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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)
Delaware 76-0518568
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
850 Saginaw Drive, 2nd Floor, Redwood City, CA 94061
(Address of principal executive office) (zip code)
Registrant's telephone number, including area code: (650) 474-5800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class On which registered
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None None
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.
4
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.
9
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.
10
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:
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)
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.
11
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
12
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
13
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."
14
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.
NAME AGE POSITION
---- --- --------
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
- --------
(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.
15
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.
16
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.
17
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,
18
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.
19
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.
Quarter High Low
------- ---- ---
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
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.
20
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.
Year Ended December 31,
----------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- ---------
(In thousands, except per share data)
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
As of December 31,
----------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- ---------
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
- --------
(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.
21
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
22
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.
23
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
24
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
25
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.
26
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.
27
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.
28
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.
29
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-direct