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OVERSTOCK.COM, INC (OSTK)
10-K
Annual report pursuant to section 13 and 15(d)
Filed on 03/14/2007
Filed Period 12/31/2006

Table of contents

  • Page 1
    OVERSTOCK.COM, INC (OSTK) 10-K Annual report pursuant to section 13 and 15(d) Filed on 03/14/2007 Filed Period 12/31/2006

  • Page 2
    ...incorporation or organization) 87-0634302 (I.R.S. Employer Identification Number) 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
    ...Item 13. Item 14. Item 15. Signatures Financial Statements Part I. Special Note Regarding Forward-Looking Statements Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Submission of Matters to a Vote of Security Holders Executive officers of the Registrant Part II. Market...

  • 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
    ...and video games ("BMMG"), and we operate as part of our Website an online auction site-a marketplace for the buying and selling of goods and services. 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...

  • Page 6
    ... an auction model to price their goods. Furthermore, we believe that there are no other dominant companies in the online liquidation market, and many of the companies that do offer overstock or liquidation merchandise are focused on single product lines. Lastly, small retailers are under competitive...

  • Page 7
    ... 500,000 BMMG 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...

  • Page 8
    ...non-travel and non-BMMG 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 card program, offering our customers a $30 store credit...

  • Page 9
    ...Websites. Our revenue from sales on our shopping site from both the direct and fulfillment partner businesses is recorded net of returns, coupons and other discounts. Our returns policy for products other than those sold in our Electronics and Computers department provides for a $4.95 restocking fee...

  • Page 10
    ... part of our Website. Our auction tab allows sellers to list items for sale, buyers to bid on items of interest, and users to browse through listed items online. For these sales we record only our listing fees and commissions for items sold as revenue. From time to time, we also sell items returned...

  • Page 11
    ...of the terms under which products are sold over our Websites. Sales and Marketing We use a variety of methods to target our consumer audience, including online campaigns, such as advertising through portals, keywords, search engines, affiliate marketing programs, banners and e-mail campaigns, and we...

  • Page 12
    ...that department. For example, the "Electronics" tab has the following product categories currently within the "Electronics & Computers" department: Audio & Video Cameras & Optics Telephones Printers & Scanners New Arrivals Computers & Hardware Cellular Phones Monitors Home Office Equipment Clearance...

  • Page 13
    ...000 non-BMMG products offered on our Websites. We operate the Salt Lake City warehouse with an automated warehouse management system that tracks the receipt of the inventory items, distributes order-fulfillment assignments to warehouse workers and obtains rates for various shipping options to ensure...

  • Page 14
    ...to entry, as new competitors can launch new Websites at relatively low cost. We believe that competition in the online liquidation market is based predominantly on: • price; • product quality and selection; • shopping convenience; • order processing and fulfillment; • customer service; and...

  • Page 15
    ... in which our products and services are made available online, including the United States. From time to time, we receive claims of and become subject to consumer protection, employment, intellectual property and other commercial litigation related to the conduct of our business. Such litigation...

  • Page 16
    ...December 31, 2006, we had 864 full-time employees, including 194 in customer service and fraud prevention, 189 in order fulfillment, 140 in information technology and Website production, 54 in marketing, 215 in merchandising (including auctions, cars and travel), 34 in accounting and finance, and 38...

  • Page 17
    ... fulfillment capabilities; • further improve our order processing systems and capabilities; • develop enhanced technologies and features; • expand our customer service capabilities to better serve our customers' needs; • expand or modify our product offerings; • rent or terminate warehouse...

  • Page 18
    ... 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...

  • Page 19
    ...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 20
    ... base and market opportunities. This expansion has placed, and is expected to continue to place, a significant strain on our management, operational and financial resources. Some of our officers have no prior senior management experience at public companies. Our new employees include a number of key...

  • Page 21
    ... offer additional types of products and services. We cannot assure you that our efforts to expand our business in this manner will succeed. Because we 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...

  • Page 22
    ... 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 23
    ... aspects of transaction processing, including customer profiling and order verifications. We have experienced periodic systems interruptions due to server failure, which we believe will continue to occur from time to time. If the volume of traffic on our Websites or the number of purchases made by...

  • Page 24
    ... and fulfill orders and provide high-quality customer service, largely depends on the efficient and uninterrupted operation of our computer and communications systems. Substantially all of our computer and communications hardware is located at a single co-location facility in Salt Lake City, Utah...

  • Page 25
    ... significant protection for our service marks or trademarks in the United States or elsewhere as we expand internationally. Our competitors or others could adopt product or service marks similar to our marks, or try to prevent us from using our marks, thereby impeding our ability to build brand...

  • Page 26
    ...information such as customer credit card numbers. We cannot assure you that advances in computer capabilities, new discoveries in the field of cryptography or other events or developments will not result in a compromise or breach of the algorithms that we use to protect customer transaction data. If...

  • Page 27
    ... funds and management time and could have a negative impact on our business. We may face risks relating to 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 West with our travel operations to...

  • Page 28
    ... alternative financing on acceptable terms could have a material adverse effect on our business, prospects, financial condition and results of operations. Risks Relating to our Auctions Site Business Our auctions site is a new business. Our auctions site began operation in September 2004. The online...

  • Page 29
    ... 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 30
    ... to attract new customers to our main shopping site, and the Overstock.com brand name generally. Fraudulent activities using our cars listing site and disputes between users of our car listing site may harm our business. We are aware that other companies operating online car listing services have...

  • Page 31
    ... businesses have a short track record. If consumers are unwilling to use the Internet to conduct business, our business may not develop profitably. The security risks or perception of risks of e-commerce may discourage customers from purchasing goods from us. In order for the e-commerce market...

  • Page 32
    ...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 may seek to impose sales tax collection obligations on us and other out-of-state companies that engage in online commerce. Our...

  • Page 33
    ... our inability to retain existing customers or encourage repeat purchases; • the extent to which our existing and 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...

  • Page 34
    ... entering into new lines of products; • our ability to attract users to our new auctions and car listing sites; and • our inability to replace the loss of significant customers. Our operating results may fluctuate depending on the season, and such fluctuations may affect the market price of our...

  • Page 35
    ... 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, customer service operations and ancilliary computer facilities in Salt Lake City, Utah. We also lease space in a co-location...

  • Page 36
    ... new co-location facility (see Item 15-"Financial Statements"-Note 4 "Restructuring Expense"), and on February 1, 2007, we terminated the lease agreement effective as of December 29, 2006. Currently, our primary computer infrastructure remains at our original co-location facility in Salt Lake City...

  • Page 37
    ... to our accounting policies, our targets, projections or estimates related to financial performance, our recent restatement of its financial statements, the filing of our complaint against Gradient Analytics, Inc., the development and implementation of certain new technology systems and disclosures...

  • Page 38
    ... uniforms. From 1995 until its sale in September 1999, Dr. Byrne was Chairman, President and Chief Executive Officer of Centricut, LLC, a manufacturer and distributor of industrial torch parts. From 1994 to the present, Dr. Byrne has served as a Manager of the Haverford Group, an investment company...

  • Page 39
    ...Science Degree in Accounting and a Master's Degree in Business Administration, both from the University of Utah. Ms. Simon currently serves as our Senior Vice President, Customer Care, PR and Branding. Ms. Simon previously served as our Vice President, BMMG, Travel and Off-Line Advertising, Chief of...

  • Page 40
    ...is traded on the Nasdaq Global 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 sales prices per share for our common stock as reported by Nasdaq (1). Common Stock Price...

  • Page 41
    ... summary of stock option activity: 2004 Weighted Average Exercise Price Shares 2005 Weighted Average Exercise Price Shares 2006 Weighted Average Exercise Price Shares Outstanding-beginning of year Granted at fair value Exercised Canceled/forfeited Outstanding-end of year Options exercisable at year...

  • Page 42
    ... (May 30, 2002) through December 31, 2006 for Overstock, Hemscott's (formerly Media General's) Nasdaq U.S. Index and Hemscott's Internet Software and Services Index. The graph assumes that $100 was invested in Overstock's common stock (at the initial public offering price of $13.00 per share), and...

  • Page 43
    ... per share data) 2006(1) 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 Technology General and administrative...

  • Page 44
    ...of a co-location data center lease, marketing of the current office facilities for sub-lease and marketing non-core businesses for sale. (3) As part of the program to reduce our expense structure and sell non-core businesses, we decided during the fourth quarter of 2006 to sell our travel subsidiary...

  • Page 45
    ...and video games ("BMMG"), and we operate as part of our Website an online auction site-a marketplace for the buying and selling of goods and services. 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...

  • Page 46
    ...Websites. Our revenue from sales on our shopping site from both the direct and fulfillment partner businesses is recorded net of returns, coupons and other discounts. Our returns policy for products other than those sold in our Electronics and Computers department provides for a $4.95 restocking fee...

  • Page 47
    ... part of our Website. Our auction tab allows sellers to list items for sale, buyers to bid on items of interest, and users to browse through listed items online. For these sales we record only our listing fees and commissions for items sold as revenue. From time to time, we also sell items returned...

  • Page 48
    ...of visitors to the website who make a purchase. The areas of our business that most directly affect conversion rate, including personalization of the website, customer retention, e-mail marketing, and site design and layout, are the responsibility of our internal marketing department. Within each of...

  • Page 49
    ... an expensive computer co-location facility lease. We are in the process of significantly reducing additional facilities and warehouse lease costs and other expenses. Among other things, we intend to move our corporate offices into existing space in our main Salt Lake City warehouse. As a result...

  • Page 50
    ... the selling price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. We generally require payment by credit card at the point of sale. Amounts received prior to when we ship the goods or provide the services to customers are recorded as deferred revenue...

  • Page 51
    ... development, including software used to upgrade and enhance our websites and processes supporting our business. As required by Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," we capitalize costs incurred during the application...

  • Page 52
    ... three-year measurement period, we record compensation expense based upon the period-end stock price and estimates regarding the ultimate growth in economic value that is expected to occur. These estimates include assumed future growth rates in revenues, gross margins and other factors. If we were...

  • Page 53
    ... revenue for 2004, 2005 and 2006. Years ended December 31, 2004 2005 2006 (as a percentage of total revenue) 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...

  • Page 54
    ... competitive pricing and inventory management decisions within the direct business; warehouse management costs; customer service costs; and our discounted shipping offers. Discounted shipping offers reduce shipping revenue, and therefore reduce our gross margins on retail sales. Direct Gross Margins...

  • Page 55
    ... in the number of units received and fulfilled, the extent we utilize third party fulfillment services and warehouses, and our ability to effectively manage customer service costs and credit card fees. Operating expenses Sales and marketing. For the years ended December 31, 2005 and 2006, sales and...

  • Page 56
    ...expense structure (see Item 15 of Part IV, "Financial Statements"-Note 4-"Restructuring Expense"). The planned actions include the termination of a co-location data center lease, marketing of the current office facilities for sub-lease, and marketing non-core businesses for sale. Of the $5.7 million...

  • Page 57
    ... operations As part of the program to reduce our expense structure and sell non-core businesses, we decided during the fourth quarter of 2006 to sell our travel subsidiary ("OTravel") , and we have received a non-binding letter of intent from a third-party to purchase this business. As a result...

  • Page 58
    ...reported for financial reporting purposes. On March 29, 2005, the SEC published Staff Accounting Bulletin ("SAB") No. 107, which provides the Staff's views on a variety of matters relating to stock-based payments. SAB 107 requires stock-based compensation be classified in the same expense line items...

  • Page 59
    ... of 62%. Gross bookings differ from GAAP 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. Gross Margins Total Gross Margins-Cost of goods sold increased $254...

  • Page 60
    ... 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 gross profits...

  • Page 61
    ... portals (MSN, Yahoo & AOL), and keyword search (Google). In addition, we continued our television, print and radio campaigns throughout 2005. Our marketing costs have also increased as a percentage of sales due to marketing efforts in our auctions business. Since we record revenues in this business...

  • Page 62
    ... was recorded as a component of other comprehensive income (loss) in the Balance Sheet. See Item 15 of Part IV, "Financial Statements"-Note 6-"Marketable Securities". Interest expense is comprised largely of interest expense related to our convertible notes, capital leases and our line of credit...

  • Page 63
    ... fair statement of our financial position ...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...to redeemable common stock Net loss ...

  • Page 64
    ... following information and purchase merchandise on our B2C Website: a unique e-mail address; a unique password; and a verified credit card account number. Average customer acquisition cost represents total shopping sales and marketing expense divided by the number of new shopping customers for the...

  • Page 65
    ... payment terms with our fulfillment partners that extend beyond the amount of time necessary to collect proceeds from our customers. As a result, following our seasonally strong fourth quarter sales, at December 31 of each year, our cash, cash equivalents, marketable securities and accounts payable...

  • Page 66
    ... of $64.0 million in 2006 primarily are the result of $64.4 million received from the sale of our common stock and $2.5 million received from the exercise of employee stock options, offset by payments on capital lease obligations of $3.0 million. Cash outflows for financing activities in 2005 were...

  • Page 67
    .... In July 2005, we entered into a Colocation Center Agreement (the "Colocation Agreement") to build out and lease 11,289 square feet of space at Old Mill Corporate Center II in Salt Lake City for an IT data center and co-location facility. The Colocation Agreement set forth the terms on which the...

  • Page 68
    ... credit agreement (as amended to date, the "Amended Credit Agreement") with Wells Fargo Bank, National Association. The Amended Credit Agreement provides a revolving line of credit to the Company of up to $30.0 million which we use primarily to obtain letters of credit to support inventory purchases...

  • Page 69
    ..., (c) enter into any merger, recapitalization or similar transaction or purchase all or substantially all of the assets or stock of another person, (d) sell assets, (e) change our name or the name of any of our subsidiaries, (f) make certain changes to our business, (g) optionally prepay, acquire or...

  • Page 70
    ... foreign exchange contracts. Our financial instruments consist of cash and cash equivalents, marketable securities, trade accounts and contracts receivable, accounts payable and long-term obligations. We consider investments in highly-liquid instruments purchased with a remaining maturity of 90 days...

  • Page 71
    ...proxy statement for the 2007 annual meeting of stockholders. The Company has adopted a Code of Business Conduct and Ethics, which is applicable to all employees of the Company, including the principal executive officer, principal financial officer, and principal accounting officer. The Code includes...

  • Page 72
    ... SERVICES The information required by this Item is incorporated by reference to the Company's definitive proxy statement for the 2007 annual meeting of stockholders. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) 1. Financial Statements INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report...

  • Page 73
    ... and Plan of Merger dated November 3, 2000 by and between Overstock.com, Inc. and Gear.com, Inc. Lease Agreement dated January 23, 2002 between Overstock.com, Inc. and Holladay Building East L.L.C. (incorporated by reference to Exhibit 10.8 to our Registration Statement on Form S-1 (File No. 333...

  • Page 74
    ... to Exhibit 99.3 to our Report on Form 8-K/A filed on December 7, 2004). Old Mill Corporate Center Fourth Amendment to the Lease Agreement. (incorporated by reference to Exhibit 99.4 to our Report on Form 8-K/A filed on December 7, 2004). Co-location Center Agreement. (incorporated by reference to...

  • Page 75
    ... January 6, 2006) Revolving Line of Credit Note dated January 1, 2006 payable to Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.2 to our Form 8-K filed on January 1, 2006) Loan and Security Agreement dated as of December 12, 2005 with Wells Fargo Retail Finance, LLC...

  • Page 76
    ...to our Form 8-K filed on March 6, 2006) Letter of Agreement dated June 30, 2006 to Stock Purchase Agreement with Ski West, Inc. and its shareholders (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on July 5, 2006) Colocation Center Termination Agreement executed February 1, 2007 and...

  • Page 77
    ... H. ABRAHAM Allison H. Abraham /s/ RAY GROVES Ray Groves Chief Executive Officer (Principal Executive Officer), Chairman of the Board Senior Vice President, Finance (Principal Financial Officer and Principal Accounting Officer) Director, President & COO Director Director March 14, 2007 March 14...

  • Page 78
    ... 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 79
    ... of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below. Consolidated financial statements and financial statement schedule In...

  • Page 80
    ... assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to...

  • Page 81
    ...marketable securities Accounts receivable, net Note receivable (Note 26) Inventories, net Prepaid inventory Prepaid expense Current assets of held for sale subsidiary Total current assets Restricted cash Property and equipment... notes are an integral part of these consolidated financial statements.

  • Page 82
    F-4

  • Page 83
    ... Statements of Operations (in thousands, except per share data) 2004 Year ended December 31, 2005 2006 Revenue Direct revenue Fulfillment partner revenue Total revenue Cost of goods sold Direct(1) Fulfillment partner Total cost of goods sold Gross profit Operating expenses: Sales and marketing...

  • Page 84
    ...to consultants in exchange for services Deemed dividend related to redeemable common stock Comprehensive income (loss): Net loss Net unrealized loss on marketable securities Cumulative translation adjustment Total comprehensive loss Balance at December 31, 2004 Exercise of stock options and warrants...

  • Page 85
    ...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 86
    ... watches, jewelry, electronics and computers, sporting goods, apparel, designer accessories and travel services, among other products. The Company also sells books, magazines, CDs, DVDs, videocassettes and video games ("BMMG"). The Company's online auction site was launched in September 2004 as part...

  • Page 87
    ... its cash primarily in money market, government and corporate securities which are uninsured. The Company's accounts receivable are derived primarily from revenue earned from customers located in the United States. The Company maintains an allowance for doubtful accounts based upon the expected...

  • Page 88
    ...including software used to upgrade and enhance websites and processes supporting the business of the Company. As required by Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, the Company capitalizes costs incurred during the application...

  • Page 89
    ... listing fees and commissions collected from products being listed and sold through the Auctions tab of its Website as well as advertisement revenue derived from its cars listing business. Both direct revenue and fulfillment partner revenue are recorded net of returns, coupons redeemed by customers...

  • Page 90
    ... items returned for non-defective reasons from the Electronics and Computers department. 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...

  • Page 91
    ... on the terms of the individual agreements, which are generally: 1) during the period customers are acquired; or 2) based on the number of clicks generated during a given period over the term of the contract. Advertising expense included in sales and marketing expenses totaled $39.2 million, $75...

  • Page 92
    ...changes in fair value are recorded in the balance sheet as an item in other comprehensive income. Changes in the fair value of derivatives not designated as hedges are recorded in the statement of operations. As of December 31, 2005 and 2006, the Company had not designated any derivative instruments...

  • Page 93
    ... a tax return. FIN 48 is effective for us on January 1, 2007. The Company does not expect the provisions of FIN 48 to have a material impact on its consolidated financial position, results of operations or cash flows. In September 2006, the Securities and Exchange Commission issued Staff Accounting...

  • Page 94
    ... other things, the Company intends to move its corporate offices into existing space in its main Salt Lake City warehouse. Lease termination costs relate primarily to the termination of leases in conjunction with the consolidation of the IT data center and co-location facilities. The accelerated...

  • Page 95
    ...): 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 years ended December 31, 2005 and 2006, the Company recorded amortization expense attributable to...

  • Page 96
    ... as a completed sale within one year; the assets are being marketed at reasonable prices in relation to their fair value; and the unlikelihood that significant changes will be made to the plan to the sell the assets. The travel business is not part of the Company's core business operations or its...

  • Page 97
    ... Company purchased $49.9 million of Foreign Corporate Securities ("Foreign Notes") which were scheduled to mature for $50.0 million in cash in November 2006. The Foreign Notes did not have a stated interest rate, but were structured to return the entire principal amount and a conditional coupon if...

  • Page 98
    ...to the sale of the Foreign Notes, the borrowings under the Amended Credit Agreement (see Note 12) are now collateralized by cash balances held at Wells Fargo Bank, National Association. 7. INVENTORIES Inventories consist of the following (in thousands): December 31, 2005 2006 Product inventory Less...

  • Page 99
    ... line of credit to the Company of up to $30.0 million which the Company uses primarily to obtain letters of credit to support inventory purchases. The Amended Credit Agreement expires on December 31, 2007, however, the Company has an option to renew the Amended Credit Agreement annually. Interest...

  • Page 100
    ... approval, including covenants that limit the Company's ability to (a) incur or guarantee debt, (b) create liens, (c) enter into any merger, recapitalization or similar transaction or purchase all or substantially all of the assets or stock of another person, (d) sell assets, (e) change its name or...

  • Page 101
    .... As of December 31, 2006, $77.0 million of the Senior Notes remained outstanding. 14. COMMITMENTS AND CONTINGENCIES Commitments Through July 2005, the Company leased 43,000 square feet of office space at Old Mill Corporate Center I for its principal executive offices under an operating lease which...

  • Page 102
    ... the Old Mill Corporate Center III in Salt Lake City, Utah for a term of ten years. In February 2005, the Company and Old Mill Corporate Center III, LLC (the "Lessor") entered into a Tenant Improvement Agreement (the "OMIII Agreement") relating to the office building. The OMIII Agreement sets forth...

  • Page 103
    ...'s accounting policies, the Company's targets, projections or estimates related to financial performance, the Company's recent restatement of its financial statements, the filing of its complaint against Gradient Analytics, Inc., the development and implementation of certain new technology systems...

  • Page 104
    ... selling, naked short selling, purchases and sales of Company stock, obtaining paper certificates, and stock loan or borrow of Company shares. The Company has responded to the subpoena. In November 2006, the Company received a letter from Applied Interactive, claiming that certain of our business...

  • Page 105
    ... 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 106
    ... and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employee , and related interpretations. The intrinsic value method of accounting resulted in compensation expense for stock options to the extent option exercise prices were set below market prices on the date of grant...

  • Page 107
    ...reported for financial reporting purposes. On March 29, 2005, the SEC published Staff Accounting Bulletin ("SAB") No. 107, which provides the Staff's views on a variety of matters relating to stock-based payments. SAB 107 requires stock-based compensation be classified in the same expense line items...

  • Page 108
    .... The Company settles stock option exercises with newly issued common shares. The following is a summary of stock option activity (in thousands, except per share data): 2004 Weighted Average Exercise Shares Price 2005 Weighted Average Exercise Shares Price 2006 Weighted Average Exercise Shares Price...

  • Page 109
    ... period, the Company records compensation expense based upon the period-end stock price and estimates regarding the ultimate growth in economic value that is expected to occur. These estimates include assumed future growth rates in revenues, gross margins and other factors. If the Company were to...

  • Page 110
    ... result of the Company's history of losses, a valuation allowance has been provided for the full amount of the Company's net deferred tax assets. In management's opinion, it is more likely than not that such benefits will be realized. At December 31, 2005 and 2006, the Company had net operating loss...

  • Page 111
    ... with sales fulfilled from our warehouse. Costs for this segment include product costs, inbound freight, warehousing, and fulfillment costs, credit card fees and customer service costs. The fulfillment partner segment includes revenues, direct costs and cost allocations associated with the Company...

  • Page 112
    ... to supply a new category within the jewelry store which allowed customers purchasing diamond rings to select both a specific diamond and ring setting. Under the agreement, the Company was to receive fifty percent (50%) of any profits of the entity. In addition, the Company had a ten year option to...

  • Page 113
    ...financial position and operating results for the quarters presented. Mar. 31, 2005 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...

  • Page 114
    ... tax valuation allowance Allowance for sales returns Reserve for inventory obsolescence Allowance for doubtful accounts Year ended December 31, 2006 Deferred tax valuation allowance Allowance for sales returns Reserve for inventory obsolescence Allowance for doubtful accounts $ 25,315 1,110 1,138...

  • Page 115
    ... 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, bonuses and stock option grants The Company is not a party to any written employment agreement...

  • Page 116
    ... meetings. 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 2006 the Board granted options to non-employee directors as follows: Exercise Price ($) Number of Options Granted Name...

  • Page 117
    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 118
    ... 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 119
    ... design or operation of internal control over financial reporting 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...

  • Page 120
    ... (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 financial reporting. Date: March 14, 2007 /s/ DAVID K. CHIDESTER David K. Chidester Senior Vice President, Finance (principal financial officer)

  • Page 121
    ... 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, 2006 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...

  • Page 122
    ... 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, 2006 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...