Stamps.com 2005 Annual Report Download

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FORM 10-K
STAMPS.COM INC
(Annual Report)
Filed 3/14/2006 For Period Ending 12/31/2005
Address 12959 CORAL TREE PLACE
LOS ANGELES, California 90066-7020
Telephone 310-482-5800
CIK 0001082923
Industry Retail (Catalog & Mail Order)
Sector Services
Fiscal Year 12/31

Table of contents

  • Page 1
    STAMPS.COM INC FORM 10-K (Annual Report) Filed 3/14/2006 For Period Ending 12/31/2005 Address Telephone CIK Industry Sector Fiscal Year 12959 CORAL TREE PLACE LOS ANGELES, California 90066-7020 310-482-5800 0001082923 Retail (Catalog & Mail Order) Services 12/31

  • Page 2
    ... Place Los Angeles, California 90066 (Address of Principal Executive Offices) Registrant's Telephone Number, Including Area Code: (310) 482-5800 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class: Common...

  • Page 3
    ... Information Directors and Executive Officers of the Registrant Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions Principal Accounting Fees and Services Exhibits, Financial Statement...

  • Page 4
    ... the US Postal Service's PC Postage program utilizing a software-only business model. As of December 31, 2005, Stamps.com provided its PC Postage service to approximately 349,000 registered customers that include small businesses, large businesses, home offices, and consumers. Our current strategy...

  • Page 5
    ... as word processing, contact and address management, and accounting and financial applications. • PhotoStamps ® . On May 17, 2005, we publicly launched our second market test of PhotoStamps, a new, patented form of postage that allows consumers to turn digital photos, designs or images into valid...

  • Page 6
    ...to track and control postage expenditures in a small office using cost codes; Customers using our service to ship packages with electronic Delivery or Signature Confirmation save approximately 50 cents per package versus comparable services at a retail USPS post office; and Stamps.com's service fees...

  • Page 7
    ... hides the actual amount paid for postage, a useful feature for e-commerce companies that may not want the recipient to have actual shipping cost information; and Our software can help a business reduce its customer support costs by automatically generating and sending package delivery status emails...

  • Page 8
    ...monthly fee of $18.99. During 2004, Pitney Bowes also began offering an Internet-based service for printing a single label for use in shipping a package that does not require a monthly subscription fee. In July 2005, Pitney Bowes introduced a custom postage offering through a partnership with Zazzle...

  • Page 9
    ... after-hours work or telecommuting numbered 24.3 million. In addition to small office, home office and small business customers, consumers and corporations are also currently customers of Stamps.com's service. US Mail Volume According to the US Postal Service Annual Report, the total postage market...

  • Page 10
    ...we improved our shipping features by adding Hidden Postage™, Stamps.com package insurance, the ability to send shipment notification e-mails with a tracking link, the ability to print shipping labels for Express Mail ® and Bound Printed Matter, and support for additional USPS services such as COD...

  • Page 11
    ... to end in March 2008. In this new market test, the US Postal Service is expected to lift the restriction on business advertising for PhotoStamps that had been in place during the previous market test. We announced that we would likely enter into this third market test in the next two months. 8

  • Page 12
    ... of active customers. In order to attract customers in the future, we may run special promotions and offers such as free trials, discounts on fees, postage and supplies, and other promotions. We cannot be sure that customers will be receptive to future fee structures and special promotions that we...

  • Page 13
    ... In order to acquire customers and achieve widespread distribution and use of our services and products, we must develop and execute costeffective marketing campaigns and sales programs. We currently rely on a combination of marketing techniques to attract new customers including direct mail, online...

  • Page 14
    ...-ins, earthquakes and similar events. Our Internet host provider does not guarantee that our Internet access will be uninterrupted, error-free or secure. Our servers are also vulnerable to computer viruses, physical, electrical or electronic break-ins and similar disruptions. We have experienced...

  • Page 15
    ..., support, technical, intellectual property and other resources than us. As a result, our competitors may be able to devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing policies and devote substantially more resources to web site and systems development...

  • Page 16
    ... with substantial customer bases in the computer and other technical fields. Additionally, companies that control access to transactions through a network or Web browsers could also promote our competitors or charge us a substantial fee for inclusion. In addition, changes in postal regulations could...

  • Page 17
    ... also seek to have the US Postal Service block the acquisition by a foreign person of our common stock or our Company in order to prevent the combined company from becoming a more effective competitor in the market for PC Postage. Our stock price is volatile. The price at which our common stock has...

  • Page 18
    ..., costs and expenses (including attorneys' fees), and rescissory damages. In April 2002, plaintiffs filed a consolidated amended class action complaint against us and certain of our current and former board members and/or officers. The consolidated amended class action complaint includes similar...

  • Page 19
    ... Stamps.com to make any payments. The proposed settlement was preliminarily approved by the court in February 2005, but remains subject to a fairness hearing and final approval by the court which has not yet occurred. In addition to the class action lawsuits against us, over 1,000 similar lawsuits...

  • Page 20
    ... "Executive Compensation and Related Information," appearing in the Proxy Statement, is hereby incorporated by reference. For additional information on our stock incentive plans and activity, see Note 14 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report...

  • Page 21
    ... Value of Shares that May Yet Be Purchased Under the Plans or Programs Period Total Number of Shares Purchased Average Price Paid per Share October 1, 2005 - October 31, 2005 November 1, 2005 - November 31, 2005 December 1, 2005 - December 31, 2005 13,396 - - $ 15.99 - - 13,396 - - $ 17...

  • Page 22
    ... in this Report. Year Ended December 31, 2005 2004 2003 2002 2001 (in thousands, except per share data) Statement of Operations Data: Revenues Cost and expenses: Cost of sales Research and development Sales and marketing General and administrative Impairment of goodwill Restructuring charges Income...

  • Page 23
    ... electronic stamps, directly onto envelopes, plain paper, or labels using ordinary laser or inkjet printers. Our service currently supports USPS classes including First-Class Mail ® , Priority Mail ® , Express Mail ® , Parcel Post™, Media Mail™ and Bound Printed Matter. Customers can also add...

  • Page 24
    ... On May 17, 2005, the Company publicly launched its second market test of PhotoStamps, a new, patented form of postage that allows consumers to turn digital photos, designs or images into valid U.S. postage. Popular categories of images used on PhotoStamps include family and friends, pets, vacations...

  • Page 25
    ...level Pro service, but adds several new capabilities and new functionality including faster print speeds, higher meter/account balances, more costs codes for tracking, support for USPS certified mail, and the ability to print FedEx shipping labels directly from the Premier interface. In January 2005...

  • Page 26
    ... product software features. Total postage printed using our service during fiscal year 2005 was up 23% compared to fiscal year 2004. We continued to attract a significant number of new customers from online advertising and direct mail, our primary marketing channels. Gross customers acquired were...

  • Page 27
    ... of $4.49 per month to the Power/Pro Plan at $15.99 per month and the Premier Plan at higher price points, resulting in higher service fee revenue per customer. As of December 31, 2005, Power/Pro Plan or Premier Plan customers accounted for 94% of total registered customers as compared to 51% as...

  • Page 28
    ... operating costs, credit card processing fees, the cost of postage for PhotoStamps, image review, printing and fulfillment costs for PhotoStamps, parcel insurance offering costs, customer misprints and products sold through our Supplies Store and the related costs of shipping and handling. Cost of...

  • Page 29
    ...of costs associated with strategic partnership relationships, advertising, and compensation and related expenses for personnel engaged in sales, marketing, and business development activities. Sales and marketing expense increased from $12.6 million in fiscal 2004 to $19.8 million in fiscal 2005, an...

  • Page 30
    ... sources: (1) service fees charged to customers for use of our PC Postage service; (2) PhotoStamps revenue from the direct sale of PhotoStamps; and (3) product sales and other revenue, consisting of Supplies Store revenue from the direct sale of consumables and supplies, advertising revenue from...

  • Page 31
    ... promotional expenses, system operating costs, credit card processing fees, the cost of postage for PhotoStamps, printing and fulfillment costs for PhotoStamps, parcel insurance offering costs, customer misprints and products sold through our Supplies Store and the related costs of shipping and...

  • Page 32
    ...a similar charge in the fiscal year 2003. General and Administrative. General and administrative expense principally consisted of compensation and related costs for executive and administrative personnel, fees for legal and other professional services, depreciation of equipment and software used for...

  • Page 33
    ... of Statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 2 to our financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an...

  • Page 34
    ... periods for such excess tax deductions were $0 in 2005, 2004 and 2003. In May 2005 the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections"(Statement 154), which replaces APB No. 20, "Accounting Changes", and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements...

  • Page 35
    .... Our management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included below. Item 9b. Other Information None. 32

  • Page 36
    ... to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that Stamps.com Inc. maintained effective internal control over financial reporting as of...

  • Page 37
    ... of our officers and employees, can be found on our web site, which is located at www.stamps.com. We intend to make all required disclosures concerning any amendments to, or waivers from, our code of ethics on our web site. Item 11. Executive Compensation We incorporate by reference the information...

  • Page 38
    ... included in a separate section of this Annual Report on Form 10-K commencing on the pages referenced below: Stamps.com Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets at December 31, 2005 and 2004 Consolidated Statements of...

  • Page 39
    ...Letter Agreement by and between the Company and John M. Payne.* Asset Purchase Agreement dated April 27, 2001 by and between the Company and E-Stamp Corporation.(9) Amendment to the Online Store Outsourcing Agreement dated January 31, 2002 by and between the Company and Office Depot, Inc.(10) Patent...

  • Page 40

  • Page 41
    ... No. 000-26427). (8) Incorporated herein by reference to the Company's Annual Report on Form 10-K/A, originally filed with the Securities and Exchange Commission on April 27, 2001 (File No. 000-26427). Incorporated herein by reference to the Company's Form 10-Q filed with the Securities and Exchange...

  • Page 42
    ... reporting as of December 31, 2005, based on criteria established in "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2006, expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Los Angeles...

  • Page 43
    ... (in thousands, except per share data) December 31, 2005 2004 Assets Current assets: Cash and cash equivalents Restricted cash Short-term investments Trade accounts receivable, net Other accounts receivable Other current assets Total current assets Property and equipment, net Intangible assets, net...

  • Page 44
    ... per share data) Year Ended December 31, 2005 2004 2003 Revenues: Service PhotoStamps, net Product and other, net Total revenues Cost of revenues: Service PhotoStamps Product and other Total cost of revenues Gross profit Operating expenses: Sales and marketing Research and development General and...

  • Page 45
    STAMPS.COM INC. STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (in thousands) Additional Paid-in Capital Notes Receivable from Stock Sales Treasury Stock at Cost Other Comprehensive Loss Common Stock Shares Amount Deferred Compensation Accumulated Deficit Total Balance at ...

  • Page 46
    ... compensation Changes in operating assets and liabilities: Trade accounts receivable Other accounts receivable Other current assets Other assets Accounts payable and accrued expenses Net cash provided by (used in) operating activities Investing activities: Sale of short-term investments Purchase...

  • Page 47
    ... vendor to offer PC Postage in a software-only business model in 1999. On August 10, 2004, we publicly launched a market test of PhotoStamps ® , a new form of postage that allows consumers to turn digital photos, designs or images into valid US postage. Stamps.com completed the first market test on...

  • Page 48
    ... are determined using quoted market prices for those securities or similar financial instruments. Concentration of Risk The Company's investments are subject to market risk, primarily interest rate and credit risk. The Company's investments are managed by a limited number of outside professional...

  • Page 49
    ... purchased by our customers directly from the US Postal Service. PhotoStamps revenue includes the price of postage and is made pursuant to a sales contract that provides for transfer of both title and risk of loss upon our delivery to the carrier. On a limited basis, we allow third parties to offer...

  • Page 50
    ... promotional expenses, system operating costs, credit card processing fees, the cost of postage for PhotoStamps, printing and fulfillment costs for PhotoStamps, parcel insurance offering costs, customer misprints and products sold through our Supplies Store and the related costs of shipping and...

  • Page 51
    ...assets when it is more likely than not a tax benefit will not be realized. Stock-Based Compensation The Company accounts for its employee stock plan under the intrinsic value method prescribed by APB No. 25, "Accounting for Stock Issued to Employees", and related interpretations, and has adopted the...

  • Page 52
    ...except per share data): 2005 2004 2003 Net income (loss) - as reported Add: Stock price based employee expense included in net income (loss) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards Net income (loss) - pro forma Basic net income...

  • Page 53
    ... prior periods for such excess tax deductions were $0 in 2005, 2004 and 2003. In May 2005 the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections"(SFAS 154), which replaces APB No. 20, "Accounting Changes", and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements...

  • Page 54
    ...December 31, 2005 Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Cash and cash equivalents: Cash Money market Commercial paper Cash and cash equivalents Restricted cash: Corporate notes and bonds Restricted cash Short term investments: Corporate notes and...

  • Page 55
    STAMPS.COM INC. NOTES TO FINANCIAL STATEMENTS (continued) December 31, 2005 Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Cash and cash equivalents : Cash Money market Cash and cash equivalents Restricted cash: Corporate notes and bonds Restricted cash ...

  • Page 56
    ... following table summarizes the Company's accounts payable and accrued expenses as of December 31, 2005 and 2004 (in thousands): 2005 2004 Payroll and related accrual Legal and related accrual Deferred rent accrual Sales and Marketing related accrual Sales tax accrual Other accrual Accrued expenses...

  • Page 57
    ... and the state credits will begin to expire in 2006. The Federal Tax Reform Act of 1986 and similar state tax laws contain provisions which may limit the net operating losses carryforwards to be used in any given year upon the occurrence of certain events, including a significant change in ownership...

  • Page 58
    ... 1,000,000 shares of common stock vesting immediately at a price of $17.50, representing an exercise price that was $3.14 higher than the fair market value on the date of grant of $14.36. During 2005, 2004 and 2003, the Company issued options to purchase a total of 265,500, 1,220,626 and 422,475...

  • Page 59
    ...): Options Outstanding Number of Options Weighted Average Exercise Price Balance at January...2005, 2004 and 2003 using the Black-Scholes valuation method are as follows: 2005 2004 2003 Weighted-average fair value of stock options with an exercise price equal to the market price on the grant date...

  • Page 60
    ...$115,000 in 2005, 2004 and 2003, respectively, related to this plan. 11. Legal Proceedings In addition to the legal proceedings described in Item 3 of this Annual Report, the Company is a party to various other legal actions, claims and proceedings incidental to its business. Litigation is uncertain...

  • Page 61
    STAMPS.COM INC. NOTES TO FINANCIAL STATEMENTS (continued) require the Company to pay ...thousands except per share data ) Fiscal Year 2005: Revenues Gross profit Income from operations Net income Net income per share: Basic Diluted Weighted average shares outstanding: Basic Diluted Fiscal Year 2004:...

  • Page 62
    ... has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on the 14 th day of March 2006. STAMPS.COM INC. By: /s/ KENNETH MCBRIDE Kenneth McBride Chief Executive Officer Pursuant to the...

  • Page 63
    ... of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Stamps.com Inc., included in the Annual Report (Form 10-K) for the year ended December 31, 2005. /s/ ERNST & YOUNG LLP Los Angeles, California March 9, 2006

  • Page 64
    ... and appoints Kenneth McBride, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all Annual Reports on Form 10-K, for the year ended December 31, 2005, of Stamps.com...

  • Page 65
    ... and appoints Kenneth McBride, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all Annual Reports on Form 10-K, for the year ended December 31, 2005, of Stamps.com...

  • Page 66
    ... and appoints Kenneth McBride, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all Annual Reports on Form 10-K, for the year ended December 31, 2005, of Stamps.com...

  • Page 67
    ... and appoints Kenneth McBride, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all Annual Reports on Form 10-K, for the year ended December 31, 2005, of Stamps.com...

  • Page 68

  • Page 69
    ... Form of Certification Required by Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended I, Ken McBride, Chief Executive Officer of Stamps.com Inc., certify that: 1. I have reviewed this Annual Report on Form 10-K of Stamps.com Inc.; 2. Based on my knowledge, this report does...

  • Page 70

  • Page 71
    ...31.2 Form of Certification Required by Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended I, Kyle Huebner, Chief Financial Officer of Stamps.com Inc. certify that: 1. I have reviewed this Annual Report on Form 10-K of Stamps.com Inc.; 2. Based on my knowledge, this report...

  • Page 72
    ...Form of Certification Required by Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended I, James A. Harper, Chief Accounting Officer of Stamps.com Inc., certify that: 1. I have reviewed this Annual Report on Form 10-K of Stamps.com Inc.; 2. Based on my knowledge, this report...

  • Page 73
    ...OF 2002 In connection with the Annual Report of Stamps.com Inc. (the "Company") on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ken McBride, Chief Executive Officer of the Company, certify, pursuant to 18...

  • Page 74
    ... OF 2002 In connection with the Annual Report of Stamps.com Inc. (the "Company") on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kyle Huebner, Chief Financial Officer of the Company, certify, pursuant to...

  • Page 75
    ...2002 In connection with the Annual Report of Stamps.com Inc. (the "Company") on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James A. Harper, Chief Accounting Officer of the Company, certify, pursuant to...