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OVERSTOCK.COM, INC (OSTK)
10-K
Annual report pursuant to section 13 and 15(d)
Filed on 03/17/2008
Filed Period 12/31/2007

Table of contents

  • Page 1
    OVERSTOCK.COM, INC (OSTK) 10-K Annual report pursuant to section 13 and 15(d) Filed on 03/17/2008 Filed Period 12/31/2007

  • Page 2
    ... (State or other jurisdiction of incorporation or organization) 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 12(b) of the...

  • Page 3
    ... by non-affiliates of the registrant as of the last business day of the registrant's most recently completed second quarter (June 30, 2007), was approximately $160.4 million based upon the last sales price reported by NASDAQ. For purposes of this disclosure, shares of Common Stock held by persons...

  • Page 4
    ... and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services Part IV. Exhibits, Financial Statement...

  • Page 5
    ... our sales and marketing teams; the possibility of future acquisitions of businesses, products or technologies; our belief that we can attract customers in a cost-efficient manner; our strategy to develop strategic business relationships with additional wholesalers and distributors; our strategy to...

  • Page 6
    ...also sell books, magazines, CDs, DVDs, videocassettes and video games ("BMMG"). We also operate as part of our Website an online auction site-a marketplace for the buying and selling of goods and services-as well as an online site for listing cars for sale. Our company, based in Salt Lake City, Utah...

  • Page 7
    ... wholesale prices. In recent years, several dynamics have shifted inventory risk from retailers to manufacturers, including dominant retailers insist on just-in-time deliveries from manufacturers; dominant retailers cancel orders mid-production and return unsold merchandise; style, color or model...

  • Page 8
    ... online chat and e-mail. Our customer service staff answers approximately 85% of phone calls within 30 seconds, and responds to approximately 98% of e-mail messages within one business day. For our consumer business, we include a return shipment label in our customer's shipment to facilitate product...

  • Page 9
    ... our Website. During the years ended December 31, 2005, 2006, and 2007, no single customer accounted for more than 1% of our total revenue. Direct business Our direct business includes sales made to individual consumers and businesses, which are fulfilled from our warehouses in Salt Lake City, Utah...

  • Page 10
    ... service as part of our Website. Our auction service allows sellers to list items for sale, buyers to bid on items of interest, and users to browse through listed items online. 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 product, as well as inbound and outbound freight, warehousing and fulfillment costs (including payroll and related expenses and stock-based compensation), credit card fees and customer service costs. Operating expenses Sales and marketing expenses consist of advertising, public relations and...

  • Page 12
    ... our Website. Products Online Products Our website is organized into four main sections, namely: Shopping, Auctions, Cars and Community. The Shopping section is organized into eleven main departments: Furniture Bedding Jewelery Electronics Books, etc. Other 10 Home Clothing Watches Sports Worldstock

  • Page 13
    ... products to consumers or business purchasers. From time to time we grant credit to our business purchasers with normal credit terms (typically 30 days). Fulfillment for Direct Business. During 2007, we fulfilled approximately 25% of all orders through our leased warehouses in Salt Lake City, Utah...

  • Page 14
    ...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 15...

  • Page 15
    ..., 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 company brand recognition...

  • Page 16
    ...consumer protection, employment, intellectual property and other commercial litigation related to the conduct of our business. Also, we receive regulatory inquiries from state and federal agencies which might relate to our business practices, our sales of securities, or the activity of our customers...

  • Page 17
    ...Sachs & Co., Bear Stearns Companies, Inc., Bank of America Securities LLC, Bank of New York, Citigroup Inc., Credit Suisse (USA) Inc., Deutsche Bank Securities, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., and UBS Financial Services, Inc. In September 2007, we filed an amended complaint adding...

  • Page 18
    ... As of December 31, 2007, we had 844 full-time employees, including 347 in customer service and fraud prevention, 130 in order fulfillment, 121 in information technology and Website production, 63 in marketing, 116 in merchandising (including auctions and cars), 39 in accounting and finance, and 28...

  • Page 19
    ...and order 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 and office...

  • Page 20
    ... parties to conduct a number of other traditional retail operations with respect to their respective products that we offer for sale on our Website, including maintaining inventory, preparing merchandise for shipment to individual customers and timely distribution of purchased merchandise. We have...

  • Page 21
    ...condition. Potential adverse consequences include reduced visibility of 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...

  • Page 22
    ..., our sales could suffer and we could be required to mark down unsold inventory which would depress our profit margins. In addition, any failure to offer products in line with customers' preferences could allow our competitors to gain market share. This could have an adverse effect on our business...

  • Page 23
    ... to offer additional types of products or services and we cannot offer any assurance that any of them will be successful. From time to time we have also modified aspects of our business model relating to our product mix and the mix of direct/ fulfillment partner sourcing of the products we offer. We...

  • Page 24
    ...these relationships on acceptable terms, our ability to attract new customers and our financial condition could be harmed. In addition, certain of our online marketing agreements may require us to pay upfront fees and make other payments prior to the realization of the sales, if any, associated with...

  • Page 25
    ...changes in the competitive environment, we may from time to time make certain pricing, service or marketing decisions or acquisitions that could harm our business, prospects, financial condition and results of operations. For example, to the extent that we enter new lines of businesses such as third...

  • Page 26
    ... facility in Salt Lake City, Utah, with a partially redundant back-up system located near our corporate headquarters in Salt Lake City. Although we have designed our back-up system in an effort to avoid or minimize service interruptions in the event of a failure of our main facility, our systems and...

  • Page 27
    ... Internet and the online commerce industry are rapidly changing. If competitors introduce new products and services using new technologies or if new industry standards and practices emerge, our existing Website and our proprietary technology and systems may become obsolete. Our failure to respond to...

  • Page 28
    ...Sachs & Co., Bear Stearns Companies, Inc., Bank of America Securities LLC, Bank of New York, Citigroup Inc., Credit Suisse (USA) Inc., Deutsche Bank Securities, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., and UBS Financial Services, Inc. In September 2007, we filed an amended complaint adding...

  • Page 29
    ... of funds and management time and could have a negative impact on our business. The promissory notes we hold in connection with the sale of our travel business are risky. As part of the sale of our travel business, we now hold senior and junior promissory notes issued by the purchaser. Both of these...

  • Page 30
    ... 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 business is a new business. Our auctions business began operation in September 2004. The online auctions business is a new...

  • Page 31
    ... purchase price or the goods they expected to receive and that, in some cases, users have been arrested and convicted for engaging in fraudulent activities using those companies' auction sites. We may receive similar complaints. We do not have the ability to require users of our services to fulfill...

  • Page 32
    ...publicity resulting from actual or alleged fraudulent or deceptive conduct by users of our auctions business could also damage our reputation, our ability to attract new customers to our main shopping site, and the Overstock.com brand name generally. Risks Relating to our Cars Site Business Our cars...

  • Page 33
    ... to attract new customers to our main shopping site, and the Overstock.com brand name generally. Fraudulent activities using our car 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 34
    ... 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 35
    ... 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 36
    ... financial performance or publication of research reports by analysts; changes in market valuations of similar companies; announcements by us or our competitors of significant contracts, acquisitions, commercial relationships, joint ventures or capital commitments; general market conditions; actual...

  • Page 37
    ... 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 and car listing...

  • Page 38
    ...control of our company. The price of our stock may be vulnerable to manipulation. We have 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, as well...

  • Page 39
    ... executive offices under an operating lease which was originally scheduled to expire in January 2007. Beginning July 2005, this lease was terminated and replaced with a lease for approximately 154,000 rentable square feet in the Old Mill Corporate Center III in Salt Lake City, Utah for a term of...

  • Page 40
    ... of our corporate office facilities. ITEM 3. LEGAL PROCEEDINGS The information set forth under Item 15 of Part IV, "Financial Statements"-Note 12-"Commitments and Contingencies", subheading "Legal Proceedings", contained in the "Notes to Consolidated Financial Statements" of this Annual Report on...

  • Page 41
    ... Degree in Business Administration, both from the University of Utah. Ms. Stormy Simon currently serves as our Senior Vice President, Customer Care and Strategic Marketing. Ms. Simon previously served as our Vice President, BMMG, Travel and Off-Line Advertising, Chief of Staff and as our Director of...

  • Page 42
    ...MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock 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...

  • Page 43
    ... Senior Notes due 2011 through December 31, 2009. Under this repurchase program, we repurchased approximately 1.1 million shares of our common stock in open market transactions for $12.0 million through March 14, 2008. None of the purchases were made during the fourth quarter of 2007. We have a 401...

  • Page 44
    ...(258) 23.65 1,161 20.48 Options exercisable at year-end 739 $ 11.33 679 $ 15.74 408 $ 22.36 In the first quarter of 2008, the Compensation Committee of the Board of Directors approved grants of approximately 460,000 restricted stock units to our officers and employees which vest over three years at...

  • Page 45
    ...basis, from the market closing price on December 31, 2002 through December 31, 2007 for Overstock.com, Inc., 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 and the above...

  • Page 46
    ... 2006(1) 2007(4) (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 Technology...

  • Page 47
    ... in cost of goods sold of $11.6 million ($3.1 million direct and and $8.5 million fulfillment partner), which reduced gross profit and increased net loss by $2.1 million (see Item 15 of Part IV, "Financial Statements"-Note 2-"Summary of Significant Accounting Policies"-"Revenue Recognition"). 45...

  • Page 48
    ...sell books, magazines, CDs, DVDs, videocassettes and video games ("BMMG"). We also operate as part of our Website an online auctions business-a marketplace for the buying and selling of goods and services-as well as an online site for listing cars for sale. Our Company, based in Salt Lake City, Utah...

  • Page 49
    ... service as 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. We record only our listing fees and commissions for items sold as revenue. From time to time, we also sell items returned...

  • Page 50
    .... Car listing business We operate an online site for listing cars for sale as a part of our Website. The car listing service allows sellers to list vehicles for sale and allows buyers to review vehicle descriptions, post offers to purchase, and provides the means for purchasers to contact sellers...

  • Page 51
    ... in cost of goods sold of $11.6 million ($3.1 million direct and $8.5 million fulfillment partner), which reduced gross profit and increased net loss by $2.1 million (see Item 15 of Part IV, "Financial Statements"-Note 2-"Summary of Significant Accounting Policies"-"Revenue Recognition"). NOTE: all...

  • Page 52
    ..., 2006 2007 Total revenue Cost of goods sold Gross profit Less: Sales and marketing expense Contribution $294,029 266,656 27,373 29,045 $291,334 243,642 47,692 27,377 $788,150 693,350 94,800 70,897 $ 23,903 $760,161 632,590 127,571 55,458 $ 72,113 $ (1,672) $ 20,315 Contribution margin...

  • Page 53
    ... able to turn our inventory more efficiently (inventory turns on the direct business increased from 4.6 times to 6.8 times) due to better inventory management and maintaining a more attractive product selection. Commentary-Cash Flows. For the year ended December 31, 2007, we generated $10.0 million...

  • Page 54
    ... the Auctions tab of our Website as well as advertisement revenue derived from our cars listing business. The Company has organized its operations into two principal segments based on the primary source of revenue: Direct revenue and Fulfillment partner revenue (see Item 15 of Part IV, "Financial...

  • Page 55
    ...when accepted by our customers, are treated as a reduction to the purchase price of the related transaction. Direct revenue Direct revenue consists of merchandise sold through our Website to individual consumers and businesses that are fulfilled from our leased warehouses. 53 -2 -1 As reported $ $

  • Page 56
    ...December 2006, we added an online site for listing cars for sale as a part of our Website. The cars listing service allows dealers to list vehicles for sale and allows buyers to review vehicle descriptions, post offers to purchase, and provides the means for purchasers to contact sellers for further...

  • Page 57
    ... obsolescence or damaged inventory of $1.8 million. Internal-Use Software and Website Development. Included in fixed assets is the capitalized cost of internal-use software and website development, including software used to upgrade and enhance our Website and processes supporting our business. As...

  • Page 58
    ...performance goals. 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 our common stock, multiplied by a percentage dependent on the extent to...

  • Page 59
    ..., the payment percentage will be determined on the basis of straight line interpolation. Amounts payable under the plan were originally payable in cash. During interim and annual periods prior to the third quarter of 2007, we recorded compensation expense based upon the period-end stock price and...

  • Page 60
    ..., 2005 2006 (as a percentage of total revenue) 2007 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 Restructuring Total...

  • Page 61
    ..., credit card fees and customer service costs-see further discussion in the following section entitled "Fulfillment Costs") to 6.2% of sales in 2007 compared to 7.7% in 2006, a 150 basis point improvement. Fulfillment Partner Gross Profit and Gross Margin-Our fulfillment partner business generated...

  • Page 62
    ...manage customer service costs and credit card fees. The decrease in fulfillment costs in 2007 has been the result of improved efficiencies in both our warehousing costs (including the reduction of warehouse space), and in our customer service operations. Operating expenses Sales and marketing. Sales...

  • Page 63
    ... of 2007 (see Item 15 of Part IV, "Financial Statements"-Note 4 -"Acquisition and Subsequent Discontinued Operations"). During Q2 of 2006, we recorded $1.9 million of interest income related to the sale of Foreign Notes (see Item 15 of Part IV, "Financial Statements"-Note 5-"Marketable Securities...

  • Page 64
    ... flows of the net proceeds from the sale, we recorded an additional goodwill impairment of $3.8 million. There was no additional impairment of goodwill during the year ended December 31, 2007 (see Item 15 of Part IV, "Financial Statements"-Note 4-"Acquisition and Subsequent Discontinued Operations...

  • Page 65
    ... our product mix of sales; sales volumes mix by our direct business and fulfillment partners; changes in vendor pricing; lowering prices for customers, including competitive pricing and inventory management decisions within the direct business; warehouse management costs; customer service costs...

  • Page 66
    ... costs at our warehouses, significant changes 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...

  • Page 67
    ... structure (see Item 15 of Part IV, "Financial Statements"-Note 3 -"Restructuring Expense"). The planned actions included the termination of a co-location data center lease, marketing of the current office facilities for sublease, and marketing non-core businesses for sale. We recorded $5.7 million...

  • Page 68
    ... 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. Also, to the extent stock awards...

  • Page 69
    ...reported for financial reporting purposes. On March 29, 2005, the SEC published SAB 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 as cash compensation. The Company...

  • Page 70
    ... 195,871 112,229 105,389 122,484 224,437 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 Restructuring Total operating expenses Operating loss Interest income, net Interest...

  • Page 71
    ... 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 72
    ...Mar. 31, 2007 June 30, 2007 Sept. 30, 2007 Dec. 31, 2007 (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 Technology General...

  • Page 73
    ... and marketable securities. For the years ended December 31, 2006 and 2007, our operating activities resulted in net cash outflows of $26.3 million and net cash inflows of $10.0 million, respectively. We have payment terms with our fulfillment partners that extend beyond the amount of time necessary...

  • Page 74
    ...future periods (in thousands): Payments Due by Period Contractual Obligations Long-term debt arrangements Interest on convertible senior notes Capital lease obligations Operating leases Purchase obligations Line of credit Total contractual cash obligations $ 2008 2009 2010 2011 2012 Thereafter Total...

  • Page 75
    ... executive offices under an operating lease which was originally scheduled to expire in January 2007. Beginning July 2005, this lease was terminated and replaced with a lease for approximately 154,000 rentable square feet in the Old Mill Corporate Center III in Salt Lake City, Utah for a term of...

  • Page 76
    ...under operating leases which expire in August 2012. We have also temporarily leased an additional 251,000 square feet of warehouse space in Utah under operating leases for the seasonal increase in inventory during the fourth quarter of 2007. Co-location data center In July 2005, we entered into a Co...

  • Page 77
    ... December 31, 2007, we had utilized all of the $100.0 million authorized by the board of directors under the share repurchase program. On January 14, 2008, our Board of Directors authorized an additional repurchase program that authorizes us to purchase up to $20.0 million of our common stock and/or...

  • Page 78
    .... Our cash, cash equivalents and marketable securities consisted of U.S. agency securities, money market funds, top tier commercial paper, and AAA-rated asset-backed securities collateralized by automobile loans/leases and credit card receivables. At December 31, 2007, we had approximately $77...

  • Page 79
    ...over financial reporting. ITEM 9B. None. OTHER INFORMATION PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Except as set forth herein, the information required by this Item is incorporated by reference to the Company's definitive proxy statement for the 2008 annual meeting...

  • Page 80
    ... to the Company's definitive proxy statement for the 2008 annual meeting of stockholders. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) 1. Financial Statements INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm Consolidated...

  • Page 81
    ... has otherwise been shown in the consolidated financial statements or notes thereto. 3. Exhibits The exhibits listed below are filed as part of, or incorporated by reference into, this Form 10-K. Exhibit Number Description of Document 3.1(a) 3.2(a) 4.1(b) 4.2(b) 10.1(b) 10.2(b) 10.3(b) 10.4(b) 10...

  • Page 82
    ... Overstock.com, Inc. and Marvin L. Oates Trust, dated December 23, 2002.(incorporated by reference to Exhibit 10.28 to our Registration Statement on Form S-1 (File No. 333-102763), which became effective on February 12, 2003). Old Mill Corporate Center First Amendment to the Lease Agreement by and...

  • Page 83
    ... 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 84
    ... in part and incorporated in part by reference to Item 5.02(d) of our Report on Form 8-K filed on January 15, 2008) 2005 Equity Incentive Plan (incorporated by reference to Appendix B to Overstock.com, Inc.'s definitive proxy statement filed with the SEC on March 29, 2005. Term sheet executed...

  • Page 85
    ...2007) Amendment dated January 1, 2008 to Credit Agreement with Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.1 to our Report on Form 8-K filed on January 3, 2008) Revolving Line of Credit Note dated January 1, 2008 entered into in connection with Amendment to Credit...

  • Page 86
    ...Section 1350 Certification of Chief Financial Officer Incorporated by reference to exhibits of the same number filed with our Form 10-Q (File No. 000-49799), filed on August 13, 2002. Incorporated by reference to exhibits of the same number filed with our Registration Statement on Form S-1 (File No...

  • Page 87
    ... Officer (Principal Executive Officer), Chairman of the Board March 17, 2008 Senior Vice President, Finance (Principal Financial Officer and Principal Accounting Officer) March 17, 2008 Director March 17, 2008 Director March 17, 2008 Director March 17, 2008 Director March 17, 2008...

  • Page 88
    ... FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statement of Stockholders' Equity and Comprehensive Loss Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements...

  • Page 89
    ... is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United...

  • Page 90
    ... Marketable securities Cash, cash equivalents and marketable securities Accounts receivable, net Note receivable (Note 25) Inventories, net Prepaid inventory Prepaid expense Current assets of held for sale subsidiary Total current assets Property and equipment, net Goodwill Other long-term...

  • Page 91
    ... Statements of Operations (in thousands, except per share data) Year ended December 31, 2005 2006 2007 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 92
    ... Statements of Stockholders' Equity and Comprehensive Loss (in thousands) Common stock Shares Balance at December 31, 2004 Exercise of stock options and warrants Treasury stock issued to employees as compensation Purchase of treasury stock Purchased call options for purchase of treasury stock...

  • Page 93
    Stock-based compensation related to performance shares Comprehensive loss: Net loss Unrealized gain on marketable securities Cumulative translation adjustment Total comprehensive loss Balance at December 31, 2007 - - - - - - - - 1,000 - - - - (45,015) - - - - - - - - - - - - 41 (3) 1,000 (45...

  • Page 94
    ... on line of credit Payments on line of credit 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 of treasury stock Settlement of call options for cash Exercise of stock options...

  • Page 95
    Net increase (decrease) in cash and cash equivalents Less change in cash and cash equivalents from discontinued operations Cash and cash equivalents, beginning of year Cash and cash equivalents from continuing operations, end of year (142,946) 143 198,678 $ 55,875 72,106 (1,016) 55,875 $ 126,965 ...

  • Page 96
    ... acquired Fair value of liabilities assumed Cash paid to purchase business $ 5,108 $ 15,438 - 185 146 41,121 - - 26,447 (1,336) 3,677 $ 2,273 450 99 3,304 - 6,702 - - - -$ 3,882 408 - - - $ 25,111 $ The accompanying notes are an integral part of these consolidated financial statements. F-7

  • Page 97
    ... watches, jewelry, electronics and computers, sporting goods, apparel, and designer accessories, among other products. The Company also sells books, magazines, CDs, DVDs, videocassettes and video games ("BMMG"). As part of its Website, the Company also offers on its Website an online auction service...

  • Page 98
    ... Company's 3.75% Convertible Senior Notes at December 31, 2006 and 2007 was $56.3 million and $60.0 million, respectively. Accounts receivable Accounts receivable consist of trade amounts due from customers and from uncleared credit card transactions at period end. Accounts receivable are recorded...

  • Page 99
    ...assets the capitalized cost of internal-use software and website development, including software used to upgrade and enhance its Website and processes supporting the Company's business. As required by Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for...

  • Page 100
    ... Financial Statements (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) useful life of three years. The Company expenses costs incurred related to design or maintenance of internal-use software as incurred. During the years ended December 31, 2006 and 2007, the Company...

  • Page 101
    ...or the service has been provided; (3) the selling price or fee revenue earned is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. Revenue related to merchandise sales is recognized upon delivery to the Company's customers. As the Company ships high volumes...

  • Page 102
    ...2006, the Company added an online site for listing cars for sale as a part of its Website. The cars listing service allows dealers to list vehicles for sale and allows buyers to review vehicle descriptions, post offers to purchase, and provides the means for purchasers to contact sellers for further...

  • Page 103
    ... Company sells gift cards and records related deferred revenue at the time of the sale. Reserve for returns. Total revenue is recorded net of estimated returns. For products other than computers, electronics and mattresses the returns policy provides for a full refund of the cost of the merchandise...

  • Page 104
    ... Statements (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Cost of goods sold Cost of goods sold includes product costs, warehousing costs, inbound and outbound shipping costs, handling and fulfillment costs, customer service costs and credit card fees, and are recorded...

  • Page 105
    ... to Consolidated Financial Statements (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Restructuring Restructuring expenses are primarily comprised of lease termination costs and the costs incurred for returning leased facilities back to their original conditionin anticipation...

  • Page 106
    ... Consolidated Financial Statements (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) hedge, a cash flow hedge or a hedge of a net investment in an international operation. For derivatives designated as hedges, the changes in fair value are recorded in the balance sheet as an item...

  • Page 107
    ... reporting date. SFAS 159 is effective for the Company's fiscal year beginning January 1, 2008. The Company anticipates that the adoption of SFAS 159 will not have a material impact on its consolidated financial statements. In December 2007, the FASB issued SFAS No. 141 (R), Business Combinations...

  • Page 108
    ...450,000 of costs to return these office facilities to their original condition as required by the lease agreement. During fiscal year 2007, the Company recorded $12.3 million of restructuring charges, of which $9.9 million related to the termination of a logistics services agreement, termination and...

  • Page 109
    ... sale in their present condition; an active program to locate buyers and other actions to sell the assets has been initiated; sale of the assets is probable and their transfer is expected to qualify for recognition as a completed sale within one year; assets are being marketed at reasonable prices...

  • Page 110
    ... Company's discontinued operations for the years ended December 31, 2005 and 2006, and the period ended April 25, 2007 (in thousands): Year ended December 31, 2005 Year ended December 31, 2006 Year-to-date period ended April 25, 2007 Sales Cost of sales Gross profit Sales and marketing Technology...

  • Page 111
    ... 31, 2007, the Company's marketable securities consisted of U.S. agency securities, top tier commercial paper, and AAA-rated assetbacked securities collateralized by automobile loans/leases and credit card receivables. All marketable securities are classified as available-for-sale securities. The...

  • Page 112
    ... to Consolidated Financial Statements (Continued) 5. MARKETABLE SECURITIES (Continued) dollar. If the Company redeemed the Foreign Notes prior to maturity, the Company would not realize the full amount of its initial investment. The Company purchased the Foreign Notes to manage its foreign currency...

  • Page 113
    Overstock.com, Inc. Notes to Consolidated Financial Statements (Continued) 7. PROPERTY AND EQUIPMENT Property and equipment consists of the following (in thousands): December 31, 2006 2007 Computer hardware and software Furniture and equipment Leasehold improvements $ 95,385 11,534 2,169 109,088 (...

  • Page 114
    ... Statements (Continued) 9. ACCRUED LIABILITIES Accrued liabilities consist of the following (in thousands): December 31, 2006 2007 Inventory received but not invoiced Allowance for returns Accrued payroll and other related costs Deferred revenue Accrued marketing expenses Credit card processing fee...

  • Page 115
    ..., its capital stock, (j) change its method of accounting, (k) make investments, (l) enter into transactions with affiliates, or (m) store any of its inventory or equipment with third parties. The Company was in compliance with these covenants as of December 31, 2007. At December 31, 2007, no amounts...

  • Page 116
    ... executive offices under an operating lease which was originally scheduled to expire in January 2007. Beginning July 2005, this lease was terminated and replaced with a lease for approximately 154,000 rentable square feet in the Old Mill Corporate Center III in Salt Lake City, Utah for a term of...

  • Page 117
    ... return its office facilities to their original condition as required by the lease agreement. During fiscal year 2007, the Company recorded an additional $6.2 million of restructuring costs related to its marketing for sub-lease office and data center space in its current corporate office facilities...

  • Page 118
    ...have a material adverse effect on its financial statements. On August 11, 2005, along with a shareholder plaintiff, the Company filed a complaint against Gradient Analytics, Inc.; Rocker Partners, LP; Rocker Management, LLC; Rocker Offshore Management Company, Inc. and their respective principals in...

  • Page 119
    ... Gradient Analytics crosscomplaint alleges that the Company and Dr. Byrne engaged in violations of California's unfair business practices act, interference with prospective business advantage, and libel. These cases are in the initial stages. The Company intends to defend these cross-complaints...

  • Page 120
    ... alleged that, because the Company followed an industry practice of displaying to the customer on a confirmation page the expiration date of the customer's credit card while the customer was online and logged into the customer's own account, the Company has violated certain provisions of the Act...

  • Page 121
    ..., the Company issued warrants to certain shareholders in connection with the purchase of additional shares of common stock. At December 31, 2006 and 2007, there were no warrants outstanding to purchase common stock of the Company. During 2005, 2006 and 2007, the number of warrants exercised was 870...

  • Page 122
    ... 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. Also, to the extent stock awards...

  • Page 123
    ... the Black-Scholes-Merton ("BSM") option-pricing formula and amortized on a straight-line basis over the respective vesting periods of the awards. Disclosures for the years ended December 31, 2006 and 2007 are not presented because stock-based payments were accounted for under SFAS 123 (R)'s fair...

  • Page 124
    ...reported for financial reporting purposes. On March 29, 2005, the SEC published SAB 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 as cash compensation. The Company...

  • Page 125
    ... Plan. 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): 2005 Shares Weighted Average Exercise Price Shares 2006 Weighted Average Exercise Price Shares 2007 Weighted Average Exercise...

  • Page 126
    .... In connection with these exercises, there was no tax benefit realized by the Company due to the Company's current loss position. In the first quarter of 2008, the Compensation Committee of the Board of Directors approved grants of approximately 460,000 restricted stock units to officers and...

  • Page 127
    ...the payment percentage will be determined on the basis of straight line interpolation. Amounts payable under the plan were originally payable in cash. During interim and annual periods prior to the third quarter of 2007, the Company recorded compensation expense based upon the period-end stock price...

  • Page 128
    ... 31, 2006 and 2007, the Company had net operating loss carryforwards of approximately $145.2 million and $164.2 million, respectively, which may be used to offset future taxable income. An additional $21.9 million of net operating losses are limited under Internal Revenue Code Section 382 to $799...

  • Page 129
    ... (an entity owned by the Company's Chairman and Chief Executive Officer) and certain affiliated entities make travel arrangements for Company executives and pay the travel related expenses incurred by our executives on Company business. In 2005, 2006, and 2007 the Company reimbursed Haverford-Valley...

  • Page 130
    ...from selling the merchandise of third parties over the Company's Website. This segment also includes revenues and costs associated with the auctions and cars listing businesses. The costs for this segment include product costs, warehousing and fulfillment costs, credit card fees and customer service...

  • Page 131
    ... purpose of buying diamonds and other jewelry, primarily to supply a new category within the jewelry department 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...

  • Page 132
    .... Notes to Consolidated Financial Statements (Continued) 25. DECONSOLIDATION OF VARIABLE INTEREST ENTITY (Continued) to July 1, 2008. As of December 31, 2007, the Company had received payments on the note totaling $5.2 million. As a result of the agreement, the Company deconsolidated certain assets...

  • Page 133
    .... 30, 2007 Dec. 31, 2007(1) (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...

  • Page 134
    ... tax valuation allowance Allowance for sales returns Reserve for inventory obsolescence Allowance for doubtful accounts Year ended December 31, 2007 Deferred tax valuation allowance Allowance for sales returns Reserve for inventory obsolescence Allowance for doubtful accounts $ 27,450 2,835 1,323...

  • Page 135

  • Page 136
    ... annual rate of $200,000. The Company does not pay its Chief Executive Officer, Patrick M. Byrne, any base salary. On January 15, 2008, the Compensation Committee of the Board of Directors of the Company approved restricted stock awards under the Company's 2005 Equity Incentive Plan, bonus payments...

  • Page 137
    QuickLinks Exhibit 10.38

  • Page 138
    ...certain affiliated entities which make travel arrangements for our executives, also occasionally make travel arrangements for directors to attend Board meetings, for which the Company reimburses Haverford Valley at rates not in excess of commercially available airline rates. The following table sets...

  • Page 139
    QuickLinks Exhibit 10.39

  • Page 140
    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

  • Page 141
    QuickLinks Exhibit 21

  • Page 142
    ... 333-115806) of Overstock.com, Inc. of our report dated March 17, 2008 relating to the financial statements, financial statement schedule, and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP Salt Lake City, Utah March 17...

  • Page 143
    QuickLinks Exhibit 23.1

  • Page 144
    ... (d) 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions...

  • Page 145
    QuickLinks Exhibit 31.1

  • Page 146
    ... (d) 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions...

  • Page 147
    QuickLinks Exhibit 31.2

  • Page 148
    ...the year ended December 31, 2007 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 respects the financial condition and results of operations of Overstock...

  • Page 149
    QuickLinks EXHIBIT 32.1

  • Page 150
    ...the year ended December 31, 2007 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 respects the financial condition and results of operations of Overstock...

  • Page 151
    QuickLinks EXHIBIT 32.2