Overstock.com 2002 Annual Report Download - page 26

Effective January 1, 2002, we adopted Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets".
SFAS 142 applies to all goodwill and identified intangible assets acquired in a business combination. Under this standard, all goodwill and long-lived
intangible assets, including those acquired before initial application of the standard will not be amortized, but will be tested for impairment at least annually.
Accordingly, we ceased amortization of goodwill associated with our acquisition of Gear.com in January 2002. We evaluated the $2.8 million of unamortized
goodwill during 2002, and determined that no impairment charge should be recorded.
We adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121 and requires
that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the
presentation of discontinued operations to include more disposal transactions. The adoption of this standard did not have a significant effect on our financial
statements.
The Financial Accounting Standards Board issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No.13, and Technical Corrections." Among other things, SFAS No. 145 eliminates the requirement that gains and losses from the extinguishment of debt be
classified as extraordinary items. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002, with early adoption permitted. We do not expect
the adoption of this standard to have a significant impact on our financial statements.
The Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146
addresses significant issues relating to the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring
activities, and nullifies the guidance in Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is effective for exit or disposal activities initiated after
December 31, 2002, with earlier application encouraged. We do not expect the adoption of this standard to have a significant impact on our financial
statements.
The Financial Accounting Standards Board issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure, an
amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS
No. 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 initial public offering, we financed our activities primarily through a series of private sales of equity securities (which include warrants to
purchase our common stock) totaling $43.0 million, promissory notes, lines of credit with related parties and capital equipment leases. During the second
quarter of 2002, we closed our initial public offering pursuant to which we received approximately $26.1 million in cash, net of underwriting discounts,
commissions, and other related expenses. Our cash and cash equivalents balance was $3.7 million and $11.1 million at December 31, 2001, and December 31,
2002, respectively. At December 31, 2002, we also had marketable securities of $21.6 million. On February 18, 2003, we closed a follow-on public offering
pursuant to which we received approximately $24.1 million in cash, net of underwriting discounts, commissions and other related expenses.
Our operating activities resulted in net cash outflows of $22.4 million and $10.5 million for the years ended December 31, 2000 and 2001, respectively,
and net cash inflows of $2.5 million for the year ended December 31, 2002. Uses of cash during the year ended December 31, 2000 were principally for net
losses, as well as changes in accounts receivable, inventory and accounts payable. Uses of cash for the year ended December 31, 2001 were principally for net
losses, offset by depreciation and amortization, and changes in inventory, prepaid expenses, accounts payable and accrued liabilities. Net cash inflows from
our operating activities in 2002 resulted from increases in our accounts payables and our accrued liabilities which were offset by the funding of our normal
operations, including net losses, changes in accounts receivable, inventories and prepaid assets.
Our investing activities resulted in net cash inflows of $236,000 for the year ended December 31, 2000, that resulted from $3.5 million received in the
Gear.com acquisition, offset by $3.3 million in capital asset expenditures. Investing activities for the year ended December 31, 2001 resulted in net cash
outflows of $1.7 million for capital and long-term asset expenditures. Investing activities for the year ended December 31, 2002 resulted in net cash outflows
of $23.3 million, which was largely used to acquire marketable securities and property and equipment.
Financing activities provided cash of $27.9 million in the year ended December 31, 2000, primarily related to issuance of common stock for cash of
$25.2 million and borrowings of $3.0 million from a bank. For the fiscal year ended December 31, 2001, financing activities provided net cash of $7.5 million
principally from the issuance of common stock for cash of $6.3 million and borrowings of $4.5 million from a related party, offset by a $3.0 million
repayment of a note payable. For the fiscal year ended December 31, 2002, financing activities provided cash of $28.2 million largely from the issuance of our
common stock in our initial public offering and the issuance of our Series A redeemable, convertible, preferred stock, and borrowings from a related party of
$1.2 million. This was offset by $5.7 million of repayments of notes payable to related parties.
On March 4, 2002, we sold 958,612 shares of our Series A redeemable, convertible, preferred stock at $6.89 per share for $6.6 million, net of issuance
costs. As the fair value of the common stock received upon conversion of the preferred stock was greater than the conversion price of the preferred stock at
the date the preferred stock was issued, a beneficial conversion feature resulted in a non-cash charge of approximately $6.6 million recorded in the first
quarter of 2002. This non-cash charge was recorded as a deemed dividend, of which $3.7 million was attributable to shares sold to the following related
parties; John J. Byrne Jr., the father of Patrick M. Byrne; Contex Limited, an entity controlled by Mark Byrne, a brother of Patrick M. Byrne; Haverford
Internet LLC, an entity controlled by Patrick M. Byrne; The Gordon S. Macklin Family Trust, a trust of a director of Overstock; and Rope Ferry
Associates, Ltd., an entity owned by John J. Byrne III and Dorothy M. Byrne, the brother and mother of Patrick M. Byrne. The remaining purchasers of our
Series A preferred stock were unrelated parties that are friends and acquaintances of our officers and directors.
On June 4, 2002, we closed our initial public offering, pursuant to which we sold approximately 2.2 million shares of our common stock, and a selling
shareholder sold 845,000 shares of our common stock at a price of $13.00 per share. The offering resulted in proceeds to us of approximately $24.9 million,
net of $2.0 million of issuance costs. As part of the offering, we granted the underwriter the right to purchase up to 450,000 additional shares within
thirty days after the offering to cover over-allotments. On June 27, 2002, the underwriter purchased an additional 101,000 shares of stock for approximately
$1.3 million. At the closing of the offering, all issued and outstanding shares of Series A preferred stock were automatically converted into common stock on
a one-to-one basis.