Overstock.com 2005 Annual Report Download - page 99

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
12. COMMITMENTS AND CONTINGENCIES (Continued)
Brook's claims. Although we have filed an answer and believe we have defenses to the allegations and intend to pursue them
vigorously, the Furnace Brook lawsuit is in the discovery stage, and we do not have sufficient information to assess the validity 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 a second
shareholder plaintiff, filed the complaint in the Superior Court of California, County of Marin. On October 12, 2005, we filed an
amended complaint against the same entities alleging libel, intentional interference with prospective economic advantage and
violations of California's unfair business practices act. On March 7, 2006, the court denied the defendants demurrers to and motions to
strike the amended complaint. The defendants have each filed a motion to appeal the court's decision. We intend to pursue this
action vigorously.
13. REDEEMABLE SECURITIES
In March 2002, the Company sold approximately 959,000 shares of mandatorily redeemable convertible preferred stock
("preferred stock") for approximately $6.6 million, net of issuance costs. The preferred stock automatically converted to common
stock on a 1:1 basis in connection with the initial public offering. As the fair value of the common stock to be received upon
conversion was greater than the conversion price of the preferred stock at the date the preferred stock was issued, a beneficial
conversion feature resulted in the amount of $6.6 million, which was calculated in accordance with Emerging Issues Task Force
No. 98-5 Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios.
This beneficial conversion feature was reflected as a deemed dividend in the statement of operations during the year ended
December 31, 2002.
Redeemable common stock relates to warrants and securities that are subject to rescission. Sales of 858,000 shares of the
common stock and the issuance of 185,000 warrants to certain individuals did not fully comply with certain requirements under
applicable State Blue Sky Laws. The offer and sale of these securities were not made pursuant to a registration statement and the
Securities Act of 1933, nor were the offer and sale registered or qualified under any state security laws. Although the Company
believed at the time that such offers, sales and conversion were exempt from such registration or qualification, they may not have been
exempt in several states. As a result, purchasers of our common stock in some states have the right under federal or state securities
laws to rescind their purchases for an amount equal to the purchase price paid for the shares, plus interest from the date of purchase
until the rescission offer expires, at the annual rate mandated by the state in which such shares were purchased. These interest rates
range from 8% to 10% per annum. The rescission rights lapse on various dates through September 2006. At December 31, 2005, there
were 446,000 shares of common stock and no warrants subject to rescission rights outstanding.
The Company has classified $3.2 million at December 31, 2005 related to the rescission rights outside of shareholders' equity,
because the redemption features are not within the control of the Company. However, management does not anticipate that holders of
the redeemable common stock will exercise their rescission rights. Interest attributable to these securities is recorded as a deemed
dividend and reflected as a deduction from net loss to arrive at net loss attributable to common shares in the Statements of Operations.
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