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Filed pursuant to Rule 424(b)(4)
Registration No. 333-85359
Registration No. 333-88631
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Prospectus
October 8, 1999
[LOGO OF E-STAMP]
7,000,000 Shares of Common Stock
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The Company:
. We provide an Internet postage service that enables users to purchase,
download and print postage directly from their personal computers.
. E-Stamp Corporation 2855 Campus Drive, Suite 100 San Mateo, California
94403(650) 554-8454
Symbol & Market:
. ESTM/Nasdaq National Market
The Offering:
. We are offering 7,000,000 shares of our common stock.
. The underwriters have an option to purchase an additional 1,050,000
shares from the Company to cover over-allotments.
. This is our initial public offering. The initial public offering price is
$17.00 per share.
. We plan to use the proceeds from this offering for sales and marketing
expenses and general corporate purposes.
. Closing: October 14, 1999.
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<S> <C> <C>
Per Share Total
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Public offering price: $17.00 $119,000,000
Underwriting fees: 1.19 8,330,000
Proceeds to Company: 15.81 110,670,000
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</TABLE>
This investment involves risk. See "Risk Factors" beginning on Page 6.
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Neither the Securities and Exchange Commission nor any state securities
commission has determined whether this prospectus is truthful or complete. Nor
have they made, nor will they make, any determination as to whether anyone
should buy these securities. Any representation to the contrary is a criminal
offense.
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Donaldson, Lufkin & Jenrette
Banc of America Securities LLC
Deutsche Banc Alex. Brown
DLJdirect Inc.
<PAGE>
You should rely only on the information contained in this document. We have
not authorized anyone to provide you with information that is different. This
document may only be used where it is legal to sell these securities. The
information in this document may only be accurate as of the date of this
document.
"E-Stamp" is a registered trademark, and "E-Stamp.com," "The Internet
Postage Company," and the E-Stamp logo are trademarks of E-Stamp. All other
trademarks or service marks appearing in this prospectus are trademarks or
service marks of others.
TABLE OF CONTENTS
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Page
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Prospectus Summary....................................................... 1
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Corporate Information.................................................... 17
Forward-Looking Statements............................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
</TABLE>
<TABLE>
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Page
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Business................................................................... 28
Management................................................................. 44
Related Party Transactions................................................. 54
Principal Stockholders..................................................... 57
Description of Capital Stock............................................... 60
Rescission Offer........................................................... 63
Shares Eligible for Future Sale............................................ 64
Underwriting............................................................... 66
Legal Matters.............................................................. 70
Experts.................................................................... 70
Additional Information..................................................... 70
Index to Financial Statements.............................................. F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all the information you
should consider before buying shares in the offering. You should read the
entire prospectus carefully.
E-Stamp Corporation
Our Business
We provide an Internet postage service that enables users to purchase,
download and print postage directly from their personal computers. The postage
can be printed directly onto envelopes, labels or documents using standard
laser or inkjet printers, 24 hours a day, seven days a week, without the need
to remain connected to the Internet. Customers can buy the software and
hardware components needed to use our Internet postage service through our
online store at www.e-stamp.com, over the telephone or at office supply stores.
We also plan to sell our services through computer superstores and catalogs.
Our Internet postage service is based upon our E-Stamp software, our secure
postage hardware device that enables the storage on the user's desktop of up to
a maximum of $500 of postage as currently allowed under U.S. Postal Service
regulations, and a U.S. Postal Service address verification CD-ROM. Our
Internet postage software and hardware currently sells for a suggested retail
price of $49.99. As part of our marketing strategy, we have previously, and may
from time to time, offer our software and hardware free of charge through
promotional arrangements with third parties. We charge a 10% convenience fee
when Internet postage is purchased, with a minimum fee of $4.99 and a maximum
fee of $24.99 per purchase. We also plan to offer for sale later this year
postage related consumables and peripherals including an Internet postage
scale, labels, window envelopes and a label printer manufactured by third
parties with whom we have established relationships.
We received approval from the U.S. Postal Service on August 9, 1999 for our
Internet postage service, and since that date have been providing our service
nationally. Our commercial roll-out is currently limited to 100,000 customers.
The U.S. Postal Service will evaluate our service when we obtain approximately
100,000 customers. Although the U.S. Postal Service has not informed us whether
it will continue to impose limitations on the number of our customers following
this evaluation, we will continue to be subject to U.S. Postal Service
regulations. As a result, the U.S. Postal Service could continue to require
periodic reviews before authorizing greater numbers of customers. Our Internet
postage service is targeted at small business, small office and home office
users, most of whom usually connect to the Internet on modems at speeds of 28.8
or 33.6 kilobytes per second and share lines with telephones or fax machines.
Our Internet postage software is tightly integrated with popular business
computer programs including Microsoft Word and Outlook. This integration allows
users to print our Internet postage without leaving Microsoft Word and to
access addresses in Outlook without leaving the E-Stamp application. We believe
our Internet postage service will enhance customer satisfaction during the mail
and postage process by improving overall access, convenience and flexibility
for small business, small office and home office users, and will increase
operating efficiencies and decrease postal fraud for the U.S. Postal Service by
including a unique digital signature on each digital stamp.
We have focused on forming marketing and distribution relationships with
industry leaders in order to quickly build our brand awareness with small
business, small office and home office users and to accelerate the adoption of
our Internet postage service. Our marketing and distribution relationships
include the following:
. Microsoft, which is also one of our equity investors, has selected us as
a nonexclusive online postage provider for its Microsoft Office Update
Web site;
. Yahoo! has chosen us to be its exclusive Internet postage merchant within
the Yahoo! Postal Center;
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. Excite@Home, which is also one of our equity investors, has entered into
a binding letter of intent to establish us as a nonexclusive Internet
postage provider on its @Work Web site; and
. America Online has agreed to include us as a nonexclusive tenant in its
new Postage Services Center.
In addition, we have developed marketing or distribution relationships with
Compaq, Francotyp Postalia, Avery Dennison, Sunbeam Corp.'s Pelouze Scale Co.
division, Tension Envelope, EarthLink, Intuit and Dymo-Costar. A number of
these third parties are still in the process of establishing the marketing,
promotional and distribution activities for our service called for under our
agreements with them. Failure to achieve these efforts in a timely and
successful manner would limit their usefulness in promoting adoption of our
service. We expect to enter into additional marketing and distribution
relationships as our business grows and we expand our portfolio of products and
services.
We Are At An Early Stage of Commercialization, Have A Large Accumulated Deficit
And Expect To Incur Continuing Losses
We have a very limited operating history and only began offering our
Internet postage service on a commercial basis on August 9, 1999. Through June
30, 1999, we had generated no revenues and had an accumulated deficit of $39.0
million. We have generated only nominal revenues since the recent commercial
introduction of our service. We have incurred increasing losses and had an
operating loss for the six month period ended June 30, 1999 of $12.5 million.
We expect to continue to incur net losses for the foreseeable future and may
never achieve profitable operations. The market for Internet postage has not
yet developed and we cannot assure you that it will develop or that, if it
develops, customers will use our service.
Our Market Opportunity
In an effort to enhance customer satisfaction, provide convenient postal
services, leverage users' existing investments in computer hardware and
software and improve access to the small business, small office and home office
market, the U.S. Postal Service developed the Information Based Indicia
Program. This program is designed to authorize third party vendors to sell
products or services that enable users to print postage, also referred to as
digital stamps, from a personal computer using ordinary laser or inkjet
printers. This new form of postage provides an opportunity to access the U.S.
postage market, which represented $60 billion in 1998. Of this amount,
$38 billion was represented by postage stamps and postage meters, which are
primarily used for first class, priority and express mail, which is the target
market for Internet postage. Keenan Vision, an independent research firm,
estimates that the market for first class, priority and express mail will grow
to $46 billion by the year 2002.
The emergence of Internet postage has created an attractive channel for the
sale of postage to small business, small office and home office users currently
underserved by existing products and services. According to International Data
Corporation, there were 44.6 million small business, small office and home
office users in the U.S. in 1998, which is expected to grow to 57.6 million by
2002. In terms of postage usage, small business, small office and home office
users generally conduct an essential part of their communications with
suppliers and customers through the postal system. Nevertheless, few small
business, small office and home office users use postage meters to automate the
mailing process. In addition, small business, small office and home office
users are increasingly adopting the Internet to improve their business
processes.
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Our Growth Strategy
Our objective is to be the leading provider of Internet postage services.
Key elements of our growth strategy include:
. entering into marketing and distribution relationships with industry
leaders to quickly acquire customers, build brand recognition and
accelerate adoption of our Internet postage service;
. initially focusing on the large and growing small business, small office
and home office market;
. building and promoting our brand through a variety of marketing and
promotional techniques and including our logo and Web site address on
each digital stamp;
. leveraging our technology platform and expertise to develop a family of
Internet postage services including a server-based service and an
intranet based service to address other market segments;
. pursuing multiple and recurring revenue streams by capitalizing on our
expertise in secure payment processing and the printing of authenticated
documents to offer other products and services that could be purchased
online and printed from the desktop, such as tickets and gift
certificates; and
. pursuing international Internet postage opportunities.
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The Offering
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<C> <S>
Common stock offered by E-Stamp.. 7,000,000 shares
Common stock to be outstanding
after this offering............. 38,141,962 shares
Use of proceeds.................. We plan to use the net proceeds from this
offering principally for sales and
marketing expenses, with the balance for
general corporate purposes, including
working capital and expansion of our
corporate infrastructure.
Nasdaq National Market symbol.... ESTM
</TABLE>
Unless otherwise indicated, this prospectus assumes the conversion of our
outstanding preferred stock into common stock on a 1.25 for 1 basis upon the
closing of this offering, reflects a stock dividend made prior to completion of
this offering of one share of common stock on each four shares of our
outstanding common stock, and assumes that the underwriters do not exercise the
option granted by us to purchase additional shares in the offering to cover
over-allotments.
----------------
The number of shares of common stock to be outstanding after this offering
is based on shares outstanding as of October 1, 1999. This number excludes:
. 2,576,229 shares of common stock reserved for future issuance under our
stock option, director stock option and employee stock purchase plans;
. 1,419,893 shares of common stock subject to outstanding options; and
. 75,040 shares of common stock issuable upon the exercise of outstanding
warrants.
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Summary Financial Information
(In thousands, except per share data)
The following table summarizes our financial data. The weighted average
shares used in calculating our pro forma net loss per share data excludes our
sale in August 1999 of shares of our convertible preferred stock for aggregate
proceeds of $30.2 million, our sale in September 1999 of shares of our common
stock with a fair value of $7.8 million for aggregate cash proceeds of $5.0
million, the exercise of warrants to purchase 83,855 shares of common stock in
September 1999 at $0.01 per share with a fair value of $1.0 million, the grant
of 187,500 shares of common stock to two of our executives in August 1999 with
a fair value of $1.8 million, and includes the automatic conversion of all
other outstanding shares of our convertible preferred stock into shares of our
common stock which will occur upon the closing of this offering.
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Six Months Ended
Year Ended December 31, June 30,
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1996 1997 1998 1998 1999
(unaudited)
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Statement of Operations Data:
Net revenues.................. $ -- $ -- $ -- $ -- $ --
Operating loss ............... (6,575) (7,821) (11,080) (4,498) (12,543)
Net loss...................... (6,339) (7,678) (10,710) (4,455) (12,367)
Accretion on redeemable
convertible
preferred stock ............. -- (196) (1,383) (307) (1,176)
Net loss attributable to
common stockholders.......... $(6,339) $(7,874) $(12,093) $(4,762) $(13,543)
Net loss per common share:
Basic and diluted........... $ (0.51) $ (0.61) $ (0.92) $ (0.37) $ (1.00)
Weighted average shares..... 12,543 12,966 13,075 13,026 13,486
Pro forma net loss per
share:.......................
Basic and diluted
(unaudited)................ $ (0.57) $ (0.57)
Weighted average shares
(unaudited)................ 18,753 21,846
</TABLE>
The following table summarizes our balance sheet data. The pro forma data
reflects our sale in August 1999 of shares of our convertible preferred stock
for aggregate proceeds of $30.2 million, our sale of common stock in September
1999 with a fair value of $7.8 million for aggregate cash proceeds of $5.0
million, the exercise of warrants to purchase 83,855 shares of common stock in
September 1999 at $0.01 per share with a fair value of $1.0 million, the grant
of 187,500 shares of common stock to two of our executives in August 1999 with
a fair value of $1.8 million and the automatic conversion of all outstanding
shares of our redeemable convertible preferred stock into shares of our common
stock which will occur upon the closing of this offering. The pro forma as
adjusted data reflects the sale of 7,000,000 shares of common stock in this
offering at the initial public offering price of $17.00 per share, after
deducting the underwriting discount and estimated offering expenses payable by
us.
<TABLE>
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As of June 30, 1999
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Pro Pro Forma
Actual Forma As Adjusted
(unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents...................... $ 1,916 $37,116 $146,786
Working capital (deficit)...................... (324) 34,876 144,546
Total assets................................... 3,096 38,296 147,966
Capital lease obligations, net of current
portion....................................... 6 6 6
Common stock subject to rescission............. 2,499 2,499 2,499
Redeemable convertible preferred stock......... 24,645 -- --
Total stockholders' equity (deficit)........... (26,792) 33,053 142,723
</TABLE>
5
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RISK FACTORS
You should carefully consider the risks described below before buying shares
in this offering.
We have a limited operating history with a history of losses, only began
offering our Internet postage service on a commercial basis in August 1999,
expect to incur losses in the future, and may never achieve profitability.
We have a very limited operating history. You should consider our prospects
in light of the risks and difficulties frequently encountered by early stage
companies in new and rapidly evolving markets. We cannot be certain that we
will achieve profitability or, if achieved, that we will be able to sustain or
increase profitability on a quarterly or annual basis. As of June 30, 1999, we
had not generated any revenues and had an accumulated deficit of $39.0 million.
Since August 1999, we have generated only nominal revenues. We have incurred
increasing losses and had an operating loss for the six month period ended June
30, 1999 of $12.5 million. We have not achieved profitability and expect to
continue to incur net losses for the foreseeable future. We expect to incur
increasing sales and marketing, research and development and administrative
expenses. As a result, we will need to generate significant revenues to achieve
and maintain profitability.
The success of our business will depend upon acceptance by customers of our
Internet postage service.
We expect that our Internet postage service will generate a substantial
portion, if not all, of our near-term future revenues. As a result, we depend
on the commercial acceptance of our Internet postage service. If we fail to
successfully gain commercial acceptance of our Internet postage service, we
will be unable to generate significant revenues. The market for Internet
postage has not developed, and we cannot assure you that it will develop. We
cannot predict the extent to which users will be willing to use the Internet to
purchase postage rather than using traditional methods. To the extent users
choose to purchase postage over the Internet, we cannot be certain that these
customers will use our service.
Intellectual property infringement claims, including claims asserted by Pitney
Bowes against us, could prevent or hinder our ability to sell Internet postage.
We face the risk that other parties' intellectual property positions will
impair successful development of the Internet postage market or our ability to
effectively participate in it. Pitney Bowes filed a patent infringement lawsuit
against us in U.S. District Court in June 1999. The suit alleges infringement
of seven patents owned by Pitney Bowes related to postage application systems
and seeks treble damages, a preliminary and permanent injunction, attorneys'
fees and other unspecified damages. On July 30, 1999, we filed our answer to
Pitney Bowes' complaint. Pendency of the litigation can be expected to result
in significant expenses to us and the diversion of management time and other
resources, the extent of which cannot be quantified with any reasonable
accuracy given the early stage of this litigation. If Pitney Bowes is
successful in its claims against us, then we may be hindered or even prevented
from competing in the Internet postage market and our operations would be
severely harmed. The Pitney Bowes suit could result in limitations on how we
implement our services, delays and costs associated with redesigning our
services and payments of license fees and other monies. An injunction obtained
by Pitney Bowes could eliminate our ability to market critical products or
services.
Pitney Bowes may be unwilling to discuss licensing or cross-licensing
arrangements with us, which could adversely impact our ability to compete in
the market for Internet postage products and services.
Although we and Pitney Bowes, prior to filing of the current litigation, had
been in discussions regarding cross-licensing a number of our patents and
Pitney Bowes' patents, some of which are identified in Pitney Bowes' complaint,
we cannot predict whether these discussions will recommence in the future or
the impact of Pitney Bowes' intellectual property claims on our business or the
Internet postage market. Since commencement of the litigation, we have not had
discussions with Pitney Bowes regarding licensing or cross-
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licensing arrangements nor do we have information concerning Pitney Bowes'
present willingness to engage in discussions.
If the U.S. Postal Service discontinues Internet postage as an approved postage
method because of counterfeiting or other issues or revokes approval of our
Internet postage service, our business will fail.
We continue to be subject to U.S. Postal Service scrutiny and other
government regulations. The U.S. Postal Service could discontinue Internet
postage as an approved postage method because of counterfeiting of Internet
postage, security or other issues, in which case our business would fail.
Further, if we are unable to successfully complete subsequent evaluations by
the U.S. Postal Service, to adapt our Internet postage service to any new
requirements or specifications or to provide adequate security, the U.S. Postal
Service could revoke its approval of our Internet postage service, in which
case our business would fail.
The commercial roll-out of our Internet postage service is currently limited to
100,000 customers and the U.S. Postal Service could continue to require
periodic reviews before authorizing greater numbers of customers.
Under the Information Based Indicia Program, the commercial roll-out of our
Internet postage service is currently limited to 100,000 customers. The U.S.
Postal Service will evaluate our service when we obtain approximately 100,000
customers. If we do not successfully complete this evaluation, the U.S. Postal
Service could delay or even prevent use of our Internet postage service by more
than 100,000 customers. The U.S. Postal Service could continue to require
additional periodic reviews before authorizing greater numbers of customers.
Any such delay in our ability to expand our customer base would result in loss
of revenue and could harm our ability to build our brand and obtain market
acceptance of our Internet postage service.
We cannot be certain that we will be able to continue to satisfy existing, new
or changed U.S. Postal Service regulations in the future, and if we are not
able to do so our ability to distribute our Internet postage service would be
adversely affected.
If we encounter difficulties with continuing compliance with U.S. Postal
Service regulations, our ability to distribute or extend the distribution of
our Internet postage service could be adversely affected. U.S. Postal Service
regulations may require that our personnel with access to postal information or
resources obtain security clearances. These regulations may cause delays or
disruptions in our business if our personnel cannot receive necessary security
clearances in a timely manner, or at all, and may limit our ability to hire
necessary personnel. Any other change in the current or future regulatory
environment could have an adverse impact on our business and could harm our
operating results and profitability.
Our Internet postage hardware device may interfere with the operation of some
printers, which may decrease adoption of our Internet postage service and which
has in the past resulted in, and may in the future result in, product returns.
Our secure Internet postage device in some cases interferes with the
operation of multifunction printers, which combine printing, faxing, copying
and scanning functions and bi-directional printers and is generally unable to
print postage on these types of printers. We believe a significant number of
our product returns to date may have been prompted by this incompatibility. If
we are unable to successfully modify our secure Internet postage device or
software to solve these issues, it will severely harm our ability to market our
Internet postage service to users of multifunctional and bi-directional
printers.
If we cannot successfully manage the commercial availability of our Internet
postage service, our ability to attract and retain customers will be harmed.
Our reputation and our ability to attract, retain and provide services to
our customers depend upon the reliable performance of our Web site, network
infrastructure and transaction-processing systems. If we are unable at any time
to provide our customers with our Internet postage service in a satisfactory
manner, our
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customers may become dissatisfied and could cease using our Internet postage
service. We have very limited experience conducting marketing campaigns, and we
may fail to generate significant interest in our Internet postage service. On
the other hand, if we generate extensive interest in our service, we cannot
assure you that we will be able to effectively manage commercial availability
of our Internet postage service due to the strains this demand will place on
our Web site, network infrastructure and our transaction-processing systems.
If we are unable to maintain and develop our marketing and distribution
relationships, our Internet postage service may not achieve commercial
acceptance.
We have established marketing and distribution relationships with a limited
number of third parties. We rely heavily upon these relationships to build our
E-Stamp brand and to accelerate the adoption of our Internet postage service.
We have limited experience in establishing and maintaining these relationships.
If we are unable to successfully maintain our existing relationships or to
establish new relationships, our Internet postage service may not achieve
commercial acceptance. In addition, a number of these third parties are still
in the process of establishing the marketing, promotional and distribution
activities for our service called for under our agreements with them. We cannot
assure you that these efforts will be achieved in a timely and successful
manner and this would limit their usefulness in promoting adoption of our
service.
If we do not achieve broad brand recognition, our ability to attract customers
will suffer dramatically.
We must quickly build our E-Stamp brand to gain market acceptance for our
service. If we fail to gain market acceptance for our Internet postage service,
our ability to attract customers will suffer dramatically. We believe it is
imperative to our long term success that we obtain significant acceptance of
our service. We cannot be certain that we will have sufficient resources to
build our brand and achieve commercial acceptance of our service. To establish
our brand awareness, we must invest substantial resources to develop our
products, pursue marketing and distribution relationships, implement marketing
initiatives, and provide a high quality experience to our users.
Subsequent Internet postage services, if successfully developed by us, will
require additional U.S. Postal Service approvals that may delay their
commercial introduction.
We have not begun the U.S. Postal Service approval process for future
services we have under development, including our server-based service. Our
current Internet postage service took approximately 18 months to complete the
beta test portion of the U.S. Postal Service's approval process. We cannot
assure you of the duration of the approval process for our server-based or any
subsequent service, or that these services will ever be approved by the U.S.
Postal Service. Further, we cannot assure you that we will be able to
successfully develop our future services in a timely manner or at all. Failure
to timely receive U.S. Postal Service approval for our server-based service or
subsequent services could limit our ability to successfully grow our business.
We have experienced significant growth in our expenses and operations in recent
periods, and any failure to manage this growth could damage our ability to
obtain market acceptance for our Internet postage service.
Our ability to successfully offer our Internet postage service and implement
our business plan requires an effective planning and management process. We
have increased, and plan to continue to increase, the scope of our operations
and have experienced, and expect to continue to experience, significant growth
in our expenses and operations. If we are unable to manage growth effectively
or experience disruptions during our expansion, our ability to market and
extend distribution of our Internet postage service and our ability to develop
future services will be seriously harmed. To manage the expected growth of
operations and personnel, we will need to improve existing and implement new
transaction-processing, operational and financial systems, procedures and
controls. In addition, we will need to expand, train and manage an increasing
employee base and to expand our finance, administrative and operations staff.
Our current expansion has placed, and we expect our future expansion to
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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 the sole supplier of our Internet postage hardware device is unable to
timely meet our commercial supply needs, our ability to expand our customer
base will be severely limited and we will lose revenue.
Dallas Semiconductor Corporation is the single source of supply for our
secure Internet postage device. We do not have a guaranteed supply arrangement
with Dallas Semiconductor, and we order such devices on a purchase order basis.
Any difficulties encountered by our sole supplier that result in product
defects, production delays, cost overruns, or the inability to fulfill orders
on a timely basis would hurt our reputation and result in loss of revenue. If
we cannot obtain an adequate supply of our Internet postage device, we will be
unable to timely deliver our Internet postage device to customers and, without
the device, customers would be unable to purchase postage using our Internet
postage service. Neither we nor our supplier maintain an extensive inventory of
our Internet postage device. We cannot assure you that our supplier will timely
meet our commercial supply needs or that alternative suppliers will be
available in the future. We have not qualified any alternative sources for the
supply of our secure Internet postage device.
System failures could harm our reputation, result in loss of revenue and
substantially and adversely affect our ability to attract or retain customers.
Our business and reputation with customers depend upon the efficient and
uninterrupted operation of our Web site, processing systems and network
infrastructure, including critical portions of this infrastructure that are
hosted by third parties, for registration of new customers and processing of
Internet postage transactions. In addition, our service depends upon continuous
operation of the U.S. Postal Service's secure postage accounting vault for our
customers to purchase postage. We have experienced system failure for short
periods of up to four hours during initial commercial launch of our service and
we may suffer additional interruptions in our service. Problems or system
failures at either our location or third party locations could result in
interruptions in our service. Unscheduled downtime of our service may result in
loss of revenue and if these system failures persist, our business, reputation
and brand could be severely harmed. We cannot assure you that we will be able
to timely expand our systems infrastructure to support growth in traffic from
our customers.
Our systems and those hosted by third parties are vulnerable to damage or
interruption which could harm our reputation and result in a loss of revenue.
Our systems and those hosted by third parties are vulnerable to damage or
interruption as a result of fire, flood, power loss, telecommunications
failure, software errors or bugs, hardware failures or computer viruses,
computer hacking and other acts of misconduct, earthquakes and similar events.
Our postage processing systems are located in Northern California, a
seismically active region. We do not have fully redundant systems, a formal
disaster recovery plan or alternative providers of hosting services, and we do
not carry sufficient business interruption insurance to compensate us for
losses that may occur. Despite any precautions we may take, problems or system
failures at our third party hosted facilities could result in interruptions in
our service which could injure our reputation and cause us to lose revenue.
The inability to expand our system's capacity may limit our growth.
Our inability to add additional software and hardware or to upgrade our
technology, transaction processing systems or network infrastructure to timely
accommodate increased Web site traffic or transaction volume could have adverse
consequences. These consequences include unanticipated system disruptions,
slower response times, degradation in levels of customer support and impaired
quality of the user's experience on our service and delays in reporting
accurate financial information. We may be unable to effectively upgrade and
expand our systems in a timely manner or to integrate smoothly any newly
developed or purchased technologies with our existing systems. These
difficulties could harm or limit our ability to expand our business.
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If we are unable to provide new features or functionality to our technology,
transaction processing systems or network infrastructure, our growth may be
limited.
Our failure to provide new features or functionality to our technology,
transaction processing systems or network infrastructure could adversely affect
demand for our Internet postage service, which would harm or limit our ability
to expand our business.
We rely heavily upon third parties to market and distribute our Internet
postage service to customers.
We rely upon third parties to market and distribute our Internet postage
service. We cannot assure you that we will be able to develop and maintain
satisfactory relationships with such parties on acceptable commercial terms, if
at all, or that we will be able to obtain adequate distribution channels for
our service. Our marketing and distribution relationships with third parties,
which include providing links to our website and distributing our product
through bundling arrangements, may not generate significant traffic on our
website or otherwise generate significant interest in our service. We cannot
assure you that office supply, computer or other retailers will carry our
product or devote sufficient marketing, shelf space or other resources to it.
If we are unable to provide an adequate distribution channel for our Internet
postage service, customers will have difficulty purchasing our product through
retail channels which would severely harm our ability to grow our business. We
depend upon the U.S. Postal Service and other delivery services for the
delivery of our secure postage device. Strikes or other service interruptions
affecting delivery services used by us would have a material adverse effect on
our ability to deliver our Internet postage service to our customers.
The Internet postage market is highly competitive and we may be unable to
compete successfully against new entrants and established industry competitors
with significantly greater financial resources.
The market for Internet postage products and services is new, rapidly
evolving and intensely competitive. We expect that our primary competitors will
include traditional providers of postage products and services, including
Pitney Bowes and Neopost, that have longer operating histories, larger customer
bases, greater brand recognition, greater financial, marketing, service,
support, technical, intellectual property and other resources than us. We will
also compete with providers of traditional postage products and delivery
services, such as the U.S. Postal Service, Federal Express and United Parcel
Service. In addition to providers of traditional postage products and services,
we compete with three other Information Based Indicia Program vendors, Neopost,
Pitney Bowes and Stamps.com, who have all initiated the certification process
with the U.S. Postal Service. Only one of these, Stamps.com, has been approved
for commercial release by the U.S. Postal Service to date. Many of 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 recognition.
A breach of our online security would harm our reputation and could interrupt
service to our customers.
A fundamental requirement to conduct electronic commerce is the secure
transmission of information over public networks. We rely on encryption and
authentication technology to provide the security necessary for transmission of
postage and other confidential information. Any breach of these security
measures would severely impact our reputation and would likely result in the
loss of customers. Advances in computer capabilities, new discoveries in the
field of cryptography, or other events or developments may result in a
compromise or breach of the algorithms we use to protect customer transaction
data. Security breaches could also expose us to a risk of loss or litigation
and possible liability for failing to secure confidential customer information.
Accordingly, 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.
10
<PAGE>
If we are unable to successfully protect our intellectual property, our
competitive position will be harmed.
We rely on a combination of patent, trademark, service mark, copyright and
trade secret laws, contractual restrictions on disclosure and transferring
title and other methods in an effort to establish and protect proprietary
rights in our services, know-how and information. If our patents or other
intellectual property fail to protect our technology, our competitive position
could be harmed. In addition, third parties may develop alternative
technologies or products that do not infringe on any of our patents or other
intellectual property. Steps taken to protect our intellectual property may not
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.
Continued adoption of the Internet as a method of conducting business is
necessary for our future growth.
The failure of the Internet to continue to develop as a medium for the
purchase of goods and services would adversely affect the willingness or
ability of users to use the Internet to purchase postage. Concerns over the
security of transactions conducted on the Internet and the privacy of consumers
may also inhibit the growth of the Internet and other online services
generally, and online commerce in particular. A decline in the growth of the
Internet could decrease demand for our services and increase our cost of doing
business. We cannot assure you that the Internet will continue to be widely
accepted and adopted for purchasing goods and services.
Failure to expand Internet infrastructure could limit our future growth.
The recent growth in Internet traffic has caused frequent periods of
decreased performance, and if Internet usage continues to grow rapidly, the
Internet's infrastructure may not be able to support these demands and its
performance and reliability may decline. If outages or delays on the Internet
occur frequently or increase in frequency, overall Web usage, including usage
of our Web site to purchase Internet postage, could grow more slowly or
decline. Our ability to increase the speed and scope of our services to users
is ultimately limited by and dependent upon the speed and reliability of the
Internet.
Our quarterly results are subject to significant fluctuations, and our stock
price may decline if we do not meet expectations.
Since August 1999, we have generated only nominal revenues from our
operations. Accordingly, we have little 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. Factors affecting our
quarterly results include:
. the costs of our marketing programs to establish the E-Stamp brand name
and generate market demand for our Internet postage service;
. timing of the commercial release of additional Internet postage services
developed by us, which depends in part on the timing of U.S. Postal
Service approval for any such services;
. the number, timing and significance of new products or services
introduced by our competitors, which are outside our control;
. the level of service and price competition;
. changes in our operating expenses as we expand operations; and
. general economic factors, which are outside our control.
Timing of commercial release of new products or services by us and our
competitors and general economic factors will also affect our long-term
financial results. Substantially all of our operating expenses are
11
<PAGE>
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 could be harmed because of increased costs and
expenses 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 public expectations. In this event, the market price
of our common stock is likely to fall.
We depend on key personnel and attracting qualified employees for our future
success.
Our success depends to a significant degree upon the continued contributions
of our executive management team and other senior level financial, technical,
marketing and sales personnel. Our key employees consist of Robert H. Ewald,
our President and Chief Executive Officer, Nicole Eagan, our Senior Vice
President, Marketing and Sales, and Anthony H. Lewis, Jr., our Vice President
and Chief Financial Officer. The loss of the services of any of these key
employees or other members of our senior management team could have a material
adverse effect on our business and results of operations. We anticipate that
the number of our employees may increase significantly during the next 12
months as we increase our research and development activities and sales and
marketing efforts. Our success depends upon our ability to attract and retain
additional highly qualified senior management and technical, sales and
marketing personnel to support planned growth of our operations. Competition
for qualified employees is intense, particularly in the Internet and high
technology industries. The process of locating and hiring personnel with the
combination of skills and attributes required to carry out our strategy is
time-consuming and costly. The loss of key personnel or our inability to
attract additional qualified personnel to supplement or, if necessary, to
replace existing personnel, could have a material adverse effect on our
business and results of operations.
Rapid technological change may make our Internet postage service obsolete or
cause us to incur substantial costs to adapt to these changes.
The use of the Internet for the purchase and sale of goods and services is
characterized by rapidly changing technology, evolving industry standards and
frequent new product announcements. To be successful, we must adapt to these
rapid changes by continually improving the performance, features and
reliability of our products and services, and to develop new products and
services, or else our products and services may become noncompetitive or
obsolete. We also could incur substantial costs to modify our service or
infrastructure and to develop new products and services, in order to adapt to
these changes. Our business, operating results and financial condition could be
harmed if we incur significant costs without adequate results, or find
ourselves unable to adapt rapidly to these changes.
We may be unable to effectively manage any future acquisitions of new or
complementary businesses, products or technology.
We may pursue the acquisition of new or complementary businesses, including
individual products or technologies, in an effort to enter into new markets,
diversify our sources of revenue and expand our services. 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 services 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. 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. We
also cannot be certain that we will generate satisfactory revenues from any
expanded services 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
12
<PAGE>
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 harm our business, financial condition and operating results.
Internet postage cannot currently be used internationally which may limit our
future growth.
At present, Internet postage approved by the U.S. Postal Service can only be
used to send mail from one United States address to another. Unless and until
foreign postal authorities create a certification process and recognize
information-based indicia postage, our Internet postage service will not be
able to address foreign markets which may limit our future growth. Efforts in
Europe and other foreign markets related to adoption of Internet postage are at
a very preliminary stage. We cannot assure you that foreign postal authorities
will adopt policies and processes for Internet postage that are compatible with
those approved by the U.S. Postal Service on a timely basis or at all.
If we market our services internationally, regulation by international agencies
could disrupt our operations.
If foreign postal authorities in the future accept postage generated by our
services and if we obtain the necessary foreign certification or approvals, we
would be subject to ongoing regulation by international governments and
agencies. If we achieve significant international acceptance of our services,
our business activities will be subject to a variety of potential risks,
including the adoption of laws and regulatory requirements, political and
economic conditions, difficulties protecting our intellectual property rights
and actions by third parties that would restrict or eliminate our ability to do
business in some 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 we do not adequately address "Year 2000" issues, we may incur significant
costs and our reputation and ability to gain market acceptance for our Internet
postage service could suffer.
Failure of our internal computer systems or third-party equipment or
software, or systems maintained by our users and third parties with whom we
have marketing or distribution agreements, to operate properly with regard to
the Year 2000 issues could require us to incur significant unanticipated
expenses to remedy any problems and could cause system interruptions and loss
of data. Any of these events could harm our reputation and materially and
adversely affect our ability to gain market acceptance for our Internet postage
service. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000 Compliance."
We may need additional capital and failure to obtain such capital could harm
our ability to market our Internet postage service and to develop future
services.
We require substantial working capital to fund our business. We cannot be
certain that additional financing will be available to us on favorable terms
when required, or at all. Since our inception, we have experienced negative
cash flow from operations and expect to experience significant negative cash
flow from operations in the future. We currently anticipate that the net
proceeds of this offering, together with our available funds, will be
sufficient to meet our anticipated needs for working capital and capital
expenditures through at least the next 12 months. The estimate of the time
period during which these proceeds will be sufficient is a forward-looking
statement that is subject to risks and uncertainties. Our actual funding
requirements may differ materially from this as a result of the number of
factors, including our plans to fully support the commercial release and
support of our Internet postage service, our development and introduction of
new services and our investments in expanding our systems infrastructure and
staffing. We may need to raise additional funds prior to the end of the next 12
months or at a later date.
13
<PAGE>
Our payment obligations under our marketing and distribution agreements could
increase.
Our aggregate payment obligations under our existing agreements with Yahoo!,
Microsoft, EarthLink, Excite@Home and Intuit total approximately $5.5 million
during the second half of 1999, $10.5 million during the year 2000, and $2.4
million during the year 2001. We have also agreed to pay approximately $1.3
million to an Internet service provider, and have agreed to pay Compaq
royalties.We could be required to make additional payments under our agreements
with these parties if advertising exceeds established levels of page views or
generates and exceeds established levels of new customers.
Regulatory and legal uncertainties could inhibit development of the Internet as
a marketplace for electronic commerce services.
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 that could adversely
affect adoption of the Internet for electronic commerce services, which would
harm our ability to attract and retain customers. Moreover, the applicability
of existing laws to the Internet is uncertain with regard to many issues such
as property ownership, export of encryption technology, sales tax, libel and
personal privacy. 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
adversely affect demand for our Internet postage service and could increase our
cost of doing business.
U.S. Postal Service regulations require a user of our Internet postage service
to print both the destination address and the digital stamp, which will
discourage use of our Internet postage service to print digital stamps for use
with pre-printed return envelopes.
U.S. Postal Service regulations require a user of our Internet postage
service to print both the destination address and the digital stamp. We have
found that many users will not take the time to type in destination addresses
to print a digital stamp for use with pre-printed payment envelopes. In
addition, the digital stamp is too large to fit on many return envelopes. As a
result, users will generally not use our service to print digital stamps for
return envelopes. In addition, our Internet postage service cannot be used to
print digital stamps for handwritten envelopes.
Our Internet postage will not print unless the U.S. Postal Service address
verification CD-ROM is loaded in the drive of the user's personal computer and
verifies the destination address.
The U.S. Postal Service requires that each digital stamp be encoded with the
destination address, which must be verified by the U.S. Postal Service's
address verification CD-ROM before the digital stamp is printed. Destination
addresses in the U.S. Postal Service database are subject to change as persons
or businesses establish a new address or for other reasons. As a result, we
will be required to periodically mail to users of our service updated address
verification CD-ROMs. Until an updated CD-ROM is received, a user will be
unable to print a digital stamp for a new address that was not included in the
U.S. Postal Service database at the time the existing CD-ROM was manufactured.
Shares eligible for future sale by our existing stockholders may adversely
affect our stock price.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options, in the public market
following this offering, the market price of our common stock could fall. In
addition, such sales could create the perception to the public of difficulties
or problems with our products and services. As a result, these sales also might
make it more difficult for us to sell equity or equity-related securities in
the future at a time and price that we deem appropriate.
Upon completion of this offering, we will have outstanding 38,141,962 shares
of common stock, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options or warrants after
14
<PAGE>
October 1, 1999. Of these shares, the shares sold in this offering are freely
tradable. The remaining 31,141,962 shares will become eligible for sale in the
public market as follows:
<TABLE>
<CAPTION>
Number of
Shares Date of Availability for Sale
<C> <S>
2,097,632 At the date of this prospectus
113,576 90 days after the date of this prospectus
19,854,064 180 days after the date of this prospectus subject to
restrictions under the federal securities laws
9,076,690 More than 180 days after the date of this prospectus,
subject to restrictions under the federal securities
laws
</TABLE>
We have broad discretion to use the proceeds from this offering and may not use
the proceeds effectively.
The majority of the net proceeds of this offering are not allocated for
specific uses other than sales and marketing expenditures, working capital and
general corporate purposes. Thus, our management has broad discretion over how
these proceeds are used and could spend most of these proceeds in ways with
which our stockholders may not agree. We cannot assure you that the proceeds
will be invested in a way that yields a favorable return.
Our securities have no prior market and our stock price may decline after the
offering.
Before this offering, there has not been a public market for our common
stock and an active public market for our common stock may not develop or be
sustained after this offering. The initial public offering price was determined
by negotiations between E-Stamp and the representatives of the underwriters,
and we cannot assure you that the trading market price of our common stock will
not decline below the initial public offering price.
On September 10, 1999, we sold 726,745 shares of our common stock to affiliates
of Deutsche Post and Deutsche Telekom at a price of $6.88 per share, which is
less than half of our initial offering price of $17.00 per share.
On September 10, 1999, we sold 726,745 shares of our common stock to
affiliates of Deutsche Post and Deutsche Telekom at a price of $6.88 per share.
The price paid by the affiliates of Deutsche Post and Deutsche Telekom is less
than half of our initial public offering price of $17.00 per share, and we
cannot assure you that the trading market price of our common stock will not
decline below the initial public offering price.
Internet related stock prices are especially volatile and this volatility could
cause our stock price to fluctuate dramatically which could result in
substantial losses to investors.
The stock market and specifically the stock of Internet related companies
have been very volatile. This broad market volatility and industry volatility
may reduce the price of our common stock, because our business is Internet-
based without regard to our operating performance. In particular, following
initial public offerings, the market prices for stock of Internet related
companies often reach levels that bear no relation to the operating performance
of these companies. The market prices are generally not sustainable and could
vary widely. If our common stock trades to high levels following this offering,
it could eventually experience a significant decline.
15
<PAGE>
Shares issued, and option grants made, under our 1996 stock plans and our 1999
stock plan violated the registration requirements of federal and state
securities laws.
Shares issued and options granted under our 1996 Stock Option and Restricted
Stock Plan, our 1996 Non-Employee Director Stock Plan and our 1999 Stock Plan
violated state and federal securities laws because these stock issuances and
option grants were not exempt from registration or qualification under federal
and state securities laws and registration or qualification was not obtained.
If the rescission offer that we intend to make to the holders of these shares
and options beginning approximately 30 days after the effective date of this
offering is accepted, we could be required to make aggregate payments to the
holders of these shares and options of up to $6.9 million plus statutory
interest. We currently expect to use a portion of the proceeds from this
offering to make such payments. Federal securities laws do not expressly
provide that a rescission offer will terminate a purchaser's right to rescind a
sale of stock which was not registered as required. If any or all of the
offerees reject the rescission offer, we may continue to be liable under
federal and state securities laws for up to an aggregate amount of
approximately $6.9 million plus statutory interest. See "Rescission Offer."
16
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of the 7,000,000 shares of common stock
offered hereby are estimated to be $109.7 million, based on the initial public
offering price of $17.00 per share and after deducting the underwriting
discount and estimated offering expenses. If the underwriters' over-allotment
option is exercised in full, our net proceeds will be approximately $126.3
million.
We expect to use approximately 65% of the net proceeds for sales and
marketing expenditures related to promoting our Internet postage service,
building E-Stamp brand recognition, and developing additional marketing and
distribution relationships, with the remaining 35% being used for general
corporate purposes, including working capital, satisfaction of our potential
obligations under the rescission offer and expansion of our corporate
infrastructure. In addition, we may use a portion of the net proceeds to
acquire complementary products, technologies or businesses; however, we
currently have no commitments or agreements and are not involved in any
negotiations to do so. Pending use of the net proceeds of this offering, we
intend to invest the funds in short-term, interest-bearing, investment-grade
securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends
in the foreseeable future.
CORPORATE INFORMATION
We were incorporated in Delaware in August 1996. Prior to that time, we
conducted operations as Post N Mail, L.L.C., a Texas limited liability company
formed in April 1994. Post N Mail was merged into E-Stamp in September 1996.
Our principal executive offices are located at 2855 Campus Drive, Suite 100,
San Mateo, California 94403 and our telephone number is (650) 554-8454. Our Web
site is located at http://www.e-stamp.com. Information contained on our Web
site does not constitute part of this prospectus.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends" and similar expressions to identify such
forward-looking statements. This prospectus also contains forward-looking
statements attributed to third parties relating to their estimates regarding
the growth of Internet usage, business-to-business, business-to-consumer
electronic commerce, postage usage, small office-home offices and related
service markets and spending. You should not place undue reliance on these
forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements for many reasons,
including the risks faced by us described in "Risk Factors" and elsewhere in
this prospectus.
17
<PAGE>
CAPITALIZATION
The following table sets forth the following information:
. our actual capitalization as of June 30, 1999, which reflects a stock
dividend made prior to the completion of this offering of one share of
common stock on each four shares of our outstanding common stock;
. our pro forma capitalization after giving effect to our sale of 726,745
shares of common stock with a fair value of $7.8 million in September
1999 for aggregate cash proceeds of $5.0 million, our sale of 2,928,521
shares of convertible preferred stock in August 1999, convertible into
3,660,651 shares of common stock, for an aggregate purchase price of
$30.2 million, the exercise of warrants to purchase 83,855 shares of
common stock at $0.01 per share in September 1999 with a fair value of
$1.0 million, the grant of 187,500 shares of common stock to two of our
executives in August 1999 with a fair value of $1.8 million, the
automatic conversion of all outstanding shares of redeemable convertible
preferred stock into shares of common stock on a 1.25-for-1 basis which
will occur upon the closing of this offering; and
. our pro forma as adjusted capitalization to give effect to the sale of
7,000,000 shares of common stock at the initial public offering price of
$17.00 per share in this offering, after deducting the underwriting
discount and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
As of June 30, 1999
----------------------------
Pro
Pro Forma As
Actual Forma Adjusted
(In thousands, except par
value data)
<S> <C> <C> <C>
Capital lease, net of current portion............ $ 6 $ 6 $ 6
Common stock subject to rescission, $0.001 par
value per share, 3,844 issued and outstanding,
actual, pro forma and pro forma as adjusted..... 2,499 2,499 2,499
Preferred stock; $0.001 par value, issuable in
series, 12,000 authorized shares actual and pro
forma; 10,000 authorized pro forma as adjusted:
Series A redeemable convertible preferred
stock; 2,500 authorized shares, issued and
outstanding, actual; no shares issued or
outstanding, pro forma and pro forma as
adjusted...................................... 7,084 -- --
Series B redeemable convertible preferred
stock; 4,188 shares authorized, issued and
outstanding, actual; no shares authorized,
issued or outstanding, pro forma and pro forma
as adjusted................................... 17,561 -- --
Stockholders' equity (deficit):
Common stock, par value $0.001; 100,000 shares
authorized, 12,950 shares issued and
outstanding, actual; 200,000 shares
authorized, 25,969 shares issued and
outstanding, pro forma; 200,000 shares
authorized, 32,969 shares issued and
outstanding, pro forma as adjusted............ 13 26 33
Additional paid-in capital..................... 22,563 87,995 197,658
Notes receivable from employees and officers... (2,157) (2,157) (2,157)
Prepaid marketing costs........................ -- (3,800) (3,800)
Deferred stock compensation.................... (14,427) (14,427) (14,427)
Deficit accumulated during development stage... (32,784) (34,584) (34,584)
-------- -------- --------
Total stockholders' equity (deficit)......... (26,792) 33,053 142,723
-------- -------- --------
Total capitalization............................. $ 358 $ 35,558 $145,228
======== ======== ========
</TABLE>
This table excludes the following shares:
. 804,093 shares of common stock reserved for future issuance under our
stock option plans as of June 30, 1999; and
. 1,286,250 shares of common stock subject to outstanding options as of
June 30, 1999 with an average exercise price of $0.72 per share of which
options as to 1,056,195 shares had been exercised subsequent to June 30,
1999.
18
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock on June 30, 1999,
after giving effect to the conversion of all outstanding shares of our
convertible preferred stock on a 1.25-for-1 basis, our sale of 726,745 shares
of common stock in September 1999 for an aggregate cash proceeds of $5.0
million, our sale of 2,928,521 shares of convertible preferred stock in August
1999, convertible into 3,660,651 shares of common stock, for an aggregate
purchase price of approximately $30.2 million, the exercise of warrants to
purchase 83,855 shares of common stock at $0.01 per share in September 1999,
and the grant of 187,500 shares of common stock to two of our executives in
August 1999, was $35.6 million, or approximately $1.27 per share. Pro forma net
tangible book value per share represents the amount of our total tangible
assets less total liabilities, divided by the number of shares of common stock
outstanding. Dilution in net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of our
common stock in this offering and the net tangible book value per share of our
common stock immediately afterwards. After giving effect to our sale of
7,000,000 shares of common stock offered by this prospectus at the initial
public offering price of $17.00 per share and after deducting the underwriting
discount and estimated offering expenses payable by us, our net tangible book
value would have been approximately $142.7 million, or $4.33 per share. This
represents an immediate increase in net tangible book value of $3.06 per share
to existing stockholders and an immediate dilution in net tangible book value
of $12.67 per share to new investors purchasing shares of common stock in this
offering. The following table illustrates this dilution.
<TABLE>
<S> <C> <C>
Initial public offering price per share.......................... $17.00
Pro forma net tangible book value per share as of June 30, 1999.. $1.27
Increase per share attributable to new investors................. 3.06
-----
As adjusted pro forma net tangible book value per share after the
offering........................................................ 4.33
------
Dilution in pro forma net tangible book value per share to new
investors....................................................... $12.67
======
</TABLE>
This table excludes all options and warrants that will remain outstanding
upon completion of this offering. As of June 30, 1999, there were options
outstanding to purchase a total of 1,286,250 shares of common stock with an
average exercise price of $0.72 per share. See Notes 4 and 10 of Notes to
Financial Statements. The exercise of outstanding options and warrants having
an exercise price less than the offering price would increase the dilutive
effect to new investors.
The following table sets forth, as of June 30, 1999, on the pro forma basis
described above, the differences between the number of shares of common stock
purchased from us, the total price paid and average price per share paid by
existing stockholders and by the new investors in this offering at the initial
public offering price of $17.00 per share, before deducting the underwriting
discount 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..... 29,812,751 81.0% $ 76,740,000 39.2% $ 2.57
New investors............. 7,000,000 19.0% 119,000,000 60.8% 17.00
---------- ----- ------------ -----
Total................... 36,812,751 100.0% $195,740,000 100.0%
========== ===== ============ =====
</TABLE>
If the underwriters over-allotment option is exercised in full, the
following will occur:
. the number of shares of common stock held by existing stockholders will
represent approximately 78.7% of the total number of shares of our common
stock outstanding after this offering, and
. the number of shares held by new public investors will increase to
8,050,000 or approximately 21.3% of the total number of shares of our
common stock outstanding after this offering.
19
<PAGE>
SELECTED FINANCIAL DATA
(In thousands, except per share data)
The statement of operations data for the years ended December 31, 1996, 1997
and 1998, and the balance sheet data as of December 31, 1997 and 1998 are
derived from our financial statements, which have been audited by Ernst & Young
LLP, independent auditors and are included elsewhere in this prospectus. The
statement of operations data for the period since inception (April 26, 1994)
through December 31, 1994 and for the year ended December 31, 1995 and the
balance sheet data as of December 31, 1994, 1995 and 1996 are derived from
audited financial statements not included in this prospectus. The financial
data as of and for the six months ended June 30, 1998 and 1999 are derived from
unaudited financial statements included elsewhere in this prospectus. We have
prepared this unaudited information on the same basis as the audited financial
statements and have included all adjustments, consisting only of normal
recurring adjustments, that we consider necessary for a fair presentation of
our financial position and operating results for such periods. When you read
this selected financial data, it is important that you also read the historical
financial statements and related notes included in this prospectus, as well as
the section of this prospectus related to "Management's Discussion and Analysis
of Financial Condition and Results of Operations." Historical results are not
necessarily indicative of future results.
<TABLE>
<CAPTION>
Period from
Inception Six Months Ended
(April 26, 1994) Year Ended December 31, June 30,
through Dec. 31, ----------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $ -- $ -- $ -- $ -- $ -- $ -- $ --
Operating expenses:
Research and
development.......... 378 701 2,387 3,916 5,603 2,458 5,225
Sales and marketing... 34 96 1,761 1,743 2,722 1,137 2,494
General and
administrative....... 160 532 1,739 1,748 1,897 903 1,373
Amortization of
deferred stock
compensation......... -- -- 688 414 858 -- 3,451
------ ------- ------- ------- -------- ------- --------
Operating loss.......... (572) (1,329) (6,575) (7,821) (11,080) (4,498) (12,543)
Interest income
(expense), net......... -- (17) 236 143 370 43 176
------ ------- ------- ------- -------- ------- --------
Net loss................ (572) (1,346) (6,339) (7,678) (10,710) (4,455) (12,367)
Accretion on redeemable
convertible preferred
stock.................. -- -- -- (196) (1,383) (307) (1,176)
------ ------- ------- ------- -------- ------- --------
Net loss attributable to
common stockholders.... $(572) $(1,346) $(6,339) $(7,874) $(12,093) $(4,762) $(13,543)
====== ======= ======= ======= ======== ======= ========
Net loss per common
share (basic and
diluted)............... $(0.05) $ (0.11) $ (0.51) $ (0.61) $ (0.92) $ (0.37) $ (1.00)
====== ======= ======= ======= ======== ======= ========
Pro forma net loss per
share basic and
diluted(1)............. $ (0.57) $ (0.57)
======== ========
Weighted average shares
outstanding (basic and
diluted)............... 11,175 11,933 12,543 12,966 13,075 13,026 13,486
Shares used in
calculation of pro
forma net loss per
share basic and
diluted(1)............. 18,753 21,846
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
----------------------------------- As of
1994 1995 1996 1997 1998 June 30, 1999
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.. $ 19 $ 190 $3,910 $4,111 $10,217 $ 1,916
Working capital (deficit).. (426) 386 3,394 2,398 8,805 (324)
Total assets............... 93 1,428 4,873 4,763 10,811 3,096
Capital lease, net of
current portion........... -- -- 88 38 11 6
Common stock subject to
rescission................ -- -- 31 252 971 2,499
Redeemable convertible
preferred stock........... -- -- -- 6,126 23,469 24,645
Total stockholders' equity
(deficit)................. (352) 646 4,070 (3,390) (15,196) (26,792)
</TABLE>
- --------------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
method used to determine the number of shares used in computing pro forma
net loss per share.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in forward-looking statements for many reasons, including the risks
described in "Risk Factors" and elsewhere in this prospectus. You should read
the following discussion with the "Selected Financial Data" and our financial
statements and related notes included elsewhere in this prospectus.
Overview
We provide an Internet postage service that enables users to purchase,
download and print Internet postage directly from their personal computers. We
pioneered the development of Internet postage, including being one of the first
companies to approach the U.S. Postal Service with the idea of printing postage
from a personal computer.
We have incurred net losses in each quarterly and annual period since our
inception, and as of June 30, 1999, we had generated no revenues and our
accumulated deficit was $39.0 million. From November 1994 to March 1998, we
incurred operating costs primarily related to the development of our Internet
postage service in accordance with U.S. Postal Service guidelines and specified
criteria. In March 1998, after extensive development and interaction with the
U.S. Postal Service, we began the three-phase beta test certification process
required by the U.S. Postal Service to qualify Internet postage vendors for
commercial distribution of Internet postage under the U.S. Postal Service's
Information Based Indicia Program. On August 9, 1999, we received final
approval from the U.S. Postal Service for our Internet postage service and
since that date have been providing our service nationally in accordance with
approved quantities and distribution channels. As of September 24, 1999, we had
delivered our Internet postage software and hardware to approximately 14,000
persons to enable them to purchase our Internet postage.
In addition to working with the U.S. Postal Service to obtain approval of
our Internet postage service, our primary activities since inception have
included:
. developing our business model;
. developing and testing our Internet postage service;
. hiring management and other key personnel;
. building our infrastructure; and
. entering into marketing and distribution relationships.
The revenue and income potential of our business and market is unproven, and
our limited operating history makes it difficult to evaluate our prospects. We
expect to continue to incur net losses for the foreseeable future and may never
achieve profitable operations. Subsequent to June 30, 1999, we have recognized
only nominal revenues from our desktop Internet postage service. We intend to
recognize revenue from an initial software license fee for our Internet postage
software and hardware, ongoing convenience fees for the purchase of postage on
the Internet, and the sale of ancillary postage supplies. Our costs of revenues
include the costs of manuals, packaging, the postage device, credit card and
electronic funds transfer fees, the address management system, support costs,
as well as fulfillment costs, and direct costs from the sale of postage
supplies.
During the years ended December 31, 1996, 1997 and 1998 and the six months
ended June 30, 1999, in connection with the grant of stock options to
employees, we recorded deferred stock compensation totaling $19.8 million,
representing the difference between the deemed fair value of our common stock
on the date such options were granted and the exercise price. Such amount is
included as a reduction of stockholders' equity and is being amortized over the
vesting period of the individual options, generally four years, using the
graded vesting method. The graded vesting method provides for vesting of
portions of the overall award at different dates and results in higher vesting
in earlier years than straight-line vesting. We recorded amortization of
deferred stock compensation in the amount of $688,000, $414,000 and $858,000
for the years ended
21
<PAGE>
December 31, 1996, 1997 and 1998 and $3.6 million for the six months ended June
30, 1999. At June 30, 1999, we had a total of $14.4 million remaining to be
amortized over the corresponding vesting periods of the stock options. We will
record additional deferred compensation totaling $9.7 million for options and
shares granted in July, August and September 1999. Such amounts related to
option grants will be amortized in accordance with the Company's accounting
policy over the remaining vesting period of the grants through mid-2003.
Approximately $1.8 million related to stock grants will be recorded as an
expense in the three months ended September 30, 1999. See Notes 4 and 10 of
Notes to Financial Statements.
On September 10, 1999, the Company issued 726,745 shares of its common stock
and warrants to purchase an additional 83,855 shares of common stock at an
exercise price of $0.01 per share to investors for cash proceeds of $5.0
million. The fair value of the common stock and warrants was deemed by
management to be $7.8 million and $1.0 million, respectively.
In connection with the issuance of common stock and warrants, the Company
and the investors signed non-binding letters of intent to negotiate for a
period of up to one year to enter into definitive joint venture, joint
marketing, cooperation, or technology development agreements. The Company will
record the $3.8 million excess of the fair value of the common stock and
warrants over the consideration received as a prepaid marketing cost, contra
equity account. The balance will be amortized to expense over the one year
period covered by the letter of intent. If it becomes probable that efforts to
reach definitive agreements will cease prior to the end of the one year
negotiation period, the unamortized balance will be fully expensed.
Results of Operations
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Research and Development. Research and development expenses include expenses
for research, design and development of our Internet postage service, expenses
related to obtaining patents from the U.S. Patent Office, and server and
network operations. Research and development expenses increased 113% to $5.2
million for the six months ended June 30, 1999 from $2.5 million for the
six months ended June 30, 1998. Of the $2.7 million increase in research and
development expenses in 1999, $1.7 million of this amount reflected increases
in research and development employee headcount, and consulting and contractor
expenses. The balance of the increase reflected costs of project materials for
further development of our Internet postage service, server-based service,
operations network investments and costs of product shipped to customers during
the beta test portion of the U.S. Postal Service approval process. We expect
the dollar amount of research and development expenses to increase in future
periods to support further development of our Internet postage service and our
server-based service and expenses related to the development of other products
and services.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and related benefits for sales and marketing personnel, Web site
development, package design, advertising and promotional expenses, and trade
show expenses. Sales and marketing expenses increased 119% to $2.5 million for
the six months ended June 30, 1999 from $1.1 million for the six months ended
June 30, 1998. Of the $1.4 million increase in sales and marketing expenses in
1999, $900,000 of this amount reflected costs associated with continued
development of our marketing campaigns in anticipation of the launch of our
Internet postage service. In addition, this increase reflected costs of
$300,000 for promotional obligations and advertising placements under marketing
and distribution relationships that were not in place in the first six months
of 1998. The increase also reflected increases in our sales and marketing
personnel. We expect sales and marketing expenses to increase in dollar amount
as we promote and launch our Internet postage service and as we hire additional
personnel, continue to promote our brand and add new marketing and distribution
relationships.
General and Administrative. General and administrative expenses consist
primarily of compensation for administrative and executive staff, fees for
professional services, depreciation expense and general office expenses.
General and administrative expenses increased 52% to $1.4 million for the six
months ended June 30, 1999 from $903,000 for the six months ended June 30,
1998. $300,000 of the increase in general and administrative expenses in 1999
reflected increases in administrative staff and professional fees. We also
22
<PAGE>
incurred a one-time charge of $175,000 for a severance accrual for a former
executive officer. We expect general and administrative expenses to increase in
dollar amount due to further additions in staffing and as we incur additional
costs necessary to prepare and manage the infrastructure for business
expansion, for legal services in connection with the Pitney Bowes litigation,
and associated costs with being a public reporting company.
Amortization of Deferred Compensation. Amortization of deferred stock
compensation was $3.5 million for the six months ended June 30, 1999. There was
no amortization of deferred stock compensation for the six months ended June
30, 1998. We recorded aggregate deferred stock compensation of $18.7 million in
the period from July 1, 1998 through June 30, 1999 for options awarded to
employees with exercise prices below the deemed fair value for financial
reporting purposes of our common stock on their respective grant dates.
Interest Income, Net. Interest income, net, consists primarily of earnings
on our cash and cash equivalents, net of interest expenses attributable to
equipment leases and any taxes. Interest income, net, increased 309% to
$176,000 for the six months ended June 30, 1999 from $43,000 for the six months
ended June 30, 1998. The increase in interest income, net, was due to
increasing average cash and cash equivalent balances as we received funds from
our financing activities. We expect interest income, net, to increase following
this offering as a result of increased cash balances resulting from this
offering.
Year Ended December 31, 1998 Compared to Years Ended December 31, 1997 and
1996
Research and Development. Research and development expenses increased 43% to
$5.6 million in 1998 from $3.9 million in 1997 and increased 64% in 1997 from
$2.4 million in 1996. A majority of the increases in research and development
expenses in 1998 and 1997 were due to increases in contractor expenses and
personnel headcount costs of $900,000 in 1998 and $1.1 million in 1997. We also
incurred increases of $800,000 in 1998 and $400,000 for costs of project
materials and network operations investments.
Sales and Marketing. Sales and marketing expenses increased 56% to $2.7
million in 1998 from $1.7 million in 1997 and decreased 1% in 1997 from $1.8
million in 1996. $500,000 of the increase in sales and marketing expenses in
1998 was due to costs related to the continued development of our marketing and
branding campaigns, and expenses related to the anticipated launch of our
Internet postage service. In addition, this increase reflected increases in our
marketing personnel costs of $400,000 and, to a lesser extent, costs incurred
for promotional obligations under our first marketing and distribution
relationships entered in 1998. Sales and marketing expenses in 1997 decreased
modestly due primarily to a reduction in trade show activity.
General and Administrative. General and administrative expenses increased 9%
to $1.9 million in 1998 from $1.7 million in 1997 and increased 1% in 1997 from
$1.7 million in 1996. The increase in general and administrative expenses in
1998 was due primarily to increases in general and administrative staffing and
to a much lesser extent professional service costs and general office expenses.
General and administrative expenses in 1997 increased modestly due to a small
increase in administrative staff.
Amortization of Deferred Stock Compensation. Amortization of deferred stock
compensation increased 107% to $858,000 in 1998 from $414,000 in 1997 and
decreased 40% in 1997 from $688,000 in 1996. In 1996, we recorded deferred
stock compensation of approximately $1.1 million related to equity awards to
employees. We also recorded aggregate deferred stock compensation of
approximately $3.6 million in 1998 for options awarded to employees with
exercise prices below the deemed fair value for financial reporting purposes of
our common stock on their respective grant dates.
Interest Income, Net. Interest income, net, increased 159% to $370,000 in
1998 from $143,000 in 1997 and decreased 39% in 1997 from $236,000 in 1996. The
increase in interest income, net, in 1998 was due to increasing average cash
and cash equivalent balances as we received funds from our financing activities
in 1998. The decrease in interest income, net, in 1997 was due to declining
average cash and cash equivalent balances as we spent funds that had been
received.
23
<PAGE>
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
sales of equity securities. We have received approximately $73.9 million in
private funding, including $35.2 million through our most recent financings in
August and September 1999. In addition, we have a $1.25 million line of credit
with a bank, all of which is available for use by us except for a $143,000
letter of credit to secure our lease and capital lease obligations totaling
$26,000 as of June 30, 1999. This line of credit bears interest at a rate of
prime plus 0.25%.
Net cash used in operating activities totaled $7.9 million for the six
months ended June 30, 1999, $9.6 million for the year ended December 31, 1998,
$5.7 million for the year ended December 31, 1997, and $4.9 million for the
year ended December 31, 1996. Cash used in operating activities for each period
resulted primarily from net operating losses in those periods.
Net cash provided by (used in) investing activities totaled $(387,000) for
the six months ended June 30, 1999, $(324,000) for the year ended December 31,
1998, $(21,000) for the year ended December 31, 1997, and $202,000 for the year
ended December 31, 1996. Cash provided by (used in) investing activities for
each period resulted primarily from the acquisition of capital assets,
primarily computer and office equipment.
Net cash provided by financing activities totaled $12,000 for the six months
ended June 30, 1999, $16.0 million for the year ended December 31, 1998, $5.9
million for the year ended December 31, 1997, and $8.4 million for the year
ended December 31, 1996. Cash provided by financing activities for each period
resulted primarily from issuances of common stock and redeemable convertible
preferred stock, offset by the repayment of lease obligations and notes payable
to related parties.
We believe that the net proceeds from this offering, together with our
current cash balances and cash flows from operations, if any, will be
sufficient to meet our present growth strategies and related working capital
and capital expenditure requirements for at least the next 12 months. Without
the proceeds of this offering, our cash resources would be sufficient to fund
our operations under our current plan through the second quarter of 2000. Our
current plan contemplates significant increases in spending when compared to
our historical expenditures. Without the proceeds from this offering, we would
be required to reduce our planned expenditures under our current operating plan
to enable our current cash resources to fund our operations for the next 12
months. We currently anticipate the need to raise additional capital prior to
achieving positive cash flows from our operations through the issuance of
additional debt or equity securities. We currently intend to use a portion of
the proceeds from this offering to satisfy our payment obligations under our
rescission offer, if any are required. We do not expect our payment obligations
under our rescission offer to have a material effect on the period of time
through which our financial resources will be adequate to support operations.
Our forecast of the period of time through which our financial resources will
be adequate to support operations is a forward-looking statement that involves
risks and uncertainties. Our actual funding requirements may differ materially
from this as a result of a number of factors including our plans to fully
support the commercial release of our desktop Internet postage service, our
introduction of new services and our investments in systems infrastructure and
staffing. We may require substantial working capital to fund our business and
we may need to raise additional capital prior to this time or thereafter. We
cannot be certain that additional funds will be available on satisfactory terms
when needed, if at all. If we are unable to raise additional necessary capital
in the future, we may be required to curtail our operations significantly.
Raising additional equity capital would have a dilutive effect on existing
stockholders.
We believe that our exposure to market risk related to changes in interest
rates, equity prices and foreign currency exchange rates is not material. At
June 30, 1999, we did not hold any short or long-term investments.
Year 2000 Compliance
Background. Many currently installed computer systems, software products and
other control devices are unable to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, many companies'
computer systems, software products and control devices may need to be upgraded
or replaced in order to operate properly in the year 2000 and beyond.
24
<PAGE>
Assessment and Implementation. The U.S. Postal Service requires participants
in the Information Based Indicia Program to maintain Year 2000 compliant
systems and software. As a result, we are in the process of developing a
comprehensive plan to make our internal computer software and hardware systems
Year 2000 compliant. Our Year 2000 compliance plan is comprised of 3 phases: an
assessment phase; an implementation phase; and a testing phase. This plan,
initiated in the first quarter of fiscal 1999, will be implemented by the end
of the fourth quarter of fiscal 1999. While we believe that this plan for
addressing the Year 2000 problem will be completed in a timely manner, we
cannot be certain that these Year 2000 compliance efforts will be successful.
The financial impact of making the required systems changes cannot be known
precisely at this time, but we currently expect these expenses to be less than
approximately $500,000. The financial impact, could, however, exceed this
estimate. Nonetheless, these costs are not expected to be material to our
business, financial condition, or results of operation. To date, we have
incurred expenses of less than approximately $100,000.
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 services, as well as monitoring and back-up
capabilities. Based upon our assessment to date, we believe that our systems
will be Year 2000 compliant and have submitted Year 2000 readiness statements
to the U.S. Postal Service to indicate our Year 2000 compliance. However, we
cannot be sure how our Internet postage service will integrate with other
vendor-provided software.
We use and depend on third-party equipment and software 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 expect to complete this assessment by the beginning of the fourth
quarter of 1999. 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. All of our significant
vendors and suppliers of third party equipment and software have provided us
with written compliance statements or published information regarding their
Year 2000 readiness except for one vendor who has only responded orally.
Approximately 90% of our significant vendors and third party suppliers have
indicated that they are currently Year 2000 compliant, and the remaining 10%
have indicated that they are in the process of remediating Year 2000 issues and
expect to be Year 2000 compliant before year end. We will develop and
implement, if necessary, a remediation plan with respect to third-party
software, third-party vendors and computer technology and services that may
fail to be Year 2000 compliant.
If Year 2000 issues prevent our users from accessing the Internet or our
Internet postage service or from processing postage, we will lose revenue. Any
failure of our third-party equipment or software to operate properly could
require us to incur unanticipated expenses. For example, pursuant to
regulations of the Information Based Indicia Program, we rely on the
U.S. Postal Service's secure postage accounting vault to purchase postage
credit for our customers. If the U.S. Postal Service systems are not Year 2000
compliant, our users may not be able to purchase additional postage which would
cause us to lose revenue and could injure our reputation.
The Year 2000 readiness of the Internet infrastructure necessary to support
our operations is difficult to assess. For instance, we depend upon 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 our customers. 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 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 customers to
reliably access the Internet would have an adverse effect on demand for our
services and would harm our results of operations.
25
<PAGE>
Most Likely Worst Case Scenarios of Year 2000 Problems. We cannot accurately
predict how many failures related to the Year 2000 problem will occur or the
severity, duration or financial consequences of these failures. Any Year 2000
problems that affect us could result in an interruption in our service or the
inability of users to access our service. As a result, the following worst case
scenarios could occur:
. any interruption in our service would result in loss of revenue and could
require significant expenditures and efforts by us to restore service;
and
. widespread Year 2000 problems could result in a significant number of our
users being unable to access our service due to problems with their
personal computers or the Internet.
Contingency Planning. We are currently developing contingency plans to be
implemented as part of our efforts to identify and correct Year 2000 problems
affecting our internal systems. We expect to complete these contingency plans
by the end of the third quarter of 1999. Depending on the systems affected,
these plans could include:
. accelerated replacement of effected equipment or software;
. increase work hours for our personnel or use of contract personnel to
correct on an accelerated schedule any Year 2000 problems which may
arise;
. the provision of manual workarounds for information systems; and
. other similar approaches.
If we are required to implement any of these contingency plans, such plans may
have a material adverse effect on our business, financial condition or results
of operations. Additionally, we may not complete these contingency plans in a
timely manner, and failure to do so could have a material adverse effect on our
business, financial condition or results and operations.
The discussion of our efforts and expectations relating to Year 2000
compliance are forward-looking statements that are subject to risks and
uncertainties and actual results may differ materially from those indicated in
these forward-looking statements. Our ability to achieve Year 2000 compliance
and the level of anticipated expenses related to Year 2000 compliance could be
adversely affected by, among other things, the availability and cost of testing
and programming resources, the ability of third parties to resolve Year 2000
issues associated with their systems and software and unanticipated problems
that may in the future be identified in our ongoing compliance review.
Recent Accounting Pronouncements
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting for Comprehensive Income." Statement
of Financial Accounting Standards No. 130 requires disclosures of components of
non-stockholder changes in equity in interim periods and additional disclosures
of components of non-stockholder changes in equity on an annual basis. Adoption
of Statement of Financial Accounting Standards No. 130 had no impact on the
Company's results of operations or financial position.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The Company adopted Statement of Financial Accounting No.
131 effective January 1, 1998. The adoption of this standard did not have a
material effect on the Company's financial statement disclosures as the Company
operates in a single segment.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Company is required to adopt Statement of
Financial Accounting Standards No. 133 for the year ending December 31, 2000.
Statement of Financial Accounting Standards No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities.
26
<PAGE>
Because the Company currently holds no derivative financial instruments and
does not currently engage in hedging activities, adoption of Statement of
Financial Accounting Standards No. 133 is expected to have no material impact
on the Company's financial condition or results of operations.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use." Statement of Position 98-1 is
effective for financial statements for years beginning after December 15, 1998.
Statement of Position 98-1 provides guidance over accounting for computer
software developed or obtained for internal use including the requirement to
capitalize specified costs and amortization of such costs. We adopted the
provisions of Statement of Position 98-1 on January 1, 1999. The adoption of
Statement of Position 98-1 has not had a material impact on our financial
position or results of operations.
Quantitative and Qualitative Disclosures About Market Risk
Our interest income and expense are sensitive to changes in the general
level of interest rates. In this regard, changes in interest rates affect the
interest on our cash equivalents earned as well as the interest incurred on our
indebtedness. Based on our cash equivalents balance and level of indebtedness
at June 30, 1999, our exposure to interest rate risk is not material.
27
<PAGE>
BUSINESS
Overview
We provide an Internet postage service that enables users to purchase,
download and print postage directly from their personal computers. The postage
can be printed directly onto envelopes, labels or documents using standard
laser or inkjet printers, 24 hours a day, seven days a week, without the need
to remain connected to the Internet. Customers can buy the software and
hardware components needed to use our Internet postage service through our
online store at www.e-stamp.com, over the telephone or at office supply stores.
We also plan to sell our services through computer superstores and catalogs.
Our Internet postage service is based upon our E-Stamp software, our secure
postage hardware device that enables the storage on the user's desktop of up to
a maximum of $500 of postage as currently allowed under U.S. Postal Service
regulations, and a U.S. Postal Service address verification CD-ROM. Our
Internet postage software and hardware currently sells for a suggested retail
price of $49.99. As part of our marketing strategy, we have previously, and may
from time to time, offer our software and hardware free of charge through
promotional arrangements with third parties. We charge a 10% convenience fee
when Internet postage is purchased, with a minimum fee of $4.99 and a maximum
fee of $24.99 per purchase. We also plan to offer for sale later this year
postage related consumables and peripherals including an Internet postage
scale, labels, windows envelopes and a label printer manufactured by third
parties with whom we have established relationships.
We received approval from the U.S. Postal Service on August 9, 1999 for our
Internet postage service, and since that date have been providing our service
nationally. Our commercial roll-out is currently limited to 100,000 customers.
The U.S. Postal Service will evaluate our service when we obtain approximately
100,000 customers. Although the U.S. Postal Service has not informed us whether
it will continue to impose limitations on the number of our customers following
this evaluation, we will continue to be subject to U.S. Postal Service
regulations. As a result, the U.S. Postal Service could continue to require
periodic reviews before authorizing greater numbers of customers. We are
targeting our Internet postage service at small business, small office and home
office users. To help build our brand awareness and accelerate the adoption of
our Internet postage service, we have formed marketing and distribution
relationships with industry leaders. We currently have marketing relationships
with Microsoft, Yahoo!, Excite@Home, America Online, Intuit, Compaq, Earthlink,
Francotyp-Postalia and Avery Dennison. We expect our marketing and distribution
relationships to generate revenue through:
. increased sales of our Internet postage product as a result of increased
traffic on our website;
. acquisition of customers through bundling arrangements and promotional
offers to promote the use and adoption of our service; and
. markups on our sales of postage related consumables and peripherals
manufactured by third parties.
We believe our Internet postage service will enhance customer satisfaction
during the mail and postage process by improving overall access, convenience
and flexibility for small business, small office and home office users, and
will increase operating efficiencies and decrease postal fraud for the U.S.
Postal Service by including a unique digital signature on each digital stamp.
Industry Background
The Internet and Electronic Commerce
The Internet has emerged as a global medium for communications, information
and commerce. With over 125 million users at the end of 1998, which is expected
to grow to approximately 500 million users by 2003, as estimated by
International Data Corporation, the Internet is dramatically changing how
businesses and other users communicate and share information. The Internet has
also created new opportunities to conduct commerce, including business-to-
business electronic commerce, which enables organizations to streamline
business processes, lower operating costs and improve productivity. According
to Forrester Research, business-to-business electronic commerce is expected to
grow from an estimated $43 billion in 1998 to approximately
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$1.3 trillion in 2003, accounting for more than 90% of the dollar value of
electronic commerce in the United States. Due to the Internet's convenience and
accessability, businesses are increasingly using the Internet for a wide
variety of operations, such as buying office supplies online, and may benefit
from emerging trends, such as buying postage over the Internet.
The Postage Industry
According to the U.S. Postal Service's latest annual report, the total
postage market in the U.S. was approximately $60 billion in 1998. Further, the
U.S. Postal Service processed over 197 billion pieces of mail, or an estimated
41% of the total worldwide mail shipments. Of the $60 billion U.S. postage
market, approximately $38 billion was represented by postage stamps and postage
meters, which are primarily used for first class, priority and express mail,
with the remaining $22 billion consisting of permit and other mail services.
Keenan Vision, an independent research firm, estimates that first class,
priority and express mail usage will grow to approximately $46 billion by the
year 2002. In addition, the worldwide private market for mail and parcel
delivery which does not require postage from governmental entities includes
services such as Federal Express and United Parcel Service.
The U.S. Postal Service's longstanding mission is to meet the needs of its
customers with convenient options and improved postage security. To enhance
customer satisfaction, we believe the U.S. Postal Service searches for
innovations that:
. provide postal services that are convenient, cost-effective and easy-to-
use;
. leverage existing customer infrastructures, such as personal computers,
printers and software, to provide better and more efficient products and
services;
. integrate mailing information on the computer desktop, including postage
accounting;
. improve access to the large and growing small business, small office and
home office markets;
. reduce the occurrence of postal fraud, which costs in excess of $150
million per year in lost revenues according to the U.S. General
Accounting Office; and
. increase efficiencies in the handling and processing of mail, thereby
expediting the mailing process and enabling the U.S. Postal Service to
lower its operating costs.
The Emergence of Internet Postage
To address these objectives, the U.S. Postal Service announced in 1995 a
program for its first new postage method since the approval of the postage
meter in 1920. The Information Based Indicia Program is a certification program
that authorizes third party vendors to sell digital postage that users purchase
over the Internet and print from a personal computer using ordinary laser or
inkjet printers. Internet postage consists of a two dimensional bar code
containing an encrypted digital signature that makes each digital stamp unique
and is intended to lower the prevalence of postal fraud. Through its
Information Based Indicia Program, the U.S. Postal Service is seeking to
enhance user convenience with a new access channel for postage that enables
users to print postage from a personal computer, 24 hours a day, seven days a
week.
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The following illustration is an example of our Internet postage that
conforms to the Information Based Indicia Program requirements, along with an
explanation of what each part represents.
[Illustration of digital stamp including the several elements described in the
bullet references below]
<TABLE>
<S> <C>
. FIM Mark. Facing identification mark . Two Dimensional Barcode. Encodes the
that is used to properly orient the readable information, including
document in the U.S. Postal Service's address of mailer and addressee, as
automated sorting system. well as other information including a
unique digital signature and a
delivery print code.
. Town Circle or Postmark. Identifies . Device ID. Unique identification code
the town and zip code in which the that links the postage back to the
postal customer resides and from device that stored the postage before
which the postal item must be sent. printing.
. Postage Amount. Ascribes a value to . Rate Category. Describes the type of
the postage that has been printed and postal service being used, which can
removed from the user's account. be first-class, priority mail,
express mail or parcel post.
</TABLE>
The Growth of Small Businesses, Small Offices and Home Offices and Their
Postage and Internet Usage
The United States has a large and growing number of small businesses, small
offices and home offices. According to International Data Corporation, there
were 44.6 million small businesses, small offices and home offices in the U.S.
in 1998, which is expected to grow to 57.6 million by 2002. Of the 44.6
million small businesses, small offices and home offices in 1998,
International Data Corporation estimates that 37.3 million were home offices,
5.7 million were small businesses with less than ten employees and 1.6 million
were small businesses with more than ten employees. Further, International
Data Corporation estimates that small businesses, small offices and home
offices accounted for $3.7 billion of electronic commerce in 1998 and will
account for $69.7 billion of electronic commerce in 2002. In addition, small
businesses, small offices and home offices are typically identified with the
following characteristics:
. limited amount of time and resources, resulting in the desire for
services that simplify business processes; and
. self sufficient and "do-it-yourself" entrepreneurs who are willing to
adopt new technologies that save time and increase flexibility.
Postage Usage. Small businesses, small offices and home offices generally
conduct an essential part of their communications with suppliers and customers
through the postal system, including letters and packages that require
expedited delivery. Despite the relative importance of postage usage, small
business, small office and home office use of postage meters is low, and it
appears that using a postage meter is not cost-effective for
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their needs. Based on a 1999 survey from International Data Corporation, 80% of
small businesses/small offices with 10 employees or less did not use a postage
meter. When the total cost is computed, including lease fees for both the
postage meter and scale, which approximate $25 per month, postage meter
resetting fees and proprietary consumables such as ink cartridges, which
approximate another $25 per month, small businesses, small offices and home
offices pay a significant premium to traditional postage stamps. In addition,
leasing a postage meter typically has required a multi-year lease lock-in
period.
Internet Usage. As the Internet helps simplify business processes, small
businesses, small offices and home offices have become more willing to rely on
its functionality to improve their businesses. Accordingly, there has been
increased adoption of the Internet by small businesses, small offices and home
offices, as the following statistics indicate:
. International Data Corporation estimates that 56% of U.S. home offices
in 1998 had Internet access, and that this percentage will reach 72% by
2002; and
. for U.S. small businesses, International Data Corporation estimates that
approximately 50% had Internet access in 1998. This amount is expected
to increase to 67% by 2002.
Despite the increasing prevalence of Internet access, most small businesses,
small offices and home offices are constrained by limited bandwidth Internet
connections. International Data Corporation estimates that:
. approximately 80% of small businesses, small offices and home offices
with Internet access use dial-up modems, usually at 28.8 or 33.6
kilobytes per second, to connect to the Internet;
. only 2.2% of small businesses, small offices and home offices with
Internet access use a broadband connection, which provides faster access
but the availability of which is limited; and
. approximately 71% of small businesses, small offices and home offices in
1998 shared their modem lines with another device such as a telephone or
fax machine, which necessitates being connected to the Internet only
when performing required business functions.
Given the rapid adoption of the Internet and the high postage usage by small
businesses, small offices and home offices, a substantial opportunity exists to
provide an automated method for purchasing, downloading and printing postage.
We believe the attractiveness of Internet postage services for the small
business, small office and home office user will depend upon the service's
ability to:
. enhance accessibility to postage, at any time of day;
. eliminate the costly time spent travelling to and waiting at the post
office;
. automate business processes through integration with existing business
software programs;
. be easy to use and flexible to meet the small business, small office and
home office user's preferences;
. enable the tracking and reporting of postage usage;
. provide cost savings and faster mail delivery versus traditional postage
solutions; and
. leverage a user's existing investment in personal computers, printers
and software.
The E-Stamp Service
We provide an Internet postage service that enables our customers to
purchase and download postage over the Internet directly into a secure, silver-
dollar size postage device, and then to print the purchased postage from their
personal computers at any time without the need to remain connected to the
Internet. We have leveraged our customer-centric focus and over 20 issued
patents to create a service that offers convenience and flexibility to small
business, small office and home office users. To help build our brand awareness
and
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accelerate the adoption of our Internet postage service, we have formed
marketing and distribution relationships with industry leaders. In addition,
our Internet postage service is tightly integrated with popular business
computer programs, such as Microsoft Word and Outlook.
We believe our desktop Internet postage service provides the following
benefits to small business, small office and home office users and the U.S.
Postal Service:
Benefits to Small Business, Small Office and Home Office Users
Enhanced Flexibility. With our Internet postage service, small business,
small office and home office users receive the benefits of buying and
downloading postage online, with the flexibility of printing postage while
connected or disconnected from the Internet. Our service is tailored to most
small business, small office and home office users, who are unable to, or
desire not to, stay continuously connected to the Internet due to shared
connections and access via slow dial-up modems;
Convenient Access. Our Internet postage service provides unlimited,
convenient access to postage from the computer desktop, 24 hours a day, seven
days a week. small business, small office and home office users can purchase,
download and print postage with their personal computer, thereby avoiding
common inconveniences such as running out of postage and waiting in long lines
at the post office;
Tight Integration. Our Internet postage service is tightly integrated with
popular software applications, such as Microsoft Word and Outlook, to enable
small business, small office and home office users to conveniently print
postage while using their most commonly used software programs;
Variety of Postage Options. Our Internet postage service enables small
business, small office and home office users to print professional looking
addresses and postage on envelopes, labels or directly on correspondence, with
the postage printed in any denomination. Further, our service enables small
business, small office and home office users to print a variety of postage
types, including first class, priority mail, express mail and parcel post; and
Simple and Secure. The components needed to use our Internet postage service
can be installed in minutes and include instructions and an intuitive user
interface. Further, our service is designed to provide small business, small
office and home office users the highest level of security and data integrity
as their databases of addresses are stored locally, rather than uploaded to a
remote server. In addition, we enable the accurate tracking and reporting of
postage purchases and usage, thereby limiting employee misuse.
Benefits to the U.S. Postal Service
A New Low-Cost Distribution Channel. Our Internet postage service enables
the U.S. Postal Service to distribute postage to users through the Internet,
thereby enabling significant manufacturing and distribution cost savings;
Automation and Operating Efficiencies. Our Internet postage service enables
the U.S. Postal Service to further automate the handling and processing of
mail, through address verification and correction and extended zip code
printing capabilities;
Extended Level of Security. Our Internet postage service provides the
highest level of security and auditing capabilities, which may help the U.S.
Postal Service to reduce the over $150 million dollars annually of postal
fraud; and
Increased Postal Competitiveness. Our Internet postage service offers
additional capabilities for sending and tracking packages, such as priority
express or parcel post, enabling the U.S. Postal Service to more effectively
compete against the private parcel shipping industry, such as Federal Express
and United Parcel Service.
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Growth Strategy
Our objective is to be the leading provider of Internet postage services.
Key elements of our growth strategy include the following:
Enter into Marketing and Distribution Relationships with Industry Leaders to
Quickly Acquire Customers
Our strategy includes entering into marketing and distribution
relationships with industry leaders to rapidly acquire customers, build brand
recognition and accelerate the adoption of our Internet postage service. We
have entered into marketing or distribution relationships with Microsoft,
Yahoo!, Excite@Home, America Online, Compaq, EarthLink, Intuit, Francotyp-
Postalia, Dymo-CoStar, Tension Envelope, Avery Dennison and Sunbeam's Pelouze
division. We have also entered into distribution agreements with Ingram Micro,
Digital River and LinkShare. Entering into these relationships with well-known
and trusted names in the Internet, computer hardware and software, and
business supply industries enable us to leverage these third parties'
installed customer bases, distribution channels and marketing expertise, and
facilitate the adoption, usage and accessibility of our Internet postage
service. We expect to enter into additional marketing and distribution
relationships as our business grows and we expand our portfolio of products
and services.
Initially Focus on the Large and Growing Small Business, Small Office and
Home Office Market
We are initially focusing on the small business, small office and home
office market due to its attractive characteristics, which include:
. a large and growing number of small business, small office and home
office users;
. high personal computer penetration;
. predominant Internet usage via dial up modems over shared data lines; and
. heavy reliance on postage, yet underserved by traditional services.
We have conducted extensive qualitative and quantitative research on small
business, small office and home office users, and have tailored our Internet
postage service to meet their needs.
Build and Promote Our Brand
We intend to aggressively build our customer base by increasing awareness
of the E-Stamp brand. We believe that associating our brand with businesses
with whom we have marketing and distribution relationships and high quality
services is important to the expansion of our customer base. As we grow in
size, we intend to invest in building brand awareness through a variety of
marketing and promotional techniques, both independently and in conjunction
with third parties. We intend to promote our brand through television, print
and radio advertising, and online banner advertising through marketing
relationships with high traffic Web sites. We also plan to generate brand
recognition through viral marketing, which involves the prominent display of
our logo and Web site address on our Internet postage.
Leverage Our Technology Platform and Expertise to Develop A Family of
Internet Postage Services
We intend to leverage our customer-centric focus, scalable electronic
commerce platform and our patent portfolio to develop a family of Internet
postage services for the high volume mailer and corporate enterprise and for
the low volume individual consumer. We intend to offer an intranet-based
service to the corporate market, through the integration of our technology
into enterprise applications and high speed mail processes, thus enabling
corporate users to print conveniently and efficiently large amounts of
Internet postage for bulk mailings and other corporate purposes. We also
intend to target the consumer market with a server-based service, that will
enable a user to purchase and store Internet postage directly on our secure
electronic commerce server and print from their local printer. We plan to
continue to develop other services that enable users to take advantage of
their existing
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investments in computing infrastructure and the Internet, and will continue to
invest in and focus our technology development efforts on increasing online
transaction efficiency, reliability and security.
Pursue Multiple and Recurring Revenue Streams
We intend to leverage our brand, electronic commerce capabilities and
infrastructure to develop incremental revenue opportunities from a broader
customer base, including the corporate enterprise and the individual consumer.
These opportunities include the following:
Sale of Postage Related Consumables and Peripherals. Through our Web site,
we intend to offer mailing-related consumables, such as labels and envelopes,
and peripherals, such as mechanical scales, personal computer-enabled digital
scales and label printers. We have created a patented window envelope, and have
entered into marketing and distribution relationships with third party vendors
of integrated scales and other postage supplies.
Authenticated Document Market. We intend to capitalize on our expertise in
secure payment processing and the printing of authenticated documents to offer
other products and services that can be purchased online and printed from the
desktop, such as tickets and gift certificates.
Pursue International Internet Postage Opportunities
We believe that there are significant opportunities in international markets
for our Internet postage service. In particular, we believe our Internet
postage service is suited for many international markets because users pay for
connecting to the Internet based on usage time and thus are seeking services
that can reduce expensive connection time. Unless and until foreign postage
authorities create a certification process and recognize information-based
indicia postage, our Internet postage service will not be able to address
international markets.
Our Internet Postage Service
Our Internet postage service enables users to purchase postage over the
Internet, download the postage quickly and efficiently into a secure, silver-
dollar size postage device, and to print the postage at any time from the
desktop directly onto envelopes, labels or documents using standard laser or
inkjet printers. We target today's small business, small office and home office
users, most of whom usually connect to the Internet on modems at speeds of 28.8
or 33.6 kilobytes per second. Our service enables users to store postage on
their desktop, thereby allowing them to print postage at their convenience
rather than requiring a reconnection to the Internet each and every time they
want to print postage.
We received U.S. Postal Service approval to begin to sell our Internet
postage service nationally in August 1999. The software and hardware components
needed to use our Internet postage service are currently available through our
Web site and through a toll-free telephone number.
Installation
The installation process can be completed in a
matter of minutes through the use of a CD-ROM.
The E-Stamp Internet postage package includes all
the components needed to use our Internet postage
service and to connect to www.e-stamp.com for the
purchase of more postage, receipt of software
updates, or to access postal information. In
addition to our software, our Internet postage
package also includes our silver-dollar size,
secure postage device that connects onto the back
of a personal computer as shown on the right. The
secure postage device stores the postage and
connects between the parallel port and any other
printer device attached there.
[Illustration of installation of postage device between printer cable and
parallel port of personal computer]
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Printing Postage
The following three steps are involved in using our Internet postage
service.
Step 1: Buy It. The user can purchase Internet postage without ever leaving
the home or office, 24 hours a day, seven days a week. The user connects to our
electronic commerce server using a standard Internet connection and then
chooses the amount of Internet postage, up to the $500 maximum storage value
allowed by the U.S. Postal Service, depending on their particular needs and
usage patterns. The Internet postage is then downloaded and stored onto the
Internet postage device.
Step 2: Print It. After choosing the medium on which to print the Internet
postage, whether directly onto a letter or using an envelope or label, the user
selects the destination address. The addresses are either read directly from
the user's current address database or can be entered with our software. In
either case, the addresses are verified with the Address Matching System from
the U.S. Postal Service contained on CD-ROM at the user's desktop, and the
amount of postage related to the item being sent is calculated. The user then
selects the printer device and prints the Internet postage.
Step 3: Mail It. The user then drops the professionally posted letters and
packages in the mail or schedules a priority mail pickup from the U.S. Postal
Service.
Additional Features
In addition to providing the means to purchase, download and print Internet
postage, we have created other features that enhance the usability of our
Internet postage service.
Business Application Integration. We have tightly integrated our Internet
postage software with the following leading software applications:
. Microsoft Word -- Upon installation, our Internet postage software
integrates tightly with Microsoft Word, with our E-Stamp icon appearing
in the Microsoft Word tool bar, so users can print postage without
leaving the application; and
. Microsoft Outlook -- Our software allows users to access addresses in
Outlook without leaving the E-Stamp application.
Address Software Functionality. Our Internet postage service enables users
to print Internet postage using their existing mailing databases, and is
compatible with eight types of contact managers and word processing, accounting
and e-mail software applications. Further, addresses are stored on the user's
personal computer with our Internet postage service, negating any need to
upload confidential information to a shared server.
Variety of Printing and Mailing Options. Users can choose from 16 different
types of envelopes, labels, air bills and postcards, as well as simply printing
postage directly onto letters and using our patented windowed envelopes.
Customers can use our Internet postage for a number of U.S. Postal Service
mailing options, including first class, priority mail and express mail for
guaranteed overnight delivery.
Tracking and Reporting. Our Internet postage software includes a function
that allows users to track postage usage, including recipient address, time and
amount.
Integrated Scale. We have teamed with Sunbeam's Pelouze division to offer an
integrated scale that automatically weighs the letter or package being sent to
correctly calculate the postage required, thus reducing over-posting.
Internet Postage Supplies. We also provide postage supplies, such as labels
and envelopes, which we have designed to be compatible with our Internet
postage service. The sale of these postage supplies requires U.S. Postal
Service approval and we have obtained the necessary approvals for our labels
and envelopes.
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Marketing and Distribution Relationships
We believe that market penetration, brand awareness and adoption of our
Internet postage service in the early stages is critical to our success. Thus,
we continually focus on enhancing the breadth and depth of market penetration
and offering our customers the most convenient access to our Internet postage
service. To achieve these goals, we have established a strategy of entering
into marketing and distribution arrangements with the industry leaders in
business segments related to the Internet, computer hardware and software,
postage and business supplies. These relationships allow us to leverage those
third parties' installed customer bases, distribution channels and marketing
expertise to facilitate the adoption, usage and accessibility of our Internet
postage service.
Microsoft. In July 1999, we entered into an agreement with Microsoft for
promotion of our service on the Microsoft Office Update Web site. Our agreement
with Microsoft contains exclusive elements, although Microsoft is not
prohibited from entering into an agreement with other Internet postage
providers. Exclusive elements of our agreement with Microsoft during the term
of the agreement include permanent placement on the home page of the web site,
co-marketing and/or co-funding of marketing activities, Internet postage launch
support and inclusion in editorial content on the web site. The initial term of
our agreement with Microsoft is one year, although the agreement is terminable
on 60 days prior notice. We have also integrated our Internet postage software
with Microsoft Word and Microsoft Outlook. Microsoft is also one of our equity
investors.
Yahoo!. In May 1999, we entered into an advertising and promotion agreement
with Yahoo!. Yahoo! is the leading Internet guide in terms of traffic,
household and business user reach, and is one of the most recognized brands
associated with the Internet. Under this agreement, Yahoo! users will have
direct access to the E-Stamp services from within the Yahoo! Postal Center.
Yahoo! has agreed to display E-Stamp banners when any of 20 key words are
entered into the Yahoo! search engine including the key words "postage" and
"stamps." During the term of the agreement, Yahoo! has agreed to not display
banners, sponsorships or other forms of advertising of Internet postage
competitors on the Yahoo! Postal Center or within Yahoo Small Business property
and to not display or co-brand content from competitors in the Yahoo! Postal
Center. The initial term of the Yahoo! agreement expires December 31, 2000.
Excite@Home. In August 1999, we entered into a binding letter of intent with
Excite@Home to provide direct access to our service across Excite@Home's @Work
division. This nonexclusive relationship is designed to provide early broadband
adopters with access to our service through the @Work site. As part of this
relationship, our service offering will be integrated into @Work's portfolio of
products and services. During the term of the agreement, other Internet postage
companies are not to be included in sponsorship areas or in the @Work small
business post office area. This service is currently expected to be available
later in 1999. Excite@Home also is one of our equity investors.
America Online. In November 1998, we agreed to become a tenant in America
Online's new Postage Services Center, which features direct links to our Web
site where America Online members can purchase our Internet postage service. As
part of the nonexclusive agreement, America Online has agreed to promote our
service until May 2000 with banner advertisements across several of America
Online's branded properties, including CompuServe, AOL.com and Digital City.
Intuit. In September 1999, we entered into an agreement with Intuit Inc., a
leading provider of financial software. Under this agreement, users of Intuit's
QuickBooks software will have access to our service directly from within the
QuickBooks software program. In addition, Intuit has agreed to market and
promote our service through Intuit's existing small business channels,
including the QuickBooks.com newsletter and the QuickBooks.com website. During
the term of this agreement so long as we meet its performance criteria, Intuit
has agreed not to market, promote or distribute Internet postage products of
our competitors in connection with the marketing, promoting and selling of the
QuickBooks software products. The initial term of the Intuit agreement expires
December 31, 2001.
Compaq. In June 1998, we entered into a nonexclusive agreement with Compaq
to help accelerate the adoption of Internet postage. Under this agreement,
Compaq will market our Internet postage service as part of
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the online services available to owners of their Prosignia line of personal
computers, targeted at the small business market and sold through their broad
sales channels, and will offer our Internet postage service through Compaq's
Web site in exchange for which we have agreed to pay Compaq royalties. The
Compaq agreement has an initial term that expires in June 2001. Compaq also is
one of our equity investors.
Francotyp-Postalia. In August 1999, we entered into a non-exclusive
marketing and distribution agreement with Francotyp-Postalia, Inc., the U.S.
division of Francotyp-Postalia AG & Co., an international market leader in
modern office equipment and services for mail processing. Under this agreement,
Francotyp-Postalia has agreed to offer our Internet postage service through its
Web site. Additionally, we intend to leverage Francotyp-Postalia's established
distribution channels and existing customer base to distribute our service.
Francotyp-Postalia also is one of our equity investors.
Avery Dennison. In July 1999, we entered into a non-exclusive relationship
with Avery Dennison that includes sales, marketing and distribution agreements.
Under this agreement, our Internet postage service is to be the only online
postage service promoted in packages of Avery labels and other printable
supplies. Additionally, we have agreed to offer a free sample pack of Avery PC
Postage Labels to our new customers. We plan to sell these labels in our online
supplies store.
Sunbeam Corp.'s Pelouze Scale Co. Division. In February 1999, we entered
into a marketing and sales agreement with Signature Brands, Inc., a subsidiary
of Sunbeam Corporation, the leading manufacturer and distributor of postal
scales. We intend to leverage Sunbeam's already established distribution
channels and promote our service with a special Pelouze Internet Postage Scale
for sale in retail, mail order and contract stationery channels. Additionally,
the scale, which is designed to work exclusively with our Internet postage
service, is currently expected to be available to our customers through our
online store later in 1999. During the term of the agreement, Sunbeam has
agreed not to bundle a scale with a competitor's Internet postage product in
the U.S. and we have agreed not to bundle our service with another
manufacturer's integrated scale.
Tension Envelope Corporation. In March 1999, Tension Envelope agreed to
become our exclusive supplier for our patented window envelopes. These patented
window envelopes, which we plan to sell through our online supplies store,
feature a special "window" for Internet postage and will save our customers
time by eliminating several steps from the mail preparation process. This
envelope has been submitted for required approvals to the U.S. Postal Service.
EarthLink. In June 1999, we entered into a non-exclusive agreement with
EarthLink, a leading Internet service provider. Under this agreement, we and
EarthLink have agreed to develop a co-branded postal center accessible to
EarthLink's more than 1.3 million users from their personal start pages and
elsewhere in the EarthLink network. Additionally, EarthLink has agreed to make
our Internet postage service available for purchase through EarthLink's mall
and to place banner advertisements for our Internet postage service in their
service. In addition, EarthLink has agreed to place an advertisement for our
service in each issue of its user magazine. The initial term of our agreement
with EarthLink expires in August 2000.
Dymo-CoStar. In July 1999, we entered into a marketing and distribution
agreement with Dymo-CoStar, a leading manufacturer of specialty label printers,
related software and supplies. Our agreement with Dymo-CoStar provides for
bundling of a promotional demonstration of our software with many Dymo-CoStar
printers. Additionally, Dymo-CoStar has agreed to jointly promote our service
in retail channels, promote us to its existing customer base, and to integrate
support for our service directly into its printer software. Although Dymo-
CoStar is not prohibited from entering into an agreement with other Internet
postage providers, under the agreement, Dymo-CoStar has agreed not to bundle
promotional materials of our competitors with Dymo-CoStar printers. Bundling
and promotion of our service under this agreement is expected to begin later
this year. Dymo-CoStar's specialty label printer has been approved for sale by
the U.S. Postal Service and the related labels have been submitted for required
approvals to the U.S. Postal Service.
Under our agreements with Yahoo!, Microsoft, EarthLink Excite@Home and
Intuit, we are required to make aggregate payments to those parties totalling
approximately $5.5 million during the second half of 1999,
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<PAGE>
$10.5 million during the year 2000, and $2.4 million during the year 2001. Our
agreement with Yahoo! requires that we make payments to Yahoo! totalling
approximately $1.4 million during the second half of 1999 and $2.0 million
during the year 2000. Our agreement with Microsoft requires that we make
payments to Microsoft totalling approximately $1.5 million during the second
half of 1999 and $1.5 million during the year 2000. Our agreement with
EarthLink requires that we make payments to EarthLink totalling approximately
$200,000 during the second half of 1999, and $200,000 during the year 2000. Our
agreement with Excite@Home requires that we make payments to Excite@Home
totalling approximately $1.3 million during the second half of 1999, $2.4
million during the year 2000 and $2.4 million during the year 2001. Our
agreement with Intuit requires that we make payments to Intuit totalling
approximately $1.0 million during the second half of 1999 and $4.5 million
during the year 2000. We have also agreed to pay approximately $1.3 million to
America Online, $700,000 of which we paid as of June 30, 1999 and $600,000 of
which we are required to pay to America Online during the second half of 1999.
We have also agreed to pay Compaq royalties. We could be required to make
additional payments under these agreements if advertising exceeds established
levels of page views or generates and exceeds established levels of new
customers.
In addition to the sales and marketing agreements described above, in
September 1999, we signed a nonbinding letter of intent with Deutsche Post AG,
Europe's largest letter services and logistics company, and a nonbinding letter
of intent with an affiliate of Deutsche Telekom AG, Europe's largest
telecommunications company. In each of these letters of intent, we agreed to
negotiate proposed business relationships involving joint marketing,
distribution and technology development. Any party can terminate negotiations
under these letters of intent at any time, and there is no assurance that any
binding agreement or business relationship with Deutsche Post AG or Deutsche
Telekom AG or any affiliate will ever develop.
Acquisition of Customers
The initial focus of our Internet postage service is on the large and
growing small business, small office and home office market. We have
established relationships with leading Internet, computer and business supply
companies to distribute our Internet postage service through channels most
frequented by small business, small office and home office users. In addition,
we are leveraging those third parties' established customer bases, marketing
efforts and distribution channels to build brand recognition, accelerate
adoption and increase product accessibility. Our plan is to also promote and
extend our brand by conducting ongoing public relations campaigns and
developing affiliation and affinity programs.
Product Distribution. We intend to make our Internet postage product
available through all standard distribution channels in order to increase
product availability and accelerate the adoption of Internet postage.
Specifically, we will target the following:
. Retail -- We have identified top retail accounts to target for our
Internet postage product since small business, small office and home
office users typically purchase a substantial portion of their office
supply needs from these sources. These targets, such as Best Buy,
CompUSA, CDW and Staples, have been targeted based on the demographics
of their customer base, their experience selling computer products to
small business customers, and their experience selling office supplies
and mailing-related products. We plan to access traditional retailers
through Ingram Micro, one of the nation's largest computer and computer-
related product distributors. We plan to access online retailers through
our relationship with Digital River, an online distributor, and our
relationship with LinkShare, a provider of affiliate marketing services.
. Direct Marketing and Mail Order -- We will also offer our products
directly from our online store at www.e-stamp.com and through our toll-
free telephone number, as well as through major Internet and mail order
software resellers, both online and catalog-based.
Promotional Bundling Arrangements. We have entered into distribution
agreements with industry leading PC hardware, printer, scale and consumables
companies to bundle promotions for our Internet postage service in selected
products, which enables us to leverage these third parties' installed customer
base, distribution channels and marketing experience.
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Affiliate and Affinity Programs. We intend to establish an extensive
affiliate program with sites who target small offices and home offices and we
will offer other revenue-sharing opportunities for affiliates who promote or
provide links to our products from their Web site. The first of our affiliate
program relationships is with LinkShare which has a network of Web sites that
access the online merchants marketed by LinkShare. In addition, we plan to
extend promotional offers to trade associations with substantial small
business, small office and home office membership.
Online and Offline Advertising. We currently have marketing relationships in
place with some of the top Internet sites, and we intend to enter into
marketing relationships with additional high traffic sites in the future. We
will also target specific customer segments through the use of varied online
banner advertisements. Further, we intend to utilize various offline forms of
advertising, such as television, print, radio and other targeted publications
that focus on specific attractive markets for our service.
Viral Marketing Programs. The U.S. Postal Service has granted us permission
to include our Web site address and our logo on each Internet postage that is
printed. We have developed our Internet postage digital stamp to prominently
display our logo and Web site address to further develop our brand recognition
and accelerate the acquisition of new customers through referrals.
U.S. Postal Service Information Based Indicia Program Certification Process
The U.S. Postal Service recently approved our Internet postage service under
its Information Based Indicia Program. The Information Based Indicia Program is
a U.S. Postal Service initiative committed to creating new, convenient,
electronic access to postage for mailing customers. Through the Information
Based Indicia Program, the U.S. Postal Service delivers a higher level of
convenience and security to customers with established performance and
evaluation criteria for personal computer postage products.
For vendors of Internet postage, approval under the Information Based
Indicia Program includes a standardized, ten-stage certification process prior
to commercial release. Information Based Indicia Program participants must
receive U.S. Postal Service authorization at each stage of the certification
process to proceed to the next stage. The second to last stage is a three phase
beta test, which includes customers sending mail through the mail system. The
final stage before commercial release is vendor product approval, which
represents formal approval to begin selling Internet postage nationally. The
significant steps in the certification process and the time commitment required
of a potential Information Based Indicia Program vendor creates a significant
barrier to entry for competitors in the U.S. Internet postage market.
The Information Based Indicia Program certification process includes the
following stages:
<TABLE>
<S> <C>
6. U.S. Postal Service address matching
1. Letter of intent system
2. Non-disclosure agreement 7. Product submission/testing
3. Operational concept 8. Product infrastructure tests
4. Software documentation 9. Beta test approval (three phases)
5. Provider infrastructure plan 10. Vendor product approval (national
distribution)
</TABLE>
Upon receipt of U.S. Postal Service certification, Information Based Indicia
Program vendors begin national distribution in accordance with approved
quantities and distribution channels. Each approved vendor's commercial roll-
out is initially limited to 10,000 customers, with expanding numbers of
customers based upon successful evaluations by the U.S. Postal Service. We
recently received authorization from the U.S. Postal Service to expand our
commercial roll-out to 100,000 customers.
Competition
We received U.S. Postal Service approval to commercially release our
Internet postage service on August 9, 1999 and began providing our service on
that date. We believe that our Internet postage service is well positioned to
compete in the small business, small office and home office market, which
consists of small businesses, small offices and home offices, because of our
tight integration with software applications and our advantages in bandwidth-
constrained environments. We will also compete with providers of traditional
postage
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products such as stamps sold by the U.S. Postal Service, and services such as
Federal Express and United Parcel Service. In addition to providers of
traditional postage products and services, we compete with three other
Information Based Indicia Program vendors, Neopost, Pitney Bowes and
Stamps.com, who have all initiated the certification process with the U.S.
Postal Service. Only one of these, Stamps.com, was approved for commercial
release by the U.S. Postal Service on August 9, 1999. However, Stamps.com
failed to make its service commercially available at that time. While the
market for Internet postage is new, we expect that competition will further
increase once Internet postage products become widely available and generally
accepted.
While we believe our Internet postage service provides significant benefits
over traditional postage methods, especially for the small business, small
office and home office market, we expect to continue to also compete with
traditional postage methods such as stamps and metered mail. Postage meters are
typically paid for on a monthly lease, require significant investments in
additional supplies such as ink cartridges, charge a premium for postage and
are subject to tampering and theft. There can be no assurance that customers
will change their current postage purchasing habits and switch to Internet
postage products. The failure of a commercially viable number of users to
switch to Internet postage would significantly harm our business, financial
condition and results of operations.
We may not be able to maintain a competitive position against current or
future competitors as they enter the Internet postage market 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
our market could seriously harm our business, financial condition and results
of operations. We believe that the principal competitive factors in the
Internet postage market include:
. U.S. Postal Service product certification;
. brand recognition;
. integration with other software applications;
. convenience;
. service availability and reliability;
. price;
. security; and
. marketing and distribution relationships.
Technology
We have leveraged our technologies, including our desktop software, postage
application programming interface, Internet postage device, patented window
envelope, and systems infrastructure, in order to create a comprehensive
service that meets our customers' needs and fulfills the U.S. Postal Service's
certification requirements.
Desktop Software. Our desktop software enables users to print Internet
postage offline without maintaining a persistent Internet connection. The
software is designed to interface with our proprietary postage device to print
the recipient's address and Internet postage in one step onto envelopes,
labels, and documents. The recipient's address can be selected using the built-
in support for many popular applications, including Microsoft Word and Outlook,
without the user having to upload data over the Internet or separately type the
address. This is a significant advantage over other Internet postage products
which require the user to type in or import addresses from other software
packages and force them to keep multiple copies of the same address
synchronized across multiple address books. In addition, the software has a
built-in electronic software update feature which automatically updates postage
rates and the software itself ensuring that each customer always has the most
current version of our software. The software includes a postage application
programming interface which enables other software vendors to integrate their
software with our software.
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Postage Application Programming Interface. We built our software from the
ground up so that it can be integrated as a component of other software
applications. This means virtually any software application can be "postage-
enabled" to print Internet postage onto envelopes, labels, or documents.
Through this technology, our software can be tightly integrated with popular
business applications.
Internet Postage Device. We have developed a proprietary silver-dollar size
Internet postage device that securely stores the postage value our customers
buy. The postage device connects to a personal computer's parallel port between
the personal computer and the printer. The postage device enables our users to
print postage without the need to remain connected to the Internet because
account balances are stored on the device, not on a remote server. The postage
device is also secure and tamper-resistant, disabling itself if anyone attempts
to open or tamper with it. Our Internet postage device has been tested by the
National Institute of Standards and Technology and certified as Federal
Information Processing Standard 140-1 compliant at security levels 3 and
partially 4. Overall security was reviewed by a Cryptographic Equipment
Assessment Laboratory and Internet Security was reviewed by ISS Group, a
leading Internet security company.
Patented Window Envelope. We have developed and patented a special window
envelope that has an additional window in the upper right corner for postage.
This enables postage to be printed directly on documents, folded in thirds and
inserted into one of our envelopes. They are a significant time-saver because
they eliminate the need to separately prepare an envelope or label. Tension
Envelope will be manufacturing this envelope for us and we plan to offer it to
our customers on our Web site.
Systems Infrastructure. Our systems have been designed to be scalable as our
business grows and to allow for rapid deployment of our Internet postage
service. As the quantity of purchases or number of users accessing our systems
increases, we have developed our systems to incrementally grow through the
necessary additions. Our systems are based on the Microsoft Windows NT,
Transaction Server and SQL Server environment. For our Web site, we utilize
Javascript and Active Server Pages.
Future Product Development
We are currently developing a server-based service that is targeted at
broadband-enabled users. As estimated by Forrester Research, broadband access
was only utilized by 2% of online users in 1998, but will increase to 26% in
2002. Once broadband connections become more prevalent and customers have
dedicated Internet access, our server-based service will be positioned to meet
the needs of this base of users. The server-based service will enable a user to
purchase and store Internet postage directly on our secure electronic commerce
server and print from their local printer.
Plan of Operation
Our plan of operation for the remainder of 1999 and the first six months of
2000 calls for significantly increasing our operating expenses and capital
expenditures when compared with our historical levels. We believe this
increased spending will be necessary to fully support the commercial release
and support of our Internet postage service, our development of our server-
based service and our investments in expanding our systems infrastructure and
staffing. We believe that the net proceeds from this offering, together with
our current cash balances and cash flows from operations, if any, will be
sufficient to meet our growth strategies and related working capital and
capital expenditure requirements under our current operating plan for at least
the next 12 months. We do not expect to have to raise additional funds to meet
expenditures required for operating our business under our current operating
plan during the next 12 months. Our forecast of the period of time through
which our financial resources will be adequate to support our operations under
our current plan of operation is a forward looking statement that is subject to
risks and uncertainties, and we may be required to raise additional capital
prior to that time and afterwards.
During the remainder of 1999, we anticipate significantly increasing our
operating expenses and capital expenditures as compared to the first two
quarters of 1999. We expect the majority of our increased spending to relate to
increased sales and marketing expenses as we continue to expand our marketing
campaign for our Internet postage service. We also expect to spend a higher
amount on research and development expenses
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primarily related to the development of our server-based service and additional
features for our Internet postage service. Our general and administrative
expenses are also expected to increase. A portion of our forecasted increase in
spending for sales and marketing, research and development and general and
administrative expenses is attributable to our plans to increase our total
employee headcount by 50% during the remainder of 1999.
We expect our operating expenses and capital expenditures to continue to
increase during the first two quarters of 2000, with the majority of this
increase relating to continued growth in our sales and marketing expenses. In
addition, we expect our total employee headcount to increase approximately 33%
during the first half of 2000 as compared to our expected employee headcount at
the end of 1999 which would also contribute to this increased spending.
In addition to the net proceeds of this offering and our current cash
resources, we expect that our cash resources for the remainder of 1999 and the
first six months of 2000 will also include any revenue generated from the sale
of our Internet postage service, although to date the amount of such revenue
has been nominal and our plan of operation for that period does not contemplate
such revenue constituting a material source of cash.
Company History
Prior to September 1996, we conducted operations as Post N Mail, L.L.C., a
Texas limited liability company formed in April 1994. From April 1994 until the
September 1996 merger with E-Stamp, Post N Mail engaged in discussions with the
U.S. Postal Service regarding non-traditional postal services and, as use of
the Internet became more prevalent, focused upon the development of our
Internet postage service. In September 1996, Post N Mail was merged into E-
Stamp, a Delaware corporation. Following the merger, we continued to develop
our Internet postage service which entered the U.S. Postal Service's three-
phase beta test certification process in March 1998 and received final U.S.
Postal Service approval on August 9, 1999.
Employees
As of June 30, 1999, we employed 75 full-time people, including 29 in
engineering, 13 in operations, eight in customer service and support, 13 in
sales, marketing and business development, and 12 in general and administrative
functions. Based on our growth plans, we anticipate hiring a significant number
of employees over the next 12 months. From time to time, we employ independent
contractors to support our research and development, marketing, sales and
support and administrative organizations. Our employees are not represented by
any collective bargaining unit, and we have never experienced a work stoppage.
We believe our relations with our employees are good.
Intellectual Property
We regard our technology as proprietary and attempt to protect it by relying
on patent, trademark, service mark, copyright and trade secret laws and
restrictions on disclosure and transferring title and other methods. We have
been issued over 20 U.S. patents and have 12 patent applications pending. Our
issued patents expire between 2010 and 2016. We consider patents to be a
significant part of our intellectual property, and will remain so for the
foreseeable future. We also generally enter into confidentiality or license
agreements with our employees and consultants, and generally control access to
and distribution of our documentation and other proprietary information.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use our proprietary information without authorization or
to develop similar technology independently. We are in the process of pursuing
the registration in the U.S. for a number of our trademarks and service marks,
including "E-Stamp," and we cannot assure you that any of these trademark
registrations will be issued or that if they are issued that we will be able to
successfully enforce them. Effective trademark, service mark, copyright and
trade secret protection may not be available in every country in which our
services are distributed or made available over the Internet, and policing
unauthorized use of our proprietary information is difficult. 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.
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In particular, Pitney Bowes has sent formal comments to the U.S. Postal
Service asserting that intellectual property of Pitney Bowes would be infringed
by products meeting the requirements of the Information Based Indicia Program's
specifications. Furthermore, in June 1999, Pitney Bowes filed a lawsuit in the
U.S. District Court against us 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 claims asserted by Pitney Bowes against us,
could prevent or hinder our ability to sell Internet postage" and "--Legal
Proceedings."
Facilities
Our headquarters are currently located in a leased facility in San Mateo,
California, consisting of approximately 25,000 square feet of office space. The
office space is under a 15-month lease which will expire in June 2000. We will
need to obtain additional office space prior to the end of 1999 and are
currently in discussions with respect to additional space.
Legal Proceedings
On June 10, 1999, Pitney Bowes filed suit against us in the U.S. District
Court for the District of Delaware alleging infringement of Pitney Bowes
patents. The suit alleges that we are infringing seven patents held by Pitney
Bowes related to postage application systems and seeks treble damages, a
preliminary and permanent injunction from further alleged infringement,
attorneys' fees and other unspecified damages. One week later, Pitney Bowes
filed a similar complaint against one of our competitors, Stamps.com, alleging
infringement of two of the seven Pitney Bowes patents alleged in the E-Stamp
complaint. On July 30, 1999, we filed our answer to Pitney Bowes' complaint in
which we deny all allegations of patent infringement and assert affirmative and
other defenses based on statutory and common law grounds, including inequitable
conduct on the part of Pitney Bowes in its procurement of patents in
proceedings before the U.S. Patent and Trademark Office. As part of the answer,
we also brought various counterclaims against Pitney Bowes claiming Pitney
Bowes' violation of Section 2 of the Sherman Act and intentional and tortious
interference with E-Stamp's business relations based, in part, upon our
allegations that Pitney Bowes has unlawfully maintained its monopoly power in
the postage metering market through a scheme to defraud the U.S. Patent and
Trademark Office and its efforts to discourage potential investors and
businesses from investing and entering into agreements with E-Stamp. Our suit
seeks compensatory and treble damages, injunctive relief and recovery of
attorney's fees. On September 21, 1999, Pitney Bowes filed a motion to strike
or dismiss certain of E-Stamp's affirmative defenses and counterclaims or, in
the alternative, to bifurcate discovery and trial of those counterclaims; E-
Stamp's response to the motion is due in October 1999. We are continuing to
investigate the claims against us as well as infringement by Pitney Bowes of
our patents, and may assert additional defenses or pursue additional
counterclaims or independent claims against Pitney Bowes in the future.
Pendency of the litigation can be expected to result in significant expenses
to us and the diversion of management time and other resources. If Pitney Bowes
is successful in its claims against us, then we may be hindered or even
prevented from competing in the Internet postage market and our operations
would be severely harmed. For example, the Pitney Bowes suit could result in
limitations on how we implement our services, delays and costs associated with
redesigning our services and payments of license fees and other payments. An
injunction obtained by Pitney Bowes could eliminate our ability to market
critical products or services.
On May 10, 1999, in U.S. District Court, E-Stamp obtained a temporary
restraining order against Dave Lahoti ordering Mr. Lahoti to refrain from using
his Web site, which he had registered as "estamps.com." On June 14, 1999, the
U.S. District Court granted a preliminary injunction requiring Mr. Lahoti to
refrain from using his Web site in connection with Internet postage and to
place a disclaimer identifying that his Web site is not associated with E-Stamp
Corporation. We are seeking damages and a permanent injunction in connection
with this matter. Mr. Lahoti has denied the material allegations and has set
forth his affirmative defenses.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth our executive officers' and directors' ages
and positions as of October 1, 1999.
<TABLE>
<CAPTION>
Name Age Position
<C> <C> <S>
Robert H. Ewald........... 51 President, Chief Executive Officer and
Director
Anthony H. Lewis, Jr. ... 45 Vice President and Chief Financial Officer
Nicole Eagan.............. 34 Senior Vice President, Marketing and Sales
Martin Pagel.............. 37 Chief Technology Officer
Roderick Witmond.......... 35 Vice President, Strategic Development and
Operations
Thomas J. Reinemer........ 39 Vice President, International
Edward F. Malysz.......... 39 Vice President, General Counsel and
Secretary
Marcelo A. Gumucio........ 61 Chairman of the Board
John V. Balen(1)(2)....... 38 Director
Thomas L. Rosch(2)........ 37 Director
Gregory S. Stanger(2)..... 35 Director
Adam Wagner(1)............ 41 Director
Rebecca Saeger............ 44 Director
</TABLE>
- ---------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Robert H. Ewald has been our President and Chief Executive Officer since
February 1999 and has been a Director since January 1999. From July 1996 to
July 1998, Mr. Ewald held various executive positions at Silicon Graphics,
Inc., a manufacturer of computer workstations, servers and supercomputers, most
recently as Executive Vice President and Chief Operating Officer. From August
1984 to June 1996, Mr. Ewald held various management and executive positions
with Cray Research, Inc., a manufacturer of high performance computers,
including President and Chief Operating Officer. Before joining Cray Research,
Inc., Mr. Ewald led the Computing and Communications Division of the Los Alamos
National Laboratory and was responsible for providing computing and
communications services to government customers nationwide between 1980 and
1984. Mr. Ewald is currently a director of Ceridian, Inc., an information
technology services company, and a member of the President's Information
Technology Advisory Committee chartered by the White House. Mr. Ewald received
his B.S. in civil engineering from the University of Nevada and his M.S. in
civil engineering from the University of Colorado.
Anthony H. Lewis, Jr. has been our Vice President and Chief Financial
Officer since July 1999. From October 1995 to July 1999, Mr. Lewis held various
management positions at Quantum Corporation, a manufacturer of computer storage
devices, most recently as Vice President of Finance, Treasurer. From 1986 to
October 1995, Mr. Lewis held various management positions at Tandem Computers,
Inc., a manufacturer of computers, including Vice President, Corporate
Financial Controller. Mr. Lewis received his A.B. in economics from Harvard
College and his M.B.A. from Harvard Business School.
Nicole Eagan has been our Senior Vice President, Marketing and Sales since
July 1999 and previously served as our Vice President, Marketing and Business
Development from May 1996. From 1993 to May 1996, Ms. Eagan held various
positions with Oracle Corporation, a manufacturer of systems software and
business applications software, including Director, Strategic Marketing,
Director, Channel Marketing for Global Business Alliances Group and Director,
Server Product Marketing for Oracle 7. Ms. Eagan received her B.S. in marketing
from Montclair University in New Jersey.
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Martin Pagel has been our Chief Technology Officer since October 1998 and
previously served as our Vice President, Engineering and Chief Architect from
July 1996. From January 1988 to June 1996, Mr. Pagel held various management
and engineering positions at Microsoft Corporation, a manufacturer of software
products, including Technical Manager, Operations for its Internet and
electronic commerce strategies and Program Manager for the design of
distributed computing enhancements, also known as the Cairo Project. Mr. Pagel
was also involved in the formation of Microsoft Consulting Services in Europe.
Mr. Pagel received his degrees in business and computer science from the
Technical University in Braunschweig, Germany.
Roderick Witmond has been our Vice President, Strategic Development and
Operations (Acting), since August 1999. From July 1995 to August 1999, Mr.
Witmond was a Principal Consultant with the Government Consulting Practice of
PricewaterhouseCoopers, an accounting and consulting firm, focusing primarily
on assignments with the U.S. Postal Service and, most recently, E-Stamp. Mr.
Witmond obtained his B.S. from London University in London, England in 1986 and
his M.B.A. from the Darden Graduate School of Business Administration,
University of Virginia in 1995.
Thomas J. Reinemer has been our Vice President, International since March
1999 and previously served as our Vice President, Operations from August 1996.
From May 1995 to July 1996, Mr. Reinemer was Senior Director of Strategic
Marketing and Development at Oracle Corporation, a manufacturer of systems
software and business applications software, where he was responsible for
developing and implementing Oracle's partner strategies. From January 1994 to
May 1995, Mr. Reinemer was International Business Development Manager at
Microsoft, a manufacturer of software products, where he played a leading role
in the launch and expansion of Microsoft's International BackOffice business.
Mr. Reinemer also held various management positions at Novell Germany, a
provider of network software between 1989 and 1995. Mr. Reinemer received his
degrees in electronic processing and in industrial electronic processing
equipment from the Freidrich Ebert Technical College in Weisbaden, Germany.
Edward F. Malysz has been our Vice President, General Counsel and Secretary
since June 1999. From July 1993 to June 1999, Mr. Malysz held various legal
positions with Silicon Graphics, Inc., a manufacturer of computer workstations,
servers and supercomputers, most recently serving as Senior Corporate Counsel.
From August 1988 to July 1993, Mr. Malysz was a transactional lawyer with the
law firm of Berliner Cohen. From August 1982 to December 1984, Mr. Malysz was a
certified public accountant with Arthur Young & Company, an accounting firm.
Mr. Malysz received his B.A. in economics from the University of California,
Santa Barbara and J.D. from Santa Clara University.
Marcelo A. Gumucio has served as Chairman of the Board since November 1998.
Mr. Gumucio is Managing Partner of Gumucio, Burke and Associates, a private
investment firm which he co-founded in 1992. From April 1996 to July 1997, Mr.
Gumucio was Chief Executive Officer of Micro Focus PLC, an enterprise software
provider. He also served as a member of the Micro Focus' board of directors
from January 1996. Before joining Micro Focus, Mr. Gumucio was President and
Chief Executive Officer of Memorex Telex NV between 1992 and 1996. Mr. Gumucio
currently serves on the board of directors of BidCom, Inc., Digital Island and
Burr Brown Corporation. Mr. Gumucio received his B.S. in mathematics from the
University of San Francisco and M.S. in applied mathematics and operations
research from the University of Idaho. Mr. Gumucio is also a graduate of the
Harvard Business School Advanced Management Program.
John V. Balen has served on the Board of Directors since July 1998. Mr.
Balen has been a principal of Canaan Partners, a national venture capital
investment firm, since September 1995. From June 1985 to June 1995, Mr. Balen
served as Managing Director of Horsley Bridge Partners, a private equity
investment management firm. Mr. Balen currently serves on the board of
directors of Intraware and Commerce One. Mr. Balen received his B.S. in
electrical engineering and M.B.A. from Cornell University.
Thomas L. Rosch has served on the Board of Directors since September 1997.
Mr. Rosch joined AT&T Ventures in December 1996 where he is currently a
partner. AT&T Ventures is an independent venture capital fund that invests in
information technology companies. Previously, Mr. Rosch served as a senior
member of The Boston Consulting Group from November 1989 to November 1996. Mr.
Rosch currently serves
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on the board of directors of Veridicom, Inc. and PaymentNet, Inc. Mr. Rosch
received his A.B. in government and philosophy from Harvard University and
J.D./M.B.A. from Stanford University.
Gregory S. Stanger has served on the Board of Directors since September
1997. Mr. Stanger is a Senior Director, Corporate Development at Microsoft
Corporation and has held various positions in Corporate Development at
Microsoft since July 1993 and within the Microsoft Finance Organization since
joining Microsoft Corporation in September 1991. Previously, Mr. Stanger worked
in investment banking at PaineWebber from March 1987 to June 1989. Mr. Stanger
received his B.A. in economics from Williams College and M.B.A. from the
University of California, Berkeley.
Adam Wagner has served on the Board of Directors since November 1996. Mr.
Wagner is the founder and principal of Neo Ventures, LLC, a privately-held
investment firm, since its formation in September 1999. From June 1992 until
September 1999, Mr. Wagner served as Vice President, Investments at Wagner &
Brown, Ltd., a closely-held oil and gas investment company. Mr. Wagner
currently serves on the board of directors of PFS Thermoplastics, Inc.,
SeaSound, LLC, nStream LLC and iSong.com, inc. Mr. Wagner received his B.S. in
geology from the University of Oklahoma and M.B.A. from the University of
Southern California.
Rebecca Saeger has served on the Board of Directors since October 1999.
Since June 1997, Ms. Saeger has served as Executive Vice President of Brand
Marketing for VISA U.S.A., a provider of payment products and services. From
June 1991 to May 1997, Ms. Saeger served in various positions at Foote, Cone &
Belding San Francisco, an advertising agency, including Senior Vice President,
Group Management Supervisor and Director of Account Management. From June 1980
to April 1991, Ms. Saeger worked at Ogilvy and Mather New York, an advertising
agency, where she held a variety of positions, including most recently, Senior
Vice President, Group Director. Ms. Saeger received her B.A. from Muhlenberg
College and M.B.A. from the Wharton School of Business, University of
Pennsylvania.
Each of our current directors was selected pursuant to a stockholders'
agreement among us, the holders of our Series A and B preferred stock and
several holders of our common stock. The stockholders' agreement will terminate
upon the closing of this offering.
Classified Board
Our certificate of incorporation provides for a classified board of
directors consisting of three classes of directors, each serving staggered
three-year terms. As a result, a portion of our board of directors will be
elected each year. Robert H. Ewald and Thomas L. Rosch have been designated
Class I directors whose terms expire at the 2000 annual meeting of
stockholders. Marcelo A. Gumucio and Adam Wagner have been designated Class II
directors whose terms expire at the 2001 annual meeting of stockholders.
Gregory S. Stanger, John V. Balen and Rebecca Saeger have been designated as
Class III directors whose terms expire at the 2002 annual meeting of
stockholders. This classification of the board of directors may delay or
prevent a change in control of our company or in our management.
Executive officers are appointed by the board of directors on an annual
basis and serve until their successors have been duly elected and qualified.
There are no family relationships among any of our directors, officers or key
employees.
Board Committees
We established an audit committee and a compensation committee in July 1998.
Our audit committee currently consists of Messrs. Balen and Wagner. The
audit committee reviews our internal accounting procedures and consults with
and reviews the services provided by our independent accountants.
Our compensation committee currently consists of Messrs. Balen, Rosch and
Stanger. The compensation committee reviews and recommends to the board of
directors the compensation and benefits of our employees.
46
<PAGE>
Compensation Committee Interlocks and Insider Participation
Prior to establishing the compensation committee, the board of directors as
a whole performed the functions delegated to the compensation committee. No
member of the board of directors or the compensation committee 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
We do not currently compensate our directors in cash for their service as
members of the board of directors, although they are reimbursed for expenses in
connection with attendance at board of director and compensation committee
meetings. Under our stock option plan, directors are eligible to receive stock
option grants at the discretion of the board of directors or other
administrator of the plan. During 1998, the board granted options to purchase
an aggregate of 373,088 shares to Marcelo A. Gumucio at an exercise price per
share of $0.64.
Executive Compensation
Summary Compensation Table
The table below summarizes the compensation earned for services rendered to
us in all capacities for the fiscal year ended December 31, 1998 by our former
chief executive officer and our next four most highly compensated executive
officers who earned more than $100,000 during the fiscal year ended December
31, 1998. These executives are referred to as the Named Executive Officers
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------
Annual
Compensation
------------------ Securities
Name and Principal Underlying
Position Salary($) Bonus($) Options(#)
<S> <C> <C> <C>
Sunir Kapoor............ $153,042 $63,500 370,263
Former Chief Executive
Officer and
President(1)
Martin Pagel............ 128,750 25,000 18,994
Chief Technical Officer
Nicole Eagan............ 128,750 28,000 32,500
Senior Vice President,
Marketing and Sales
Thomas J. Reinemer...... 128,750 28,000 35,000
Vice President,
International(2)
Rick D. Prime........... 128,750 -- 12,500
Former Vice President,
Finance(3)
</TABLE>
- ---------------------
(1) Mr. Kapoor served as Chief Executive Officer and President of E-Stamp from
February 1996 until February 1999. Robert H. Ewald joined E-Stamp as our
Chief Executive Officer and President in February 1999. Mr. Ewald currently
is compensated with an annual salary of $250,000 and a guaranteed bonus of
$25,000.
(2) Mr. Reinemer served as Vice President, Operations from August 1996 until
March 1999.
(3) Mr. Prime served as Vice President, Finance from October 1997 until July
1999.
47
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth information with respect to stock options
granted to each of the Named Executive Officers in the fiscal year ended
December 31, 1998, including the potential realizable value over the ten-year
term of the options, based on assumed rates of stock appreciation of 5% and
10%, compounded annually, and based upon the fair market value at the date of
grant as determined by the board of directors which was equal to the exercise
price. These assumed rates of appreciation comply with the rules of the
Securities and Exchange Commission and do not represent our estimate of future
stock price. Actual gains, if any, on stock option exercises will be dependent
on the future performance of our common stock.
In the fiscal year ended December 31, 1998, we granted options to purchase
up to an aggregate of 1,359,600 shares to employees, directors and consultants.
All options were granted under our 1996 Stock Option and Restricted Stock Plan
at exercise prices at or above the fair market value of our common stock on the
date of grant, as determined in good faith by the board of directors. All
options have a term of ten years. Optionees may pay the exercise price by cash,
certified check, or delivery of already-owned shares of our common stock. All
options to the Named Executive Officers are immediately exercisable upon grant;
however, any unvested shares may be repurchased by us at their cost in the
event of the optionee's termination of employment. All option shares vest over
four years, with 25% of the option shares vesting one year after the option
grant date, and the remaining option shares vesting ratably each quarter
thereafter.
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------
Potential
Realizable Value
at Assumed Annual
Number of % of Total Rates of Stock
Securities Options Price
Underlying Granted to Appreciation for
Options Employees Exercise Option Term
Granted In Last Price Expiration -----------------
Name (#) Fiscal Year ($/share) Date 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Sunir Kapoor............ 74,013 5.4% $0.64 11/01/08 $ 29,789 $ 75,492
296,250 21.8 0.64 12/15/08 119,238 302,174
Martin Pagel............ 18,994 1.4 0.64 11/01/08 7,645 19,374
Nicole Eagan............ 32,500 2.4 0.64 11/01/08 13,081 33,150
Thomas J. Reinemer...... 35,000 2.6 0.64 11/01/08 14,087 35,700
Rick D. Prime........... 12,500 0.9 0.64 11/01/08 5,031 12,750
</TABLE>
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table describes for the Named Executive Officers their option
exercises for the fiscal year ended December 31, 1998, and exercisable and
unexercisable options held by them as of December 31, 1998.
The "Value of Unexercised In-the-Money Options at December 31, 1998" is
based on a value of $0.80 per share, the fair market value of our common stock
as of December 31, 1998, as determined by the board of directors, less the per
share exercise price, multiplied by the number of shares issued upon exercise
of the option. All options were granted under our 1996 Stock Option and
Restricted Stock Plan. The shares vest over four years, with 25% of the shares
vesting one year after the grant date and the remaining shares vesting ratably
each quarter thereafter.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-
Options At December 31, the-Money Options at
Value 1998 (#) December 31, 1998 ($)
Shares Acquired Realized ------------------------- -------------------------
Name on Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Sunir Kapoor(1)......... 749,000 $23,063 370,263 -- $ -- $ --
Martin Pagel............ 225,325 6,406 18,994 -- -- --
Nicole Eagan............ 332,693 6,406 32,500 -- -- --
Thomas J. Reinemer...... 306,920 6,406 35,000 -- -- --
Rick D. Prime........... 125,000 -- -- -- -- --
</TABLE>
- --------
(1) E-Stamp repurchased 409,878 unvested shares held by Mr. Kapoor in June
1999.
48
<PAGE>
1999 Stock Plan
The board of directors adopted our 1999 Stock Plan, referred to as the 1999
Plan, in August 1999, and our stockholders subsequently approved our 1999 Stock
Plan. This stock option plan provides for the grant to employees of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, and for the grant to employees, directors and consultants of
nonstatutory stock options and stock purchase rights.
As adjusted for our stock dividend prior to the completion of this offering,
a total of 2,500,000 shares of common stock were reserved for issuance, plus
annual increases, beginning in fiscal year 2000, equal to the lesser of:
. 1,250,000 shares;
. 3% of the outstanding shares on such date; or
. a lesser amount determined by the board.
As of October 1, 1999, options to purchase 266,753 shares of our common
stock were outstanding under the 1999 Plan, and a total of 460,765 shares that
have been issued pursuant to the 1999 Plan were outstanding.
The stock plan administrator, which is the board of directors or a committee
of the board, administers the 1999 Plan. In the case of options intended to
qualify as "performance based compensation" within the meaning of the Internal
Revenue Code of 1986, as amended, the committee will consist of two or more
"outside directors" within the meaning of the Internal Revenue Code of 1986, as
amended.
The administrator determines the exercise price of nonstatutory stock
options granted under the 1999 Plan, but with respect to nonstatutory stock
options intended to qualify as "performance based compensation" within the
meaning of the Internal Revenue Code of 1986, as amended, the exercise price
must be at least equal to the fair market value of the common stock on the date
of grant. The exercise price of incentive stock options granted under the 1999
Plan must be at least equal to the fair market value of the common stock on the
date of grant. For any participant who owns stock possessing more than 10% of
the voting power of all classes of our capital stock, the exercise price of any
incentive stock option must equal at least 110% of the fair value on the date
of grant and the term of such incentive stock option must not exceed five
years. The term of all other options granted under the stock option plan may
not exceed 10 years.
An optionee must exercise an option granted under the 1999 Plan generally
within three months after the end of the optionee's status as an employee,
director or consultant of E-Stamp, or within 12 months after the optionee's
termination by death or disability, but in no event later than the expiration
of the option's term. Unless determined otherwise by the administrator, an
optionee generally may not transfer options and stock purchase rights granted
under the 1999 Plan.
The administrator determines the exercise price of stock purchase rights
granted under the 1999 Plan. In the case of stock purchase rights, unless the
administrator determines otherwise, the restricted stock purchase agreement
entered into in connection with the exercise of the stock purchase rights
contains a repurchase option that we may exercise upon the voluntary or
involuntary termination of the purchaser's service with us for any reason,
including death or disability. The purchase price for shares we repurchase
under the restricted stock purchase agreements will be the original price paid
by the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to us. The repurchase option lapses at a rate that the administrator
determines.
The 1999 Plan provides that in the event of our merger with or into another
corporation or the sale of substantially all of our assets, the successor
corporation will assume or substitute each option or stock purchase right. If
the outstanding options or stock purchase rights are not assumed or
substituted, the administrator will provide notice to the optionee that he or
she has the right to exercise each outstanding option or stock purchase right
as to all of the shares subject to the option or stock purchase right,
including shares that would not otherwise be exercisable, for a period of 30
days from the date of the notice. The options and stock purchase rights will
terminate upon the expiration of the 30-day period.
49
<PAGE>
Unless terminated sooner, the 1999 Plan will terminate automatically in
2009. In addition, the administrator has the authority to amend, suspend or
terminate the 1999 Plan, provided that no such action may affect any share of
common stock previously issued and sold or any option previously granted.
1996 Stock Option and Restricted Stock Plan
Our 1996 Stock Option and Restricted Stock Plan, referred to as the 1996
Plan, was adopted by the board of directors and subsequently approved by our
stockholders. The 1996 Plan provides for the grant to employees of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, and for the grant to employees and consultants of
nonstatutory stock options and restricted stock rights.
The board of directors has determined that no future options or restricted
stock rights will be granted under our 1996 Plan after the effective date of
this offering. However, the board or a committee of our board of directors will
administer the options and stock purchase rights granted under the 1996 Plan
that are outstanding on the effective date of this offering. A total of
6,018,750 shares of common stock were authorized for issuance under the 1996
Plan. As of October 1, 1999, options to purchase an aggregate of 1,215,640
shares of our common stock were outstanding under this stock option plan, and a
total of 4,891,695 shares that have been issued pursuant to the exercise of
options granted under the 1996 Plan were outstanding.
The options outstanding at the time of this offering will remain subject to
the terms of the agreements evidencing such options and the terms of the 1996
Plan. The 1996 Plan provides that in the event of a merger of the Company with
or into another corporation, or the sale of substantially all of the Company's
assets, each outstanding option will terminate immediately prior to such
transaction, unless determined otherwise by the plan administrator.
1999 Employee Stock Purchase Plan
Our 1999 Employee Stock Purchase Plan was adopted by our board of directors
in August 1999, and was subsequently approved by our stockholders. A total of
500,000 shares of common stock has been reserved for issuance under the
purchase plan, plus annual increases equal to the lesser of:
. 350,000 shares;
. 1% of the outstanding shares on such date; or
. a lesser amount determined by the board.
The board of directors or a committee appointed by the board administers the
stock purchase plan. The board or its committee has full and exclusive
authority to interpret the terms of the stock purchase plan and determine
eligibility.
Employees are eligible to participate if they are employed by us or any
participating subsidiary for at least 20 hours per week and more than five
months in any calendar year. However, the following employees may not be
granted options to purchase stock under the purchase plan:
. any employee who immediately after grant owns stock possessing 5% or more
of the total combined voting power or value of all classes of our capital
stock; or
. any employee whose rights to purchase stock under all of our employee
stock purchase plans accrues at a rate which exceeds $25,000 worth of
stock for each calendar year.
The stock purchase plan, which is intended to qualify under Section 423 of
the United States tax code, contains consecutive, overlapping 24 month offering
periods. Each offering period includes four six-month purchase periods. The
offering periods generally start on the first trading day on or after May 15
and November 15 of each year, except for the first such offering period which
will commence on the first trading day on or after the effective date of this
offering and will end on the last trading day on or before November 14, 2001.
50
<PAGE>
Participants may purchase common stock through payroll deductions of up to
15% of the participant's eligible compensation. The maximum number of shares a
participant may purchase during a single offering period is 5,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the purchase plan is 85% of the lower of the fair market value
of the common stock at the beginning of the offering period and the end of each
offering period. In the event the fair market value at the end of a purchase
period is less than the fair market value at the beginning of the offering
period, participants will withdraw from the current offering period following
the exercise and will automatically re-enroll in a new offering period.
Participants may end their participation at any time during an offering period,
and they will be paid their payroll deductions to date. Participation ends
automatically upon termination of employment with E-Stamp.
The purchase plan provides that, if we merge with or into another
corporation or sell substantially all of our assets, each outstanding option
may be assumed or substituted for by the successor corporation. If the
successor corporation refuses to assume or substitute for the outstanding
options, the offering period then in progress will be shortened and a new
exercise date will be set, which will occur before the proposed sale or merger.
The purchase plan became effective on the effective date of this offering
and will terminate in 2009. The board of directors has the authority to amend
or terminate the purchase plan, except that no such action may adversely affect
any outstanding rights to purchase stock.
1999 Director Option Plan
Non-employee directors are entitled to participate in our 1999 Director
Option Plan. The board of directors adopted the director plan in August 1999,
and our stockholders subsequently approved the director plan, but it did not
become effective until the effective date of this offering. The director plan
has a term of ten years, unless terminated sooner by the board. A total of
300,000 shares of common stock have been reserved for issuance under the
director plan.
The director plan provides for the automatic grant of 40,000 shares of
common stock to each non-employee director who first becomes a non-employee
director after adoption of this plan, and who does not beneficially hold more
than one percent (1%) of the total voting power of our voting securities on the
date of grant. The shares purchasable under this option shall vest over four
years at the rate of 1/48th per month. In addition, after this offering, each
non-employee director who has served on the board for at least the six previous
months, and who does not beneficially hold more than one percent (1%) of the
total voting power of our voting securities on the date of grant, will be
granted an option to purchase 2,500 shares of common stock on the date of each
annual meeting of our stockholders. The shares purchasable under this option
shall vest over one year at the rate of 1/12th per month. Each option granted
to a non-employee director under this director plan will have a term of ten
years. The exercise price of all options shall be 100% of the fair market value
per share of the common stock, generally determined with reference to the
closing price of the common stock as reported on the Nasdaq National Market on
the date of grant.
Options granted under the director plan must be exercised within three
months of the end of the optionee's tenure as a director, or within twelve
months after such director's termination by death or disability to the extent
the option was exercisable on the date of termination, but not later than the
expiration of the option's ten year term.
1996 Non-Employee Director Stock Option Plan
Our 1996 Non-Employee Director Stock Option Plan, referred to as the 1996
Director Plan, was adopted by the Board and approved by the stockholders. Our
board of directors terminated this 1996 Director Plan with
51
<PAGE>
respect to future grants. However, outstanding options granted under this plan
will remain outstanding and subject to the terms and conditions of the
agreements evidencing such options and the terms of the 1996 Director Plan.
A total of 125,000 shares of our common stock are authorized for issuance
under the 1996 Director Plan. As of October 1, 1999, a total of 19,063 shares
were subject to outstanding options granted under this plan. Although 105,937
shares remain available for further grant of options under the 1996 Director
Plan, no more options will be granted under this plan.
401(k) Plan
We sponsor a 401(k) plan which provides eligible employees located in the
United States an opportunity to save money for their retirement on a tax
deferred basis. The 401(k) plan is intended to qualify under Sections 401(a)
and 401(k) of the Internal Revenue Code of 1986, as amended. Eligible employees
may elect to reduce their current eligible compensation by up to 15%, subject
to the statutory annual limit in 1999 of $10,000, and to have the amount of
such reduction contributed on their behalf to the 401(k) plan. We currently
provide a matching contribution to those eligible employees who have elected to
participate in the 401(k) plan equal to 50% of the first 4% of their eligible
contributions to the 401(k) plan. In addition, the 401(k) plan permits, but
does not require, an additional discretionary profit sharing contribution to be
made by us on behalf of eligible employees. To date, we have not made any such
discretionary profit sharing contribution to the 401(k) plan. Contributions
that are made to the 401(k) plan, whether if made by the eligible employees, or
by us, and the investment earnings thereon, are not taxable to employees until
such amounts are withdrawn from the 401(k) plan. However, any contributions
made by us will be deductible in the taxable year they are made. The 401(k)
plan may be amended or terminated by us at anytime, and in our sole discretion.
Employment Agreements
We have issued offer letters to each of Robert H. Ewald, Anthony H. Lewis,
Jr., Roderick Witmond, Edward Malysz and Marcelo A. Gumucio pursuant to which
each is entitled to a base salary, bonuses and an option to purchase shares of
our common stock. In addition, we granted Mr. Ewald 125,000 shares of common
stock for our commencing an initial public offering within twelve months of his
employment start date. We agreed to provide Mr. Lewis with a promissory note in
the amount of $38,100 which will be forgiven in the event he is terminated
without cause prior to one year of service or upon completion of one year of
service from his start date. We agreed that if Mr. Gumucio is involuntarily
terminated within one year of his start date, 25% of his option shall become
immediately exercisable, and if we experience a change of control, Mr.
Gumucio's option shall become immediately exercisable.
We have entered into employment agreements with each of Nicole Eagan, Martin
Pagel and Thomas J. Reinemer pursuant to which each is entitled to a base
salary, bonuses, an option to purchase shares of common stock and an option to
purchase shares of restricted common stock. All of these options have been
exercised in full and the shares issued thereunder are included in the share
amounts throughout this prospectus. Under these agreements, if any of Nicole
Eagan, Martin Pagel or Thomas J. Reinemer are terminated without cause, he or
she will be entitled to the payment of six months of his or her base salary.
Limitations on Directors' Liability and Indemnification
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for any of the
following:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
52
<PAGE>
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity,
regardless of whether our bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification of our directors
and executive officers for expenses, judgments, fines and settlement amounts
incurred by any such person in any action or proceeding arising out of such
person's services as a director or executive officer or at our request. We
believe that these provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers.
The limited liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against our directors for breach of their fiduciary duty and may reduce the
likelihood of derivative litigation against our directors and officers, even
though a derivative litigation, if successful, might otherwise benefit us and
our stockholders. A stockholder's investment in us may be adversely affected to
the extent we pay the costs of settlement or damage awards against our
directors or officers under these indemnification provisions.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees in which indemnification is sought, nor
are we aware of any threatened litigation that may result in claims for
indemnification.
53
<PAGE>
RELATED PARTY TRANSACTIONS
During the last two years, there has not been, nor is there currently
proposed, any transaction or series of similar transactions to which we were or
are to be a party in which the amount involved exceeds $60,000 and in which any
director, executive officer or holder of more than 5% of our common stock had
or will have a director or indirect interest other than compensation
arrangements, which are described where required under "Management," and the
transactions described below.
Equity Investment Transactions for Cash
In September 1997, we sold 2,500,000 shares of Series A preferred stock for
$2.40 per share. In July 1998, we sold 4,188,000 shares of Series B preferred
stock for $3.82 per share. In August 1999, we sold 2,928,521 shares of Series C
preferred stock for $10.31 per share. Listed below are the directors, executive
officers and stockholders who beneficially own more than 5% of our securities
who participated in these financings. We have also indicated in the table below
the value of shares held by these individuals based on the initial public
offering price of $17.00 per share. The initial public offering price of $17.00
per share does not represent our estimate of future stock prices. Actual gains,
if any, on sale of our shares will be dependent on the future performance of
our common stock.
<TABLE>
<CAPTION>
Value of
Shares at
Initial
Aggregate Public
Series A Series B Series C Cash Offering
Name Preferred Preferred Preferred Consideration Price
<S> <C> <C> <C> <C> <C>
Microsoft Corporation... 1,250,000 261,750 109,231 $5,126,174 $34,445,847
Entities affiliated with
AT&T Ventures(1)....... 1,250,000 261,750 218,462 6,252,343 36,767,005
Canaan Equity, L.P...... -- 1,047,000 151,302 5,559,463 25,463,918
Unified Holdings,
L.L.C.................. -- 1,047,000 -- 4,000,000 22,248,750
John V. Balen(2)........ -- 1,047,000 151,302 5,559,463 25,463,918
Thomas L. Rosch(3)...... 1,250,000 261,750 218,462 6,252,343 36,767,005
Gregory S. Stanger(4)... 1,250,000 261,750 109,231 5,126,174 34,445,847
Adam Wagner(5).......... -- 1,047,000 5,416 4,055,379 22,363,840
Martin Pagel............ -- -- 2,166 22,323 46,027
</TABLE>
- ---------------------
(1) Includes 1,125,000 shares of Series A preferred stock, 235,575 shares of
Series B preferred stock and 196,616 shares of Series C preferred stock
held by AT&T Venture Fund II, L.P. and 125,000 shares of Series A preferred
stock, 26,175 shares of Series B preferred stock and 21,846 shares of
Series C preferred stock held by Venture Fund I, L.P.
(2) Includes 1,047,000 shares of Series B preferred stock and 151,302 shares of
Series C preferred stock held by Canaan Equity, L.P. Mr. Balen disclaims
beneficial ownership of these shares.
(3) Includes 1,125,000 shares of Series A preferred stock, 235,575 shares of
Series B preferred stock and 196,616 shares of Series C preferred stock
held by AT&T Venture Fund II, L.P. and 125,000 shares of Series A preferred
stock, 26,175 shares of Series B preferred stock and 21,846 shares of
Series C preferred stock held by Venture Fund I, L.P. Mr. Rosch disclaims
beneficial ownership of these shares.
(4) Includes 1,250,000 shares of Series A preferred stock, 261,750 shares of
Series B preferred stock and 109,231 shares of Series C preferred stock
held by Microsoft Corporation. Mr. Stanger disclaims beneficial ownership
of these shares.
(5) Includes 1,047,000 shares of Series B preferred stock held by Unified
Holdings, L.L.C. Mr. Wagner is a managing member of Unified Holdings,
L.L.C. Wagner & Brown, Ltd., Mr. Wagner's former employer, claims
beneficial ownership of 130,875 shares and Wagner Family Partnership VI of
which Mr. Wagner is a partner claims beneficial ownership of 45,021 shares.
Includes 2,708 shares of Series C preferred stock held by Wagner & Brown,
Ltd. and 2,708 shares of Series C preferred stock held by Wagner Family
Partnership VI.
54
<PAGE>
Sales of Equity Securities to Executive Officers
On May 30, 1999, we sold 1,531,250 shares of common stock at a price of
$0.72 per share to Robert H. Ewald. We have the right to repurchase such shares
in the event Mr. Ewald's services to us terminate, which right lapses
progressively over four years after the date of grant. Mr. Ewald paid for such
shares with a full-recourse, five-year $1,102,500 promissory note, secured by
the purchased shares. The note bears interest at a rate of 6% per annum.
On June 12, 1998, we sold an aggregate of 332,692 shares of common stock at
a price of $0.20 per share for 32,031 shares and $0.40 per share for 300,661
shares to Nicole Eagan. We have the right to repurchase such shares in the
event Ms. Eagan's services to us terminate, which right lapses progressively
over four years after the date of grant. Ms. Eagan paid for such shares with a
full-recourse, five-year $126,671 promissory note, secured by the purchased
shares. The note bears interest at a rate of 6% per annum.
On June 12, 1998, we sold an aggregate of 225,325 shares of common stock at
a price of $0.20 per share for 32,031 shares and $0.40 per share for 193,294
shares to Martin Pagel. We have the right to repurchase such shares in the
event Mr. Pagel's services to us terminate, which right lapses progressively
over four years after the date of grant. Mr. Pagel paid for such shares with a
full-recourse, five-year $83,724 promissory note, secured by the purchased
shares. The note bears interest at a rate of 6% per annum.
On June 12, 1998, we sold an aggregate of 306,920 shares of common stock at
a price of $0.20 per share for 32,031 shares and $0.40 per share for 274,889
shares to Thomas J. Reinemer. We have the right to repurchase such shares in
the event Mr. Reinemer's services to us terminate, which right lapses
progressively over four years after the date of grant. Mr. Reinemer paid for
such shares with a full-recourse, five-year $116,362 promissory note, secured
by the purchased shares. The note bears interest at a rate of 6% per annum.
On June 28, 1999, we sold 187,500 shares of common stock at a price of $1.20
per share to Edward F. Malysz. We have the right to repurchase such shares in
the event Mr. Malysz's services to us terminate, which right lapses
progressively over four years after the date of grant. Mr. Malysz paid for such
shares with a full-recourse, five-year $225,000 promissory note, secured by the
purchased shares. The note bears interest at a rate of 6% per annum.
On July 31, 1999, we sold 375,000 shares of common stock at a price of $1.20
per share to Anthony H. Lewis, Jr. We have the right to repurchase such shares
in the event Mr. Lewis' services to us terminate, which right lapses
progressively over four years after the date of grant. Mr. Lewis paid for such
shares with a full-recourse, five-year $450,000 promissory note, secured by the
purchased shares. The note bears interest at a rate of 6% per annum.
On August 1, 1999, we sold 187,500 shares of common stock at a price of
$1.20 per share to Roderick Witmond. We have the right to repurchase such
shares in the event Mr. Witmond's services to us terminate, which right lapses
progressively over four years after the date of grant. Mr. Witmond paid for
such shares with a full-recourse, five-year $225,000 promissory note, secured
by the purchased shares. The note bears interest at a rate of 6% per annum.
On August 18, 1999, we granted Mr. Ewald a stock bonus of 125,000 shares of
common stock. We have also agreed to loan Mr. Ewald up to $430,000 for the
purpose of satisfying his income tax liability associated with this stock
bonus. This loan will bear interest at a rate of 6% per annum and will be
forgivable over 2 years based on Mr. Ewald remaining our employee throughout
such period.
On August 18, 1999, we granted Marcelo Gumucio a stock bonus of 62,500
shares of common stock. We have also agreed to loan Mr. Gumucio up to $215,000
for the purpose of satisfying his income tax liability associated with this
stock bonus. This loan will bear interest at a rate of 6% per annum and will be
forgivable over 2 years based on Mr. Gumucio's continuing service as a director
throughout such period.
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<PAGE>
Benefits to Executive Officers
The following table sets forth:
. the aggregate number of shares purchased by each of our executive
officers during the last three years on an as converted to common stock
basis after giving effect to our stock dividend;
. the aggregate purchase price paid for those shares by each of our
executive offices; and
. the value of those shares based on the initial public offering price of
$17.00 per share.
The initial public offering price of $17.00 per share does not represent our
estimate of future stock prices. Actual gains, if any, on sale of our shares
will be dependent on the future performance of our common stock.
<TABLE>
<CAPTION>
Value of Shares
Shares at
Purchased Aggregate Initial Public
Name (#) Consideration Offering Price
<S> <C> <C> <C>
Robert H. Ewald......................... 1,656,250 $1,102,500 $28,156,250
Anthony H. Lewis, Jr.................... 375,000 450,000 6,375,000
Nicole Eagan............................ 332,693 126,671 5,655,781
Martin Pagel............................ 228,032 106,056 3,876,544
Roderick Witmond........................ 187,500 225,000 3,187,500
Thomas J. Reinemer...................... 318,170 116,362 5,408,890
Edward F. Malysz........................ 187,500 225,000 3,187,500
Marcelo A. Gumucio...................... 373,087 238,776 6,342,479
</TABLE>
Other Transactions
We have entered into indemnification agreements with each of our executive
officers and directors.
We have granted options to our executive officers and some of our directors.
Holders of preferred stock are entitled to registration rights with respect
to the common stock issued or issuable upon conversion of the preferred stock.
We believe that all related party transactions described above were on terms
no less favorable than could have been obtained from unrelated third parties.
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of October 1, 1999, by the following
individuals or groups:
. each person or entity who we know beneficially owns more than 5% of our
outstanding stock;
. each of the Named Executive Officers;
. each of our directors; and
. all directors and executive officers as a group.
Unless otherwise indicated, the address for each stockholder listed in the
following table is c/o E-Stamp Corporation, 2855 Campus Drive, Suite 100, San
Mateo, California 94403. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission. In computing the number of
shares beneficially owned by a person and the percentage ownership of that
person, shares of common stock subject to options or warrants held by that
person that are currently exercisable or will become exercisable within 60 days
after October 1, 1999, are deemed outstanding, while the shares are not deemed
outstanding for purposes of computing percentage ownership of any other person.
Except as otherwise indicated, and subject to applicable community property
laws, the persons named in the table have sole voting and investment power with
respect to all shares of common stock held by them.
Applicable percentage ownership in the following table is based on
31,141,962 shares of common stock outstanding as of October 1, 1999, as
adjusted to reflect the conversion of all outstanding shares of preferred stock
upon the closing of this offering. The numbers shown in the table below assume
no exercise by the underwriters of their over-allotment option.
Principal Stockholders Table
<TABLE>
<CAPTION>
Percentage of
Shares
Number of Outstanding
Shares -----------------
Beneficially Before After
Name Owned(1) Offering Offering
<S> <C> <C> <C>
5% Stockholders:
Entities affiliated with AT&T Ventures(2)... 2,162,764 6.9% 5.7%
Microsoft Corporation(3).................... 2,026,226 6.5 5.3
John Trotter(4)............................. 2,043,893 6.6 5.4
Directors and Executive Officers:
Robert H. Ewald(5).......................... 1,656,250 5.3 4.3
Anthony H. Lewis, Jr.(6).................... 375,000 1.2 1.0
Martin Pagel(7)............................. 247,025 * *
Nicole Eagan(8)............................. 427,692 1.4 1.1
Thomas J. Reinemer(9)....................... 341,920 1.1 *
Rick D. Prime(10)........................... 126,353 * *
Sunir Kapoor................................ 342,506 1.1 *
Marcelo A. Gumucio(11)...................... 498,087 1.6 1.3
John V. Balen(12)........................... 1,497,877 4.8 3.9
Thomas L. Rosch(13)......................... 2,162,764 7.0 5.7
Gregory S. Stanger(14)...................... 2,026,226 6.5 5.3
Adam Wagner(15)............................. 1,828,020 5.9 4.8
All directors and executive officers as a
group (14 persons)(16)..................... 11,857,442 38.1 31.1
</TABLE>
- ---------------------
* Less than 1% of the outstanding shares of common stock.
(1) All share numbers in this table are on an as-converted to common basis
giving effect to our stock dividend.
57
<PAGE>
(2) The aggregated shares listed for entities affiliated with AT&T Ventures are
owned as follows: 1,946,488 shares are beneficially owned by AT&T Venture
Fund II, L.P. and 216,276 shares are beneficially owned by Venture Fund I,
L.P. The address for AT&T Ventures is 3000 Sand Hill Road, Building 1,
Suite 285, Menlo Park, CA 94025.
(3) The address for Microsoft Corporation is One Microsoft Way, Redmond, WA
98502.
(4) Includes 306,993 shares of common stock held by Trotter 1993
Grandchildren's Trust and 119,087 shares of common stock held by Trotter
1993 Children's Trust. The address for Mr. Trotter is 1000 Louisiana #3600,
Houston, Texas 77002.
(5) At October 1, 1999, 1,531,250 shares held by Mr. Ewald were unvested and
subject to a right of repurchase in favor of us, which right lapses over
time.
(6) At October 1, 1999, 375,000 shares held by Mr. Lewis were unvested and
subject to a right of repurchase in favor of us, which right lapses over
time.
(7) At October 1, 1999, 153,729 shares held by Mr. Pagel were vested, and
74,303 shares were unvested and subject to a right of repurchase in favor
of us, which right lapses over time. Includes 18,993 shares issuable upon
exercise of options held by Mr. Pagel within 60 days of October 1, 1999,
all of which would be subject to a right of repurchase in favor of us,
which right lapses over time.
(8) At October 1, 1999, 210,869 shares held by Ms. Eagan were vested, and
121,823 shares were unvested and subject to a right of repurchase in favor
of us, which right lapses over time. Includes 95,000 shares issuable upon
exercise of options held by Ms. Eagan within 60 days of October 1, 1999,
all of which would be subject to a right of repurchase in favor of us,
which right lapses over time.
(9) At October 1, 1999, 196,421 shares held by Mr. Reinemer were vested, and
145,499 shares were unvested and subject to a right of repurchase in favor
of us, which right lapses over time. Includes 35,000 shares issuable upon
exercise of options held by Mr. Reinemer within 60 days of October 1, 1999,
all of which would be subject to a right of repurchase in favor of us,
which right lapses over time.
(10) At October 1, 1999, 54,687 shares held by Mr. Prime were vested, and
70,313 shares were unvested and subject to a right of repurchase in favor
of us, which right lapses over time.
(11) At October 1, 1999, 62,500 shares held by Mr. Gumucio were vested, and
435,587 shares were unvested and subject to a right of repurchase in favor
of us, which right lapses over time. Includes 62,500 shares issuable upon
exercise of options held by Mr. Gumucio within 60 days of October 1, 1999,
all of which would be subject to a right of repurchase in favor of us,
which right lapses over time.
(12) The shares are beneficially owned by Canaan Equity, L.P. Mr. Balen is a
principal of Canaan Partners. Mr. Balen disclaims beneficial ownership of
these shares.
(13) 1,946,488 shares are beneficially owned by AT&T Venture Fund II, L.P. and
216,276 shares are beneficially owned by Venture Fund I, L.P. Mr. Rosch is
a partner at AT&T Ventures. Mr. Rosch disclaims beneficial ownership of
these shares.
(14) The shares are beneficially owned by Microsoft Corporation. Mr. Stanger is
Senior Director, Corporate Development at Microsoft Corporation. Mr.
Stanger disclaims beneficial ownership of these shares.
(15) Includes 250,000 shares of common stock held by Wagner & Brown, Ltd, Mr.
Wagner's former employer. Mr. Wagner has disclaimed beneficial ownership
of these shares. Includes 62,500 shares of common stock held by Wagner
Family Partnership VI, of which Mr. Wagner is a partner. Mr. Wagner has a
12.5% beneficial ownership of these shares. Includes 200,000 shares of
common stock held in escrow and for which Mr. Wagner is an escrow agent.
Wagner & Brown, Ltd. claims beneficial ownership of 38,280 shares and
Wagner Family Partnership VI claims beneficial ownership of 9,560 shares.
Includes 1,047,000 shares of Series B preferred stock, convertible into
1,308,750 shares of common stock, held by Unified Holdings, L.L.C.
Mr. Wagner is a managing member of Unified Holdings, L.L.C. Wagner &
Brown, Ltd. claims beneficial ownership of 163,594 shares and Wagner
Family Partnership VI claims
58
<PAGE>
beneficial ownership of 56,276 shares. Includes 2,708 shares of Series C
preferred stock, convertible into 3,385 shares of common stock, held by
Wagner & Brown, Ltd. and 2,708 shares of Series C preferred stock,
convertible into 3,385 shares of common stock, held by Wagner Family
Partnership VI.
(16) Includes 678,206 shares issued under the 1999 Stock Plan and 1996 Stock
Option and Restricted Stock Plan which were vested and 3,128,775 shares
which were unvested at October 1, 1999 and subject to a right of
repurchase in favor of us, which right lapses over time. Includes 211,493
shares issuable upon exercise of options within 60 days of October 1,
1999, all of which would be subject to a right of repurchase in favor of
us, which right lapses over time.
59
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Upon the completion of this offering, we will be authorized to issue
200,000,000 shares of common stock, $0.001 par value, and 10,000,000 shares of
undesignated preferred stock, $0.001 par value. The following description of
our capital stock does not purport to be complete and is subject to and
qualified in its entirety by our certificate of incorporation and bylaws, which
are included as exhibits to the registration statement of which this prospectus
forms a part, and by the provisions of applicable Delaware law.
Common Stock
As of October 1, 1999, there were 31,141,962 shares of common stock
outstanding which were held of record by approximately 473 stockholders, as
adjusted for the conversion of all outstanding shares of convertible preferred
stock into common stock, which will occur upon the closing of this offering.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Our stockholders do not have
cumulative voting rights. Subject to preferences that may be applicable to any
outstanding preferred stock, the holders of common stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the board of directors out of funds legally available for that purpose. In the
event of our liquidation, dissolution or winding up, the holders of common
stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of preferred stock, if any,
then outstanding. The holders of common stock have no preemptive or conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are fully paid and nonassessable. The shares of common stock to be issued
upon the closing of this offering will be fully paid and nonassessable.
Preferred Stock
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may
be greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of such preferred stock. However, the effects
might include, among other things:
. restricting dividends on the common stock;
. diluting the voting power of the common stock;
. impairing the liquidation rights of the common stock; or
. delaying or preventing a change in control of us without further action
by the stockholders.
Upon the closing no shares of preferred stock will be outstanding, and we
have no present plans to issue any shares of preferred stock.
Warrants
At October 1, 1999, there were warrants outstanding to purchase 21,235
shares of Series C preferred stock, which will be exercisable to purchase an
aggregate of 26,544 shares of common stock upon closing of this offering. At
October 1, 1999, there were warrants outstanding to purchase 48,496 shares of
common stock.
60
<PAGE>
Registration Rights
The holders of preferred stock convertible into 12,020,651 shares of common
stock, referred to as the registrable securities, are entitled to rights with
respect to registration of such shares under the Securities Act. These rights
are provided under the terms of an agreement between the holders of registrable
securities and us. Beginning 180 days following the date of this prospectus,
holders of at least 25% of the then outstanding registrable securities obtained
from conversion of our Series A preferred stock, or such lesser percentage if
the anticipated aggregate offering price would exceed $15,000,000, may require
on one occasion that we register their shares for public resale. Beginning 180
days following the date of this prospectus, holders of at least 25% of the then
outstanding registrable securities obtained from conversion of our Series B
preferred stock, or such lesser percentage if the anticipated aggregate
offering price would exceed $15,000,000 may require on one occasion that we
register their shares for public resale. Beginning 180 days following the date
of this prospectus, holders of at least 25% of the then outstanding registrable
securities obtained from conversion of our Series C preferred stock, or such
lesser percentage of the anticipated aggregate offering price would exceed
$15,000,000, may require on one occasion that we register their shares for
public resale. However, we may defer such registration for 90 days in view of
market conditions. Also, holders of registrable securities may require on two
separate occasions within any twelve month period that we register their shares
for public resale on Form S-3 or similar short-form registration if the value
of the securities to be registered is at least $500,000, however we may defer
such registration for 90 days in view of market conditions. Furthermore, in the
event we elect to register any of our shares of common stock for purposes of
effecting any public offering, the holders of registrable securities are
entitled to include their shares of common stock in the registration, but we
may reduce the number of shares proposed to be registered in view of market
conditions. These registration rights have been waived with respect to this
offering. All expenses in connection with any registration, other than
underwriting discounts and commissions, will be borne by us. All registration
rights will terminate five years following the consummation of this offering,
or, with respect to each holder of registrable securities, at such time as the
holder is entitled to sell all of its shares in any 90 day period under Rule
144 of the Securities Act.
Delaware Anti-Takeover Law and Charter and Bylaw Provisions
Provisions of Delaware law and our certificate of incorporation and bylaws
could make the following more difficult:
. the acquisition of us by means of a tender offer;
. acquisition of us by means of a proxy contest or otherwise; or
. the removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage coercive
takeover practices and inadequate takeover bids. These provisions are also
designed to encourage persons seeking to acquire control of us to first
negotiate with our board. We believe that the benefits of increased protection
of our potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure us outweigh the disadvantages of
discouraging such proposals because negotiation of such proposals could result
in an improvement of their terms.
Election and Removal of Directors. Our board of directors is divided into
three classes. The directors in each class will serve for a three-year term,
one class being elected each year by our stockholders. This system of electing
and removing directors may tend to discourage a third party from making a
tender offer or otherwise attempting to obtain control of us because it
generally makes it more difficult for stockholders to replace a majority of the
directors.
Stockholder Meetings. Under our certificate of incorporation, only the board
of directors, the chairman of the board and the chief executive officer may
call special meetings of stockholders.
61
<PAGE>
Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee of the board.
Delaware AntiTakeover Law. We are subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person became an interested stockholder, unless the
"business combination" or the transaction in which the person became an
interested stockholder is approved in a prescribed manner. Generally, a
"business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder.
Generally, an "interested stockholder" is a person who, together with
affiliates and associates, owns or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision may have an anti-
takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
Elimination of Stockholder Action By Written Consent. Our certificate of
incorporation eliminates the right of stockholders to act by written consent
without a meeting at any time when we have 500 or more record stockholders.
Elimination of Cumulative Voting. Our certificate of incorporation and
bylaws do not provide for cumulative voting in the election of directors.
Undesignated Preferred Stock. The authorization of undesignated preferred
stock makes it possible for the board of directors to issue preferred stock
with voting or other rights or preferences that could impede the success of
any attempt to change control of us. These and other provisions may have the
effect of deferring hostile takeovers or delaying changes in control or
management of us.
Amendment of Charter Provisions. The amendment of any of the above
provisions would require approval by holders of at least 66 2/3% of the
outstanding common stock.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is Continental Stock
Transfer and Trust Company.
Nasdaq National Market Listing
Our common stock has been approved for quotation on The Nasdaq National
Market under the symbol "ESTM."
62
<PAGE>
RESCISSION OFFER
Shares issued, and option grants made under, our 1999 Stock Plan, our 1996
Stock Option and Restricted Stock Plan and our 1996 Non-Employee Director Stock
Option Plan were not exempt from registration or qualification under federal
and state securities laws, and these stock issuances and option grants violated
the registration requirements of federal and state securities laws because
registration or qualification was not obtained. We intend to make a rescission
offer to the holders of these shares and options approximately 30 days after
the effective date of this offering pursuant to a registration statement filed
under the Securities Act of 1933, as amended. Offerees will be able to accept
our rescission offer prior to its expiration date by returning to us shares to
be repurchased and an election notice that we will deliver to the offerees
together with the prospectus for our rescission offer. If accepted, our
rescission offer could require us to make aggregate payments to the holders of
these shares and options of up to approximately $6.9 million plus statutory
interest. We currently expect to use a portion of the proceeds from this
offering to make such payments, if any are required.
This rescission offer will cover an aggregate of 273,265 shares of common
stock issued under the 1999 Stock Plan and 4,891,695 shares of common stock
issued under the 1996 Stock Option and Restricted Stock Plan, which shares were
sold in violation of the registration requirements of the federal and state
securities laws. We were unable to rely upon Rule 701 under the Securities Act
because the amount of securities sold exceeded the limits set forth in Rule
701. Because of the frequency and number of sales, including the number of
persons who received offers and purchased shares, the private placement
exemption under federal securities laws was also not available for these stock
issuances. We were also unable to rely on the exemption provided by Section
25102(f) of the California Corporation Code because these shares were issued to
more than 35 persons during a 12 month period, or on the exemption provided by
Section 25102(o) of the California Corporation Code because the required filing
under that section was not made. We will offer to rescind such prior sales at
the price per share paid therefor, an average price of $6.88 per share under
the 1999 Stock Plan and an average price of $0.90 per share under the 1996
Stock Option and Restricted Stock Plan, plus interest thereon at a statutory
rate as the case may be from the date of purchase by the purchaser to the
expiration of the rescission offer. The rescission offer will expire
approximately 30 days after the effectiveness of the registration statement
relating to the rescission stock. Under the rescission offer, we would be
required to make an aggregate payment of approximately $6.3 million plus the
aggregate amount of interest thereon, if all offerees accept the offer.
Offerees who do not accept the rescission offer will, for purposes of
applicable federal and state securities laws, be deemed to hold registered
shares under the Securities Act which will be freely tradeable in the public
market as of the effective date of the registration statement with respect to
the rescission stock. The Securities Act does not expressly provide that a
rescission offer will terminate a purchaser's right to rescind a sale of stock
which was not registered under the Securities Act as required. Accordingly,
should the rescission offer be rejected by any or all offerees, we may continue
to be contingently liable under the Securities Act for the purchase price of
these shares up to an aggregate amount of approximately $6.3 million plus
statutory interest.
In addition, we were unable to rely on the exemption provided by Section
25102(f) of the California Corporation Code for our options to purchase shares
of common stock granted under our 1999 Stock Plan, our 1996 Stock Option and
Restricted Stock Plan and our 1996 Non-Employee Director Stock Option Plan
because options were granted to more than 35 persons during a 12 month period,
or on the exemption provided by Section 25102(o) of the California Corporation
Code because the required filing under that section was not made. As of October
1, 1999, options to purchase 266,753 shares of common stock at a weighted
average exercise price of $6.88 per share were outstanding under our 1999 Stock
Plan, options to purchase 1,118,308 shares of common stock at a weighted
average exercise price of $0.90 per share were outstanding under our 1996 Stock
Option and Restricted Stock Plan, and options to purchase 19,062 shares of
common stock at a weighted average exercise price of $0.40 per share were
outstanding under our 1996 Non-Employee Director Option Plan, all of which
options are potentially subject to rescission, and we plan to include them in
our planned rescission offer discussed above. Under such rescission offer, we
could be required to make an aggregate payment of up to approximately $600,000
for such grants.
As of the date hereof, we are not aware of any claims for rescission against
us.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
there can be no assurance that a significant public market for our common stock
will develop or be sustained after this offering. Future sales of substantial
amounts of common stock, including shares issued upon exercise of outstanding
options and warrants, in the public market following this offering could
adversely affect market prices prevailing from time to time and could impair
our ability to raise capital through sale of its equity securities. Sales of
substantial amounts of our common stock in the public market could adversely
affect the prevailing market price and our ability to raise equity capital in
the future. As described below, only 2,097,632 shares currently outstanding
will be available for sale immediately after this offering because of
contractual restrictions on resale and resale restrictions under the federal
securities laws.
Upon completion of this offering, we will have outstanding 38,141,962 shares
of common stock based upon shares outstanding as of October 1, 1999, assuming
no exercise of the underwriters' over-allotment option and no exercise of
outstanding options or warrants prior to completion of this offering. Of these
shares, the 7,000,000 shares sold in this offering will be freely tradable
without restriction under the Securities Act except for any shares purchased by
our "affiliates" as that term is defined in Rule 144 under the Securities Act
and for any shares purchased in our directed shares program which will be
subject to 180 day lock-up agreements. The remaining 31,141,962 shares of
common stock held by existing stockholders are restricted shares as that term
is defined in Rule 144. These restricted shares may be sold in the public
market only if registered under the Securities Act or pursuant to an exemption
from registration under the Securities Act. As a result of the lock-up
agreements described below and the provisions of Rule 144 and 144(k), the
restricted shares will become eligible for sale in the public market as
follows:
. 2,097,632 shares will become eligible for sale on the date of this
prospectus,
. 113,576 shares will become eligible for sale 90 days after the date of
this prospectus,
. 19,854,064 shares will become eligible for sale 180 days after the date
of this prospectus, and
. the remaining 9,076,690 shares will become eligible for sale from time to
time more than 180 days after the date of this prospectus.
In addition, as of October 1, 1999, there were outstanding options to
purchase 1,419,893 shares of common stock, warrants to purchase 48,496 shares
of common stock and warrants to purchase preferred stock convertible into
26,544 shares of common stock, some of which may be exercised prior to this
offering. Officers, directors, and stockholders holding 28,203,238 shares have
entered into lock-up agreements providing that, with certain limited
exceptions, the stockholder will not offer, sell, contract to sell or otherwise
dispose of any common stock or any securities that are convertible into common
stock for a period of 180 days after the date of this prospectus without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation.
Donaldson, Lufkin & Jenrette Securities Corporation may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to lock-up agreements.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year including the holding period of any prior owner
except an affiliate would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding which will
equal approximately shares immediately after this offering; or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to
the availability of current public information about us. Under Rule 144(k), a
person who is not deemed to have
64
<PAGE>
been an affiliate of us at any time during the three months preceding a sale,
and who has beneficially owned the shares proposed to be sold for at least two
years including the holding period of any prior owner except an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Within 90 days following the effectiveness of this offering, we will file a
Registration Statement on Form S-8 registering 4,261,336 shares of common stock
subject to outstanding options or reserved for future issuance under our stock
plans. As of October 1, 1999, options to purchase a total 1,419,893 shares were
outstanding and 2,576,229 shares were reserved for future issuance under our
stock plans. Common stock issued upon exercise of outstanding vested options or
issued under our purchase plan, other than common stock issued to our
affiliates, is available for immediate resale in the open market.
Also beginning six months after the date of this offering, holders of
12,020,651 restricted shares will be entitled to registration rights for sale
in the public market. Registration of such shares under the Securities Act
would result in such shares becoming freely tradable without restriction under
the Securities Act, except for shares purchased by affiliates, immediately upon
the effectiveness of such registration.
65
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated October 8, 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Banc of America Securities
LLC, Deutsche Bank Securities Inc. and DLJdirect Inc., have severally agreed to
purchase from us the respective number of shares of common stock set forth
opposite their names below:
<TABLE>
<CAPTION>
Number of
Underwriters: Shares
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation............... 2,829,000
Banc of America Securities LLC.................................... 1,414,500
Deutsche Bank Securities Inc...................................... 1,414,500
DLJdirect Inc. ................................................... 100,000
CIBC World Markets................................................ 54,000
Credit Suisse First Boston Corporation............................ 54,000
A.G. Edwards & Sons, Inc.......................................... 54,000
Goldman, Sachs & Co............................................... 54,000
Hambrecht & Quist LLC............................................. 54,000
Lehman Brothers Inc............................................... 54,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................ 54,000
Salomon Smith Barney Inc.......................................... 54,000
Warburg Dillon Read LLC........................................... 54,000
SG Cowen.......................................................... 54,000
SoundView Technology Group........................................ 54,000
Advest, Inc....................................................... 27,000
Robert W. Baird & Co., Inc........................................ 27,000
J.C. Bradford & Co................................................ 27,000
Crowell, Weedon & Co.............................................. 27,000
Fahnestock & Co., Inc............................................. 27,000
First Union Capital Markets Group................................. 27,000
Harris Webb & Garrison, Inc....................................... 27,000
Wachovia Securities, Inc.......................................... 27,000
Janney Montgomery Scott LLC....................................... 27,000
C.L. King & Associates, Inc....................................... 27,000
Ladenburg Thalmann & Co., Inc..................................... 27,000
Legg Mason Wood Walker, Incorporated.............................. 27,000
McDonald Investments Inc., a KeyCorp Company...................... 27,000
Morgan Keegan & Co., Inc.......................................... 27,000
Needham & Co., Inc................................................ 27,000
Pennsylvania Merchant Group....................................... 27,000
Raymond James & Associates, Inc................................... 27,000
The Robinson-Humphrey Company..................................... 27,000
Sanders Morris Mundy.............................................. 27,000
Stephens Inc...................................................... 27,000
Sutro & Co. Incorporated.......................................... 27,000
Tucker Anthony Incorporated....................................... 27,000
C.E. Unterberg, Towbin............................................ 27,000
---------
Total........................................................... 7,000,000
=========
</TABLE>
66
<PAGE>
The underwriting agreement provides that the obligations of the underwriters
to purchase and accept delivery of the shares of common stock in the offering
are subject to approval by their counsel of legal matters concerning the
offering and to condition precedents that must be satisfied by us. The
underwriters are obligated to purchase and accept delivery of all the shares of
common stock in the offering, other than those shares covered by the over-
allotment option described below, if any are purchased.
The underwriters initially propose to offer the shares of common stock in
part directly to the public at the initial public offering price set forth on
the cover page of this prospectus and in part to dealers, including the
underwriters, at such price less a concession not in excess of $0.71 per share.
The underwriters may allow, and such dealers may re-allow, to other dealers a
concession not in excess of $0.10 per share. After the initial offering of the
common stock, the public offering price and other selling terms may be changed
by the Representatives at any time without notice. The underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority. An electronic prospectus will be available on the Web site
maintained by DLJdirect Inc. DLJdirect account holders with at least $100,000
in their accounts will be able to express an interest in purchasing shares in
the offering. DLJdirect will allocate shares among those account holders who
have expressed interest based on its subjective judgement of what is E-Stamp's
best interest. In making this judgement, DLJdirect will consider the account
holder's asset level, investment objectives, trading history, tenure with
DLJdirect and post-offering activity in previous offerings.
We have granted to the underwriters an option, exercisable for 30 days after
the date of this prospectus, to purchase, from time to time, in whole or in
part, up to an aggregate of additional shares of common stock at the initial
public offering price less underwriting discounts and commission. The
underwriters may exercise the option solely to cover over-allotments, if any,
made in connection with the offering. To the extent that the underwriters
exercise the option, each underwriter will become obligated, subject to
conditions contained in the underwriting agreement, to purchase its pro rata
portion of such additional shares based on the underwriters' percentage
underwriting commitment as indicated in the above table.
The following table sets forth the items of compensation considered to be
underwriting compensation under the rules of the National Association of
Securities Dealers, Inc.:
<TABLE>
<CAPTION>
Per Share Total
--------------------- -----------------------------
Without
Over- With Over- Without With
Allotment Allotment Over-Allotment Over-Allotment
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions
paid by us............... $1.19 $1.19 $8,330,000 $ 9,579,500
Additional deemed
compensation paid by us.. 0.12 0.10 822,045 822,045
----- ----- ---------- -----------
Total..................... $1.31 $1.29 $9,152,045 $10,401,545
</TABLE>
We will pay the offering expenses, estimated to be $1.0 million. We will pay
to the underwriters underwriting discounts and commissions in an amount equal
to the public offering price per share of common stock less the amount the
underwriters pay to us per share of common stock.
Donaldson, Lufkin & Jenrette Securities Corporation acted as the placement
agent for private placements of E-Stamp's Series C Preferred Stock in August
1999 and E-Stamp's common stock in September 1999. As compensation for its
services as placement agent, Donaldson, Lufkin & Jenrette Securities
Corporation received a cash fee of $1,225,000 and warrants to purchase an
aggregate of 21,235 shares of Series C preferred stock at an exercise price of
$10.31 per share, the same price per share paid by all investors who
participated in the private placement. This warrant will entitle Donaldson,
Lufkin & Jenrette Securities Corporation to acquire 26,543 shares of common
stock at an exercise price of $8.25 upon completion of the Company's planned
1.25 for 1 stock dividend and the closing of this offering. Several entities
affiliated with Donaldson, Lufkin & Jenrette Securities Corporation also
invested in the August 1999 private placement, purchasing an aggregate of
67
<PAGE>
87,294 shares of Series C preferred stock on the same terms and conditions as
the other investors in the private placement, including price per share. These
87,294 shares of Series C preferred stock will automatically convert into
109,117 shares of common stock upon the closing of this offering.
An additional 9,207 shares of Series C preferred stock were purchased in the
August 1999 private placement by associated persons of other members of the
National Association of Securities Dealers, Inc. that are participating in the
underwriting syndicate for this offering, on the same terms and conditions as
the other investors in the private placement, including price per share. These
9,207 shares of Series C preferred stock will automatically convert into 11,508
shares of common stock upon the closing of this offering.
Pursuant to the rules of the National Association of Securities Dealers,
Inc. the warrant issued to Donaldson, Lufkin & Jenrette Securities Corporation,
44,718 shares of Series C preferred stock purchased by entities affiliated with
Donaldson, Lufkin & Jenrette Securities Corporation and 9,207 shares of Series
C Preferred Stock purchased by associated persons of other members of the
National Association of Securities Dealers, Inc. that are participating in the
underwriting syndicate for the offering are presumed to be underwriting
compensation. The additional deemed compensation included in the chart above
was computed in accordance with the rules of the National Association of
Securities Dealers, Inc.
Prior to the closing of this offering, Donaldson, Lufkin & Jenrette
Securities Corporation will exercise the warrant described above. Under the
rules of the National Association of Securities Dealers, Inc., the 26,543
shares of common stock issuable upon exercise of the warrant issued to
Donaldson, Lufkin & Jenrette Securities Corporation, the 55,897 shares of
common stock issuable upon conversion of the Series C preferred stock purchased
by entities affiliated with Donaldson, Lufkin & Jenrette Securities Corporation
and the 11,508 shares of common stock issuable upon conversion of the Series C
preferred stock purchased by associated persons of the other members of the
National Securities Association of Securities Dealers, Inc. participating in
the underwriting syndicate for the offering that are presumed to be
underwriting compensation, are restricted as to sale, transfer, assignment,
pledge, or hypothecation for a period of one year following the effective date
of this offering, except for transfers to officers or partners of the entities
currently holding these securities.
We have agreed to indemnify the underwriters against liabilities which may
arise in connection with the offering, including liabilities under the
Securities Act of 1933, or to contribute to payments that the underwriters may
be required to make.
Our executive officers, directors and other stockholders and option holders
have agreed not to:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock, other than shares
acquired in the initial public offering or on the Nasdaq National
Market, or any securities convertible into or exercisable or
exchangeable for common stock; or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock, whether any such transaction described above is to be
settled by delivery of common stock or other securities, in cash, or
otherwise.
Donaldson, Lufkin & Jenrette Securities Corporation may choose to release
some of these shares from such restrictions prior to the expiration of the 180-
day lock-up period with or without notice, although it has no current intention
of doing so.
In addition, during such 180-day period, we have also agreed not to file any
registration statement with respect to, and each of our executive officers,
directors and stockholders have agreed not to make any demand for, or exercise
any right with respect to, the registration of any shares of common stock or
any securities convertible into or exercisable or exchangeable for common stock
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation.
68
<PAGE>
Prior to the offering, there has been no established trading market for the
common stock. The initial public offering price of the shares of common stock
offered was determined by negotiation among E-Stamp and the underwriters. The
factors considered in determining the initial public offering price include:
. the history of and the prospects for the industry in which we compete;
. our past and present operations;
. our historical results of operations;
. our prospects for future operational results;
. the recent market prices of securities of generally comparable companies;
and
. the general condition of the securities markets at the time of the
offering.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of common stock
offered in any jurisdiction where action for that purpose is required. The
shares of common stock offered may not be offered or sold, directly or
indirectly, nor may this prospectus or any other offering material or
advertisements in connection with the offer and sale of any such shares of
common stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this prospectus
comes are advised to inform themselves about and observe any restrictions
relating to the offering and the distribution of this prospectus. This
prospectus does not constitute an offer to sell or a solicitation of any offer
to buy any shares of common stock offered in any jurisdiction in which such an
offer or a solicitation is unlawful.
In connection with the offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may over-allot the offering, creating a
syndicate short position. The underwriters may bid for and stabilize the price
of the common stock. In addition, the underwriting syndicate may reclaim
selling concessions from syndicate members and selected dealers if they
repurchase previously distributed common stock in syndicate covering
transactions, in stabilizing transactions or otherwise. These activities may
stabilize or maintain the market price of the common stock above independent
market levels. The underwriters are not required to engage in these activities,
and may end any of these activities at any time.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to five percent of the shares offered hereby to be
sold to people associated with us, such as employees, vendors, suppliers, and
other persons that have relationships with or are interested in developing
relationships with us such as service providers and potential vendors,
suppliers and customers. No shares have been reserved for sale to our directors
or officers. Indications of interest will be sought by means of a written
notice, which conforms to Rule 134, accompanied by a copy of this prospectus.
The number of shares of our common stock available for sale to the general
public will be reduced to the extent that those persons purchase the reserved
shares. All reserved shares purchased by those persons will be subject to a
180-day lock-up agreement. Any reserved shares which are not confirmed for
purchase will be offered by the underwriters to the general public on the same
terms as the other shares offered by this prospectus.
69
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Selected legal matters in connection with this offering will be
passed upon for the underwriters by Pillsbury Madison & Sutro LLP, Palo Alto,
California. As of the date of this prospectus, an investment partnership
composed of members of and persons associated with Wilson Sonsini Goodrich &
Rosati, Professional Corporation, as well as some individual attorneys of this
firm, beneficially own an aggregate of 18,728 shares of our Series C preferred
stock.
EXPERTS
Ernst & Young, LLP, independent auditors, have audited our financial
statements at December 31, 1997 and 1998, and for each of the three years in
the period ended December 31, 1998, as set forth in their report. We have
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given upon
the authority of such firm as experts in accounting and auditing.
Statements in this prospectus and registration statement under the caption
"Risk Factors--Intellectual property infringement claims, including a claim
asserted by Pitney Bowes against us, could prevent or hinder our ability to
sell Internet postage" and in the first two paragraphs under the caption
"Business--Legal Proceedings" have been reviewed and approved by Howrey &
Simon, patent litigation counsel to E-Stamp, as experts in such matters, and
are included herein in reliance upon its review and approval.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the
registration statement or the exhibits and schedules which is part of the
registration statement. For further information with respect to us and our
common stock, see the registration statement and the exhibits and schedules
thereto. Any document we file may be read and copied at the Commission's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the Commission at 1-800-SEC-0330 for further information about the
public reference rooms. Our filings with the Commission are also available to
the public from the Commission's Web site at http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and,
accordingly, will file periodic reports, proxy statements and other information
with the Commission. Such periodic reports, proxy statements and other
information will be available for inspection and copying at the Commission's
public reference rooms, and the Web site of the Commission referred to above.
70
<PAGE>
E-STAMP CORPORATION
(a development stage company)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Common Stock Subject to Rescission, Redeemable Convertible
Preferred Stock and Stockholders' Equity (Deficit)........................ F-5
Statements of Cash Flows................................................... F-8
Notes to Financial Statements.............................................. F-9
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
E-Stamp Corporation
We have audited the accompanying balance sheets of E-Stamp Corporation (a
development stage company) as of December 31, 1997 and 1998, and the related
statements of operations, common stock subject to rescission, redeemable
convertible preferred stock and stockholders' equity (deficit), and cash flows
for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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 audits provide 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 E-Stamp Corporation at
December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 19, 1999,
except for the "Stock Subject to Rescission" paragraphs of Note 4 and for Note
10 as to which the date is October 6, 1999.
F-2
<PAGE>
E-STAMP CORPORATION
(a development stage company)
BALANCE SHEETS
(In thousands, except par value amounts)
<TABLE>
<CAPTION>
Pro forma
December 31, Stockholders'
----------------- June 30, Equity at
1997 1998 1999 June 30, 1999
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.......... $ 4,111 $ 10,217 $ 1,916
Other current assets............... 24 144 498
------- -------- --------
Total current assets................. 4,135 10,361 2,414
Property and equipment:
Computers.......................... 964 1,039 1,350
Furniture and fixtures............. 198 165 192
Leasehold improvements............. 30 -- 49
------- -------- --------
1,192 1,204 1,591
Accumulated depreciation and
amortization...................... (596) (754) (909)
------- -------- --------
Net property and equipment........... 596 450 682
Other assets......................... 32 -- --
------- -------- --------
Total assets..................... $ 4,763 $ 10,811 $ 3,096
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
------------------------------------
Current liabilities:
Accounts payable and accrued
liabilities....................... $ 1,701 $ 1,529 $ 2,718
Current portion of obligations
under capital lease............... 36 27 20
------- -------- --------
Total current liabilities............ 1,737 1,556 2,738
Capital lease obligations............ 38 11 6
Commitments and contingencies........
Common stock subject to rescission,
$0.001 par value per share: 68,
1,974 and 3,844 shares issued and
outstanding at December 31, 1997 and
1998 and June 30, 1999 (3,844 pro
forma).............................. 252 971 2,499
Redeemable convertible preferred
stock, $0.001 par value per share,
12,000 authorized, issuable in
series (aggregate liquidation
preference of $21,998 at December
31, 1998):
Series A redeemable convertible
preferred stock: 2,500 shares
authorized, 2,500 shares issued
and outstanding at December 31,
1997 and 1998 and June 30, 1999
(none pro forma).................. 6,126 6,746 7,084 $ --
Series B redeemable convertible
preferred stock: 4,188 shares
authorized, 4,188 shares issued
and outstanding at December 31,
1997 and 1998 and June 30, 1999
(none pro forma).................. -- 16,723 17,561 --
Stockholders' equity (deficit):
Common stock, $0.001 par value per
share: 100,000 shares authorized,
12,940, 12,950, and 12,950 shares
issued and outstanding at
December 31, 1997 and 1998 and
June 30, 1999, respectively
(200,000 shares authorized and
21,310 shares outstanding pro
forma)............................ 13 13 13 21
Additional paid-in capital......... 6,304 8,627 22,563 47,200
Notes receivable from employees and
officers.......................... -- (653) (2,157) (2,157)
Deferred stock compensation........ -- (2,766) (14,427) (14,427)
Deficit accumulated during
development stage................. (9,707) (20,417) (32,784) (32,784)
------- -------- -------- --------
Total stockholders' equity
(deficit)........................... (3,390) (15,196) (26,792) $ (2,147)
------- -------- -------- ========
Total liabilities and stockholders'
equity (deficit).................... $ 4,763 $ 10,811 $ 3,096
======= ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
E-STAMP CORPORATION
(a development stage company)
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Period from
Six months ended inception
Year ended December 31, June 30, (April 26, 1994)
-------------------------- ----------------- through June 30,
1996 1997 1998 1998 1999 1999
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $ -- $ -- $ -- $ -- $ -- $ --
Operating expenses:
Research and
development.......... 2,387 3,916 5,603 2,458 5,225 18,210
Sales and marketing... 1,761 1,743 2,722 1,137 2,494 8,850
General and
administrative....... 1,739 1,748 1,897 903 1,373 7,449
Amortization of
deferred stock
compensation......... 688 414 858 -- 3,451 5,411
------- ------- -------- ------- -------- --------
Operating loss.......... (6,575) (7,821) (11,080) (4,498) (12,543) (39,920)
Interest income......... 239 157 380 46 177 1,017
Interest expense........ (3) (14) (10) (3) (1) (109)
------- ------- -------- ------- -------- --------
Net loss................ (6,339) (7,678) (10,710) (4,455) (12,367) (39,012)
Accretion on redeemable
convertible preferred
stock.................. -- (196) (1,383) (307) (1,176) (2,755)
------- ------- -------- ------- -------- --------
Net loss attributable to
common stock........... $(6,339) $(7,874) $(12,093) $(4,762) $(13,543) $(41,767)
======= ======= ======== ======= ======== ========
Net loss per common
share (basic and
diluted)............... $ (0.51) $ (0.61) $ (0.92) $ (0.37) $ (1.00)
======= ======= ======== ======= ========
Weighted-average shares
outstanding (basic and
diluted)............... 12,543 12,966 13,075 13,026 13,486
Unaudited pro forma net
loss per share (basic
and diluted)........... $ (0.57) $ (0.57)
======== ========
Unaudited pro forma
weighted-average shares
outstanding (basic and
diluted)............... 18,753 21,846
</TABLE>
See accompanying notes.
F-4
<PAGE>
E-STAMP CORPORATION
(a development stage company)
STATEMENTS OF COMMON STOCK SUBJECT TO RESCISSION, REDEEMABLE CONVERTIBLE
PREFERRED STOCKAND STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except per share amounts)
Period from inception (April 26, 1994) through June 30, 1999
<TABLE>
<CAPTION>
Redeemable
Common Stock Convertible Deficit
Subject to Preferred Notes Accumulated
Rescission Stock LLC Units Common Stock Additional Receivable During the
------------- ------------- ---------------- ------------- Paid-In From Development Deferred
Shares Amount Shares Amount Units Amount Shares Amount Capital Employees Stage Compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial capital
contribution.... -- $-- -- $ -- 11,063 $ 210 -- $-- $ -- $ -- $ -- $ --
Issuance of
units at $0.05
per share for
services........ -- -- -- -- 225 10 -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- -- (572) --
--- --- --- ---- ------- ------- ------ --- ------ ---- ------- --------
Balance at
December 31,
1994............ -- -- -- -- 11,288 220 -- -- -- -- (572) --
Redemption of
units........... -- -- -- -- (1,131) (5,400) -- -- -- -- -- --
Issuance of
units to
investors at
$4.76 per unit
for cash, net of
issuance costs
of $56, and
conversion of
notes........... -- -- -- -- 1,613 7,624 -- -- -- -- -- --
Issuance of
units for
services at
$4.80 per unit.. -- -- -- -- 19 90 -- -- -- -- -- --
Deferred
compensation
related to
restricted unit
grants.......... -- -- -- -- -- 60 -- -- -- -- -- (60)
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- -- -- -- 30
Net loss........ -- -- -- -- -- -- -- -- -- -- (1,346) --
--- --- --- ---- ------- ------- ------ --- ------ ---- ------- --------
Balance at
December 31,
1995............ -- -- -- -- 11,789 2,594 -- -- -- -- (1,918) (30)
Issuance of
units at $8.00
per unit for
cash to
investors in May
1996, net of
issuance costs
of $25.......... -- -- -- -- 1,125 8,975 -- -- -- -- -- --
Issuance of
units for
services to
consultants at
$8.00 per unit
during 1996..... -- -- -- -- 13 100 -- -- -- -- -- --
Conversion of
Post N Mail
units into E-
Stamp common
stock and merger
of Post N Mail
into E-Stamp.... -- -- -- -- (12,927) (11,669) 12,927 13 5,428 -- 6,228 --
Exercise of
stock options
for cash by
employees during
1996............ 19 31 -- -- -- -- -- -- -- -- -- --
Deferred
compensation
related to
restricted
common stock
grants and stock
options......... -- -- -- -- -- -- -- -- 1,072 -- -- (1,072)
Stock issuance
and amortization
of deferred
compensation.... -- -- -- -- -- -- 13 -- -- -- -- 688
Net loss........ -- -- -- -- -- -- -- -- -- -- (6,339) --
--- --- --- ---- ------- ------- ------ --- ------ ---- ------- --------
Balance at
December 31,
1996............ 19 $31 -- $ -- -- $ -- 12,940 $13 $6,500 $ -- $(2,029) $ (414)
<CAPTION>
Total
Stockholders'
Equity
(Deficit)
<S> <C>
Initial capital
contribution.... $ 210
Issuance of
units at $0.05
per share for
services........ 10
Net loss........ (572)
-------------
Balance at
December 31,
1994............ (352)
Redemption of
units........... (5,400)
Issuance of
units to
investors at
$4.76 per unit
for cash, net of
issuance costs
of $56, and
conversion of
notes........... 7,624
Issuance of
units for
services at
$4.80 per unit.. 90
Deferred
compensation
related to
restricted unit
grants.......... --
Amortization of
deferred
compensation.... 30
Net loss........ (1,346)
-------------
Balance at
December 31,
1995............ 646
Issuance of
units at $8.00
per unit for
cash to
investors in May
1996, net of
issuance costs
of $25.......... 8,975
Issuance of
units for
services to
consultants at
$8.00 per unit
during 1996..... 100
Conversion of
Post N Mail
units into E-
Stamp common
stock and merger
of Post N Mail
into E-Stamp.... --
Exercise of
stock options
for cash by
employees during
1996............ --
Deferred
compensation
related to
restricted
common stock
grants and stock
options......... --
Stock issuance
and amortization
of deferred
compensation.... 688
Net loss........ (6,339)
-------------
Balance at
December 31,
1996............ $ 4,070
</TABLE>
See accompanying notes.
F-5
<PAGE>
E-STAMP CORPORATION
(a development stage company)
STATEMENTS OF COMMON STOCK SUBJECT TO RESCISSION, REDEEMABLE CONVERTIBLE
PREFERRED STOCKAND STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
(In thousands, except per share amounts)
Period from inception (April 26, 1994) through June 30, 1999
<TABLE>
<CAPTION>
Reedemable
Common Stock Convertible Deficit
Subject to Preferred Notes Accumulated
Rescission Stock LLC Units Common Stock Additional Receivable During the
-------------- -------------- ------------ ------------- Paid-In From Development Deferred
Shares Amount Shares Amount Units Amount Shares Amount Capital Employees Stage Compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
Series A
redeemable
convertible
preferred stock
for cash to
investors at
$2.40 per share
in September
1997, net of
issuance costs
of $70.......... -- $ -- 2,500 $ 5,930 -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of
common stock for
services to
consultants at
$8.00 per share
between
September and
December 1997... 22 175 -- -- -- -- -- -- -- -- -- --
Exercise of
stock options
for cash by
employees during
1997............ 27 46 -- -- -- -- -- -- -- -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- -- -- -- 414
Accretion on
redeemable
convertible
preferred
stock........... -- -- -- 196 -- -- -- -- (196) -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- -- (7,678) --
----- ---- ----- ------- --- ---- ------ ---- ------ ----- -------- -------
Balance at
December 31,
1997............ 68 252 2,500 6,126 -- -- 12,940 13 6,304 -- (9,707) --
Issuance of
Series B
redeemable
convertible
preferred stock
to investors at
$3.82 per share
for cash in July
1998, net of
issuance costs
of $40.......... -- -- 4,188 15,960 -- -- -- -- -- -- -- --
Issuance of
notes receivable
from employees
for exercise of
stock options... 1,738 653 -- -- -- -- -- -- -- (653) -- --
Issuance of
common stock for
services to
consultants at
$8.00 per share
between January
and June 1998... -- -- -- -- -- -- 10 -- 82 -- -- --
Exercise of
stock options
for cash by
employees during
1998............ 178 70 -- -- -- -- -- -- -- -- -- --
Shares
repurchased from
employees upon
termination at a
price of $0.40
per share in
September 1998.. (10) (4) -- -- -- -- -- -- -- -- -- --
Deferred stock
compensation.... -- -- -- -- -- -- -- -- 3,624 -- -- (3,624)
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- -- -- -- 858
Accretion on
redeemable
convertible
preferred
stock........... -- -- -- 1,383 -- -- -- -- (1,383) -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- -- (10,710) --
----- ---- ----- ------- --- ---- ------ ---- ------ ----- -------- -------
Balance at
December 31,
1998 ........... 1,974 $971 6,688 $23,469 -- $ -- 12,950 $ 13 $8,627 $(653) $(20,417) $(2,766)
<CAPTION>
Total
Stockholders'
Equity
(Deficit)
<S> <C>
Issuance of
Series A
redeemable
convertible
preferred stock
for cash to
investors at
$2.40 per share
in September
1997, net of
issuance costs
of $70.......... $ --
Issuance of
common stock for
services to
consultants at
$8.00 per share
between
September and
December 1997... --
Exercise of
stock options
for cash by
employees during
1997............ --
Amortization of
deferred
compensation.... 414
Accretion on
redeemable
convertible
preferred
stock........... (196)
Net loss........ (7,678)
-------------
Balance at
December 31,
1997............ (3,390)
Issuance of
Series B
redeemable
convertible
preferred stock
to investors at
$3.82 per share
for cash in July
1998, net of
issuance costs
of $40.......... --
Issuance of
notes receivable
from employees
for exercise of
stock options... (653)
Issuance of
common stock for
services to
consultants at
$8.00 per share
between January
and June 1998... 82
Exercise of
stock options
for cash by
employees during
1998............ --
Shares
repurchased from
employees upon
termination at a
price of $0.40
per share in
September 1998.. --
Deferred stock
compensation.... --
Amortization of
deferred
compensation.... 858
Accretion on
redeemable
convertible
preferred
stock........... (1,383)
Net loss........ (10,710)
-------------
Balance at
December 31,
1998 ........... $(15,196)
</TABLE>
See accompanying notes.
F-6
<PAGE>
E-STAMP CORPORATION
(a development stage company)
STATEMENTS OF COMMON STOCK SUBJECT TO RESCISSION REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
(In thousands, except per share amounts)
Period from inception (April 26, 1994) through June 30, 1999
<TABLE>
<CAPTION>
Redeemable
Common Stock Convertible Deficit
Subject to Preferred Notes Accumulated
Rescission Stock LLC Units Common Stock Additional Receivable During the
-------------- -------------- ------------ ------------- Paid-In From Development Deferred
Shares Amount Shares Amount Units Amount Shares Amount Capital Employees Stage Compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of
stock options
for cash by
employees during
1999
(unaudited)..... 63 $ 24 -- $ -- -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of
notes receivable
from employees
for exercise of
stock options
(unaudited)..... 2,217 1,668 -- -- -- -- -- -- -- (1,668) -- --
Shares
repurchased from
employee upon
termination at
$0.40 per share
in March 1999
(unaudited)..... (410) (164) -- -- -- -- -- -- -- 164 -- --
Deferred stock
compensation
(unaudited)..... -- -- -- -- -- -- -- -- 15,112 -- -- (15,112)
Amortization of
deferred
compensation
(unaudited)..... -- -- -- -- -- -- -- -- -- -- -- 3,451
Accretion on
redeemable
convertible
preferred stock
(unaudited)..... -- -- -- 1,176 -- -- -- -- (1,176) -- -- --
Net loss
(unaudited)..... -- -- -- -- -- -- -- -- -- -- (12,367) --
----- ------ ----- ------- --- ----- ------ ----- ------- ------- -------- --------
Balance at June
30, 1999
(unaudited)..... 3,844 $2,499 6,688 $24,645 -- $ -- 12,950 $ 13 $22,563 $(2,157) $(32,784) $(14,427)
===== ====== ===== ======= === ===== ====== ===== ======= ======= ======== ========
<CAPTION>
Total
Stockholders'
Equity
(Deficit)
<S> <C>
Exercise of
stock options
for cash by
employees during
1999
(unaudited)..... $ --
Issuance of
notes receivable
from employees
for exercise of
stock options
(unaudited)..... (1,668)
Shares
repurchased from
employee upon
termination at
$0.40 per share
in March 1999
(unaudited)..... 164
Deferred stock
compensation
(unaudited)..... --
Amortization of
deferred
compensation
(unaudited)..... 3,451
Accretion on
redeemable
convertible
preferred stock
(unaudited)..... (1,176)
Net loss
(unaudited)..... (12,367)
-------------
Balance at June
30, 1999
(unaudited)..... $(26,792)
=============
</TABLE>
See accompanying notes.
F-7
<PAGE>
E-STAMP CORPORATION
(a development stage company)
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six months ended
Year ended December 31, June 30, Period from inception
-------------------------- ----------------- (April 26, 1994)
1996 1997 1998 1998 1999 through June 30, 1999
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating activities
Net loss................ $(6,339) $(7,678) $(10,710) $(4,455) $(12,367) $(39,012)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization.......... 163 366 405 222 155 1,156
Loss on disposal of
assets................ -- -- 65 -- -- 180
Amortization of
deferred compensation
expense............... 688 414 858 -- 3,451 5,411
Issuance of common
stock for services.... 100 175 82 -- -- 457
Changes in assets and
liabilities:
Note receivable....... (60) 60 -- -- -- --
Other assets.......... 27 (14) (88) (10) (354) (498)
Accounts payable and
accrued liabilities.. 501 957 (172) (65) 1,189 2,718
------- ------- -------- ------- -------- --------
Net cash used in
operating activities... (4,920) (5,720) (9,560) (4,308) (7,926) (29,588)
Investing activities
Purchase of property and
equipment.............. (669) (119) (324) (144) (387) (1,881)
Purchase of short-term
investments............ -- -- -- -- -- (969)
Sale of short-term
investments............ 871 98 -- -- -- 969
------- ------- -------- ------- -------- --------
Net cash provided by
(used in) investing
activities............. 202 (21) (324) (144) (387) (1,881)
Financing activities
Repayments of lease
obligations............ (28) (34) (36) (20) (12) (82)
Proceeds from issuance
of notes payable....... -- -- 700 700 -- 700
Repayments of notes
payable................ -- -- (700) -- -- (700)
Repayments of notes
payable to related
parties................ (540) -- -- -- -- (5,740)
Proceeds from issuance
of notes payable to
related parties........ -- -- -- -- -- 521
Net proceeds from
exercise of stock
options................ 31 46 66 38 24 167
Net proceeds from
issuance of redeemable
convertible preferred
stock.................. -- 5,930 15,960 -- -- 21,890
Net proceeds from
issuance of common
stock.................. 8,975 -- -- -- -- 16,629
------- ------- -------- ------- -------- --------
Net cash provided by
financing activities... 8,438 5,942 15,990 718 12 33,385
------- ------- -------- ------- -------- --------
Net increase (decrease)
in cash and cash
equivalents............ 3,720 201 6,106 (3,734) (8,301) 1,916
Cash and cash
equivalents at
beginning of period.... 190 3,910 4,111 4,111 10,217 --
------- ------- -------- ------- -------- --------
Cash and cash
equivalents at end of
period................. $ 3,910 $ 4,111 $ 10,217 $ 377 $ 1,916 $ 1,916
======= ======= ======== ======= ======== ========
Supplemental cash flow
information
Cash paid for interest.. $ 3 $ 14 $ 10 $ 3 $ 3 $ 88
======= ======= ======== ======= ======== ========
Schedule of non-cash
financing and investing
transactions
Issuance of notes
receivable from
employees for exercise
of stock options....... $ -- $ -- $ (653) $ (653) $ (1,668) $ (2,321)
======= ======= ======== ======= ======== ========
Common stock repurchased
from employee upon
termination by
forgiveness of notes
receivable............. $ -- $ -- $ -- $ -- $ 164 $ 164
======= ======= ======== ======= ======== ========
Conversion of related
party notes payable to
shares................. $ -- $ -- $ -- $ -- $ -- $ 180
======= ======= ======== ======= ======== ========
Redemption of 905 shares
for related party notes
payable (Note 3)....... $ -- $ -- $ -- $ -- $ -- $ 5,400
======= ======= ======== ======= ======== ========
Assets acquired under
capital lease
obligations............ $ -- $ 80 $ -- $ -- $ -- $ 113
======= ======= ======== ======= ======== ========
</TABLE>
See accompanying notes.
F-8
<PAGE>
E-STAMP CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
1. Background and Summary of Significant Policies
E-Stamp Corporation, a Delaware corporation, was formed on August 23, 1996.
Effective September 1, 1996, Post N Mail, L.L.C., formed on April 26, 1994, was
merged (the "Merger") into E-Stamp Corporation (collectively, the "Company" or
"E-Stamp"). Upon completion of the Merger, all of the assets of Post N Mail,
L.L.C. were acquired by E-Stamp Corporation. The Merger was accounted for as a
combination of entities under common control. Each unit of Post N Mail, L.L.C.
ownership received 5,000 shares of E-Stamp common stock. The financial
statements have been presented to reflect the Merger for all periods presented.
The Company is a development stage company which has devoted substantially all
of its efforts to recruiting personnel to conduct research and product
development and sales and marketing and has not yet generated revenues from the
sale of products.
The Company has incurred significant losses since inception. Its activities
to date have been financed primarily through private placements of equity
securities. The Company may seek to raise additional capital through the
issuance of debt or equity securities. However, there can be no assurance that
the Company will be able to obtain additional financing on acceptable terms, if
at all.
Nature of Operations
The Company has developed technology that allows users to apply digital
postage to envelopes, mailing labels, and documents from their personal
computers. This technology, termed the E-Stamp Internet postage solution,
allows authorized users to purchase postage via the Internet and subsequently
print postage from personal computers onto envelopes, mailing labels, and
documents using standard laser and inkjet printers. The Internet postage
solution is designed to print a postmark indicia that can be used as a
replacement for other current forms of postage, including stamps and today's
postmarks generated by postage metering devices. The information generated by
the Internet postage solution will be read by the U.S. Postal Service during
mail processing and allow for routing to intended recipients.
Revenue Recognition
Through June 30, 1999, the Company had not generated any revenues. The
Company anticipates that it will generate revenue from software license fees,
postage convenience fees and sale of postage supplies.
Software license fees are amounts paid by end-users and resellers for a
perpetual license to the Company's software. The Company's software package
allows the end-user to apply for a USPS license. When the Company is notified
that the USPS has approved the license, the Company ships a secure internet
postage device, necessary for the use of the Company's software, to the end-
user. Revenues from software license fees are recognized in accordance with
AICPA Statement of Position 97-2, "Software Revenue Recognition," and Statement
of Position 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2,
Software Revenue Recognition." Revenues from software license fees are
recognized when delivery of the secure internet postage device and the software
are complete, when persuasive evidence of an arrangement exists, collection is
probable, the fee is fixed and determinable and no significant obligations
remain.
Postage convenience fees are amounts paid by end-users for the delivery of
postage by the Company to the end-user. The convenience fees are based on the
amount of postage ordered by the end-user. Revenues from postage convenience
fees are recognized when the postage is downloaded into the secure postage
hardware device.
The Company anticipates that it will operate an Internet-based postal store
where end-users may purchase various postal supplies. The Company will
recognize revenues related to the postage supplies when the supplies are
delivered.
F-9
<PAGE>
E-STAMP CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
1. Background and Summary of Significant Policies (continued)
Revenue Recognition (continued)
The Company will provide an allowance for estimated returns upon the
recognition of the related revenue.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a remaining
maturity of three months or less when purchased to be cash equivalents. The
Company's cash equivalents were composed of government securities as of
December 31, 1998 and of money market mutual funds and government securities
as of December 31, 1997. The Company's cash and cash equivalents are carried
at cost which approximates market.
Property and Equipment
Property and equipment are recorded at cost. Additions, improvements, and
renewals that significantly add to the asset value or extend the life of the
asset are capitalized. Expenditures for maintenance and repairs are expensed
as costs are incurred.
Depreciation and amortization, for financial reporting purposes, are
provided on the straight-line method based upon the estimated useful lives as
follows:
<TABLE>
<S> <C>
Computer and other equipment............................. 3 years
Furniture and fixtures................................... 3 years
Leasehold improvements................................... Life of the lease
</TABLE>
In accordance with Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of" ("SFAS
No. 121"), the Company records impairment losses on long-lived assets used in
operations when events or circumstances indicate that the carrying amount of
the asset exceeds its fair value. If there is impairment in the future, the
Company will measure the amount of the loss based on discounted expected
future cash flows from the impaired assets. The cash flow calculations would
be based on management's best estimates, using appropriate assumptions and
projections at the time. Through June 30, 1999 the Company has not recorded
any such impairment losses.
Research and Development
Research and development costs are expensed as they are incurred. Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software To Be Sold, Leased, or Otherwise Marketed" (FAS 86),
requires capitalization of certain software development costs subsequent to
the establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion
of all phases of the detailed product design necessary to establish that the
product can be manufactured to meet all design specifications. Through June
30, 1999, technological feasibility for the Company's primary product was not
established and, therefore, all software research and development costs were
expensed as incurred.
Advertising Costs
The Company expenses the costs of advertising as incurred. Advertising
expense consists principally of advertising contracts in which the Company is
guaranteed a minimum number of impressions (a view of an advertisement by a
consumer) for a fixed fee. The fees are recorded as advertising expense
ratably over the
F-10
<PAGE>
E-STAMP CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
1. Background and Summary of Significant Policies (continued)
Advertising Costs (continued)
term of the agreements. To the extent that impression deliveries are falling
short of the guarantees, the Company defers recognition of the corresponding
advertising expense until the impressions are delivered. The Company also pays
royalties (see Note 4) for the promotion of its product. Such royalties are
recorded as advertising expense as the royalties are earned. Advertising
expense was $117,000 for the year ended December 31, 1998. No advertising
expense was recorded for the years ended December 31, 1996 and 1997.
Income Taxes
The Company computes and records income tax in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). Under FAS 109, the liability method is used to calculate deferred taxes.
Stock-Based Compensation
In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), which
the Company adopted in 1996, the Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB Opinion No. 25"), and related interpretations in accounting for stock
options. Under APB Opinion No. 25, if the exercise price of the Company's
employee and director stock options equals or exceeds the fair value of the
underlying stock on the date of grant, no compensation expense is recognized.
Options granted to consultants are accounted for using the Black-Scholes method
prescribed by FAS 123 in accordance with Emerging Issues Task Force consensus
No. 96-18 and the assumptions used for stock-based awards to employees (see
Note 4) except that a volatility of 100% was used. (See Note 3 for pro forma
disclosures of stock-based compensation pursuant to FAS 123.) Any deferred
stock compensation is amortized over the vesting period of the individual
options, generally four years, using the graded vesting method. The graded
vesting method provides for vesting of portions of the overall award at
different dates and results in higher vesting in earlier years than straight-
line vesting.
Use of Estimates
The Company's management makes estimates and assumptions in the preparation
of its financial statements in conformity with generally accepted accounting
principles. These estimates and assumptions may affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities as
of the date of the financial statements, and the reported amounts of expenses
during the respective reporting periods. Actual results could differ from those
estimates.
Concentrations
The Company relies on one manufacturer for the supply and production of its
Internet postage device. The inability of this manufacturer to fulfill the
Company's supply requirements could negatively impact future results.
Effect of New Accounting Standards
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting for Comprehensive Income," ("SFAS
130"). SFAS 130 requires disclosures of components of
F-11
<PAGE>
E-STAMP CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
1. Background and Summary of Significant Policies (continued)
Effect of New Accounting Standards (continued)
non-stockholder changes in equity in interim periods and additional disclosures
of components of non-stockholder changes in equity on an annual basis. Adoption
of SFAS 130 had no impact on the Company's results of operations or financial
position.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
("SFAS 131"). The Company adopted SFAS 131 effective January 1, 1998. The
adoption of this standard did not have a material effect on the Company's
financial statement disclosures as the Company operates in a single segment.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133"). The Company is required to
adopt SFAS 133 for the year ending December 31, 2000. SFAS 133 establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities.
Because the Company currently holds no derivative financial instruments and
does not currently engage in hedging activities, adoption of SFAS 133 is
expected to have no material impact on the Company's financial condition or
results of operations.
In March 1998, the AICPA issued Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP
98-1"). SOP 98-1 requires that entities capitalize certain costs related to
internal use software once certain criteria have been met. The Company adopted
the provisions of SOP 98-1 on January 1, 1999. Through June 30, 1999, the
Company has not capitalized any costs related to internal use software.
The Company will adopt AICPA Statement of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2"), and Statement of Position 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2, Software Revenue Recognition" ("SOP
98-4") upon its first product revenue transactions. SOP 97-2 and SOP 98-4
provide guidance for recognizing revenue on software transactions and supersede
SOP 91-1, "Software Revenue Recognition." As no revenues have been recognized,
the adoption of SOP 97-2 and SOP 98-4 did not have any impact on the Company's
financial results through December 31, 1998. However, full implementation
guidelines for this standard have not yet been issued. Once available, the
planned revenue accounting practices may need to change and such changes could
affect the Company's future revenues and results of operations. In December
1998, the AICPA issued Statement of Position 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions" ("SOP 98-
9"). SOP 98-9 amends SOP 98-4 to extend the deferral of the application of
certain passages of SOP 97-2 provided by SOP 98-4 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after March
15, 1999. E-Stamp has not yet determined the effect of the final adoption of
SOP 98-9 on its future revenues and results of operations.
Reclassifications
Certain prior-year amounts have been reclassified to conform with the
current year's presentation.
Unaudited Financial Statements
According to management, the accompanying unaudited financial statements for
the six months ended June 30, 1998 and 1999 and for the period from inception
(April 26, 1994) to June 30, 1999 have been
F-12
<PAGE>
E-STAMP CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
1. Background and Summary of Significant Policies (continued)
Unaudited Financial Statements (continued)
prepared on substantially the same basis as the audited financial statements
and include all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation of the financial information set
forth therein.
Unaudited Pro Forma Information
If the offering contemplated by this prospectus is consummated, the Series A
and B redeemable convertible preferred stock outstanding as of the closing date
will be converted into shares of the Company's common stock. The pro forma
stockholders' equity as of June 30, 1999 reflects conversion of the outstanding
preferred stock into 8,360,000 shares of common stock. Pro forma net loss per
share is computed as if the outstanding preferred stock had been converted into
common stock on the date of issuance.
2. Line of Credit
On October 11, 1997, the Company entered into a Loan and Security Agreement
with a bank which allows for a $1,000,000 line of credit to be used for general
business purposes. An amendment dated September 21, 1998 increased the line of
credit to $1,250,000. The Loan and Security Agreement, which expires
September 30, 1999, grants the bank a security interest in all the assets of
the Company except the intellectual property. As of December 31, 1998 and June
30, 1999, no amounts were outstanding under this arrangement; however, a
$35,000 letter of credit required for the Company's California office lease was
secured by this credit facility, leaving the balance of the line of credit of
$1,215,000 available for other purposes. At June 30, 1999, $143,000 was
outstanding on the letter of credit and $1,107,000 was available.
3. Redeemable Convertible Preferred Stock
As of December 31, 1998, the Company is authorized to issue 12,000,000
shares of preferred stock in series. Rights and preferences of each series of
preferred stock are to be determined by the Board of Directors. As of December
31, 1998, 2,500,000 and 4,188,000 shares have been designated as Series A and B
redeemable convertible preferred stock, respectively.
The Series A and B redeemable convertible preferred stock carries an 8%,
noncumulative dividend, payable at the discretion of the Board of Directors.
Additionally, each outstanding share of Series A and B redeemable convertible
preferred stock is convertible into 1.25 shares of common stock (i) at the
option of the holder, (ii) upon the closing of a public offering, as defined,
or (iii) upon the consent of a majority of holders of the Series A and B
redeemable convertible preferred stock. The Company has reserved 3,125,000 and
5,235,000 shares of common stock for the conversion of the Series A and B
redeemable convertible preferred stock, respectively.
The holders of Series A and B redeemable convertible preferred stock are
entitled to receive noncumulative dividends at the rate of $0.192 and $0.3056
per share, respectively, if declared by the Board of Directors. These dividends
are in preference to any declaration or payment of and dividend on common stock
of the Company. No dividends have been declared from inception (April 26, 1994)
through December 31, 1998.
F-13
<PAGE>
E-STAMP CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
3. Redeemable Convertible Preferred Stock (continued)
Upon liquidation of the Company, the Series A and B redeemable convertible
preferred stockholders are entitled to a liquidation preference equal to the
original issuance price, plus any declared unpaid dividends, which is superior
to the claim of common stockholders.
The holders of Series A and B redeemable convertible preferred stock are
entitled to one vote for each share of common stock into which such convertible
preferred stock could be converted.
At any time after September 3, 2001 but not later than September 3, 2003, a
majority of the holders of Series A redeemable convertible preferred stock can
require the Company to redeem the outstanding Series A redeemable convertible
preferred stock at the redemption price. The redemption price is equal to the
original issuance price of the Series A redeemable convertible preferred stock
plus a 10% compound annual rate of return. The carrying amount of Series A
redeemable convertible preferred stock is being increased by periodic
accretions so that its carrying amount will equal the redemption amount at the
redemption date.
At any time after July 7, 2002 but not later than July 7, 2004, a majority
of the holders of Series B redeemable convertible preferred stock can require
the Company to redeem the outstanding Series B convertible preferred stock at
the redemption price. The redemption price is equal to the original issuance
price of the Series B redeemable convertible preferred stock plus a 10%
compound annual rate of return. The carrying amount of Series B redeemable
convertible preferred stock is being increased by periodic accretions so that
its carrying amount will equal the redemption amount at the redemption date.
4. Stockholders' Equity
Stock Option Plans
Stock Option and Restricted Stock Plan
Effective September 1996, the Company established the 1996 Stock Option and
Restricted Stock Plan (the "Employee Plan"). The Employee Plan expires in
August 2006 and provides for the grant of incentive stock options, nonstatutory
stock options, and restricted stock to employees and consultants of the
Company. An amendment increasing the number of shares thereunder from 2,500,000
to 3,437,500 was approved by the Board of Directors on June 26, 1998. The
Employee Plan is administered by a committee of the Board of Directors. This
committee has the authority to determine the employees and consultants to whom
awards will be made, the amount of the awards, and the other terms and
conditions of the awards. Stock options are limited to ten-year terms, and
options granted through December 31, 1998 generally vest at the rate of 25%
upon the first anniversary of the grant and 6.25% each quarter thereafter. The
exercise price for stock options may not be less than the fair value of the
shares on the date of grant for incentive stock options and is subject to the
discretion of the committee for nonstatutory stock options. Restricted stock
may be granted at no additional cost to recipients. Compensation expense, if
any, equal to the fair value of the restricted stock or stock options granted
in excess of the purchase or exercise price, is recognized over the related
vesting period. A total of 3,437,500 shares of common stock are currently
reserved for issuance pursuant to the Employee Plan. As of December 31, 1998,
options to purchase 1,259,241 shares of common stock at a weighted-average
exercise price of $0.60 per share were outstanding of which 1,037,163 were
vested, and 203,906 shares of common stock remained available for future grants
under the Employee Plan.
F-14
<PAGE>
E-STAMP CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
4. Stockholders' Equity (continued)
Stock Option Plans (continued)
Nonemployee Directors' Plan
Also in September 1996, the Company established the 1996 Nonemployee
Director Stock Option Plan (the "Director Plan") which authorizes the issuance
of up to 125,000 shares of common stock. The Director Plan expires in August
2006. The Director Plan is a nondiscretionary stock option plan for nonemployee
directors of the Company, which generally provides for the grant of stock
options for 10,000 shares upon election as a nonemployee director and an
additional grant of stock options for 3,000 shares as of April 1 of each year.
The options are limited to a ten-year term, vest at the rate of 50% per year,
and have an exercise price equal to the fair value of the shares on the date of
grant. A total of 125,000 shares of common stock are currently reserved for
issuance pursuant to the Director Plan. As of December 31, 1998, options to
purchase 19,063 shares of common stock at a weighted-average exercise price of
$0.40 per share were outstanding of which 13,906 were vested, and 105,937
shares of common stock remained available for future grants under the Director
Plan.
The following is a summary of the combined option transactions under the
Employee Plan and Director Plan for the years ended December 31, 1997 and 1998.
<TABLE>
<CAPTION>
Weighted-
Number of Average
Options Exercise Price
(In thousands, except
per share amounts)
<S> <C> <C>
Options outstanding at December 31, 1996........... 824 $4.66
Granted.......................................... 1,518 0.57
Exercised........................................ (29) 1.60
Canceled......................................... (224) 5.79
------
Options outstanding at December 31, 1997........... 2,089 0.50
Granted.......................................... 1,360 0.55
Exercised........................................ (1,916) 0.42
Canceled......................................... (255) 0.41
------
Options outstanding at December 31, 1998........... 1,278 0.60
Granted (unaudited).............................. 2,870 0.78
Exercised (unaudited)............................ (2,280) 0.74
Canceled (unaudited)............................. (583) 0.72
------
Options outstanding at June 30, 1999 (unaudited)... 1,285 0.72
======
Exercisable at December 31, 1998................... 1,053
======
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
----------------------------------------------
Options
Outstanding at Weighted-Average Weighted-
December 31, Remaining Average
Range of Exercise Prices 1998 Contractual Life Exercise Price
(In thousands) (In years)
<S> <C> <C> <C>
$0.04-$0.20............... 31 5.23 $0.14
$0.40-$0.40............... 379 7.65 0.40
$0.64-$0.64............... 855 9.82 0.64
$4.80-$5.28............... 13 1.00 4.80
----- ----
1,278 8.98
===== ====
</TABLE>
F-15
<PAGE>
E-STAMP CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
4. Stockholders' Equity (continued)
Stock Option Plans (continued)
Stock-Based Compensation
During 1995, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), which became effective for the Company's 1996 fiscal
year. FAS 123 requires the Company to disclose the pro forma effect of the
method of accounting prescribed in FAS 123, which would generally require the
Company to record compensation expense equal to the valuation of a stock option
on the grant date.
The fair value of the Company's stock-based awards to employees was
estimated using the minimum value method and assuming no expected dividends and
the following weighted average assumptions:
<TABLE>
<CAPTION>
Years ended
December 31,
----------------
1996 1997 1998
<S> <C> <C> <C>
Expected volatility........................................ N/A N/A N/A
Expected life of options in years.......................... 5.5 5.5 4.0
Risk-free interest rate.................................... 6.0% 6.0% 5.0%
Expected dividend yield.................................... 0.00% 0.00% 0.00%
</TABLE>
For pro forma purposes, the estimated minimum value of the Company's stock-
based awards to employees is amortized over the options' vesting period. If the
Company had elected to recognize compensation cost based on the fair value of
the options granted at grant date as prescribed by FAS 123, net loss and net
loss per share would have increased to the pro forma amounts indicated in the
table below (in thousands except per share amounts):
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1996 1997 1998
<S> <C> <C> <C>
Net loss attributable to common stockholders:
As reported.................................. $(6,339) $(7,874) $(12,093)
======= ======= ========
Pro forma.................................... $(7,146) $(8,831) $(12,643)
======= ======= ========
Net loss per share (basic and diluted):
As reported.................................. $ (0.51) $ (0.61) $ (0.92)
======= ======= ========
Pro forma.................................... $ (0.57) $ (0.68) $ (0.97)
======= ======= ========
</TABLE>
The weighted-average fair value of options granted in fiscal 1997 and 1998
was $0.19 and $0.14, respectively.
In 1996, the Company granted equity awards of common stock to certain
employees. Restrictions, as determined by management, lapse from one year to
four years after the grant date. Upon grant, deferred compensation of
approximately $1.1 million was charged to stockholders' equity and is being
amortized to expense over the periods until the restrictions lapse. In
connection with these restricted shares, amortization charged to expense in
1996 and 1997 was $688,000 and $414,000, respectively, and $1,132,000 for the
period from inception to December 31, 1998.
F-16
<PAGE>
E-STAMP CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
4. Stockholders' Equity (continued)
The Company has recorded additional deferred stock compensation of
approximately $3,624,000 during the year ended December 31, 1998 and
$15,112,000 during the six months ended June 30, 1999 representing the
difference between the exercise price and the deemed fair value, for financial
reporting purposes, of the Company's common stock on the grant date for certain
of the Company's stock options granted to officers and employees. In the
absence of a public market for the Company's common stock, the deemed fair
value was determined by the Company's Board of Directors and was based on the
price per share of sales of equity securities to third parties. These amounts
are being amortized by charges to operations over the vesting periods of the
individual stock options using a graded vesting method. Such amortization
expense amounted to approximately $858,000 for the year ended December 31, 1998
and approximately $3,451,000 for the six months ended June 30, 1999.
Stock Subject to Rescission
Shares issued and options grants made under the Company's 1996 Employee
Plan, 1996 Director Plan and 1999 Stock Plan may not have qualified for
exemption from registration or qualification under federal and state securities
laws and therefore may be subject to rescission. As discussed in Note 10, the
Company plans on commencing a rescission offer for these shares and options. If
a rescission offer is actually made and if all of the holders of these shares
and options acquired through October 1, 1999 accept the Company's offer, the
Company would be required to make aggregate payments of up to $6.9 million plus
statutory interest.
The Company has reclassified the amounts paid in for outstanding shares
subject to rescission outside of permanent equity in the accompanying balance
sheets.
Stock Subject to Repurchase
As of December 31, 1997 and 1998 the Company had none and 1,751,063 shares
of common stock outstanding which were subject to repurchase, respectively. At
June 30, 1999 the Company had 3,968,538 shares of common stock outstanding
which were subject to repurchase. These shares are the result of the exercise
of unvested stock options by employees in exchange for notes (see Note 8).
These shares will vest over the four-year vesting period of the underlying
exercised stock options. The right to repurchase these shares is at the sole
discretion of the Company.
5. Marketing and Distribution Agreements
Compaq Software Alliance Agreement
In July 1998, the Company entered into a three year Software Alliance
Agreement ("Alliance Agreement") with Compaq Computer Corporation ("Compaq").
Under this agreement, Compaq will market our Internet postage solution as part
of their online services and, in exchange, the Company agreed to pay Compaq
royalties.
Strategic Marketing Agreement
In November, 1998, the Company entered into a strategic marketing agreement
with an Internet service provider (the "Provider") for the promotion of the
Company's internet postage service. The Provider has agreed to deliver a
minimum number of impressions over the approximate 15 month term of the
agreement, commencing on the date the Company receives approval for Phase III
beta testing from the USPS. In exchange for these promotional services, the
Company has agreed to pay the Provider approximately $1.3 million.
F-17
<PAGE>
E-STAMP CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
6. Income Taxes
As of December 31, 1998, the Company had federal and state net operating
loss carryforwards of approximately $7,100,000 and $5,700,000 respectively. The
net operating loss carryforwards will expire at various dates beginning in 2004
through 2018, if not utilized.
Utilization of the net operating losses may be subject to a substantial
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code and similar state provisions. The annual limitation may
result in the expiration of the net operating loss carryforwards before
utilization.
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
(In thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 900 $ 2,800
Capitalized research and development...................... 2,400 4,300
Capitalized start-up costs................................ 2,100 1,700
Deferred compensation..................................... 400 600
Other..................................................... 600 800
------- --------
Total deferred tax assets................................. 6,400 10,200
Valuation allowance....................................... (6,400) (10,200)
------- --------
Net deferred tax assets................................... $ -- $ --
======= ========
</TABLE>
FAS 109 provides for the recognition of deferred tax assets if realization
of such assets is more likely than not. Based upon the weight of available
evidence, which includes the Company's historical operating performance and the
reported cumulative net losses in prior years, the Company has provided a full
valuation allowance against its net deferred tax assets.
The valuation allowance increased by $3,100,000 and $3,800,000 during the
years ended December 31, 1997 and 1998, respectively.
7. Commitments
401(k) Plan
Effective April 1, 1996, the Company established the E-Stamp Corporation
Benefit Plan (the "Plan"). The Plan provides for a Company match of employee
contributions equal to 50% of employee contributions up to 4% of their
compensation. Employees are eligible to participate in the Plan at the
beginning of the month following the first day of employment. The terms of the
Plan are subject to change as determined by management. The Company made
contributions in 1997 and 1998 of approximately $18,000 and $59,000,
respectively.
F-18
<PAGE>
E-STAMP CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
7. Commitments (continued)
Leases
The Company has various operating leases, the terms of which range from 12
to 60 months. The operating leases are primarily for facilities in Houston,
Texas and Palo Alto, California. Rental expenses related to these leases for
the periods ended December 31, 1996, 1997 and 1998 were $188,000, $411,000 and
$554,000, respectively. During 1997, the Company entered into computer lease
agreements classified as capital leases in the accompanying financial
statements.
In February 1999, the Company entered into a new sublease pertaining to a
new facility at a monthly rent payment of $71,683 effective April 1, 1999. The
sublease term will end on June 30, 2000. The table below includes the rental
payments from this sublease.
Leases (continued)
The following represents future minimum rental payments under noncancelable
operating leases and capital leases:
<TABLE>
<CAPTION>
Operating Capital
(In thousands)
<S> <C> <C>
For the years ending December 31:
1999..................................................... $ 943 $31
2000..................................................... 459 8
2001..................................................... -- 4
2002..................................................... -- 1
------ ---
Total minimum lease payments............................... $1,402 44
======
Less amount representing interest.......................... (6)
---
Present value of future minimum lease payments............. 38
Less current portion of capital leases..................... (27)
---
Long-term portion of capital leases........................ $11
===
</TABLE>
Assets capitalized under capital leases totaled approximately $80,000 at
December 31, 1997 and 1998 and are included in computers and furniture and
fixtures. Accumulated amortization related to assets under capital leases
totaled $22,000 and $49,000 at December 31, 1997 and 1998, respectively.
8. Notes Receivable
On June 12, 1998, the Company received $653,294 of full recourse notes
receivable from employees which bear interest at 6% per annum in consideration
for the exercise of stock options. The interest portion is payable annually or
on or before the 12th day of June, commencing June 12, 1999 and continuing
through June 12, 2003, at which time the entire amount of principal and all
accrued interest then outstanding and remaining unpaid shall become due and
payable in full. The principal is payable in full on the earlier to occur of
June 12, 2003 or 90 days following the termination of employment for any
reason.
Interest receivable recorded for these notes receivable totaled $21,800 at
December 31, 1998.
F-19
<PAGE>
E-STAMP CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
9. Net Loss Per Share
Net loss per share has been computed in accordance with the Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"), which
requires disclosure of basic and diluted earnings per share. Basic earnings per
share excludes any dilutive effects of options, shares subject to repurchase,
warrants, and convertible securities. Diluted earnings per share includes the
impact of potentially dilutive securities. The Company's potentially dilutive
securities were antidilutive and therefore were not included in the computation
of weighted-average shares used in computing diluted loss per share. Following
the guidance given by the Securities and Exchange Commission Staff Accounting
Bulletin No. 98, common stock and convertible preferred stock that has been
issued or granted for nominal consideration prior to the anticipated effective
date of the initial public offering date must be included in the calculation of
basic and diluted net loss per common share as if these shares had been
outstanding for all periods presented. To date, the Company has not issued or
granted shares for nominal consideration.
The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per share (in thousands, except per share
data):
<TABLE>
<CAPTION>
Years ended Six months ended
December 31, June 30,
-------------------------- -----------------
1996 1997 1998 1998 1999
(unaudited)
<S> <C> <C> <C> <C> <C>
Basic and diluted:
Net loss.................. $(6,339) $(7,678) $(10,710) $(4,455) $(12,367)
Accretion on redeemable
convertible preferred
stock.................... -- (196) (1,383) (307) (1,176)
------- ------- -------- ------- --------
Net loss attributable to
common stock............. $(6,339) $(7,874) $(12,093) $(4,762) $(13,543)
======= ======= ======== ======= ========
Weighted-average shares of
common stock
outstanding.............. 12,543 12,966 14,044 13,200 15,404
Less: weighted-average
shares subject to
repurchase............... -- -- (969) (174) (1,918)
------- ------- -------- ------- --------
Weighted-average shares
used in computing basic
and diluted net loss per
share.................... 12,543 12,966 13,075 13,026 13,486
======= ======= ======== ======= ========
Basic and diluted net loss
per share................ $ (0.51) $ (0.61) $ (0.92) $ (0.37) $ (1.00)
======= ======= ======== ======= ========
Pro forma basic and
diluted:
Net loss.................. $(10,710) $(12,367)
======== ========
Shares used above......... 13,075 13,486
Pro forma adjustment to
reflect weighted effect
of assumed conversion of
convertible preferred
stock (unaudited)........ 5,678 8,360
-------- --------
Shares used in computing
pro forma basic and
diluted net loss per
share (unaudited)........ 18,753 21,846
======== ========
Pro forma basic and
diluted net loss per
share (unaudited)........ $ (0.57) $ (0.57)
======== ========
</TABLE>
The Company has excluded all convertible preferred stock and outstanding
stock options from the calculation of diluted net loss per share because all
such securities are antidilutive for all periods presented. The total number of
shares excluded from the calculations of diluted net loss per share was
659,000, 4,172,000, and 7,711,000 for the years ended December 31, 1996, 1997,
and 1998, respectively, and 2,998,000 and 7,717,000 for the six months ended
June 30, 1998 and 1999, respectively. Such securities, had they been dilutive,
would have been included in the computations of diluted net loss per share
using the treasury stock method.
F-20
<PAGE>
E-STAMP CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
10. Subsequent Events
Strategic Distribution Agreements (unaudited)
From January 1, 1999 through September 24, 1999, the Company entered into
agreements for online advertising with Yahoo!, Inc., Microsoft Corporation,
Earthlink Operations, Inc., Excite@Home and Intuit. Aggregate noncancelable
advertising commitments related to these agreements total approximately $5.5
million, $10.5 million and $2.4 million for the second half of 1999 and for the
years ending December 31, 2000 and 2001, respectively. The Company has paid
$500,000 under these agreements in the six months ended June 30, 1999. The
Company could be subject to additional payments under these agreements if
advertising exceeds established levels of page views or generates and exceeds
established levels of new customers.
Pitney Bowes Litigation (unaudited)
On June 10, 1999, Pitney Bowes filed suit against us in U.S. District Court
alleging infringement of Pitney Bowes patents. The suit alleges that we are
infringing seven patents held by Pitney Bowes related to postage application
systems and seeks treble damages, a preliminary and permanent injunction from
further alleged infringement, attorneys' fees and other unspecified damages. On
July 30, 1999, we filed our answer to Pitney Bowes' complaint in which we deny
all allegations of patent infringement and assert certain affirmative and other
defenses based on statutory and common law grounds, including inequitable
conduct on the part of Pitney Bowes in its procurement of patents in
proceedings before the U.S. Patent and Trademark Office. As part of the answer,
we also brought various counterclaims against Pitney Bowes claiming Pitney
Bowes' violation of Section 2 of the Sherman Act and intentional and tortious
interference with E-Stamp's business relations based, in part, upon our
allegations that Pitney Bowes has unlawfully maintained its monopoly power in
the postage metering market through a scheme to defraud the U.S. Patent and
Trademark Office and its efforts to discourage potential investors and
strategic partners from investing and entering into partnerships with E-Stamp.
Our suit seeks compensatory and treble damages, injunctive relief and recovery
of attorney's fees. On September 21, 1999, Pitney Bowes filed a motion to
strike or dismiss certain of the Company's affirmative defenses and
counterclaims or, in the alternative, to bifurcate discovery and trial of those
counterclaims; the Company's response to the Motion is due in October 1999. We
are continuing to investigate the claims against us as well as infringement by
Pitney Bowes of our patents, and may assert additional defenses or pursue
additional counterclaims or independent claims against Pitney Bowes in the
future.
Pendency of the litigation can be expected to result in significant expenses
to us and the diversion of management time and other resources. If Pitney Bowes
is successful in its claims against us, then we may be hindered or even
prevented from competing in the Internet postage market and our operations
would be severely harmed. For example, the Pitney Bowes suit could result in
limitations on how we implement our solutions, delays and costs associated with
redesigning our solutions and payments of license fees and other payments. An
injunction obtained by Pitney Bowes could eliminate our ability to market
critical products or services.
Bridge Loan Financing (unaudited)
On July 12, 1999, the Company entered into bridge loan financing arrangement
with a financial institution under which the Company borrowed $5.0 million.
Amounts borrowed under the arrangement bear interest at a rate of 13% per
annum. In connection with this financing, the Company granted the lender
warrants to purchase 48,496 shares of common stock with an exercise price of
$8.25 per share. These warrants expire in July, 2004. The Company anticipates
recording the fair value of these warrants of approximately $85,000 as interest
F-21
<PAGE>
E-STAMP CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
10. Subsequent Events (continued)
expense over the period the loan is outstanding. The Company borrowed $5.0
million in July, 1999 under the facility and fully repaid the outstanding
balance in August, 1999.
Employee Option Grants (unaudited)
From July 1, 1999 to September 24, 1999, options to purchase 1,471,893
shares were granted to employees pursuant to the 1996 Stock Option Plan with
exercise prices of between $1.20 and 6.88 per share. The Company estimates that
additional deferred compensation of $7.9 million will be recorded as a result
of these option grants and amortized to compensation expense in accordance with
the Company's policy.
1996 Stock Plan (unaudited)
In February 1999, the board of directors approved an amendment increasing
the number of shares reserved for issuance under the 1996 Stock Plan from
3,437,500 to 5,937,500 subject to shareholder approval. The shareholders
approved the increase in April 1999. In August 1999, the board of directors
approved an amendment increasing the number of shares reserved by 81,250
subject to shareholder approval. The shareholders approved the increase in
September 1999.
1999 Stock Plan (unaudited)
In August 1999, the board of directors approved the 1999 Stock Plan subject
to shareholder approval. A total of 2,500,000 shares of common stock are
reserved for issuance under the plan. The shareholders approved the plan in
September 1999.
1999 Employee Stock Purchase Plan (unaudited)
In August 1999, the board of directors approved the 1999 Employee Stock
Purchase Plan subject to shareholder approval. A total of 500,000 shares of
common stock has been reserved for issuance under the 1999 Purchase Plan. The
1999 Purchase Plan permits eligible employees to acquire shares of the
Company's common stock through periodic payroll deductions of up to 15% of
total compensation. No more than 5,000 shares may be purchased on any purchase
date per employee. Each offering period will have a maximum duration of 24
months. The price at which the common stock may be purchased is 85% of the
lesser of the fair market value of the Company's common stock on the first day
of the applicable offering period or on the last day of the respective purchase
period. The initial offering period will commence on the effectiveness of the
initial public offering and will end on the last trading day on or before
November 14, 2001. The shareholders approved the plan in September 1999.
1999 Director Option Plan (unaudited)
In August 1999, the board of directors approved the 1999 Option Plan subject
to shareholder approval. A total of 300,000 shares of common stock are reserved
for issuance under the Plan. The shareholders approved the plan in September
1999.
Initial Public Offering
In August 1999, the board of directors authorized the filing of a
registration statement with the Securities and Exchange Commission to register
shares of its common stock in connection with a proposed Initial Public
F-22
<PAGE>
E-STAMP CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
10. Subsequent Events (continued)
Offering ("IPO"). If the offering is consummated under the terms presently
anticipated, all of the outstanding convertible preferred stock as of June 30,
1999 will convert to 8,360,000 shares of common stock upon the closing of the
IPO. The effect of this conversion has been reflected as unaudited pro forma
stockholders' equity in the accompanying consolidated balance sheet at June 30,
1999. Additionally, the shares of Series C preferred stock issued in August
1999 discussed below will convert into 3,660,651 shares of common stock upon
completion of this offering.
In July 1999, the board of directors authorized an increase in the
authorized number of shares of common stock to 200,000,000 shares subject to
stockholder approval.
Sales of Preferred Stock
In August 1999, the Company issued 2,928,521 shares of Series C redeemable
convertible preferred stock at $10.31 per share for cash. Series C redeemable
convertible preferred stock carries an 8%, noncumulative dividend, is
convertible into 1.25 shares of common stock and has other rights and
preferences similar to those described for Series A and B convertible stock in
Note 3. In connection with the sale of Series C redeemable convertible
preferred stock, the Company committed to issue warrants to purchase 21,235
shares of Series C redeemable convertible preferred stock at $10.31 per share
to Donaldson, Lufkin & Jenrette Securities Corporation as placement agent.
Stock Grant
In August 1999, the Company granted 187,500 shares of common stock to two
Company executives. On the date of grant, the Company recorded approximately
$1.8 million of compensation expense.
Sales of Common Stock (unaudited)
On September 10, 1999, the Company issued 726,745 shares of its common stock
and warrants to purchase an additional 83,855 shares of common stock at an
exercise price of $0.01 per share to investors for cash proceeds of $5.0
million. The fair value of the common stock and warrants was deemed by
management to be $7.8 million and $1.0 million, respectively. The fair value of
the warrants was computed using the Black Scholes method under the following
assumptions: expected volatility of 100%, expected life of 3 years, risk free
interest rate of 6.0% and expected dividend yield of 0.0%.
In connection with the issuance of common stock and warrants, the Company
and the investors signed non-binding letters of intent to negotiate for a
period of up to one year to enter into definitive joint venture, joint
marketing, cooperation, or technology development agreements.The Company will
record the $3.8 million excess of the fair value of the common stock and
warrants over the consideration received as a prepaid marketing cost (contra
equity account). The balance will be amortized to expense over the one year
period covered by the letter of intent. If it becomes probable that efforts to
reach definitive agreements will cease prior to the end of the one year
negotiation period, the unamortized balance will be fully expensed.
Stock Dividend
In September 1999, the Company declared a stock dividend of one share of
common stock on each four shares of outstanding common stock pending approval
by the Board of Directors. This dividend resulted in a
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<PAGE>
E-STAMP CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
10. Subsequent Events (continued)
change in the conversion ratio of the Series A, B and C redeemable convertible
preferred stock from one-for-one to 1.25-for-one. All common stock, option and
warrant information, weighted average shares, the preferred to common stock
conversion ratio and loss per share information has been retroactively restated
to reflect the common stock dividend.
Planned Rescission Offer (unaudited)
Shares issued, and option grants made under the Company's 1996 Employee
Plan, 1996 Director Plan and 1999 Stock Plan (the "Plans") may not have
qualified for exemption from registration or qualification under federal and
state securities laws. Therefore, the Company intends to make a rescission
offer for these shares and options after the effective date of the proposed
initial public offering which, if accepted, could require the Company to make
aggregate payments to the holders of these shares and options of up to
$6,900,000 plus statutory interest.
The Company plans to commence, approximately 30 days after the effectiveness
of this offering, a rescission offer pursuant to a registration statement filed
under the Securities Act of 1933, as amended, and pursuant to the state
securities laws of California covering shares of common stock issued, and
options to purchase shares of common stock granted, under the Plans. The
Company will offer to rescind any prior sales at the price per share paid
therefor (average $1.22 per share) plus interest thereon at a statutory rate as
the case may be from the date of purchase by the purchaser to the expiration of
the rescission offer. The rescission offer will expire approximately 30 days
after the effectiveness of the registration statement relating to the
rescission stock. Under the rescission offer, the Company would be required to
make an aggregate payment of approximately $6,300,000 plus the aggregate amount
of interest thereon for shares acquired through October 1, 1999, if all
offerees accept the offer. Offerees who do not accept the rescission offer
will, for purposes of applicable federal and state securities laws, be deemed
to hold registered shares under the Act which will be freely tradeable in the
public market as of the effective date of the registration statement with
respect to the rescission stock. The Act does not expressly provide that a
rescission offer will terminate a purchaser's right to rescind a sale of stock
which was not registered under the Act as required. Accordingly, should the
rescission offer be rejected by any or all offerees, the Company may continue
to be contingently liable under the Act for the purchase price of the
rescission stock up to an aggregate amount of approximately $6,300,000 plus
statutory interest.
In addition, the Company is unable to rely on the exemption provided by
Section 25102(f) of the California Corporation Code for its options to purchase
shares of common stock granted under its 1996 Stock Option and Restricted Stock
Plan and our 1996 Non-Employee Director Stock Option Plan. As of October 1,
1999 options to purchase 273,265 shares of common stock at a weighted average
exercise price of $6.88 per share were outstanding under our 1999 Stock Plan,
options to purchase 1,118,308 shares of common stock at a weighted average
exercise price of $0.90 per share were outstanding under the Company's 1996
Stock Option and Restricted Stock Plan and options to purchase 19,062 shares of
common stock at a weighted average exercise price of $0.40 per share were
outstanding under the Company's 1996 Non-Employee Director Option Plan, all of
which options are potentially subject to the rescission, and the Company plans
to include them in its planned rescission offer discussed above. Under such
rescission offer, the Company could be required to make an aggregate payment of
up to approximately $600,000 for such grants.
As of the date hereof, the Company is not aware of any claims for rescission
against us.
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<PAGE>
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October 8, 1999
[LOGO OF E-STAMP]
7,000,000 Shares of Common Stock
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PROSPECTUS
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Donaldson, Lufkin & Jenrette
Banc of America Securities LLC
Deutsche Banc Alex. Brown
DLJdirect Inc.
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We have not authorized any dealer, sales person or other person to give you
written information other than this prospectus or to make representations as
to matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where
that would not be permitted or legal. Neither the delivery of this prospectus
nor any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of E-Stamp
Corporation have not changed since the date hereof.
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Until November 2, 1999 (25 days after the date of this prospectus), all
dealers that effect transactions in these shares of common stock may be
required to deliver a prospectus. This is in addition to the dealer's
obligation to deliver a prospectus when acting as an underwriter and with
respect to their unsold allotments or subscriptions.
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