businesses have
employees who are online multiple times a day. This increased use of the
Internet has resulted in small businesses becoming significant participants in
the electronic commerce market. International Data Corporation estimates that
small businesses accounted for $4.4 billion of electronic commerce in 1998 and
will account for approximately $100.4 billion of electronic commerce activity
in 2002.
Traditional Postage Industry and the Emergence of the Internet Postage
The traditional postage industry is large and growing. According to the US
Postal Service Annual Report, the total postage market was $58.0 billion in
1998, of which $38.9 billion was represented by first class, priority and
express mail with the remainder consisting of other classes of mail including
periodicals, bulk and international. In addition, the US Postal Service
processed over 197 billion pieces of mail in 1998 and, despite the growth in
the use of e-mail, the total US postage market increased by 3.1% in 1998 from
1997. Keenan Vision, an independent research firm, estimates that revenues from
first class, priority and express mail will grow to $46.2 billion by 2002.
Despite this consistent growth in the postage market, the US Postal Service has
experienced:
. strong competition from overnight delivery services;
. loss of revenue due to postal fraud; and
. continued public demand for more convenient access to US Postal Service
products and services.
In response to these challenges, in 1995 the US Postal Service announced a
program for its first new postage method since the approval of the postage
meter in 1920. The Information Based Indicia Program is a ten-stage
certification process for commercial release of Information Based Indicia
products, or electronic postage, that can be purchased over the Internet and
printed from a computer using ordinary laser or inkjet printers. Indicia are a
new type of US Postal Service approved postage marks similar to stamps or
metered postage. Information Based Indicia, which are essentially digital
stamps, consist of a two dimensional bar code containing an encrypted digital
signature that make each indicium unique. Through the Information Based Indicia
Program, the US Postal Service is seeking to enhance user convenience with a
new access channel for postage that allows users to print postage from their
personal computer 24 hours a day, seven days a week. The Information Based
Indicia Program is intended to achieve the US Postal Service's security and
revenue objectives by incorporating technological security features in each
unique digitally-signed indicium and a secure postage accounting vault to
provide greater revenue security. All Internet postage products, including any
subsequent enhancements or additional implementation of a product, must
complete US Postal Service testing and evaluation to ensure operational
reliability, financial integrity and security to become certified for
commercial distribution. Overall, the Information Based Indicia Program aims to
provide improved, accurate mail processing and increased productivity, a result
which is intended to:
. reduce US Postal Service costs and postal fraud;
. increase US Postal Service service to underserved markets, including
the rapidly growing small office/home office and other small business
markets; and
. improve the US Postal Service's competitive position against overnight
delivery services.
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The emergence of Internet postage though the US Postal Service's
Information Based Indicia Program has created an attractive channel for the
sale of postage, particularly to small office/home office and other small
businesses. According to a 1997 US Postal Service survey of over 1,600 home
offices, 98% of the respondents would likely use commercial software products
to print postage directly from their computers, 88% of the respondents did not
use a postage meter and 43% of the respondents purchased over $50 of postage
per month. We believe that small businesses consider cost-effective mail
generation, elimination of trips to the post office and the production of
professional-looking mail as key components of an effective mailing system.
Internet postage satisfies these requirements by providing 24 hours a day,
seven day a week access to metered mail from the desktop. Furthermore, when
considering the total cost of a traditional postage meter, including lease fees
for both the meter and scale, meter resetting fees and special ink cartridges,
small businesses pay a significant premium in addition to their normal postage
expenditures for leasing a postage meter. Leasing a postage meter also requires
space for additional hardware and the purchase of specialized materials and
supplies. Meanwhile, small businesses that find leasing a postage meter
uneconomical are still faced with the inconvenience of travelling to the post
office, ATM or other locations to purchase stamps.
Our Solution
We offer a convenient, cost effective and easy to use service for
purchasing and printing postage over the Internet. We target the small
office/home office, other small business, corporate and consumer user markets
and provide an Internet service that is accessible via a free software
downloaded from the Internet or installed from a free CD-ROM; the user's
existing PC, printer and Internet set up are sufficient to purchase and print
postage. Using our service requires no purchase or installation of a hardware
device for a user's PC and users can access and print postage without the US
Postal Service address matching CD-ROM needed by hardware-based Internet
postage products. Our Internet postage solution was the first software-based
service approved for beta testing by the US Postal Service and provides the
following benefits to the user and the US Postal Service:
Benefits to the User. Our Internet postage service is designed to be
convenient, cost effective and easy to use and provides the following benefits
to the user:
. unlimited, convenient access to postage from the desktop 24 hours a
day, 7 days a week;
. prints address and postage in one easy step;
. secure and accurate tracking of postage expenditures;
. cost effective relative to traditional postage meter solutions; and
. no additional hardware is required.
Using our free software, which can be downloaded from the Internet or
installed from a CD-ROM, users can purchase postage with their PC from our
secure Postage Server where and when it is most convenient. Our solution allows
users to avoid common inconveniences, including running out of postage, using
too much postage for a letter or parcel and enduring long lines at the post
office. The Stamps.com service is designed to enable users to print postage in
any denomination and rely on secure, accurate management of their postal
dollars. Finally, we will seek to enhance our convenient, easy to use service
with other benefits, including integrating our software with a wide range of
software applications to increase the efficiency of the everyday tasks of
writing letters, paying bills or generating invoices.
Benefits to the US Postal Service. Our Internet postage service provides
several benefits to the US Postal Service including:
. increased convenience to the postal consumer;
. increased security to protect postal revenues;
. the ability to more effectively compete with overnight delivery
services;
. the use of advanced technology for more cost efficient mail processing
and tracking; and
. cost savings relating to printing and distribution of traditional
postage stamps.
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We believe our convenient, cost effective, easy to use Internet postage
solution addresses the US Postal Service's goals for the Information Based
Indicia Program. Our service is designed to provide a high level of security
and auditing capabilities, helping to reduce the millions of dollars of known
postal fraud to the US Postal Service. As additional security and as required
by US Postal Service specifications, our solution will provide for the printing
of unique, secure Information Based Indicia, or electronic postage, on ordinary
laser or inkjet printers. Our service is designed to promote postal
efficiencies and cost savings for the US Postal Service with address
verification and correction and extended zip code printing capabilities.
Finally, our solution is designed to allow the US Postal Service to capitalize
on advances in technology, especially as the US Postal Service seeks to phase
out traditional postage methods.
Our Strategy
Our objective is to be the leading provider of convenient, cost effective
and easy to use software-based Internet postage services. To achieve this
objective, our strategy includes the following key elements:
Enhance Our Brand Name. We intend to increase our brand recognition through
a variety of marketing and promotional techniques, including the prominent
display of our logo on all pieces of mail generated through our service and co-
marketing and co-branding agreements with strategic partners. We also intend to
promote our brand by conducting an ongoing public relations campaign and
developing affiliations and affinity programs. We believe that building the
brand awareness of our Internet Postage Server is critical to attracting and
expanding our customer base.
Leverage Our Strategic Partnerships. We intend to develop and utilize
strategic partnerships to gain access to large numbers of potential users,
cooperatively market products and services, cross-sell additional services and
gain entry into new markets. As of May 1999, we have entered into strategic
partnerships with AOL, Intuit and Office Depot, among others. We believe that
we can further utilize our premier strategic partnerships to enhance our brand
name and grow our customer base.
Establish First-to-Market Advantages. Our Internet postage solution was the
first software-based Internet postage solution approved for the beta testing
that is required for US Postal Service certification. We believe that we will
have significant first-to-market advantages as a software-based solution in the
Internet postage market. We intend to use this first-to-market advantage to
rapidly establish our brand and grow our customer base. We believe our
potential market position will be enhanced by significant barriers to entry,
including:
. a ten-step US Postal Service certification process, including a three
phase beta testing requirement;
. our anticipated lead in providing a software-based Internet postage
solution that does not require additional hardware or a CD-ROM to be
employed with a user's PC;
. significant up-front time and investment by potential competitors in
technology and technical infrastructure;
. strong brand awareness for our software-based Internet postage
solution; and
. inconvenience of switching from one metered postage provider to
another.
Rapidly Grow Our Customer Base. We intend to broaden our customer base by
enhancing our brand, forming strategic partnerships and establishing first-to-
market advantages. We believe that our service can achieve rapid distribution
because there is no investment in hardware beyond a PC and printer, and users
can obtain our software for free. We are primarily targeting the small
office/home office and small business markets as well as various segments of
the corporate and consumer markets.
Leverage Our Software-Based Solution and Technology. We intend to utilize
our scaleable, e-commerce platform to enhance our service offerings and expand
the benefits of secure online transactions. We believe that we have an inherent
advantage relative to our competitors in the Internet postage industry because
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our solution does not require the use of additional hardware. We believe we can
achieve rapid distribution of our services as users download or install our
free software. Additionally, we provide increased flexibility and scalability
over competing solutions because transactions are processed through our secure
Postage Server while competing hardware solutions require each user to utilize
a CD-ROM and peripheral hardware device for each PC that is engaged in a
postage transaction. We will continue to invest in and enhance our technology
in order to increase efficiency, reliability and bandwidth, and to expand our
services and reduce our costs.
Pursue Additional Revenue Opportunities. We intend to utilize our brand,
electronic commerce capabilities, infrastructure and user base to develop
additional revenue opportunities. We will consider the following opportunities:
. Sale of Postage Related Products. We intend to use our Web site to
offer mailing-related products, including labels and envelopes,
mechanical scales, PC-enabled digital scales and label printers. We
also intend to offer package insurance to our customers through third-
party insurance companies.
. International Internet Postage Market. We believe that if foreign
postal authorities accept the use of Internet postage there will be
significant opportunities in international markets for our Internet
postage service. We intend to focus on those regions where there is a
critical mass of Internet use and a large current postage market with a
need for highly secure, transaction-oriented Internet services.
. Document Fulfillment Market. We will consider investing in technology
that will allow us to extend our core Internet postage technology to
print authenticated documents, including airline, movie and concert
tickets, from laser or inkjet printers.
Our Internet Postage Service
We offer a convenient, cost effective and easy to use service for
purchasing and printing postage over the Internet. Our core service is designed
to enable users to print information based indicia, or electronic stamps,
directly onto envelopes, labels or business documents using ordinary laser or
inkjet printers. No additional hardware is necessary for a user to purchase and
print our Internet postage; the user's existing PC, printer and Internet set-up
are sufficient.
[Insert Graphic--Description: Describe three steps to using our service. Step 1
is download and install free software and complete brief registration process.
Step 2 is users print postage using their existing PC and printer set-up. Step
3 is postage is printed on envelopes, lables or business documents.]
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Accessing our service is simple. A user will obtain our free software
either via a download from the Internet or through an install from a CD-ROM.
After installing the software and completing a brief registration process, the
user can connect via the Internet to our secure Postage Server and purchase
postage electronically 24 hours a day, seven days a week. We act as an ongoing
intermediary between the US Postal Service and users by offering users the
ability to purchase postage through our secure Postage Server. We use
sophisticated technologies which meet strict US government security standards
and our service incorporates the US Postal Service mandated address
verification features to enhance the efficiency of mail processing and
delivery. Finally, our Postage Server is designed to interact with word
processing, contact and address management, accounting and corporate
applications to provide postage for letters, invoices, statements, checks and
other business documents automatically. Our customers will sign up for a
service plan that provides access to our Internet Postage Server and we plan to
assess a "convenience" fee based on the customer's postage use. The service
plan will also offer benefits that could include various items, such as free
postage, free labels and envelopes and discounts on scales or printers.
As part of our Internet postage service, we intend to roll out functional
modules of our Web site to address our strategic initiatives, including:
. a Virtual Post Office through which we plan to provide a variety of
mailing services and resources including bulk mail fulfillment, free e-
mail, Express and Priority Mail tracking, ZIP Code look-up, and other
postal information;
. a Product Center through which we plan to feature mailing supplies and
general office supplies; and
. a Small Business Resource Center through which we plan to feature
products, services, and editorial content targeted to the small business
market.
The US Postal Service Certification Process
All Internet postage products must complete extensive US Postal Service
testing and evaluation in the areas of operational reliability, financial
integrity and security to become certified for commercial distribution. Each
additional implementation of a particular product or function requires
additional evaluation and approval by the US Postal Service prior to commercial
delivery.
The US Postal Service certification process for Internet postage is a
standardized, ten-stage process concluding with commercial release. Each stage
requires US Postal Service review and authorization to proceed to the next
stage of the certification process. The US Postal Service has no published
timeline or estimated time to complete each of the ten stages of the program.
The ten stages of the US Postal Service certification process are defined
at the US Postal Service Web site and are as follows:
1. Letter of Intent 6. US Postal Service Address
2. Non-Disclosure Agreements Matching System CD-ROM
3. Concept of Operations Integration
4. Software and Documentation 7. Product Submission/Testing
Requirements 8. Product Infrastructure Testing
5. Provider Infrastructure Plan 9. Three Phase Beta Test Approval
(Limited Distribution)
10. Vendor Product Approval (Full
Distribution)
Our Certification Progress and Commercial Release
In March 1997, we submitted our letter of intent to join the Information
Based Indicia Program. From March 1997 through August 1998, we progressed
through the first eight stages of the US Postal Service certification process.
On August 24, 1998, the US Postal Service announced that we were approved for
beta
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testing and our Internet postage service became the first software-based
postage solution approved by the US Postal Service for market testing.
Subsequent to US Postal Service approval for beta testing, we selected 25 users
from approximately 1,000 beta test applications. Beta users are small
office/home office, other small business and home consumer users with an
average mail volume of 30 to 500 pieces per month. Most of the beta users we
selected do not have postage meters, but all have some form of Internet access.
The following describes the planned three phase beta test that we are currently
conducting:
Phase I. We completed Phase I testing in December 1998. All Phase I
participants were located in the Washington, D.C. area. In this phase, we
performed on-site software installations for all beta testers, including five
US Postal Service users. User feedback was largely positive and focused on
feature enhancements and US Postal Service regulations. We provided user
support through an 800-number, online help, and printed or viewable manuals. We
generated weekly usage reports and log files that were forwarded to the US
Postal Service Beta Program Manager. Phase I users and data requirements
continued for Phases II and III.
Phase II. We completed Phase II testing in May 1999. Phase II of our beta
testing included the expansion of the user base by an additional 475 users.
These users were in the Washington, D.C. and San Francisco Bay Areas per US
Postal Service specification. Installations in Phase II were executed via a
software download over the Internet or with a CD-ROM provided to users. Our
recruiting process for testers included use of our Web site, local advertising,
small office/home office lists and business development relationships. During
Phase II beta testing, we developed electronic file submission requirements,
continued to strengthen our US Postal Service relationship, maintained heavy
user focus and dialogue and continued to develop support strategy and
infrastructure.
Phase III. We commenced Phase III testing on May 6, 1999. Phase III of beta
testing includes expansion of the user base from 500 to 1,500 users in the
Washington, D.C. and California regions. Phase III will provide us and the US
Postal Service the opportunity to perform statistically significant market
analyses to determine marketing and pricing strategies and to further evaluate
our systems in preparation for a national launch.
US Postal Service Approval. Upon satisfactory completion of Phase III, the
US Postal Service will publish and announce in the federal register the
approval of the Stamps.com service for commercial release.
Commercial Release. Following US Postal Service approval, we will conduct a
readiness review and then be subject to a US Postal Service mandated limited
launch of 10,000 customers following the initial commercial release of our
service. After completion of the limited launch, we will conduct a controlled
national launch of our service through our strategic distribution partners.
Our Strategic Distribution Partners
Our objective is to achieve significant market penetration through
relationships with strategic partners in each of the four following categories:
. Web portals, content sites and Internet service providers, including
AOL;
. independent software vendors, including Intuit/Quicken.com;
. PC, printer and other equipment manufacturers; and
. office/postal supplies vendors, including Office Depot and Avery
Dennison.
We believe we will benefit from these relationships by achieving positive
brand association and a cost effective means of customer acquisition. We
believe our partners can utilize their relationships with us to derive
additional revenue opportunities, including revenue-sharing arrangements with
us, and provide more value-added services to their customers.
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America Online. In December 1998, we entered into a two phase co-marketing
and distribution agreement with AOL and are currently in the first phase, or
Pre-Launch Phase, of the program. During the Pre-Launch Phase, we are
collaboratively conducting development, testing, advertising and educational
activities over the AOL network. The second phase of the Stamps.com/AOL
program, or Launch Phase, becomes active when the US Postal Service approves
the commercial release of our Internet postage service. Subject to conditions,
the Launch Phase provides the following benefits to us:
. our software will be bundled exclusively on CD-ROMs that are
distributed to AOL prospects and customers;
. our software CD-ROMs will exclusively be inserted in boxes with select
products purchased through AOL Store;
. we will be featured prominently when AOL Keyword "stamps" is used;
. we will receive top positioning on the AOL Network postage category
page; and
. we will collaboratively develop and present an exclusive three day
Internet postage educational program for the AOL customer base.
The Launch Phase will also include a significant advertising impression
commitment throughout select AOL properties, including the AOL Service,
aol.com, Digital Cities and CompuServe.
Office Depot. In February 1999, we entered into a partnership with Office
Depot, Inc., a leading seller of office products. Our agreement with Office
Depot provides us with a download link to sign up for our service available
from the Office Depot Online Superstore, including "above the fold" positioning
of the link, which means our link will appear on the portion of the Office
Depot Web site that doesn't require a user to scroll down the page to access
our link. The agreement also contemplates a "point of purchase" advertisement
campaign.
Avery Dennison. In March 1999, we entered into to a distribution
relationship with Avery Dennison Corporation, a leading supplier of adhesive
materials, office products and label systems. Our agreement with Avery Dennison
provides that through 1999 our service will be exclusively offered for download
from the Avery Web Site and exclusively distributed on Avery Label Pro Software
CD-ROMs through retail channels. During this time period, we will exclusively
promote Avery Label products.
Dymo/CoStar. In March 1999, we entered into a distribution relationship
with Dymo, a leading label-making brand available in 160 countries worldwide.
Dymo is part of Esselte, an international office and business supply company,
which recently acquired CoStar Corporation. CoStar is a leading manufacturer of
specialty printers, software and supplies for printing labels, bar codes,
receipts and identification badges. Our agreement with Dymo/CoStar provides
that our software will be bundled on all software installation CD-ROMs included
in all CoStar LabelWriter printer boxes. In addition, our software will be
downloadable from the CoStar Web site.
Seiko Instruments. In March 1999, we entered into a distribution agreement
with Seiko Instruments USA Inc., a leading supplier and marketer of electronic
components, consumer electronics, printer mechanisms, PC peripheral color
printers, and specialty black and white printers. Our agreement with Seiko
provides that our software will be bundled on software installation CD-ROMs
included in all Seiko Smart Label Printer boxes. In addition, our software will
be downloadable from the Seiko Web site.
Westvaco. In April 1999, we entered into a distribution and co-development
agreement with Westvaco Corporation, a leading manufacturer and supplier of
paper materials, envelopes and other packaging products. Our agreement with
Westvaco provides that our service will be promoted on boxes of Westvaco's
Columbian brand laser and inkjet envelopes sold through several channels,
including office superstores. In addition, our service will be promoted on the
Columbian brand Web site.
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Intuit. In May 1999, we entered into a promotional agreement with Intuit,
Inc., a leading supplier of small business software. Our agreement provides us
with an electronic link to our Web site available from various channels within
the Intuit network of Web sites, including the "small business channel" of the
Quicken.com, Excite Money & Investing and WebCrawler Money & Investing Web
sites. Our agreement also provides us with promotional advertisements on the
"QuickBooks.com" Web site and on the home page of the "Quicken.com" Web site.
In addition, we have promotional advertisements and electronic links to our Web
site available from Quicken '99 software products.
Our Marketing and Sales
We intend to establish a strong brand name by allocating significant
resources to our marketing and distribution efforts. We intend to distribute
our postage printing software through our Web site. In addition, we will rely
on traditional media and several other channels to achieve rapid distribution
of our services, including:
Web Sites. We intend to work with high traffic Web sites including portals,
commerce and content sites, and other high visibility Internet sites. This
channel will provide the opportunity for users to download our software and
access our Internet postage service.
Affiliate Programs. We intend to utilize the traffic and customers of other
online sites by offering revenue-sharing opportunities to affiliates that
provide a link on their Web site to download our Internet postage software and
access other related services. Affiliates can capitalize on the ability to
offer new, value-added services and increase repeat visits to their site.
Preloaded/Bundled Hardware and Services. We intend to take advantage of
relationships with vendors of hardware products, including computers, printers
and label makers, and with Internet service providers to offer our software to
buyers of their products. Resellers can capitalize on the ability to promote
new features on commodity, non-differentiated products and services.
Embedded Software. We intend to seek further partnerships with software
publishing companies. Software packages that would benefit from our current
services would include word processing, contact and address management,
accounting, billing and retail software.
Postal Supplies. We will target companies in the postal supplies industry,
including manufacturers of envelopes, labels, checks, forms, digital scales and
postage meters.
Financial Services. We will seek distribution and co-branding opportunities
with banks and brokerages by incorporating our Internet postage service into
online banking and investing offered by financial service providers.
Direct Sales. We will target specific large industries or vertical markets
where distributed use of the mail is prevalent, including insurance, travel and
hospitality, financial services, law firms or other businesses where branch
offices or agent organizational structures are common. We believe that
significant benefits in the form of usability, convenience and cost savings to
large corporate users may result from integrating our Internet postage service
into the everyday work flow.
Customer Retention Programs. We believe we can increase customer retention
by offering co-branded affinity marketing programs, including frequent flyer
miles based on postage and other related expenditures. Further, we intend to
create strong customer loyalty by offering discounts to our online store that
are tied to customer postage volume.
Our Competition
The market for Internet postage products and services is new and we expect
it to be intensely competitive. At present, three other Internet postage
vendors have hardware products available for beta testing, one of which was
approved for Phase III beta testing at the same time as our software-based
service. One of the vendors also has a software-based product in beta testing.
However, we were the first participant authorized for beta testing by the US
Postal Service with a software-based solution that does not require the
purchase or use of additional hardware for a user's PC and printer set-up. We
were approved for beta testing on August 25,
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1998 and the other software-based product vendor announced their approval for
the first stage of beta testing on March 29, 1999. As a result, we believe we
have a significant development lead over software-based solutions given the
length of time associated with security evaluation and beta testing to which
the US Postal Service subjects all new product offerings.
The following is a summary of our competitors in the Information Based
Indicia Program program:
E-Stamp Corporation. E-Stamp is a developer and marketer of a hardware-
based solution enabling users to generate postage transactions from their
existing personal computers and printers. E-Stamp was the first company to gain
US Postal Service approval for market testing of a hardware storage device
identified as the Postal Security Device. E-Stamp is currently in beta testing
for its PC Postal Security Device product and announced their approval for
Phase III beta testing in May 1999. E-Stamp currently has partnerships with
America Online, Compaq, Microsoft and Yahoo!
Neopost. Neopost is a large French postage company with a small percentage
of US market share in the traditional postage meter industry. Similar to E-
Stamp, Neopost has developed an online postage product that requires a special
purpose hardware device, and announced their approval for Phase I beta testing
in September 1998. Neopost has also announced a software-based postage product
for which it is seeking US Postal Service certification. On March 29, 1999,
Neopost announced approval for their software based postage product for Phase I
beta testing. Finally, Neopost has commercially available a specialty metering
device that can be attached to a user's PC and allows a user to download
postage to the specialty device from the Internet. This specialty metering
device is not regulated by the Information Based Indicia Program because it
does not allow for the printing of postage from standard inkjet or laser
printers.
Pitney Bowes, Inc. Pitney Bowes is the current market leader in the
traditional postage meter business and according to its most recent annual
report had approximately $4.2 billion in revenues in 1998. Pitney Bowes has
developed a product similar to E-Stamp which requires the use of a specialized
hardware device for postage transactions. Pitney Bowes announced the approval
of their hardware-based product for Phase II beta testing on March 9, 1999. In
addition, Pitney Bowes has made formal comments to the US Postal Service
asserting that it holds several patents and has patent applications pending
which are infringed by the product specifications that Information Based
Indicia Program participants are required to follow. To that end, Pitney Bowes
filed two separate lawsuits in June 1999 against us and E-Stamp alleging
infringement of Pitney Bowes patents. See "Risk Factors--Intellectual property
claims, including a June 1999 claim against us by Pitney Bowes, could delay our
development and harm our results of operations."
In addition to competing with Internet postage vendors for market share of
Internet postage sales, we will also compete with traditional postage methods
including stamps and metered mail. While we believe our Internet postage
service provides benefits over traditional postage methods, we cannot be
certain that Internet postage will be adopted by postage consumers on a
commercial scale, if at all. These customers may continue to use traditional
means to purchase postage, including purchasing postage from their local post
office. Any failure by us or other Internet postage vendors to displace
traditional postage methods would seriously impact our ability to compete with
providers of traditional postage.
We may also face competition from hardware-based products. Although, we
believe our software-based solution is easier to use than hardware-based
products, hardware-based products have some advantages. For example, our
service requires a user to connect to the Internet each time the user prints
postage, while the hardware-based solution allows users to download postage
onto a storage device that is connected to the user's computer. If users of
hardware-based products do not transition to software-based solution we could
face continuing competition from this market.
Overall, we may not be able to maintain a competitive position against
current or future competitors as they enter the markets in which we compete.
This is particularly true with respect to competitors with greater financial,
marketing, service, support, technical, intellectual property and other
resources than us. Our failure to maintain a competitive position within the
market could seriously harm our business, financial condition and results of
operations. We believe that the principal competitive factors in our market
include:
. US Postal Service product certification;
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. ability to successfully achieve commercial release of an Internet
postage product;
. brand recognition;
. convenience;
. ease of use;
. price;
. accountability;
. security;
. compatibility;
. accuracy; and
. integration.
For further discussion of the competitive risks and factors to be
considering in making an investment in our common stock, see "Risk Factors--
Intellectual property infringement claims, including a June 1999 claim against
us by Pitney Bowes, could delay our development and harm our results of
operations" and "--If we are unable to compete successfully, particularly
against large, traditional providers of postage products such as Pitney Bowes
who enter the online postage market, our revenues and operating results will
suffer."
Our Technology
Our service is comprised of the following key components:
System Architecture. Our servers are located in a high-security, off-site
data center and operate with internally developed security software. These
servers create the information based indicia. These servers also process
postage purchases using secure technology that meets US Postal Service security
requirements.
Our service currently supports Windows-based client applications, which we
believe is easier for customers to use and provides the power and flexibility
necessary to support a variety of label and envelope options and a wide range
of printers. In addition, our application employs an internally developed user
authentication mechanism for additional security.
Transaction Processing. Our transaction processing servers are a
combination of secure, commercially available technologies that are designed to
provide secure and reliable transactions. Our system implements hardware to
exceed the highest government standard for security and data integrity
currently in effect. The performance and scalability of our Internet postage
system allows a wide range of users to process postage transactions through our
Web site.
Database Processing. Our database servers are designed to complement
industry leading database technologies and can be built to scale incrementally
as needed.
Client Interoperability. Our system utilizes a secure client module for
authentication, which has been designed to minimize transmission time over the
Internet. The client module is designed to be the building block for Internet
postage capabilities that are accessible from popular software applications.
Our client module will be used by our postage application as well as add-ins
for popular word processing applications and third party mailing and business
systems.
Our Intellectual Property
We rely on a combination of patent, trade secret, copyright and trademark
laws and contractual restrictions to establish and protect intellectual
property rights in products, services, know-how and information. We have three
issued US patents and have filed four patent applications in the United States.
We have also applied for several trademarks and service marks. We plan to apply
for other patents in the future.
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Despite efforts to protect our intellectual property rights, we face
substantial uncertainty regarding the impact that other parties' intellectual
property positions will have on the Internet postage market. In particular,
Pitney Bowes has sent formal comments to the US Postal Service asserting that
intellectual property of Pitney Bowes related to postage metering and systems
would be infringed by products meeting the requirements of the Information
Based Indicia Program's specifications. Furthermore, in June 1999, Pitney Bowes
filed two separate lawsuits in the United States District Court for the
District of Delaware against both us and E-Stamp alleging infringement of
Pitney Bowes patents. For a discussion of claims by Pitney Bowes and risks
associated with intellectual property, please refer to "Risk Factors--
Intellectual property infringement claims, including a June 1999 claim against
us by Pitney Bowes, could delay our development and harm our results of
operations and "--Legal Proceedings."
Our Employees
As of May 31, 1999, we had 99 full time employees, of which 40 were
employed in research and development, 32 were employed in network operations,
11 were employed in sales and marketing, and 16 were employed in administrative
positions. None of our employees are represented by a labor union, and we
consider our employee relations to be good. We intend to expand significantly
our employee base in 1999. See "Risk Factors--We rely on a relatively new
management team and need additional personnel to grow our business."
Our Properties
Our corporate headquarters is located in a 41,000 square foot facility in
Santa Monica, California under a lease expiring on May 31, 2004. We also have a
5,000 square foot satellite research and development site in Irvine, California
under a lease expiring in September 1999. We believe that our current
facilities and other facilities that will be available to us will be adequate
to accommodate our needs for the foreseeable future.
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 alleges
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. Pitney Bowes filed a similar
complaint in Delaware in early June 1999 against one of our competitors, E-
Stamp Corporation, alleging infringement of seven Pitney Bowes patents. If
Pitney Bowes successfully asserts its claims against us and E-Stamp, the
Internet postage market could be severely impacted and may not develop. We are
currently investigating the claims against us and have not responded to the
suit. To date, we believe we have meritorious defenses and intend to defend
ourselves vigorously. However, the litigation could result in significant
expenses and diversion of management time and other resources. Further, if
Pitney Bowes successfully asserts an infringement claim against us, our
operations would be impacted severely. The Pitney Bowes suit could result in
limitations on how we implement our service, delays and costs associated with
redesigning our service, payments of license fees and other payments. See "Risk
Factors--Intellectual property infringement claims, including a June 1999 claim
against us by Pitney Bowes, could delay our development and harm our results of
operations."
We are not currently involved in any other material legal proceedings, nor
have we been involved in any such proceedings that has had or may have a
significant effect on our financial position. We are not aware of any other
material legal proceedings pending against us.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding our executive
officers and directors as of May 31, 1999:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------ --- ---------------------------------------------------------------------------
<S> <C> <C>
John M. Payne........... 43 Chief Executive Officer, President and Director
John W. LaValle......... 42 Chief Financial Officer, Senior Vice President of Operations, and Secretary
Michael D. Walther...... 45 Senior Vice President, Network Operations
Timothy A. Von Kaenel... 33 Senior Vice President, Product Development
Douglas J. Walner....... 29 Vice President, Business Development
Jeffrey L. Green........ 28 Vice President, Marketing
Candelario J. Andalon... 30 Corporate Controller
Thomas H. Bruggere (2).. 53 Chairman of the Board of Directors
Mohan P. Ananda......... 52 Director
David C. Bohnett (1).... 43 Director
Jeffrey J. Brown (1).... 38 Director
Thomas N. Clancy (2).... 41 Director
G. Bradford Jones (2)... 44 Director
Marvin Runyon (1)....... 74 Director
Loren E. Smith.......... 61 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
John M. Payne has been our Chief Executive Officer and President and a
Director since October 1998, and was a consultant to us from May 1998 to
October 1998. From June 1994 to January 1998, Mr. Payne served as the President
and Chief Operating Officer and later the President and Chief Executive Officer
of Airmedia, Inc., a wireless communications software and service provider. On
April 15, 1999, Airmedia filed for Chapter 11 bankruptcy protection. From
October 1992 to June 1994, Mr. Payne was the founding Chief Executive Officer
of Fingertip Technologies, Inc., a software company. Previously, Mr. Payne co-
founded and served as President of two specialty software firms, Financial
Microsystems from June 1986 to October 1992, and LoanStar Computer from
September 1979 to November 1986. Mr. Payne received his B.A. in Economics from
the University of California, Irvine.
John W. LaValle has been our Chief Financial Officer, Senior Vice President
of Operations, and Secretary since September 1998. From July 1997 to September
1998, Mr. LaValle served as Chief Financial Officer of Comcore Semiconductor,
Inc., a semiconductor manufacturer. From November 1994 to July 1997, he was the
Chief Financial Officer of Trikon Technologies; a semiconductor equipment
manufacturer. Previously, Mr. LaValle served as the Chief Financial Officer at
Superconductor Technologies, a manufacturer of high temperature thin film
superconductors used in cellular base station applications from September 1989
to November 1994. From April 1987 to September 1989, he was the Chief Financial
Officer of PS Medical, a manufacturer of implantable neurosurgery products.
From August 1984 to February 1987, Mr. LaValle served as a senior financial
analyst for Chevron Corporation, and from December 1980 to September 1982, he
served as a senior analyst for Andersen Consulting. Mr. LaValle received his
B.A. in Government from Boston College and his M.B.A. from Harvard University.
Michael D. Walther has been our Senior Vice President of Network Operations
since April 1999 after having served as a consultant since January 1999. From
December 1997 to December 1998, Mr. Walther provided interim CEO/COO support to
early stage venture companies. In June 1994, he co-founded Artios Corporation,
an enterprise solutions company, and served as its President until December
1997. From October 1989 to June 1994, Mr. Walther served as President of AEI, a
computer aided design software firm. Mr. Walther received his B.S. in Computer
Science from the Texas A&M University--School of Commerce.
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Timothy A. Von Kaenel has been our Senior Vice President of Product
Development since January 1999. From July 1998 to January 1999, Mr. Von Kaenel
was Director, Product Management at IMA, a customer service software company.
From July 1995 to July 1998, Mr. Von Kaenel was Senior Vice President of
Product Development at AirMedia, Inc., a wireless communications software and
service provider. On April 15, 1999, Airmedia filed for Chapter 11 bankruptcy
protection. Before AirMedia, Mr. Von Kaenel was Vice President, Interactive
Technologies at Advanced Media, a multimedia software and interactive services
company. In 1990, he founded and was President of Vision Imaging, an
international developer and publisher of multimedia software products, which
was later acquired by Advanced Media. Mr. Von Kaenel received his B.A. in
Economics and M.B.A. from the University of California, Irvine.
Douglas J. Walner has been our Vice President of Business Development since
September 1998, and from March 1998 to August 1998, Mr. Walner served as a
business development and strategic relationship consultant. From January 1996
to March 1998, Mr. Walner was the Director of Business Development at
CyberMedia, a software company. Mr. Walner served as the Original Equipment
Manufacturer Sales Manager at Airmedia, Inc., from April 1994 to January 1996.
Prior to 1994, Mr. Walner served as a Program Manager at Mortgage Capital
Group/City National Bank. Mr. Walner received his B.A. in History from Tulane
University.
Jeffrey L. Green has been our Vice President of Marketing since co-founding
Stamps.com in September 1996. From August 1992 to May 1995, Mr. Green served as
an account executive at Ziff Davis, Inc., a publishing company. Mr. Green also
worked at Hewlett Packard in Product Marketing in 1996 while attending the
Anderson School at UCLA. Mr. Green received his B.A. in Political Science from
Dartmouth and his M.B.A. from UCLA.
Candelario J. Andalon has been our Corporate Controller since October 1998.
From September 1991 to September 1998, Mr. Andalon served in various capacities
at Ernst & Young LLP, most recently as Manager in the firm's Technology,
Communications and Entertainment group. Mr. Andalon received his B.S. degree in
Accounting from Loyola Marymount University and is a Certified Public
Accountant.
Thomas H. Bruggere has been our Chairman of the Board of Directors since
April 1998. Since 1994, Mr. Bruggere has been a private investor. In 1995 and
1996, Mr. Bruggere was the Democratic Nominee for the US Senate from Oregon.
Mr. Bruggere founded Mentor Graphics, an electronic design automation software
company, in 1981 and served as its Chief Executive Officer until 1994. Mr.
Bruggere also serves on the Board of Directors of Open Market, Inc., a software
development company, and several privately-held companies. Mr. Bruggere
received his B.S. in Mathematics from UC Santa Barbara, his M.S. in Computer
Science from the University of Wisconsin and his M.B.A. from Pepperdine
University.
Mohan P. Ananda has been a Director since January 1998. Mr. Ananda is a
founder and currently serves as the Chief Executive Officer and Chairman of the
Board of AmazingHitz.com, Inc., an Internet-based entertainment company. From
January 1997 to October 1998, Mr. Ananda served as our Chief Executive Officer.
From June 1986 to December 1996, Mr. Ananda was a partner of Ananda & Krause, a
law firm. Mr. Ananda also serves on the Board of Directors of other privately-
held companies. Mr. Ananda received his B.S. in Engineering from Coimbature
Institute of Technology in India, his M.S. in Aeronautics from the California
Institute of Technology, his Ph.D. in Astrodynamics and Control from UCLA, and
his J.D. from the University of West Los Angeles.
David C. Bohnett has been a Director since March 1999. Until May 1999, Mr.
Bohnett served as Chairman of the Board and Secretary of GeoCities, an Internet
hosting company, which he founded in November 1994. From November 1994 to April
1998, Mr. Bohnett also served as GeoCities' Chief Executive Officer and
President. From November 1994 to November 1997, Mr. Bohnett also served as
GeoCities' Chief Financial Officer. Prior to founding GeoCities, from February
1990 to May 1994, Mr. Bohnett served as Director of Product Marketing at Goal
Systems, which merged with LEGENT, a software company. From 1988 to 1990, Mr.
Bohnett was Chief Financial Officer of Essential Software, which merged with
Goal Systems. Mr. Bohnett also was a director of GeoCities until May 1999, and
he continues to serve on the Board of Directors
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<PAGE>
of several private companies. Mr. Bohnett was elected to our Board of Directors
as a representative of the class of Series C investors under a voting agreement
which will terminate upon the closing of this offering. Mr. Bohnett received
his B.S. degree in Business Administration from the University of Southern
California and his M.B.A. degree in Finance from the University of Michigan.
Jeffrey J. Brown has been a Director since February 1998. In June 1993, Mr.
Brown founded and, since that time, he has been a director, executive officer
and shareholder of Forrest Binkley & Brown Venture Co., the general partner of
Forrest Binkley & Brown L.P., the Managing Partner of SBIC Partners. Mr. Brown
is also a founder, director, executive officer and shareholder of Forrest
Binkley & Brown Venture Advisor Co., an affiliate of SBIC Partners. From 1987
to 1992, Mr. Brown served in various executive capacities at Security Pacific
Venture Capital Group. From April 1992 until June 1993, Mr. Brown acted as
Senior Vice President of BankAmerica Venture Capital Group. Mr. Brown is a
director of Golden State Vintners, Inc., a supplier of premium bulk wines and
wine processing services, and serves on the boards of a number of private
companies. Mr. Brown was elected to our Board of Directors as a representative
of SBIC Partners under a voting agreement which will terminate upon the closing
of this offering. Mr. Brown received his B.S. in Mathematics from Willamette
University and his M.B.A. from Stanford University.
Thomas N. Clancy has been a Director since February 1998. Mr. Clancy has
been a Venture Partner at Enterprise Partners Venture Capital since February
1997. Prior to joining Enterprise Partners in September 1996, Mr. Clancy was a
Partner at Technical Resource Connection, now Perot Systems, a provider of
information technology services, from March 1996 to July 1996. Previously, Mr.
Clancy served as the Chief Executive Officer at Expersoft from May 1994 to
January 1996 and as Vice President of Product Marketing at Expersoft from
October 1993 to May 1994. From March 1983 to November 1991, Mr. Clancy worked
at Citibank in engineering management and product development. Mr. Clancy
serves on the board of a number of private companies. Mr. Clancy was elected to
our Board of Directors as a representative of Enterprise Partners under a
voting agreement which will terminate upon the closing of this offering. Mr.
Clancy received his Computer and Systems Engineering degree from Rensselaer
Polytechnic Institute in New York.
G. Bradford Jones has been a Director since October 1998. Mr. Jones is
currently a General Partner at Brentwood Venture Capital, which he joined in
1981. Mr. Jones also currently serves on the board of directors of Onyx
Acceptance Corporation, a specialized consumer finance company, Interpore
International, a medical device company, and ISOCOR, a software developer, and
several privately-held companies. Mr. Jones was elected to our Board of
Directors as a representative of Brentwood Associates under a voting agreement
which will terminate upon the closing of this offering. Mr. Jones received his
B.S. in Chemistry from Harvard University, his Master degree in Physics from
Harvard University and his J.D./M.B.A. from Stanford University.
Marvin Runyon has been a Director since February 1999. From 1992 to 1999,
Mr. Runyon served as Postmaster General of the United States. Prior to joining
the US Postal Service, he served as Chairman of the Tennessee Valley Authority
from 1988 to 1992. From 1980 to 1988, Mr. Runyon was the founding President and
CEO of Nissan Motor Manufacturing Corporation U.S.A. Previously, Mr. Runyon
spent 37 years at Ford Motor Co., leaving in 1980 with the position of Vice
President, Body and Assembly Operations. Mr. Runyon serves as a board member of
Genesis Direct, Inc., a specialty retailer. Mr. Runyon received his B.S. from
Texas A&M University.
Loren E. Smith has served as a Director since February 1999. Since November
1996, Mr. Smith has been a Principal at Threshold Management, a consulting firm
that specializes in strategic growth management for leading businesses in a
diverse range of industries. He was also employed as a Principal at Threshold
Management from July 1993 to October 1994. From October 1994 to October 1996,
he served as the Senior Vice President and Chief Marketing Officer of the US
Postal Service. In 1985, Mr. Smith joined Citibank and was responsible for
establishing the national marketing organization of its Consumer Services
Group. From 1975 to 1995, he founded Threshold Management. Previously, Mr.
Smith held various management positions at General Foods Corporation and
Colgate Palmolive Co. Mr. Smith received his A.B. in Economics from Albion
College and his M.B.A. from the University of Michigan.
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<PAGE>
Classified Board of Directors
Our Board of Directors is divided into three classes of directors serving
staggered three-year terms. As a result, approximately one-third of the board
of directors will be elected each year. These provisions, together with the
provision of our amended and restated certificate of incorporation, allow the
board of directors to fill vacancies of or increase the size of the board of
directors, and may deter a stockholder from removing incumbent directors and
filling such vacancies with its own nominees in order to gain control of the
board.
Our board has resolved that Messrs. Bohnett, Bruggere and Jones will serve
as Class I Directors whose terms expire at the 2000 annual meeting of
stockholders. Messrs. Ananda, Clancy and Runyon will serve as Class II
directors whose terms expire at the 2001 annual meeting of stockholders.
Messrs. Brown, Payne and Smith will serve as Class III directors whose terms
expire at the 2002 annual meeting of stockholders.
Board Committees
The Board has established an Audit Committee to meet with and consider
suggestions from members of management and our internal accounting personnel,
as well as our independent accountants, concerning our financial operations.
The Audit Committee also has the responsibility to review our audited financial
statements and consider and recommend the employment of, and approve the fee
arrangements with, independent accountants for both audit functions and for
advisory and other consulting services. The Audit Committee is currently
comprised of Messrs. Runyon, Bohnett and Brown. The Board has also established
a Compensation Committee to review and approve the compensation and benefits
for our key executive officers, administer our stock purchase, equity incentive
and stock option plans and make recommendations to the Board regarding these
matters. The Compensation Committee is currently comprised of Messrs. Bruggere,
Clancy and Jones.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists of Messrs. Bruggere, Clancy and Jones.
Neither of these individuals was an employee of ours at any time since our
formation. None of our executive officers serves as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving as a member of our Board of Directors or
Compensation Committee.
Director Compensation and Other Arrangements
Our directors receive no cash remuneration for serving on the Board of
Directors or any board committee. In March 1999, Messrs. Bohnett, Runyon and
Smith were each granted an option to purchase 108,000 shares of common stock.
The options were granted at fair market value on the date of grant and vest
ratably over three year periods. In April 1999, Messrs. Clancy, Jones and Brown
were each granted an option to purchase 36,000 shares of common stock. These
options were granted at fair market value on the date of grant and vest in full
on the first anniversary of the grant. In addition, directors are reimbursed
for all reasonable expenses incurred by them in attending Board and Committee
meetings.
In February 1999, we entered into a three-year consulting agreement with
Loren Smith under which he will provide marketing and strategic planning
services. Mr. Smith also agreed to serve as a director on our Board of
Directors and to serve as a member on a board committee. In exchange for these
services, we will compensate Mr. Smith $120,000 per year, and in consideration
of his consulting services, grant him an option to purchase 135,000 shares of
our common stock at $0.33 per share.
Directors who are also our employees are eligible to receive options and be
issued shares of common stock directly under our 1999 Stock Incentive Plan.
Non-employee directors will also receive automatic option grants under our 1999
Stock Incentive Plan. See "--1999 Stock Incentive Plan."
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<PAGE>
Executive Compensation
The following summary compensation table indicates the cash and non-cash
compensation earned during the fiscal year ended December 31, 1998 by our Chief
Executive Officer and each of our other four highest paid executive officers
whose total compensation exceeded or would have exceeded $100,000 during 1998
had those officers provided services to us for the entire fiscal year.
Summary Compensation Table for Fiscal Year 1998
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Annual Compensation Securities
Name and Principal -------------------- Other Annual Underlying All Other
Positions Salary ($) Bonus ($) Compensation ($) Options (#) Compensation ($)
------------------ ---------- --------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
John M. Payne
President and Chief
Executive Officer
(October 1998 to
present)............ 27,897 -- -- -- 112,800(1)
John W. LaValle
Chief Financial Officer
and Senior Vice
President of
Operations........... 42,000 -- -- 395,802 --
Mohan P. Ananda
Chief Executive Officer
and President
(January 1998 to
October 1998)........ 85,500 -- -- -- --
Douglas J. Walner
Vice President of
Business Development. 35,000 25,000 -- 366,357 7,434(2)
</TABLE>
- --------
(1) Represents total payments to Mr. Payne for consulting services performed
during the period from May 1998 to October 1998.
(2) Represents total payments to Mr. Walner for consulting services performed
during the period from August 1998 to September 1998.
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<PAGE>
Stock Options Granted During Fiscal Year 1998
During the fiscal year ended December 31, 1998, we granted options to
purchase 2,347,471 shares of common stock. All options were granted at an
exercise price equal to the fair market value of our common stock as determined
by our Board of Directors on the date of grant. The exercise price may be paid
in cash, check, promissory note, shares of our common stock valued at fair
market value on the exercise date or a cashless exercise procedure involving a
same-day sale of the purchased shares. The following table indicates
information regarding options to purchase common stock granted to our officers
listed in the Summary Compensation Table.
<TABLE>
<CAPTION>
Potential
Realizable
Value at
Assumed Annual
Rates of Stock
Appreciation
Individual Grants For Option Term
------------------------------------------------------------- ---------------
Number of
Securities Percentage of Exercise
Underlying Options Total Options Granted Price Per Expiration
Name Granted to Employees in 1998 Share Date 5% 10%
---- ------------------ --------------------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
John W. LaValle......... 395,802 17.1% $0.07 9/24/08 $16,594 $42,054
Douglas J. Walner....... 366,357 15.6% $0.07 8/20/08 $15,360 $38,925
</TABLE>
Each option listed in the table was granted under our 1998 Stock Plan,
which was succeeded by our 1999 Stock Incentive Plan upon the execution of the
underwriting agreement for this offering. The options shown in the table are
immediately exercisable. The shares underlying the options are subject to a
repurchase option which expires over a four year period. The purchase price per
share upon exercise of the repurchase option by us is equal to the exercise
price paid by the optionee to originally purchase the shares. One year after
the option grant date, 1/4 of the shares are no longer subject to the
repurchase option and the repurchase option expires for 1/48 of the shares each
month thereafter. The shares underlying the options may also vest fully upon a
change in control. See "--1999 Stock Incentive Plan."
Potential realizable values are net of exercise price, but before the
payment of taxes associated with exercise. Amounts represent hypothetical gains
that could be achieved for the respective options if exercised at the end of
the option term. The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange Commission
and do not represent our estimate or projection of our future common stock
prices. These amounts represent assumed rates of appreciation in the value of
the common stock from the fair market value on the date of grant. Actual gains,
if any, on stock option exercises are dependent on the future performance of
the common stock and overall stock market conditions. The amounts reflected in
the table may not necessarily be achieved.
Aggregated Option Exercises and Year-End Option Values
The following table indicates the number and value of unexercised options
held by our officers listed on the Summary Compensation Table. There was no
public trading market for the common stock as of December 31, 1998.
Accordingly, these values of unexercised options have been calculated by
subtracting the exercise price from the fair market value of the underlying
securities as determined by the Board of Directors. No options were exercised
by our executive officers in 1998.
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised In-
Unexercised the-Money
Options at Options at
December 31, December 31,
1998 1998
--------------- ---------------
Name Vested Unvested Vested Unvested
---- ------ -------- ------ --------
<S> <C> <C> <C> <C>
John W. LaValle................................. 0 395,802 0 $105,547
Douglas J. Walner............................... 0 366,357 0 $ 97,695
</TABLE>
44
<PAGE>
Employment Agreements and Change in Control Arrangements
John M. Payne has entered into a letter agreement, effective as of October
29, 1998, to serve as our President and Chief Executive Officer. Mr. Payne's
1999 compensation includes a base salary of $210,000 per year and a potential
bonus of $90,000. In addition, we gave Mr. Payne benefits that we make
available to our employees in comparable positions, and upon his execution of
the letter agreement, we sold 1,500,000 shares of our common stock to him at
$0.07 per share, the fair market value on the purchase date. Mr. Payne is an
at-will employee and his employment may be terminated at any time by him or by
us. If Mr. Payne's employment is constructively terminated or terminated by us
or a successor entity involuntarily within 12 months following a change in
control, or if we terminate or constructively terminate Mr. Payne's employment
for any reason other than for cause, he will be entitled to receive monthly
installments of his base salary for six months and all of his unvested stock
will become immediately vested. After two years of employment, Mr. Payne's
severance period will increase to nine months, and after three years of
service, the severance period will increase to one year.
John W. LaValle entered into a letter agreement, effective as of August
16, 1998, to serve as our Chief Financial Officer and Senior Vice President.
Mr. LaValle receives a base salary of $156,000 per year and was granted an
option to purchase 395,802 shares of common stock at $0.07 per share, the fair
market value on the grant date. In addition, Mr. LaValle receives standard
medical and dental benefits available to our other employees. Mr. LaValle is
an at-will employee and his employment can be terminated at any time by him or
by us. If Mr. LaValle's employment is constructively terminated or terminated
by us or a successor entity within 12 months following a change in control,
all of his unvested stock will become immediately vested.
For purposes of Messrs. Payne and LaValle, "constructive termination"
shall occur upon the following:
. a relocation without consent;
. disability or death;
. an assignment to a new position that is not commensurate with the
individual's seniority and compensation level; or
. any reduction in the individual's compensation.
Mohan P. Ananda entered into an employment agreement, effective as of
January 20, 1998, under which Mr. Ananda served as our President, Chief
Executive Officer and the Chairman of the Board of Directors. Mr. Ananda
received an initial base salary of $60,000, which was increased to $120,000
per year in October 1998. In addition, we sold 2,172,595 shares of our common
stock to Mr. Ananda at $0.01 per share, the fair market value on the purchase
date. Mr. Ananda has ceased active involvement with our operations, but he
continues as a director.
Douglas J. Walner is subject to an agreement which partially accelerates
the vesting of his options upon a change in control and his subsequent
termination.
In April 1999, we amended our 1998 Stock Plan to adopt a change in control
provision. As a result of this provision, should any optionee have his or her
service involuntarily terminated within eighteen (18) months following a
Corporate Transaction in which his or her options are assumed by the successor
corporation and do not otherwise accelerate at that time, then those options
will accelerate and become fully exercisable for all of the option shares as
fully-vested shares of common stock upon an involuntary termination. A
"Corporate Transaction" under the 1998 Stock Plan is defined as a merger or
consolidation in which securities possessing more than 50% of the total
combined voting power of our outstanding securities are transferred to a
person or persons different from those who held those securities immediately
prior to the transaction, or the sale, transfer or other disposition of all or
substantially all of our assets in complete liquidation of us. "Involuntary
Termination" is defined under the 1998 Stock Plan as the optionee's
involuntary dismissal or discharge by us for reasons other than misconduct, or
the optionee's voluntary resignation following:
. a change in his or her position with us which materially reduces his or
her responsibilities;
. a reduction in his or her level of compensation by more than 15%; or
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<PAGE>
. a relocation of the optionee's place of employment by more than 50
miles, and this change, reduction or relocation is effected by us
without the optionee's consent.
Our 1999 Stock Incentive Plan is a successor plan to our 1998 Stock Plan,
and includes change in control provisions which may result in the accelerated
vesting of outstanding option grants and stock issuances. See "--1999 Stock
Incentive Plan--Change in Control."
1999 Stock Incentive Plan
Introduction. The 1999 Stock Incentive Plan serves as the successor program
to our 1998 Stock Plan. The 1999 plan was adopted by the board and approved by
the stockholders in June 1999. The 1999 plan became effective when the
underwriting agreement for this offering was signed. At that time, all
outstanding options under our existing 1998 plan were transferred to the 1999
plan, and no further option grants can be made under the 1998 plan. The
transferred options will continue to be governed by their existing terms,
unless our compensation committee decides to extend one or more features of the
1999 plan to those options. Except as otherwise noted below, the transferred
options have substantially the same terms as are in effect for grants made
under the discretionary option grant program of our 1999 stock plan.
Share Reserve. 7,290,000 shares of our common stock have been authorized
for issuance under the 1999 plan. This share reserve consists of the number of
shares that were carried over from the 1998 plan. The share reserve under our
1999 plan will automatically increase on the first trading day in January each
year, beginning with calendar year 2000, by an amount equal to three percent
(3%) of the total number of shares of our common stock outstanding on the last
trading day of December in the prior year, but in no event will this annual
increase exceed 1,564,715 shares. In addition, no participant in the 1999 plan
may be granted stock options or direct stock issuances for more than 1,125,000
shares of common stock in total in any calendar year.
Programs. Our 1999 plan has five separate programs:
. the discretionary option grant program, under which eligible employees
may be granted options to purchase shares of our common stock at an
exercise price not less than the fair market value of those shares on
the grant date;
. the stock issuance program, under which eligible individuals may be
issued shares of common stock directly, upon the attainment of
performance milestones or upon the completion of a period of service or
as a bonus for past services;
. the salary investment option grant program, under which our executive
officers and other highly compensated employees may be given the
opportunity to apply a portion of their base salary to the acquisition
of special below market stock option grants;
. the automatic option grant program, under which option grants will
automatically be made at periodic intervals to eligible non-employee
board members to purchase shares of common stock at an exercise price
equal to the fair market value of those shares on the grant date; and
. the director fee option grant program, under which our non-employee
board members may be given the opportunity to apply a portion of any
retainer fee otherwise payable to them in cash for the year to the
acquisition of special below-market option grants.
Eligibility. The individuals eligible to participate in our 1999 plan
include our officers and other employees, our board members and any consultants
we hire.
Administration. The discretionary option grant and stock issuance programs
are administered by our compensation committee. This committee determines which
eligible individuals will receive option grants or stock issuances under those
programs, the time or times when the grants or issuances are to be made, the
number of shares subject to each grant or issuance, the status of any granted
option as either an incentive stock option or a nonstatutory stock option under
the federal tax laws, the vesting schedule to be in effect for the option grant
or stock issuance and the maximum term for which any granted option is to
remain outstanding.
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<PAGE>
The compensation committee also has the authority to select the executive
officers and other highly compensated employees who may participate in the
salary investment option grant program in the event that program is put into
effect for one or more calendar years.
Plan Features. Our 1999 plan includes the following features:
. The exercise price for any options granted under the plan may be paid
in cash or in shares of our common stock valued at fair market value on
the exercise date. The option may also be exercised through a same-day
sale program without any cash outlay by the optionee.
. The compensation committee has the authority to cancel outstanding
options under the discretionary option grant program, including any
transferred options from our 1998 Stock Plan, in return for the grant
of new options for the same or different number of option shares with
an exercise price per share based upon the fair market value of our
common stock on the new grant date.
. Stock appreciation rights may be issued under the discretionary option
grant program. These rights will provide the holders with the election
to surrender their outstanding options for a payment from us equal to
the fair market value of the shares subject to the surrendered options
less the exercise price payable for those shares. We may make the
payment in cash or in shares of our common stock. None of the options
under our 1998 Stock Plan have any stock appreciation rights.
Change in Control. The 1999 plan includes the following change in control
provisions which may result in the accelerated vesting of outstanding option
grants and stock issuances:
. In the event that we are acquired by merger or asset sale, each
outstanding option under the discretionary option grant program which
is not to be assumed by the successor corporation will immediately
become exercisable for all the option shares, and all outstanding
unvested shares will immediately vest, except to the extent our
repurchase rights with respect to those shares are to be assigned to
the successor corporation.
. The compensation committee has complete discretion to grant one or more
options which will become exercisable for all the option shares in the
event those options are assumed in the acquisition but the optionee's
service with us or the acquiring entity is subsequently terminated. The
vesting of any outstanding shares under our 1999 plan may be
accelerated upon similar terms and conditions.
. The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a successful tender offer for
more than fifty percent of our outstanding voting stock or a change in
the majority of our board through one or more contested elections. This
accelerated vesting may occur either at the time of the transaction or
upon the subsequent termination of the individual's service.
. The options that were outstanding under our 1998 Stock Plan will
immediately vest in the event we are acquired and the acquiring company
does not assume those options. Any options which are assumed will
immediately vest upon an involuntary termination of the optionee's
employment within 18 months after the acquisition.
Salary Investment Option Grant Program. In the event the compensation
committee decides to put this program into effect for one or more calendar
years, each of our executive officers and other highly compensated employees
may elect to reduce his or her base salary for the calendar year by an amount
not less than $10,000 nor more than $50,000. Each selected individual who makes
this election will automatically be granted, on the first trading day in
January of the calendar year for which his or her salary reduction is to be in
effect, an option to purchase that number of shares of common stock determined
by dividing the salary reduction amount by two-thirds of the fair market value
per share of our common stock on the grant date. The option will have exercise
price per share equal to one-third of the fair market value of the option
shares on the grant date. As a result, the option will be structured so that
the fair market value of the option shares on the
47
<PAGE>
grant date less the exercise price payable for those shares will be equal to
the amount of the salary reduction. The option will become exercisable in a
series of twelve equal monthly installments over the calendar year for which
the salary reduction is to be in effect.
Automatic Option Grant Program. Each individual who first becomes a non-
employee board member at any time after the effective date of this offering
will receive an option grant for 10,000 shares of common stock on the date such
individual joins the board. In addition, on the date of each annual
stockholders meeting held after the effective date of this offering, each non-
employee board member who is to continue to serve as a non-employee board
member, including each of our current non-employee board members, will
automatically be granted an option to purchase 2,500 shares of common stock,
provided such individual has served on the board for at least six months.
Each automatic grant has an exercise price per share equal to the fair
market value per share of our common stock on the grant date and will have a
term of 10 years, subject to earlier termination following the optionee's
cessation of board service. The option will be immediately exercisable for all
of the option shares; however, we may repurchase, at the exercise price paid
per share, any shares purchased under the option which are not vested at the
time of the optionee's cessation of board service. The shares subject to each
annual automatic grant will be fully-vested when granted. The shares subject to
each initial 10,000-share automatic option grant will vest in a series of 36
successive equal monthly installments upon the optionee's completion of each
month of board service over the 36 month period measured from the grant date.
However, the shares will immediately vest in full upon certain changes in
control or ownership or upon the optionee's death or disability while a board
member.
Director Fee Option Grant Program. If this program is put into effect in
the future, then each non-employee board member may elect to apply all or a
portion of any cash retainer fee for the year to the acquisition of a below-
market option grant. The option grant will automatically be made on the first
trading day in January in the year for which the non-employee board member
would otherwise be paid the cash retainer fee in the absence of his or her
election. The option will have an exercise price per share equal to one-third
of the fair market value of the option shares on the grant date, and the number
of shares subject to the option will be determined by dividing the amount of
the retainer fee applied to the program by two-thirds of the fair market value
per share of our common stock on the grant date. As a result, the option will
be structured so that the fair market value of the option shares on the grant
date less the exercise price payable for those shares will be equal to the
portion of the retainer fee applied to that option. The option will become
exercisable in a series of twelve equal monthly installments over the calendar
year for which the election is in effect. However, the option will become
immediately exercisable for all the option shares upon the death or disability
of the optionee while serving as a board member.
Additional Program Features. Our 1999 plan also has the following features:
. Outstanding options under the salary investment and director fee option
grant programs will immediately vest if we are acquired by a merger or
asset sale or if there is a successful tender offer for more than 50%
of our outstanding voting stock or a change in the majority of our
board through one or more contested elections.
. Limited stock appreciation rights are automatically included as part of
each grant made under the salary investment option grant program and
the automatic and director fee option grant programs, and these rights
may also be granted to one or more officers as part of their option
grants under the discretionary option grant program. Options with this
feature may be surrendered to us upon the successful completion of a
hostile tender offer for more than 50% of our outstanding voting stock.
In return for the surrendered option, the optionee will be entitled to
a cash distribution from us in an amount per surrendered option share
based upon the highest price per share of our common stock paid in that
tender offer.
. The board may amend or modify the 1999 plan at any time, subject to any
required stockholder approval. The 1999 plan will terminate no later
than the last business day of June 2009.
48
<PAGE>
1999 Employee Stock Purchase Plan
Introduction. Our 1999 Employee Stock Purchase Plan was adopted by the
board and approved by the stockholders in June 1999. The plan became effective
immediately upon the signing of the underwriting agreement for this offering.
The plan is designed to allow our eligible employees and the eligible employees
of our participating subsidiaries to purchase shares of common stock, at semi-
annual intervals, with their accumulated payroll deductions.
Share Reserve. 300,000 shares of our common stock have initially been
reserved for issuance. The reserve will automatically increase on the first
trading day in January each year, beginning in calendar year 2000, by an amount
equal to one percent (1%) of the total number of outstanding shares of our
common stock on the last trading day in December in the prior year. In no event
will any annual increase exceed 521,571 shares.
Offering Periods. The plan has a series of successive offering periods,
each with a maximum duration of 24 months. The initial offering period starts
on the date the underwriting agreement for the offering covered was signed and
ends on the last business day in July 2001. The next offering period will start
on the first business day in August 2001, and subsequent offering periods will
be set by our compensation committee.
Eligible Employees. Individuals scheduled to work more than 20 hours per
week for more than 5 calendar months per year may join an offering period on
the start date or any semi-annual entry date within that period. Semi-annual
entry dates will occur on the first business day of February and August each
year. Individuals who become eligible employees after the start date of an
offering period may join the plan on any subsequent semi-annual entry date
within that offering period.
Payroll Deductions. A participant may contribute up to 15% of his or her
cash earnings through payroll deductions, and the accumulated deductions will
be applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per
share on the participant's entry date into the offering period or, if lower,
85% of the fair market value per share on the semi-annual purchase date.
Semi-annual purchase dates will occur on the last business day of January
and July each year. In no event, however, may any participant purchase more
than 1,200 shares on any purchase date, and not more than 75,000 shares may be
purchased in total by all participants on any purchase date.
Reset Feature. If the fair market value per share of our common stock on
any purchase date is less than the fair market value per share on the start
date of the two-year offering period, then that offering period will
automatically terminate, and a new two-year offering period will begin on the
next business day. All participants in the terminated offering will be
transferred to the new offering period.
Change in Control. Should we be acquired by merger or sale of substantially
all of our assets or more than fifty percent of our voting securities, then all
outstanding purchase rights will automatically be exercised immediately prior
to the effective date of the acquisition. The purchase price will be equal to
85% of the market value per share on the participant's entry date into the
offering period in which an acquisition occurs or, if lower, 85% of the fair
market value per share immediately prior to the acquisition.
Plan Provisions. The following provisions are also in effect under the
plan:
. The plan will terminate no later than the last business day of June
2009.
. The board may at any time amend, suspend or discontinue the plan.
However, some amendments may require stockholder approval.
49
<PAGE>
Limitation on Liability and Indemnification Matters
The certificate of incorporation that we will adopt immediately prior to
the closing of this offering provides that, except to the extent prohibited by
the Delaware General Corporation Law, our directors will not be personally
liable to us or our stockholders for monetary damages for any breach of
fiduciary duty as directors. Under the Delaware General Corporation Law, the
directors have a fiduciary duty to Stamps.com which is not eliminated by this
provision of the certificate of incorporation and, in appropriate
circumstances, equitable remedies including injunctive or other forms of
nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under the Delaware law for:
. breach of the director's duty of loyalty;
. acts or omissions which are found by a court of competent jurisdiction
to be not in good faith or which involve intentional misconduct, or
knowing violations of law;
. actions leading to improper personal benefit to the director; and
. payment of dividends or approval of stock repurchases or redemptions
that are prohibited by Delaware law.
This provision also does not affect the director's responsibilities under any
other laws, including the federal securities laws or state or federal
environmental laws. We have obtained liability insurance for our officers and
directors.
Section 145 of the Delaware law empowers a corporation to indemnify its
directors and officers and to purchase insurance with respect to liability
arising out of their capacity or status as directors and officers, provided
that this provision shall not eliminate or limit the liability of a director:
. for any breach of the director's duty of loyalty to the corporation or
its stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. arising under Section 174 of the Delaware law; or
. for any transaction from which the director derived an improper
personal benefit.
The Delaware law provides further that the indemnification permitted
thereunder shall not be deemed exclusive of any other rights to which the
directors and officers may be entitled under the corporation's bylaws, any
agreement, a vote of stockholders or otherwise. The certificate of
incorporation provides that we indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding by reason of the fact that the person is or was a director
or officer, or is or was serving at our request as a director or officer of
another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise, against expenses, judgements, fines and amounts paid in
settlement actually and reasonably incurred by the person in the action, suit
or proceeding.
We plan to enter into indemnification agreements with our directors and our
executive officers containing provisions that may require us, among other
things, to indemnify our directors and officers against liabilities that may
arise by reason of their status or service as directors or officers other than
liabilities arising from willful misconduct of a culpable nature, to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors' and officers' liability
insurance if maintained for other directors or officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for indemnification.
50
<PAGE>
RELATED PARTY TRANSACTIONS
Sales of Securities
We have issued a total of 6,900,975 shares of common stock for a total
purchase price of $194,760.00. John M. Payne, our President and Chief Executive
Officer, purchased 1,500,000 shares of common stock in November 1998 for a
purchase price of $100,000.00, which amount includes a note payable to
Stamps.com for $99,000.00. Thomas Bruggere, our Chairman of the Board of
Directors, purchased 488,475 shares of common stock in October 1998 and
December 1998 for a total purchase price of $28,460.00. Mohan Ananda, a member
of our board of directors, purchased 2,172,595 shares of common stock in
January 1998 for a total purchase price of $28,967.94. As payment of the
purchase price, Mr. Ananda assigned to us intellectual property rights in his
inventions developed for us and received a license back from us to use those
intellectual property rights in a restricted field of use. A more detailed
description of transactions with Mr. Ananda appears below. In January 1998, we
also sold 423,993 shares of common stock to each of our co-founders, James
McDermott, Ari Engelberg and Jeffrey Green, for a total purchase price of
$16,959.72, which amount includes $9,000.00 in notes payable to Stamps.com.
We have issued, in private placement transactions, shares of preferred
stock as follows:
. 3,762,500 shares of Series A preferred stock at $0.40 per share in
February 1998;
. 6,020,000 shares of Series B preferred stock at $0.75 per share in
August, October and November 1998; and
. 5,464,486 shares of Series C preferred stock at $5.49 per share in
February and March 1999.
Transactions with Mr. Ananda
We paid $61,000 in March 1998 to Safeware Corporation for employee salary
and patent prosecution expenses incurred on our behalf to attain patents for
us. These patent prosecution expenses consisted primarily of fees paid to
patent counsel and fees paid to the US Patent and Trademark Office. Mr. Ananda
is the majority shareholder in Safeware Corporation. We also reimbursed Mr.
Ananda for approximately $20,000 for expenses incurred on our behalf.
Under our previous agreements with Mr. Ananda, we own all of the
intellectual property developed by Mr. Ananda during the course of his
employment and all of the intellectual property he developed for us before his
formal employment began. Mr. Ananda resigned as our Chief Executive Officer on
January 1, 1999. In May 1999, we entered into a separation agreement and a
license agreement with Mr. Ananda to formalize his resignation and to redefine
his intellectual property rights relative to us. The new license agreement
reaffirmed our ownership of the intellectual property invented by Mr. Ananda.
In addition, the license agreement clarified and narrowed Mr. Ananda's field of
use restrictions to limit his license to a few narrowly defined electronic
commerce applications that do not compete with our Internet postage service.
Consulting Services
We paid Mr. Payne $112,800 for consulting services he rendered to us
between May 1998 and October 1998.
In February 1999, Loren Smith, a director, entered into a three-year
consulting agreement with us to provide marketing and strategic planning
services. In exchange for his consulting services, Mr. Smith will receive
consulting fees of $120,000 per annum and an option to purchase 135,000 shares
of common stock at $0.33 per share. The term of this agreement expires in
February 2002.
51
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table indicates beneficial ownership of our common stock as
of May 31, 1999, after giving effect to the conversion of convertible preferred
stock, and as adjusted to reflect the sale of the shares of common stock
offered in this offering, by:
. each stockholder whom we know to beneficially own 5% or more of the
outstanding shares of common stock;
. each of our directors and our executive officers named in the Summary
Compensation Table, and
. all of our directors and executive officers as a group.
Unless otherwise indicated, the address of each beneficial owner listed below
is c/o Stamps.com Inc., 3420 Ocean Park Boulevard, Suite 1040, Santa Monica,
California 90405.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated by the footnotes below,
we believe, based on information furnished to us, that the persons and entities
named in the table below have sole voting and investment power with respect to
all shares of common stock shown as beneficially owned by them. Percentage of
beneficial ownership is based on 29,771,454 shares of common stock outstanding
as of May 31, 1999 and 34,771,454 shares of common stock outstanding after the
completion of this offering. In computing the number of shares of common stock
subject to options held by that person that are exercisable within 60 days of
May 31, 1999, these shares are deemed outstanding for the purpose of
determining the percentage ownership of the optionee. These shares, however,
are not deemed outstanding for the purpose of computing the percentage
ownership of any other stockholder.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned
------------------------
Number of Shares Before After
Name of Beneficial Owner Beneficially Owned Offering Offering
------------------------ ------------------ ---------- ----------
<S> <C> <C> <C>
Named executive officers and
Directors:
Jeffrey J. Brown(1)........... 5,457,448 18.3% 15.7%
Thomas N. Clancy(2)........... 5,457,448 18.3% 15.7%
G. Bradford Jones(3).......... 5,457,448 18.3% 15.7%
Mohan P. Ananda(4)............ 2,172,595 7.3% 6.2%
John M. Payne................. 1,500,000 5.0% 4.3%
Thomas H. Bruggere(5)......... 488,475 1.6% 1.4%
John W. LaValle (6)........... 395,802 1.3% 1.1%
Douglas J. Walner(7).......... 366,357 1.2% 1.0%
Loren E. Smith(8)............. 243,000 * *
David C. Bohnett(9)........... 135,322 * *
Marvin Runyon(10)............. 114,831 * *
Other 5% Stockholders:
Brentwood Venture Capital
(11)........................ 5,421,448 18.2% 15.6%
11150 Santa Monica Blvd,
Suite 1200
Los Angeles, CA 90025
Enterprise Partners IV, L.P.
(12)........................ 5,421,448 18.2% 15.6%
5000 Birch Street, Suite
6200
Newport Beach, CA 92660
SBIC Partners, L.P. .......... 5,421,448 18.2% 15.6%
201 Main Street, Suite 2302
Fort Worth, TX 76102
Vulcan Ventures Inc........... 2,732,241 9.2% 7.9%
110-110th Ave., N.E., Suite
550
Bellevue, WA 98004
Chase Venture Capital
Partners, L.P............... 2,185,792 7.3% 6.3%
380 Madison Ave., 12th
Floor
New York, NY 10017
All directors and executive
officers as a group
(15 people) (13).............. 22,400,086 71.6% 64.2%
</TABLE>
52
<PAGE>
- --------
* Represents beneficial ownership of less than 1% of the outstanding shares
of common stock.
(1) Consists of 5,421,448 shares held by SBIC Partners, L.P. Jeffrey Brown is
a director and executive officer of Forrest Binkley & Brown Venture Co.,
the general partner of Forrest Binkley & Brown L.P., the Managing Partner
of SBIC Partners. Mr. Brown disclaims beneficial ownership of these
shares except to the extent of his pecuniary interest therein. Also
includes 36,000 shares subject to options, all of which are presently
exercisable within 60 days from May 31, 1999.
(2) Includes 4,987,732 shares and 433,716 shares held by Enterprise Partners
IV, L.P. and Enterprise Partners IV Associates, L.P., respectively.
Thomas N. Clancy is a Venture Partner at Enterprise Partners Venture
Capital. Mr. Clancy disclaims beneficial ownership of these shares except
to the extent of his pecuniary interest therein. Also includes 36,000
shares subject to options, all of which are presently exercisable within
60 days from May 31, 1999.
(3) Includes 5,204,590 shares and 216,858 shares held by Brentwood Associates
VIII, L.P. and Brentwood Affiliates Fund, L.P., respectively. G. Bradford
Jones is a General Partner at Brentwood Venture Capital. Mr. Jones
disclaims beneficial ownership of these shares except to the extent of
his pecuniary interest therein. Also includes 36,000 shares subject to
options, all of which are presently exercisable within 60 days from May
31, 1999.
(4) Includes 240,000 shares held in trust for the benefit of Mr. Ananda's
family.
(5) Includes 75,000 shares held in trust for the benefit of his children as
to which Mr. Bruggere disclaims beneficial ownership.
(6) Includes 395,802 shares subject to options, all of which are presently
exercisable or will become exercisable within 60 days from May 31, 1999.
(7) Includes 366,357 shares subject to options, all of which are presently
exercisable or will become exercisable within 60 days from May 31, 1999.
(8) Includes 243,000 shares subject to options, all of which are presently
exercisable or will become exercisable within 60 days from May 31, 1999.
(9) Includes 108,000 shares subject to options, all of which are presently
exercisable or will become exercisable within 60 days from May 31, 1999.
(10) Includes 108,000 shares subject to options, all of which are presently
exercisable or will become exercisable within 60 days from May 31, 1999.
(11) Includes 5,204,590 shares and 216,858 shares held by Brentwood Associates
VIII, L.P. and Brentwood Affiliates Fund, L.P., respectively. G. Bradford
Jones is a General Partner at Brentwood Venture Capital. Mr. Jones
disclaims beneficial ownership of these shares except to the extent of
his pecuniary interest therein.
(12) Includes 4,987,732 shares and 433,716 held by Enterprise Partners IV,
L.P. and Enterprise Partners IV Associates, L.P., respectively. Thomas N.
Clancy is a Venture Partner at Enterprise Partners Venture Capital. Mr.
Clancy disclaims beneficial ownership of these shares except to the
extent of his pecuniary interest therein.
(13) Includes 1,516,659 shares subject to options, all of which are presently
exercisable or will become exercisable within 60 days of May 31, 1999.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of our securities and provisions of our
certificate of incorporation and bylaws is only a summary. You should also
refer to the copies of our certificate and bylaws which have been filed with
the Securities and Exchange Commission as exhibits to our registration
statement, of which this prospectus forms a part. The description of common
stock and preferred stock reflect changes to our capital structure that will
occur upon the closing of this offering in accordance with the terms of the
certificate of incorporation that will be adopted by us immediately prior to
the closing of this offering.
Upon the closing of this offering, our authorized capital stock will
consist of 95,000,000 shares of common stock, par value $0.001, and 5,000,000
shares of preferred stock, par value $0.001.
Common Stock
As of May 31, 1999, there were 29,771,454 shares of common stock
outstanding and held of record by 36 stockholders, assuming conversion of all
shares of preferred stock into common stock. Based on the number of shares
outstanding as of that date and giving effect to the issuance of the 5,000,000
shares of common stock in this offering, there will be 34,771,454 shares of
common stock outstanding upon the closing of the offering.
Holders of the common stock are entitled to one vote for each share held on
all matters submitted to a vote of the stockholders. Holders of common stock
are entitled to receive dividends ratably, if any, as may be declared by the
Board of Directors out of legally available funds, subject to any preferential
dividend rights of any outstanding preferred stock. Upon our liquidation,
dissolution or winding up, the holders of common stock are entitled to receive
ratably our net assets available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding preferred stock.
Holders of common stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of common stock are, and the shares
offered by us in this offering will be, upon receipt of payment for the shares,
fully paid and nonassessable. The rights, preferences and privileges of holders
of common stock are subject to, and may be adversely affected by, the rights of
holders of shares of any series of preferred stock which we may designate and
issue in the future without further stockholder approval. Upon the closing of
the offering, there will be no shares of preferred stock outstanding.
Preferred Stock
Upon the closing of this offering, all outstanding shares of our redeemable
preferred stock will convert into shares of common stock. Thereafter, the Board
of Directors will be authorized without further stockholder approval, to issue
from time to time up to a total of 5,000,000 shares of preferred stock in one
or more series and to fix or alter the designations, preferences, rights and
any qualifications, limitations or restrictions of the shares of each series,
including the dividend rights, dividend rates, conversion rights, voting
rights, term of redemption, redemption price or prices, liquidation preferences
and the number of shares constituting any series or designations of these
series without further vote or action by the stockholders. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change in control of our management without further action by the stockholders
and may adversely affect the voting and other rights of the holders of common
stock. The issuance of preferred stock with voting and conversion rights may
adversely affect the voting power of the holders of common stock, including the
loss of voting control to others. We have no present plans to issue any shares
of preferred stock.
Warrant
On May 1, 1998, we issued a warrant which is currently exercisable for
7,050 shares of common stock at $0.27 per share. The warrant may be exercised
at any time on or before May 1, 2005.
54
<PAGE>
Anti-Takeover Effects of Provisions of Delaware Law and our Certificate of
Incorporation and Bylaws
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Subject to exceptions, Section 203 prohibits a publicly-held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years from the date of the
transaction in which the person became an interested stockholder, unless the
interested stockholder attained this status with the approval of the board of
directors or unless the business combination is approved in a prescribed
manner. A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder.
Subject to exceptions, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years did own, 15% or
more of the corporation's voting stock. This statute could prohibit or delay
the accomplishment of mergers or other takeover or change in control in
attempts with respect to us and, accordingly, may discourage attempts to
acquire us.
In addition, provisions of our certificate of incorporation and bylaws, may
be deemed to have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt that a stockholder might consider in his best
interest, including those attempts that might result in a premium over the
market price for the shares held by our stockholders.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual meeting of stockholders, must provide timely
notice thereof in writing. To be timely, a stockholder's notice must be
delivered to or mailed and received at our principal executive offices not less
than 120 days prior to the date of our annual meeting. The bylaws also specify
requirements as to the form and content of a stockholder's notice. These
provisions may preclude stockholders from bringing matters before an annual
meeting of stockholders or from making nominations for directors at an annual
meeting of stockholders.
Authorized But Unissued Shares. The authorized but unissued shares of
common stock and preferred stock are available for future issuance without
stockholder approval. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
authorized but unissued shares of common stock and preferred stock could render
more difficult or discourage an attempt to obtain control of us by means of a
proxy contest, tender offer, merger or otherwise.
Classified Board of Directors; Removal. Upon the closing of this offering,
our directors will be divided into three classes. The number of directors will
be distributed among the three classes so that each class will consist of one-
third of the Board of Directors. The classification of the Board of Directors
will have the effect of requiring at least two annual stockholder meetings,
instead of one, to replace a majority of the directors which could have the
effect of delaying or preventing a change in control of Stamps.com. Subject to
the rights of the holders of any outstanding series of preferred stock, the
certificate of incorporation will authorize only the Board of Directors to fill
vacancies, including newly created directorships. The certificate of
incorporation will also provide that directors may be removed by stockholders
only for cause and only by the affirmative vote of holders of two-thirds of the
outstanding shares of voting stock.
Supermajority Vote to Amend Charter and Bylaws. Our certificate of
incorporation and bylaws will each provide that our bylaws may only be amended
by a two-thirds vote of the outstanding shares. In addition, our certificate of
incorporation will provide that its provisions related to bylaw amendments,
staggered board and indemnification may only be amended by a two-thirds vote of
the outstanding shares.
55
<PAGE>
Registration Rights
After this offering, holders of approximately 25,043,074 shares of common
stock issuable upon conversion of the outstanding preferred stock upon the
closing of this offering will be entitled to registration rights with respect
to their shares. Of these shares, 2,172,595 shares of common stock do not have
demand registration rights and are only entitled to "piggy-back" registration
rights. The holders of securities with registration rights can require us to
register all or part of their shares at any time following six months after
this offering. In addition these holders may also require us to include their
shares in future registration statements that we file and may require us to
register their shares on Form S-3. Upon registration, these shares are freely
tradable in the public market without restriction.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is U.S. Stock
Transfer Corporation.
Listing
Our common stock has been approved for quotation on the Nasdaq National
Market under the trading symbol "STMP."
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have 34,771,454 shares of common
stock outstanding assuming no exercise of the underwriters' over-allotment
option or outstanding options as of May 31, 1999. Of this amount, the 5,000,000
shares offered by this prospectus will be available for immediate sale in the
public market as of the date of this prospectus. Approximately 10,313,199
additional shares will be available for sale in the public market following the
expiration of 180-day lock-up agreements with the representatives of our
underwriters, subject in some cases to compliance with the volume and other
limitations of Rule 144.
<TABLE>
<CAPTION>
Days after the
Date of this Approximate Shares
Prospectus Eligible for Future Sale Comment
-------------- ------------------------ ---------------------------------
<C> <C> <S>
Upon Effectiveness 5,000,000 Freely tradable shares sold in
offering and shares salable under
Rule 144(k) that are not subject
to 180-day lock-up
90 days 209,301 Shares salable under Rules 144 or
701 that are not subject to 180-
day lock-up
180 days 10,313,199 Lock-up released; shares salable
under Rules 144 or 701
</TABLE>
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least one year is entitled to sell within any
three-month period commencing 90 days after the date of this prospectus a
number of shares that does not exceed the greater of (a) 1% of the then
outstanding shares of common stock (approximately 348,000 shares immediately
after the offering) or (b) the average weekly trading volume during the four
calendar weeks preceding the sale, subject to the filing of a Form 144 with
respect to the sale. A person who is not deemed to have been an affiliate of
Stamps.com at any time during the 90 days immediately preceding the sale and
who has beneficially owned his or her shares for at least two years is entitled
to sell these shares under Rule 144(k) without regard to the limitations
described above. Persons deemed to be affiliates must always sell under Rule
144, even after the applicable holding periods have been satisfied.
We are unable to estimate the number of shares that will be sold under Rule
144, since this will depend on the market price for our common stock, the
personal circumstances of the sellers and other factors. Prior to the offering,
there has been no public market for the common stock, and there can be no
assurance that a significant public market for the common stock will develop or
be sustained after the offering. Any future sale of substantial amounts of the
common stock in the open market may adversely affect the market price of the
common stock offered by this prospectus.
Our directors, executive officers, and other significant stockholders have
agreed that they will not sell any common stock without the prior written
consent of BancBoston Robertson Stephens Inc. for a period of 180 days from the
date of this prospectus. We have also agreed not to issue any shares during the
lock-up period without the consent of BancBoston Robertson Stephens Inc.,
except that we may, without this consent, grant options and sell shares under
our stock incentive and purchase plans although the shares may not be resold
into the public market during the lock-up period.
Any of our employees or consultants who purchased his or her shares under a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701, which permits nonaffiliates to resell their Rule 701
shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
resell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
prospectus. As of May 31, 1999, there were outstanding 3,208 shares of common
stock that would be entitled to rely on Rule 701 for resales.
As of May 31, 1999, there were outstanding options to purchase 5,374,959
shares of common stock under our stock plans. We intend to file a registration
statement on Form S-8 under the Securities Act shortly after the completion of
the offering to register the shares of common stock subject to outstanding
stock options that may be issued under these plans, which will permit the
resale of these shares in the public market without restriction after the lock-
up period expires.
In addition, some of our stockholders have registration rights with respect
to approximately 25,043,074 shares of common stock and common stock
equivalents. Registration of these securities under the Securities Act would
result in these shares becoming freely tradable without restriction under the
Securities Act provided their shares were not purchased by any of our
affiliates.
57
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Thomas Weisel Partners LLC, Volpe Brown
Whelan & Company, LLC and Wit Capital Corporation have severally agreed with
us, subject to the terms and conditions of the underwriting agreement, to
purchase from us the number of shares of common stock indicated opposite their
names below. The underwriters are committed to purchase and pay for all of the
shares if any are purchased.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
BancBoston Robertson Stephens Inc. ............................... 2,337,500
Thomas Weisel Partners LLC........................................ 1,285,625
Volpe Brown Whelan & Company, LLC................................. 1,051,875
Wit Capital Corporation........................................... 125,000
William Blair & Company, L.L.C.................................... 100,000
C.E. Unterburg, Towbin............................................ 100,000
---------
Total........................................................... 5,000,000
=========
</TABLE>
We have been advised that the underwriters propose to offer the shares of
common stock to the public at the public offering price located on the cover
page of this prospectus and to dealers at that price less a concession of not
in excess of $0.46 per share, of which $0.10 may be reallowed to other dealers.
After the initial public offering, the public offering price, concession and
reallowance to dealers may be reduced by the representatives. No reduction in
this price will change the amount of proceeds to be received by us as indicated
on the cover page of this prospectus.
Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 750,000 additional shares of common stock at the same price per
share as we will receive for the 5,000,000 shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise this option,
each of the underwriters will have a firm commitment to purchase approximately
the same percentage of additional shares that the number of shares of common
stock to be purchased by it shown in the above table represents as a percentage
of the 5,000,000 shares offered by this prospectus. If purchased, the
additional shares will be sold by the underwriters on the same terms as those
on which the 5,000,000 shares are being sold. We will be obligated, under this
option, to sell shares to the extent the option is exercised. The underwriters
may exercise the option only to cover over-allotments made in connection with
the sale of the 5,000,000 shares of common stock offered by this prospectus.
The following table shows the per share and total underwriting discounts
and commissions to be paid by us to the underwriters. This information is
presented assuming either no exercise or full exercise by the underwriters of
their over-allotment option.
<TABLE>
<CAPTION>
Per Without
Share Option With Option
------ ----------- -----------
<S> <C> <C> <C>
Public offering price........................ $11.00 $55,000,000 $63,250,000
Underwriting discounts and commissions....... $ 0.77 $ 3,850,000 $ 4,427,500
Proceeds, before expenses, to us............. $10.23 $51,150,000 $58,822,500
</TABLE>
The expenses of the offering are estimated at $700,000 and are payable entirely
by us. BancBoston Robertson Stephens Inc. expects to deliver the shares of
common stock to purchasers on June 30, 1999.
Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters and us against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representation and warranties contained in the underwriting agreement.
Future Sales. Each of our executive officers, directors and other
significant stockholders of record has agreed with the representatives, for a
period of 180 days after the date of this prospectus, not to offer to sell,
contract to sell or otherwise sell, dispose of, loan, pledge or grant any
rights with respect to any shares of common stock, any options or warrants to
purchase any shares of common stock, or
58
<PAGE>
any securities convertible into or exchangeable for shares of common stock
owned as of the date of this prospectus or acquired directly from us by these
holders or with respect to which they have or may acquire the power of
disposition, without the prior written consent of BancBoston Robertson Stephens
Inc. However, BancBoston Robertson Stephens Inc. may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to lock-up agreements. There are no agreements between the
representatives and any of our stockholders providing consent by the
representatives to the sale of shares prior to the expiration of the 180-day
lock-up period. In addition, we have generally agreed that, during the 180-day
lock-up period, we will not, without the prior written consent of BancBoston
Robertson Stephens Inc., (a) consent to the disposition of any shares held by
stockholders prior to the expiration of the 180-day lock-up period or (b)
issue, sell, contract to sell or otherwise dispose of, any shares of common
stock, any options or warrants to purchase any shares of common stock, or any
securities convertible into, exercisable for or exchangeable for shares of
common stock, other than our sale of shares in the offering, our issuance of
common stock upon the exercise of currently outstanding options and warrants,
and our issuance of incentive awards under our stock incentive plans. See
"Shares Eligible for Future Sale."
Directed Shares. We have requested that the underwriters reserve up to ten
percent of the shares of common stock for sale at the initial public offering
price to directors, officers, employees and other individuals designated by
Stamps.com. All of our directors, executive officers and five percent or
greater stockholders have received allocations in the directed share program.
The number of shares reserved for these persons ranges from 7,500 to 25,000
shares.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
No Prior Public Market. Prior to this offering, there has been no public
market for the common stock. Consequently, the initial public offering price
for the common stock offered by this prospectus has been determined through
negotiations between us and the representatives. Among the factors considered
in these negotiations were prevailing market conditions, our financial
information, market valuations of other companies that we and the
representatives believe to be comparable to us, estimates of our business
potential, the present state of our development and other factors deemed
relevant.
Bayview Investors, Ltd., an investment partnership affiliated with
BancBoston Robertson Stephens Inc., purchased 60,717 shares of Series C
Preferred Stock from us on February 17, 1999 at a price of $5.49 per share and
on the same terms and conditions as all other purchasers in our Series C
Preferred Stock financing. BancBoston Robertson Stephens Inc. acted as
placement agent for our Series C Preferred Stock financing and received for its
services a fee of approximately $1.4 million from us.
Electronic Prospectus Delivery. A prospectus in electronic format is being
made available on an Internet Web site maintained by Wit Capital. In addition,
pursuant to an e-Dealer Agreement, all dealers purchasing shares from Wit
Capital in the offering similarly have agreed to make a prospectus in
electronic format available on Web sites maintained by each of the e-Dealers.
New Underwriters. Thomas Weisel Partners LLC, one of the representatives of
the underwriters, was organized and registered as a broker-dealer in December
1998. Since December 1998, Thomas Weisel Partners has been named as a lead or
co-manager on 37 filed public offerings of equity securities, of which 16 have
been completed, and has acted as a syndicate member in an additional 10 public
offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with
us under the underwriting agreement entered into in connection with this
offering.
Wit Capital, a member of the National Association of Securities Dealers,
Inc. will participate in the offering as one of the underwriters. The National
Association of Securities Dealers, Inc. approved the membership of Wit Capital
on September 4, 1997. Since that time, Wit Capital has acted as an underwriter,
co-manager or selected dealer in over 70 public offerings. Except for its
participation as a manager in this offering, Wit Capital has no relationship
with Stamps.com, Inc. or any of its founders or significant stockholders.
59
<PAGE>
Stabilization. The representatives have advised us that, under Regulation M
under the Securities Exchange Act, some participants in the offering may engage
in transactions, including stabilizing bids, syndicate covering transactions or
the imposition of penalty bids, that may have the effect of stabilizing or
maintaining the market price of the common stock at a level above that which
might otherwise prevail in the open market. A "stabilizing bid" is a bid for or
the purchase of the common stock on behalf of the underwriters for the purpose
of fixing or maintaining the price of the common stock. A "syndicate covering
transaction" is the bid for or purchase of the common stock on behalf of the
underwriters to reduce a short position incurred by the underwriters in
connection with the offering. A "penalty bid" is an arrangement permitting the
representatives to reclaim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with the offering if the common
stock originally sold by the underwriter or syndicate member is purchased by
the representatives in a syndicate covering transaction and has therefore not
been effectively placed by the underwriter or syndicate member. The
representatives have advised us that these transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Brobeck, Phleger & Harrison LLP, Irvine, California. As of May
31, 1999, affiliates of Brobeck, Phleger & Harrison LLP beneficially owned a
total of 77,413 shares of our common stock. Legal matters relating to the sale
of common stock in this offering will be passed upon for the underwriters by
Wilson Sonsini Goodrich & Rosati, Palo Alto, California.
EXPERTS
The financial statements included in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares to be
sold in the offering. This prospectus does not contain all the information
contained in the registration statement. For further information with respect
to Stamps.com and the shares to be sold in the offering, reference is made to
the registration statement and the exhibits and schedules filed with the
registration statement. We have described all material information for each
contract, agreement or other document filed with the registration statement in
the prospectus. However, statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete. As a result, you should refer to the copy of the
contract, agreement or other document filed as an exhibit to the registration
statement for a complete description of the matter involved.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information that we file at the Securities and
Exchange Commission's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You can request copies of these documents, upon payment
of a duplicating fee, by writing to the Securities and Exchange Commission.
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information on the operation of the public reference rooms. The
Securities and Exchange Commission's filings, including the registration
statement are also available to you without charge on their Web site
(http://www.sec.gov).
60
<PAGE>
STAMPS.COM INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Balance Sheets at December 31, 1998 and March 31, 1999 (unaudited)....... F-3
Statements of Operations for the period from January 9, 1998 (date of
inception) to December 31, 1998, the period from January 9, 1998 (date
of inception) to March 31, 1998 (unaudited), the three months ended
March 31, 1999 (unaudited) and the period from January 9, 1998 (date of
inception) to March 31, 1999 (unaudited)............................... F-4
Statements of Stockholders' Equity (Deficit) for the period from January
9, 1998 (date of inception) through December 31, 1998 and the three
months ended March 31, 1999 (unaudited)................................ F-5
Statements of Cash Flows for the period from January 9, 1998 (date of
inception) to December 31, 1998, the period from January 9, 1998 (date
of inception) to March 31, 1998 (unaudited), the three months ended
March 31, 1999 (unaudited) and the period from January 9, 1998 (date of
inception) to March 31, 1999 (unaudited)............................... F-6
Notes to Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Stamps.com Inc.:
We have audited the accompanying balance sheet of Stamps.com Inc. (a
Delaware corporation in the development stage) as of December 31, 1998, and the
related statements of operations, stockholders' equity (deficit) and cash flows
for the period from January 9, 1998 (date of inception) through December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Stamps.com Inc. as of
December 31, 1998, and the results of its operations and its cash flows for the
period from January 9, 1998 (date of inception) through December 31, 1998 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
January 13, 1999
F-2
<PAGE>
STAMPS.COM INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1999
------------------------
December 31, Pro Forma
1998 Historical (Note 1)
------------ ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 3,470,207 $28,523,897 $28,523,897
Prepaid expenses................... 48,118 170,809 170,809
----------- ----------- -----------
Total current assets................. 3,518,325 28,694,706 28,694,706
Property and equipment, net.......... 670,301 920,255 920,255
Patents, trademarks and other
intangibles, net................... 78,122 75,854 75,854
Other................................ 159,071 181,437 181,437
----------- ----------- -----------
Total assets......................... $ 4,425,819 $29,872,252 $29,872,252
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Line of credit..................... $ 1,000,000 $ 1,000,000 $ 1,000,000
Accounts payable................... 392,372 559,158 559,158
Accrued expenses................... 192,528 537,106 537,106
Accrued payroll and related........ 140,942 300,751 300,751
Accrued professional............... 200,000 -- --
Current portion of capital lease
obligations...................... 207,683 207,683 207,683
----------- ----------- -----------
Total current liabilities............ 2,133,525 2,604,698 2,604,698
Capital lease obligations, less
current portion.................... 265,070 216,916 216,916
Commitments
Redeemable preferred stock, $.001 par
value (Series A, B & C):
Authorized shares 10,000,000 at
December 31, 1998 and 15,500,000
at March 31, 1999 (pro forma:
5,000,000).......................
Issued and outstanding shares
9,782,500 at December 31, 1998
and 15,246,986 at March 31, 1999
(pro forma: none)................
Liquidation preference of
$6,020,000 at December 31, 1998
and $36,020,028 at March 31, 1999
(pro forma: none)................ 5,978,344 34,277,938 --
Stockholders' equity (deficit):
Common stock, $.001 par value:
Authorized shares 20,000,000 at
December 31, 1998 and 40,000,000
at March 31, 1999 (pro forma:
95,000,000).....................
Issued and outstanding shares
6,900,975 at December 31, 1998
and March 31, 1999 (pro forma:
29,771,454)..................... 6,901 6,901 29,771
Additional paid-in capital......... 1,437,859 4,784,859 39,039,927
Notes receivable from stock sales.. (117,000) (117,000) (117,000)
Deferred compensation.............. (1,083,000) (4,020,000) (4,020,000)
Deficit accumulated during the
development stage................ (4,195,880) (7,882,060) (7,882,060)
----------- ----------- -----------
Total stockholders' equity
(deficit).......................... (3,951,120) (7,227,300) 27,050,638
----------- ----------- -----------
Total liabilities and stockholders'
equity (deficit)................... $ 4,425,819 $29,872,252 $29,872,252
=========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
STAMPS.COM INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from Period from Period from
January 9, 1998 January 9, 1998 Three Months January 9, 1998
(inception) to (inception) Ended (inception) to
December 31, 1998 to March 31, 1998 March 31, 1999 March 31, 1999
----------------- ----------------- -------------- ---------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues................ $ -- $ -- $ -- $ --
Costs and expenses:
Research and
development......... 1,531,811 83,381 1,159,772 2,691,583
General and
administrative...... 2,648,279 279,713 2,528,426 5,176,705
----------- --------- ----------- -----------
Total costs and
expenses......... 4,180,090 363,094 3,688,198 7,868,288
----------- --------- ----------- -----------
Loss from operations.... (4,180,090) (363,094) (3,688,198) (7,868,288)
Other income (expense):
Interest expense...... (27,624) -- (33,001) (60,625)
Interest income....... 11,834 -- 35,019 46,853
----------- --------- ----------- -----------
Net loss................ $(4,195,880) $(363,094) $(3,686,180) $(7,882,060)
=========== ========= =========== ===========
Basic and diluted net
loss per share........ $ (0.85) $ (0.09) $ (0.53) $ (1.48)
=========== ========= =========== ===========
Pro forma basic and
diluted net loss per
share................. $ (0.36) $ (0.05) $ (0.15) $ (0.55)
=========== ========= =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
STAMPS.COM INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Deficit
Notes Accumulated
Common Stock Additional Receivable During the
----------------- Paid-in from Deferred Development
Shares Amount Capital Stock Sales Compensation Stage Total
---------- ------ ---------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 9,
1998 (inception)....... -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common
stock................. 4,912,500 4,913 61,387 (18,000) -- -- 48,300
Issuance of restricted
common stock.......... 1,988,475 1,988 126,472 (99,000) -- -- 29,460
Deferred compensation.. -- -- 1,250,000 -- (1,250,000) -- --
Amortization of
deferred
compensation.......... -- -- -- -- 167,000 -- 167,000
Net loss............... -- -- -- -- -- (4,195,880) (4,195,880)
---------- ------ ---------- --------- ----------- ----------- -----------
Balance at December 31,
1998................... 6,900,975 6,901 1,437,859 (117,000) (1,083,000) (4,195,880) (3,951,120)
Deferred compensation
(unaudited)........... -- -- 3,347,000 -- (3,347,000) -- --
Amortization of
deferred compensation
(unaudited)........... -- -- -- -- 410,000 -- 410,000
Net loss (unaudited)... -- -- -- -- -- (3,686,180) (3,686,180)
---------- ------ ---------- --------- ----------- ----------- -----------
Balance at March 31,
1999 (unaudited)....... 6,900,975 $6,901 $4,784,859 $(117,000) $(4,020,000) $(7,882,060) $(7,227,300)
========== ====== ========== ========= =========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
STAMPS.COM INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
January 9 Period from
1998 January 9, Three Period from
(inception) 1998 Months January 9, 1998
to (inception) to Ended (inception) to
December 31, March 31, March 31, March 31,
------------ -------------- ----------- ---------------
1998 1998 1999 1999
------------ -------------- ----------- ---------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Operating activities:
Net loss.............. $(4,195,880) $ (363,094) $(3,686,180) $(7,882,060)
Adjustments to
reconcile net loss
to net cash used in
operating
activities:
Depreciation and
amortization..... 81,540 4,126 63,480 145,020
Amortization of
deferred
compensation..... 167,000 4,000 410,000 577,000
Changes in
operating assets
and liabilities:
Prepaid
expenses....... (48,118) (10,023) (122,691) (170,809)
Accounts
payable........ 392,372 20,928 166,786 559,158
Accrued
expenses....... 533,470 -- 304,387 837,857
----------- ---------- ----------- -----------
Net cash used in
operating activities.. (3,069,616) (344,063) (2,864,218) (5,933,834)
Investing activities:
Capital
expenditures........ (195,297) (111,513) (311,166) (506,463)
Other................. (209,071) (24,512) (22,366) (231,437)
----------- ---------- ----------- -----------
Net cash used in
investing activities.. (404,368) (136,025) (333,532) (737,900)
Financing activities:
Net proceeds from
line of credit...... 1,000,000 -- -- 1,000,000
Repayment of capital
lease obligations... (81,945) -- (48,154) (130,099)
Issuance of series A
redeemable
preferred stock,
net................. 1,463,344 1,463,344 -- 1,463,344
Issuance of series B
redeemable
preferred stock..... 4,515,000 -- -- 4,515,000
Issuance of series C
redeemable
preferred stock,
net................. -- -- 28,299,594 28,299,594
Issuance of common
stock............... 47,792 18,332 -- 47,792
----------- ---------- ----------- -----------
Net cash provided by
financing activities.. 6,944,191 1,481,676 28,251,440 35,195,631
----------- ---------- ----------- -----------
Net increase in cash and
cash equivalents...... 3,470,207 1,001,588 25,053,690 28,523,897
Cash and cash
equivalents at
beginning of period... -- -- 3,470,207 --
----------- ---------- ----------- -----------
Cash and cash
equivalents at end of
period................ $ 3,470,207 $1,001,588 $28,523,897 $28,523,897
=========== ========== =========== ===========
Supplemental cash flow
disclosure:...........
Cash paid for:
Interest.............. $ 27,624 $ -- $ 33,001 $ 60,625
Income taxes.......... $ 800 $ 800 $ 800 $ 1,600
Noncash investing and
financial activity:
Issuance of common
stock in exchange
for a patent and a
trademark name...... $ 29,968 $ 28,968 $ -- $ 29,968
Equipment acquired
under capital
lease............... $ 554,698 $ -- $ -- $ 554,698
Issuance of notes
receivable from
stock sales......... $ 117,000 $ 117,000 $ -- $ 117,000
</TABLE>
See accompanying notes.
F-6
<PAGE>
STAMPS.COM INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
Stamps.com Inc. (Stamps.com Inc. or the Company), formerly known as
StampMaster, Inc., was incorporated in Delaware on January 9, 1998, and is a
development stage company. Its primary activities since inception have been to
develop an internet-based postal service delivery system for end-users and
raise capital to finance operations.
The Company is subject to the normal risks associated with a development
stage enterprise in the technology industry. These risks include, among others,
the risks associated with product development, approval of product by the
United States Postal Service, acceptance of the product by end users and the
ability to raise additional capital to sustain operations.
The Company's Internet postage service for purchasing postage over the
Internet has not yet been approved by the US Postal Service. The Company is
currently in the pre-approval testing stage of the US Postal Service's
Information Based Indicia Program. There can be no assurance that the Company's
service will successfully emerge from this testing phase or that the US Postal
Service will approve the service for commercial use.
The statement of operations for the period from inception through December
31, 1998 includes approximately $35,000 of expenses incurred prior to
incorporation. In September 1996, the founders began to investigate the
feasibility of entering into the United States Postal Service's Information
Based Indicia Program and initiated the certification process.
Unaudited Interim Financial Information and Pro Forma Balance Sheet
The interim financial statements of the Company for the period from January
9, 1998 (date of inception) to March 31, 1998 and the three months ended March
31, 1999, included herein have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations relating to interim financial statements. In the opinion of
management, the accompanying unaudited interim financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position of the Company at March 31, 1999, the
results of operations and its cash flows for the period from January 9, 1998
(date of inception) to March 31, 1998 and the three months ended March 31,
1999.
The unaudited pro forma balance sheet is presented to show the effects on
the unaudited March 31, 1999 balance sheet of the conversion of all outstanding
shares of redeemable preferred stock into 22,870,479 shares of common stock
which will occur upon the completion of the anticipated initial public offering
(see Note 6 and 7) as if the conversions took place at inception, or the date
of original issuance, if later.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results could differ from those estimates and
such differences may be material to the financial statements.
Cash Equivalents
Cash equivalents include demand deposits and short-term investments with a
maturity of three months or less when purchased.
Concentration of Risk
The financial instrument that potentially exposes the Company to
concentrations of credit risks consists primarily of cash equivalents. The
Company places its cash equivalents with high quality financial institutions.
At times, such balances may be in excess of the FDIC insurance limit.
F-7
<PAGE>
STAMPS.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Computation of Historical Net Loss per Share and Pro Forma Net Loss Per Share
In accordance with Statement of Financial Accounting Standards (SFAS) No.
128, "Computation of Earnings 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.
A summary of the shares used to compute earnings per share is as follows:
<TABLE>
<CAPTION>
Period from Period from Period from
January 9, 1998 January 9, 1998 Three Months January 9, 1998
(inception) to (inception) to Ended (inception) to
December 31, 1998 March 31, 1998 March 31, 1999 March 31, 1999
----------------- --------------- -------------- ---------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Weighted average common
shares used to compute
basic net loss per
share.................. 4,955,913 4,240,518 6,900,975 5,344,926
Effect of dilutive
securities............. -- -- -- --
---------- --------- ---------- ----------
Weighted average common
shares used to compute
dilutive net loss per
share.................. 4,955,913 4,240,518 6,900,975 5,344,926
---------- --------- ---------- ----------
Conversion of preferred
stock.................. 6,637,467 2,623,399 18,156,807 8,941,335
---------- --------- ---------- ----------
Weighted average common
shares used to compute
pro forma basic and
diluted net loss per
share.................. 11,593,380 6,863,917 25,057,782 14,286,261
========== ========= ========== ==========
</TABLE>
Pro forma net loss per share is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's Series A, B and C Preferred Stock into shares of
the Company's Common Stock effective upon the closing of the Company's Initial
Public Offering as if such conversion occurred at inception or the date of
original issuance, if later. Pro forma diluted earnings per share is computed
using the pro forma weighted average number of common and common equivalents
shares outstanding during the period, to the extent such shares are dilutive.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization is
computed principally on a straight-line method over the estimated useful lives
of the assets ranging from three to five years. Assets acquired under
capitalized lease arrangements are recorded at the present value of the minimum
lease payments. Amortization of assets capitalized under capital leases is
computed using the straight-line method over the life of the asset or term of
the lease, whichever is shorter. Expenditures for repairs and maintenance are
charged to expense as incurred.
Patents, Trademarks and Other Intangibles
Patents, trademarks and other intangibles are carried at cost less
accumulated amortization that is calculated on a straight-line basis over the
estimated useful lives of the assets, not to exceed 40 years. Patents are
currently amortized over an estimated useful live of 17 years. Trademarks and
other intangibles have useful lives that range from 5 to 15 years. Accumulated
amortization as of December 31, 1998 is $1,846.
F-8
<PAGE>
STAMPS.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income Taxes
The Company accounts for income taxes in accordance with FASB 109,
"Accounting for Income Taxes." Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statements
and the tax basis of assets and liabilities using the enacted tax rate in
effect for the years in which the differences are expected to reverse.
Research and Development Costs
Research and development costs are expensed as incurred. These costs
primarily consist of salaries, development materials, supplies and applicable
overhead expenses of personnel directly involved in the research and
development of new technology and products.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123)
encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has chosen
to continue to account for stock-based compensation using the intrinsic-value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees."
2. Line of Credit
On May 1, 1998, the Company entered into a credit line agreement with a
lender. The initial $300,000 borrowing base was increased to $1 million based
on the Company's net equity balance, as defined, through December 31, 1998.
Borrowings bear interest at the lender's prime rate plus 1% (8.75% at
December 31, 1998) and are collateralized by certain of the Company's assets.
The Company used the amount drawn for working capital purposes. The unpaid
balance due under the line of credit at February 9, 1999 may be converted to a
term loan payable in 24 equal monthly installments commencing on such date.
Otherwise, the credit line agreement matures on October 8, 1999.
In connection with this indebtedness agreement, the Company issued a
detachable warrant which permits the holder to purchase 7,050 shares of the
Company's Common Stock for $.27 per share. The term of this warrant is for a
period of seven years from the date of grant.
3. Income Taxes
The provision for income taxes consists solely of minimum state taxes. The
Company's effective tax rate differs from the statutory federal income tax rate
primarily as a result of the establishment of a valuation allowance for the
future benefits to be received from the net operating loss carryforwards and
research tax credit carryforwards. The tax effect of temporary differences that
give rise to a significant portion of the deferred tax assets and liabilities
at December 31, 1998 are presented below.
<TABLE>
<S> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards............................. $ 537,154
Research credits............................................. 150,000
Depreciation................................................. (28,006)
Capitalized start-up costs................................... 988,403
Accruals..................................................... 46,068
-----------
Total deferred tax assets...................................... 1,693,619
Valuation allowance............................................ (1,693,619)
-----------
Net deferred tax assets........................................ $ --
===========
</TABLE>
F-9
<PAGE>
STAMPS.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Because the Company is uncertain when it may realize the benefits of its
favorable tax attributes in future returns, the Company has placed a valuation
allowance against its otherwise recognizable deferred tax assets. In 1998, the
valuation allowance recorded was $1,693,619.
The Company has a net operating loss carryforward for federal and state
income tax purposes at December 31, 1998 of $1,348,467, and an available tax
credit carryforward at December 31, 1998 of $150,000, each of which can be
carried forward to offset future taxable income, if any. The Company's federal
net operating loss expires starting in 2018, state net operating loss expires
starting in 2006, and credits expire starting in 2018. The Federal Tax Reform
Act of 1986 and similar state tax laws contain provisions which may limit the
net operating losses carryforwards to be used in any given year upon the
occurrence of certain events, including a significant change in ownership
interests.
4. Capital Leases, Commitments and Contingencies
The Company leases certain equipment under capital lease arrangements
expiring on various dates through 2001. Included in property and equipment are
the following assets held under capital lease at December 31, 1998:
<TABLE>
<S> <C>
Computer equipment................................................ $ 554,698
Accumulated depreciation.......................................... (58,129)
---------
$ 496,569
=========
</TABLE>
The following is a schedule of future minimum lease payments:
<TABLE>
<S> <C>
Year ending December 31, 1998:
1999............................................................. $254,148
2000............................................................. 254,520
2001............................................................. 31,007
--------
539,675
Less amount representing interest................................ (66,922)
--------
Present value of net minimum lease payments ($207,683 payable
currently)..................................................... $472,753
========
</TABLE>
The Company currently rents its facilities on a month-to-month basis or for
terms less than one year. Total rent expense for the period from January 9,
1998 through December 31, 1998 was $109,428 and includes $23,400 paid to a
stockholder/officer for rental of office space.
In December 1998, the Company entered into a Distribution and Marketing
Agreement with America Online, Inc. (AOL) that provides broad distribution and
marketing campaigns amongst AOL's diverse properties. In exchange for these
services, the Company is required to make minimum payments that approximate
$1,700,000 and $525,000 in 1999 and 2000, respectively. In exchange for these
services, the Company is required to pay $2.3 million in varied amounts through
February 2000 ($75,000 in 1998, $1,700,000 in 1999 and $525,000 in 2000). The
Company may purchase additional advertising under this Marketing and
Distribution Agreement but it is not required. The Company will recognize the
related expense upon performance of services.
F-10
<PAGE>
STAMPS.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Stock Options
In January 1998, the Company adopted the 1998 Stock Option Plan (the Plan)
which authorizes the Board of Directors to grant incentive stock options,
nonqualified stock options and stock purchase rights (collectively options) to
employees, directors, consultants and advisors of the Company. The maximum
number of shares of common stock to be issued under the Plan is 7,290,000. All
options granted under the Plan have been made at prices not less than fair
value of the stock at the date of grant, as determined by the Board of
Directors. Options granted under the Plan are generally exercisable
immediately, however, they vest 25% per year, and the Board of Directors has
the discretion with respect to vesting periods applicable to a particular
grant. During 1998, the Company issued options to purchase approximately
2,347,471 shares of common stock at prices which included approximately
$600,000 of a compensation element. The $600,000 is being recognized as expense
over the vesting periods of the related options and has been presented as a
reduction of stockholders' equity (deficit) in the accompanying balance sheets.
The following tabulation summarizes certain information related to options
for common stock:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
--------- --------
<S> <C> <C>
Outstanding options at January 9, 1998................... -- $ --
Grants................................................... 2,347,471 .07
Surrendered, forfeited or expired........................ (36,562) .03
Exercised................................................ -- --
--------- ----
Outstanding options at December 31, 1998................. 2,310,909 $.06
========= ====
</TABLE>
As of December 31, 1998, all options were exercisable. However, no options
were vested and 1,904,091 were available for future grant. The weighted average
remaining contractual life of the outstanding stock options at December 31,
1998, is 9.7 years.
Pro forma information regarding net loss is required by SFAS 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair-value method of that statement. The fair value for these options
was estimated at the date of grant using the minimum-value method, which
utilizes a near-zero volatility factor. The remaining assumptions, which are
weighted average, under this method are as follows:
<TABLE>
<S> <C>
Expected life (years)............................................. 5
Risk-free interest rate........................................... 5.50%
Dividend yield.................................................... --
</TABLE>
This option-valuation method requires input of highly subjective
assumptions. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because change in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing method does not necessarily provide a
reliable single measure of the fair value of its employee stock options. The
effects of applying SFAS 123 in this pro forma disclosure are not indicative of
future amounts and additional awards in future years are anticipated.
If the Company recognized employee stock related compensation expense in
accordance with SFAS 123 under the minimum value method, its net loss for 1998
would not be materially different.
F-11
<PAGE>
STAMPS.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Stock Transactions
During 1998, the Company issued restricted stock to an employee and a
director totaling 1,988,475 shares. These shares vest one-fourth on May 30,
1999 and the remaining shares vest monthly over the subsequent thirty-six
months. The Company issued these shares at prices which included approximately
$650,000 of a compensation element. The $650,000 is being recognized as expense
over the vesting periods and has been presented as a reduction of stockholders'
equity (deficit) in the accompanying balance sheets.
In February 1998, the Company issued 3,762,500 shares of its Series A
Redeemable Preferred Stock at $0.40 per share and warrants to acquire 6,020,000
shares of the Company's its Series B Redeemable Preferred Stock at $0.75 per
share. In August and October 1998, 6,020,000 shares of Series B Redeemable
Preferred Stock were issued under these warrants.
Redeemable Preferred stock is convertible to common stock on a one-for-one
basis at the option of the holder at any time after issuance, subject to anti-
dilution protection. Each share of Redeemable Preferred Stock automatically
converts to Common Stock upon (i) the sale of Common Stock by the Company in an
underwritten public offering with a public offering price of $2.00 per share
and net proceeds of $15 million or (ii) written consent of the majority holders
of outstanding shares of Preferred Stock (see Note 7).
The holders of Redeemable Preferred Stock are entitled to receive non-
cumulative dividends in preference to the Common stock at a rate of $0.040 and
$0.075 per share per annum, respectively, or if greater (as determined on a per
annum basis and an as converted basis for Redeemable Preferred Stock), an
amount equal to that paid on any other outstanding share, payable quarterly
when, as and if declared. No dividends can be paid or declared on any Common
Stock unless full cash dividends, including past dividends declared, have been
paid on the Redeemable Preferred Stock.
The Series A and Series B Redeemable Preferred Stock have a liquidation
preference over Common Stock of $0.40 and $0.75 per share, respectively.
The Redeemable Preferred Stock may be redeemed at any time after February
26, 2003 at the written consent of the majority holders of outstanding shares
of Redeemable Preferred Stock. The redemption price for Series A and Series B
Redeemable Preferred Stock is $0.40 and $0.75 per share, respectively. Series A
and Series B Redeemable Preferred Stock has been reflected in the accompanying
balance sheets outside of stockholders' equity (deficit) due to its redemption
feature.
In connection with the issuance of Common Stock during the period, the
Company exchanged shares with a fair value of $117,000 for notes receivable of
the same amount. These notes receivable bear interest at 9% per annum and are
payable in February 2003.
7. Events Subsequent to the Date of the Auditors' Report (Unaudited)
Redeemable Preferred Stock
On February 10, 1999, the Board of Directors approved the sale of Series C
Redeemable Preferred Stock. In February and March 1999, the Company issued
5,464,486 shares of its Series C Redeemable Preferred Stock at $5.49 per share.
Series C Redeemable Preferred Stock is convertible to common stock on a one-
for-one basis at the option of the holder at any time after issuance, subject
to anti-dilution protection. In connection with the sale of Series C Redeemable
Preferred Stock, the board of directors amended the certificate of
incorporation and each share of Series A, Series B and Series C Redeemable
Preferred Stock automatically converts to
F-12
<PAGE>
STAMPS.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Common Stock upon (i) the sale of Common Stock by the Company in an
underwritten public offer with a public offering price of at least $10.98 per
share and net proceeds of $20 million or (ii) written consent of the majority
of holders of outstanding shares of Redeemable Preferred Stock.
The holders of Series C Redeemable Preferred Stock are entitled to receive
noncumulative dividends in preference of the Common Stock at a rate of $0.55
per share per annum or if greater (as determined on a per annum basis and as a
converted bases for Preferred Stock), an amount equal to that paid on any other
outstanding share, payable quarterly when, as and if declared. No dividends can
be paid or declared on any Common Stock unless full cash dividends, including
past dividends declared, have been paid on the Redeemable Preferred Stock. The
Series C Redeemable Preferred Stock have a liquidation preference over Common
Stock or $5.49 per share and may be redeemed at any time after February 27,
2003, at the written consent of the majority holders of outstanding shares of
Redeemable Preferred Stock at the redemption price of $5.49 per share. Series C
Redeemable Preferred Stock has been reflected in the accompanying balance
sheets outside of stockholders' equity (deficit) due to its redemption feature.
Authorized Stock and Stock Dividend
On February 17, 1999, the Company increased the number of authorized shares
of common stock and preferred stock to 40,000,000 shares and 15,500,000 shares,
respectively. Subsequent to year end, the Board of Directors increased the
number of shares reserved for issuance under the 1998 Stock Option Plan to
7,290,000 shares.
On June 3, 1999, the Board of Directors declared a stock dividend of 3
shares of Common Stock for every 2 shares of Common Stock then outstanding, an
action which also resulted in an adjustment to the conversion ratio of the
Series A, B and C redeemable preferred stock to a three-for-two basis. The
stock dividend will become effective on the date that the Company's public
offering of Common Stock is closed. Accordingly, the accompanying financial
statements and footnotes have been restated to reflect the stock dividend. In
addition the board increased the number of authorized shares of Common Stock
and Preferred Stock to 95,000,000 and 5,000,000 shares, respectively. These
increases will also take effect upon closing of the Company's initial public
offering.
Stock options
During the period from January 1, 1999 through June 3, 1999, the Company
issued 3,072,000 additional stock options under the 1998 stock option plan. A
summary of the options granted is as follows:
<TABLE>
<CAPTION>
Exercise Estimated
Number of options Price Fair Value
----------------- -------- ----------
<S> <C> <C>
189,150.............................................. $5.60 $1.33
892,050.............................................. $3.00 $0.71
1,990,800.............................................. $0.33 $0.08
</TABLE>
The estimated fair value for these options was estimated at the date of
grant using the minimum-value method using the same assumptions as Note 5. From
January 1, 1999 through March 31, 1999, the Company issued options to purchase
approximately 2,180,250 shares of common stock at prices which included
approximately $3,347,000 of a compensation element. The $3,347,000 is being
recognized as expense over the vesting periods of the related options and has
been presented as a reduction of stockholders' equity (deficit) in the
accompanying balance sheets.
F-13
<PAGE>
STAMPS.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Commitments
In May 1999, the Company entered into a facility lease agreement for its
corporate headquarters with minimum lease payments approximating $4.8 million
over 5 years.
Also, in May 1999, the Company entered into a Sponsorship Agreement with
Intuit Inc. (Intuit) that markets our Internet postage service on various
Intuit Internet sites and software. In exchange for this sponsorship, the
Company is required to pay $3.3 million ($2 million in 1999 and $1.3 million in
2000). Additional payments may be required if this Sponsorship Agreement
results in certain customer levels. The related expense will be recognized as
the services are provided.
Legal Proceedings
On June 16, 1999, Pitney Bowes filed a patent infringement lawsuit against
the Company in the United States District Court for the District of Delaware.
The suit alleges that the Company is 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. The
Company is currently investigating the claims against it and has not responded
to the suit. To date, the Company believes it has meritorious defenses and
intends to defend the lawsuit vigorously. However, the litigation could result
in significant expenses and diversion of management time and other resources.
Further, if Pitney Bowes successfully asserts an infringement claim against the
Company, its operations would be impacted severely. The Pitney Bowes suit could
result in limitations on the Company's ability to market its service, delays
and costs associated with redesigning its service or payments of license fees
or other payments.
F-14
