Overstock.com 2002 Annual Report Download

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OVERSTOCK.COM, INC (OSTK)
10-K
Annual report pursuant to section 13 and 15(d)
Filed on 02/21/2003
Filed Period 12/31/2002

Table of contents

  • Page 1
    OVERSTOCK.COM, INC (OSTK) 10-K Annual report pursuant to section 13 and 15(d) Filed on 02/21/2003 Filed Period 12/31/2002

  • Page 2
    ...or Organization) 87-0634302 (I.R.S. Employer Identification Number) 6322 South 3000 East, Suite 100 Salt Lake City, Utah 84121 (Address of Principal Executive Offices including Zip Code) (801) 947-3100 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12...

  • Page 3
    ....COM, INC. ANNUAL REPORT ON FORM 10-K INDEX Part I. Item 1. Item 2. Item 3. Item 4. Special Note Regarding Forward-Looking Statements Business Properties Legal Proceedings Submission of Matters to a Vote of Security Holders Part II. Market for the Registrant's Common Stock and Related Stockholder...

  • Page 4
    ....worldstock.com. We continually add new, limited inventory products to our Websites in order to create an atmosphere that encourages customers to visit frequently and purchase products before our inventory sells out. Closeout merchandise is typically available in inconsistent quantities and prices...

  • Page 5
    ... B2B. Additionally, we operate a small store located in our warehouse in Salt Lake City. Overstock provides manufacturers with a one-stop liquidation channel to sell both large and small quantities of excess and closeout inventory without disrupting sales through traditional channels. Key advantages...

  • Page 6
    ... to process and fulfill orders on an accurate, timely and reliable basis. We operate a 354,255 square foot leased warehouse in Salt Lake City, Utah to help ensure the highest level of customer service. We strive to improve our product offerings, the look and feel of our Websites and the quality of...

  • Page 7
    ... Worldstock Home & Garden Each of these departments has multiple categories that more specifically define the products offered within that department. For example, the following product categories are currently within the "Electronics & Computers" department: Audio & Video Office & Phones Cameras...

  • Page 8
    ... Lake City, Utah warehouse. We monitor both sources for accurate order fulfillment and timely shipment. We currently charge $2.95 for basic ground shipping, but customers can choose from various expedited shipping services at their expense. Returns Policy. Our returns policy for consumer purchases...

  • Page 9
    ...of December 31, 2002, we had 194 full-time employees, including 49 in customer service, 34 in order fulfillment, 13 in information technology and Web store production, 9 in sales and marketing, 42 in merchandising, 10 in finance, 18 in B2B sales, 6 in business development and 13 in our executive and...

  • Page 10
    ... of our Website through which customers could purchase products. Our limited operating history makes it difficult to evaluate our business and future operating results. We have a history of significant losses. If we do not achieve profitability, our financial condition and our stock price could...

  • Page 11
    ... customer service policies and ship the products directly to the customer. If we do not maintain our existing or build new relationships with third parties on acceptable commercial terms, we may not be able to offer a broad selection of merchandise, and customers may refuse to shop at our Websites...

  • Page 12
    ... reduced shipment quality, which may result in damaged products and customer dissatisfaction. Our operating results depend on our Websites, network infrastructure and transaction-processing systems. Capacity constraints or system failures would harm our business, results of operations and financial...

  • Page 13
    ... so may cause unanticipated system disruptions, slower response times, degradation in levels of customer service, impaired quality and speed of order fulfillment or delays in reporting accurate financial information. We may be unable to manage expansion into new business areas which could harm our...

  • Page 14
    ...and fulfill orders and provide high-quality customer service, largely depends on the efficient and uninterrupted operation of our computer and communications hardware systems. Substantially all of our computer and communications hardware is located at a single leased facility in Salt Lake City, Utah...

  • Page 15
    ... from third parties to provide the security and authentication necessary to effect secure transmission of confidential information such as customer credit card numbers. We cannot assure you that advances in computer capabilities, new discoveries in the field of cryptography or other events or...

  • Page 16
    ... and federal levels. These laws and regulations could cover issues such as user privacy, freedom of expression, pricing, fraud, quality of products and services, taxation, advertising, intellectual property rights and information security. Applicability to the Internet of existing laws governing...

  • Page 17
    ...obtain control of our company. ITEM 2. PROPERTIES We lease 22,000 square feet of office space for our corporate headquarters and customer service operations in Salt Lake City, Utah, and we lease a 354,255 square foot warehouse and distribution facility also in Salt Lake City, Utah. We believe these...

  • Page 18
    ... was no public market for our common stock. The following table sets forth, for the periods indicated, the high and low closing prices per share for our common stock as reported on the Nasdaq National Market since May 30, 2002. Common Stock Price High Low Year Ended December 31, 2002 Second Quarter...

  • Page 19
    ... Year ended December 31, 1998 1999 2000 2001 2002 (in thousands, except per share data) Consolidated Statement of Operations Data: Direct revenue Commission revenue Warehouse revenue Total revenue Cost of goods sold(1) Gross profit (loss) Operating expenses: Sales and marketing expenses(2) General...

  • Page 20
    ... which are fulfilled from our warehouse in Salt Lake City, Utah. We generate business-to-business (B2B) sales when we contact retailers by phone and email and offer them our merchandise below wholesale prices, allowing them an opportunity to be more price-competitive in their local markets. After we...

  • Page 21
    ... generally require payment by credit card at the point of sale. Any amounts received prior to when we ship the goods to customers are deferred. Reserve for returns and the allowance for obsolete and damaged inventory. Our management must make estimates of potential future product returns related to...

  • Page 22
    ... 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...

  • Page 23
    ... 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...

  • Page 24
    ... Three Months Ended Mar. 31, June 30, Sept. 30, 2001 2001 2001 Additional Operating Data(1): Gross merchandise sales (in thousands)(2) Number of orders(3) Number of new B2C customers(4) Average customer acquisition cost(5) Dec. 31, 2001 Mar. 31, June 30, Sept. 30, 2002 2002 2002 Dec. 31, 2002 $ 15...

  • Page 25
    ... email address; a unique password; and a verified credit card account number. Average customer acquisition cost represents total sales and marketing expense excluding B2B sales force compensation (including salary, bonus, commission and benefits costs) divided by the number of new customers for...

  • Page 26
    ...123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. We have adopted the disclosure provisions of this statement as of December 31, 2002. Liquidity and Capital Resources Prior to our...

  • Page 27
    ..., standby letters of credit, guarantees, standby repurchase obligations or other commercial commitments. In July 2001, Patrick M. Byrne, our President and Chief Executive Officer, who is also a significant beneficial owner of our stock, agreed to personally guarantee our merchant account with a bank...

  • Page 28
    ... Ownership Reporting Compliance." ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference from the Proxy Statement under the caption "Executive Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information...

  • Page 29
    .... Strategic Alliance and Product Sales Agreement dated February 26, 2002 between Overstock.com, Inc. and Safeway, Inc. Irrevocable Letter of Credit dated August 24, 2001 from Wells Fargo Bank, N.A. for the account of Patrick M. Byrne in favor of Wells Fargo Merchant Services, LLC. Lease Termination...

  • Page 30
    ... of the same number filed with our Registration Statement on Form S-1 (File No. 333-102763), which became effective on February 12, 2003. (a) (b) (c) (b) Reports on Form 8-K. During the last quarter of 2002, we filed a Report on Form 8-K on October 25, 2002 (Items 5 and 9), announcing changes...

  • Page 31
    ... affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and any fraud, whether or not material, that involves management or other employees who have a significant role in...

  • Page 32
    ... affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and any fraud, whether or not material, that involves management or other employees who have a significant role in...

  • Page 33
    ... effective on May, 29, 2002. Incorporated by reference to exhibits of the same number filed with our Registration Statement on Form S-1 (File No. 333-102763), which became effective on February 12, 2003. (a) (b) (c) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Accountants...

  • Page 34
    ... to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. /s/ PricewaterhouseCoopers LLP Salt Lake City, Utah January 27...

  • Page 35
    ...,956 Overstock.com, Inc. Consolidated Statements of Operations Year ended December 31, 2000 2001 2002 (in thousands, except per share data) Direct revenue Commission revenue Warehouse revenue Total revenue Cost of goods sold (includes amortization of stock-based compensation of $0, $78, and $373...

  • Page 36
    ... and amortization Amortization of goodwill Amortization of unearned stock-based compensation Realized loss on marketable securities Stock options issued to consultants for services Stock issued to employees Amortization of debt discount 2002 $(21,312) 706 226 - - - - - $(13,806) 1,735 3,056...

  • Page 37
    ...1. BUSINESS AND ORGANIZATION Overstock.com, Inc. (the "Company") is an online "closeout" retailer offering discount, brand-name merchandise for sale primarily over the Internet. The Company's merchandise offerings include bed-and-bath goods, kitchenware, watches, jewelry, electronics, sporting goods...

  • Page 38
    ...of these instruments. Marketable securities consist of funds deposited into a capital management account managed by a financial institution. The financial institution has invested these funds in municipal, government and corporate bonds which are classified as available-for-sale and reported at fair...

  • Page 39
    .... Direct revenue consists of merchandise sales made to individual consumers and businesses that are fulfilled from our warehouse. The Company generally requires payment by credit card at the point of sale. Amounts received prior to shipment of goods to customers are recorded as deferred revenue...

  • Page 40
    ...table sets forth the computation of basic and diluted earnings (loss) per share for the periods indicated: Year ended December 31, 2000 2001 2002 Net loss attributable to common shares Weighted average common shares outstanding-basic Effective of dilutive securities: Warrants Employee stock options...

  • Page 41
    ... effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. The Company has adopted the disclosure provisions of this statement as of December 31, 2002. 3. INITIAL PUBLIC OFFERING On June 4, 2002, the Company closed its initial public...

  • Page 42
    5. MARKETABLE SECURITIES The Company's marketable securities consist of funds deposited into a capital management account managed by a financial institution. The financial institution has invested these funds in municipal, government, and corporate bonds at December 31, 2002, as follows: Cost Basis ...

  • Page 43
    ... 22 square feet of office space and 354 square feet for its warehouse facility in Salt Lake City, Utah. The Company also has lease obligations under non-cancelable operating leases for computer equipment. Minimum future payments under these leases are as follows: Year Ending December 31, 2003 2004...

  • Page 44
    ... in these consolidated financial statements are shown after giving retroactive effect to the 1-for-28.34 reverse stock split. Reincorporation In May 2002, the Company reincorporated in Delaware. As a result of the reincorporation, the Company is authorized to issue 100,000 shares of $0.0001 par...

  • Page 45
    ...2001 and 2002, the fair value of these options was calculated using a Black-Scholes option pricing model using risk-free rates of 4.65% and 3.31% and an expected life of 5 years and 3 years, respectively, expected volatility of 100%, and a dividend yield of 0%. Because there was no public market for...

  • Page 46
    ...deemed fair market value of the stock. The ESPP expires in May 2011. A total of 353 shares were available for purchase under the ESPP. There were 14 and 6 shares issued under the ESPP during 2001 and 2002, respectively. The Company recognized approximately $63 and $51 of stock-based compensation for...

  • Page 47
    ...warehouse. Costs for this segment include product cost warehousing, fulfillment, credit card fees and customer service costs. The commission segment includes revenues, direct costs and cost allocations associated with the Company's commission-based third party commissions and are earned from selling...

  • Page 48
    ...the Company's warehouse store. Costs for this segment include product costs, warehousing and credit card fees. Assets, have not been allocated between the segments for management purposes, and as such, they are not presented here. In 2000, 2001 and 2002, virtually all sales were made to customers in...

  • Page 49
    ...) Balance at Beginning of Year Charged to Expense Deductions Balance at End of Year Year ended December 31, 2002 Allowance for uncollectible accounts Deferred tax valuation allowance Reserve for sales returns Allowance for inventory obsolescence Year ended December 31, 2001 Deferred tax valuation...

  • Page 50
    ....com, Inc. of our report dated January 27, 2003, except as to Note 23 which is as of February 18, 2003, relating to the financial statements and financial statement schedule, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP Salt Lake City, Utah February 21, 2003 QuickLinks CONSENT...

  • Page 51
    ... M. Byrne Title: Chief Executive Officer I, Jason C. Lindsey, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Overstock.com, Inc. on Form 10-K for the year ended December 31, 2002 fully complies with the...