Stamps.com 2006 Annual Report Download - page 46

STAMPS.COM INC.
NOTES TO FINANCIAL STATEMENTS
1. Description of Business
The Company’s core service allows customers to buy and print United States Postal Service (“U.S. Postal Service” or “USPS”) approved
postage using any PC, an ordinary inkjet or laser printer, and an internet connection. Customers use the Company’s service to mail and ship a
variety of mail pieces including postcards, envelopes, flats and packages, and using a wide range of USPS mail classes including First Class
Mail®, Priority Mail®, Express Mail®, Media Mail®, Parcel Post®, and others. The Company’s customers include home businesses, small
businesses, corporations and individuals. In 1999, Stamps.com became the first ever USPS-licensed vendor to offer PC Postage in a software-
only business model. On August 10, 2004, the Company 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 September 30, 2004,
launched a second market test of PhotoStamps on May 17, 2005 and subsequently a third market test on May 17, 2006. This third phase of the
market test has an initial authorization period of one year, through May 16, 2007, and includes an option for the USPS to extend the test for a
second year to May 16, 2008.
2. Summary of Significant Accounting Policies
Use of Estimates and Risk Management
The preparation of financial statements in conformity with US generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ
from those estimates and such differences may be material to the financial statements. Examples include estimates of loss contingencies,
promotional coupon redemptions and estimates regarding the useful lives of patents and other amortizable 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 in which a customer qualifies using estimated redemption rates based on historical data. Promotional expense which is included in cost
of service is incurred as customers qualify and thereby may not correlate directly with changes in revenue as the revenue associated with the
acquired customer is earned over the customer’s lifetime.
The Company is involved in various litigation matters as a claimant and a defendant. The Company records any amounts recovered in
these matters when received. The Company records liabilities for claims against it when the loss is probable and estimable. Amounts recorded
are based on reviews by outside counsel, in-house counsel and management. Actual results could differ from estimates.
Cash Equivalents and Investments
The Company considers all highly liquid investments with an original or remaining maturity of three months or less at the date of purchase
to be cash equivalents.
The Company’s cash equivalents and investments are comprised of money market, U.S. government obligations and public corporate debt
securities at December 31, 2006 and 2005. All investments are classified as available for sale and are recorded at market value using the
specific identification method. Realized gains and losses are reflected in other income and expense while unrealized gains and losses are
included as a separate component of stockholders’ equity.
Trade Accounts Receivable
The Company’s trade accounts receivable primarily relate to PC Postage Services and Branded Insurance provided to customers prior to
billing. Trade accounts receivable, net of allowances for uncollectible accounts of $8,713 as of the fiscal years ended December 31, 2006 and
2005, were approximately $2,365,000 and $2,131,000 as of December 31, 2006 and 2005, respectively.
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