Overstock.com 2004 Annual Report Download - page 38

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overall gross margins will be impacted by the blend of Club O, Club O Gold, and BMV sales as a percentage of our total revenue.
Sales and marketing expenses consist primarily of advertising, public relations and promotional expenditures, as well as payroll and related expenses for
personnel engaged in marketing and selling activities. Advertising expense is the largest component of our sales and marketing expenses and is primarily
attributable to expenditures related to online marketing activities and our offline national radio and television advertising. For the years ended December 31,
2002, 2003 and 2004, our advertising expenses totaled approximately $7.0 million, $18.6 million and $39.2 million, which represents 81%, 92% and 97%,
respectively, of our sales and marketing expenses. We expect our sales and marketing expenses to increase in future periods on an absolute dollar basis as we
expect to continue to increase our advertising in our efforts to continue to grow the business.
General and administrative expenses consist of wages and benefits for executive, accounting, technology, merchandising and administrative personnel,
rents and utilities, legal and accounting fees, travel and entertainment, depreciation and amortization and other general corporate expenses.
We adopted SFAS No. 142 for the fiscal year beginning January 1, 2002. Under this pronouncement, any remaining goodwill is not amortized, but is
evaluated at least annually for impairment. There were no impairments of goodwill during the years ended December 31, 2002, 2003 and 2004.
We have recorded no provision or benefit for federal and state income taxes as we have incurred net operating losses since inception. As of
December 31, 2003 and 2004, we had net operating loss carryforwards of approximately $48.0 million and $53.3 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 carryforwards begin to expire in 2019. We have provided a full valuation allowance on the deferred tax asset, consisting primarily of net operating loss
carryforwards, because of uncertainty regarding its realizability.
Both direct and fulfillment partner revenue are seasonal, with revenues historically being the highest in the fourth quarter, reflecting higher consumer
holiday spending. We anticipate this will continue in the foreseeable future. With the exception of our acquisition of Gear.com, we have achieved our
historical growth from internal operations.
Executive Commentary
This executive commentary is intended as a supplement to, but not a substitute for, the more detailed discussion of our business included elsewhere
herein. Investors are cautioned to read our entire Management's Discussion and Analysis of Financial Condition and Results of Operation, as well as our
audited financial statements, and the discussion of our business and risk factors and other information included elsewhere in this report. This executive
commentary includes forward-looking statements, and investors are cautioned to read the Special Note Regarding Forward-Looking Statements included
elsewhere in this report.
Commentary—Increases in Gross Bookings. Management believes that to understand our business and our financial statements, investors should
understand the difference between total revenue and gross bookings. Gross bookings represents the gross selling price of all transactions, including those for
which we only record a commission, before returns, sales discounts, and before payments to fulfillment partners prior to July 1, 2003, and therefore differs
from total revenue. We sustained year-over-year growth in gross bookings for 2004's four quarters of 79%, 88%, 87%, and 82%, respectively, compared to
2003's respective quarters. For the year, gross bookings grew 84% from $294.8 million to $541.4 million in 2004. Our B2C business, which excludes Safeway
and our B2B business, grew 106% in 2004. This growth was due to the continued expansion of our customer base (2.5 of our 5.5 million
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