Overstock.com 2005 Annual Report Download - page 52

Therefore, beginning in the third quarter of 2003, overall blended gross margins are significantly lower than they had historically
been.
Our fulfillment partner operations generated gross profits of $11.6 million (12% margins) and $38.0 million (13% margins) for
the years ended December 31, 2003 and 2004, respectively. The increase in the gross profit dollars for our fulfillment partner
operations was due to the general growth of the consumer business during the year, and an increase in the number of fulfillment
partner products offered on our Websites. The increase in gross margins for our fulfillment partner operations is largely due to
improvements in buying, customer service costs and credit card fees, as well as a decrease in BMV sales from 38% of fulfillment
partner revenue in 2003 to 22% in 2004. Gross margins for BMV products have historically been much lower than those of other
product categories.
Operating Expenses
Sales and marketing. Sales and marketing expenses totaled $20.2 million and $40.5 million for the years ended December 31,
2003 and 2004, respectively, representing 8% of total revenue for each year. During 2004, online marketing rates generally increased.
This increase coupled with our decision to increase our ongoing online marketing efforts, particularly with the large portals (MSN,
Yahoo & AOL), and keyword search (Google) resulted in the increase in our sales and marketing expenses. In addition, we continued
our television and radio campaigns throughout 2004.
Technology expenses. Technology expenses increased 249%, from $2.4 million in the year ended December 31, 2003 to
$8.4 million in same period ended December 31, 2004.
General and administrative. General and administrative expenses increased from $14.5 million in 2003 to $21.8 million in
2004, representing 6% and 4% of total revenue, respectively. As a percentage of gross bookings, general and administrative expenses
were 5% and 4% for each of those respective years. The increase in absolute dollars was primarily attributable to costs associated with
building infrastructure, including expansion of corporate systems and additional personnel costs from increased corporate headcount.
The increase in general and administrative expenses also included the costs associated with the strategic projects of 2004, namely,
completion of our auctions tab, reconstruction of our travel department and the development of our search engine. The 2004 increase
also reflects significant increases in technology, legal and accounting costs over 2003.
Amortization of stock-based compensation. Prior to the Company's initial public offering in May 2002, the Company recorded
unearned stock-based compensation related to stock options granted below the fair market value of the underlying stock. Since the
initial public offering, the Company has not granted any additional stock options below fair market value. Amortization of stock-based
compensation was approximately $756,000 and $360,000 for the years ended December 31, 2003 and 2004, respectively.
Interest income, interest expense and other income (expense). The increase in interest income from $461,000 in 2003 to
$1.2 million in 2004 is due to the increase in our cash and marketable securities from our equity and debt offerings during 2004.
Interest expense increased from $76,000 in 2003 to $775,000 in 2004, primarily as a result of the interest expense from our convertible
senior notes issued in November 2004. Other income (expense) was relatively consistent, changing from income of $115,000 in 2003
to expense of $49,000 in 2004.
Income taxes. For the years ended December 31, 2003 and 2004, we incurred net operating losses, and consequently paid
insignificant amounts of federal, state and foreign income taxes. As of December 31, 2003 and 2004, we had net operating loss
carryforwards of approximately $47.1 million and $50.5 million, respectively, which may be used to offset future taxable income. An
additional $14.4 million of net operating losses are limited under Internal Revenue Code Section 382 to $799,000 a year. These net
operating loss carryforwards will begin to expire in 2019.
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