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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X]Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended December 31, 1999
or
[_]Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from to
Commission File Number: 0-27417
E-Stamp Corporation
(Exact name of Registrant as specified in its charter)
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<S> <C>
Delaware 76-0518568
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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<TABLE>
<S> <C>
850 Saginaw Drive, 2nd Floor, Redwood City, CA 94061
(Address of principal executive office) (zip code)
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Registrant's telephone number, including area code: (650) 474-5800
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange
Title of each class On which registered
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None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on March
20, 2000 as reported on the National Market of The Nasdaq Stock Market, was
approximately $250,827,817. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes. As of March 20, 2000, registrant had
outstanding 39,162,732 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Form 10-
K portions of its Proxy Statement for Registrant's Annual Meeting of
Stockholders to be held on or about May 12, 2000.
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The Business section and other parts of this report contain forward-looking
statements that involve risks and uncertainties. Our actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in the section entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operation -- Risk Factors" commencing on
page 28.
PART I
Item 1. BUSINESS
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, through catalogs or at
office supply stores and computer superstores. 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. We may from
time to time offer our software and hardware at a discounted price or free of
charge in connection with 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 may from
time to time modify the pricing of our services in connection with promotional
arrangements with third parties, including the use of a maximum monthly charge
for convenience fees. We also offer for sale mailing and postage related
consumables and peripheral devices, including an Internet postage scale,
labels, window envelopes and a label printer, each manufactured by third
parties with whom we have established relationships.
We received approval from the U.S. Postal Service on August 9, 1999 for
commercial release of 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. The U.S. Postal
Service has not informed us whether it will continue to impose a limitation on
the number of our customers following this evaluation, and 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. 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!, eBay,
Excite@Home, America Online, Intuit, Compaq, EarthLink, Francotyp-Postalia,
Sunbeam Corporation's Pelouze Scale Co. division and Avery Dennison.
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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 $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 accessibility,
businesses are increasingly using the Internet for a wide variety of
operations, such as buying office supplies, and may benefit from emerging
trends, such as buying postage over the Internet.
THE POSTAGE INDUSTRY
According to the U.S. Postal Service's 1998 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 EMERGENCE OF INTERNET POSTAGE
In 1995, the U.S. Postal Service announced the introduction of the
Information Based Indicia Program. 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 occurrence of
postal fraud.
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.
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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 using
a postage meter is not generally cost-effective for 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
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our customer-centric focus and 26 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 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:
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 and Intuit
QuickBooks 2000, 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.
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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,
eBay, 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 plan
to develop an Internet browser-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
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.
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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 small and medium-sized
businesses. These opportunities include the following:
Sale of Postage Related Consumables and Peripherals. Through our Web site,
we 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 over the Internet 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. The secure postage device
stores the postage and connects between the parallel port and printer cable.
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.
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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;
. Microsoft Outlook -- Our software allows users to access addresses in
Outlook without leaving the E-Stamp application; and
. Intuit QuickBooks 2000 -- Users of QuickBooks 2000 are able to sign up
for the E-Stamp Internet postage service and access our Internet postage
application without leaving the QuickBooks 2000 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 and parcel post.
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.
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
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these goals, we have established a strategy of entering into marketing and
distribution arrangements with industry leaders in markets related to the
Internet; computer hardware and software; postage; shipping; and business
supplies. These relationships allow us to leverage those industry leaders'
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. In November 1999, we entered into an
agreement with Microsoft for promotion of our service on the Microsoft
Network. This agreement contains exclusive elements including placements on
bCentral, MSN's small business site, and banner advertising in MSNBC's small
business site. The initial term of this agreement 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.
eBay. In December 1999, we entered into an agreement with eBay for
promotion of our service on the eBay website. eBay is the leading Internet
online listing and trading service, with over 10 million registered users and,
according to Media Metrix, approximately 10 million unique visitors each month
to its website, representing approximately 6% of all daily Internet traffic.
Under the agreement, E-Stamp will be featured on and integrated into areas of
the eBay website, and eBay users will be allowed to access E-Stamp services
and purchase supplies through a co-branded website. Additionally, eBay and E-
Stamp will jointly develop promotions targeting eBay's PowerSellers. During
the term of the agreement, eBay has agreed to not promote the services or
directly link to the websites of other Internet postage competitors. The
initial term of the agreement expires on December 9, 2002.
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 may 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 launched in the fall
of 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. Additionally, in October 1999 we entered into an agreement with America
Online to become an anchor tenant in the Shop@AOL channel. Through this
agreement E-Stamp will be featured in the Home Office & Business and Computing
areas. The agreement expires in August 2000.
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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 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 being
promoted exclusively in packages of Avery labels and other printable supplies.
Additionally, we offer a free sample pack of Avery PC Postage Labels to our
new customers. We sell these labels in our online supplies store.
Sunbeam Corporation's Pelouze 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 are leveraging 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 available to our customers through our online supplies store.
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 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. The U.S.
Postal Service has approved this envelope for distribution.
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 developed 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. Beginning in early 2000, our software demo will be
included on EarthLink's Total Access start-up CD, which is distributed to over
4 million individuals and small businesses. 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.
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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 jointly promotes our service
in retail channels, promotes us to its existing customer base, and plans to
integrate support for our service directly into its printer software. Although
Dymo-CoStar is not prohibited from entering 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 label products. The
U.S. Postal Service has approved Dymo-CoStar's specialty label printer and
related labels for sale.
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 markets. 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. Our Internet postage product is available through all
standard distribution channels in order to increase product availability and
accelerate the adoption of Internet postage. Specifically, our Internet
postage product is available through the following:
. Retail -- We have identified and secured distribution agreements with
top retail accounts to expand the market 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 retailers, such as Best Buy, CompUSA, CDW and
Staples, have been selected 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 access traditional and online retailers through
Ingram Micro, one of the nation's largest computer and computer-related
product distributors. We plan to access additional 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 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.
. Direct Sales -- We have hired a direct sales force to sell our Internet
postage products to corporations and purchasing organizations, focusing
primarily on vertical markets such as insurance, mortgage, real estate,
brokerage, medical, dental, legal and other business associations. We
intend to enter into co-branding and co-marketing arrangements with
industry leaders in these markets, and to integrate our Internet postage
product with key software applications commonly used in these markets.
. Software Integration and Bundling Arrangements -- We plan to distribute
our Internet postage product as part of a software integration and
bundling arrangement with Kewill Electronic Commerce, a leading provider
of multi-carrier shipping compliance software to small and medium sized
enterprises.
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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.
Affiliate and Affinity Programs. We have established an extensive affiliate
program with sites that 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 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 approved our Internet postage service under its
Information Based Indicia Program in August 1999. 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>
1. Letter of intent 6. U.S. Postal Service address matching 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.
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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 also compete with providers of traditional
postage 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. As of December 31, 1999, Stamps.com and Neopost were approved
for commercial release by the U.S. Postal Service. 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;
. ease of use;
. 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
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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.
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 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.
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 an Internet browser-based service that will be
targeted at broad-band 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 browser-based service will be
positioned to meet the needs of this base of users. The browser-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. We are
also developing browser-based products for electronic commerce transactions,
such as on-line ticketing and gift certificates.
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 Corporation, a Delaware corporation. Following the merger, we continued
to
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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 December 31, 1999, we employed 157 full-time people, including 36 in
engineering, 56 in operations, 8 in customer service and support, 34 in sales,
marketing and business development, and 23 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 26 U.S. patents and have 14 patent applications pending. Our
issued patents expire between 2010 and 2016. We consider patents to be a
significant part of our intellectual property, and we believe they 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, 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.
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."
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EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth our executive officers' and directors' ages
and positions as of December 31, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Robert H. Ewald....................... 52 President, Chief Executive Officer
and Director
Anthony H. Lewis, Jr. ................ 46 Vice President and Chief Financial
Officer
Nicole Eagan.......................... 35 Senior Vice President, Marketing
and Sales
Martin Pagel.......................... 37 Chief Technology Officer
Thomas J. Reinemer.................... 39 Vice President, International
Edward F. Malysz...................... 39 Vice President, General Counsel
and Secretary
Marcelo A. Gumucio.................... 62 Chairman of the Board
John V. Balen(1)...................... 39 Director
Thomas L. Rosch(2).................... 37 Director
Michael Leitner....................... 34 Director
Adam Wagner(1)........................ 41 Director
Rebecca Saeger(2)..................... 44 Director
Robert J. Cresci(1)................... 56 Director
Jerry Gramaglia(2).................... 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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<PAGE>
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 the
Windows 2000 Active Directory. 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.
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 Friedrich Ebert Technical College in Wiesbaden, 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 and serves as Chairman of the boards of WebSentric and
NetFreight. 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 joined Canaan Partners, a national venture capital investment firm, in
September 1995 where he is currently a general partner. 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 InterWest Partners in January 2000 where he is currently
general partner and managing director. InterWest Partners is a Silicon Valley-
based venture capital firm that invests in information technology and health
care companies. Previously, Mr. Rosch was a partner at AT&T Ventures from
December 1996 to January 2000. AT&T Ventures is an independent venture capital
fund that invests in information technology companies. Prior to AT&T Ventures,
Mr. Rosch served as a senior member of The Boston Consulting Group from
November 1989 to November 1996. Mr. Rosch currently serves on the board of
directors of Veridicom, Inc. and Signio. Mr. Rosch received his A.B. in
government and philosophy from Harvard University and J.D./M.B.A. from
Stanford University.
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Michael Leitner has served on the Board of Directors since January 2000.
Mr. Leitner is a Director of Corporate Development for Microsoft Corporation,
a manufacturer of software products, and has held this position since July
1998. From August 1994 to March 1998, Mr. Leitner served as a Vice President
in the Technology Mergers and Acquisitions Group of Merrill Lynch, an
investment bank. Mr. Leitner currently serves on the board of directors of
divine interVentures, Inc. Mr. Leitner received his B.A. in economics from the
University of California, Los Angeles and M.B.A. from the University of
Michigan.
Adam Wagner has served on the Board of Directors since November 1996. Mr.
Wagner is the founder in 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 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 September 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.
Robert J. Cresci has served on the Board of Directors since October 1999.
Since 1990, Mr. Cresci has served as a Managing Director of Pecks Management
Partners Ltd., which specializes in managing portfolios of public and private
convertible securities for institutional clients. Mr. Cresci is a graduate of
the United States Military Academy at West Point and received an MBA from
Columbia University.
Jerry Gramaglia has served on the Board of Directors since October 1999.
Mr. Gramaglia is the Chief Marketing Officer of E*Trade Group, Inc., a
financial services company, and has held this position since June 1998. From
March 1997 to June 1998, Mr. Gramaglia served as Vice President, Marketing of
the Consumer division of Sprint Corporation, a telecommunications company.
From November 1994 to January 1997, Mr. Gramaglia was Chief Marketing Officer
of Taco Bell Corp., a subsidiary of PepsiCo, a manufacturer of beverage
products. Mr. Gramaglia received his B.A. from Denison University.
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, Thomas L. Rosch and Robert J. Cresci have
been designated Class I directors whose terms expire at the 2000 annual
meeting of stockholders. Marcelo A. Gumucio, Adam Wagner and Jerry Gramaglia
have been designated Class II directors whose terms expire at the 2001 annual
meeting of stockholders. Michael Leitner, 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.
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Our audit committee currently consists of Messrs. Balen, Wagner and Cresci.
The audit committee reviews our internal accounting procedures and consults
with and reviews the services provided by our independent auditors.
Our compensation committee currently consists of Messrs. Rosch and
Gramaglia and Ms. Saeger. The compensation committee reviews and recommends to
the board of directors the compensation and benefits of our employees.
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
Except for our Chairman of the Board, we do not currently compensate our
directors in cash for their service as members of the board of directors,
although we reimburse our directors for expenses in connection with attendance
at board of director and compensation committee meetings. We currently pay
Marcelo Gumucio $10,000 per month for his service as Chairman of the Board.
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 1999, the board granted options to purchase an aggregate of
50,000 shares to Rebecca Saeger at an exercise price per share of $6.88,
granted options to purchase an aggregate of 40,000 shares to Jerry Gramaglia
at an exercise price per share of $18.9375 and granted Marcelo Gumucio a stock
bonus of 62,500 shares.
ITEM 2. PROPERTIES
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 15 month sublease which will expire in June 2000. We
also sublease an additional 20,700 square feet of office space in Redwood
City, California. This sublease has a three year term expiring in December
2002. We recently entered into a lease for approximately 92,300 square feet of
office space in Mountain View, California. The lease has an eighty-five month
term expiring on April 30, 2007. We do not anticipate a need for additional
office space during 2000.
ITEM 3. 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,
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in the alternative, to bifurcate discovery and trial of those counterclaims;
E- Stamp's response to the motion was filed on October 20, 1999. The U.S.
District Court for the District of Delaware held a hearing on November 18,
1999, regarding Pitney Bowes' motion, but as of the date hereof, a decision
has not been rendered. 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. On February 7, 2000, the U.S. District Court found Mr.
Lahoti in contempt of the preliminary injunction, and ordered Mr. Lahoti to
transfer to E-Stamp administrative control of the domain name "estamps.com"
and to pay to E-Stamp attorney's fees and costs incurred by E-Stamp in
connection with the contempt order. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on The Nasdaq Stock Market's National Market
under the symbol "ESTM" since our initial public offering on October 8, 1999.
The following table sets forth, for the periods indicated, the range of the
high and low sale prices for our common stock as reported on The Nasdaq Stock
Market's National Market.
<TABLE>
<CAPTION>
Quarter High Low
------- ---- ---
<S> <C> <C>
Fiscal Year Ended December 31, 1999:
Fourth Quarter (from October 8, 1999)................... $39.250 $18.000
Fiscal Year Ended December 31, 2000:
First Quarter (through March 20, 2000).................. $23.063 $ 8.563
</TABLE>
The last reported sale price of our common stock on The Nasdaq Stock
Market's National Market was $10.625 on March 20, 2000. As of March 20, 2000,
there were 39,162,732 shares of common stock outstanding that were held of
record by approximately 568 stockholders.
We commenced our initial public offering on October 8, 1999 pursuant to a
Registration Statement on Form S-1 (File No. 333-85359) which was declared
effective by the Securities and Exchange Commission on October 8, 1999. The
Company sold an aggregate of 8,050,000 shares of Common Stock in our initial
public offering at an initial price to the public of $17.00 per share. Our
initial public offering has terminated and all shares have been sold. The
managing underwriters of our initial public offering were Donaldson, Lufkin &
Jenrette, Banc of America Securities LLC, Deutsche Banc Alex. Brown and
DLJdirect Inc. Aggregate proceeds from our initial public offering were
$136,850,000, which includes $17,850,000 in aggregate proceeds due to the
exercise of the underwriters' option to purchase shares to cover over-
allotments.
We paid underwriters' discounts and commissions of $9,580,000 in connection
with our initial public offering. The total expenses we paid in our initial
public offering were $1,834,000, and the net proceeds to us of our initial
public offering were $125,406,000.
From October 8, 1999, the effective date of the Registration Statement, to
December 31, 1999, the ending date of the reporting period, the approximate
amount of net offering proceeds used were $31.4 million for general business
operations including funding of operating losses generated in the fourth
fiscal quarter. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Dividend Policy
We have never declared or paid any 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.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in connection with the
Financial Statements and Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" commencing on page
22.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Net revenues.................. $ -- $ -- $ -- $ -- $ 1,318
Cost of Sales................. -- -- -- -- (2,396)
------- ------- ------- -------- ---------
Gross profit (loss)........... -- -- -- -- (1,078)
Operating expenses:
Research and development...... 701 2,387 3,916 5,603 14,024
Sales and marketing........... 96 1,761 1,743 2,722 22,292
General and administrative.... 532 1,739 1,748 1,897 8,419
Amortization of deferred stock
compensation and deferred
distribution costs........... -- 688 414 858 11,539
------- ------- ------- -------- ---------
Total operating expenses.. 1,329 6,575 7,821 11,080 56,274
------- ------- ------- -------- ---------
Loss from operations.......... (1,329) (6,575) (7,821) (11,080) (57,352)
Interest income (expense),
net.......................... (17) 236 143 370 1,942
------- ------- ------- -------- ---------
Net loss...................... (1,346) (6,339) (7,678) (10,710) (55,410)
Accretion on redeemable
convertible preferred stock.. -- -- (196) (1,383) (2,086)
------- ------- ------- -------- ---------
Net loss attributable to
common stockholders.......... $(1,346) $(6,339) $(7,874) $(12,093) $(57,496)
======= ======= ======= ======== =========
Net loss per common share
(basic and diluted)(1)....... $ (0.11) $ (0.51) $ (0.61) $ (0.92) $ (3.32)
======= ======= ======= ======== =========
Weighted average shares
outstanding (basic and
diluted)..................... 11,933 12,543 12,966 13,075 17,313
Pro forma net loss per common
share basic and diluted
(unaudited)(1)............... $ (0.57) $ (2.18)
======== =========
Shares used in calculation of
pro forma net loss per common
share basic and diluted
(unaudited)(1)............... 18,753 25,387
<CAPTION>
As of December 31,
----------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents..... $ 190 $ 3,910 $ 4,111 $ 10,217 $ 118,689
Working capital............... 386 3,394 2,398 8,805 124,590
Total assets.................. 1,428 4,873 4,763 10,811 136,417
Capital lease, net of current
portion...................... -- 88 38 11 --
Common Stock subject to
rescission................... -- 31 252 971 2,776
Redeemable convertible
preferred stock.............. -- -- 6,126 23,469 --
Total stockholders' equity
(deficit).................... 646 4,070 (3,390) (15,196) 124,554
</TABLE>
- --------
(1) See Note 10 of Notes to Financial Statements for an explanation of the
method used to determine the number of shares used in computing per share
amounts.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This section and other parts of this report contain 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 the section titled "Risk
Factors" beginning on page 20. You should read the following discussion with
the "Selected Financial Data" and our financial statements and related notes
included elsewhere in this report.
Overview
We provide an Internet postage service that enables users to conveniently
purchase, download and print Internet postage directly from their personal
computers without the need to maintain a persistent Internet connection. 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 December 31, 1999
we had accumulated aggregate losses of $75.8 million. The quarter ended
September 30, 1999 was the first quarter in which we generated revenue. 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. On that date, we were the first company to
commercially launch a national Internet postage service. During the year ended
December 31, 1999, we shipped 46,310 units of our Internet postage product.
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. We recognize revenue from
an initial software license fee for our Internet postage product, ongoing
convenience fees for the purchase of postage over 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 year ended December 31, 1999, in connection with the grant of
stock options to employees, we recorded deferred stock compensation totaling
$23.2 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 $10.6 million
during the
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year ended December 31, 1999. At December 31, 1999, we had a total of $15.3
million remaining to be amortized over the corresponding vesting periods of
the stock options. Such amounts related to option grants will be amortized in
accordance with our accounting policy over the remaining vesting period of the
grants through mid-2003. The anticipated charge in the years 2000, 2001 and
2002 and thereafter are $9.6 million, $4.0 million and $1.7 million,
respectively.
On September 10, 1999, we 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, we 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. We recorded the $3.8
million excess of the fair value of the common stock and warrants over the
consideration received as deferred distribution costs (contra equity account).
The balance is being 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 at that time. As of December 31,
1999, a binding agreement had not yet been signed.
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenue. We 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 our
software. Postage convenience fees are amounts paid by end-users for the
delivery of postage by us to the end-user. Supplies revenue are amounts paid
by end-users for purchase of various postal supplies.
Revenue for the year ended December 31, 1999 totaled $1.3 million. There
was no revenue for the year ended December 31, 1998. Revenue was generated
from software license fees, postage convenience fees and sales of postage
supplies.
Cost of Sales. Cost of sales includes costs related to product shipments,
including materials, labor and other direct or allocated costs involved in
their manufacture or delivery. It also includes cost of customer support
services and technical support. Cost of sales for the year ended December 31,
1999 totaled $2.4 million. There were no costs of sales for the year ended
December 31, 1998. The gross loss arose as a result of nominal revenues
derived from the initial ramp up of the release of our services. We expect
that our gross margin will be positive in future periods as our sales volume
increases. The foregoing expectation is a forward-looking statement that
involves risks and uncertainties and the actual results could vary materially
as a result of a number of factors, including those set forth under the
captions "Risk Factors."
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 and Trademark
Office, and server and network operations. Research and development expenses
increased 150% to $14 million for the year ended December 31, 1999 from $5.6
million for the year ended December 31, 1998. Of the $8.4 million increase in
research and development expenses in 1999, $4.9 million of this amount
reflected increases in research and development employee headcount, and
consulting and contractor expenses. 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 browser-based service and
expenses related to the development of other products and services.
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Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and related benefits for sales and marketing personnel, strategic
partner marketing, Web site development, package design, advertising and
promotional expenses, and tradeshow expenses. Sales and marketing expenses
increased 719% to $22.3 million for the year ended December 31, 1999 from $2.7
million for the year ended December 31, 1998. Of the $19.6 million increase in
sales and marketing expenses in 1999, $16.7 million of this amount reflected
costs associated with continued development of our marketing campaigns related
to the August 9, 1999 launch of our Internet postage service, advertising and
strategic partners expenses. The increase also reflected increases in our
sales and marketing personnel. We expect the dollar amount of our sales and
marketing expenses to increase as we further promote and support the 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 344% to $8.4 million for the
year ended December 31, 1999 from $1.9 million for the year ended December 31,
1998. Of the $6.5 million increase in general and administrative expenses in
1999, $1.9 million related to a one-time non-cash stock compensation charge.
An additional $1.8 million of the increase related to legal expenses. The
balance reflected increases in administrative staff and other professional
services. 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 and costs associated with being a public company.
Amortization of Deferred Stock Compensation. Amortization of deferred stock
compensation was $10.6 million for the year ended December 31, 1999, compared
to $0.9 million for the year ended December 31, 1998. We recorded aggregate
deferred stock compensation of $26.8 million in the period from July 1, 1998
through December 31, 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 425% to $1.9
million for the year ended December 31, 1999 from $0.4 million for the year
ended December 31, 1998. The increase in interest income, net, was due to
increasing interest earned as a result of increased cash balances resulting
from our recent public offering.
Income Taxes
As of December 31, 1999, we had federal and state net operating loss
carryforwards of approximately $38.2 million and $35.8 million, respectively.
The net operating loss carryforwards will expire at various dates beginning in
2004 and through 2019, if not utilized.
Utilization of the net operating loss carryforwards 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 net operating loss carryforwards
before utilization.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Research and Development. Research and development expenses increased 43%
to $5.6 million in 1998 from $3.9 million in 1997. 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 and $400,000 in 1998
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. $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
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<PAGE>
costs of $400,000 and, to a lesser extent, costs incurred for promotional
obligations under our first marketing and distribution relationships entered
into in 1998.
General and Administrative. General and administrative expenses increased
9% to $1.9 million in 1998 from $1.7 million in 1997. 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.
Amortization of Deferred Stock Compensation. Amortization of deferred stock
compensation increased 107% to $858,000 in 1998 from $414,000 in 1997. We
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. 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.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
and public sales of equity securities. We have received net proceeds of
approximately $73.9 million in private financings and net proceeds of $125.4
million from our initial public offering. As of December 31, 1999, we had cash
and cash equivalents totalling $118.7 million.
Net cash used in operating activities totaled $48.8 million for the year
ended December 31, 1999 and $9.6 million for the year ended December 31, 1998.
Cash used in operating activities for each period resulted primarily from net
operating losses in those periods.
Net cash used in investing activities totaled $2.8 million for the year
ended December 31, 1999 and $0.3 million for the year ended December 31, 1998.
Cash 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 $160.0 million for the
year ended December 31, 1999 and $16.0 million for the year ended December 31,
1998. Cash provided by financing activities for each period resulted primarily
from issuances of common stock and redeemable convertible preferred stock in
1999, and redeemable convertible preferred stock in 1998.
We have entered into agreements for online advertising with America Online,
Yahoo!, Inc., Microsoft Corporation, Earthlink Operations, Inc., Excite@Home
Corporation, Intuit Inc., and eBay Inc. Aggregate noncancelable advertising
commitments related to these agreements total approximately $21.8 million and
$12.3 million for the years ending December 31, 2000 and 2001, respectively.
We 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.
We believe that our current cash balances and cash flows from operations,
if any, together with the net proceeds from our 1999 initial public offering
will be sufficient to meet our present growth strategies and related working
capital and capital expenditure requirements through December 31, 2000. Our
current plan contemplates significant increases in spending when compared to
our historical expenditures, consistent with the planned growth in our
business. We currently intend to use a portion of the proceeds from our recent
public offering to satisfy our payment obligations under our rescission offer,
if any are required. If all of the holders of the shares and options under our
recission offer accept the offer, the Company would be required to make
aggregate payments of up to $6.9 million plus statutory interest. 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
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<PAGE>
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.
Impact of Year 2000
In prior years, we discussed the nature and progress of its plans to become
Year 2000 ready. In late 1999, we completed our remediation and testing of
systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believes those systems
successfully responded to the Year 2000 date change. We expensed approximately
$250,000 during 1999 in connection with remediating its systems. We are not
aware of any material problems resulting from Year 2000 issues, either with
its products, its internal systems, or the products and services of third
parties. We will continue to monitor our mission critical computer
applications and those of our suppliers and vendors throughout the year 2000
to ensure that any latent Year 2000 matters that may arise are addressed
promptly.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulleting No. 101, "Revenue Recognition" ("SAB 101") which
provides guidance on the recognition, presentation and disclosure of revenue
in financial statements filed with the SEC. SAB 101 outlines the basic
criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. We are currently
reviewing the SAB and assessing its potential impact upon our operations.
In March 2000, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board issued EITF Issue 00-2, "Accounting for Website
Development Costs." The Issue addresses how an entity should account for costs
incurred to develop a website. We are currently reviewing EITF Issue 00-2 and
evaluating its potential impact upon our financial condition and results of
operations.
In March 2000, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board issued EITF Issue 00-3, "Application of AICPA
Statement of Position 97-2, Software Revenue Recognition, to Arrangements that
Include the Right to use Software Stored on Another Entity's Hardware." We are
currently reviewing EITF Issue 00-3 and evaluating its potential impact upon
our financial condition and results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." We are required to adopt Statement of Financial
Accounting Standards No. 133 for the year ending December 31, 2001. 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. Because we currently hold no
derivative financial instruments and do not currently engage in hedging
activities, we do not expect the adoption of Statement of Financial Accounting
Standards No. 133 to have a material impact on our financial condition or
results of operations.
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Quantitative and Qualitative Disclosures About Market Risk
Disclosures About Market Risk
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially as a result of a number
of factors including those set forth under the caption "Risk Factors--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," and "--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."
Interest Rate Risk
As of December 31, 1999, we did not have any outstanding short- or long-
term debt. Increases in interest rates could, however, increase the interest
expense associated with our future borrowings, if any. We do not hedge against
interest rate increases.
Equity Price Risk
As of December 31, 1999, we did not hold any equity investments.
Foreign Currency Exchange Rate Risk
We realize all of our revenues in U.S. dollars, and all of our revenues
were derived from customers in the United States. Therefore, we do not believe
we have any significant direct foreign currency exchange rate risk. We do not
hedge against foreign currency exchange rate changes.
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RISK FACTORS
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 December 31,
1999, we generated revenues of $1.3 million and had an accumulated deficit of
$75.8 million. We have incurred increasing losses and had a net loss for the
year ended December 31, 1999 of $55.4 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-
licensing arrangements nor do we have information concerning Pitney Bowes'
present willingness to engage in discussions.
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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 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 document, 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.
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.
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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. Any 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, in such cases, may be
unable to print postage on these printers. If our recent modifications to our
Internet postage software are not successful in resolving the majority of
these issues, our ability to market our Internet postage service to users of
multifunctional and bi-directional printers may be severely harmed.
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 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.
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. Our
retail distribution arrangements, which include office supply, computer or
other retailers, may not generate significant sales of our Internet postage
software. If we are unable to provide adequate distribution channels for our
Internet postage service, customers will have difficulty
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purchasing our product 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.
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 be severely harmed. 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. We
cannot be certain that we will have sufficient resources to build our brand
and achieve commercial acceptance of our service.
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 recently begun the U.S. Postal Service approval process for our
browser-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 browser-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 browser-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 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
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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.
If the U.S. Postal Service, the sole supplier of digital certificates for our
Internet postage 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.
Under the Information-Based Indicia Program, a digital certificate is
required to be issued for each secure Internet postage device. Currently, the
U.S. Postal Service is the only approved source of supply of digital
certificates. We do not have a guaranteed supply arrangement with the U.S.
Postal Service with regard to the supply of digital certificates. If we cannot
obtain an adequate supply of digital certificates, we will be unable to timely
deliver our Internet postage device to customers and, without the device,
customers would be unable to print postage using our Internet postage service.
We cannot assure you that the U.S. Postal Service will timely meet our
commercial supply needs or that we will have the ability to obtain digital
certificates from alternative suppliers in the future.
If the U.S. Postal Service charges us a fee for digital certificates, our
gross margins will be adversely impacted.
The U.S. Postal Service recently invoiced us for fees in connection with
digital certificates issued by the U.S. Postal Service to our customers. We
have disputed these fees, but it is too early to ascertain the outcome. Should
the U.S. Postal Service pursue a claim against us successfully for these fees,
our gross margins will be adversely impacted.
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
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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.
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. Two of these, Stamps.com
and Neopost, have been approved for commercial release by the U.S. Postal
Service as of December 31, 1999. 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.
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.
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.
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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. The loss of the services
of any of these key employees or 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 current year 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 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 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.
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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.
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 our available
funds, which include the net proceeds of our recent public offering, will be
sufficient to meet our anticipated needs for working capital and capital
expenditures through 2000. 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 2000 or at a later date.
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.
U.S. Postal Service regulations require a user of our Internet postage
service to print both the destination address and the digital stamp. Users may
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 may
be too large to fit on many return envelopes. As a result, users will
generally not use our service to print digital stamps for smaller return
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.
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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.
Future sales of our common stock may depress our stock price.
A substantial number of our shares of common stock will become available
for sale on April 6, 2000. Sales of such shares could depress the market price
of our common stock.
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. Due to this volatility, the
market price of our common stock could eventually experience a significant
decline.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Disclosures About Market Risk
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially as a result of a number
of factors including those set forth under the caption "Risk Factors--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." and "--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."
Interest Rate Risk
As of December 31, 1999, we did not have any outstanding short or long-term
debt. Increases in interest rates could, however, increase the interest
expense associated with our future borrowings, if any. We do not hedge against
interest rate increases.
Equity Price Risk
As of December 31, 1999, we did not hold any equity investments.
Foreign Currency Exchange Rate Risk
We realize all of our revenues in U.S. dollars, and as of December 31,
1999, as of December 31, 1999, all of our revenues were derived from customers
in the United States. Therefore, we do not believe we have any significant
direct foreign currency exchange rate risk. We do not hedge against foreign
currency exchange rate changes.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Report of Ernst & Young LLP, Independent Auditors......................... 38
Balance Sheets............................................................ 39
Statements of Operations.................................................. 40
Statements of Common Stock Subject to Rescission, Redeemable Convertible
Preferred Stock and Stockholders' Equity (Deficit)....................... 41
Statements of Cash Flows.................................................. 43
Notes to Financial Statements............................................. 45
</TABLE>
37
<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 as
of December 31, 1998 and 1999, 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, 1999. 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 auditing standards generally
accepted in the United States. 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, 1998 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Palo Alto, California
January 28, 2000
38
<PAGE>
E-STAMP CORPORATION
BALANCE SHEETS
(In thousands, except par value amounts)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 10,217 $118,689
Prepaid marketing expenses............................... -- 6,156
Other prepaid assets..................................... -- 6,222
Inventory................................................ -- 2,120
Other current assets..................................... 144 490
-------- --------
Total current assets...................................... 10,361 133,677
Property and equipment, net............................... 450 2,740
-------- --------
Total assets.............................................. $ 10,811 $136,417
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................................... $ 62 $ 707
Accrued liabilities...................................... 1,467 8,164
Deferred Revenue......................................... -- 193
Current portion of obligations under capital lease....... 27 23
-------- --------
Total current liabilities................................. 1,556 9,087
Capital lease obligations................................. 11 --
Commitments and contingencies
Common stock subject to recission, $0.001 par value per
share: 1,974 and 4,279 shares issued and outstanding at
December 31, 1998 and 1999, respectively................. 971 2,776
Redeemable convertible preferred stock, $0.001 par value
per share, 12,000 and no shares authorized at December
31, 1998 and 1999, respectively, issuable in series
(aggregate liquidation preference of $21,998 and $0 at
December 31, 1998 and 1999, respectively):
Series A redeemable convertible preferred stock: 2,500
and no shares authorized, issued and outstanding at
December 31, 1998 and 1999, respectively............... 6,746 --
Series B redeemable convertible preferred stock: 4,188
and no shares authorized, issued and outstanding at
December 31, 1998 and 1999, respectively............... 16,723 --
Stockholders' equity (deficit):
Common stock, $0.001 par value per share: 100,000 shares
authorized, 12,950 and 34,831 shares issued and
outstanding at December 31, 1998 and 1999,
respectively............................................ 13 35
Additional paid-in capital............................... 8,627 222,063
Notes receivable from employees and officers............. (653) (3,540)
Deferred stock compensation.............................. (2,766) (15,327)
Deferred distribution costs.............................. -- (2,850)
Accumulated deficit...................................... (20,417) (75,827)
-------- --------
Total stockholders' equity (deficit)...................... (15,196) 124,554
-------- --------
Total liabilities and stockholders' equity................ $ 10,811 $136,417
======== ========
</TABLE>
See accompanying notes.
39
<PAGE>
E-STAMP CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Net revenues..................................... $ -- $ -- 1,318
Cost of sales.................................... -- -- (2,396)
------- -------- --------
Gross profit(loss)............................... -- -- (1,078)
Operating expenses:
Research and development........................ 3,916 5,603 14,024
Sales and marketing............................. 1,743 2,722 22,292
General and administrative...................... 1,748 1,897 8,419
Amortization of deferred stock compensation and
deferred distribution costs.................... 414 858 11,539
------- -------- --------
Total operating expenses......................... 7,821 11,080 56,274
------- -------- --------
Loss from operations............................. (7,821) (11,080) (57,352)
Interest income.................................. 157 380 1,979
Interest expense................................. (14) (10) (37)
------- -------- --------
Net loss......................................... (7,678) (10,710) (55,410)
Accretion on redeemable convertible preferred
stock........................................... (196) (1,383) (2,086)
------- -------- --------
Net loss attributable to common stockholders..... $(7,874) $(12,093) $(57,496)
------- -------- --------
Net loss per common share, basic and diluted..... $ (0.61) $ (0.92) $ (3.32)
======= ======== ========
Shares used in computing net loss per common
share, basic and diluted........................ 12,966 13,075 17,313
Pro forma net loss per common share, basic and
diluted......................................... $ (0.57) $ (2.18)
======== ========
Shares used in computing pro forma net loss per
common share, basic and diluted (unaudited)..... 18,753 25,387
</TABLE>
See accompanying notes.
40
<PAGE>
E-STAMP CORPORATION
STATEMENTS OF COMMON STOCK SUBJECT TO RESCISSION, REDEEMABLE CONVERTIBLE
PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
REDEEMABLE
COMMON STOCK CONVERTIBLE NOTES
SUBJECT TO PREFERRED RECEIVABLE
RESCISSION STOCK COMMON STOCK ADDITIONAL FROM DEFERRED DEFERRED
-------------- -------------- ------------- PAID-IN EMPLOYEES STOCK DISTRIBUTION ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL AND OFFICERS COMPENSATION COSTS DEFICIT
------ ------ ------ ------- ------ ------ ---------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31,
1996............ 19 $ 31 -- $ -- 12,940 $13 $6,500 $ -- $ (414) $-- $ (2,029)
Issuance of
Series A
redeemable
convertible
preferred stock
for cash........ -- -- 2,500 5,930 -- -- -- -- -- -- --
Issuance of
common stock for
services........ 22 175 -- -- -- -- -- -- -- -- --
Exercise of
stock options... 27 46 -- -- -- -- -- -- -- -- --
Amortization of
deferred stock
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........... -- -- 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..... -- -- -- -- 10 -- 82 -- -- -- --
Exercise of
stock options... 178 70 -- -- -- -- -- -- -- -- --
Shares
repurchased from
employees....... (10) (4) -- -- -- -- -- -- -- -- --
Deferred stock
compensation.... -- -- -- -- -- -- 3,624 -- (3,624) -- --
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- -- -- 858 -- --
Accretion on
redeemable
convertible
preferred
stock........... -- -- -- 1,383 -- -- (1,383) -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- -- (10,710)
----- ---- ----- ------- ------ --- ------ ----- ------- --- --------
BALANCE AT
DECEMBER 31,
1998 CARRIED
FORWARD......... 1,974 $971 6,688 $23,469 12,950 $13 $8,627 $(653) $(2,766) $-- $(20,417)
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
BALANCE AT
DECEMBER 31,
1996............ $ 4,070
Issuance of
Series A
redeemable
convertible
preferred stock
for cash........ --
Issuance of
common stock for
services........ --
Exercise of
stock options... --
Amortization of
deferred stock
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........... --
Issuance of
notes receivable
from employees
for exercise of
stock options... (653)
Issuance of
common stock for
services to
consultants..... 82
Exercise of
stock options... --
Shares
repurchased from
employees....... --
Deferred stock
compensation.... --
Amortization of
deferred stock
compensation.... 858
Accretion on
redeemable
convertible
preferred
stock........... (1,383)
Net loss........ (10,710)
-------------
BALANCE AT
DECEMBER 31,
1998 CARRIED
FORWARD......... $(15,196)
</TABLE>
See accompanying notes.
41
<PAGE>
E-STAMP CORPORATION
STATEMENTS OF COMMON STOCK SUBJECT TO RESCISSION, REDEEMABLE CONVERTIBLE
PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
(In thousands)
<TABLE>
<CAPTION>
Redeemable Notes
Common Stock Convertible Receivable
Subject Preferred From
to Rescission Stock Common Stock Additional Employees Deferred Deferred
-------------- --------------- ------------- Paid-In and Stock Distribution Accumulated
Shares Amount Shares Amount Shares Amount Capital Officers Compensation Costs Deficit
------ ------ ------ ------- ------ ------ ---------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1998 brought
forward......... 1974 $ 971 6,688 $23,469 12,950 $13 $ 8,627 $ (653) $ (2,766) $ -- $(20,417)
Issuance of
warrants for
bridge loan..... -- -- -- -- -- -- 85 -- -- -- --
Issuance of
Series C
redeemable
convertible
preferred stock,
net of issuance
costs........... -- -- 2,929 28,879 -- -- -- -- -- -- --
Common stock
grants to
executives...... -- -- -- -- 188 -- 1,800 -- -- -- --
Issuance of
common stock to
strategic
investors....... -- -- -- -- 726 1 8,799 -- -- (3,800) --
Accretion on
redeemable
convertible
preferred
stock........... -- -- -- 2,086 -- -- (2,086) -- -- -- --
Conversion of
redeemable
convertible
preferred stock
upon IPO........ -- -- (9,617) (54,434) 12,021 12 54,422 -- -- -- --
Issuance of
common stock
upon IPO, net of
issuance costs.. -- -- -- -- 8,050 8 125,398 -- -- -- --
Exercise of
stock options... 560 328 -- -- 137 -- 198 -- -- -- --
Issuance of
notes receivable
for exercise of
stock options... 2,217 1,668 -- -- 669 1 1,413 (3,082) -- -- --
Repayments of
notes receivable
from employees.. -- -- -- -- -- -- -- 168 -- -- --
Shares
repurchased from
employee........ (472) (191) -- -- -- -- -- 27 -- -- --
Deferred stock
compensation.... -- -- -- -- -- -- 23,150 -- (23,150) -- --
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- -- -- 10,589 -- --
Issuance of
common stock for
services by
consultants..... -- -- -- -- 6 -- 37 -- -- -- --
Exercise of
warrants........ -- -- -- -- 84 -- 220 -- -- -- --
Amortization of
deferred
distribution
costs........... -- -- -- -- -- -- -- -- -- 950 --
Net loss........ -- -- -- -- -- -- -- -- -- -- (55,410)
----- ------ ------ ------- ------ --- -------- ------- -------- ------- --------
Balance at
December 31,
1999............ 4,279 $2,776 -- $ -- 34,831 $35 $222,063 $(3,540) $(15,327) $(2,850) $(75,827)
===== ====== ====== ======= ====== === ======== ======= ======== ======= ========
<CAPTION>
Total
Stockholders'
Equity
(Deficit)
-------------
<S> <C>
Balance at
December 31,
1998 brought
forward......... $(15,196)
Issuance of
warrants for
bridge loan..... 85
Issuance of
Series C
redeemable
convertible
preferred stock,
net of issuance
costs........... --
Common stock
grants to
executives...... 1,800
Issuance of
common stock to
strategic
investors....... 5,000
Accretion on
redeemable
convertible
preferred
stock........... (2,086)
Conversion of
redeemable
convertible
preferred stock
upon IPO........ 54,434
Issuance of
common stock
upon IPO, net of
issuance costs.. 125,406
Exercise of
stock options... 198
Issuance of
notes receivable
for exercise of
stock options... (1,668)
Repayments of
notes receivable
from employees.. 168
Shares
repurchased from
employee........ 27
Deferred stock
compensation.... --
Amortization of
deferred stock
compensation.... 10,589
Issuance of
common stock for
services by
consultants..... 37
Exercise of
warrants........ 220
Amortization of
deferred
distribution
costs........... 950
Net loss........ (55,410)
-------------
Balance at
December 31,
1999............ $124,554
=============
</TABLE>
See accompanying notes.
42
<PAGE>
E-STAMP CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Operating activities
Net loss......................................... $(7,678) $(10,710) $(55,410)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................... 366 405 502
Loss on disposal of assets...................... -- 65 --
Amortization of deferred stock compensation..... 414 858 10,589
Amortization of deferred distribution costs..... -- -- 950
Stock based compensation........................ 175 82 1,837
Warrants issued in connection with short term
loan........................................... -- -- 85
Changes in assets and liabilities:
Notes receivable from employees and officers.. 60 -- 4
Prepaid marketing expenses.................... -- -- (6,156)
Other prepaid assets.......................... -- -- (6,222)
Inventory and other assets.................... (14) (88) (2,466)
Current liabilities........................... 957 (172) 7,535
------- -------- --------
Net cash used in operating activities............ (5,720) (9,560) (48,752)
Investing activities
Purchase of property and equipment............... (119) (324) (2,778)
Sale of short-term investments................... 98 -- --
------- -------- --------
Net cash used in investing activities............ (21) (324) (2,778)
Financing activities
Repayments of lease obligations.................. (34) (36) (29)
Proceeds from issuance of notes payable.......... -- 700 --
Repayments of notes payable...................... -- (700) --
Net proceeds from issuance of redeemable
convertible preferred stock..................... 5,930 15,960 28,879
Net proceeds from issuance of common stock....... -- -- 5,000
Net proceeds from issuance of common stock in
Initial Public Offering......................... -- -- 125,406
Net proceeds from exercise of stock options...... 46 66 526
Net proceeds from exercise of warrants........... -- -- 220
------- -------- --------
Net cash provided by financing activities........ 5,942 15,990 160,002
------- -------- --------
Net increase in cash and cash equivalents........ 201 6,106 108,472
Cash and cash equivalents at beginning of year... 3,910 4,111 10,217
------- -------- --------
Cash and cash equivalents at end of year......... $ 4,111 $ 10,217 $118,689
======= ======== ========
</TABLE>
See accompanying notes.
43
<PAGE>
E-STAMP CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1997 1998 1999
---- ------ -------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.................................. $ 14 $ 10 $ 37
==== ====== =======
SCHEDULE OF NON-CASH FINANCING AND INVESTING
TRANSACTIONS
Issuance of notes receivable from employees and officers
for exercise of stock options.......................... $ -- $ (653) $(3,082)
==== ====== =======
Issuance of common stock for deferred distribution
costs.................................................. $ -- $ -- $ 3,800
==== ====== =======
Conversion of preferred stock to common stock........... $ -- $ -- $54,434
==== ====== =======
Deferred stock compensation related to grants of stock
options................................................ $ -- $3,624 $23,150
==== ====== =======
Assets acquired under capital lease obligations......... $ 80 $ -- $ 14
==== ====== =======
</TABLE>
See accompanying notes.
44
<PAGE>
E-STAMP CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 began shipping its products in the thrid
quarter of 1999 and emerged form the development stage at that time.
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.
INITIAL PUBLIC OFFERING
In October 1999, the Company completed an initial public offering of
8,050,000 shares of its common stock to the public, at a price per share of
$17.00. The Company received net proceeds from the offering of approximately
$125.4 million. Upon the consummation of the Company's initial public
offering, all of the then outstanding shares of redeemable convertible
preferred stock automatically converted into shares of common stock.
STOCK DIVIDEND
In September 1999, the Board of Directors declared a stock dividend of one
share of common stock on each four shares of outstanding common stock. This
dividend resulted in a 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.
REVENUE RECOGNITION
The Company currently generates revenue from software license fees, postage
convenience fees and the 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 or determinable and no significant
obligations remain.
45
<PAGE>
E-STAMP CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
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 recognizes revenues related to the postage supplies when the
supplies are delivered.
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions", or 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. The
Company does not expect the final adoption of SOP 98-9 to have a material
impact on its future revenues or results of operations.
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 money market mutual funds and
government securities as of December 31, 1998 and December 31, 1999. The
Company's cash and cash equivalents are carried at cost which approximates
market.
INVENTORY
Inventory, consisting principally of compact disks (CDs), user manuals and
internet postage devices, are stated at the lower of standard cost (which
approximates actual cost) and 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 December 31, 1999, no impairment indicators
have been identified and, therefore, the Company has not recorded any
impairment losses.
46
<PAGE>
E-STAMP CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
1. Background and Summary of Significant Policies (continued)
Property and Equipment (continued)
Property and equipment held at December 31, 1998 and 1999 were as follows:
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------ ------
(In
thousands)
<S> <C> <C>
Property and equipment:
Computers.................................................. $1,039 $3,146
Furniture and fixtures..................................... 165 708
Leasehold improvements..................................... -- 142
------ ------
1,204 3,996
Accumulated depreciation and amortization.................. (754) (1,256)
------ ------
Net property and equipment................................... $ 450 $2,740
====== ======
</TABLE>
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. Costs incurred
by the Company between the completion of the detailed product design and the
point at which the product is ready for general release have been
insignificant. Therefore, through December 31, 1999, the Company has charged
all such costs to research and development expense in the period incurred.
Software Development Cost
Costs of software developed internally by us for use in our operations are
accounted for under the American Institute of Certified Public Accountants'
Statement of Position (SOP) 98-1, "Internal use Software," which the Company
adopted on January 1, 1999. Under SOP 98-1, the Company expenses costs of
research, including pre-development efforts prior to establishing
technological feasibility, and costs incurred for training and maintenance.
Software development costs are capitalized when technological feasibility has
been established and its is probable that the project will be completed and
the software will be used as intended. No costs related to internal use
software have been capitalized through December 31, 1999.
Advertising Costs
Advertising production costs are recorded as expense the first time an
advertisement appears. The costs of communicating advertising are incurred and
expensed as the advertisement is broadcast. All other advertising costs are
expensed as incurred. The Company also pays royalties for the promotion of its
product. Such royalties are recorded as advertising expense as the royalties
are earned. Advertising expense was approximately $0, $156,000 and $6.8
million for the years ended December 31, 1997, 1998 and 1999, respectively.
The Company also recorded $0 and $6.2 million of prepaid marketing costs in
1998 and 1999, respectively.
47
<PAGE>
E-STAMP CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
1. Background and Summary of Significant Policies (continued)
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
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.
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.
Other Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130") which establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. There is no difference in the Company's historical net losses as
reported and the comprehensive net losses under the provisions of FAS 130 for
all periods presented. Accordingly, the adoption of FAS 130 had no effect on
the Company's reported results of operations.
Segment Reporting
Effective in January 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 established annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas, and major
customers. The Company has determined that it operates in only one segment.
Accordingly, the adoption of SFAS 131 had no impact on the Company's financial
statements.
Concentrations
The Company relies on one manufacturer for the supply and production of its
Internet postage device and upon one single source of supply for digital
certificates. The inability of these suppliers to fulfill the Company's supply
requirements could negatively impact future results.
For the year ended December 31, 1999, one customer accounted for $282,300
or 21% of net revenues.
Effect of New Accounting Standards
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which
provides guidance on the recognition, presentation and
48
<PAGE>
E-STAMP CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
1. Background and Summary of Significant Policies (continued)
Effect of New Accounting Standards (continued)
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. The Company
is currently reviewing the SAB and assessing its potential impact upon its
operations.
In March 2000, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board issued EITF Issue 00-2, "Accounting for Website
Development Costs." The Issue addresses how an entity should account for costs
incurred to develop a website. Management is currently evaluating EITF Issue
00-2's impact on the Company's financial condition or results of operations.
In March 2000, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board issued EITF Issue 00-3, "Application of AICPA
Statement of Position 97-2, Software Revenue Recognition, to Arrangements that
Include the Right to use Software Stored on Another Entity's Hardware."
Management is currently evaluating EITF Issue 00-3's impact on the Company's
financial condition or results of operations.
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, 2001. 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.
Reclassifications
Certain prior-year amounts have been reclassified to conform with the
current year's presentation.
2. Accrued Liabilities
At December 31, 1998 and 1999, Accrued Liabilities is comprised of the
following:
<TABLE>
<CAPTION>
December
31,
-----------
1998 1999
----- -----
(In
thousands)
<S> <C> <C>
Accrued payroll and other compensation expenses.................. 430 2,810
Accrued legal expenses........................................... 432 1,302
Accrued inventory costs.......................................... -- 961
Accrued marketing expenses....................................... -- 342
Other accrued liabilities........................................ 643 2,749
----- -----
1,467 8,164
===== =====
</TABLE>
3. Borrowings
On July 12, 1999, the Company entered into a bridge loan financing
arrangement with a financial institution under which the Company borrowed $5.0
million under the facility. Amounts borrowed under the arrangement bore
interest at a rate of 13% per annum. The outstanding balance was fully repaid
in August 1999.
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 and remain outstanding at December
31, 1999. The Company recorded the fair value of these warrants upon issuance
of approximately $85,000 as interest expense over the period the loan was
outstanding.
The Company had a letter of credit outstanding amounting to $143,000 as of
December 31, 1999,.
49
<PAGE>
E-STAMP CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Redeemable Convertible Preferred Stock
Redeemable convertible preferred stock at December 31, 1998 was as follows
by series (in thousands of shares):
<TABLE>
<CAPTION>
Authorized Shares issued
shares and outstanding
---------- ---------------
<S> <C> <C>
A................................................. 2,500 2,500
B................................................. 4,188 4,188
Undesignated...................................... 5,312 --
------ -----
Total preferred stock............................. 12,000 6,688
====== =====
</TABLE>
In August 1999, the Company issued 2,928,521 shares of Series C redeemable
convertible preferred stock at $10.31 per share.
The redemption price for each share of preferred stock was equal to the
respective original issuance price plus a 10% compound annual rate of return.
During the period that the preferred stock was outstanding, the carrying
amount of all three series of redeemable convertible preferred stock was
increased by periodic accretions so that the carrying amount equaled the
redemption amount at the redemption date.
Each share of preferred stock was convertible at the option of the holder
into shares of common stock at the then effective conversion ratio. Upon the
Company's initial public offering, each outstanding share of preferred stock
automatically converted into 1.25 shares of common stock.
5. Stockholders' Equity
Sales of Common Stock
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
recorded the $3.8 million excess of the fair value of the common stock and
warrants over the consideration received as deferred distribution costs (as a
contra equity account). The balance is being amortized to expense over the one
year period covered by the letter of intent. Amortization of deferred
distribution costs amounted to $950,000 for the year ended December 31, 1999.
If it becomes probable that efforts to reach definitive agreements will cease
prior to the end of the one year negotiation period, the un-amortized balance
will be fully expensed. A definitive agreement had not yet been signed as of
December 31, 1999.
1999 Employee Stock Purchase Plan
In September 1999, the board of directors and shareholders adopted the 1999
Employee Stock Purchase Plan. 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
50
<PAGE>
E-STAMP CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Stockholders Equity (continued)
1999 Employee Stock Purchase Plan (continued)
offering period commenced on the effectiveness of the initial public offering
and will end on the last trading day on or before November 14, 2001. As of
December 31, 1999, no shares were issued and outstanding under the 1999
Employee Stock Purchase Plan.
Stock Option Plans
Pursuant to the Company's 1996 Stock Option and Restricted Stock Plan, the
1999 Stock Plan, the 1996 Non-Employee Stock Option Plan and the 1999 Director
Option Plan (together, the "Plans"), the board of directors or one of its
designated committees are authorized to grant incentive stock options or
nonstatutory stock options to employees, officers and directors of the
Company. During the year ended December 31, 1999, the board of directors
terminated the 1996 Stock Option and Restricted Stock Plan and the 1996 Non-
Employee Director Stock Option Plan with respect to future grants. As of
December 31, 1999, a total of 1,304,000 shares remain available for future
grants under the Plans.
Stock options are limited to ten-year terms, and options granted through
December 31, 1999 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 discreation 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
using the graded vesting method.
A summary of activity under the Company's Plans is as follows:
<TABLE>
<CAPTION>
Options Outstanding
------------------------
Shares Weighted-
Available Number Average
for Grant of Shares Exercise Price
--------- --------- --------------
(in thousands, except for
share and per share amounts)
<S> <C> <C> <C>
Options outstanding at December 31, 1996.... 1,655 824 $4.66
Authorized................................ -- -- --
Granted................................... (1,518) 1,518 0.57
Exercised................................. -- (29) 1.60
Repurchased............................... -- -- --
Canceled.................................. 224 (224) 5.79
------ ------
Options outstanding at December 31, 1997.... 361 2,089 0.50
Authorized................................ 938 -- --
Granted................................... (1,360) 1,360 0.55
Exercised................................. -- (1,916) 0.42
Repurchased............................... 10 -- --
Canceled.................................. 255 (255) 0.41
------ ------
Options outstanding at December 31, 1998.... 204 1,278 0.60
Authorized................................ 5,381 -- --
Granted................................... (5,425) 5,425 4.18
Exercised................................. -- (3,771) 0.96
Repurchased............................... 472 -- --
Canceled.................................. 672 (672) 2.03
------ ------ -----
Options outstanding at December 31, 1999.... 1,304 2,260 7.37
====== ====== =====
Exercisable at December 31, 1999............ 121 1.40
====== =====
</TABLE>
51
<PAGE>
E-STAMP CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Stockholders Equity (continued)
1999 Employee Stock Purchase Plan (continued)
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- ----------------------------------------------
Options Weighted- Options Weighted-
Outstanding at Average Weighted- Outstanding at Average Weighted-
December 31, Remaining Average December 31, Remaining Average
Range of Exercise Prices 1999 Contractual Life Exercise Price 1999 Contractual Life Exercise Price
- ------------------------ -------------- ---------------- -------------- -------------- ---------------- --------------
(In thousands) (In years) (In thousands) (In years)
<S> <C> <C> <C> <C> <C> <C>
$0.20-$0.72............. 566 8.50 $ 0.60 110 8.23 $ 0.49
$1.20-$6.88............. 972 9.55 $ 4.70 9 9.55 $ 8.87
$11.7-$18.9............. 520 9.78 $12.26 2 9.80 $18.94
$21.8-$32.2............. 202 9.97 $28.31 -- -- $ --
----- ---
2,260 9.45 $ 7.37 121 9.19 $ 1.40
===== ===
</TABLE>
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 prior to
the Company's initial public offering in October 1999 was estimated using the
minimum value method. Options granted subsequent to the initial public
offering have been valued using the Black-Scholes pricing model. In addition,
the following weighted average assumptions were used:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Expected volatility............................ N/A N/A 2.0
Expected life of options in years.............. 5.5 4.0 3.5
Risk-free interest rate........................ 6.0% 5.0% 6.0%
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 using
a graded vesting method. 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,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Net loss attributable to common stockholders:
As reported................................. $(7,874) $(12,093) $(57,496)
======= ======== ========
Pro forma................................... $(8,966) $(12,667) $(69,940)
======= ======== ========
Net loss per share (basic and diluted):
As reported................................. $ (0.61) $ (0.92) $ (3.32)
======= ======== ========
Pro forma................................... $ (0.69) $ (0.97) $ (4.04)
======= ======== ========
</TABLE>
52
<PAGE>
E-STAMP CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Stockholders Equity (continued)
Stock-Based Compensation (continued)
The weighted-average fair value of options granted during 1997, 1998 and
1999 was $0.14, $4.42 and $7.89, respectively.
The Company recorded deferred stock compensation of approximately $3.6
million and $23.2 million, during the years ended December 31, 1998 and 1999
respectively, 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 the graded
vesting method. Such amortization expense amounted to approximately $0.9
million and $10.6 million for the years ended December 31, 1998 and 1999,
respectively.
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.
Stock Subject to Rescission
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 and therefore may be subject to rescission. The Company
plans on commencing a rescission offer for these shares and options in 2000.
If all of the holders of these shares and options accept the Company's offer,
the Company would be required to make aggregate payments of up to $6.9 million
plus statutory interest.
Under the rescission offer, the Company would be required to make an
aggregate payment of approximately $6.3 million 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 $6.3 million 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.
53
<PAGE>
E-STAMP CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Stockholders Equity (continued)
Stock Subject to Rescission (continued)
The Company has reclassified the amounts paid in for outstanding shares
subject to rescission outside of permanent equity in the accompanying balance
sheets. As of December 31, 1999, the Company is not aware of any claims for
rescission.
Stock Subject to Repurchase
As of December 31, 1998 and 1999 the Company had 1,751,063 and 3,358,570
shares of common stock outstanding which were subject to repurchase,
respectively. These shares are the result of the exercise of unvested stock
options by employees in exchange for notes and cash. These shares 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.
6. Marketing and Distribution Agreements
The Company has entered into agreements for online advertising with America
Online, Yahoo!, Inc., Microsoft Corporation, EarthLink Operations, Inc.,
Excite@Home Corporation, Intuit Inc., and eBay Inc. Aggregate noncancelable
advertising commitments related to these agreements total approximately $21.8
million and $12.3 million for the years ending December 31, 2000 and 2001,
respectively. 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.
7. Income Taxes
As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $38.2 million and $35.8 million,
respectively. The net operating loss carryforwards will expire at various
dates beginning in 2004 and through 2019, if not utilized.
Utilization of the net operating loss carryforwards 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 net operating loss carryforwards
before utilization.
Significant components of the Company's deferred tax assets and liabilities
for federal and state tax purposes are as follows:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
(in thousands)
<S> <C> <C>
Net operating loss carryforwards.............................. $ 2,800 $15,100
Deferred compensation......................................... 600 4,400
Capitalized research and development.......................... 4,300 9,300
Capitalized start-up costs.................................... 1,700 1,500
Other......................................................... 800 3,600
------- -------
Total deferred tax assets 10,200 33,900
Valuation allowance........................................... (10,200) (33,900)
------- -------
Net deferred tax assets....................................... $ -- $ --
======= =======
</TABLE>
FASB Statement No. 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
54
<PAGE>
E-STAMP CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Income Taxes (continued)
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 $3.8 million and $23.7 million during
the years ended December 31, 1998 and 1999, respectively.
8. 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 1998 and 1999 of approximately $59,000 and $101,000,
respectively.
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, San Mateo and Redwood City, California. Rental expenses
related to these leases for the periods ended December 31, 1997, 1998 and
1999, were $411,000, $554,000 and $853,000, 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 and has no renewal terms. In November
1999, the Company entered into an additional sublease pertaining to a new
facility at a monthly rent payment of $51,768 effective January 1, 2000. The
sublease term will end on December 31, 2002 and has no renewal terms. The
table below includes the rental payments from these subleases.
The following represents future minimum rental payments under noncancelable
operating leases and capital leases:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- -------
(In thousands)
<S> <C> <C>
For the years ending December 31:
2000.................................................... $1,051 $ 23
2001.................................................... 640 --
2002.................................................... 659 --
------ ------
Total minimum lease payments.............................. $2,350 23
======
Less amount representing interest......................... ( --)
------
Present value of future minimum lease payments............ 23
Less current portion of capital leases.................... (23)
------
Long-term portion of capital leases....................... $ --
======
</TABLE>
55
<PAGE>
E-STAMP CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. Commitments (continued)
Leases (continued)
Assets capitalized under capital leases totaled approximately $80,000 and
$94,000 at December 31, 1998 and 1999, respectively and are included in
computers and furniture and fixtures. Accumulated amortization related to
assets under capital leases totaled $49,000 and $74,000 at December 31, 1998
and 1999, respectively.
9. 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 of the
anniversary or 90 days following the termination of employment for any reason.
In addition, during 1999 the Company received $3.1 million of full recourse
notes receivable from employees and officers which bear interest at 6% per
annum in consideration for the exercise of stock options. The interest portion
is payable annually.
10. 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. The Company's potentially
dilutive securities were antidilutive and therefore were not included in the
computation of weighted-average shares used in computing diluted net loss per
share. Therefore, the Company's basic and diluted net loss are the same.
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.
56
<PAGE>
E-STAMP CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
10. Net Loss Per Share (continued)
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 December 31,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Basic and diluted:
Net loss.................................... $(7,678) $(10,710) $(55,410)
Accretion on redeemable convertible
preferred stock............................ (196) (1,383) (2,086)
------- -------- --------
Net loss attributable to common stock....... $(7,874) $(12,093) $(57,496)
======= ======== ========
Weighted-average shares of common stock
outstanding................................ 12,966 14,044 20,240
Less: weighted-average shares subject to
repurchase................................. -- (969) (2,927)
------- -------- --------
Weighted-average shares used in computing
basic and diluted net loss per share....... 12,966 13,075 17,313
======= ======== ========
Basic and diluted net loss per share........ $ (0.61) $ (0.92) $ (3.32)
======= ======== ========
Pro forma basic and diluted:
Net loss.................................... $(10,710) $(55,410)
======== ========
Shares used above........................... 13,075 17,313
Pro forma adjustment to reflect weighted
effect of assumed conversion of convertible
preferred stock (unaudited)... 5,678 8,074
-------- --------
Shares used in computing pro forma basic and
diluted net loss per share (unaudited) ... 18,753 25,387
======== ========
Pro forma basic and diluted net loss per
share (unaudited).......................... $ (0.57) $ (2.18)
======== ========
</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 were
4,172,000, 7,711,000 and 1,942,000 for the years ended December 31, 1997, 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.
11. Contingencies
Pitney Bowes Litigation
On June 10, 1999, Pitney Bowes filed suit against the Company in U.S.
District Court alleging infringement of Pitney Bowes patents. The suit alleges
that the Company is infringing on 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, the Company filed an answer to
Pitney Bowes' complaint in which it denied all allegations of patent
infringement and asserted 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, the Company also brought
various counterclaims against Pitney Bowes claiming
57
<PAGE>
E-STAMP CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. Contingencies (continued)
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
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.
The Company's 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 filed its response to the motion on October
20, 1999. The U.S. District Court for the District of Delaware held a hearing
on November 18, 1999 regarding Pitney Bowes' motion, but as of December 31,
1999, a decision has not been rendered. Management continues to investigate
the claims against the Company as well as infringement by Pitney Bowes of its
patents, and may assert additional defenses or pursue additional counterclaims
or independent claims against Pitney Bowes in the future. Regardless of the
outcome, any litigation may require that we incur significant litigation
expenses and may result in significant division of management. An unfavorable
outcome may have a material adverse effect on our financial position or
results of operations.
12. Subsequent Events (unaudited)
Kewill Agreement
On February 8, 2000, the Company entered into a cross-licensing agreement
with Kewill Electronic Commerce ("Kewill"), a supplier of electronic commerce
software and services. Under the agreement, Kewill is to pay the Company $1.0
million in exchange for a two year license to the Company's internet postage
technology. Conversely, the Company is to pay Kewill $1.6 million in exchange
for a two year license to Kewill's multi-carrier shipping services product.
Rescission Offer
On February 2, 2000, the Company filed 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 has offered 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. The registration statement has not yet been
declared effective by the Securities and Exchange Commission.
Operating Lease
The Company entered into an operating lease agreement on February 25, 2000
for office space in Mountain View, California. The term of the lease is 85
months and there are no renewal terms. The rental commitment relating to this
lease for the years 2000, 2001, 2002, 2003, 2004 and thereafter are
$2,906,000, $3,580,000, $3,690,000, $3,801,000 and $12,759,000, respectively.
58
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this report in
that the registrant will file a definitive Proxy Statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end
of the fiscal year covered by this report, and certain information included
therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY
Certain information regarding the directors and officers of the Company is
contained herein under Item 1, "Executive Officers and Directors of the
Company."
Information regarding directors appearing under the caption "Election of
Directors -- Directors and Nominees for Director" in the Proxy Statement is
hereby incorporated by reference.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is hereby incorporated herein by reference
from the section entitled "Election of Directors -- Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is set forth under the caption,
"Executive Compensation" in our Proxy Statement, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is set forth under the caption
"Security Ownership" in our Proxy Statement, which information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is set forth under the captions
"Compensation Committee Interlocks and Insider Participation" and "Related
Party Transactions" in our Proxy Statement, which information is incorporated
herein by reference.
59
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Reference is made to page 37 for a list of all financial statements
and schedules filed as a part of this report.
2. Financial Statement Schedules
None.
3. Exhibits
The exhibits listed under Item 14(c) hereof are filed as part of this
Annual Report on Form 10-K.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
(c) Exhibits
The following exhibits are filed with this report:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
3.1* Certificate of Incorporation of Registrant.
3.2* Bylaws of Registrant.
3.3* Form of Amended and Restated Certificate of Incorporation of
Registrant.
3.4* Form of Amended and Restated Bylaws of Registrant.
3.5* Certificates of Designation of Registrant relating to Series A
Preferred Stock.
3.6* Certificates of Designation of Registrant relating to Series B
Preferred Stock.
3.7* Certificates of Designation of Registrant relating to Series C
Preferred Stock.
3.8* Amendment to Certificate of Incorporation of the Registrant.
4.1* Specimen Common Stock Certificate.
10.1* Form of Indemnification Agreement between the Registrant and each of
its directors and officers.
10.2* 1999 Stock Plan and form of agreements thereunder.
10.3* 1999 Employee Stock Purchase Plan and form of agreements thereunder.
10.4* 1999 Director Option Plan and form of agreements thereunder.
10.5* 1996 Stock Option and Restricted Stock Plan.
10.6* 1996 Non-Employee Director Stock Option Plan.
10.7* Second Amended and Restated Investors Rights Agreement.
10.8* Employment Agreement, dated March 29, 1996, between Registrant and
Nicole Ward (Eagan).
10.9* Employment Agreement, dated May 13, 1996, between Registrant and
Martin Pagel.
10.10* Employment Agreement, dated July 27, 1996, between Registrant and
Thomas Reinemer.
10.11* Promissory Note, dated May 30, 1999, between Registrant and Robert H.
Ewald.
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
10.12* Crypto iButton Service Provider Agreement dated August 21, 1998,
between Registrant and Dallas Semiconductor Corporation.
10.13+* Premium Partner Website Marketing Agreement dated July 1, 1999,
between Registrant and Microsoft Corporation.
10.14+* America Online Strategic Marketing Agreement dated November 13,
1998, between Registrant and America Online.
10.15+* Turnkey/Inventory Agreement dated June 1, 1999, between Registrant
and Modus Media International.
10.16+* Agreement for Services dated June 27, 1997 between Registrant and
Pilot Network Services, Inc.
10.17* Sublease Agreement dated February 2, 1999 between the Registrant and
Electronics for Imaging, Inc.
10.18+* Advertising and Promotion Agreement dated May 14, 1999 between
Registrant and Yahoo!, Inc.
10.19+* Letter Agreement dated August 2, 1999 between Registrant and At Home
Corporation.
10.20+* Platinum Premier Partner Package Agreement dated June 25, 1999
between Registrant, EarthLink Network, Inc. and EarthLink
Operations, Inc.
10.21+* Services Agreement dated September 24, 1999 between Registrant and
Intuit Inc.
10.22++** Cobranding and Promotion Agreement dated December 10, 1999 between
Registrant and eBay Inc.
10.23** Promissory Note dated December 23, 1999, between Registrant and
Marcelo Gumucio.
10.24** Promissory Note dated January 14, 2000, between Registrant and
Robert H. Ewald.
10.25** Stock Pledge Agreement dated December 22, 1999 between Registrant
and Marcelo Gumucio.
10.26** Stock Pledge dated January 14, 2000 between Registrant and Robert H.
Ewald.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (Included on Page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Incorporated by reference from Registration Statement No. 333-85359, as
amended, originally filed with the Securities and Exchange Commission on
August 17, 1999.
** Incorporated by reference from Registration Statement No. 333-96013,
originally filed with the Securities and Exchange Commission on February
2, 2000.
+ The registrant obtained confidential treatment of certain portions of this
exhibit from the Commission. The omitted portions have been filed
separately with the Commission.
++ The registrant is seeking confidential treatment of certain portions of
this exhibit from the Commission. The omitted portions have been filed
separately with the Commission.
(d) Financial Statement Schedules.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
61
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized, in
San Mateo, California, on the 30th day of March, 2000.
E-STAMP CORPORATION
By: /s/ Robert H. Ewald
-----------------------------------
Robert H. Ewald
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert H. Ewald and Edward Malysz and
each of them singly, as true and lawful attorneys-in-fact and agents with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities to sign this Annual Report on Form 10-K filed
herewith and any or all amendments to said report, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission granting unto said attorneys-in-fact and
agents the full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the foregoing, as to all
intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or his substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this report has been signed by the following persons in the capacities and on
the dates indicated below.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert H. Ewald President, Chief Executive March 30, 2000
____________________________________ Officer and Director
Robert H. Ewald (Principal Executive
Officer)
/s/ Anthony H. Lewis, Jr. Vice President and Chief March 30, 2000
____________________________________ Financial Officer (Principal
Anthony H. Lewis, Jr. Financial and Accounting
Officer)
/s/ Marcelo A. Gumucio Chairman of the Board March 30, 2000
____________________________________
Marcelo A. Gumucio
/s/ John V. Balen Director March 30, 2000
____________________________________
John V. Balen
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Thomas L. Rosch Director March 30, 2000
____________________________________
Thomas L. Rosch
/s/ Michael Leitner Director March 30, 2000
____________________________________
Michael Leitner
/s/ Adam Wagner Director March 30, 2000
____________________________________
Adam Wagner
/s/ Rebecca Saeger Director March 30, 2000
____________________________________
Rebecca Saeger
/s/ Robert J. Cresci Director March 30, 2000
____________________________________
Robert J. Cresci
/s/ Jerry Gramaglia Director March 30, 2000
____________________________________
Jerry Gramaglia
</TABLE>
63
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-89053) pertaining to the 1996 Non-Employee Director Stock
Option Plan, the 1996 Stock Option and Restricted Stock Plan, the 1999
Employee Stock Purchase Plan and the 1999 Stock Plan of E-Stamp Corporation,
and in the Registration Statement (Form S-8 No. 333-31902) pertaining to the
1999 Employee Stock Purchase Plan and the 1999 Stock Plan of E-Stamp
Corporation, of our report dated January 28, 2000, with respect to the
financial statements of E-Stamp Corporation included in the Annual Report on
Form 10-K for the year ended December 31, 1999.
/s/ Ernst & Young LLP
Palo Alto, California
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 118,680
<SECURITIES> 0
<RECEIVABLES> 548
<ALLOWANCES> (58)
<INVENTORY> 2,120
<CURRENT-ASSETS> 133,677
<PP&E> 3,996
<DEPRECIATION> (1,256)
<TOTAL-ASSETS> 136,417
<CURRENT-LIABILITIES> 9,087
<BONDS> 0
0
0
<COMMON> 35
<OTHER-SE> 124,519
<TOTAL-LIABILITY-AND-EQUITY> 124,554
<SALES> 1,318
<TOTAL-REVENUES> 1,318
<CGS> (2,396)
<TOTAL-COSTS> (2,396)
<OTHER-EXPENSES> 56,274
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37
<INCOME-PRETAX> (55,410)
<INCOME-TAX> 0
<INCOME-CONTINUING> (55,410)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (55,410)
<EPS-BASIC> (3.32)
<EPS-DILUTED> (3.32)
</TABLE>
