Stamps.com 2006 Annual Report Download

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FORM 10-K
STAMPS.COM INC
(Annual Report)
Filed 3/16/2007 For Period Ending 12/31/2006
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 3/16/2007 For Period Ending 12/31/2006 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
    ..., California 90066 (Address of principal executive office) (310) 482-5800 (Registrant's telephone number, including area code) _____ 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 Stock, $.001...

  • Page 3
    STAMPS.COM INC. FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2006 TABLE OF CONTENTS Page PART I. Item 1. ...12. Item 13. Item 14. PART IV. Item 15. Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Submission of Matters to a Vote of Security Holders 1 1 10 16 16...

  • Page 4
    ...USPS mail classes including First Class Mail®, Priority Mail®, Express Mail®, Media Mail®, Parcel Post®, and others. Our customers include home businesses, small businesses, corporations and individuals. Stamps.com was the first ever USPS-licensed vendor to offer PC Postage® in a software-only...

  • Page 5
    ... we were successful in attracting a good number of enterprise users to our service in 2006 at a low cost per acquisition relative to the lifetime value of the enterprise customers. Enterprise customers continued to be attracted to us versus using a postage meter based on our dramatically lower total...

  • Page 6
    ... offered the following products and services to our customers: • PC Postage Service. Our U.S. Postal Service-approved PC Postage service enables users to print information-based indicia, or electronic stamps, directly onto envelopes, plain paper, or labels using ordinary laser or inkjet printers...

  • Page 7
    ... in a small office using cost codes built into our software; (4) 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 (5) our service fee of $15.99/month is...

  • Page 8
    ... with Stamps.com. Our affiliate channel is currently managed by a third party. We offer financial incentives for these small businesses and individuals to drive traffic to our web site. Direct Mail. We send direct mail pieces to prospective small business, small office, and home office customers. We...

  • Page 9
    ...-based service for printing a single label for use in shipping a package that does not require a monthly subscription fee, in partnership with eBay. In July 2005, Pitney Bowes introduced a customized postage offering which it branded ZazzleStamps through a partnership with Zazzle.com, Inc., a small...

  • Page 10
    ... the IBI program has created an attractive alternative channel for the sale of postage, particularly to small offices, home offices and small businesses. We believe that our current customers have chosen our service over other forms of postage such as postage stamps or postage meters primarily to...

  • Page 11
    ... 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 12
    ... of Stamps.com stock as market and business conditions warrant (the "February 2007 Program"). The February 2007 Program will commence when the November 2006 Program is completed and will expire one year from its commencement date. Share purchases may be made from time to time on the open market...

  • Page 13
    ...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 may implement. Even though we have established a sizeable base of users, we...

  • Page 14
    ...sales programs. We currently rely on a combination of marketing techniques to attract new customers including direct mail, online marketing and business partnerships. We may be unable to continue marketing our services and products in a costeffective manner. If we fail to acquire customers in a cost...

  • Page 15
    ... our service. We do not presently have a full disaster recovery plan in effect to cover the loss of facilities and equipment. In addition, we do not have a fail-over site that mirrors our infrastructure to allow us to operate from a second location. We have business interruption insurance; however...

  • Page 16
    ... issues. Our business would suffer dramatically if we are unable to adapt our services to any new requirements or specifications or if the U.S. Postal Service were to discontinue PC Postage as an approved postage method. Alternatively, the U.S. Postal Service could introduce competitive programs...

  • Page 17
    ... postage meters provided by companies such as Pitney Bowes, postage stamps and permit mail. We may not be able to establish or maintain a competitive position against current or future competitors as they enter the market. Many of our competitors have longer operating histories, larger customer...

  • Page 18
    ...") No. 25, "Accounting for Stock Issued to Employees," with a pro forma disclosure of the impact on net income (loss) of using the fair value option expense recognition method. Prior to our adoption of SFAS No. 123 (revised 2004), "Share Based Payment", or Statement 123R, on January 1, 2006, we had...

  • Page 19
    ...claims and intend to defend the lawsuit vigorously. On November 22, 2006, we filed a lawsuit against Endicia, Inc. and PSI Systems, Inc. in the United States District Court for the Central District of California for infringement of 11 Stamps.com patents covering, among other things, Internet postage...

  • Page 20
    ... underwriter defendants, and failed to disclose them in our public filings. Plaintiffs seek damages and statutory compensation, including interest, costs and expenses (including attorneys' fees). Over 1,000 similar lawsuits have been brought against over 250 companies that issued stock to the public...

  • Page 21
    ... Matters and Issuer Repurchases of Equity Securities Market Information Our common stock is traded on The Nasdaq National Market under the symbol "STMP". The following table sets forth the range of high and low closing sales prices reported on The Nasdaq National Market for our common stock...

  • Page 22
    ... information on our stock incentive plans and activity, see Note 10 of Notes to Financial Statements, included in Part IV, Item 15 of this Report. Recent Sales of Unregistered Securities We did not have any unregistered sales of common stock during the fiscal year ended December 31, 2006. 19

  • Page 23
    ... expenses: Cost of sales Research and development Sales and marketing General and administrative Income (loss) from operations Other income, net Provision for income taxes Net income (loss) Basic net income (loss) per share Diluted net income (loss) per share Weighted average shares outstanding used...

  • Page 24
    ... telephone number is (310) 482-5800. PC Postage Service Our U.S. Postal Service-approved PC Postage service enables users to print information-based indicia, or electronic stamps, directly onto envelopes, plain paper, or labels using ordinary laser or inkjet printers. Our service currently supports...

  • Page 25
    ... Store, in order to enhance our customer convenience. Branded Insurance We offer Stamps.com branded insurance to our users so that they may insure their mail or packages in a fully integrated, online process that eliminates any trips to the post office or the need to complete any special forms...

  • Page 26
    ...purchased by our customers directly from the U.S. 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 27
    .... Promotional Expense . New core service customers are generally offered promotional items that are redeemed using coupons that are qualified for redemption after a customer is successfully billed beyond an initial trial period. This includes free postage and a free digital scale and is expensed in...

  • Page 28
    ... of customer service, certain promotional expenses, system 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...

  • Page 29
    ..., customer referral programs, customer re-marketing efforts, telemarketing, direct mail, and online advertising. Additionally, included in sales and marketing expense for fiscal 2006 was approximately $336,000 of stock-based employee compensation expense related to our adoption of the new accounting...

  • Page 30
    ... compensation and related costs for executive and administrative personnel, fees for legal and other professional services, depreciation of equipment and software used for general corporate purposes and amortization of intangible assets. General and administrative expense increased from $9.6 million...

  • Page 31
    ... of customer service, certain promotional expenses, system 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...

  • Page 32
    ... revenues. General and Administrative . General and administrative expense principally consist of compensation and related costs for executive and administrative personnel, fees for legal and other professional services, depreciation of equipment and software used for general corporate purposes and...

  • Page 33
    ...During fiscal year 2006, we repurchased approximately 1.6 million shares of common stock for approximately $26.7 million. We will consider repurchasing stock throughout our current repurchase program by evaluating such factors as the price of the stock, the daily trading volume and the availability...

  • Page 34
    .... In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (Statement 157), which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles. Statement...

  • Page 35
    .... Our management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 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
    ...assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the...

  • Page 37
    ... to our directors and all 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...

  • Page 38
    ....com are included in a separate section of this Annual Report on Form 10-K commencing on the pages referenced below: STAMPS.COM FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm Balance Sheets at December 31, 2006 and 2005 Statements of Operations for the Years Ended...

  • Page 39
    ... 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 License and Settlement Agreement dated December 19, 2003 by and between Stamps.com Inc. and Pitney Bowes Inc. (11) Agreement dated July...

  • Page 40
    ... herein by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on July 16, 2004 (File No. 000-26427). Filed with the Securities and Exchange Commission with this Annual Report on Form 10-K. Previously filed. Confidential treatment requested and received as...

  • Page 41
    ...Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts...

  • Page 42
    ... LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses Total current liabilities Commitments and contingencies Stockholders' equity: Common stock, $.001 par value Authorized shares 47,500 in 2006 and 2005 Issued shares of 24,082 in 2006 and 23,372 in 2005...

  • Page 43
    ...data) Year Ended December 31, 2006 2005 2004 Revenues: Service PhotoStamps Product Other Total revenues Cost of revenues: Service PhotoStamps Product Other Total cost of revenues Gross profit Operating expenses: Sales and marketing Research and development General and administrative Total operating...

  • Page 44
    ...Stock at Cost Accumulated Deficit Other Comprehensive Loss Total Balance at January 1, 2004 Comprehensive income (loss): Net loss Unrealized loss on investments Comprehensive loss Exercise of stock options Shares purchased under the ESPP Return of capital dividend Return of capital make-up payment...

  • Page 45
    ...Compensation charge relating to the return of capital dividend 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 operating activities Investing activities: Sale...

  • Page 46
    ... intangibles. New core service customers are generally offered promotional items that are redeemed using coupons that are qualified for redemption after a customer is successfully billed beyond an initial trial period. This includes free postage and a free digital scale and is expensed in the period...

  • Page 47
    ... institutions, government and government agencies, and corporations, thereby reducing credit risk and credit risk concentrations. From time to time, the Company's investments held with its financial institutions may exceed Federal Deposit Insurance Corporation insurance limits. Interest rate...

  • Page 48
    ... when the revenue is earned and collection is deemed probable. Customers who purchase postage for use through our NetStamps, shipping label or mailing features, pay face value, and the funds are transferred directly from the customers to the U.S. Postal Service. No revenue is recognized for this...

  • Page 49
    ... of customer service, certain promotional expenses, system 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...

  • Page 50
    ...based on net income (loss) not including stock based compensation expense as required by Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" (SFAS 123R). The Company adopted SFAS 123R on January 1, 2006 using the modified prospective transition method which does...

  • Page 51
    ... Net income (loss) as reported Add: Stock price based employee expense included in net income Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects Net income (loss) pro forma Basic net income (loss) per common...

  • Page 52
    ... the year ended December 31, 2006, the Company received $7.6 million and $538,000, respectively, in cash from stock options exercised and from shares issued through the Employee Stock Purchase Program. Upon adoption of SFAS 123R the Company continued to use the Black-Scholes option valuation model...

  • Page 53
    ... Accounting Policies - (continued) The following table summarizes stock option activity related to the Company's plan for the year ended December 31, 2006: Weighted Average Remaining Contractual Life (in years) Number of Stock Options (in thousands) Weighted Average Exercise Price Aggregate...

  • Page 54
    ... on the Company's capitalization policy. These capitalized costs are amortized based on their estimated useful life. Costs related to the maintenance and development of the website content are expensed as incurred. Recent Accounting Pronouncements In June 2006, the FASB issued FASB Interpretation No...

  • Page 55
    ...December 31, 2006 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 56
    ...21,314 31,910 41,110 94,334 Total restricted cash of approximately $554,000 as of December 31, 2006 and 2005 is related to a letter of credit for a facility leased by the Company which will expire in February 2010. 5. Accounts Payable and Accrued Expenses The following table summarizes the Company...

  • Page 57
    ...the state credits began 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 interests...

  • Page 58
    ... corporate headquarters with aggregate lease payments of approximately $4.0 million through February 2010. As of December 31, 2006, the Company maintained a letter of credit for the facility lease in the amount of $554,000. 10. Employee Stock Plans Stock Incentive Plans The 1999 Stock Incentive Plan...

  • Page 59
    ... Plan generally vest 25% per year, and the Board of Directors has the discretion with respect to vesting periods applicable to a particular grant. Each option granted has a 10 year contractual life. On November 3, 2004, the Company issued options to purchase 1,000,000 shares of common stock vesting...

  • Page 60
    ...of common stock issued pursuant to the ESPP during 2006, 2005 and 2004 were 55,825, 43,170 and 32,449, respectively. Savings Plan During 1999, the Company implemented a savings plan for all eligible employees, which qualifies under Section 401(k) of the Internal Revenue Code. Participating employees...

  • Page 61
    ...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, and the outcome of individual cases is not predictable with any assurance. The Company has established loss provisions only for matters in which...

  • Page 62
    ... 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 16th day of March 2007. STAMPS.COM INC. By: /s/ Kenneth McBride Kenneth McBride Chief Executive Officer Pursuant to the requirements of...

  • Page 63
    ... to the 1999 Stock Incentive Plan, 1999 Employee Stock Purchase Plan, and IShip.com, Inc. Amended and Restated 1997 Stock Plan of Stamps.com Inc, (3) Registration Statement (Form S-8 No. 333-42764) pertaining to the 1999 Stock Incentive Plan of Stamps.com Inc.; of our reports dated March 14...

  • Page 64
    ...all capacities, to sign any and all Annual Reports on Form 10-K, for the year ended December 31, 2006, of Stamps.com Inc., a Delaware corporation, under the Securities Exchange Act of 1934, as amended, and to file the same, with exhibits thereto, and other documents in connection therewith, with the...

  • Page 65
    ...all capacities, to sign any and all Annual Reports on Form 10-K, for the year ended December 31, 2006, of Stamps.com Inc., a Delaware corporation, under the Securities Exchange Act of 1934, as amended, and to file the same, with exhibits thereto, and other documents in connection therewith, with the...

  • Page 66
    ...all capacities, to sign any and all Annual Reports on Form 10-K, for the year ended December 31, 2006, of Stamps.com Inc., a Delaware corporation, under the Securities Exchange Act of 1934, as amended, and to file the same, with exhibits thereto, and other documents in connection therewith, with the...

  • Page 67
    ...all capacities, to sign any and all Annual Reports on Form 10-K, for the year ended December 31, 2006, of Stamps.com Inc., a Delaware corporation, under the Securities Exchange Act of 1934, as amended, and to file the same, with exhibits thereto, and other documents in connection therewith, with the...

  • Page 68
    Exhibit 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Ken McBride, 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 not contain any untrue statement of a material fact or omit to state a...

  • Page 69
    ... Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Kyle Huebner, 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 not contain any untrue statement of a material fact or omit to state a material...

  • Page 70
    ... OF 2002 In connection with the Annual Report of Stamps.com Inc. (the "Company") on Form 10-K for the period ended December 31, 2006 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 71
    ... OF 2002 In connection with the Annual Report of Stamps.com Inc. (the "Company") on Form 10-K for the period ended December 31, 2006 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...