Overstock.com 2006 Annual Report Download - page 52

ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts will be recorded as an
adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of
awards, employee class, and historical experience. Actual results may differ substantially from these estimates. We have utilized a
Black-Scholes-Merton valuation model to estimate the value of stock options granted to employees. Several of the primary estimates
used in measuring stock-based compensation are as follows:
Expected Volatility: The fair value of stock options were valued using a volatility factor based on the Company's historical
stock prices.
Expected Term: The Company's expected term represents the period that the Company's stock options are expected to be
outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms
and vesting provisions of the stock-based awards.
Expected Dividend: The Company has not paid any dividends and does not anticipate paying dividends in the foreseeable
future.
Risk-Free Interest Rate: The Company bases the risk-free interest rate used on the implied yield currently available on U.S.
Treasury zero-coupon issues with remaining term equivalent to the expected term of the options.
Estimated Pre-vesting Forfeitures: When estimating forfeitures, the Company considers voluntary and involuntary
termination behavior.
Performance Share Plan. In January 2006 the Board and Compensation Committee adopted the Overstock.com Performance
Share Plan, and approved grants to executive officers and certain employees of the Company. The Performance Share Plan provides
for a three-year period for the measurement of the Company's attainment of certain performance goals, but at the Company's sole
option the Company may make a payment of estimated amounts payable to a plan participant after two years.
The performance goal is measured by growth in economic value, as defined in the plan. The amount of payments due to
participants under the plan will be a function of the then current market price of a share of the Company's common stock, multiplied
by a percentage dependent on the extent to which the performance goal has been attained, which will be between 0% and 200%. If the
growth in economic value is 10% compounded annually or less, the percentage will be 0%. If the growth in economic value is 25%
compounded annually, the percentage will be 100%. If the growth in economic value is 40% compounded annually or more, the
percentage will be 200%. If the percentage growth is between these percentages, the payment percentage will be determined on the
basis of straight line interpolation. Amounts payable under the plan will be payable in cash. During interim and annual periods prior to
the completion of the 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 to use different assumptions, the estimated compensation charges could
be significantly different.
As of December 31, 2006, the Company has accrued $900,000 in total compensation expense under the performance share plan
which is included in general and administrative expenses.
Recent Accounting Pronouncements.
In March 2006, the Emerging Issue Task Force reached a consensus on Issue No. 06-03 "How Taxes Collected from Customers
and Remitted to Government Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation)"
("EITF No. 06-03"). We are required to adopt the provisions of EITF No. 06-03 beginning its fiscal year 2007. We do not expect the
provisions of EITF No. 06-03 to have a material impact on our consolidated financial position, results of operations or cash flows.
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