Overstock.com 2003 Annual Report Download - page 29

quarter of 2002. The gross merchandise sales of goods sold directly by us and on behalf of third parties were $69.3 million in 2001 and $154.5 million in
2002, an increase of 123%.
Cost of Goods Sold. Cost of goods sold increased in absolute dollars from $34.6 million to $73.4 million in 2002. This represents a decrease, as a
percent of total revenue, from 87% in 2001 to 80% in 2002. The decrease in cost of goods sold as a percentage of total revenue in 2002 compared to 2001 was
primarily a result of economies of scale achieved through an increased number of sales transactions and efficiencies in operations. These efficiencies include,
but are not limited to, efficiencies in the actual costs paid to suppliers for goods, freight and handling costs, the costs of customer service and returns. The
decrease is also attributable to an increase in fulfillment partner revenue as a percentage of total revenue (from 10% in 2001 to 13% in 2002), as fulfillment
partner revenue has higher gross margins than direct revenue. Cost of goods sold also includes $78,000 and $373,000 of stock-based compensation for the
years ended December 31, 2001 and 2002, respectively.
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Operating Expenses
Sales and marketing. Sales and marketing expenses increased on an absolute dollar basis from $5.8 million in 2001, to $8.7 million in 2002 primarily
as a result of our increased online marketing expenditures, including fixed payment arrangements in connection with online marketing relationships.
However, this represents a decrease as a percent of total revenue from 15% to 9%. The decrease in marketing costs as a percentage of total revenue as
compared to 2001 reflects an effort by our management to focus advertising expenditures on campaigns that it believes are the most cost-effective to increase
net sales, such as targeted online advertising, as well as negotiating reduced rates charged to us for online marketing.
General and administrative. General and administrative expenses increased from $9.4 million in 2001, to $10.8 million in 2002 representing 24% and
12% of total revenue, respectively. The increase in absolute dollars was due primarily to new business development and the staffing necessary to manage and
support our growth. General and administrative personnel increased from 65 employees at the end of 2001, to 84 employees at the end of 2002. The decrease
in general and administrative expense as a percentage of total revenue was a result of economies of scale achieved through increased sales volume and the
allocation of general and administrative expenses over a substantially larger revenue base.
Amortization of goodwill. Effective January 2002, we adopted SFAS No. 142, which requires that goodwill no longer be amortized. Hence, we did not
record any goodwill amortization during fiscal year 2002. During 2001, $3.1 million was recorded as amortization of goodwill for the fiscal year ended
December 31, 2001. Goodwill resulted from the acquisition of Gear.com in November 2000.
Amortization of stock-based compensation. Amortization of stock-based compensation was approximately $649,000 and $2.9 million in 2001 and
2002, respectively. We attribute this increase primarily to amortization of non-cash deferred stock-based compensation recognized relating to options grants
during the respective periods.
Interest income, interest expense and other income (expense). Interest income was $461,000 in 2001 compared to $403,000 in 2002. Interest expense
decreased from $729,000 in 2001 to $465,000 in 2002, primarily as a result of the reduction in notes payable. Other income (expense) changed from income
of $29,000 in 2001 to expense of $444,000 primarily because the company paid $439,000 of selling costs on behalf of the selling shareholder as part of the
initial public offering.
Income taxes. We incurred net operating losses in 2001 and 2002, and consequently paid insignificant amounts of federal, state and foreign income
taxes. As of December 31, 2002, we had $51.3 million of net operating loss carryforwards, of which $14.4 million is subject to limitation. These net operating
loss carryforwards will begin to expire in 2019.
Quarterly Results of Operations
The following tables set forth our unaudited quarterly results of operations data for the eight most recent quarters for the period ended December 31,
2003, as well as such data expressed as a percentage of our total revenue for the periods presented. The information in the table below should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this Form 10-K. We have prepared this information on
the same basis as the Consolidated Financial Statements and the information includes all adjustments, consisting only of normal recurring adjustments, that
we consider necessary for a fair statement of our financial position and operating results for the quarters presented. Our quarterly operating results have varied
substantially in the past
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and may vary substantially in the future. You should not draw any conclusions about our future results from the results of operations for any particular
quarter.
Three Months Ended
Mar. 31,
2002
June 30,
2002
Sept. 30,
2002
Dec. 31,
2002
Mar. 31,
2003
June 30,
2003
Sept. 30,
2003
Dec. 31,
2003
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Direct revenue $10,029 $11,853 $20,759 $35,302 $24,962 $25,159 $29,011 $ 57,460
Fulfillment revenue 1,659 2,230 2,857 5,633 3,966 3,431 28,504 64,910
Warehouse revenue 379 297 192 594 236 243 273 790