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OVERSTOCK.COM, INC (OSTK)
10-K
Annual report pursuant to section 13 and 15(d)
Filed on 02/24/2004
Filed Period 12/31/2003

Table of contents

  • Page 1
    OVERSTOCK.COM, INC (OSTK) 10-K Annual report pursuant to section 13 and 15(d) Filed on 02/24/2004 Filed Period 12/31/2003

  • Page 2
    ... jurisdiction of incorporation or organization) 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(b) of the Act: None...

  • Page 3
    ... Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions Principal Accountant Fees and Services Part IV. Exhibits, Financial Statement Schedules and Reports on Form 8-K Item 5. Item 6. Item...

  • Page 4
    ... inventory levels at appropriate levels despite the seasonal nature of our business; and our belief that we can successfully offer and sell a constantly changing mix of products and services, including those we recently introduced in our new travel department, ranging across a wide variety of price...

  • Page 5
    ...travel services, including airline tickets, hotel reservations and car rentals. 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...

  • Page 6
    ... (books, magazines, CDs, DVDs, video cassettes and video games) in up to twelve departments. Convenient access on a secure site. Our customers are able to access and purchase our products 24 hours a day from the convenience of their home or office. Further, we do not sell any personal information...

  • Page 7
    ... process and fulfill orders on an accurate, timely and reliable basis. We operate an approximately 354,000-square foot leased warehouse in Salt Lake City, Utah to help provide a high level of customer service. We strive continually to improve our product offerings, the look and feel of our Websites...

  • Page 8
    ... departments on our consumer Website: Apparel, Shoes & Accessories Jewelry, Gifts & Watches Books, Movies, CDs & Games Sporting Goods & Events Electronics & Computers Travel Home & Garden Worldstock Each of these departments has multiple categories that more specifically define the products offered...

  • Page 9
    ...from our Salt 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. Payment Terms. As a general policy, we require...

  • Page 10
    ...future competitors or address increased competitive pressures. See "Risk Factors." Intellectual Property We regard our domain names and similar intellectual property as critical to our success. We rely on a combination of laws and contractual restrictions with our employees, customers, suppliers, 10...

  • Page 11
    ...of December 31, 2003, we had 326 full-time employees, including 62 in customer service, 125 in order fulfillment, 29 in information technology and Web store production, 19 in marketing, 41 in merchandising, 15 in finance, 20 in B2B sales and 15 in our executive and administrative department. We have...

  • Page 12
    ...future marketing agreements are successful; price competition that results in lower profit margins or losses; the amount and timing of operating costs and capital expenditures relating to the expansion of our business operations and infrastructure; the amount and timing of our purchases of inventory...

  • Page 13
    ... 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 14
    ... 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 business operations and reputation. Our long-term strategic plan...

  • Page 15
    ...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 19 hardware is located at a single leased facility in Salt Lake City, Utah...

  • Page 16
    ... returned products. In the recent past, we have recorded charges for obsolete inventory and have had to sell certain merchandise at a discount or loss. It is impossible to determine with certainty whether an item will sell for more than the price we pay for it. Because we rely heavily on purchased...

  • Page 17
    ... lack of security of information or privacy protection; possible disruptions, computer viruses or other damage to the Internet servers or to users' computers; and excessive governmental regulation. 22 Customers may be unwilling to use the Internet to purchase goods. Our long-term future depends...

  • Page 18
    ... 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 19
    ... website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. ITEM 2. PROPERTIES We lease approximately 33,000 square feet of office space for our corporate headquarters and customer service operations in Salt Lake City...

  • Page 20
    ...AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is traded on the Nasdaq National Market under the symbol "OSTK." Prior to May 30, 2002, there 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...

  • Page 21
    ... Data: Direct revenue Fulfillment partner revenue Warehouse revenue Total revenue Cost of goods sold(1) Gross profit (loss) Operating expenses: Sales and marketing expenses(2) General and administrative expenses(2) Amortization of goodwill Amortization of stock-based compensation Total operating...

  • Page 22
    ..., jewelry, electronics, sporting goods, designer accessories and travel. Our company, based in Salt Lake City, Utah, was founded in 1997, and we launched our first Website through which customers could purchase products in March 1999. Our revenue is comprised of direct revenue, fulfillment partner...

  • Page 23
    ..., the returns policies applicable to the 31 merchandise sold via the website. Management uses the measure of gross merchandise sales for internal planning purposes, including measuring the Company's growth, measuring the effectiveness of marketing expenditures, and capacity planning for information...

  • Page 24
    ... product ordered from our Website is shipped from our Salt Lake City warehouse. Though we publicize a standard of shipping within two business days of receipt of order, under our internal standards, we try to ship orders received by 1:00 p.m. Mountain time the same day. Two weeks before Thanksgiving...

  • Page 25
    ... we sell a product through our website and collect the cash from a credit card transaction within a few days, but pay our fulfillment partner 15 to 30 days later. Because we collect cash for the sale before we pay our fulfillment partner, the fulfillment partner portion of our business generates...

  • Page 26
    ... sale of merchandise shipped by fulfillment partners directly to consumers and other businesses; and (iii) warehouse revenue, which consists of sales of residual products from large bulk purchases of inventory. Both direct revenue and fulfillment partner revenue are recorded net of returns, coupons...

  • Page 27
    ... 2003 Revenue Beginning July 1, 2003, customer returns from sales shipped by our fulfillment partners are returned directly to us and processed through our Salt Lake City warehouse, rather than returned to our fulfillment partners, as they previously were. We made the decision to change this policy...

  • Page 28
    ... policy change, and due to process inefficiencies that were identified and fixed during the third and fourth quarters. Cost of goods sold on sales transactions from our fulfillment partners now includes the cost of the product, warehousing and fulfillment costs, credit card fees and customer service...

  • Page 29
    ... 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 30
    ... sales price of all sales transactions, including those for which we only record a commission under generally accepted accounting principles, and therefore differs from GAAP revenue. Beginning, July 1, 2003 we changed our business practices regarding returns, which affected our fulfillment partner...

  • Page 31
    ... valid customer account, a person must provide us with the following information and purchase merchandise on our B2C Website: a unique e-mail address; a unique password; and a verified credit card account number. 43 (5) Average customer acquisition cost represents total sales and marketing expense...

  • Page 32
    ...our existing warehouse facility, a new customer service telephone system ($800,000), and upgrades to the existing internal database ($500,000). These expenditures were offset by a net increase of $10.0 million in cash and cash equivalents from the purchase and sales of marketable securities. For the...

  • Page 33
    ... obligations, guarantees, standby repurchase obligations or other commercial commitments. We have a $3.5 million revolving letter of credit facility, which expires June 30, 2005, which we use to obtain letters of credit supporting our inventory purchases. At December 31, 2003 the issuing bank or an...

  • Page 34
    ... ended December 31, 2003, there was no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 48 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE...

  • Page 35
    ... as Vice President of Sales and Marketing for several months prior to her promotion. From 1992 to 1996, Ms. Abraham held several marketing and management positions at Ameritech Corporation. She was employed at American Express Travel Related Services in New York City from 1988 to 1992, focusing...

  • Page 36
    ...Company's directors and employees, including the Company's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Company hereby undertakes to provide a copy of the code of ethics to any person without charge...

  • Page 37
    ... 31, 2003, we granted options to purchase up to an aggregate of 853,803 shares to employees under our 2002 Stock Option Plan. 53 Individual Grants Percent of Total Options Granted to Number of Securities Underlying Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for...

  • Page 38
    ...to purchase shares of our common stock under our Amended and Restated 1999 Stock Option Plan and our 2002 Stock Option Plan for their service on our Board. Our Board determines the number of option shares to be granted, if any, to any new non-employee directors. The following table shows information...

  • Page 39
    ...by our 2002 Stock Option Plan. As of the closing of our initial public offering we are not granting any additional options under this plan. Instead we are granting options under our 2002 Stock Option Plan. The Amended and Restated 1999 Stock Option Plan provides that after termination of service, an...

  • Page 40
    ... to purchase our common stock, may be issued under our 2002 Stock Option Plan. The administrator determines the purchase price of stock purchase rights granted under our 2002 Stock Option Plan. Unless the administrator determines otherwise, a restricted stock purchase agreement, an agreement between...

  • Page 41
    ... Policies Applicable to other Executive Officers The Company's compensation program for its executive officers other than Dr. Byrne consists of (i) salaries, and (ii) stock option grants. 58 Salaries. The Company pays its executive officers other than Dr. Byrne salaries that are determined, in part...

  • Page 42
    ... FISCAL YEAR ENDING DECEMBER 31, 2003 59 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth information regarding the beneficial ownership of our common stock as of December 31, 2003 by the following individuals or...

  • Page 43
    ... to our executive officers and directors and 665,566 shares issuable upon exercise of currently exercisable warrants. (3) (4) (5) (6) (7) (8) (9) (10) (11) The following table provides information as of December 31, 2003 with respect to shares of our common stock that may be issued under our...

  • Page 44
    ... make travel arrangements for our executives and pay the travel related expenses incurred by our executives on Company business. In 2003 we reimbursed Haverford Valley, L.C. approximately $236,000 for these expenses. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Audit Fees The aggregate fees...

  • Page 45
    ...on internal controls for financial reporting. The Policy provides that the Audit Committee will monitor the Audit services engagement throughout the year and will also approve, if necessary, any changes in terms and conditions resulting from changes in audit scope or other items. The Policy provides...

  • Page 46
    ... of its directors and officers. Amended and Restated 1999 Stock Option Plan and form of agreements thereunder. 2001 Stock Purchase Plan and form of agreements thereunder. Gear.com, Inc. Restated 1998 Stock Option Plan and form of agreements thereunder. 2002 Stock Option Plan, as amended, and form...

  • Page 47
    ...30, 2001. Credit Agreement dated February 13, 2004 between Overstock.com, Inc. and Wells Fargo Bank National Association Subsidiaries of the Registrant Consent of Independent Accountants Power of Attorney (see signature page) Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer Rule 13a...

  • Page 48
    ...each of its directors and officers Amended and Restated 1999 Stock Option Plan and form of agreements thereunder 2001 Stock Purchase Plan and form of agreements thereunder Gear.com, Inc. Restated 1998 Stock Option Plan and form of agreements thereunder 2002 Stock Option Plan, as amended, and form of...

  • Page 49
    ... all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these...

  • Page 50
    ...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 February 20...

  • Page 51
    ..., 2001 2002 2003 (in thousands, except per share data) Direct revenue Fulfillment partner revenue Warehouse revenue Total revenue Cost of goods sold (includes amortization of stock-based compensation of $78, $373, and $90, respectively) Gross profit Operating expenses: Sales and marketing expenses...

  • Page 52
    ... Amortization of goodwill Amortization of unearned stock-based compensation Realized loss (gain) on marketable securities Stock options issued to consultants for services Stock issued to employees Amortization of debt discount Selling shareholder fees Changes in operating assets and liabilities...

  • Page 53
    ..., 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 and designer accessories. The Company also sells books, magazines, CDs, DVDs, videocassettes and video games ("BMV...

  • Page 54
    ... other customer accounted for greater than 10% of revenues or receivables during 2001, 2002 or 2003. Inventories Inventories consist of merchandise purchased for resale and are stated at the lower of average cost or market. The Company establishes reserves for estimated obsolescence or damage equal...

  • Page 55
    ... fourth quarter of 2003, the Company added a discount travel store to the Company's Website. Fulfillment partners are used to supply the travel products (flights, hotels, rental cars, etc.) in the store. For the products sold in the travel store, the Company does not currently have inventory risk or

  • Page 56
    ... obtain such sales. The Company closed its warehouse store in January 2004. F-10 Cost of goods sold Cost of goods sold include product costs, warehousing costs, inbound and outbound shipping costs, handling and fulfillment costs, customer service costs and credit card fees, and are recorded in the...

  • Page 57
    ...after June 15, 2003. The adoption of this standard did not have a material effect on the Company's financial statements. 3. PUBLIC OFFERINGS On June 4, 2002, the Company closed its initial public offering, pursuant to which it sold 2,155 shares of its common stock, and a selling shareholder sold 845...

  • Page 58
    4. MARKETABLE SECURITIES The Company's marketable securities consist of funds deposited into capital management accounts managed by two financial institutions. The financial institutions invested these funds in municipal, government, and corporate bonds at December 31, 2002, as follows: Cost Basis ...

  • Page 59
    ... On May 22, 2002, the Company entered into a $1,000 revolving credit agreement (the "Revolving Credit Facility") with Wells Fargo Bank, N.A. The proceeds are to be used for issuing standby and commercial letters of credit for the purchase of inventory. The Revolving Credit Facility was increased to...

  • Page 60
    ...(16) 161 (75) $ 86 The Company leases 33 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...

  • Page 61
    ... by the Company's Board of Directors, usually over four years from the grant date. As of the initial public offering, the Amended and Restated 1999 Stock Option Plan was terminated. Future shares will be granted under the 2002 Stock Option Plan. As of December 31, 2003, 328 shares are available...

  • Page 62
    ... shares of stock at a value determined by the Company's board of directors which approximates the deemed fair market value of the stock. As of the initial public offering, the ESPP was terminated. Future shares will be granted under the 2002 Stock Option Plan There were 14 and 6 shares issued...

  • Page 63
    ...of a demand deposit of $1,000 with the bank. In exchange for his personal guarantee, the Company compensated the Chief Executive Officer with options to purchase 35 shares of the Company's common stock at an exercise price of $5.07 per share. F-22 These options vested over a three-year period based...

  • Page 64
    ... credit card fees and customer service costs. From July 1, 2003 forward, due to a change in the company's business practices, including the partner sales return process, these sales transactions are now recorded gross. As a result, this segment's name has been changed to the "fulfillment partner...

  • Page 65
    ... 2002 2003 2003 2003 2003 (unaudited) Consolidated Statement of Operations Data: Direct revenue Commission revenue Warehouse revenue Total revenue Cost of goods sold(1) Gross profit Operating expenses: Sales and marketing expenses(2) General and administrative expenses(2) Amortization of stock-based...

  • Page 66
    ... tax valuation allowance Reserve for sales returns Allowance for inventory obsolescence Allowance for doubtful accounts Year ended December 31, 2003 Deferred tax valuation allowance Reserve for sales returns Allowance for inventory obsolescence Allowance for doubtful accounts $ 21,762 496 943 - 21...

  • Page 67
    ..., amendment or cancellation of any Letter of Credit) determined in accordance with Bank's standard fees and charges then in effect for such activity. SECTION 1.3. COLLATERAL. As security for all indebtedness of Borrower to Bank subject hereto, Borrower hereby grants to Bank security interests of...

  • Page 68
    ... and warranties shall survive the execution of this Agreement and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations of Borrower to Bank subject to this Agreement. SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly...

  • Page 69
    ... business similar to that of Borrower, including but not limited to fire, extended coverage, public liability, flood, property damage and workers' compensation, with all such insurance carried with companies and in amounts satisfactory to Bank, and deliver to Bank from time to time at Bank's request...

  • Page 70
    ...Article I hereof. SECTION 5.2. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or consolidate with any other entity; make any substantial change in the nature of Borrower's business as conducted as of the date hereof; acquire all or substantially all of the assets of any other entity; nor sell...

  • Page 71
    ... deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable...

  • Page 72
    ... fees and costs in which case the arbitration shall be conducted in accordance with the AAA's optional procedures for large, complex commercial disputes (the commercial dispute resolution procedures or the optional procedures for large, complex commercial disputes to be referred to, as 8 applicable...

  • Page 73
    OVERSTOCK. COM, INC. By: /s/ DAVID K. CHIDESTER David K. Chidester Vice President, Finance WELLS FARGO BANK, NATIONAL ASSOCIATION By: /s/ LISBETH HOPPER Lisbeth Hopper, Relationship Manager 10 QuickLinks CREDIT AGREEMENT

  • Page 74
    QuickLinks -- Click here to rapidly navigate through this document Exhibit 21 SUBSIDIARIES OF THE REGISTRANT Name Jurisdiction of Formation Trade Names Overstock Mexico, S. de R.L. de C.V. Mexico Overstock Mexico QuickLinks SUBSIDIARIES OF THE REGISTRANT

  • Page 75
    ... on Form S-8 (No. 333-89890) of Overstock.com, Inc. of our report dated February 20, 2004 relating to the financial statements and financial statement schedule, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP Salt Lake City, Utah February 20, 2004 QuickLinks CONSENT OF INDEPENDENT...

  • Page 76
    ... information; and any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. (b) Date: February 20, 2004 /s/ PATRICK M. BYRNE Patrick M. Byrne President (principal executive officer...

  • Page 77
    ...affect the registrant's ability to record, process, summarize and report financial information; and any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. (b) Date: February 20, 2004...

  • Page 78
    ... Securities Exchange Act of 1934, as applicable, and that information contained in such Report fairly presents in all material respects the financial condition and results of operations of Overstock.com, Inc. /s/ PATRICK M. BYRNE Name: Patrick M. Byrne Title: President (principal executive officer...

  • Page 79
    ...of 2002, that the Annual Report of Overstock.com, Inc. on Form 10-K for the year ended December 31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as applicable, and that information contained in such Report fairly presents in all material...