Overstock.com 2002 Annual Report Download - page 12

manufacturers may decide not to offer particular products for sale on the Internet. If we are unable to maintain our existing or build new commission-based
relationships or if other product manufacturers refuse to allow their products to be sold via the Internet, our business would suffer severely.
We are partially dependent on third parties to fulfill a number of our customer service and other retail functions. If such parties are unwilling or
unable to continue providing these services, our business could be seriously harmed.
In our commission business we rely on third parties to conduct a number of other traditional retail operations with respect to their respective products
that we offer for sale on our Websites, including maintaining inventory, preparing merchandise for shipment to individual customers and timely distribution of
purchased merchandise. We have no effective means to ensure that these third parties will continue to perform these services to our satisfaction or on
commercially reasonable terms. In addition, because we do not take possession of these third parties' products, we are unable to fulfill these traditional retail
operations ourselves. Our customers could become dissatisfied and cancel their orders or decline to make future purchases if these third parties are unable to
deliver products on a timely basis. If our customers become dissatisfied with the services provided by these third parties, our reputation and the Overstock
brand could suffer.
We rely on our relationships with manufacturers, retailers and other suppliers to obtain sufficient quantities of quality merchandise on acceptable
terms. If we fail to maintain our supplier relationships on acceptable terms, our sales and profitability could suffer.
To date, we have not entered into contracts with manufacturers or liquidation wholesalers that guarantee the availability of merchandise for a set
duration. Our contracts or arrangements with suppliers do not provide for the continuation of particular pricing practices and may be terminated by either
party at any time. Our current suppliers may not continue to sell their excess inventory to us on current terms or at all, and we may not be able to establish
new supply relationships. For example, it is difficult for us to maintain high levels of product quality and selection because none of the manufacturers,
suppliers and liquidation wholesalers from whom we purchase products on a purchase order by purchase order basis have a continuing obligation to provide
us with merchandise at historical levels or at all. In most cases, our relationships with our suppliers do not restrict the suppliers from selling their respective
excess inventory to other traditional or online merchandise liquidators, which could in turn limit the selection of products available on our Websites. If we are
unable to develop and maintain relationships with suppliers that will allow us to obtain sufficient quantities of merchandise on acceptable commercial terms,
such inability could harm our business, results of operation and financial condition.
Our business may be harmed by the listing or sale of pirated, counterfeit or illegal items by third parties.
We have received in the past, and we anticipate we will receive in the future, communications alleging that certain items listed or sold through our
Websites infringe third-party copyrights, trademarks and trade names or other intellectual property rights. For example, in February 2002, Microsoft
Corporation filed a complaint against us alleging that we have distributed counterfeit and otherwise unauthorized Microsoft software in violation of federal
copyright and trademark law and related state laws. This litigation matter is ongoing and unresolved. These and future claims could result in increased costs of
doing business through legal expenses, adverse judgment or settlement or require us to change our business practices in expensive ways. In addition, litigation
could result in interpretations of the law that require us to change our business practices or otherwise increase our costs.
In addition, we may be unable to prevent third parties from listing unlawful goods, and we may be subject to allegations of civil or criminal liability for
unlawful activities carried out by third parties through our Websites. In the future, we may implement measures to protect against these potential liabilities
that could require us to spend substantial resources and/or to reduce revenues by discontinuing certain service offerings. Any costs incurred as a result of
liability or asserted liability relating to the sale of unlawful goods or the unlawful sale of goods could harm our business.
Our business may be harmed by fraudulent activities on our Websites.
We have received in the past, and anticipate that we will receive in the future, communications from customers who did not receive goods that they
purchased. We also periodically receive complaints from our customers as to the quality of the goods purchased and services rendered. Negative publicity
generated as a result of fraudulent or deceptive conduct by third parties could damage our reputation, harm our business and diminish the value of our brand
name. We expect to continue to receive from customers requests for reimbursement or threats of legal action against us if no reimbursement is made.
We depend upon third-party delivery services to deliver our products to our customers on a timely and consistent basis. A deterioration in our
relationship with any one of these third parties could decrease our ability to track shipments, cause shipment delays, and increase our shipping costs
and the number of damaged products.
Although we operate our own fulfillment center, we rely upon multiple third parties for the shipment of our products. Because we do not have a written
long-term agreement with any of these third parties, we cannot be sure that these relationships will continue on terms favorable to us, if at all. Unexpected
increases in shipping costs or delivery times, particularly during the holiday season, could harm our business, prospects, financial condition and results of
operations. If our relationships with these third parties are terminated or impaired or if these third parties are unable to deliver products for us, whether
through labor shortage, slow down or stoppage, deteriorating financial or business condition, responses to terrorist attacks or for any other reason, we would
be required to use alternative carriers for the shipment of products to our customers. We may be unable to engage alternative carriers on a timely basis or upon
terms favorable to us. Changing carriers would likely have a negative effect on our business, operating results and financial condition. Potential adverse
consequences include:
reduced visibility of order status and package tracking;
delays in order processing and product delivery;
increased cost of delivery, resulting in reduced gross margins; and
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 condition.
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