Overstock.com 2005 Annual Report Download - page 42

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our auctions tab, reconstruction of our travel website, and development of our search engine and keyword management applications.
Although we plan to continue to invest in technology, we expect overall capital expenditures to decrease to approximately $30
million, or half of 2005 levels. This includes some additional investment in our newly expanded infrastructure, including hardware
and software used to enhance performance, reliability and stability.
Commentary—General and Administrative Expenses. General and administrative expenses increased 68% from $21.8 million in
2004 to $36.5 million in 2005, representing 4% and 5% of total revenue for each respective period.
The increase in general and administrative expenses in 2005 relate to an increase in payroll expenses and professional fees related
to merchandising, legal and finance. In addition, during the third quarter of 2005, we relocated our corporate offices to larger facilities
to accommodate future growth, which increased facilities costs by approximately $1 million per quarter.
On July 1, 2005, we completed our acquisition of Ski West and consolidated its operations into our travel business at that time.
During the last six months of 2005, Ski West's operations contributed an additional $2.4 million of general and administrative
expenses and an additional $1.3 million of expense related to the amortization of the intangible assets acquired in the acquisition.
Commentary—Cash and liquidity. To provide additional liquidity, we have established a $50 million line of credit with Wells
Fargo Retail Finance collateralized primarily by inventory and receivables, and an additional $30 million line of credit with Wells
Fargo secured by our $50 million of foreign bonds that mature during 2006. We also plan to decrease inventory levels during the year,
which will contribute to our goal of breakeven to positive operating cash flows in 2006.
The balance of our Management's Discussion and Analysis of Financial Condition and Results of Operations provides further
information about the matters discussed above and other important matters affecting our business.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Our critical accounting policies are as follows:
• revenue recognition;
• estimating valuation allowances and accrued liabilities, specifically, the reserve for returns, the allowance for doubtful
accounts and the reserve for obsolete and damaged inventory;
• accounting for income taxes;
• valuation of long-lived and intangible assets and goodwill; and
• derivative instruments
Revenue recognition. We derive our revenue from four sources: (i) direct revenue, which consists of merchandise sales made to
consumers and businesses that are fulfilled from our warehouse; (ii) fulfillment
38