Stamps.com 2006 Annual Report Download - page 32

addition, during the first quarter of fiscal 2004, we incurred a charge of approximately $185,000 relating to cash and stock distributed to
customer service employees as compensation for a loss in value of employee stock options as a result of our return of capital cash dividend of
$1.75 per share in February 2004. We did not incur a similar charge in 2005.
Cost of PhotoStamps revenue increased from $1.5 million in fiscal 2004 to $5.5 million in fiscal 2005, an increase of 270%. As a
percentage of total revenue, cost of PhotoStamps revenue increased five percentage points from 4% in fiscal 2004 to 9% in fiscal 2005. The
cost of PhotoStamps revenue increase, both on an absolute basis and as a percentage of total revenue, is primarily due to the increase in
customer orders as a result of our marketing efforts, and from seasonal strength from holiday demands. Cost of PhotoStamps revenue includes
the face value of the postage, credit card processing fees, customer support costs, and cost associated with the printing and fulfillment of the
product.
Cost of product revenue increased from $1.7 million in fiscal 2004 to $2.2 million in fiscal 2005, an increase of 30%. The increase was
primarily due to the expansion of our consumable and supplies sales through our Supplies Store as a result of our continued effort to market
these offerings to our existing and new customers. As a percentage of total revenue, cost of product revenue was four percentage points in
fiscal 2004 and 2005, respectively.
Cost of other revenue decreased from $578,000 in fiscal 2004 to $535,000 in fiscal 2005, a decrease of 7%. The decrease was primarily
due to a purchase of equipment in fiscal 2004 for the procurement of other revenue. We did not incur any such purchase in fiscal 2005. As a
percentage of total revenue, cost of other revenue decreased one percentage point to 1% in fiscal 2005 as compared to 2% in fiscal 2004.
Sales and Marketing . Sales and marketing expense principally consists 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 increase of 57%. As a percentage of total
revenue, sales and marketing expense was 33% and 32% in fiscal 2004 and 2005, respectively. The increase in sales and marketing expense
was primarily due to the increase in various marketing program expenditures relating to the acquisition of customers for our core business and
for PhotoStamps. During the first quarter of fiscal 2004, we incurred a charge of approximately $328,000 relating to cash and stock distributed
to employees to compensate them for the loss in value of employee stock options held by sales and marketing personnel as a result of our return
of capital cash dividend of $1.75 per share in February 2004. We did not incur a similar charge in 2005.
Research and Development . Research and development expense principally consists of compensation for personnel involved in the
development of our services and expenditures for consulting services and third party software. Research and development expense increased
from $6.2 million in fiscal 2004 to $6.6 million in fiscal 2005, an increase of six percent. This increase was primarily due to an increase in
salary, software maintenance, and depreciation expense. During the first quarter of fiscal 2004, we incurred a charge of approximately
$900,000 relating to cash and stock distributed to employees to compensate them for the loss in value of employee stock options held by
research and development personnel as a result of our return of capital cash dividend of $1.75 per share in February 2004. We did not incur a
similar charge in 2005. As a percentage of total revenue, research and development expense decreased five percentage points from 16% in
fiscal 2004 to 11% in fiscal 2005 due to the growth in 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 amortization of intangible assets. General and administrative expense decreased from $13.0 million in fiscal 2004 to $9.6 million
in fiscal 2005, a decrease of 26%. As a percentage of total revenue, general and administrative expenses decreased 18 percentage points from
34% in fiscal 2004 to 16% in fiscal 2005. The decrease in general and administrative expense both on an absolute basis and as a percentage of
total revenue was primarily due to the decrease in legal expense related to a one-time expense of $1.4 million associated with the settlement of
an eBay litigation in July 2004. In addition, during the first quarter of fiscal 2004, we incurred a charge of approximately $1.6 million relating
to cash and stock distributed to employees to compensate them for the loss in value of employee stock options held by general and
administrative personnel as a result of our return of capital cash dividend of $1.75 per share in February 2004.
Other Income, Net . Other income, net consists of interest income from cash equivalents and short-term and long-term investments and
income relating to a legal settlement in the amount of $64,000 in 2005. Other income, net
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