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OVERSTOCK.COM, INC (OSTK)
10-K
Annual report pursuant to section 13 and 15(d)
Filed on 03/16/2006
Filed Period 12/31/2005

Table of contents

  • Page 1
    OVERSTOCK.COM, INC (OSTK) 10-K Annual report pursuant to section 13 and 15(d) Filed on 03/16/2006 Filed Period 12/31/2005

  • Page 2
    ... or organization) 87-0634302 Identification Number) (I.R.S. Employer 6350 South 3000 East 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...

  • Page 3
    ... Other Information Part III. Directors and Executive Officers of the Registrant Executive Compensation Security Ownership of Certain Beneficial Owners and Management Certain Relationships and Related Transactions Principal Accounting Fees and Services Part IV. Item 15. Exhibits, Financial Statement...

  • Page 4
    ... the increases we have made in the scope of our Books, Music and Video department offerings will be attractive to customers and will result in increased sales of higher margin products; • our belief that we can meet our published product shipping standards even during periods of relatively high...

  • Page 5
    ...; Books, Music, Movies and Games; Bulk Buys & Business Supplies; Auctions; 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 Websites offer our customers an opportunity to...

  • Page 6
    ... the buying and selling of goods between our customers. Our auction site is strictly a consumer-to-consumer site; we do not list or sell any goods on this site. In January 2005, we opened our travel department offering air, hotel and car reservation services as well as cruise and vacation packages...

  • Page 7
    ... BMV products (books, magazines, CDs, DVDs, video cassettes and video games) in eight major 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 computer. We do not sell any personal information...

  • Page 8
    ...an annual fee of $29.95 and receive a 5% discount on all non-travel and non-BMV products and $1 shipping per order, along with access to a special customer service hotline. Additionally, in November 2005, we partnered with Chase Card Services to launch an Overstock.com Co-Branded Rewards Visa credit...

  • Page 9
    ... our warehouse in Salt Lake City rather than multiple hundreds of different partner warehouses across the United States, we can verify that fulfillment partner products are being packaged and shipped to our standards. Additionally, as customer returns are now all shipped to one location, the process...

  • Page 10
    ..., as most of the product sold is supplied by fulfillment partners. Travel business During the fourth quarter of 2003, we added a discount travel department to our Website. We used fulfillment partners to supply the travel products and services (flights, hotels, rental cars, etc.). For the first...

  • Page 11
    ..., Books, Music, Movies & Games, Bulk Buys & Business Supplies, Auctions Tab and Travel Tab. Currently, our products under our Shopping Tab are organized into eight different product departments: Apparel Electronics & Computers Gifts Health & Wellness Home & Garden Jewelry & Watches Sporting Goods...

  • Page 12
    .... We also process returns of direct and fulfillment partner merchandise in the Salt Lake City warehouse. Our warehouses store approximately 14,000 non-BMV products offered on our Websites. We operate the Salt Lake City warehouse with an automated warehouse management system that tracks the receipt...

  • Page 13
    ...providing superior customer service. We staff our customer service department with dedicated in-house and outsourced professionals who respond to phone, instant online chat and e-mail inquiries on products, ordering, shipping status, and returns. Our customer service staff processes approximately 40...

  • Page 14
    ... such as Ross Stores, Inc., Walmart Stores, Inc., TJX Companies, Inc., Costco Wholesale Corporation, Target Corporation and Best Buy Co., Inc., which may or may not also have an online presence. As the market for online liquidation grows, we believe that companies involved in online retail, as well...

  • Page 15
    ... As of December 31, 2005, we had 620 full-time employees, including 109 in customer service and fraud prevention, 145 in order fulfillment, 93 in information technology and Website production, 38 in marketing, 166 in merchandising (including auctions and travel), 34 in accounting and finance, and 35...

  • Page 16
    ... our customer service capabilities to better serve our customers' needs; • expand our product offerings, including our auctions site, our travel site and our custom design jewelry site; • rent additional warehouse and office space; • increase our general and administrative functions to support...

  • Page 17
    .... In our fulfillment partner business, although we handle returned merchandise, we continue to 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...

  • Page 18
    ...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. A significant number of merchandise returns...

  • Page 19
    ... were unable to generate significant traffic for our former B2B site, in the third quarter of 2004, we merged the B2B site into our main website, and opened our Wholesale bulk purchase program. Our failure to succeed in this market or other markets or other product or service offerings may harm our...

  • Page 20
    ...with online services, search engines, directories and other Websites and e-commerce businesses to provide content, advertising banners and other links that direct customers to our Websites. We rely on these relationships as significant sources of traffic to our Websites and to generate new customers...

  • Page 21
    ... such as SmartBargains; • online retailers with discount departments such as Amazon.com, Inc., eBay, Inc. and Buy.com, Inc.; and • traditional retailers and liquidators such as Ross Stores, Inc., Walmart Stores, Inc., TJX Companies, Inc., Costco Wholesale Corporation, Target Corporation and Best...

  • Page 22
    ... increased traffic during sales or other promotions and during the holiday shopping season. Capacity constraints can cause unanticipated system disruptions, slower response times, and degradation in levels of customer service, impaired quality and delays in reporting accurate financial information...

  • Page 23
    ... Websites and our proprietary technology and systems may become obsolete. Our failure to respond to technological change or to adequately maintain, upgrade and develop our computer network and the systems used to process customers' orders and payments could harm our business, prospects, financial...

  • Page 24
    ... Litigation In August 2005 we filed an unfair business practice lawsuit against Gradient Analytics, Rocker Partners, L.P. and others, alleging that the defendants have conspired to denigrate Overstock's business for personal profit. In October 2005 we filed an amended complaint alleging additional...

  • Page 25
    ... management time and could have a negative impact on our business. We may face risks relating to our recent acquisition of Ski West, Inc. and the development of our travel business. We acquired all of the capital stock of Ski West, Inc., an on-line travel company, on July 1, 2005 and integrated Ski...

  • Page 26
    ...such as those requiring a license to sell or purchase certain items or mandating particular disclosures in connection with an offer or sale of an item. To the extent that such current or future laws or regulations prevent users from selling items on our auction site, they could harm our business. 23

  • Page 27
    ... auction sites. We may receive similar complaints. We do not have the ability to require users of our services to fulfill their obligations to make payments or to deliver items. We are aware that other companies periodically receive complaints from buyers about the quality of the items they purchase...

  • Page 28
    ... 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. Customers may be unwilling to use the Internet to purchase goods. Our long-term future...

  • Page 29
    ... merchandise or the merchandise of third parties that we offer for sale on our Websites, our business could be harmed. We do not currently collect sales or other similar taxes for physical shipments of goods into states other than Utah and Indiana. One or more local, state or foreign jurisdictions...

  • Page 30
    ...to manage distribution operations or provide adequate levels of customer service; • our ability to successfully integrate operations and technologies from acquisitions or other business combinations; • entering into new lines of products; • our ability to attract users to our new auctions site...

  • Page 31
    ... in control of our company. The issuance of preferred stock could also adversely affect the voting powers of the holders of common stock, including the loss of voting control to others. We are also afforded the protections of Section 203 of the Delaware General Corporation Law, which could delay...

  • Page 32
    ... Report on Form 10-K. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES We lease approximately 154,000 square feet of office space for our corporate headquarters and customer service operations in Salt Lake City, Utah, and we lease an approximately 610,000 square feet in two warehouses...

  • Page 33
    ...Federal Circuit. On August 18, 2005, shortly after we filed the complaint in Utah, Furnace Brook filed a complaint in the United States District Court for the Southern District of New York, alleging that certain of our business practices and our on-line ordering system infringe a single patent owned...

  • Page 34
    ... the fourth quarter of 2005. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS 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...

  • Page 35
    ... determined 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 awards will be made under the 2005 Equity Incentive Plan. As of December 31, 2005, 1,100,000 shares...

  • Page 36
    ... Ski West starting from July 1, 2005. 2001 2002 Year ended December 31, 2003 2004 2005 (in thousands, except per share data) Consolidated Statement of Operations Data: Revenue Direct revenue Fulfillment partner revenue Total revenue Cost of goods sold Direct Fulfillment partner Total cost of goods...

  • Page 37
    Weighted average common shares outstanding-basic and diluted 10,998 13,108 16,198 17,846 19,429 33

  • Page 38
    ... bed-and-bath goods, home décor, kitchenware, watches, jewelry, electronics & computers, sporting goods, apparel, designer accessories and travel, among other products. We also sell books, magazines, CD's, DVD's, videocassettes and video games ("BMV"). Our company, based in Salt Lake City, Utah...

  • Page 39
    ...95 restocking fee) on all items returned for non-defective reasons from the Electronics and Computers department. Cost of goods sold consists of the cost of the product, as well as inbound and outbound freight, fixed warehouse costs, warehouse handling costs, credit card fees, and customer service...

  • Page 40
    ... during 2005 that some of our systems required upgrading and some required replacement. Therefore, during the year we implemented a large Enterprise Resource Planning ("ERP") system to replace some of our existing systems. Upon implementation of the ERP system, more background processes failed...

  • Page 41
    ...to the cost of processing returns, customer service costs and credit card fees. Management believes that additional improvements can be made in gross margins; particularly in the customer service, order fulfillment and returns areas of the business. Commentary-Marketing. Sales and marketing expenses...

  • Page 42
    ... 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...

  • Page 43
    ...from our auctions and agency travel operations. All sources of revenue are recorded net of returns, coupons redeemed by customers, and other discounts. Revenues from our auction, travel services and bulk buys were not material in 2004 or 2005 and therefore are included in fulfillment partner revenue...

  • Page 44
    ... in any accounting period. The reserve for returns was $2.8 million and $5.6 million as of December 31, 2004 and 2005, respectively. From time to time, we may grant credit to certain of our business customers on normal credit terms. We perform ongoing credit evaluations of our customers' financial...

  • Page 45
    ... December 2004, the "FASB" issued Statement of Financial Accounting Standard ("SFAS") No. 123 (revised 2004) ShareBased Payment ("Statement 123R"). This standard requires companies to measure and recognize the cost of employee services received in exchange for an award of equity instruments based on...

  • Page 46
    ...revenue in that gross bookings represent the gross sales price of goods sold by the Company before returns, sales discounts and before payments to fulfillment partners prior to July 1, 2003. The increase in total revenue is also a reflection of our ability to acquire new customers from our marketing...

  • Page 47
    ...returns, customer service costs and credit card fees. Management believes that additional improvements can be made in gross margins, particularly in the customer service, order fulfillment and returns areas of the business. Fulfillment Partner Gross Margins-Our fulfillment partner business generated...

  • Page 48
    ... party fulfillment services and warehouses, and our ability to effectively manage customer service costs and credit card fees. Year ended December 31, 2004 2003 2005 Total revenue Cost of goods sold Product costs and other cost of goods sold Fulfillment costs Total cost of goods sold Gross profit...

  • Page 49
    ... of the underlying stock. Since the initial public offering, the Company has not granted any additional stock options below fair market value. Amortization of stock-based compensation was approximately $360,000 and $72,000 for the years ended December 31, 2004 and 2005, respectively. The decrease...

  • Page 50
    ... 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 to have more...

  • Page 51
    ... favorable pricing and effective buying as well as decreases in outbound and inbound shipping costs. Cost of goods sold on sales transactions from our fulfillment partners now includes the cost of the product, warehousing and fulfillment costs, including credit card fees and customer service costs...

  • Page 52
    ... of the consumer business during the year, and an increase in the number of fulfillment partner products offered on our Websites. The increase in gross margins for our fulfillment partner operations is largely due to improvements in buying, customer service costs and credit card fees, as well as...

  • Page 53
    ... of Ski West starting from July 1, 2005. Three Months Ended Mar. 31, Dec. 31, 2005 2004 Mar. 31, 2004 Consolidated Statement of Operations Data: Revenue Direct revenue Fulfillment partner revenue Total revenue Cost of goods sold Direct Fulfillment partner Total cost of goods sold Gross profit...

  • Page 54
    ...orders. Number of new B2C customers represents the number of valid new customer accounts. To establish a 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...

  • Page 55

  • Page 56
    ... higher in the fourth calendar quarter of each year than in the preceding three quarters. Fulfillment partner revenue increased significantly beginning in the third quarter of 2003 due to the change in our business practices. Cost of goods sold as a percentage of total revenue has fluctuated...

  • Page 57
    ... financing activities during the year ended December 31, 2005 totaled $99.1 million, consisting primarily of cash used for payments of capital leases of $7.1 million, retirement of our convertible senior notes of $35.7 million, and cash used to buy stock and options to buy our stock of $63.7 million...

  • Page 58
    ... outstanding. Lease and Purchase Obligations The lease obligations include our obligations under a ten-year lease agreement we entered in December 2004 for approximately 154,000 square feet of office space in Salt Lake City. We took possession of the new office space in July of 2005, and terminated...

  • Page 59
    ... by the board under the repurchase program. Shelf Registration In April 2005, we filed a registration statement with the Securities and Exchange Commission using a "shelf" registration or continuous offering process. Under this shelf process, we may, from time to time, sell any or all of the...

  • Page 60
    ... are recorded in shareholder's equity in the accompanying consolidated balance sheets. As of December 31, 2005, we have utilized all of the $100.0 million authorized by the board under the repurchase program. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and...

  • Page 61
    ... recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to management, including the President (principal executive officer) and Senior Vice President, Finance (principal financial officer...

  • Page 62
    .... PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated by reference to the Company's definitive proxy statement for the 2006 annual meeting of stockholders. The Company has adopted a Code of Business Conduct and Ethics, which is...

  • Page 63
    ... SERVICES The information required by this Item is incorporated by reference to the Company's definitive proxy statement for the 2006 annual meeting of stockholders. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) 1. Financial Statements INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report...

  • Page 64
    ...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. Form of agreements under 2002 Stock Option Plan, as...

  • Page 65
    ... Statement on Form S-1 (File No. 333-102763), which became effective on February 12, 2003). Credit Agreement dated February 13, 2004 between Overstock.com, Inc. and Wells Fargo Bank National Association (incorporated by reference to Exhibit 10.31 to our Annual Report on Form 10-K for the year...

  • Page 66
    ...and old Mill Corporate Center III, LLC entered on February 11, 2005 (incorporated by reference to Exhibit 99.1 to our Report on Form 8-K filed on February 11, 2005). 10.27 Sublease Agreement by and between Overstock.com, Inc., Old Mill Technology Center, LLC, and Old Mill Building LLC. (incorporated...

  • Page 67
    ..., Inc.'s definitive proxy statement filed with the SEC on March 29, 2005. Term sheet executed March 14, 2005 with IXIS Derivatives Inc. (incorporated by reference to Exhibit 99.1 to our Report on Form 8-K filed on March 16, 2005) Stock Purchase Agreement dated June 24, 2005 with Ski West, Inc. and...

  • Page 68
    .... 1 dated March 1, 2006 to Stock Purchase Agreement with Ski West, Inc. and its shareholders (incorporated by reference to Exhibit 10.1 to our Form 8K filed on March 6, 2006) Subsidiaries of the Registrant Consent of Independent Registered Public Accounting Firm Power of Attorney (see signature page...

  • Page 69
    ...in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and ... (Principal Executive Officer) Senior Vice President, Finance (Principal Financial Officer and Principal Accounting Officer) Director Director ...

  • Page 70
    ... FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statement of Stockholders' Equity and Comprehensive Income Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements...

  • Page 71
    ... responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board...

  • Page 72
    ...of the control criteria, Overstock.com, Inc. did not maintain effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the COSO. /S/ PRICEWATERHOUSECOOPERS LLP Salt Lake City, Utah March 16, 2006 F-3

  • Page 73
    .... Consolidated Balance Sheets December 31, 2004 2005 (in thousands) Assets Current assets: Cash and cash equivalents Marketable securities Cash, cash equivalents and marketable securities Accounts receivable, net Inventories, net Prepaid inventory Prepaid expenses Total current assets Restricted...

  • Page 74
    ..., Inc. Consolidated Statements of Operations 2003 Year ended December 31, 2004 2005 (in thousands, except per share data) Revenue Direct revenue Fulfillment partner revenue Total revenue Cost of goods sold Direct Fulfillment partner Total cost of goods sold (includes amortization of stock-based...

  • Page 75
    ... of stock options and warrants Issuance of common stock in follow-on offering Issuance of common stock Forfeitures of unearned stock-based compensation from options issued to employees Amortization of stock-based compensation Stock-based compensation to consultants in exchange for services Lapse...

  • Page 76
    ... purchased call options in exchange for cash Settlement of purchased call options in exchange for treasury stock Forfeitures of unearned stock-based compensation from options issued to employees Amortization of stock-based compensation Stock-based compensation to consultants in exchange for services...

  • Page 77
    ...line of credit Payments on line of credit Payments of deferred financing fees Proceeds from the issuance of convertible senior notes Payments to retire convertible senior notes Issuance of common stock in offerings, net of issuance costs Purchase of treasury stock Purchased call options for purchase...

  • Page 78
    ...Lapse of rescission rights on redeemable common stock Settlement of purchased call options for treasury stock Supplemental disclosure on non-cash activities: Fair value of assets acquired, net of cash acquired Fair value of liabilities assumed Cash paid to purchase business $ 17,787 11,059 $ 28,846...

  • Page 79
    ... video games ("BMV"). The Company's online auction site was launched in September 2004 as part of the Company's Website-which acts as an online marketplace for the buying and selling of goods between our customers. In January 2005, the travel store was officially opened offering air, hotel and car...

  • Page 80
    ... management accounts managed by two financial institutions. The Company generally invests excess cash in "A" rated or higher short- to intermediate-term fixed income securities and money market mutual funds. The financial institutions have invested these funds in municipal, government and corporate...

  • Page 81
    ...Until the time of shipping, inventory ownership related to product sales by third parties through the Company's website is maintained by the third parties. Prepaid inventory Prepaid inventory represents inventory paid for in advance of receipt. Prepaid inventory at December 31, 2004 and 2005 was $12...

  • Page 82
    ...and $10.4 million was recorded for the purchase of Gear.com in 2000 and Ski West, Inc. in 2005, respectively, and represents the excess of the purchase price paid over the fair value of the tangible net assets acquired. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill...

  • Page 83
    ... by credit card at the point of sale. From time to time, the Company grants credit to its business customers on normal credit terms. Amounts received prior to shipment of goods to customers are recorded as deferred revenue. Direct revenue is recorded net of estimated returns, fraud and coupons...

  • Page 84
    ...fraud and coupons redeemed by customers and other discounts to obtain such sales. Total revenue is recorded net of estimated returns, coupons and other discounts. Our returns policy for all products other than those sold in our Electronics and Computers department provides for a $4.95 restocking fee...

  • Page 85
    ... Financial Statements (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) relationship with the customer. Our Travel business provides extensive customer service and support for its customers; however, the supplier hotel is principally liable to its merchant hotel customers...

  • Page 86
    ...Consolidated Financial Statements (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Stock-based compensation The Company measures compensation expense to employees for its equity incentive plan using the intrinsic value method prescribed by Accounting Principles Board Opinion No...

  • Page 87
    ...two categories of stock-based awards: restricted stock and stock options. Through December 31, 2005, the Company accounted for stock-based awards under the intrinsic value method, which follows the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees...

  • Page 88
    ... requires companies to measure and recognize the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value. The effective date is the first annual reporting period beginning after June 15, 2005. The Company will begin expensing all stock...

  • Page 89
    ... purchaser's discount and debt issuance costs. 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...

  • Page 90
    ... of 2005, the Company purchased $49.9 million of Foreign Corporate Securities ("Foreign Notes") which fully mature for $50.0 million in cash in November 2006. The Foreign Notes do not have a stated interest rate, but are structured to return the entire principal amount and a conditional coupon if...

  • Page 91
    ... in the Balance Sheet. The Company purchased the Foreign Notes to manage its foreign currency risks related to the strengthening of Asian currencies compared to the U.S. dollar, which would reduce the inventory purchasing power of the Company in Asia. However, the Company determined that the Foreign...

  • Page 92
    ... 1, 2006. Ski West is an on-line travel company whose proprietary technology provides easy consumer access to a large, fragmented, hardto-find inventory of lodging, vacation, cruise and transportation bargains. The travel offerings are primarily in popular ski areas in the U.S. and Canada, with more...

  • Page 93
    ... (in thousands): Years Enterprise information system Customer list Supplier contracts Web sites and destination portal Non-competition agreements 860 2,339 6,271 2,887 1,956 $ 14,313 $ 5 4 12 5 2 During the year ended December 31, 2005, the Company recorded amortization expense attributable...

  • Page 94
    ...2005, the Company exercised its option to renew the Amended Credit Agreement through December 31, 2007. Included in the $30.0 million Amended Credit Agreement is a $15.0 million sub-limit for a revolving line of credit which the Company uses to obtain letters of credit to support inventory purchases...

  • Page 95
    ...Consolidated Financial Statements (Continued) 10. BORROWINGS (Continued) $15.0 million sub-limit used to obtain letters of credit to support inventory purchases remained the same. We have an option to renew the Sixth Amended Credit Agreement annually. The Sixth Amendment increased the interest rate...

  • Page 96
    ...straight-line method which approximates the interest method. During 2004 and 2005, the Company recorded amortization of discount and debt issuance costs related to this offering totaling $52,000 and $620,000. Interest on the Senior Notes is payable semi-annually on June 1 and December 1 of each year...

  • Page 97
    ...terminated and replaced with a lease for a new office building in the Old Mill Corporate Center III in Salt Lake City, Utah. Pursuant to this agreement, the Company began leasing approximately 154,000 rentable square feet for a term of ten years beginning July 2005. In February 2005, the Company and...

  • Page 98
    ...Federal Circuit. On August 18, 2005, shortly after we filed the complaint in Utah, Furnace Brook filed a complaint in the United States District Court for the Southern District of New York, alleging that certain of our business practices and our on-line ordering system infringe a single patent owned...

  • Page 99
    ... of the claims or the amount of potential damages. On August 11, 2005, along with a shareholder plaintiff, we filed a complaint against Gradient Analytics, Inc.; Rocker Partners, LP; Rocker Management, LLC; Rocker Offshore Management Company, Inc. and their respective principals. We, along with...

  • Page 100
    ... recorded in shareholders' equity in the consolidated balance sheet. At the Company's option, the purchased call options were settled in cash or stock, based on the market price of its common stock on the date of the settlement. Upon settlement, the Company either had its capital investment returned...

  • Page 101
    ... determined 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, 2005, 1,100,000 shares...

  • Page 102
    ... 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plan. The Company recorded stock-based compensation expense of $846,000, $360,000 and $72,000 during the years ended December 31, 2003, 2004 and 2005, respectively. During the years ended December 31, 2003, 2004...

  • Page 103
    ...) 19. OTHER COMPREHENSIVE LOSS The Company follows SFAS No. 130, Reporting Comprehensive Income. This Statement establishes requirements for reporting comprehensive income and its components. The Company's comprehensive loss for the years ended December 31, 2003, 2004 and 2005 is as follows (in...

  • Page 104
    ... of management. On occasion, Haverford-Valley, L.C. (an entity owned by the Company's president) and certain affiliated entities make travel arrangements for our executives and pay the travel related expenses incurred by our executives on Company business. In 2003, 2004, and 2005 we reimbursed...

  • Page 105
    ... commission segment only included 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 based upon the gross sales price. As a result, this...

  • Page 106
    ....com, Inc. Notes to Consolidated Financial Statements (Continued) 23. BUSINESS SEGMENTS (Continued) segment include product costs, warehousing and fulfillment costs, credit card fees and customer service costs. Assets have not been allocated between the segments for management purposes, and as such...

  • Page 107
    ... 2005 Cash Accounts receivable Inventory Prepaid expenses Property and equipment 295 113 7,373 - 224 $ 8,005 $ During the first quarter of 2006, the Company temporarily removed the functionality for the customer to design jewelry from its website, and therefore the entity will sell its inventory...

  • Page 108
    ..., Dec. 31, 2005 2004 (in thousands, except per share data) Consolidated Statement of Operations Data: Revenue Direct revenue Fulfillment partner revenue Total revenue Cost of goods sold Direct Fulfillment partner Total cost of goods sold Gross profit Operating expenses: Sales and marketing expenses...

  • Page 109
    ... tax valuation allowance Allowance for sales returns Reserve for inventory obsolescence Allowance for doubtful accounts Year ended December 31, 2005 Deferred tax valuation allowance Allowance for sales returns Reserve for inventory obsolescence Allowance for doubtful accounts $ 21,476 465 1,011 145...

  • Page 110
    ...") oversees and reviews the Company's executive compensation policies and programs and approves the form and amount of compensation to be paid to the Company's executive officers. Annual Compensation-Base salaries and bonuses The Company is not a party to any written employment agreement with any of...

  • Page 111
    ... Awards-Stock option awards - 10,000 14,000 10,000 10,000 15,000 15,000 The Company maintains its 2005 Equity Incentive Plan, under which the Committee and the Board have the power to grant options and other awards to employees, including the named executive officers. No options or other awards...

  • Page 112
    ...per year for consulting services. The Company maintains its 2005 Equity Incentive Plan, under which the Board of Directors has the power to grant options and other awards to members of the Board. During 2005 the Board granted options to non-employee directors as follows: Exercise Price ($) Number of...

  • Page 113
    Exhibit 21 SUBSIDIARIES OF THE REGISTRANT Name Jurisdiction of Formation Trade Names Overstock Mexico, S. de R.L. de C.V. OTravel.com, Inc. Mexico Utah Overstock Mexico OTravel.com Overstock.com Travel OTravel

  • Page 114
    ... financial statements, financial statement schedule, management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. /s/PricewaterhouseCoopers LLP Salt Lake City, Utah March...

  • Page 115
    ... which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over...

  • Page 116
    ... which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over...

  • Page 117
    ... 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, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as...

  • Page 118
    ... 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, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as...