Overstock.com 2007 Annual Report Download - page 131

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
24. INDEMNIFICATIONS AND GUARANTEES
During its normal course of business, the Company has made certain indemnities, commitments, and guarantees under which it may be required to make
payments in relation to certain transactions. These indemnities include, but are not limited to, indemnities to various lessors in connection with facility leases
for certain claims arising from such facility or lease, and indemnities to directors and officers of the Company to the maximum extent permitted under the
laws of the State of Delaware. The duration of these indemnities, commitments, and guarantees varies, and in certain cases, is indefinite. In addition, the
majority of these indemnities, commitments, and guarantees do not provide for any limitation of the maximum potential future payments the Company could
be obligated to make. As such, the Company is unable to estimate with any reasonableness its potential exposure under these items. The Company has not
recorded any liability for these indemnities, commitments, and guarantees in the accompanying consolidated balance sheets. The Company does, however,
accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is both probable
and reasonably estimable. The Company carries specific and general liability insurance policies that the Company believes would, in most circumstances,
provide some, if not total recourse to any claims arising from these indemnifications.
25. DECONSOLIDATION OF VARIABLE INTEREST ENTITY
In April 2005, the Company entered into an agreement which allowed the Company to lend up to $10.0 million to an entity for the 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 the entity. In addition, the
Company had a ten year option to purchase ("Purchase Option") 50% of the ownership and voting interest of the entity. The exercise price of the Purchase
Option was the sum of (a) one thousand dollars, and (b) $3.0 million, which may have been paid, at the Company's election, in cash or by the forgiveness of
$3.0 million of the entity's indebtedness to the Company.
The entity was evaluated in accordance with FASB Interpretation No. 46 Revised, Consolidation of Variable Interest Entities—an Interpretation of ARB
No. 51 ("FIN 46"), and it was determined to be a variable interest entity for which the Company was determined to be the primary beneficiary. As such, the
financial statements of the entity were consolidated into the financial statements of the Company.
In November 2004, the Company loaned the entity $8.4 million. The promissory note bore interest at 3.75% per annum. Interest on the loan was due and
payable quarterly on the fifteenth day of February, May, August and November, commencing on November 15, 2004 until the due date of November 30,
2006, on which all principal and interest accrued and unpaid thereon, was due and payable. The promissory note was collateralized by all of the assets of the
entity.
In November 2006, an unrelated third party purchased the Company's interests in the variable interest entity by executing a promissory note to the
Company in exchange for termination of all agreements between the Company and the variable interest entity. The promissory note is equal to the net assets
of the entity or $6.7 million and bears no interest. The first payment on the note receivable was due and paid on February 1, 2007 in the amount of
$3.7 million with remainder of balance due in twelve equal monthly payments of $251,000 beginning on March 1, 2007. In September 2007, the Company
amended the note receivable deferring the final six monthly payments from February 1, 2008
F-42