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PC Connection Inc.Use these links to rapidly review the document INDEX ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Financial StatementsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K(MARK ONE) ýANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934For the fiscal year ended December 31, 2003ORoTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934For the transition period from to Commission file number 000-49799OVERSTOCK.COM, INC.(Exact name of Registrant as specified in its charter)Delaware 87-0634302(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification Number)6322 South 3000 East, Suite 100Salt 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 Act: NoneSecurities registered pursuant to Section 12(g) of the Act:Common Stock, $0.0001 par value (title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes ý No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not becontained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. ý Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý No o The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of the last business day of theregistrant's most recently completed second quarter (June 30, 2003), was approximately $150 million based upon the last sales price reported forsuch date on The NASDAQ Stock Market's National Market. For purposes of this disclosure, shares of Common Stock held by persons who holdmore than 5% of the outstanding shares of Common Stock and shares held by officers and directors of the registrant have been excluded in thatsuch persons may be deemed to be affiliates. This determination is not necessarily conclusive. As of February 9, 2004 there were 16,548,231 shares of the registrant's Common Stock outstanding.DOCUMENTS INCORPORATED BY REFERENCE None. OVERSTOCK.COM, INC.ANNUAL REPORT ON FORM 10-K INDEX Part I. Special Note Regarding Forward-Looking StatementsItem 1. BusinessItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security Holders Part II.Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and IssuerPurchases of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management's Discussion and Analysis of Financial Condition and Results of OperationItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and Procedures Part III.Item 10. Directors and Executive Officers of the RegistrantItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and Management and Related StockholderMattersItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accountant Fees and Services Part IV.Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-KSignaturesExhibit IndexFinancial Statements Overstock.com, Overstockb2b.com, Worldstock.com and The Big O are trademarks of Overstock.com, Inc. The Overstock.com logo andWorldstock.com logo are also trademarks of Overstock.com, Inc. Other service marks, trademarks and trade names referred to in this Form 10-K are property of their respective owners.i PART I SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. These statements are therefore entitled to the protection of the safe harbor provisions of these laws. Theseforward-looking statements involve risks and uncertainties, and relate to future events or our future financial or operating performance. Thesestatements include, but are not limited to, statements concerning:•the anticipated benefits and risks of our business relationships; •our ability to attract retail and business customers; •the anticipated benefits and risks associated with our business strategy; •our future operating results; •the anticipated size or trends of the market segments in which we compete and the anticipated competition in those markets; •potential government regulation; •our future capital requirements and our ability to satisfy our capital needs; •our expansion in international markets; our expansion in international markets; •the potential for additional issuances of our securities; •our plans to devote substantial resources to 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 belief that current or future litigation will likely not have a material adverse effect on our business; •our belief that certain of our stockholders are unlikely to exercise any rights of rescission or certain other remedies that they maypossess; •the anticipated anti-takeover effects of certain provisions of our charter documents; •the ability of our online marketing campaigns to be a cost-effective method of attracting customers; •possible technological improvements to existing inventory management systems, distribution and order fulfillment, networkinfrastructure and website features; •our belief that manufacturers will recognize us as an efficient liquidation solution; •our belief that the national television and radio branding campaign we began during 2003 will be effective and that the results of thecampaign will justify its expense; •our belief that the efforts we made during 2003 to improve the search function capabilities of our Websites will be effective and thatwe will be able to further improve those capabilities; •our belief that the increases we made during 2003 in the scope of our Books, Music and Video department offerings will be attractiveto customers and will result in increased sales of higher margin products;1•our belief that we can meet our published product shipping standards even during periods of relatively high sales activity; •our belief that we can maintain or improve upon customer service levels that we and our customers consider acceptable; •our belief that our information technology infrastructure, including the database cluster technology we implemented in late 2003, canand will support our operations and will not suffer significant downtime; •our belief that the actions we took in late 2003 to improve the efficiency of our warehouse and to decrease our costs of providingcustomer service will be effective and will not have adverse effects on our business; •our belief that the personnel adjustments we made in early 2004, which reduced our aggregate annual compensation byapproximately $1.5 million, will not have adverse effects on our business; •our belief that we can maintain inventory levels at appropriate levels despite the seasonal nature of our business; and •our belief that we can successfully offer and sell a constantly changing mix of products and services, including those we recentlyintroduced in our new travel department, ranging across a wide variety of price points. Furthermore, in some cases, you can identify forward-looking statements by terminology such as may, will, could, should, expect, plan,intend, anticipate, believe, estimate, predict, potential or continue, the negative of such terms or other comparable terminology. These statementsare only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider the risksoutlined in this Form 10-K, including those described in Item 1 under the caption "Risk Factors." These factors may cause our actual results todiffer materially from those contemplated by any forward-looking statement. Except as otherwise required by law, we expressly disclaim anyobligation to release publicly any update or revisions to any forward-looking statements to reflect any changes in our expectations or any change inevents, conditions or circumstances on which any of our forward-looking statements are based. Although we believe that the expectationsreflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. ITEM 1. BUSINESS The following description of our business contains forward-looking statements relating to future events or our future financial or operatingperformance that involve risks and uncertainties, as set forth under "Special Note Regarding Forward-Looking Statements." Our actual resultscould differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under theheading "Risk Factors" and elsewhere in this Form 10-K.Overview We are an online "closeout" retailer offering discount, brand-name merchandise for sale primarily over the Internet. Our merchandise offeringsinclude bed-and-bath goods, kitchenware, watches, jewelry, electronics, sporting goods and designer accessories. We also sell books, magazines,CDs, DVDs, video cassettes and video games ("BMV"). We offer our customers an opportunity to shop for bargains conveniently, while offeringour suppliers an alternative inventory liquidation distribution channel. We typically offer approximately 12,000 non-BMV products and approximately500,000 BMV products in up to twelve departments on our Websites, www.overstock.com, www.overstockb2b.com and2 www.worldstock.com. We also offer travel services, including airline tickets, hotel reservations and car rentals. We continually add new, limitedinventory products to our Websites in order to create an atmosphere that encourages customers to visit frequently and purchase products beforeour inventory sells out. Closeout merchandise is typically available in inconsistent quantities and prices and often is only available to consumers after it has beenpurchased and resold by disparate liquidation wholesalers. We believe that the traditional liquidation market is therefore characterized byfragmented supply and fragmented demand. Overstock utilizes the Internet to aggregate both supply and demand and create a more efficientmarket for liquidation merchandise. We have a "direct" business, in which we buy and take possession of excess inventory for resale. We also have our "fulfillment partner"business, which we formerly called our "commission" business. In our "fulfillment partner" business, we sell merchandise of other retailers,cataloguers or manufacturers ("fulfillment partners") through our Websites. For both our direct and our fulfillment partner businesses we have aconsumer and a business-to-business ("B2B") sales channel. Therefore, our business consists primarily of four combinations of thesecomponents: direct consumer, direct B2B, fulfillment partner consumer and fulfillment partner B2B.Industry Overview Manufacturers and retailers traditionally hold inventory to buffer against uncertain demand within their normal, "inline" sales channels. Inlinesales channels are manufacturers' primary distribution channels, which are characterized by regularly placed orders by established retailers at ornear 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 often cancel orders mid-production and return unsold merchandise; •style, color or model changes can quickly turn inventory into closeout merchandise; •incorrect estimates of consumer demand which can lead to overproduction; and •changes in a retailer's financial situation or strategy results in cancelled orders. The disposal of excess, or overstock, inventory represents a substantial burden for many manufacturers, especially those who produce high-quality branded merchandise. Manufacturers seek to avoid liquidating through traditional retail channels where the manufacturer's discountedproducts may be sold alongside other full-price products. This can result in weaker pricing and decreased brand strength, and is known as channelconflict or sales channel pollution. As a result, many manufacturers turn to liquidation wholesalers and discount retailers. These liquidationchannels provide manufacturers limited control of distribution and are, we believe, unreliable and expensive to manage when compared with theirinline channels. Despite the challenges encountered by manufacturers in the liquidation market, the proliferation of outlet malls, wholesale clubs and discountchains is evidence of the strong level of consumer demand for discount and closeout merchandise. However, consumers face several difficultiesin shopping for closeout and overstock merchandise. For example, many traditional merchandise liquidation outlets are located in remote locationsand have limited shopping hours, which we believe makes shopping burdensome and infrequent for many consumers. In addition, the spaceavailable in a traditional merchandise liquidation outlet constrains the number of products that a traditional merchandise liquidation outlet can offerat any given time.3 However, we believe that the market for online liquidation is still early in its development and is characterized by only a limited number ofcompetitors, some of which utilize an auction model to price their goods. Furthermore, we believe that there are no dominant companies in theonline 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 pressure from large national retailers. Small retailers generally do not have purchasing leveragewith manufacturers; consequently, they are more likely to pay full wholesale prices and are more likely to receive inferior service. We believe thatsmall retailers generally do not have access to the liquidation market because liquidation wholesalers are most often interested in liquidating largevolumes of merchandise, rather than the small quantities appropriate for small, local retailers.The Overstock Solution Overstock utilizes the Internet to create a more efficient market for liquidation merchandise. We provide consumers and businesses withquick and convenient access to high-quality, brand-name merchandise at discount prices. We believe we are unlike other online liquidatorsbecause we focus on multiple product lines, offer a single price (as opposed to an auction format), and serve both businesses and consumers. We have a "direct" business, in which we buy and take possession of inventory for resale. We also have our "fulfillment partner" business,which we formerly called our "commission" business. In our "fulfillment partner" business, we sell merchandise of other retailers, cataloguers or manufacturers ("fulfillment partners") through our Websites. We currently have fulfillment partner relationships with approximately 250 third partieswhich post over 6,000 non-BMV products on our Websites. Prior to July 1, 2003, we did not physically handle the merchandise we sold for ourfulfillment partners, as the merchandise was shipped directly by them. They also handled all customer returns related to those sales. BeginningJuly 1, 2003, we took responsibility for all returned items relating to these sales and we now handle the possible resale of any returned items. Wemade the decision to change this policy to have more control over the Overstock customer shopping experience, as we believe that a seamlesscustomer experience is key to creating loyal, long-term customers. By accepting returns at our warehouse, we can verify that fulfillment partnerproducts are being packaged and shipped to our standards. Additionally, as customer returns are now all shipped to one location, the process ismuch more simple and convenient for our customers. As a result, beginning July 1, 2003, we are considered to be the primary obligor for thesesales transactions, and we assume the risk of loss on the returned items. As a consequence, we now record revenue from sales transactionsinvolving our fulfillment partners (excluding travel products) on a gross basis, rather than recording a commission on those sales as we did prior toJuly 1, 2003. During the fourth quarter of 2003, we added a discount travel store to our Website. We use a fulfillment partner to supply the travel products(flights, hotels, rental cars, etc.) in our travel store. For the products sold in our travel store, we do not currently have inventory risk or pricingcontrol, and do not directly provide customer service. Therefore, for these sales we are not considered to be the primary obligor, and record onlyour commission as revenue. For both our direct and our fulfillment partner businesses we have a consumer and a business-to-business ("B2B") sales channel. Therefore,our business consists primarily of four combinations of these components: direct consumer, direct B2B, fulfillment partner consumer andfulfillment partner B2B. During 2003, we also operated a warehouse store from our Salt Lake City warehouse where we sold certain items thatcould not be economically sold on our Websites. Sales from the warehouse store in 2003 accounted for less than 1% of our total revenue, and inJanuary 2004, we closed the warehouse store.4 Overstock provides manufacturers with a one-stop liquidation channel to sell both large and small quantities of excess and closeoutinventory without disrupting sales through traditional channels. Key advantages for manufacturers liquidating their excess inventory throughOverstock include:•Resolution of channel conflict. Channel conflicts arise when a manufacturer's excess inventory is sold through the same channel astheir other product offerings. Since excess inventory is usually sold at a discount, sales of the manufacturer's other product offeringsmay be impacted as a consumer in a retail store may opt for the excess product or become confused by the pricing and modeldiscrepancies. By using Overstock, manufacturers have an alternative and independent channel where they can sell excessinventory without the fear of hindering the sale of their other products. •Single point of distribution. Manufacturers often use multiple liquidation sources to clear their excess inventory. Multiple sourcescreate additional logistics issues that they would rather avoid. By using Overstock, manufacturers have a single source for thedistribution of excess inventory. •Improved control of distribution. By using Overstock, manufacturers can monitor what kind of customer, whether individualconsumer or small retailer, ultimately purchases their merchandise. In addition, a manufacturer can request that its products beoffered in only one of our sales channels in order to avoid sales channel pollution. •Improved transaction experience. By having a reliable inventory clearing channel, manufacturers are able to more quickly and easilydispense of their excess merchandise. Overstock also offers consumers a compelling alternative for bargain shopping. Key advantages for consumers include:•High quality and broad product selection. Most of the merchandise offered on our Websites is from well-known, brand-namemanufacturers. We typically have approximately 12,000 non-BMV products and approximately 500,000 BMV products (books,magazines, CDs, DVDs, video cassettes and video games) in up to twelve departments. •Convenient access on a secure site. Our customers are able to access and purchase our products 24 hours a day from theconvenience of their home or office. Further, we do not sell any personal information about our customer base to third parties. •Responsive customer service and positive shopping experience. Our team of customer service representatives (which includesemployees, temporary employees and outsourced staff) assists customers by telephone and e-mail. Our customer service staffanswers approximately 85% of phone calls within 30 seconds, and responds to approximately 98% of its e-mails within 12 hours. Forour consumer business, we include a return shipment label in our customer's shipment to facilitate product returns and, subject tocertain conditions, we allow customers up to 15 days to initiate the return of purchased merchandise. In addition, we continuallyupdate and monitor our Websites to enhance the shopping experience for our customers. We also offer small businesses and retailers a compelling method for obtaining products for resale. We believe that small businesses andretailers can secure lower prices and better service through us than they typically receive from manufacturers or other distributors. We believe weare able to offer these advantages because, unlike many small businesses and retailers, we have the ability to access the liquidation market tobuy merchandise in bulk quantities for which we often receive volume-based price discounts. Accordingly, we have designed our shipping andreceiving operations with the flexibility to accommodate both the receipt of large shipments of inventory purchases, and the distribution of bulkloads to our small business customers.5 Business Strategy Our objective is to leverage the Internet to become the dominant closeout solution for holders of brand-name merchandise, allowing them todispose of that merchandise discreetly and with high recovery values. We are pursuing this objective through the following key strategies:•Establish strong relationships with manufacturers. With the growth in the scale of our operations, we believe we are becoming anefficient liquidation channel for manufacturers and distributors. With scale comes the ability to buy in volume, and we believemanufacturers appreciate our ability to liquidate their products without disturbing their traditional channels. Generally, manufacturersdo not want their product offerings sold as heavily discounted, closeout products in brick-and-mortar retailers, as is common today.We believe that as manufacturers learn of our capabilities, they will increasingly recognize the attractiveness of Overstock as anefficient liquidation solution. •Optimize inventory management through the use of technology. Our merchandise buyers are supported by proprietary software thatprovides nearly instantaneous information on product sales, margins and inventory levels. This technology enables us to makeinformed decisions and quickly change prices in an effort to maximize sales volume, gross profits and return on inventory capital. •Optimize marketing initiatives through the use of technology. Our marketing team is supported by proprietary software thatenhances the level of service provided to our customers and takes advantage of the unique characteristics of online distribution. Oursoftware provides us immediate feedback on the effectiveness of various marketing campaigns, allowing us to optimize ourmarketing expenditures. •Maintain low customer acquisition costs. We believe that by utilizing targeted online campaigns such as banner ad and e-mailcampaigns, the results of which we are able to quantify, as well as our internally developed national television and radio brandingcampaign, we will be able to keep our per customer acquisition costs low. •Aggressively grow our B2B business. We believe we offer our B2B customers a compelling opportunity for purchasing bulkinventory online at low prices with high-quality service. We believe that the small retail market is underserved by existing liquidatorsand we are working to take advantage of this significant opportunity. We have a dedicated B2B Website, as well as a dedicated B2Bsales team, whose sole purpose is to further develop this business. •Provide responsive customer service. Overstock maintains the infrastructure necessary to process and fulfill orders on an accurate,timely and reliable basis. We operate an approximately 354,000-square foot leased warehouse in Salt Lake City, Utah to help providea high level of customer service. We strive continually to improve our product offerings, the look and feel of our Websites and thequality of our customers' shopping experience.Key Relationships Manufacturer, Supplier and Distribution Relationships. It is difficult to establish closeout buying relationships with manufacturers. Trust andexperience gained through past interactions are important. We believe our business model reduces the risk to the manufacturer that its discountedproducts are sold alongside its full-priced products. Our supplier relationships provide us with recognized,6brand-name products. The table below identifies, for each of our product departments, the brand names that generate the largest revenues in eachdepartment.AOL Time WarnerBissellBlue Ridge Home FashionsCuisinartFujiHewlett-PackardJansportKeltyKenneth Cole KrupsMaiMovadoNicole MillerNovicaOriental WeaversPanasonicPhilipsRalph Lauren Random HouseRCASamsoniteSeikoSimon & SchusterSonySwiss ArmyTaylor MadeVera Wang To date, we have not entered into contracts with manufacturers or liquidation wholesalers that guarantee the availability of merchandise for aset duration. Our manufacturer and supplier relationships are based on historical experience with manufacturers and liquidation wholesalers and donot obligate or entitle us to receive merchandise on a long-term or short-term basis. In our direct business, we purchase the products frommanufacturers or liquidation wholesalers using standard purchase orders. Generally, suppliers do not control any of the terms under which productsare sold over our Websites. In 2002, we entered into an agreement with Safeway Inc. to provide discounted merchandise to be sold within their stores. Safeway Inc.accounted for approximately $21.0 million, or approximately 9%, of our total revenues for the fiscal year ended December 31, 2003. Currently, weare supplying certain stores in the western and midwestern regions of the United States. During the term of our agreement with Safeway, whichends on February 26, 2004, we are prevented from selling the same or similar goods to any store that has more than 400 retail stores in thefollowing categories: drug, mass merchandising, grocery, club or warehouse. We have notified Safeway that we do not intend to renew thisagreement. In the future, we hope to develop relationships with other large retailers. Fulfillment Partner Business. We have a "direct" business, in which we buy and take possession of inventory for resale. We also have our"fulfillment partner" business, which we formerly called our "commission" business. In our fulfillment partner business, we sell merchandise ofother retailers, cataloguers or manufacturers ("fulfillment partners") through our Websites. We currently have fulfillment partner relationships withapproximately 250 third parties which post over 6,000 non-BMV products on our Websites. Prior to July 1, 2003, we did not physically handle themerchandise we sold for our fulfillment partners, as the merchandise was shipped directly by them. They also handled all customer returns relatedto those sales. Beginning July 1, 2003, we took responsibility for all returned items relating to these sales, and we now handle the possible resale of any returned items. As a result, beginning July 1, 2003, we are considered to be the primary obligor for these sales transactions, and weassume the risk of loss on the returned items. As a consequence, we now record revenue from sales transactions involving our fulfillment partners(excluding products from our travel store) on a gross basis, rather than recording a commission on those sales as we did prior to July 1, 2003. During the fourth quarter of 2003, we added a discount travel store to our Website. We use a fulfillment partner to supply the travel products(flights, hotels, rental cars, etc.) in our travel store. For the products sold in our travel store, we do not currently have inventory risk or pricingcontrol, and do not directly provide customer service. Therefore, for these sales we are not considered to be the primary obligor, and record onlyour commission as revenue.7 Sales and Marketing B2B. As of December 31, 2003, we had a dedicated sales force of 20 people who primarily interact with small, regional or local retailers bytelephone or through e-mail to alert them to the opportunity they have to purchase merchandise at prices that are below wholesale, and which webelieve are often lower than the prices paid by the larger retailers with whom they compete. Consumer. We use cost-effective methods to target our consumer audience, including online campaigns, such as banner ad and e-mailcampaigns, and we are able to monitor and evaluate the results of our online campaigns. We seek to identify and eliminate campaigns that do notmeet our expectations. We also recently created and launched a national television and radio branding campaign. We developed the brandingcampaign internally, and we believe that we did so in a cost-effective manner.ProductsOnline Products Currently, our products are organized into eight different product departments on our consumer Website:Apparel, Shoes & AccessoriesBooks, Movies, CDs & GamesElectronics & ComputersHome & Garden Jewelry, Gifts & WatchesSporting Goods & EventsTravelWorldstock Each of these departments has multiple categories that more specifically define the products offered within that department. For example,the following product categories are currently within the "Electronics & Computers" department:Audio & VideoCameras & Optics Office & PhonesComputers & Printers Each category has several subcategories that further detail the product contained within. For example, under the "Audio & Video" category,we have the subcategories of "Audio" and "TV&Video" and under the "Audio" subcategory we have the further sub-subcategories of "Car Audio &Video," "Clock Radios," "D.J. & Karaoke Equipment," "MP3/CD Players," "Other Audio," "Portable Stereo," and "Stereo Equipment." Our B2B Website is organized into twelve different product departments, each of which contains multiple categories similar to those on ourconsumer Website. Individual products can be accessed and viewed from the category or subcategory pages. These specific product pages include detailedproduct descriptions, a color picture and pricing information. The number of total products we offer has grown from less than 100 in 1999, to more than 12,000 non-BMV products and approximately500,000 BMV products (books, magazines, CDs, DVDs, video cassettes and video games) as of December 31, 2003. As the number of productsand product categories change throughout the year, we periodically reorganize our departments and/or categories to better reflect our currentproduct availability. Our Worldstock Website, at www.worldstock.com, is our Internet marketplace through which artisans in the United States and around theworld can sell their products and gain access to a broader market.8 Fulfillment Operations General. When customers place orders on our Websites, orders are fulfilled either by a third party "fulfillment partner" or directly from ourSalt Lake City, Utah warehouse. We monitor both sources for accurate order fulfillment and timely shipment. We currently charge $2.95 for basicground shipping, but customers can choose from various expedited shipping services at their expense. Payment Terms. As a general policy, we require verification of receipt of payment or credit card authorization before we ship products toconsumers or B2B purchasers. From time to time we grant credit to our B2B purchasers with normal credit terms. Direct Fulfillment. During 2003, we fulfilled approximately 41% of all orders through our leased Salt Lake City, Utah warehouse where westore approximately 6,000 non-BMV products offered on our Websites. We operate the warehouse with an automated warehouse managementsystem that tracks the receipt of the inventory items, distributes order-fulfillment assignments to warehouse workers and obtains rates for variousshipping options to ensure low-cost outbound shipping. Our Websites relay orders to the warehouse management system throughout each day,and the warehouse management system in turn confirms to our Websites shipment of each order. Customers track the shipping status of their packages through links we provide on our Websites. We advertise a standard of shipping within two business days of order placement, but mostorders ship within one business day. The warehouse team generally ships between 4,000 and 5,000 orders per day, and up to approximately10,000 orders per day during peak periods, using two overlapping daily shifts. We also process returns of direct and fulfillment partner merchandisein the Salt Lake City, Utah warehouse. Fulfillment Partner Business. During 2003, approximately 59% of our orders were for inventory owned and shipped by third party fulfillmentpartners. We currently manage approximately 250 entities that collect their orders through our Websites. These third parties perform essentially thesame operations as our warehouse: order picking and shipping; however, beginning July 1, 2003, we began handling returns for these sales. Thesethird parties relay shipment confirmations to our Websites, where customers can review shipping and tracking information. From a customer's pointof view, shipping from our warehouse or from the warehouse of one of these third parties is indistinguishable.Customer Service We are committed to superior customer service. We staff our customer service department with dedicated professionals who respond tophone and e-mail inquiries on products, ordering, shipping status, and returns. Our customer service representatives include Overstockemployees, temporary employees and outsourced staff. Our customer service staff processes approximately 20,000 to 25,000 calls per week. Thesame staff processes approximately 20,000 to 40,000 e-mail messages each week, with less than a 24-hour turnaround time. We use automatede-mail and phone systems to route traffic to appropriate customer service representatives.Technology We use our internally developed Websites and a combination of proprietary technologies and commercially available licensed technologiesand solutions to support our operations. We use the services of XO Communications, Inc., Qwest Communications International, Inc. andMCI, Inc. to obtain connectivity to the Internet over two OC3s and one DS3. We currently store our data on an Oracle 9i database cluster usingDell computer hardware, which is backed up by a high-speed redundant Network Appliance storage system. Currently, we use thirty-one DellPowerEdge servers for our Websites, which are connected to the Oracle database and operate in a multi-processing Linux environment designedto accommodate large volumes of Internet traffic. During the 2003 holiday shopping season, our Internet systems operated at 30% of theircapacity. We have added internal9 "relief valve" technology and improved existing "relief valve" functionality with technology provided by Akamai Technologies, Inc. andSpeedera, Inc. to provide a redundant solution to off-load transactions during extreme loads. We are constantly working to enhance the reporting capabilities of our Websites to improve our understanding of our customers' needs andthe operation of our Websites. Our Internet systems include redundant hardware on mission critical components and are located in our Salt LakeCity, Utah facility.Competition The online liquidation services market is new, rapidly evolving, intensely competitive and has relatively low barriers to entry, as newcompetitors can launch new Websites at relatively low cost. We believe that competition in the online liquidation market is based predominantlyon:•price; •product quality and selection; •shopping convenience; •customer service; and •brand recognition. Our liquidation services compete with other online retailers and traditional liquidation "brokers," some of which may specifically adopt ourmethods and target our customers. We currently or potentially compete with a variety of companies that can be divided into several broadcategories:•liquidation e-tailers 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. and TJX Companies, Inc. As the market for online liquidation grows, we believe that companies involved in online retail, as well as traditional retailers and liquidationbrokers, will increase their efforts to develop services that compete with our online services. We also face potential competition from Internetcompanies not yet focused on the liquidation market, and from retail companies not yet operating online. We are unable to anticipate which othercompanies are likely to offer services in the future that will compete with the services we provide. In addition, many of our current and potential competitors have greater brand recognition, longer operating histories, larger customer basesand significantly greater financial, marketing and other resources than us, and may enter into strategic or commercial relationships with larger,more established and well-financed companies. Some of our competitors could enter into exclusive distribution arrangements with our vendors anddeny us access to their products, devote greater resources to marketing and promotional campaigns and devote substantially more resources totheir Website and systems development than our company. New technologies and the continued enhancement of existing technologies also may increase competitive pressures on our company. We cannot assure you that we will be able to compete successfully against current and futurecompetitors or address increased competitive pressures. See "Risk Factors."Intellectual Property We regard our domain names and similar intellectual property as critical to our success. We rely on a combination of laws and contractualrestrictions with our employees, customers, suppliers,10 affiliates and others to establish and protect our proprietary rights. Despite these precautions, it may be possible for a third party to copy orotherwise obtain and use our intellectual property without authorization. In addition, we cannot assure you that others will not independentlydevelop similar intellectual property. Although we are pursuing the registration of our key trademarks in the United States, some of our tradenames are not eligible to receive trademark protection. In addition, effective trademark protection may not be available or may not be sought by usin every country in which our products and services are made available online, including the United States. From time to time, we may be subject to legal proceedings and claims in the ordinary course of our business, including claims of allegedinfringement of the trademarks and other intellectual property rights of third parties by our company. For example, in October 2003, Tiffany(NJ) Inc. and Tiffany and Company filed a complaint against us in the United States District Court for the Southern District of New York allegingthat we have distributed counterfeit and otherwise unauthorized Tiffany product in violation of federal copyright and trademark law and related statelaws. The complaint seeks statutory and other damages in an unspecified amount and injunctive relief. Although we have filed an answer andbelieve we have defenses to the allegations and intend to pursue them vigorously, the Tiffany lawsuit is in the early stages of discovery, and wedo not have sufficient information to assess the validity of the claims or the amount of potential damages. These types of claims could result inincreased costs of doing business through legal expenses, adverse judgments or settlements or require us to change our business practices inexpensive ways. In addition, litigation could result in interpretations of the law that require us to change our business practices or otherwiseincrease our costs. Third parties have in the past, and may in the future, recruit our employees who have had access to our proprietary technologies, processesand operations. These recruiting efforts expose us to the risk that such employees will misappropriate our intellectual property. Additional litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine thevalidity and scope of the proprietary rights of others. Any litigation, regardless of outcome or merit, could result in substantial costs and diversionof management and technical resources, any of which could materially harm our business. See "Risk Factors."Government Regulation All of our services are subject to federal and state consumer protection laws including laws protecting the privacy of consumer non-publicinformation and regulations prohibiting unfair and deceptive trade practices. In particular, under federal and state financial privacy laws andregulations, we must provide notice to consumers of our policies on sharing non-public information with third parties, must provide advance noticeof any changes to our policies and, with limited exceptions, must give consumers the right to prevent sharing of their non-public personalinformation with unaffiliated third parties. Furthermore, the growth and demand for online commerce could result in more stringent consumerprotection laws that impose additional compliance burdens on online companies. These consumer protection laws could result in substantialcompliance costs and could interfere with the conduct of our business. Moreover, in many states, there is currently great uncertainty whether or how existing laws governing issues such as property ownership,sales and other taxes, libel and personal privacy apply to the Internet and commercial online services. These issues may take years to resolve. Inaddition, new state tax regulations may subject us to additional state sales and income taxes. New legislation or regulation, the application of lawsand regulations from jurisdictions whose laws do not currently apply to our business or the application of existing laws and regulations to theInternet and commercial online services could result in significant additional taxes on our business. These taxes could have an adverse effect onour cash flows and results of operations. Furthermore, there is a possibility that we11 may be subject to significant fines or other payments for any past failures to comply with these requirements.Employees As of December 31, 2003, we had 326 full-time employees, including 62 in customer service, 125 in order fulfillment, 29 in informationtechnology and Web store production, 19 in marketing, 41 in merchandising, 15 in finance, 20 in B2B sales and 15 in our executive andadministrative department. We have never had a work stoppage, and none of our employees are represented by a labor union. We consider ouremployee relationships to be positive.Risk Factors Any investment in our common stock involves a high degree of risk. Investors should consider carefully the risks and uncertainties describedbelow, and all other information in this Form 10-K and in any reports we file with the SEC after we file this Form 10-K, before deciding whether topurchase or hold our common stock. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may alsobecome important factors that may harm our business. The occurrence of any of the following risks could harm our business. The trading price ofour common stock could decline due to any of these risks and uncertainties, and investors may lose part or all of their investment.Risks Relating to OverstockBecause we have a limited operating history, it is difficult to evaluate our business and future operating results. We were originally organized in May 1997 and began posting a list of our merchandise on our Website in August 1998. In March 1999, welaunched the first version of our Website through which customers could purchase products. Our limited operating history makes it difficult toevaluate our business and future operating results.We have a history of significant losses. If we do not achieve profitability, our financial condition and our stock price could suffer. We have a history of losses and we may continue to incur operating and net losses for the foreseeable future. We incurred net lossesattributable to common shares of $11.6 million and $12.1 million for the years ended December 31, 2002 and 2003, respectively. As ofDecember 31, 2002, and 2003, our accumulated deficit was $55.7 million and $67.8 million, respectively. We will need to generate significantrevenues to achieve profitability, and we may not be able to do so. Even if we do achieve profitability, we may not be able to sustain or increaseprofitability on a quarterly or annual basis in the future. If our revenues grow more slowly than we anticipate, or if our operating expenses exceedour expectations, our financial results would be harmed. We will continue to incur significant operating expenses and capital expenditures as we:•enhance our distribution 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 our product offerings; •rent additional warehouse and office space;12•increase our general and administrative functions to support our operations; and •increase our sales, branding and marketing activities, including maintaining existing or entering into new online marketingarrangements, and continuing or increasing our national television and radio branding campaign. Because we will incur many of these expenses before we receive any revenues from our efforts, our losses may be greater than the losseswe would incur if we developed our business more slowly. Further, we base our expenses in large part on our operating plans and future revenueprojections. Many of our expenses are fixed in the short term, and we may not be able to quickly reduce spending if our revenues are lower thanwe project. Therefore, any significant shortfall in revenues would likely harm our business, operating results and financial condition. In addition, wemay find that these efforts are more expensive than we currently anticipate, which would further increase our losses. Also, the timing of theseexpenses may contribute to fluctuations in our quarterly operating results.Our quarterly operating results are volatile and may adversely affect our stock price. Our future revenues and operating results are likely to vary significantly from quarter to quarter due to a number of factors, many of which areoutside our control, and any of which could harm our business. As a result, we believe that quarterly comparisons of our operating results are notnecessarily meaningful and that you should not rely on the results of one quarter as an indication of our future performance. In addition to the otherrisk factors described in this report, additional factors that have caused and/or could cause our quarterly operating results to fluctuate include:•increases in the cost of advertising; •our inability to retain existing customers or encourage repeat purchases; •difficulties developing our B2B operations; •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 relating to the expansion of our business operations andinfrastructure; •the amount and timing of our purchases of inventory; •our inability 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; and •our inability to replace the loss of a significant customer.If we fail to accurately forecast our expenses and revenues, our business, operating results and financial condition may suffer and the price of our stock may decline. Our limited operating history and the rapidly evolving nature of our industry make forecasting operating results difficult. We may not be ableto quickly reduce spending if our revenues are lower than we project. Therefore, any significant shortfall in revenues would likely harm ourbusiness, operating results and financial condition and cause our results of operation to fall below the expectations of public market analysts andinvestors. If this occurs, the price of our common stock may decline.13 We have grown quickly and if we fail to manage our growth, our business will suffer. We have rapidly and significantly expanded our operations, and anticipate that further significant expansion will be required to addresspotential growth in our customer base and market opportunities. This expansion has placed, and is expected to continue to place, a significantstrain on our management, operational and financial resources. Some of our officers have no prior senior management experience at publiccompanies. Our new employees include a number of key managerial, technical and operations personnel who have not yet been fully integratedinto our operations, and we expect to add additional key personnel in the near future. To manage the expected growth of our operations andpersonnel, we will be required to improve existing and implement new transaction-processing, operational and financial systems, procedures andcontrols, and to expand, train and manage our already growing employee base. If we are unable to manage growth effectively, our business,prospects, financial condition and results of operations will be harmed.In order to obtain future revenue growth and achieve and sustain profitability we will have to attract customers on cost-effective terms. Our success depends on our ability to attract customers on cost-effective terms. We have relationships with online services, search engines,directories and other Websites and e-commerce businesses to provide content, advertising banners and other links that direct customers to ourWebsites. We rely on these relationships as significant sources of traffic to our Websites and to generate new customers. If we are unable todevelop or maintain these relationships on acceptable terms, our ability to attract new customers and our financial condition could be harmed. Inaddition, certain of our online marketing agreements may require us to pay upfront fees and make other payments prior to the realization of thesales, if any, associated with those payments. Accordingly, if these agreements or similar agreements that we may enter into in the future fail toproduce the sales that we anticipate, our results of operations will be adversely affected. We cannot assure you that we will be able to increase ourrevenues, if at all, in a cost-effective manner. We have also begun national television and radio branding and advertising campaigns. Suchcampaigns are expensive and may not result in the cost effective acquisition of customers. Further, many of the parties with which we may have online-advertising arrangements could provide advertising services for other online ortraditional retailers and merchandise liquidators. As a result, these parties may be reluctant to enter into or maintain relationships with us. Failureto achieve sufficient traffic or generate sufficient revenue from purchases originating from third parties may result in termination of theserelationships by these third parties. Without these relationships, our revenues, business, prospects, financial condition and results of operationscould suffer.The loss of key personnel or any inability to attract and retain additional personnel could affect our ability to successfully grow ourbusiness. Our performance is substantially dependent on the continued services and on the performance of our senior management and other keypersonnel, particularly Patrick M. Byrne, our President and Chairman of the Board. Our performance also depends on our ability to retain andmotivate other officers and key employees. The loss of the services of any of our executive officers or other key employees for any unforeseenreason, including without limitation, illness or call to military service, could harm our business, prospects, financial condition and results ofoperations. We do not have employment agreements with any of our key personnel and we do not maintain "key person" life insurance policies.Our future success also depends on our ability to identify, attract, hire, train, retain and motivate other highly-skilled technical, managerial,editorial, merchandising, marketing and customer service personnel. Competition for such personnel is intense, and we cannot assure you that wewill be able to successfully attract, assimilate or retain sufficiently qualified personnel. During 2003 individuals serving as our president and chieffinancial officer, our chief operating officer and our chief14 technology officer each stepped down from those positions for unrelated reasons. Each of these three individuals remained an employee of theCompany, and each continues to serve the Company at present. Our failure to retain and attract the necessary technical, managerial, editorial,merchandising, marketing and customer service personnel could harm our revenues, business, prospects, financial condition and results ofoperations.Our operating results may fluctuate depending on the season, and such fluctuations may affect our stock price. We have experienced and expect to continue to experience fluctuations in our operating results because of seasonal fluctuations intraditional retail patterns. Sales in the retail and wholesale industry tend to be significantly higher in the fourth calendar quarter of each year than inthe preceding three quarters due primarily to increased shopping activity during the holiday season. However, there can be no assurance that oursales in the fourth quarter will exceed those of the preceding quarters or, if the fourth quarter sales do exceed those of the preceding quarters, thatwe will be able to manage the increased sales effectively. Further, we may increase our inventories substantially in anticipation of holiday seasonshopping activity, which may have a negative effect on our cash flow. Securities analysts and investors may inaccurately estimate the effects ofseasonality on our results of operations in one or more future quarters and, consequently, our operating results may fall below expectations,causing our stock price to decline.We depend on our relationships with third party fulfillment partners for a large portion of the products that we offer for sale on ourWebsites. If we fail to maintain these relationships, our business will suffer. During 2003, we had fulfillment partner relationships with approximately 250 third parties whose products we offer for sale on our Websites.At December 31, 2003, these products accounted for approximately 53% of the non-BMV products available on our Websites. We do not have anylong-term agreements with any of these third parties. Our agreements with third parties are terminable at will by either party immediately uponnotice. In general, we agree to offer the third parties' products on our Websites and these third parties agree to provide us with information abouttheir products, honor our customer service policies and ship the products directly to the customer. If we do not maintain our existing or build newrelationships with third parties on acceptable commercial terms, we may not be able to offer a broad selection of merchandise, and customers mayrefuse to shop at our Websites. In addition, manufacturers may decide not to offer particular products for sale on the Internet. If we are unable tomaintain our existing or build new fulfillment partner relationships or if other product manufacturers refuse to allow their products to be sold via theInternet, our business would suffer severely.We are partially dependent on third parties to fulfill a number of our fulfillment, distribution and other retail functions. If such parties areunwilling or unable to continue providing these services, our business could be seriously harmed. In our fulfillment partner business, although we now handle returned merchandise, we continue to rely on third parties to conduct a number ofother 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 have no effective means toensure that these third parties will continue to perform these services to our satisfaction or on commercially reasonable terms. In addition,because we do not take possession of these third parties' products, we are unable to fulfill these traditional retail operations ourselves. Ourcustomers could become dissatisfied and cancel their orders or decline to make future purchases if these third parties are unable to deliverproducts on a timely basis. If our customers become15 dissatisfied with the services provided by these third parties, our reputation and the Overstock brand could suffer.We rely on our relationships with manufacturers, retailers and other suppliers to obtain sufficient quantities of quality merchandise onacceptable terms. If we fail to maintain our supplier relationships on acceptable terms, our sales and profitability could suffer. To date, we have not entered into contracts with manufacturers or liquidation wholesalers that guarantee the availability of merchandise for aset duration. Our contracts or arrangements with suppliers do not provide for the continuation of particular pricing practices and may be terminatedby either party at any time. Our current suppliers may not continue to sell their excess inventory to us on current terms or at all, and we may notbe able to establish new supply relationships. For example, it is difficult for us to maintain high levels of product quality and selection becausenone of the manufacturers, suppliers and liquidation wholesalers from whom we purchase products on a purchase order by purchase order basishave a continuing obligation to provide us with merchandise at historical levels or at all. In most cases, our relationships with our suppliers do notrestrict the suppliers from selling their respective excess inventory to other traditional or online merchandise liquidators, which could in turn limitthe selection of products available on our Websites. If we are unable to develop and maintain relationships with suppliers that will allow us toobtain sufficient quantities of merchandise on acceptable commercial terms, such inability could harm our business, results of operation andfinancial condition.Our business may be harmed by the listing or sale of pirated, counterfeit or illegal items by third parties, and by intellectual propertylitigation. We have received in the past, and we anticipate we will receive in the future, communications alleging that certain items listed or soldthrough our Websites infringe third-party copyrights, trademarks and trade names or other intellectual property rights or that we have otherwiseinfringed third parties' past, current or future intellectual property rights. For example, in October 2003, Tiffany (NJ) Inc. and Tiffany and Companyfiled a complaint against us in the United States District Court for the Southern District of New York alleging that we have distributed counterfeitand otherwise unauthorized Tiffany product in violation of federal copyright and trademark law and related state laws. The complaint seeksstatutory and other damages in an unspecified amount and injunctive relief. Although we have filed an answer and believe we have defenses to theallegations and intend to pursue them vigorously, the Tiffany lawsuit is in the early stages of discovery, and we do not have sufficient informationto assess the validity of the claims or the amount of potential damages. We may be unable to prevent third parties from listing unlawful goods, and we may be subject to allegations of civil or criminal liability forunlawful activities carried out by third parties through our Websites. In the future, we may implement measures to protect against these potentialliabilities that could require us to spend substantial resources and/or to reduce revenues by discontinuing certain service offerings. Any costsincurred as a result of liability or asserted liability relating to the sale of unlawful goods or the unlawful sale of goods could harm our revenues,business, prospects, financial condition and results of operations. Resolving litigation or claims regarding patents or other intellectual property, whether meritorious or not, could be costly, time-consuming,cause service delays, divert our management and key personnel from our business operations, require expensive or unwanted changes in ourmethods of doing business or require us to enter into costly royalty or licensing agreements, if available. As a result, these claims could harm ourbusiness.16 Our business may be harmed by fraudulent activities on our Websites. We have received in the past, and anticipate that we will receive in the future, communications from customers who did not receive goodsthat they purchased. We also periodically receive complaints from our customers as to the quality of the goods purchased and services rendered.Negative publicity generated as a result of fraudulent or deceptive conduct by third parties could damage our reputation, harm our business anddiminish the value of our brand name. We expect to continue to receive from customers requests for reimbursement or threats of legal actionagainst us if no reimbursement is made. We depend upon third-party delivery services to deliver our products to our customers on a timely and consistent basis. A deteriorationin our relationship with any one of these third parties could decrease our ability to track shipments, cause shipment delays, andincrease our shipping costs and the number of damaged products. We rely upon multiple third parties for the shipment of our products. Because we do not have a written long-term agreement with any of thesethird parties, we cannot be sure that these relationships will continue on terms favorable to us, if at all. Unexpected increases in shipping costs ordelivery times, particularly during the holiday season, could harm our business, prospects, financial condition and results of operations. If ourrelationships with these third parties are terminated or impaired or if these third parties are unable to deliver products for us, whether through laborshortage, slow down or stoppage, deteriorating financial or business condition, responses to terrorist attacks or for any other reason, we would berequired to use alternative carriers for the shipment of products to our customers. We may be unable to engage alternative carriers on a timelybasis or upon terms favorable to us. Changing carriers would likely have a negative effect on our business, prospects, operating results andfinancial 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 dissatisfaction.Our operating results depend on our Websites, network infrastructure and transaction-processing systems. Capacity constraints orsystem failures would harm our business, prospects, results of operations and financial condition. Any system interruptions that result in the unavailability of our Websites or reduced performance of our transaction systems would reduceour transaction volume and the attractiveness of the services that we provide to suppliers and third parties and would harm our business, operatingresults and financial condition. We use internally developed systems for our Websites and certain aspects of transaction processing, including customer profiling and orderverifications. 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 customers substantially increases, we will need to further expand andupgrade our technology, transaction processing systems and network infrastructure. We have experienced and expect to continue to experiencetemporary capacity constraints due to sharply increased traffic during sales or other promotions and during the holiday shopping season. Capacityconstraints can cause unanticipated system disruptions, slower response times, degradation in levels of customer service, impaired quality anddelays in reporting accurate financial information.17 Our transaction processing systems and network infrastructure may be unable to accommodate increases in traffic in the future. We may beunable to project accurately the rate or timing of traffic increases or successfully upgrade our systems and infrastructure to accommodate futuretraffic levels on our Websites. In addition, we may be unable to upgrade and expand our transaction processing systems in an effective and timelymanner or to integrate any newly developed or purchased functionality with our existing systems. Any inability to do so may cause unanticipatedsystem disruptions, slower response times, degradation in levels of customer service, impaired quality and speed of order fulfillment or delays inreporting accurate financial information.We may be unable to manage expansion into new business areas which could harm our business operations and reputation. Our long-term strategic plan involves expansion of our operations in the B2B merchandise liquidation market, entering into agreements toprovide products and services to retail chains and other businesses, and possible expansion into additional markets. We cannot assure you thatour efforts to expand our business in this manner will succeed or that we will be successful in managing agreements to provide products andservices to retail chains and other businesses. To date, we have expended significant financial and management resources developing our B2Boperations. Our failure to succeed in this market or other markets may harm our business, prospects, financial condition and results of operation.The exclusivity provisions of our Safeway agreement prevent us from providing similar products to stores having greater than 400 stores in thedrug, mass merchandising, grocery, club or warehouse store categories, which may adversely affect our ability to grow and expand our B2Bbusiness. The Safeway agreement expires on February 26, 2004, and we do not intend to renew it. We may choose to expand our operations bydeveloping new Websites, promoting new or complementary products or sales formats, such as our recent addition of travel product offerings,expanding the breadth and depth of products and services offered or expanding our market presence through relationships with third parties. Inaddition, we may pursue the acquisition of new or complementary businesses or technologies, although we have no present understandings,commitments or agreements with respect to any material acquisitions or investments. We cannot assure you that we would be able to expand ourefforts and operations in a cost-effective or timely manner or that any such efforts would increase overall market acceptance. Furthermore, anynew business or Website we launch that is not favorably received by consumers could damage our reputation or the Overstock brand. We mayexpand the number of categories of products we carry on our Websites, and these and any other expansions of our operations would also requiresignificant additional expenses and development and would strain our management, financial and operational resources. The lack of marketacceptance of such efforts or our inability to generate satisfactory revenues from such expanded services or products to offset their cost couldharm our business, prospects, financial condition and results of operations.We may not be able to compete successfully against existing or future competitors. The online liquidation services market is new, rapidly evolving and intensely competitive. Barriers to entry are minimal, and current and newcompetitors can launch new Websites at a relatively low cost. Our consumer Website currently competes with:•other online liquidation e-tailers, such as SmartBargains; •traditional retailers and liquidators, such as Ross Stores, Inc., Walmart Stores, Inc. and TJX Companies, Inc.; and traditional retailers and liquidators, such as Ross Stores, Inc., Walmart Stores, Inc. and TJX Companies, Inc.; and •online retailers and marketplaces such as Amazon.com, Inc., Buy.com, Inc. and eBay, Inc., which have discount departments. Our B2B Website competes with liquidation "brokers" and retailers and online marketplaces such as eBay, Inc.18 We expect the online liquidation services market to become even more competitive as traditional liquidators and online retailers continue todevelop services that compete with our services. In addition, manufacturers and retailers may decide to create their own Websites to sell their ownexcess inventory and the excess inventory of third parties. Competitive pressures created by any one of our competitors, or by our competitorscollectively, could harm our business, prospects, financial condition and results of operations. Further, as a strategic response to changes in the competitive environment, we may from time to time make certain pricing, service ormarketing decisions or acquisitions that could harm our business, prospects, financial condition and results of operations. For example, to theextent that we enter new lines of businesses such as third-party logistics, online auction services or discount brick and mortar retail, we would becompeting with large established businesses such as APL Logistics, Ltd., eBay, Inc., Ross Stores, Inc. and TJX Companies, Inc., respectively. Many of our current and potential competitors described above have longer operating histories, larger customer bases, greater brandrecognition and significantly greater financial, marketing and other resources than we do. In addition, online retailers and liquidation e-tailers maybe acquired by, receive investments from or enter into other commercial relationships with larger, well-established and well-financed companies.Some of our competitors may be able to secure merchandise from manufacturers on more favorable terms, devote greater resources to marketingand promotional campaigns, adopt more aggressive pricing or inventory availability policies and devote substantially more resources to Websiteand systems development than we do. Increased competition may result in reduced operating margins, loss of market share and a diminishedbrand franchise. We cannot assure you that we will be able to compete successfully against current and future competitors.A significant number of merchandise returns could harm our business, financial condition and results of operations. We allow our customers to return products and, beginning July 1, 2003, we started accepting returns of products sold through our fulfillmentpartners. Our ability to handle a large volume of returns is unproven. In addition, any policies intended to reduce the number of product returns mayresult in customer dissatisfaction and fewer return customers. If merchandise returns are significant, our business, financial condition and resultsof operations could be harmed.If the products that we offer on our Websites do not reflect our customers' tastes and preferences, our sales and profit margins woulddecrease. Our success depends in part on our ability to offer products that reflect consumers' tastes and preferences. Consumers' tastes are subject tofrequent, significant and sometimes unpredictable changes. Because the products that we sell typically consist of manufacturers' and retailers'excess inventory, we have limited control over the specific products that we are able to offer for sale. If our merchandise fails to satisfycustomers' tastes or respond to changes in customer preferences, our sales could suffer and we could be required to mark down unsold inventorywhich would depress our profit margins. In addition, any failure to offer products in line with customers' preferences could allow our competitors togain market share. This could have an adverse effect on our business, results of operations and financial condition.If the single facility where substantially all of our computer and communications hardware is located fails, our business, results ofoperations and financial condition will be harmed. Our success, and, in particular, our ability to successfully receive and fulfill orders and provide high-quality customer service, largelydepends on the efficient and uninterrupted operation of our computer and communications hardware systems. Substantially all of our computer andcommunications19 hardware is located at a single leased facility in Salt Lake City, Utah. Our systems and operations are vulnerable to damage or interruption fromfire, flood, power loss, telecommunications failure, terrorist attacks, acts of war, break-ins, earthquake and similar events. We do not presentlyhave redundant systems in multiple locations or a formal disaster recovery plan and our business interruption insurance may be insufficient tocompensate us for losses that may occur. Despite the implementation of network security measures, our servers are vulnerable to computerviruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays, loss of critical data or the inability toaccept and fulfill customer orders. The occurrence of any of the foregoing risks could harm our business, prospects, financial condition and resultsof operations.We may be unable to protect our proprietary technology or keep up with that of our competitors. Our success depends to a significant degree upon the protection of our software and other proprietary intellectual property rights. We may beunable to deter misappropriation of our proprietary information, detect unauthorized use and take appropriate steps to enforce our intellectualproperty rights. In addition, our competitors could, without violating our proprietary rights, develop technologies that are as good as or better thanour technology. Our failure to protect our software and other proprietary intellectual property rights or to develop technologies that are as good as ourcompetitors' could put us at a disadvantage to our competitors. In addition, the failure of the third parties whose products we offer for sale on ourWebsites to protect their intellectual property rights, including their domain names, could impair our operations. These failures could harm ourbusiness, results of operations and financial condition.If we do not respond to rapid technological changes, our services could become obsolete and we could lose customers. To remain competitive, we must continue to enhance and improve the functionality and features of our e-commerce businesses. We mayface material delays in introducing new services, products and enhancements. If this happens, our customers may forgo the use of our Websitesand use those of our competitors. The Internet and the online commerce industry are rapidly changing. If competitors introduce new products andservices using new technologies or if new industry standards and practices emerge, our existing Websites and our proprietary technology andsystems may become obsolete. Our failure to respond to technological change or to adequately maintain, upgrade and develop our computernetwork and the systems used to process customers' orders and payments could harm our business, prospects, financial condition and results ofoperations.Issuances of our securities are subject to federal and state securities laws, and certain holders of common stock issued by us may beentitled to rescind their purchases. Issuances of securities are subject to federal and state securities laws. From November 1999 through September 2000, we offered and soldcommon stock to investors in various states. Certain of those offerings may not have complied with various requirements of applicable statesecurities laws. In such situations a number of remedies may be available to regulatory authorities and the investors who purchased commonstock in those offerings, including, without limitation, a right of rescission, civil penalties, seizure of our assets, a restraining order or injunction,and a court order to pay restitution and costs. As a result, certain investors in our common stock may be entitled to return their shares toOverstock and receive from us the full price they paid, plus interest, which we estimate to be an aggregate amount of approximately $3.0 million atDecember 31, 2003.20We face risks relating to our inventory. We directly purchase some of the merchandise that we sell on our Websites. We assume the inventory damage, theft and obsolescencerisks, as well as price erosion risks for products that we purchase directly. These risks are especially significant because some of themerchandise we sell on our Websites are characterized by rapid technological change, obsolescence and price erosion (for example, computerhardware, software and consumer electronics), and because we sometimes make large purchases of particular types of inventory. In addition, weoften do not receive warranties on the merchandise we purchase. Further, beginning July 1, 2003, we started accepting returns of products soldthrough our fulfillment partners, and we have the risk of reselling the returned products. In the recent past, we have recorded charges for obsolete inventory and have had to sell certain merchandise at a discount or loss. It isimpossible to determine with certainty whether an item will sell for more than the price we pay for it. Because we rely heavily on purchasedinventory, our success will depend on our ability to liquidate our inventory rapidly, the ability of our buying staff to purchase inventory at attractiveprices relative to its resale value and our ability to manage customer returns and the shrinkage resulting from theft, loss and misrecording ofinventory. If we are unsuccessful in any of these areas, we may be forced to sell our inventory at a discount or loss.We may be liable if third parties misappropriate our customers' personal information. If third parties are able to penetrate our network security or otherwise misappropriate our customers' personal information or credit cardinformation, or if we give third parties improper access to our customers' personal information or credit card information, we could be subject toliability. This liability could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims. Thisliability could also include claims for other misuses of personal information, including unauthorized marketing purposes. These claims could resultin litigation. Liability for misappropriation of this information could adversely affect our business. In addition, the Federal Trade Commission andstate agencies have been investigating various Internet companies regarding their use of personal information. We could incur additional expensesif new regulations regarding the use of personal information are introduced or if government agencies investigate our privacy practices. We rely on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to effectsecure transmission of confidential information such as customer credit card numbers. We cannot assure you that advances in computercapabilities, new discoveries in the field of cryptography or other events or developments will not result in a compromise or breach of thealgorithms that we use to protect customer transaction data. If any such compromise of our security were to occur, it could harm our reputation,business, prospects, financial condition and results of operations. A party who is able to circumvent our security measures could misappropriateproprietary information or cause interruptions in our operations. We may be required to expend significant capital and other resources to protectagainst such security breaches or to alleviate problems caused by such breaches. We cannot assure you that our security measures will preventsecurity breaches or that failure to prevent such security breaches will not harm our business, prospects, financial condition and results ofoperations.We may expand our international business, causing our business to become increasingly susceptible to numerous internationalbusiness risks and challenges that could affect our profitability. We have begun to expand into international markets, and in the future we may do so more aggressively. International sales and transactionsare subject to inherent risks and challenges that could adversely affect our profitability, including:•the need to develop new supplier and manufacturer relationships;21•unexpected changes in international regulatory requirements and tariffs; •difficulties in staffing and managing foreign operations; •longer payment cycles from credit card companies; •greater difficulty in accounts receivable collection; •potential adverse tax consequences; •price controls or other restrictions on foreign currency; and •difficulties in obtaining export and import licenses. To the extent we generate international sales and transactions in the future, any negative impact on our international operations couldnegatively impact our business. In particular, gains and losses on the conversion of foreign payments into United States dollars may contribute tofluctuations in our results of operations and fluctuating exchange rates could cause reduced gross revenues and/or gross margins from non-dollar-denominated international sales.We may be subject to product liability claims that could be costly and time consuming. We sell products manufactured by third parties, some of which may be defective. If any product that we sell were to cause physical injury orinjury to property, the injured party or parties could bring claims against us as the retailer of the product. Our insurance coverage may not beadequate to cover every claim that could be asserted. If a successful claim were brought against us in excess of our insurance coverage, it couldadversely affect our business. Even unsuccessful claims could result in the expenditure of funds and management time and could have a negativeimpact on our business.We may not be able to obtain trademark protection for our marks, which could impede our efforts to build brand identity. We have filed trademark applications with the Patent and Trademark Office seeking registration of certain service marks or trademarks.There can be no assurance that our applications will be successful or that we will be able to secure significant protection for our service marks ortrademarks. 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 identity and possibly leading to customer confusion. Any claim by another party against us or customerconfusion related to our trademarks, or our failure to obtain trademark registration, could negatively affect our business.Risks Relating to the Internet IndustryOur success is tied to the continued use of the Internet and the adequacy of the Internet infrastructure. Our future revenues and profits, if any, substantially depend upon the continued widespread use of the Internet as an effective medium ofbusiness and communication. Factors which could reduce the widespread use of the Internet include:•actual or perceived lack of security of information or privacy protection; •possible disruptions, computer viruses or other damage to the Internet servers or to users' computers; and •excessive governmental regulation.22Customers may be unwilling to use the Internet to purchase goods. Our long-term future depends heavily upon the general public's willingness to use the Internet as a means to purchase goods. E-commerceremains a relatively new concept, and large numbers of customers may not begin or continue to use the Internet to purchase goods. The demandfor and acceptance of products sold over the Internet are highly uncertain, and most e-commerce businesses have a short track record. Ifconsumers are unwilling to use the Internet to conduct business, our business may not develop profitably.The security risks of e-commerce may discourage customers from purchasing goods from us. In order for the e-commerce market to develop successfully, we and other market participants must be able to transmit confidentialinformation securely over public networks. Third parties may have the technology or know-how to breach the security of customer transaction data.Any breach could cause customers to lose confidence in the security of our Websites and choose not to purchase from our Websites. If someoneis able to circumvent our security measures, he or she could destroy or steal valuable information or disrupt our operations. Concerns about thesecurity and privacy of transactions over the Internet could inhibit the growth of the Internet and e-commerce. Our security measures may noteffectively prohibit others from obtaining improper access to our information. Third parties may target our customers directly with fraudulent identitytheft schemes designed to appear as legitimate communications from us. Any security breach or fraud perpetrated on our customers could exposeus to increased costs and to risks of loss, litigation and liability and could seriously disrupt our operations.Credit card fraud could adversely affect our business. We do not carry insurance against the risk of credit card fraud, so the failure to adequately control fraudulent credit card transactions couldreduce our net revenues and our gross margin. We have implemented technology to help us detect the fraudulent use of credit card information.However, we may in the future suffer losses as a result of orders placed with fraudulent credit card data even though the associated financialinstitution approved payment of the orders. Under current credit card practices, we may be liable for fraudulent credit card transactions because wedo not obtain a cardholder's signature. If we are unable to detect or control credit card fraud, our liability for these transactions could harm ourbusiness, results of operation or financial condition.If one or more states successfully assert that we should collect sales or other taxes on the sale of our merchandise or the merchandiseof third parties that we offer for sale on our Websites, our business could be harmed. We do not currently collect sales or other similar taxes for physical shipments of goods into states other than Utah. One or more local, stateor foreign jurisdictions may seek to impose sales tax collection obligations on us and other out-of-state companies that engage in online commerce. Our business could be adversely affected if one or more states or any foreign country successfully asserts that we should collectsales or other taxes on the sale of our merchandise.Existing or future government regulation could harm our business. We are subject to the same federal, state and local laws as other companies conducting business on the Internet. Today there are relativelyfew laws specifically directed towards conducting business on the Internet. However, due to the increasing popularity and use of the Internet,many laws and regulations relating to the Internet are being debated at the state and federal levels. These laws and regulations could cover issuessuch as user privacy, freedom of expression, pricing, fraud, quality of products and services, taxation, advertising, intellectual property rights andinformation security. Applicability to the Internet of existing laws governing issues such as property ownership, copyrights23 and other intellectual property issues, taxation, libel, obscenity and personal privacy could also harm our business. For example, United Statesand foreign laws regulate our ability to use customer information and to develop, buy and sell mailing lists. The vast majority of these laws wereadopted prior to the advent of the Internet, and do not contemplate or address the unique issues raised thereby. Those laws that do reference theInternet, such as the Digital Millennium Copyright Act and the CAN-SPAM Act of 2003, are only beginning to be interpreted by the courts and theirapplicability and reach are therefore uncertain. These current and future laws and regulations could harm our business, results of operation andfinancial condition.Laws or regulations relating to privacy and data protection may adversely affect the growth of our Internet business or our marketingefforts. We are subject to increasing regulation at the federal, state and international levels relating to privacy and the use of personal userinformation. For example, we are subject to various telemarketing laws that regulate the manner in which we may solicit future suppliers andcustomers. Such regulations, along with increased governmental or private enforcement, may increase the cost of growing our business. Inaddition, several states have proposed legislation that would limit the uses of personal user information gathered online or require online servicesto establish privacy policies. The Federal Trade Commission has adopted regulations regarding the collection and use of personal identifyinginformation obtained from children under 13. Bills proposed in Congress would extend online privacy protections to adults. Moreover, proposedlegislation in this country and existing laws in foreign countries require companies to establish procedures to notify users of privacy and securitypolicies, obtain consent from users for collection and use of personal information, and/or provide users with the ability to access, correct anddelete personal information stored by us. We could become a party to a similar enforcement proceeding. These data protection regulations andenforcement efforts may restrict our ability to collect demographic and personal information from users, which could be costly or harm ourmarketing efforts.Risks Relating to the Securities Markets and Ownership of Our Common StockOur stock price may be volatile and you may lose all or a part of your investment. Our common stock has been publicly traded only since May 30, 2002. The market price of our common stock has been subject to significantfluctuations since the date of our initial public offering. These fluctuations could continue. It is possible that in some future periods our results ofoperations may be below the expectations of public market analysts and investors. If this occurs, our stock price may decline. Among the factorsthat could affect our stock price are as follows:•changes in securities analysts' recommendations or estimates of our financial performance or publication of research reports byanalysts; •changes in market valuations of similar companies; •announcements by us or our competitors of significant contracts, acquisitions, commercial relationships, joint ventures or capitalcommitments; •general market conditions; •actual or anticipated fluctuations in our operating results; •intellectual property or litigation developments; •changes in our management team; •economic factors unrelated to our performance; and •our issuance of additional shares of stock.24 In addition, the stock markets have experienced significant price and trading volume fluctuations. These broad market fluctuations mayadversely affect the trading price of our common stock. In the past, following periods of volatility in the market price of a public company'ssecurities, securities class action litigation has often been instituted against that company. Such litigation could result in substantial cost and adiversion of management's attention and resources.We do not intend to pay dividends on our non-redeemable common stock, and you may lose the entire amount of your investment. We have never declared or paid any cash dividends on our non-redeemable common stock and do not intend to pay dividends on our non-redeemable common stock for the foreseeable future. We intend to invest our future earnings, if any, to fund our growth. Therefore, you will notreceive any funds without selling your shares. We cannot assure that you will receive a positive return on your investment when you sell yourshares or that you will not lose the entire amount of your investment.Our Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws and the Delaware General Corporation Lawcontain anti-takeover provisions which could discourage or prevent a takeover, even if an acquisition would be beneficial to ourstockholders. Several provisions of our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws could discourage potentialacquisition proposals and could delay or prevent a change in control of our company even if that change in control would be beneficial to ourstockholders. For example, only one-third of our board of directors will be elected at each of our annual meetings of stockholders, which will makeit more difficult for a potential acquirer to change the management of our company, even after acquiring a majority of the shares of our commonstock. These provisions, which cannot be amended without the approval of two-thirds of our stockholders, could diminish the opportunities for astockholder to participate in tender offers, including tender offers at a price above the then current market value of our common stock. In addition,our board of directors, without further stockholder approval, may issue preferred stock, with such terms as the board of directors may determine,that could have the effect of delaying or preventing a change in control of our company. The issuance of preferred stock could also adverselyaffect the voting powers of the holders of common stock, including the loss of voting control to others. We are also afforded the protections ofSection 203 of the Delaware General Corporation Law, which could delay or prevent a change in control of our company or could impede a merger,consolidation, takeover or other business combination involving our company or discourage a potential acquirer from making a tender offer orotherwise attempting to obtain control of our company.Available Information Our Internet website address is http://www.overstock.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, CurrentReports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934are available through our Internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.Our Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report onForm 10-K. ITEM 2. PROPERTIES We lease approximately 33,000 square feet of office space for our corporate headquarters and customer service operations in Salt Lake City,Utah, and we lease an approximately 354,000 square foot warehouse and distribution facility also in Salt Lake City, Utah. We believe that thesefacilities will be sufficient for our needs for the next twelve months.25 ITEM 3. LEGAL PROCEEDINGS From time to time, we receive claims of and become subject to consumer protection, employment, intellectual property and other commerciallitigation related to the conduct of our business. Such litigation could be costly and time consuming and could divert our management and keypersonnel from our business operations. The uncertainty of litigation increases these risks. In connection with such litigation, we may be subject tosignificant damages or equitable remedies relating to the operation of our business and the sale of products on our websites. Any such litigationmay materially harm our business, results of operations, financial condition and cash flows. In October 2003, Tiffany (NJ) Inc. and Tiffany and Company filed a complaint against us in the United States District Court for the SouthernDistrict of New York alleging that we have distributed counterfeit and otherwise unauthorized Tiffany product in violation of federal copyright andtrademark law and related state laws. The complaint seeks statutory and other damages in an unspecified amount and injunctive relief. Althoughwe have filed an answer and believe we have defenses to the allegations and intend to pursue them vigorously, the Tiffany lawsuit is in the earlystages of discovery, and we do not have sufficient information to assess the validity of the claims or the amount of potential damages. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 2003.26PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDERMATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is traded on the Nasdaq National Market under the symbol "OSTK." Prior to May 30, 2002, there was no public market forour common stock. The following table sets forth, for the periods indicated, the high and low closing prices per share for our common stock asreported on the Nasdaq National Market since May 30, 2002. CommonStock Price High LowYear Ended December 31, 2002 Second Quarter (from May 30, 2002) $14.60 $12.25 Third Quarter 14.55 5.40 Fourth Quarter 15.43 4.41Year Ended December 31, 2003 First Quarter 18.11 9.74 Second Quarter 14.69 8.00 Third Quarter 17.24 10.47 Fourth Quarter 20.92 12.84 As of December 31, 2003, there were approximately 165 holders of record of our common stock. Because many of our shares of commonstock are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of shareholders representedby these record holders. We have never declared or paid any cash dividends on shares of our non-redeemable common stock. We currently intend to retain ourearnings for future growth and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends willbe at the discretion of our board of directors and will depend on our results of operations, financial conditions, contractual and legal restrictions andother factors the board deems relevant. During the fourth quarter of 2003, there were no purchases of shares of the Company's common stock made by or on behalf of the Companyor any "affiliated purchaser" as defined in Rule 10b-18(a)(3) under the Exchange Act. ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data as of December 31, 2002 and 2003 and for each of the three years in the period endedDecember 31, 2003, are derived from our consolidated financial statements and are included elsewhere in this Form 10-K. The consolidatedfinancial data as of December 31, 1999, 2000 and 2001 and for the years ended December 31, 1999 and 2000, are derived from consolidatedfinancial statements, but are not contained herein. The historical results do not necessarily indicate results expected for any future period. Thisinformation should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of27 Operations" and the Consolidated Financial Statements and the related notes thereto included elsewhere in this Form 10-K. Year ended December 31, 1999 2000 2001 2002 2003 (in thousands, except per share data) Consolidated Statement of Operations Data: Direct revenue $1,835 $21,762 $35,243 $77,943 $136,592 Fulfillment partner revenue — 867 3,965 12,379 100,811 Warehouse revenue — 2,894 795 1,462 1,542 Total revenue 1,835 25,523 40,003 91,784 238,945 Cost of goods sold(1) 2,029 27,812 34,640 73,441 213,492 Gross profit (loss) (194) (2,289) 5,363 18,343 25,453 Operating expenses: Sales and marketing expenses(2) 4,948 11,376 5,784 8,669 20,173 General and administrative expenses(2) 3,230 7,556 9,441 10,825 16,911 Amortization of goodwill — 226 3,056 — — Amortization of stock-based compensation — — 649 2,903 756 Total operating expenses 8,178 19,158 18,930 22,397 37,840 Operating loss (8,372) (21,447) (13,567) (4,054) (12,387)Interest income 52 241 461 403 461 Interest expense (37) (73) (729) (465) (76)Other income (expense), net — (33) 29 (444) 115 Net loss (8,357) (21,312) (13,806) (4,560) (11,887)Deemed dividend related to redeemable commonstock (4) (210) (404) (406) (262) Deemed dividend related to beneficial conversionfeature of preferred stock — — — (6,607) — Net loss attributable to common shares $(8,361)$(21,522)$(14,210)$(11,573)$(12,149) Net loss per common share—basic and diluted $(4.63)$(3.63)$(1.29)$(0.88)$(0.75)Weighted average common shares outstanding—basicand diluted 1,804 5,922 10,998 13,108 16,198 (1) Amounts include stock based compensation of $— $— $78 $373 $90 (2) Amounts exclude stock-based compensation asfollows: Sales and marketing expenses $— $— $14 $83 $22 General and administrative expenses — — 635 2,820 734 $— $— $649 $2,903 $756 28 As of December 31, 1999 2000 2001 2002 2003 (in thousands)Balance Sheet Data: Cash and cash equivalents $2,563 $8,348 $3,729 $11,059 $28,846Marketable securities — — — 21,603 11,500Working capital 1,253 6,440 3,071 35,679 45,284Total assets 5,735 30,401 21,714 63,956 97,732Total indebtedness 378 3,591 4,677 182 161Redeemable common stock 505 4,930 5,284 4,363 2,978Stockholders' equity 1,835 12,349 5,980 39,271 54,914 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATION The following Management's Discussion and Analysis of Financial Condition and Results of Operation should be read in conjunction with ourConsolidated Financial Statements and the related Notes thereto. This discussion contains forward-looking statements based upon currentexpectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions, as set forth under "Special NoteRegarding Forward-Looking Statements." Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth in the following discussion and under "Risk Factors" and elsewhere inthis Form 10-K.Overview We are an online "closeout" retailer offering discount brand name merchandise, including bed-and-bath goods, kitchenware, watches, jewelry,electronics, sporting goods, designer accessories and travel. Our company, based in Salt Lake City, Utah, was founded in 1997, and we launchedour first Website through which customers could purchase products in March 1999. Our revenue is comprised of direct revenue, fulfillment partner revenue and warehouse revenue. During 2003 no single customer accountedfor more than 1% of our total revenue other than Safeway, Inc., which accounted for 9% of our total revenue. Direct revenue includes sales madeto individual consumers and businesses, which are fulfilled from our warehouse in Salt Lake City, Utah. We generate business-to-business (B2B)sales when we contact retailers by phone and e-mail and offer them our merchandise below wholesale prices, allowing them an opportunity to bemore price-competitive in their local markets. After we establish a relationship with a B2B client, the client sometimes places subsequent ordersdirectly through our B2B Website. Our B2B calling effort began in October 2001, so our historical direct revenue has predominantly been based onindividual consumer purchases made directly through our consumer Website. Our fulfillment partner revenue is derived from two sources, consumer fulfillment partner revenue and B2B fulfillment partner revenue.Consumer fulfillment partner revenue is generated when we sell merchandise of other retailers, cataloguers or manufacturers ("fulfillment partners")through our consumer Websites. Prior to July 1, 2003, we did not own or physically handle the merchandise we sold in these transactions, as themerchandise was shipped directly by a third party vendor, which also handled all customer returns related to those sales. Beginning July 1, 2003,we took responsibility for all returned items relating to these sales and we now handle the resale of any returned items. As a result, beginningJuly 1, 2003, we are considered to be the primary obligor for these sales transactions, and we assume the risk of loss on the returned items. As aconsequence, we now record revenue from sales transactions involving our fulfillment partners (excluding travel products) on a gross basis, ratherthan recording a commission on sales as we did prior to July 1, 2003. Similar to the manner in which we generate consumer fulfillment partnerrevenue, we generate B2B fulfillment partner revenue when29 we sell the merchandise of third parties through our B2B Website. Our use of the term "partner" or "fulfillment partner" does not mean that we haveformed any legal partnerships with any of our fulfillment partners. During the fourth quarter of 2003, we added a discount travel store to our Website. We use fulfillment partners to supply the travel products(flights, hotels, rental cars, etc.) in our store. For the products sold in our travel store, we do not currently have inventory risk or pricing control,and do not provide customer service. Therefore, for these sales we are not considered to be the primary obligor, and record only our commissionas revenue. Our warehouse revenue is derived primarily from sales of products that cannot be economically sold on our Websites due to their low pricepoints, bulk, irregular size or other factors. Historically, we held our warehouse sales in various physical locations. We held our first warehousesale from November 2000 to January 2001, primarily to liquidate residual products from the purchase of the entire inventory of a distressed toyretailer. We initiated a second warehouse sale in February 2002, primarily to liquidate residual products from our acquisition of Gear.com. Salesfrom our warehouse store in 2003 accounted for less than 1% of total revenue. We closed the warehouse store in January 2004. Our revenue is recorded net of returns, coupons and other discounts. In February 2002, we implemented a policy intended to reduce thenumber of returned products. This new policy provides for a $4.95 restocking fee and the provision that we will not accept product returns initiatedmore than fifteen days after the shipment date. We charge a 15% restocking fee (instead of the $4.95 handling fee) on all returned items from theElectronics & Computers department. Cost of goods sold consists of the cost of the product, as well as inbound and outbound freight, fixed warehouse costs, warehouse handlingcosts, credit card fees, and customer service costs. B2B gross margins are typically less than individual consumer gross margins. Therefore,future overall gross margins will be impacted by the blend of net revenues from the consumer and B2B sales channels. Cost of goods sold alsoincludes related stock-based compensation for each respective period. Sales and marketing expenses consist primarily of advertising, public relations and promotional expenditures, as well as payroll and relatedexpenses for personnel engaged in marketing and selling activities. Advertising expense is the largest component of our sales and marketingexpenses and is primarily attributable to expenditures related to online marketing activities and our offline national radio and television brandingcampaign launched during the third quarter of 2003. For example, our advertising expenses totaled approximately $4.8 million, $7.0 million and$18.6 million during the years ended December 31, 2001, 2002 and 2003, respectively. We expect our sales and marketing expenses to increasein future periods on an absolute dollar basis as we expect to continue to increase our online marketing efforts. General and administrative expenses consist of wages and benefits for executive, accounting, technology, merchandising and administrativepersonnel, rents and utilities, travel and entertainment, depreciation and amortization and other general corporate expenses. Amortization of goodwill during 2001 resulted from the acquisition of Gear.com, Inc. in November 2000. We adopted SFAS No. 142 for thefiscal year beginning January 1, 2002. Under this pronouncement, the remaining goodwill is not amortized, but is evaluated at least annually forimpairment. There were no impairments of goodwill during the years ended December 31, 2002 and 2003. We have recorded no provision or benefit for federal and state income taxes as we have incurred net operating losses since inception. As ofDecember 31, 2002 and 2003, we had $51.3 million and $62.4 million, respectively, of net operating loss carryforwards, of which $14.4 million issubject to limitation for those respective years. These net operating loss carryforwards will begin to expire in 2019. We have provided a fullvaluation allowance on the deferred tax asset, consisting primarily of net operating loss carryforwards, because of uncertainty regarding itsrealizability.30 Both direct and fulfillment partner revenue are seasonal, with revenues historically being the highest in the fourth quarter, reflecting higherconsumer holiday spending. We anticipate this will continue in the foreseeable future. With the exception of our acquisition of Gear.com, we haveachieved our historical growth from internal operations.Executive Commentary The following executive commentary is intended to provide investors with a view of our business through the eyes of our management. As anexecutive commentary, it necessarily focuses on selected aspects of our business, including the following:•The difference between our revenue reported under generally accepted accounting principles ("GAAP") and our gross merchandisesales; •Changes we made to our merchandise returns policies during 2003 that affect our GAAP revenues; •The increases in our gross merchandise sales and factors contributing to the increases; •Certain issues relating to our operations; •Certain issues relating to our expenses; •Certain issues relating to our capital resources and liquidity; and •The status of certain of our strategic projects. This executive commentary is intended as a supplement to, but not a substitute for, the more detailed discussion of our business includedelsewhere herein. Investors are cautioned to read our entire Management's Discussion and Analysis of Financial Condition and Results ofOperation, as well as our audited financial statements, and the discussion of our business and risk factors and other information includedelsewhere in this report. This executive commentary includes forward-looking statements, and investors are cautioned to read the Special Note Regarding Forward-Looking Statements included elsewhere in this report. Commentary—Changes to our Returns Policies. At the beginning of the third quarter of 2003, we changed our merchandise return policiesand procedures to permit our customers to return all items directly to us, rather than to the fulfillment partner who may have shipped themerchandise to the customer, and we are now considered the primary obligor. As a result, our GAAP revenue increased significantly and grossmargins decreased significantly in the third and fourth quarters compared to previous reporting periods. Investors should understand that asignificant portion of the increase in our GAAP revenues resulted solely from this change, and consequently, that gross merchandise salescomparisons year-over-year may be more informative than GAAP revenue comparisons for the affected periods. We also believe gross profit dollarcomparisons year-over-year may be more informative than gross margin percentage comparisons. Commentary—GAAP revenue and Gross Merchandise Sales. Management believes that to understand our business and our financialstatements, investors should understand the difference between our gross revenues as recorded under generally accepted accounting principles,and the non-GAAP measure we call gross merchandise sales. Gross merchandise sales ("GMS") represents the gross sales price of all salestransactions, including those for which the Company has recorded only a commission under generally accepted accounting principles, andtherefore differs from GAAP revenue. Management believes that gross merchandise sales provides useful information to investors because itrepresents the total sales price of the merchandise sold via the Overstock websites or through our other business-to-business sales channels,regardless of the amount of GAAP revenue recorded by Overstock on those sales, which varies, depending on, among other things, the returnspolicies applicable to the31 merchandise sold via the website. Management uses the measure of gross merchandise sales for internal planning purposes, including measuringthe Company's growth, measuring the effectiveness of marketing expenditures, and capacity planning for information technology, customer serviceand logistics. In the future, our GAAP revenues are likely to constitute approximately 90-95% of our gross merchandise sales, and the differencebetween the two measures will be less significant than in the prior years. The following table reconciles our gross merchandise sales to our GAAP revenues for the quarter and year ended December 31, 2003 (inmillions). Three months endedDecember 31, Year endedDecember 31, 2002 2003 2002 2003 Total revenue $41.5 $123.2 $91.8 $238.9Add: obligations payable to third parties upon sale of third-party merchandise 22.0 — 51.0 39.9Add: sales returns and discounts 3.7 7.0 11.7 16.0 Gross merchandise sales $67.2 $130.2 $154.5 $294.8 As mentioned above, we believe gross profit dollar comparisons year-over-year may be more informative than gross margin percentagescomparisons. In the fourth quarter of 2003, our gross profits increased to $11.8 million from $9.1 million in the fourth quarter of 2002. Note that thisincrease is, on a percentage basis, much smaller than our GMS growth (gross profits increased 29%, while our GMS increased 94%). For the yearended December 31, 2003, gross profits increased to $25.5 million from $18.3 million (gross profits increased 39%, while our GMS increased91%). The difference is accounted for partially by our decision to sell books, music, and videos at extremely slim margins, and also by some ofthe expense control issues discussed below. Commentary—Increases in Gross Merchandise Sales. In 2003, the Company experienced year-over-year growth in GMS of almost 91%. Inthe first two quarters of 2003, our year-over-year growth in GMS was 138% and 94%, but dropped in the third quarter to 57%. In the fourth quarterof 2003, our GMS growth increased to 94% over the fourth quarter of 2002. This was due to several factors:•Customer Acquisition and Marketing—We attracted 744,000 new customers during the fourth quarter of 2003, bringing the number ofcustomers who have bought from us to just over three million. Our average cost per new customer, or customer acquisition cost("CPA") as it is called in our industry, was $13.19 for the fourth quarter, compared with $14.06, $8.69 and $10.97 in the first threequarters of 2003, and $11.20 in the previous year fourth quarter. CPA is calculated by taking our total marketing expenses, excludingonly our B2B sales force compensation costs (which represented less than 1% of total marketing expenses), divided by the numberof new business to consumer customers ("B2C"). Given that our CPA for the fourth quarter 2003 included a national branding effortthat accounted for almost half of our total marketing expenses in the quarter, we consider this result very good. Historically, we have acquired new customers almost exclusively through various online advertising channels. We try to generate at least adollar of gross profit for every dollar we spend for online marketing, so that our online marketing pays for itself on the first purchase. We havedifficulty finding sufficient advertising channels that meet our objective, and not all of our advertising channels always reach it. However, if we areable to locate channels that meet our standards, we may spend as much as $50 million on online advertising in 2004.32 As mentioned above, we made a significant investment in a national television and radio branding effort in the fourth quarter of 2003. Basedon independent surveys that we commissioned over the course of the quarter, the public's reported awareness of our Website increasedsignificantly. According to the surveys, adult unprompted awareness of "Overstock.com" went from 4% to 14%, while adult prompted awarenesswent from 12% to 33% (for comparison, the same surveys show eBay and Amazon.com, with roughly 70% adult prompted awareness). Inaddition, we experienced significant increases in website traffic during the campaign, and based on our own statistical analysis of the traffic and resulting customers, we believe that we received approximately 50 to 70 cents in gross profits for every dollar we spent on television and radioadvertising. This is below our online marketing standard. However, we believe that we realized other benefits from the national branding effort,including greater awareness with vendors and manufacturers. We also expect that the branding effort will increase the effectiveness of our onlineadvertising as more people recognize our name and have a better understanding of our product selection and pricing. We intend to decrease ourspending in this area in the first quarter of 2004, but expect to increase it again in the future.•Conversion—Our marketing efforts are designed to attract visitors to our Website. After we attract a visitor, we attempt to convertthe visitor into a purchaser. We are working to improve our conversion ratio by improving various aspects of our Website, includingthe improvements we made to the search function on our Website by installing an EasyAsk search engine during the third quarter of2003. We believe that we still have room for significant improvement in our search function. In addition, we have begun to developpersonalization and optimization algorithms that select products for customers and repeat visitors based on behavior and otherfactors. We are in the initial stages of this effort.Commentary—Operations•Warehouse—Approximately half of the product ordered from our Website is shipped from our Salt Lake City warehouse. Though wepublicize a standard of shipping within two business days of receipt of order, under our internal standards, we try to ship ordersreceived by 1:00 p.m. Mountain time the same day. Two weeks before Thanksgiving, when the surge of Christmas orders firststarted, we slipped a day behind our internal standard, and then even further behind during the Thanksgiving weekend. However, werecognized the problem, devoted significant executive and key employee time and attention to it, and by December 4 we weregenerally shipping within 36 hours of receipt of orders; by December 9 we were shipping within 24 hours of order, and byDecember 13, we were shipping the same day of the order. By the end of December, we were again shipping 99% of orders within24 hours, and 100% within 48 hours. •Customer Service—During the fourth quarter of 2003, we answered emails within 12 hours 85% of the time, and answered phonecalls within 30 seconds 85% of the time. We consider that good, but we consider some of our response times (hold times as long asthree minutes, for example) unacceptable. We are addressing this issue aggressively. •Information Technology—For our Website to handle the continued growth in 2003, we needed to expand our existing technologyinfrastructure. Rather than acquire a multi-million dollar Superdome or mainframe, we chose to implement a less-expensive, cuttingedge, 8-node database cluster (a "cluster" is a database distributed across multiple interconnected servers). In October, our systemwas beginning to reach its capacity constraints, and we switched over to the new database cluster. Over the fourth quarter ourinformation technology team refined this system with support from Oracle. In the process we experienced insignificant amounts ofdowntime, and we believe that we now have a more reliable and scalable system and Website.33Commentary—Expense discipline•Warehouse—As discussed above, as a result of falling a few days behind in fulfillment at the warehouse, we incurred additionalexpenses in order to ship packages faster. We estimate that we incurred a few hundred thousand dollars in expenses in order toquickly increase our shipping capacity and fulfill customer orders on a timely basis. •Customer Service—With the benefit of experience, we believe that we can reduce our costs of providing future customer service. Wehave now implemented changes, including the outsourcing of a portion of our customer service staff, that we believe will decreaseour overall cost per customer contact, while maintaining the level of customer service that we have historically provided. •Compensation—Our total compensation expense including benefits for 2003 was approximately $10.0 million. In early 2004 wereduced our staff, resulting in a reduction of our future compensation expense, on an annual basis, of approximately $1.5 million.Investors should note, however, that we will hire additional staff during 2004, and that we therefore may not realize a $1.5 millionreduction in our 2004 compensation expense compared with 2003. Further, we do not expect to make similar cost reductions infuture years.Commentary—Inventory, Liquidity and Related Matters•Inventory. We ended 2002 running low on inventory. An unexpectedly strong January 2003 depleted it further, and by February 2003we believe that our low inventory levels choked sales. In an effort to avoid a repeat of this situation, we ended 2003 with inventorysufficient to support growth. We believe that our current inventory level and selection are appropriate, with the possible exception ofour opportunistic purchase of over $5 million of Franck Muller watches in the closing weeks of 2003. We have limited experienceselling these watches, which typically sell for over $15,000 each. We believe that we now offer them at some of the lowest prices inthe world. •Cash and Marketable Securities. We ended 2003 with $40.3 million in cash and marketable securities, but at one point during thefourth quarter our cash was down to $9.7 million. There is an aspect of the cash flow of our business that is different than most otherbusinesses. A typical business running at breakeven profitability absorbs cash as it grows to fund increased working capital needs,and releases cash as it shrinks as working capital declines, all else being equal. Overstock is different: about half of our business isour "fulfillment partner" business, where we sell a product through our website and collect the cash from a credit card transactionwithin a few days, but pay our fulfillment partner 15 to 30 days later. Because we collect cash for the sale before we pay ourfulfillment partner, the fulfillment partner portion of our business generates temporary liquidity that we call float-cash. If we wererunning at break-even profitability but our fulfillment partner business were growing, our growth would generate float-cash. If weshrank, we would lose float-cash (again, all else being equal). This dynamic is the reverse of that displayed by the typical business.Investors should understand that a portion of the $40.3 million cash and marketable securities we held at December 31, 2003 was cash we owed to our fulfillment partners. Due to the seasonality of our business, our fulfillment partner business is expected toshrink in the first quarter of 2004, so we expect our cash balance to decrease during the first quarter of 2004 approximatelyproportionate with the decrease in sales by our fulfillment partners. •Capital Needs. In addition to the other matters discussed below under Liquidity and Capital Resources, management periodicallyanalyzes our capital resources, liquidity, and anticipated needs. One of the analyses our management performs periodicallyassumes that we will operate our business at break-even and grow 100% each year, and then assesses our need for capital34under those assumptions. As discussed above, since the fulfillment partner portion of our business generates float-cash as we grow,our need for additional capital may be less than the need of other businesses. However, as mentioned above, at our lowest point inthe fourth quarter, our cash balance was as low as $9.7 million. That may be insufficient in the future. We are not yet at break-even,as our GAAP loss in the fourth quarter of 2003 was 2.5% of revenue. We will continue to look at our capital needs and try to positionourselves so that we will be able to raise capital if circumstances are appropriate. In addition, we are in the process of obtaining aninventory line of credit.Commentary—Strategic projects Following is a brief update on some of our recent strategic projects, some of which are also discussed above.•Search Engine. As discussed above, we have implemented an "EasyAsk" search engine. We consider this superior to our oldsystem, but believe that we can continue to improve our search function substantially. •Branding Campaign. As discussed above, we launched our "Overstock.com—The Big O"-branding campaign through nationaltelevision and radio ads, and we believe that we realized significant benefits from this campaign. •Travel. We opened a travel department in the third quarter, which generated more than $1,000,000 of bookings in the fourth quarter.In 2003 we included only the net commissions realized on travel bookings in our GAAP revenues and in our gross merchandisesales. In 2003 our net commissions from the travel department were insignificant.Commentary—Worldstock One additional project to report on is our Worldstock department, which sells handmade goods made primarily in underdeveloped countriesthroughout the world. While representing only a couple percentage points of our overall sales, Worldstock has generated about $5 million inrevenue in the 27 months it has been open, with approximately 15% gross profit margins. Based on assumptions management considersreasonable, we estimate that our Worldstock department has lost a little less than $1 million since its inception (and its inventory now ties upapproximately another $500,000 in cash). Worldstock purchases products from about 4,000 artisans in the developing world and has been growingquickly. The balance of our Management's Discussion and Analysis of Financial Condition and Results of Operation provides further information aboutthe matters discussed above and other important matters affecting our business.Critical Accounting Policies Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United Statesof America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that we believe to bereasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Ourcritical accounting policies are as follows:•revenue recognition;35•estimating valuation allowances and accrued liabilities, specifically, the reserve for returns, the allowance for doubtful accounts andthe allowance for obsolete and damaged inventory; •accounting for income taxes; and •valuation of long-lived and intangible assets and goodwill. Revenue recognition. We derive our revenue from three sources: (i) direct revenue, which consists of merchandise sales made toconsumers and businesses that are fulfilled from our warehouse; (ii) fulfillment partner revenue, which consists of revenue from the sale ofmerchandise shipped by fulfillment partners directly to consumers and other businesses; and (iii) warehouse revenue, which consists of sales ofresidual products from large bulk purchases of inventory. Both direct revenue and fulfillment partner revenue are recorded net of returns, couponsredeemed by customers, and other discounts. With regards to our fulfillment partner revenue, prior to July 1, 2003, we did not own or physically handle the merchandise sold in thesetransactions, as the merchandise was shipped directly by a third party vendor, who also handled all customer returns related to those sales.Beginning July 1, 2003, we took responsibility for all returned items relating to these sales, and we now handle the resale of any returned items. As a result, beginning July 1, 2003, we are considered to be the primary obligor for these sales transactions, and we assume the risk of loss on thereturned items. We now record revenue from sales transactions involving our fulfillment partners on a gross basis, rather than recording acommission on sales as we did prior to July 1, 2003. Similar to the manner in which we generate consumer fulfillment partner revenue, wegenerate B2B fulfillment partner revenue when we sell the merchandise of third parties through our B2B Website. For sales transactions, we comply with the provisions of Staff Accounting Bulletin 101 "Revenue Recognition", as amended, which statesthat revenue should be recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists;(2) the product has been shipped and the customer takes ownership and assumes the risk of loss; (3) 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. Any amountsreceived prior to when we ship the goods to customers are deferred. Reserve for returns, allowance for doubtful accounts and the allowance for obsolete and damaged inventory. Our management must makeestimates of potential future product returns related to current period revenue. Management analyzes historical returns, current economic trendsand changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns and other allowances in anyaccounting period. The reserve for returns was $1.1 million as of December 31, 2003. From time to time, we may grant credit to certain of our business customers on normal credit terms. We perform ongoing credit evaluationsof our customers' financial condition and maintain an allowance for doubtful accounts receivable based upon our historical collection experienceand expected collectibility of all accounts receivable. As of December 31, 2003, we recorded an allowance for doubtful accounts receivable of$650,000. Overstock writes down its inventory for estimated obsolescence or damage equal to the difference between the cost of inventory and theestimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable thanthose projected by management, additional inventory write-downs may be required. Our inventory balance was $29.9 million, net of allowance forobsolescence or damaged inventory of $1.1 million as of December 31, 2003.36 Accounting for income taxes. Significant management judgment is required in determining our provision for income taxes, our deferred taxassets and liabilities and any valuation allowance recorded against our net deferred tax assets. As of December 31, 2003, we have recorded a fullvaluation allowance of $25.7 million against our net deferred tax asset balance due to uncertainties related to our deferred tax assets as a result ofour history of operating losses. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and theperiod over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust theseestimates in future periods, we may need to change the valuation allowance, which could materially impact our financial position and results ofoperations. Valuation of long-lived and intangible assets and goodwill. Effective January 1, 2002, we have adopted SFAS No. 142 Goodwill and OtherIntangible Assets. Under this standard, goodwill is no longer amortized, but must be tested for impairment at least annually. Other long-livedassets must also be evaluated for impairment when management believes that an asset has experienced a decline in value that is other thantemporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability torecover the carrying value of the asset that may not be reflected in an asset's current carrying value, thereby possibly requiring an impairmentcharge in the future. There were no impairments of goodwill or long-lived assets during 2001, 2002, or 2003. Net intangible assets and goodwillamounted to $3.0 million as of December 31, 2003.Results of Operations The following table sets forth our results of operations expressed as a percentage of total revenue for 2001, 2002 and 2003. Year ended December 31, 2001 2002 2003 (as a percentage of total revenue) Direct revenue 88.1%84.9%57.2%Fulfillment partner revenue 9.9 13.5 42.2 Warehouse revenue 2.0 1.6 0.6 Total revenue 100.0 100.0 100.0 Cost of goods sold(1) 86.6 80.0 89.3 Gross profit (loss) 13.4 20.0 10.7 Operating expenses: Sales and marketing expenses(2) 14.5 9.4 8.4 General and administrative expenses(2) 23.6 11.8 7.1 Amortization of goodwill 7.6 — — Amortization of stock-based compensation 1.6 3.2 0.3 Total operating expenses 47.3 24.4 15.8 Operating loss (33.9)(4.4)(5.1)Interest income 1.2 0.4 0.2 Interest expense (1.8)(0.5)(0.0)Other income (expense), net 0.1 (0.5)0.0 Net loss (34.4)%(5.0)%(4.9)% 37Comparison of Years Ended December 31, 2002 and 2003Revenue Beginning July 1, 2003, customer returns from sales shipped by our fulfillment partners are returned directly to us and processed through ourSalt Lake City warehouse, rather than returned to our fulfillment partners, as they previously were. We made the decision to change this policy tohave more control over the Overstock customer shopping experience, as we believe that a seamless customer experience is key to creating loyal,long-term customers. By accepting returns at our warehouse, we can verify that fulfillment partner products are being packaged and shipped to ourstandards. Additionally, as customer returns are now all shipped to one location, the process is much more simple and convenient for ourcustomers. As a result of this change in business practices, we now record sales transactions shipped by our fulfillment partners on a gross basisinstead of on a net basis, as we have historically done. Therefore, from the third quarter 2003 forward, revenue recorded in accordance withaccounting principles generally accepted in the United States ("GAAP") will increase significantly from our results as reported in previous SECfilings. Additionally, as illustrated in the table above that sets forth our results of operations expressed as a percentage of total revenue for 2001,2002 and 2003, direct revenue as a percentage of total revenue will decrease significantly while fulfillment partner revenue as a percentage of totalrevenue will increase. As a result, we believe that for year-over-year comparison purposes, gross merchandise sales (non-GAAP) comparisonsmay be more informative than GAAP revenue comparisons, as gross merchandise sales were not affected by the change in business practices. Total revenue grew from $91.8 million in 2002, to $238.9 million in 2003, representing growth of 160%. During this same period, directrevenue increased from $77.9 million to $136.6 million, or a 75% growth, and fulfillment partner revenue grew from $12.4 million to $100.8 millionrepresenting growth of 714%. Warehouse revenue remained constant at $1.5 million for the years ended December 31, 2002 and 2003. Thesignificant increase in total revenue was due primarily to the change in our business practices described above, coupled with an increase in thenumber of both direct and fulfillment partner orders and sales to other businesses. This increase was also a result of the growth of our B2Cbusiness due to increased marketing efforts, including the initiation of a nationwide television and radio advertising campaign that began in thethird quarter of 2003 and continued through the fourth quarter. Gross merchandise sales totaled $294.8 million and $154.5 million for the yearsended December 31, 2003 and 2002, respectively, representing an increase of 91%. Gross merchandise sales differ from GAAP revenue in thatgross merchandise sales represent the gross sales price of goods sold by the Company before returns, sales discounts and before payments tofulfillment partners prior to July 1, 2003.Cost of Goods Sold As a result of the fulfillment partner returns policy change that occurred beginning the third quarter of 2003, we now record sales transactionsshipped by our fulfillment partners on a gross basis instead of on a net basis as we have historically done. Therefore, GAAP revenue increasedsignificantly beginning in the third quarter of 2003, which resulted in a significant increase in cost of goods sold and hence, a decrease in grossmargins from previous quarters. These margins will now more closely resemble margins we receive from our direct revenue. As a result, webelieve that for year-over-year comparison purposes, gross profit dollar comparisons may be more informative than gross margin percentagecomparisons. Cost of goods sold increased in absolute dollars, from $73.4 million in 2002 to $213.5 million in 2003, and as a percent of total revenue, from80% to 89%, respectively. This increase in cost of goods sold, as a percent of total revenue, was primarily a result of the change in our businesspractices described above. In addition, cost of goods sold increased as a percentage of total revenue due to the38 growth in sales of BMV products, which account for approximately 12% of total revenue in 2003, compared to less than 1% in 2002. Thesecombined changes correlate to gross margins of 20% and 11% for the years ended December 31, 2002 and 2003, respectively. Cost of goods soldalso includes stock-based compensation of $373,000 and $90,000 for the years ended December 31, 2002 and 2003, respectively. Gross profits for our direct operations increased to $13.5 million for the year ended December 31, 2003, from $8.9 million recorded during thesame period in 2002. For our direct operations, gross profit dollars increased 51% on a year-over-year basis while sales increased 75%. Grossprofits for our direct operations, as a percentage of direct revenue decreased from 11% in 2002 to 10% in 2003. This was primarily due toincreased costs related to capacity expansion at the warehouse, as well as an increase in warehouse handling expense as we ramped up staffingand packaging in anticipation of sales increases. Additionally, overall returns costs increased significantly as we increased capacity and staffingfor increased returns volumes due to the returns policy change, and due to process inefficiencies that were identified and fixed during the third andfourth quarters. Cost of goods sold on sales transactions from our fulfillment partners now includes the cost of the product, warehousing and fulfillmentcosts, credit card fees and customer service costs. Therefore, beginning in the third quarter of 2003, overall blended gross margins will besignificantly lower than they have historically been. Now that the costs related to the initial implementation and process refinement of thefulfillment partner returns process have been absorbed in the third quarter, future gross profit dollars generated from these sales should not besignificantly affected by this change. Our fulfillment partner operations generated gross profits of $11.6 million (12% margins) and $9.6 million (78% margins) for the years endedDecember 31, 2003 and 2002, respectively. The increase in the gross profit dollars for our fulfillment partner operations was due to the generalgrowth of the consumer business during the year, and an increase in the number of fulfillment partner products offered on our Websites. Thedecrease in gross margins for our fulfillment partner operations is largely due to the change in our business operations described above as well asan increase in BMV sales from 2% of fulfillment partner revenue in 2002 to 25% in 2003. Margins for BMV products have historically been muchlower than those of other product categories.Operating Expenses Sales and marketing. Sales and marketing expenses totaled $8.7 million and $20.2 million for the years ended December 31, 2002 and2003, representing 9% and 8% of total revenue, respectively. The increased marketing expense reflects increased online marketing efforts,particularly with the large portals (MSN, Yahoo & AOL), and with our affiliate marketing program. In addition, during 2003 we initiated our firstnational radio and television campaign, which added approximately $5.5 million to the marketing expense in the current year over the previousyear. We expect total marketing expenses to continue to increase in the future as a result of the expenses related to online marketing agreementsthat we have recently entered into and similar online or offline radio, television, or other similar agreements that we may enter into in the future.The decrease in sales and marketing as a percentage of total revenue was due to the increase in total revenue in 2003 which was a result of thefulfillment partner returns policy change that occurred beginning the third quarter of 2003. General and administrative. General and administrative expenses increased from $10.8 million in 2002 to $16.9 million in 2003,representing 12% and 7% of total revenue, respectively. The increase in absolute dollars was primarily attributable to costs associated withbuilding infrastructure, including expansion of corporate systems and additional personnel costs from increased corporate headcount. Thedecrease in general and administrative expenses as a percentage of total revenue was due to the increase in total revenue in 2003 which was aresult of the fulfillment partner returns policy change that occurred beginning the third quarter of 2003.39 Amortization of goodwill. Effective January 2002, we adopted SFAS No. 142, which requires that goodwill no longer be amortized. Hence,we did not record any goodwill amortization during the years ended December 31, 2002 and 2003. Amortization of stock-based compensation. Prior to the Company's initial public offering in May 2002, the Company recorded unearnedstock-based compensation related to stock options granted below the fair market value of the underlying stock. Since the initial public offering, theCompany has not granted any additional stock options below fair market value. Amortization of stock-based compensation was approximately$2.9 million and $756,000 for the years ended December 31, 2002 and 2003, respectively. Interest income, interest expense and other income (expense). The increase in interest income from $403,000 in 2002 to $461,000 in 2003is due to the increase in our cash and marketable securities from our follow-on offering in the first quarter of 2003. Interest expense decreasedfrom $465,000 in 2002 to $76,000 in 2003, primarily as a result of our termination of our inventory lines of credit in June 2002 and the reduction inour capital leases. Other income (expense) changed from expense of $444,000 in 2002 to income of $115,000 in 2003 primarily because thecompany paid $439,000 of selling costs on behalf of a selling shareholder as part of the initial public offering in 2002. Income taxes. We incurred net operating losses in 2002 and 2003, and consequently paid insignificant amounts of federal, state andforeign income taxes. As of December 31, 2003, we had $62.4 million of net operating loss carryforwards, of which $14.4 million is subject tolimitation. These net operating loss carryforwards will begin to expire in 2019.Comparison of Years Ended December 31, 2001 and 2002 Revenue. Total revenue grew from $40.0 million in 2001, to $91.8 million in 2002, representing growth of 129%. During this same period,direct revenue increased from $35.2 million to $77.9 million or a 121% growth, and fulfillment partner (formerly "commission") revenue grew from$4.0 million to $12.4 million representing growth of 212%. Warehouse revenue was $795,000 in 2001 and $1.5 million in 2002, representing growthof 84%. The increase in total revenue was due primarily to an increase in the number of both direct and commission orders and in the averageorder size. This increase was also a result of the growth of our B2C business due to increased marketing efforts and increased sales to otherbusinesses, including Safeway, Inc. The increase in warehouse revenue from 2001 to 2002 was due primarily to an establishment of a permanentlocation for our warehouse store at our warehouse facility in July of 2002. For the warehouse sale in 2001, we liquidated part of a large inventorypurchase from Toytime.com during January of that year. For the warehouse sale in 2002, we liquidated the remnants of the Gear.com inventorythat occurred during the latter end of the first quarter and the first part of the second quarter of 2002. The gross merchandise sales of goods solddirectly by us and on behalf of third parties were $69.3 million in 2001 and $154.5 million in 2002, an increase of 123%. Cost of Goods Sold. Cost of goods sold increased in absolute dollars from $34.6 million to $73.4 million in 2002. This represents adecrease, as a percent of total revenue, from 87% in 2001 to 80% in 2002. The decrease in cost of goods sold as a percentage of total revenue in2002 compared to 2001 was primarily a result of economies of scale achieved through an increased number of sales transactions and efficienciesin operations. These efficiencies include, but are not limited to, efficiencies in the actual costs paid to suppliers for goods, freight and handlingcosts, the costs of customer service and returns. The decrease is also attributable to an increase in fulfillment partner revenue as a percentage oftotal revenue (from 10% in 2001 to 13% in 2002), as fulfillment partner revenue has higher gross margins than direct revenue. Cost of goods soldalso includes $78,000 and $373,000 of stock-based compensation for the years ended December 31, 2001 and 2002, respectively.40 Operating Expenses Sales and marketing. Sales and marketing expenses increased on an absolute dollar basis from $5.8 million in 2001, to $8.7 million in 2002primarily as a result of our increased online marketing expenditures, including fixed payment arrangements in connection with online marketingrelationships. However, this represents a decrease as a percent of total revenue from 15% to 9%. The decrease in marketing costs as a percentage of total revenue as compared to 2001 reflects an effort by our management to focus advertising expenditures on campaigns that itbelieves are the most cost-effective to increase net sales, such as targeted online advertising, as well as negotiating reduced rates charged to usfor online marketing. General and administrative. General and administrative expenses increased from $9.4 million in 2001, to $10.8 million in 2002 representing24% and 12% of total revenue, respectively. The increase in absolute dollars was due primarily to new business development and the staffingnecessary to manage and support our growth. General and administrative personnel increased from 65 employees at the end of 2001, to 84employees at the end of 2002. The decrease in general and administrative expense as a percentage of total revenue was a result of economies ofscale achieved through increased sales volume and the allocation of general and administrative expenses over a substantially larger revenuebase. Amortization of goodwill. Effective January 2002, we adopted SFAS No. 142, which requires that goodwill no longer be amortized. Hence,we did not record any goodwill amortization during fiscal year 2002. During 2001, $3.1 million was recorded as amortization of goodwill for the fiscalyear ended December 31, 2001. Goodwill resulted from the acquisition of Gear.com in November 2000. Amortization of stock-based compensation. Amortization of stock-based compensation was approximately $649,000 and $2.9 million in2001 and 2002, respectively. We attribute this increase primarily to amortization of non-cash deferred stock-based compensation recognizedrelating to options grants during the respective periods. Interest income, interest expense and other income (expense). Interest income was $461,000 in 2001 compared to $403,000 in 2002.Interest expense decreased from $729,000 in 2001 to $465,000 in 2002, primarily as a result of the reduction in notes payable. Other income(expense) changed from income of $29,000 in 2001 to expense of $444,000 primarily because the company paid $439,000 of selling costs onbehalf of the selling shareholder as part of the initial public offering. Income taxes. We incurred net operating losses in 2001 and 2002, and consequently paid insignificant amounts of federal, state andforeign income taxes. As of December 31, 2002, we had $51.3 million of net operating loss carryforwards, of which $14.4 million is subject tolimitation. These net operating loss carryforwards will begin to expire in 2019.Quarterly Results of Operations The following tables set forth our unaudited quarterly results of operations data for the eight most recent quarters for the period endedDecember 31, 2003, as well as such data expressed as a percentage of our total revenue for the periods presented. The information in the tablebelow should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this Form 10-K. Wehave prepared this information on the same basis as the Consolidated Financial Statements and the information includes all adjustments,consisting only of normal recurring adjustments, that we consider necessary for a fair statement of our financial position and operating results forthe quarters presented. Our quarterly operating results have varied substantially in the past41 and may vary substantially in the future. You should not draw any conclusions about our future results from the results of operations for anyparticular quarter. Three Months Ended Mar. 31,2002 June 30,2002 Sept. 30,2002 Dec. 31,2002 Mar. 31,2003 June 30,2003 Sept. 30,2003 Dec. 31,2003 (in thousands, except per share data) Consolidated Statement ofOperations Data: Direct revenue $10,029 $11,853 $20,759 $35,302 $24,962 $25,159 $29,011 $57,460 Fulfillment revenue 1,659 2,230 2,857 5,633 3,966 3,431 28,504 64,910 Warehouse revenue 379 297 192 594 236 243 273 790 Total revenue 12,067 14,380 23,808 41,529 29,164 28,833 57,788 123,160 Cost of goods sold(1) 9,990 11,831 19,238 32,382 24,539 24,030 53,537 111,386 Gross profit 2,077 2,549 4,570 9,147 4,625 4,803 4,251 11,774 Operating expenses: Sales and marketing expenses(2) 1,219 1,313 2,083 4,054 3,848 2,572 3,855 9,898 General and administrativeexpenses(2) 2,802 2,195 2,372 3,456 4,545 3,367 4,059 4,940 Amortization of goodwill — — — — — — — — Amortization of stock-basedcompensation 846 806 674 577 328 112 171 145 Total operating expenses 4,867 4,314 5,129 8,087 8,721 6,051 8,085 14,983 Operating income (loss) (2,790) (1,765) (559) 1,060 (4,096) (1,248) (3,834) (3,209)Interest income 22 49 229 103 152 142 98 69 Interest expense (240) (208) (7) (10) (7) (55) (8) (6)Other income (expense), net 1 (442) 63 (66) 10 25 79 1 Net income (loss) (3,007) (2,366) (274) 1,087 (3,941) (1,136) (3,665) (3,145)Deemed dividend related toredeemable common stock (111) (106) (97) (92) (77) (78) (58) (49)Deemed dividend related to beneficialconversion feature of preferred stock (6,607) — — — — — — — Net income (loss) attributable tocommon shares $(9,725)$(2,472)$(371)$995 $(4,018)$(1,214)$(3,723)$(3,194) Net income (loss) per common share —basic $(0.87)$(0.20)$(0.03)$0.07 $(0.26)$(0.07)$(0.23)$(0.19) —diluted $(0.87)$(0.20)$(0.03)$0.06 $(0.26)$(0.07)$(0.23)$(0.19)Weighted average common sharesoutstanding —basic 11,171 12,280 14,447 14,486 15,486 16,384 16,419 16,473 —diluted 11,171 12,280 14,447 15,696 15,486 16,384 16,419 16,473 (1) Amounts include stock basedcompensation of $102 $96 $93 $82 $39 $13 $20 $18 (2) Amounts exclude stock-basedcompensation as follows: Sales and marketing expenses $22 $21 $21 $19 $11 $3 $5 $3 General and administrativeexpenses 824 785 653 558 317 109 166 142 $846 $806 $674 $577 $328 $112 $171 $145 42 Three Months Ended Mar. 31,2002 June 30,2002 Sept. 30,2002 Dec. 31,2002 Mar. 31,2003 June 30,2003 Sept. 30,2003 Dec. 31,2003Additional Operating Data(1): Gross merchandise sales (inthousands)(2) $21,989 $26,505 $38,772 $67,217 $52,270 $51,315 $61,018 $130,155Number of orders(3) 177,339 212,383 290,649 578,839 490,507 521,846 643,402 1,375,506Number of new B2C customers(4) 104,989 117,672 163,691 347,578 264,144 283,164 341,834 744,133Average customer acquisitioncost(5) $8.68 $9.68 $11.64 $11.20 $14.06 $8.69 $10.97 $13.19(1)The additional operating data sets forth certain operating data relating to our business for the eight most recent quarters for the period endedDecember 31, 2003. While we believe that the information in the table above facilitates an understanding of our business and results ofoperations for the periods presented, such information is not in accordance with generally accepted accounting principles and should beread in conjunction with the quarterly results of operations data set forth above. We believe that gross merchandise sales is a metric widelyused in our industry and by making this metric available to investors, we believe investors are able to compare our performance againstothers in our industry. We believe that investors may use the average customer acquisition cost metric to determine how efficiently we areable to achieve growth, if any. Again, we believe this metric is widely used in our industry, and providing these values to investors enablesthem to make more meaningful comparisons. (2)Gross merchandise sales represents the gross sales price of all sales transactions, including those for which we only record a commissionunder generally accepted accounting principles, and therefore differs from GAAP revenue. Beginning, July 1, 2003 we changed ourbusiness practices regarding returns, which affected our fulfillment partner revenue. As a result, we believe that for year-over-yearcomparison purposes, gross merchandise sales (non-GAAP) comparisons may be more informative than GAAP revenue comparisons, asthe gross merchandise sales were not affected by the change in business practices. The following table reconciles total revenue to grossmerchandise sales (in thousands): Three Months Ended Mar. 31,2002 June 30,2002 Sept. 30,2002 Dec. 31,2002 Mar. 31,2003 June 30,2003 Sept. 30,2003 Dec. 31,2003 (in thousands)Total revenue $12,067 $14,380 $23,808 $41,529 $29,164 $28,833 $57,788 $123,160Add: Obligations payable tothird parties upon sale of third-party merchandise 7,031 9,474 12,488 21,969 20,527 19,399 — —Add: Sales returns anddiscounts 2,891 2,651 2,476 3,719 2,579 3,083 3,230 6,995 Gross merchandise sales $21,989 $26,505 $38,772 $67,217 $52,270 $51,315 $61,018 $130,155 (3)Number of orders represents the number of individual orders for merchandise through our Websites excluding B2B orders. (4)Number of new B2C customers represents the number of valid new customer accounts. To establish a valid customer account, a personmust provide us with the following information and purchase merchandise on our B2C Website: a unique e-mail address; a unique password;and a verified credit card account number.43(5)Average customer acquisition cost represents total sales and marketing expense excluding B2B sales force compensation (includingsalary, bonus, commission and benefits costs) divided by the number of new customers for the period presented. Three Months Ended Mar. 31,2002 June 30,2002 Sept. 30,2002 Dec. 31,2002 Mar. 31,2003 June 30,2003 Sept. 30,2003 Dec. 31,2003 (as a percentage of total revenue) Direct revenue 83.2%82.4%87.2%85.0%85.6%87.3%50.2%46.7%Fulfillment partner revenue 13.7 15.5 12.0 13.6 13.6 11.9 49.3 52.7 Warehouse revenue 3.1 2.1 0.8 1.4 0.8 0.8 0.5 0.6 Total revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Cost of goods sold(1) 82.8 82.3 80.8 78.0 84.1 83.3 92.6 90.4 Gross profit 17.2 17.7 19.2 22.0 15.9 16.7 7.4 9.6 Operating expenses: Sales and marketingexpenses(2) 10.1 9.1 8.7 9.8 13.2 8.9 6.7 8.0 General and administrativeexpenses(2) 23.2 15.3 10.0 8.3 15.6 11.7 7.0 4.0 Amortization of goodwill — — — — — — — — Amortization of stock-basedcompensation 7.0 5.6 2.8 1.4 1.1 0.4 0.3 0.1 Total operating expenses 40.3 30.0 21.5 19.5 29.9 21.0 14.0 12.1 Operating income (loss) (23.1)(12.3)(2.3)2.5 (14.0)(4.3)(6.6)(2.5)Interest income 0.2 0.3 0.9 0.2 0.5 0.5 0.2 0.1 Interest expense (2.0)(1.4)0.0 0.0 0.0 (0.2)(0.0)(0.0)Other income (expense), net 0.0 (3.1)0.2 (0.2)0.0 (0.1)0.1 0.0 Net income (loss) (24.9)%(16.5)%(1.2)%2.5%(13.5)%(4.1)%(6.3)%(2.4)% (1) Amounts include stock-basedcompensation of 0.8%0.7%0.4%0.2%0.1%0.0%0.0%0.0% (2) Amounts exclude stock-basedcompensation as follows: Sales and marketing expenses 0.2%0.1%0.1%0.1%0.0%0.0%0.0%0.0% General and administrativeexpenses 6.8 5.5 2.7 1.3 1.1 0.4 0.3 0.1 7.0%5.6%2.8%1.4%1.1%0.4%0.3%0.1% Our direct revenue and fulfillment partner revenue have increased in every quarter on a year-over-year basis. The general increase in totalrevenue is due to the expansion of our customer base as we attracted more visitors to our Websites, as well as repeat purchases from thesecustomers. We have experienced significant seasonality in our business, reflecting a combination of seasonal fluctuations in Internet usage andtraditional retail seasonality patterns. Internet usage and the rate of Internet growth may be expected to decline during the summer. Further, salesin the traditional retail industry are significantly higher in the fourth calendar quarter of each year than in the preceding three quarters. Fulfillmentpartner revenue increased significantly during the past two quarters due to the change in our business practices. Cost of goods sold as a percentage of total revenue has fluctuated during the eight quarters ended December 31, 2003, ranging from 78% to93%. The significant increases during the 3rd and 4th quarters of 2003 relate specifically to the change in business practices in our fulfillmentpartner operations and the resulting shift from recognizing revenue on a commission basis to a gross basis.44 Total operating expenses as a percentage of total revenue have decreased on a year-over-year basis each quarter during 2003 as comparedto 2002 as a result of economies of scale achieved through increased sales volume. In the near future, we expect to continue to devotesubstantial resources to the expansion of our sales and marketing efforts, and expect that total operating expenses may increase in absolutedollars in future periods. These expenses as a percentage of total revenue will vary depending on the level of revenue obtained. Due to the foregoing factors, in one or more future quarters our operating results may fall below the expectations of securities analysts andinvestors. In such an event, the trading price of our common stock would likely be materially adversely affected.Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company'sfinancial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resourcesthat is material to investors.Liquidity and Capital Resources Prior to the second quarter of 2002, we financed our activities primarily through a series of private sales of equity securities, warrants topurchase our common stock and promissory notes. During the second quarter of 2002, we completed our initial public offering pursuant to whichwe received approximately $26.1 million in cash, net of underwriting discounts, commissions, and other related expenses. Additionally, inFebruary 2003, we completed a follow-on offering pursuant to which we received approximately $24.0 million in cash, net of underwriting discounts,commissions, and other related expenses. Our cash and cash equivalents balance was $28.8 million at December 31, 2003. We also hadmarketable securities of $11.5 million at December 31, 2003. Our operating activities resulted in net cash outflows of $10.4 million for the year ended December 31, 2003 and net cash inflows of$2.5 million for the year ended December 31, 2002. The primary use of cash and cash equivalents during 2003 was to fund our normal operations,including net losses of $11.9 million, and changes in accounts receivable ($3.2 million), inventories ($16.0 million), and prepaid expenses and otherassets ($2.3 million). This was offset by the change in accounts payable ($16.6 million) and accrued liabilities ($2.9 million). Cash used in investing activities included $6.7 million in capital expenditures for property and equipment, including $2.8 million in the thirdquarter 2003 for expansion of our existing warehouse facility, a new customer service telephone system ($800,000), and upgrades to the existinginternal database ($500,000). These expenditures were offset by a net increase of $10.0 million in cash and cash equivalents from the purchaseand sales of marketable securities. For the year ended December 31, 2003 and 2002, net cash provided by (used in) investing activities amountedto $3.1 million and $(23.3 million), respectively. Net cash provided by financing activities during the year ended December 31, 2003 was $25.1 million, consisting primarily of net proceeds of$24.0 million received from the follow-on public offering which occurred in February 2003 and approximately $1.2 million received from the exerciseof stock options and warrants, offset by $141,000 of payments on capital leases. Net cash provided by financing activities for the year endedDecember 31, 2002 was $28.2 million, consisting primarily of proceeds from our initial public offering in May 2002 and the issuance of preferredstock in March 2002, offset by the repayment of $4.5 million of notes payable. On March 4, 2002, we sold 958,612 shares of our Series A redeemable convertible preferred stock at $6.89 per share for $6.6 million, net ofissuance costs. As the fair value of the common stock to be45 received upon conversion of the preferred stock was greater than the conversion price of the preferred stock at the date the preferred stock wasissued, a beneficial conversion feature resulted in a non-cash charge of approximately $6.6 million which was recorded in the first quarter of 2002.This non-cash charge was recorded as a deemed dividend, of which $3.7 million is attributable to shares sold to the following related parties;John J. Byrne Jr., a former director of Overstock; Contex Limited, an entity controlled by Mark Byrne, a brother of Patrick M. Byrne; HaverfordInternet LLC, an entity controlled by Patrick M. Byrne; The Gordon S. Macklin Family Trust, a trust controlled by a director of Overstock; andRope Ferry Associates, Ltd., an entity owned by John J. Byrne III and Dorothy M. Byrne, the brother and mother of Patrick M. Byrne. Theremaining purchasers of our Series A preferred stock are unrelated parties that are friends and acquaintances of our officers and directors. Contractual Obligations and Commitments. The following table summarizes our contractual obligations as of December 31, 2003 and theeffect such obligations and commitments are expected to have on our liquidity and cash flow in future periods: Payments Due by Period(in thousands)Contractual Obligations Total Less than1 Year 1-3 Years 4-5 Years After 5yearsLong-term debt arrangements $— $— $— $— $—Capital lease obligations 177 85 85 7 —Operating leases 3,748 1,575 2,108 65 —Purchase obligations 8,038 8,038 — — — Total contractual cash obligations $11,963 $9,698 $2,193 $72 $— Amounts of Commitment Expiration Per Period(in thousands)Other Commercial Commitments TotalAmountsCommitted Less thanYear 1 1-3 Years 4-5 Years Over 5yearsLetters of credit $1,882 $1,882 $— $— $—Redeemable common stock 2,978 — 2,978 — — Total commercial commitments $4,860 $1,882 $2,978 $— $— The amount of purchase obligations shown is based on assumptions regarding the legal enforceability against us of purchase orders we hadoutstanding at December 31, 2003. Under different assumptions regarding our rights to cancel our purchase orders or different assumptionsregarding the enforceability of the purchase orders under applicable law, the amount of purchase obligations shown in the table above would beless. The estimated amount of redeemable common stock is based solely on the statutes of limitations of the various states in which stockholdersmay have rescission rights and may not reflect the actual results. The stock is not redeemable by its terms. We do not have any unconditionalpurchase obligations, other long-term obligations, guarantees, standby repurchase obligations or other commercial commitments. We have a $3.5 million revolving letter of credit facility, which expires June 30, 2005, which we use to obtain letters of credit supporting ourinventory purchases. At December 31, 2003 the issuing bank or an affiliate of the bank had letters of credit totaling $1.9 million outstanding underthis facility. However, we have no liability for this amount except to the extent, if any, that a beneficiary of any of the outstanding letters of creditdraws upon a letter of credit. In evaluating our contractual obligations and commitments, investors should understand that the amount shownabove under letters of credit is duplicative of a portion of the amount shown above under purchase obligations, because we have no46 actual liability in connection with the letter of credit facility (other than for commitment fees and similar items) except to the extent that we fail topay a similar amount included above in purchase obligations. We believe that the cash and marketable securities currently on hand will be sufficient to continue operations for at least the next twelvemonths. While we anticipate that, beyond the next twelve months, our cash flows from operations will be sufficient to fund our operationalrequirements, we may require additional financing. However, there can be no assurance that if additional financing is necessary it will be available,or, if available, that such financing can be obtained on satisfactory terms. Failure to generate sufficient revenues or raise additional capital couldhave a material adverse effect on our ability to continue as a going concern and to achieve our intended business objectives. Any projections offuture cash needs and cash flows are subject to substantial uncertainty. See "Factors that May Affect Future Results."Seasonality Financial results for Internet retailers are generally seasonal. Based upon the Company's historical experience, increased revenues typicallyoccur during the fourth quarter because of the Christmas retail season. The actual quarterly results for each quarter could differ materiallydepending upon consumer preferences, availability of product and competition, among other risks and uncertainties. Accordingly, there can be noassurances that seasonal variations will not materially affect the Company's results of operations in the future. The following table reflects theCompany's revenues for each of the quarters available since 2000 (in thousands): FirstQuarter SecondQuarter ThirdQuarter FourthQuarter 2003 $29,164 $28,833 $57,788*$123,160*2002 12,067 14,380 $23,808 $41,529 2001 9,578 7,407 8,744 14,274 2000 2,257 3,795 4,339 15,132 *Note that the revenue for the third and fourth quarters of 2003 reflect the change in Company policy in which sales by fulfillment partnersare now recorded "gross" instead of "net" as in prior quarters.Factors That May Affect Future Results Any investment in our common stock involves a high degree of risk. Investors should consider carefully the risks and uncertainties, and allother information in this Form 10-K before deciding whether to purchase or hold our common stock. Additional risks and uncertainties not currentlyknown to us or that we currently deem immaterial may also become important factors that may harm our business. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instrumentsconsist of cash and cash equivalents, marketable securities, trade accounts and contracts receivable, accounts payable and long-termobligations. We consider investments in highly-liquid instruments purchased with a remaining maturity of 90 days or less at the date of purchase tobe cash equivalents. Our exposure to market risk for changes in interest rates relates primarily to our short-term investments and short-termobligations; thus, fluctuations in interest rates would not have a material impact on the fair value of these securities.47 At December 31, 2003, we had $28.8 million in cash and cash equivalents and $11.5 million in marketable securities. A hypothetical 10%increase or decrease in interest rates would not have a material impact on our earnings or loss, or the fair market value or cash flows of theseinstruments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required by this item are included in Part IV, Item 15 of this Form 10-K and are presentedbeginning on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES The Company's President (principal executive officer) and Vice President, Finance (principal financial officer), based on the evaluation of theCompany's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, asamended) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, as of December 31, 2003, have concluded that the Company's disclosurecontrols and procedures were effective to ensure the timely collection, evaluation and disclosure of information relating to the Company that wouldpotentially be subject to disclosure under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgatedthereunder. During the three-month period ended December 31, 2003, there was no change in the Company's internal control over financial reporting thathas materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.48PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information Regarding Directors Set forth below is certain information as of January 12, 2004 regarding the members of the Board of Directors of Overstock.Class I Directors (Term Expiring in 2006)Name Age Position with the Company Director SinceJohn A. Fisher 56 Director May 2002Patrick M. Byrne 41 President, and Chairman of theBoard of Directors October 1999 John A. Fisher has served as a director of Overstock since May 2002. Mr. Fisher has served as Managing Director of Fisher & CompanyLLC, an investment banking advisor to international branded consumer growth companies since October 1996. From 1987 to 1996, Mr. Fisher wasManaging Director of Hambrecht & Quist Group, a venture capital and investment banking company, responsible for leading all services to brandedconsumer growth companies. From 1984 to 1987, he served as chief executive of Bechtle Fisher & Company, Inc., a private investment bank.From 1976 to 1984, he served as vice president of corporate finance of The Crocker Bank. From 1973 to 1976, he served as a member of theWhite House staff (Office of Management & Budget), and from 1971 to 1973, as management consultant with Touche Ross & Co. Mr. Fisher has aBachelor of Arts Degree in Economics from Yale College and an MBA from Stanford University. Dr. Patrick M. Byrne has served as our principal executive officer and as a Director since October 1999, and as Chairman of the Board sinceFebruary 2001. Dr. Byrne has currently assumed the role of President. From September 1997 to May 1999, Dr. Byrne served as President andChief Executive Officer of Fechheimer Brothers, Inc., a manufacturer and distributor of 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 and an affiliate of Overstock. Dr. Byrnehas a Bachelor of Arts degree in Chinese studies from Dartmouth College, a Master's degree from Cambridge University as a Marshall Scholar,and a Ph.D. in philosophy from Stanford University.Class II Director (Term Expiring in 2004)Name Age Position with the Company Director SinceGordon S. Macklin 75 Director October 1999 Gordon S. Macklin has served as a Director of Overstock since October 1999. Mr. Macklin is currently an independent corporate financialadvisor. Mr. Macklin served as Chairman, President and Chief Executive Officer of White River Corporation, an information services company,from October 1993 to July 1998. Mr. Macklin was Chairman of Hambrecht and Quist Group, a venture capital and investment banking company,from 1987 until 1992. From 1970 to 1987 Mr. Macklin served as President of the National Association of Securities Dealers, Inc. Mr. Macklinserves as a director for Martek Biosciences Corporation; MedImmune, Inc.; White Mountains Insurance Group, Ltd.; and is a director, trustee ormanaging general partner of 48 of the investment companies in the Franklin Templeton Group of Funds. Mr. Macklin has a Bachelor of Arts inEconomics from Brown University.49 Class III Director (Term Expiring in 2005)Name Age Position with the Company Director SinceAllison H. Abraham 41 Director March 2002 Allison H. Abraham has served as a Director of Overstock since March 2002. Ms. Abraham served as President and as a director ofLifeMinders, Inc., an online direct marketing company, from May 2000 until the acquisition of LifeMinders by Cross Media Marketing Corp. inOctober 2001. Prior to joining LifeMinders, Ms. Abraham served as Chief Operating Officer of iVillage Inc., an online media company, fromMay 1998 to May 2000. From February 1997 to April 1998, Ms. Abraham was President, Chief Operating Officer and a director of ShoppersExpress, an online grocery service, and also served as Vice President of Sales and Marketing for several months prior to her promotion. From1992 to 1996, Ms. Abraham held several marketing and management positions at Ameritech Corporation. She was employed at American ExpressTravel Related Services in New York City from 1988 to 1992, focusing on the launch of new products and loyalty programs. Ms. Abraham holds aBachelor of Arts in Economics from Tufts University and a MBA degree from the Darden School at the University of Virginia.Information Regarding Executive Officers In addition to Dr. Byrne, the following persons were executive officers of the Company as of December 31, 2003:Executive Officers Age PositionDavid K. Chidester 32 Vice President, FinanceJonathan E. Johnson III 37 Vice President, Strategic Projects andGeneral CounselShawn Schwegman 29 Vice President, Technology Mr. Chidester served as our Controller from August 1999 to August 2003, as our Acting Chief Financial Officer from August 2003 toJanuary 2004 and is now our Vice President, Finance (our principal financial and accounting officer). Prior to joining Overstock, Mr. Chidester waswith PricewaterhouseCoopers LLP from December 1995 to August 1999. Mr. Chidester holds a Bachelor of Science Degree in Accounting and aMaster's Degree in Business Administration, both from the University of Utah. Mr. Johnson has served as our General Counsel since September 2002, as our Secretary since October 2002, and as our Vice President,Strategic Projects since April 2003. From May 1999 to September 2002 Mr. Johnson held various positions with TenFold Corporation, includingpositions as General Counsel, Executive Vice President and Chief Financial Officer. From October 1997 to April 1999 Mr. Johnson practiced law inthe Los Angeles offices of Milbank, Tweed, Hadley & McCloy and from September 1994 to September 1997 he practiced law in the Los Angelesoffices of Graham & James. From February 1994 to August 1994 Mr. Johnson served as a judicial clerk at the Utah Supreme Court for JusticeLeonard H. Russon, and prior to that, from August 1993 to January 1994, Mr. Johnson served as a judicial clerk at the Utah Court of Appeals forJustice Russon. Mr. Johnson holds a Bachelor's Degree in Japanese from Brigham Young University, studied for a year at Osaka University ofForeign Studies in Japan, and received his law degree from the J. Reuben Clark, Jr. Law School at Brigham Young University. Mr. Schwegman has served as our Vice President, Technology since January 2004. He has also served as our Chief Technology Officerfrom September 2003 to January 2004, as our Vice President of Sales and Marketing from April 2003 to December 2003; as our Director of Books,Music & Videos department from June 2002 to April 2003; as Manager of our Affiliate Marketing Program from50 January 2002 to April 2003; as our Manager of Special Projects from April 2001 to January 2002; and as our Director of Information Technologyfrom March 2000 to April 2001. From April 1999 to February 2000 Mr. Schwegman served as Vice President of Sales with Sycamore SoftwareDevelopment Corp. From January 1999 to April 1999 Mr. Schwegman served as Director of Management Information Systems with FechheimerBrothers Co. There are no family relationships among any of the officers and directors of the Company. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities and Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than tenpercent (10%) of the Company's common stock, to file certain reports regarding ownership of, and transactions in, the Company's securities withthe SEC. Such officers, directors, and 10% stockholders are also required to furnish the Company with copies of all Section 16(a) forms that theyfile. Based solely on a review of reports filed by, and on written representations from, its officers, directors and 10% stockholders, the Companybelieves that during 2003, all of its officers, directors and 10% stockholders complied with requirements for reporting ownership and changes inownership of Company common stock under Section 16(a) of the Securities Act of 1934.Audit Committee Financial Expert The Company's Board of Directors has determined that the Company has three audit committee financial experts serving on its auditcommittee. The names of the audit committee financial experts are John A. Fisher, Gordon S. Macklin and Allison H. Abraham, and each of suchpersons is "independent" as that term is defined in Rule 4200(a)(15) of the Nasdaq Marketplace Rules. As used herein, the term "audit committee financial expert" means a person who has the following attributes:•an understanding of generally accepted accounting principles and financial statements; •the ability to assess the general application of such principles in connection with the accounting for estimates, accruals andreserves; •experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity ofaccounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to beraised by the Company's financial statements, or experience actively supervising one or more persons engaged in such activities; •an understanding of internal control over financial reporting; and •an understanding of audit committee functions. Each member of the audit committee acquired the foregoing attributes through:•education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor, orexperience in one or more positions that involve the performance of similar functions; •experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor orperson performing similar function; or •experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing, orevaluation of financial statements.51 The identification of the foregoing members of the audit committee as "audit committee financial experts" shall not:•constitute a designation of any such person as an expert for any purpose, including, without limitation, for purposes of Section 11 ofthe Securities Act of 1933; or •impose on any such person any duties, obligations, or liability that are greater than the duties, obligations and liability imposed onany such person as a member of the audit committee and board of directors in the absence of such designation or identification.Identification of the Audit Committee The Company has a separately-designated audit committee established in accordance with section 3(a)(58)(A) of the Securities ExchangeAct of 1934, as amended. The members of the audit committee are John A. Fisher, Gordon S. Macklin, and Allison H. Abraham. Each member ofthe audit committee is "independent" as that term is defined in Rule 10A-3 promulgated under the Exchange Act.Code of Ethics The Company has adopted a code of ethics that applies to all of the Company's directors and employees, including the Company's principalexecutive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Company herebyundertakes to provide a copy of the code of ethics to any person without charge, upon request. Requests for a copy of the code of ethics may bemade in writing addressed to: General Counsel, Overstock.com, Inc., 6322 South 3000 East, Suite 100, Salt Lake City, Utah, 84121.Communications with Board Members In January 2004 the Board adopted resolutions to provide a formal process by which stockholders may communicate with the Board.Although the adoption of the formal process did not change the previously existing informal procedures by which stockholders could communicatewith the Board, whether for the purpose of recommending nominees for election to the Company's Board of Directors or for other purposes, theadoption of the formal process did clarify that stockholders may communicate directly with the Board, whether for the purpose of recommendingnominees for election to the Company's Board of Directors or for other purposes. The formal process adopted by the Board permits stockholders tocommunicate with the Board either in writing, addressed to the Board at the Company's headquarters, or by e-mail, sent toboardofdirectors@overstock.com. ITEM 11. EXECUTIVE COMPENSATIONSummary Compensation Table The table below shows, for the last three fiscal years, compensation information for (i) the Company's chief executive officer, (ii) the next fourmost highly compensated executive officers who were serving as such at December 31, 2003 and whose total salary and bonus was $100,000 ormore, and (iii) up to two additional individuals for whom disclosure would have been provided but for the fact that the individual was not serving asan executive officer at December 31, 2003. We refer to all of these individuals as our named officers.52 Summary Compensation Table Long-TermCompensationAwards Annual Compensation Name and Principal Position FiscalYear SecuritiesUnderlyingOptions All OtherCompensation(1) Salary Bonus Patrick M. ByrnePresident 200320022001 $——— $——— —119,97235,286 $——— Jonathan E. Johnson IIIVice President, Strategic Projects and GeneralCounsel 200320022001 140,00032,397N/A ——— 30,00040,000N/A ——N/A Douglas GreeneChief Technology Officer(2) 200320022001 117,101145,000137,500 ——— 25,00015,87981,158 121,1671,813—(4)Shawn A. SchwegmanVice President, Technology 200320022001 88,333100,000100,000 ——— 43,53310,1285,753 2,6501,500— James Hyde(3)Chief Operations Officer 200320022001 160,240150,00071,634 ——— 60,89134,40824,700 4,5003,938— (1)Amounts represent our matching contributions to the 401(k) plan accounts for such officers, unless otherwise noted. (2)Mr. Greene resigned as our Chief Technology Officer in March 2003. (3)Mr. Hyde resigned as our Chief Operating Officer on November 26, 2003. (4)Amount includes $120,261, which represents taxable income from options exercised by Mr. Greene, and $906, which represents ourmatching contributions to the 401(k) plan account for Mr. Greene.OPTION GRANTS The following table summarizes the stock options granted to each named officer during the year ended December 31, 2003, including thepotential realizable value over the term of the options, which is based on assumed rates of stock appreciation of 5% and 10%, compoundedannually and subtracting from that result the aggregate option exercise price. These assumed rates of appreciation comply with the rules of theSEC and do not represent our estimate of future stock price. Actual gains, if any, on stock option exercises will depend on the future performanceof our common stock. During the year ended December 31, 2003, we granted options to purchase up to an aggregate of 853,803 shares to employees under our2002 Stock Option Plan.53 Individual Grants Percent ofTotalOptionsGranted toEmployeesin Fiscal Year Potential Realizable Value atAssumed Annual Rates ofStock Price Appreciationfor Option Terms Number ofSecuritiesUnderlyingOptionsGranted MarketValue onDate ofGrant Name ExercisePrice ExpirationDate 0% 5% 10%Patrick M. Byrne — 0.0%$— $— — — — —Jonathan E. Johnson III 15,00015,000 1.81.8%%$$8.5413.09 $$8.5413.09 4/28/20087/28/2008 $$—— $$35,39254,248 $$78,206119,874Douglas Greene 25,000 2.9%$15.25 $15.25 1/27/2008 $— $105,332 $232,757Shawn A. Schwegman 3,00015,00025,533 0.41.83.0%%%$$$13.578.5413.09 $$$13.578.5413.09 3/16/20084/28/20087/28/2008 $$$——— $$$11,24735,39292,341 $$$24,85478,206204,049James Hyde 40,00015,0005,891 4.71.80.7%%%$$$15.258.5413.09 $$$15.258.5413.09 1/27/20084/28/20087/28/2008 $$$——— $$$168,53235,39221,305 $$$372,41178,20647,078 AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END VALUES This table shows information about unexercised in-the-money stock options held by the named officers on December 31, 2003. These valueshave been calculated on the basis of the closing price of our common stock on December 31, 2003, which was $19.87 per share. All options weregranted under our Amended and Restated 1999 Stock Option Plan or our 2002 Stock Option Plan. Number of Shares UnderlyingUnexercised Options at December 31,2003 Value of UnexercisedIn-the-Money Optionsat December 31, 2003Name Exercisable Unexercisable Exercisable UnexercisablePatrick M. Byrne 97,530 61,257 $1,403,257 $904,035Jonathan E. Johnson III 12,800 57,200 191,488 678,562Douglas Greene 69,174 58,913 1,013,479 627,859Shawn A. Schwegman 18,799 51,201 260,903 476,369James Hyde 29,394 90,606 444,612 843,031 COMPENSATION OF DIRECTORS We reimburse our non-employee directors for out-of-pocket expenses incurred in connection with attending Board and committee meetings.No member of our Board currently receives any additional cash compensation. In 2003, we did not grant any stock options to any of our directors. In prior years, we granted non-employee directors options to purchaseshares of our common stock under our Amended and Restated 1999 Stock Option Plan and our 2002 Stock Option Plan for their service on ourBoard. Our Board determines the number of option shares to be granted, if any, to any new non-employee directors. The following table showsinformation about aggregate options granted to non-employee directors in prior years:Name Grant Date Exercise Price($) Number ofOptions GrantedGordon Macklin 10/23/1999 3.69 21,172 1/22/2002 5.07 7,058Allison Abraham 4/23/2002 11.90 15,000John Fisher 5/2/2002 11.90 15,00054 SEVERANCE AND CHANGE OF CONTROL ARRANGEMENTS Agreements with Certain Executive Officers None of our executive officers has any contractual right to any severance or change of control payment other than pursuant to the optionplans described below.Benefit PlansGear.com, Inc. Restated 1998 Stock Option Plan The Company acquired Gear.com, Inc. on November 20, 2000 and assumed the outstanding options under the Gear.com, Inc. Restated 1998Stock Option Plan (the "Gear.com Restated 1998 Stock Option Plan"). The Gear.com Restated 1998 Stock Option Plan provided for the grant ofincentive stock options to Gear.com employees or the employees of Gear.com's parent or subsidiary, and the grant of nonstatutory stock optionsto Gear.com, or Gear.com parent's or subsidiary's, employees, directors, consultants, agents, advisors, and independent contractors. As amendedon February 22, 2001, 181,154 shares of common stock were reserved for issuance under this Plan and as of December 31, 2003, options topurchase 1,548 shares of our common stock were outstanding. The Gear.com Restated 1998 Stock Option Plan terminated on the close of our acquisition of Gear.com and we will not grant any additional options under the plan. However, the outstanding options issued pursuant to the plancontinue to be governed by its terms. The Gear.com Restated 1998 Stock Option Plan provides that after termination of employment or serviceother than by reason of death or Cause (as defined in the Plan), an optionee may exercise his or her option to the extent it was exercisable on thedate of such termination within (i) one year if the termination is coincident with retirement, early retirement at the Company's request, or disability,or (ii) three months after termination for reasons other than retirement, early retirement at the Company's request, or disability. Generally, iftermination is due to death, the option will remain exercisable for twelve (12) months from the date of such termination. If termination is for Cause(as defined in the Plan), the option will automatically terminate upon first notification to the optionee of such termination. In no event may an optionbe exercised after the expiration of the option term. The Gear.com Restated 1998 Stock Option Plan generally provides that in the event of (i) the consummation of a merger or consolidation inwhich we are not the surviving corporation or in which more than 331/3% of our total combined voting power is transferred to persons different fromthe persons holding those securities immediately prior to such merger or consolidation, (ii) the consummation of any sale, exchange or transfer ofall or substantially all of our assets (other than a transfer to our majority owned subsidiary corporation), or (iii) shareholder approval of a plan orproposal for our liquidation or dissolution, each outstanding option shall automatically accelerate so that immediately prior to the effective date ofthe corporate transaction each option shall become 100% vested and exercisable; provided, however, that options shall not accelerate if and to theextent the options are assumed or substituted by the successor corporation or parent thereof. If an executive officer's employment is terminatedwithin two years following a corporate transaction in which options were assumed or substituted, other than a voluntary termination of theexecutive officer without Good Reason (as defined in the Plan) or a termination by the successor corporation for Cause (as defined in the Plan),then the executive officer's option shall accelerate and become fully vested. Except to the extent assumed or substituted by the successorcorporation, all options will terminate and cease to be outstanding immediately following the consummation of a corporate transaction.Amended and Restated 1999 Stock Option Plan Our Amended and Restated 1999 Stock Option Plan was adopted by our board of directors on May 1, 1999, and approved by ourstockholders on October 5, 1999. Our Amended and Restated 1999 Stock Option Plan provides for the grant of incentive stock options to ouremployees, and the grant of55 nonstatutory stock options to our employees, directors and consultants. We reserved an aggregate of 1,764,291 shares of our common stock forissuance under this plan; however, any shares of our common stock available for issuance thereunder have been and continue to be assumed byour 2002 Stock Option Plan. As of the closing of our initial public offering we are not granting any additional options under this plan. Instead we aregranting options under our 2002 Stock Option Plan. The Amended and Restated 1999 Stock Option Plan provides that after termination of service, an optionee may exercise his or her option tothe extent it was exercisable on the date of such termination for a certain period of time. Generally, if termination is due to death or disability, theoption will remain exercisable for twelve (12) months from the date of such termination. If termination is due to an optionee's misconduct, theoption will terminate and cease to be outstanding. In all other cases, the option will generally remain exercisable for a period of three (3) monthsfollowing termination. The Amended and Restated 1999 Stock Option Plan provides that in the event of the sale, transfer or other disposition of all or substantiallyall of our assets in our complete liquidation or dissolution, or a merger or consolidation in which more than 50% of our total combined voting poweris transferred to persons different from the persons holding those securities immediately prior to such merger or consolidation, the outstandingoptions under the plan may be assumed by the successor entity or, in the administrator's discretion, the vesting of all outstanding options may beaccelerated so that the options become fully vested and exercisable immediately prior to such transaction. In addition, the administrator mayaccelerate the vesting of assumed options in the event the optionee is involuntarily terminated within eighteen (18) months following suchtransaction. After such an involuntary termination, the accelerated options will remain exercisable for one (1) year from the date of termination orthe expiration of the option term, whichever is shorter. In the event of the direct or indirect acquisition by any person of beneficial ownershiprepresenting more than 50% of the total combined voting power of our outstanding securities, or a change in the composition of the board over aperiod of thirty-six (36) consecutive months, or less, in which a majority of the board members cease to be incumbent directors, or were notelected by at least a majority of the incumbent directors, the administrator has the discretion to accelerate the vesting of any outstanding optionsso that the options become fully vested and exercisable upon such occurrence, or to condition such option acceleration on an optionee'sinvoluntary termination within a period of up to 18 months following such change in control.2002 Stock Option Plan. Our 2002 Stock Option Plan was adopted by our board of directors and approved by our stockholders in April 2002. Our 2002 Stock OptionPlan provides for the grant of incentive stock options, within the meaning of Section 422 of the Code, to our employees, and for the grant ofnonstatutory stock options and stock purchase rights to our employees, directors and consultants. Number of Shares of Common Stock Available under the 2002 Stock Option Plan. We have reserved a total of 638,680 shares of ourcommon stock for issuance pursuant to the 2002 Stock Option Plan. In addition, any remaining shares that were initially reserved under ourAmended and Restated 1999 Stock Option Plan and would have been available for issuance under our Amended and Restated 1999 Stock OptionPlan are instead reserved for issuance and assumed under our 2002 Stock Option Plan. As of December 31, 2003, 328,128 shares were availablefor future issuance. Administration of the 2002 Stock Option Plan. Our board of directors or, with respect to different groups of optionees, different committeesappointed by our board, will administer the 2002 Stock Option Plan. In the case of options intended to qualify as "performance basedcompensation" within the meaning of Section 162(m) of the Code, the committee will consist of two or more "outside directors" within the meaningof Section 162(m) of the Code. The administrator has the power to determine the terms of the options and stock purchase rights granted, includingthe exercise price, the56 number of shares subject to each option or stock purchase right, the exercisability of the options and stock purchase rights and the form ofconsideration payable upon exercise. Options. The administrator determines the exercise price of options granted under the 2002 Stock Option Plan, but with respect tononstatutory stock options intended to qualify as "performance based compensation" within the meaning of Section 162(m) of the Code and allincentive stock options, the exercise price must be at least equal to the fair market value of our common stock on the date of grant. The term ofan incentive stock option may not exceed ten (10) years, except that with respect to any participant who owns 10% of the voting power of allclasses of our outstanding capital stock, the term must not exceed five (5) years and the exercise price must equal at least 110% of the fairmarket value on the grant date. The administrator determines the term of all other options. No optionee may be granted an option to purchase more than 423,430 shares in any fiscal year. In connection with his or her initial serviceas an employee, an optionee may be granted an additional option to purchase up to 423,430 shares. After termination of one of our employees, directors or consultants, he or she may exercise his or her option for the period of time stated inthe option agreement. Generally, if termination is due to death or disability, the option will remain exercisable for twelve (12) months. In all othercases, the option will generally remain exercisable for three (3) months. However, an option may never be exercised later than the expiration of itsterm. Stock Purchase Rights. Stock purchase rights, which represent the right to purchase our common stock, may be issued under our 2002Stock Option Plan. The administrator determines the purchase price of stock purchase rights granted under our 2002 Stock Option Plan. Unlessthe administrator determines otherwise, a restricted stock purchase agreement, an agreement between us and an optionee which governs theterms of stock purchase rights, will grant us a repurchase option that we may exercise upon the voluntary or involuntary termination of thepurchaser's service with us for any reason, including death or disability. The purchase price for shares we repurchase will generally be the originalprice paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to us. The administrator determines the rate atwhich our repurchase option will lapse. Transferability of Options and Stock Purchase Rights. Our 2002 Stock Option Plan generally does not allow for the transfer of options orstock purchase rights and only the optionee may exercise an option or stock purchase right during his or her lifetime. Adjustments upon Change in Control. Our 2002 Stock Option Plan provides that in the event of a change of control, the successorcorporation will assume or substitute each option or stock purchase right. If the outstanding options or stock purchase rights are not assumed orsubstituted, the administrator will provide notice to the optionee that he or she has the right to exercise the option or stock purchase right as to allof the shares subject to the option or stock purchase right, including shares which would not otherwise be exercisable, for a period of fifteen(15) days from the date of the notice. The option or stock purchase right will terminate upon the expiration of the fifteen (15)-day period. In addition,in the event that the optionee is involuntarily terminated without cause within eighteen months following a change of control, he or she will have theright to exercise the option or stock purchase right as to all of the shares subject to the option or stock purchase right, including the shares whichwould not otherwise be exercisable. Amendment and Termination of our 2002 Stock Option Plan. Our 2002 Stock Option Plan will automatically terminate in 2012, unless weterminate it sooner. In addition, the administrator has the authority to amend, suspend or terminate the 2002 Stock Option Plan provided suchamendment does not impair the rights of any optionee.57 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 2003:•None of the members of the Compensation Committee was an officer (or former officer) or employee of the Company or any of itssubsidiaries; •None of the members of the Compensation Committee entered into (or agreed to enter into) any transaction or series of transactionswith the Company or any of its subsidiaries in which the amount involved exceeds $60,000; •None of the Company's executive officers served on the Compensation Committee (or another Board committee with similarfunctions or, if there was no committee like that, the entire Board of Directors) of another entity where one of that entity's officersserved on the Company's Board or as a member of its Compensation Committee; and •None of the Company's executive officers was a director of another entity where one of that entity's officers served on theCompany's Compensation Committee. REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION The Committee has provided the following report on the compensation of the executive officers including the chief executive officer and therelationship of the Company's performance to executive compensation. Compensation Committee Report In 2003, the Compensation Committee (the "Committee") of the Board consisted of Messrs. Fisher and Macklin, neither of whom was an employee or former employee of the Company or any of its subsidiaries during the year. The Committee has overall responsibility for theCompany's executive compensation policies and practices. The Committee's functions include:•evaluating management's performance, •reviewing and approving the Company's compensation philosophy, •reviewing and approving all executive officers' compensation, including salaries, and •administering compensation plans including granting awards under the Company's stock option plans to its employees.Compensation of the Chief Executive Officer The Company's President, Patrick M. Byrne, declined to accept any salary or bonus payment from the Company during 2003. Dr. Byrne alsodeclined to accept any salary or bonus payment from the Company during each of the two preceding years. Dr. Byrne's lack of any cashcompensation bears no relationship at all to the Company's performance. In addition to serving as President, Dr. Byrne serves as Chairman of the Board of Directors, and controls High Plains Investments, LLC,which is the Company's largest stockholder. The Committee believes that Dr. Byrne's economic interest in the Company, directly and through HighPlains Investments LLC, is fully aligned with the economic interests of the other stockholders.Compensation Policies Applicable to other Executive Officers The Company's compensation program for its executive officers other than Dr. Byrne consists of (i) salaries, and (ii) stock option grants.58 Salaries. The Company pays its executive officers other than Dr. Byrne salaries that are determined, in part, based on the responsibilitiesof the position and the experience and knowledge of the individual. Salaries are adjusted periodically at the discretion of the Committee, taking intoconsideration factors including the Company's growth, performance and financial condition and the Committee's subjective perception of theindividual's performance. The Company did not pay any bonuses to any of its executive officers during 2003. The lack of any bonus paymentsbears no relationship at all to the Company's performance. Stock Option Grants. The second component of the Company's compensation program consists of stock option grants. The optionsgranted to executive officers during 2003 were granted in January, March, April, and July of 2003, with exercise prices of $15.25, $13.57, $8.54and $13.09 per share, respectively, which the Committee determined to be equal to the fair market value of the underlying shares of commonstock on the date of grant. The Committee believes that stock option grants or other equity awards provide proper incentives to management andalign the economic interests of management with those of the other stockholders. Members of the Compensation CommitteeGordon S. MacklinJohn A. Fisher Stock Performance Graph The following graph shows a comparison of cumulative total stockholder return, calculated on a dividend reinvested basis, from the effectivedate of the initial public offering of Overstock's common stock (May 30, 2002) through December 31, 2003 for Overstock, Media General's NasdaqU.S. Index and Media General'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 the above indices on May 30, 2002. Historic stock price performance is not necessarilyindicative of future stock price performance. ASSUMES $100 INVESTED ON MAY 30, 2002ASSUMES DIVIDENDS REINVESTEDFISCAL YEAR ENDING DECEMBER 31, 2003 59 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth information regarding the beneficial ownership of our common stock as of December 31, 2003 by the followingindividuals or groups:•each person or entity who is known by us to own beneficially more than 5% of our outstanding stock; •each of our named officers; •each of our directors; and •all directors and executive officers as a group. The table is based upon information supplied by officers, directors and principal stockholders and schedules 13D and 13G filed with the SEC.Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting andinvestment power with respect to all shares of common stock held by them. Applicable percentages are based on 16,485,348 shares of commonstock outstanding as of December 31, 2003, as adjusted as required by rules promulgated by the SEC. Shares Beneficially Owned Beneficial Owner (Name and Address) Number Percent 5% Stockholders High Plains Investments LLC700 Bitner RoadPark City, Utah 84098 5,707,261(1)34.6% Dorothy M. Byrne3 Laramie RoadEtna, NH 03750 1,270,735(2)7.7% John J. Byrne Jr.3 Laramie RoadEtna, NH 03750 1,270,735(3)7.7% Krevlin Advisors LLC650 Madison Ave, 26th FloorNew York, NY 10022 880,039 5.3% Ashford Capital Management, Inc.P. O. Box 4172Wilmington, DE 19807 954,050 5.8%Directors and Executive Officers Patrick M. Byrne 6,147,861(4)37.3% Gordon S. Macklin 318,964(5)1.9% Jonathan E. Johnson III 15,200(6)* Shawn Schwegman 28,915(7)* Allison H. Abraham 12,083(8)* John A. Fisher 10,166(9)* David K. Chidester 17,048(10)* Directors and Officers as a Group (7 persons) 6,550,237(11)39.7%*Less than 1% of the outstanding shares of common stock. (1)Includes 629,536 shares issuable upon exercise of currently exercisable warrants. Patrick M. Byrne, our President and Chairman of ourBoard of Directors, holds 100% of the voting interest in and60controls High Plains Investments LLC. These shares also include 201,693 shares held by High Meadows Finance L.C. High PlainsInvestments LLC disclaims beneficial ownership of the shares held by High Meadows Finance L.C. to the extent it does not exercise votingor dispositive control over the shares held by High Meadows Finance L.C.(2)Ms. Byrne's shares include 4,414 shares issuable upon exercise of currently exercisable warrants. Ms. Byrne's shares also include 365,107shares held by Haverford-Utah, LLC; 50,361 shares issuable upon exercise of currently exercisable warrants held by Haverford-Utah, LLC;201,693 shares held by High Meadows Finance L.C.; 523,545 shares held by John J. Byrne Jr.; and 92,850 shares issuable upon exercise of currently exercisable warrants held by John J. Byrne Jr. Ms. Byrne disclaims beneficial ownership of the shares held by Haverford-Utah,LLC; and High Meadows Finance L.C. except to the extent of her pecuniary interest in each entity respectively. Ms. Byrne also disclaimsbeneficial ownership of the shares held by John J. Byrne Jr. to the extent she does not exercise voting or dispositive control over theshares held by John J. Byrne Jr. (3)John J. Byrne Jr.'s shares include 92,850 shares issuable upon exercise of currently exercisable warrants. Mr. Byrne's shares also include:365,107 shares held by Haverford-Utah, LLC and 50,361 shares issuable upon exercise of currently exercisable warrants held by Haverford-Utah, LLC; 201,693 shares held by High Meadows Finance L.C.; 32,765 shares held by Dorothy Byrne; and 4,414 shares issuable uponexercise of currently exercisable warrants held by Dorothy Byrne. Mr. Byrne disclaims beneficial ownership of the shares held by Haverford-Utah, LLC and High Meadows Finance L.C. except to the extent of his pecuniary interest in each entity, respectively. Mr. Byrne alsodisclaims beneficial ownership of the shares held by Dorothy Byrne to the extent he does not exercise voting or dispositive control over theshares held by Dorothy Byrne. (4)Patrick M. Byrne's shares include 106,000 shares issuable upon exercise of options. Patrick M. Byrne's shares also include 4,876,032shares held by High Plains Investments LLC; 629,536 shares issuable upon exercise of currently exercisable warrants held by High PlainsInvestments LLC; and 201,693 shares held by High Meadows Finance L.C. Dr. Byrne disclaims beneficial ownership of the shares held byHigh Plains Investments LLC and High Meadows Finance L.C. except to the extent of his pecuniary interests in each entity respectively. (5)Mr. Macklin's shares include 25,124 shares issuable upon exercise of options and an aggregate of 257,810 shares and warrants currentlyexercisable for an aggregate of 36,030 shares held by the following entities: Macklin Family Limited Partnership I, the Macklin FamilyLimited Partnership III, the Gordon Macklin Family Trust and the Marilyn C. Macklin Family Trust. (6)Mr. Johnson's shares include 15,200 shares issuable upon the exercise of options. (7)Mr. Schwegman's shares include 21,227 shares issuable upon the exercise of options. (8)Ms. Abraham's shares include 9,583 shares issuable upon exercise of options. (9)Mr. Fisher's shares include 9,166 shares issuable upon exercise of options. (10)Mr. Chidester's shares include 17,048 shares issuable upon exercise of options. (11)Includes a total of 203,348 shares issuable upon exercise of options granted to our executive officers and directors and 665,566 sharesissuable upon exercise of currently exercisable warrants. The following table provides information as of December 31, 2003 with respect to shares of our common stock that may be issued under ourexisting equity compensation plans.61 Equity Compensation Plan Information Plan category Number of securities tobe issued uponexercise of outstandingoptions, warrants andrights Weighted averageexercise price ofoutstanding options,warrants and rights Number ofsecuritiesremaining availablefor future issuanceEquity compensation plans approved bysecurity holders 2,849,101 $7.33 328,128Equity compensation plans not approved bysecurity holders — — —Total 2,849,101 $7.33 328,128 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain Relationships and Related Transactions Since January 1, 2003, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we wereor are to be a party in which the amount involved exceeds $60,000 and in which any director, executive officer or holder of more than 5% of ourcommon stock had or will have a direct or indirect interest other than the transactions described below. On occasion, Haverford Valley, L.C. and certain affiliated entities make travel arrangements for our executives and pay the travel relatedexpenses incurred by our executives on Company business. In 2003 we reimbursed Haverford Valley, L.C. approximately $236,000 for theseexpenses. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Audit Fees The aggregate fees PricewaterhouseCoopers LLP billed us for each of the last two fiscal years for professional services for the audits of our annual financial statements and review of financial statements included in our Reports on Form 10-Q or services normally provided byPricewaterhouseCoopers LLP in connection with filings or engagements for those years were $130,000 in 2002 and $177,500 in 2003.Audit-Related Fees The aggregate fees PricewaterhouseCoopers LLP billed us in each of the last two fiscal years for assurance and related services that arereasonably related to the performance of the audit or review of the Company's financial statements and are not reported above under the caption"Audit Fees" were $340,000 in 2002, all of which was for audit-related services in connection with our initial public offering, and $138,000 in 2003,of which $120,000 was for audit-related services in connection with our follow-on offering in the first quarter of 2003, and of which $18,000 was forconsultations regarding revenue recognition and compliance with the Sarbanes-Oxley Act of 2002.Tax Fees PricewaterhouseCoopers LLP did not bill us any additional fees in the last two fiscal years for compliance, tax advice, or tax planning.All Other Fees PricewaterhouseCoopers LLP did not bill us any additional fees in the last two fiscal years for products and services provided byPricewaterhouseCoopers LLP, other than the services reported above.62 Audit Committee Pre-Approval PoliciesGeneral The Audit Committee has adopted an Audit and Non-Audit Services Pre-Approval Policy, which sets forth the procedures and the conditionspursuant to which services to be performed by the independent auditor are to be pre-approved. Under the Policy, proposed services either may bepre-approved by agreeing to a framework with descriptions of allowable services with the Audit Committee ("general pre-approval"), or require thespecific pre-approval of the Audit Committee ("specific pre-approval"). Unless a type of service has received general pre-approval, it requiresspecific pre-approval by the Audit Committee if it is to be provided by the independent auditor. The Policy describes the Audit, Audit-related, Tax and All Other Services that are subject to the general pre-approval of the Audit Committee.The Audit Committee will annually review and pre-approve the services that may be provided by the independent auditor that are subject to generalpre-approval. Under the Policy, the Audit Committee may delegate either type of pre-approval authority to its chairperson or any other member ormembers. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the AuditCommittee at its next meeting. The Policy does not delegate the Audit Committee's responsibilities to pre-approve services performed by theindependent auditor to management.Audit Services The annual Audit services engagement scope and terms are subject to the general pre-approval of the Audit Committee. Audit servicesinclude the annual financial statement audit (including required quarterly reviews) and other procedures required to be performed by theindependent auditor to be able to form an opinion on the Company's consolidated financial statements. Audit services also include the attestationengagement for the independent auditor's report on management's assertion on internal controls for financial reporting. The Policy provides that theAudit Committee will monitor the Audit services engagement throughout the year and will also approve, if necessary, any changes in terms andconditions resulting from changes in audit scope or other items. The Policy provides for Audit Committee pre-approval of specific Audit services.Audit-related Services Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of theCompany's financial statements or that are traditionally performed by the independent auditor. Under the Policy, the Audit Committee grantsgeneral pre-approval to specified Audit-related services. All other Audit-related services not specified must be specifically pre-approved by theAudit Committee.Tax Services Under the Policy, the Audit Committee grants general pre-approval to specific tax compliance, planning and advice services that havehistorically been provided by the auditor, that the Audit Committee has reviewed and believes would not impair the independence of the auditor,and that are consistent with the SEC's rules on auditor independence. Other tax services must be specifically approved by the Audit Committee.All Other Services Under the Policy, the Audit Committee grants general pre-approval to specific permissible non-audit services classified as All Other Servicesthat it believes are routine and recurring services, would not impair the independence of the auditor and are consistent with the SEC's rules onauditor63 independence. Services permissible under applicable rules but not specifically approved in the Policy require further specific pre-approval by theAudit Committee.Procedures The Policy provides that at the beginning of each year, the chief financial officer and the Company's independent auditor will jointly submit tothe Audit Committee a schedule of audit, audit-related, tax and other non-audit services that are subject to general pre-approval. This schedule willprovide a description of each type of service that is subject to general pre-approval and, where possible, will provide projected fees (or a range ofprojected fees) for each service. The Audit Committee will review and approve the types of services and review the projected fees for the nextfiscal year. Any changes to the fee amounts listed in the schedule will be subject to further specific approval of the Audit Committee. The Policyprohibits the independent auditor from commencing any project not described in the schedule approved by the Audit Committee until specificapproval has been given. The Audit Committee did not pre-approve any of the services described above under the caption "Audit Related Fees" pursuant toparagraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X, as those services were performed prior to the effective date of the pre-approval requirements.64 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)1. Financial StatementsINDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent AuditorsConsolidated Balance SheetsConsolidated Statements of OperationsConsolidated Statement of Stockholders' Equity and Comprehensive IncomeConsolidated Statements of Cash FlowsNotes to Consolidated Financial StatementsSchedule II Valuation and Qualifying Accounts 2. Financial Statement Schedules Schedule II Valuation and Qualifying Accounts listed in (a)(1) above is included herein. Schedules other than those listed above have beenomitted as they are either not required, not applicable, or the information has otherwise been shown in the consolidated financial statements ornotes 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 Document3.1(a) Amended and Restated Certificate of Incorporation of the Registrant currently in effect.3.2(a) Amended and Restated Bylaws of the Registrant currently in effect.4.1(b) Form of specimen certificate for Overstock.com, Inc.'s common stock.4.2(b) Investor Rights Agreement, dated March 4, 2002.10.1(b) Form of Indemnification Agreement between Overstock.com, Inc. and each of its directors andofficers.10.2(b) Amended and Restated 1999 Stock Option Plan and form of agreements thereunder.10.3(b) 2001 Stock Purchase Plan and form of agreements thereunder.10.4(b) Gear.com, Inc. Restated 1998 Stock Option Plan and form of agreements thereunder.10.5(b) 2002 Stock Option Plan, as amended, and form of agreements thereunder.10.6(b) Agreement and Plan of Merger dated November 3, 2000 by and between Overstock.com, Inc.and Gear.com, Inc.10.7(b) Form of Guaranty of Credit agreement entered into by John J. Byrne, John J. Byrne III, PatrickM. Byrne, J. Gregory Hale, and Cirque Property LC in connection with the Norwich Associates,LC $7.0 million line of credit established on September 17, 2001.10.8(b) Lease Agreement dated January 23, 2002 between Overstock.com, Inc. and Holladay BuildingEast L.L.C.10.9(b) Lease Agreement dated November 27, 2001 between Overstock.com and Holladay BuildingEast L.L.C. 6510.10(b) First Lease Extension Agreement dated January 25, 2002 by and between Overstock.com,Inc. and Holladay Building East L.L.C.10.11(b) Lease Agreement, as amended, between 2855 E. Cottonwood Parkway, L.C., andDiscountsdirect, dated December 21, 1998.10.12(b) Lease Agreement by and between Overstock.com, Inc. and Marvin L. Oates Trust datedMarch 15, 2000.10.13(b) Severance Package Agreement with Douglas Greene dated June 17, 1999.10.14(b) Intellectual Property Assignment Agreement with Douglas Greene dated February 28, 2002.10.15(b)* Strategic Alliance and Product Sales Agreement dated February 26, 2002 betweenOverstock.com, Inc. and Safeway, Inc.10.16(b) Irrevocable Letter of Credit dated August 24, 2001 from Wells Fargo Bank, N.A. for theaccount of Patrick M. Byrne in favor of Wells Fargo Merchant Services, LLC.10.17(b) Lease Termination Agreement dated March 27, 2002 by and between Overstock.com, Inc. and2855 E. Cottonwood Parkway, L.C.10.18(b) Amendment No. 1, dated April 29, 2002 to Intellectual Property Assignment Agreement datedFebruary 28, 2002 by and between Overstock.com, Inc. and Douglas Greene.10.19(b) Registration and Expenses Agreement dated May 3, 2002 among Overstock.com, Inc. andAmazon.com NV Investment Holdings, Inc.10.20(b) Form of Warrant to purchase Overstock.com, Inc. common stock10.21(b) Form of Series A Preferred Stock Purchase Agreement dated March 4, 2002 amongOverstock.com, Inc., The Gordon S. Macklin Family Trust, Haverford Internet, LLC, John J.Byrne Jr., and twelve other purchasers of Series A Preferred Stock.10.22(c) Lease Amendment #1 by and between Overstock.com, Inc. and Marvin L. Oates Trust, datedAugust 28, 2000.10.23(c) Commencement of Lease Amendment #1 by and between Overstock.com, Inc. and Marvin L.Oates Trust, dated October 25, 2000.10.24(c) Lease Amendment #2 by and between Overstock.com, Inc. and Marvin L. Oates Trust, datedNovember 12, 2001.10.25(c) Lease Amendment #3 by and between Overstock.com, Inc. and Marvin L. Oates Trust, datedJuly 23, 2002.10.26(c) Lease Amendment #4 by and between Overstock.com, Inc. and Marvin L. Oates Trust, datedAugust 19, 2002.10.27(c) Lease Amendment #5 by and between Overstock.com, Inc. and Marvin L. Oates Trust, datedOctober 11, 2002.10.28(c) Lease Amendment #6 by and between Overstock.com, Inc. and Marvin L. Oates Trust, datedDecember 23, 2002.10.29(c) Old Mill Corporate Center First Amendment to the Lease Agreement by and betweenOverstock.com, Inc. and Holladay Building East L.L.C., dated September 1, 2002. 6610.30(c) Letter Agreement by and between Overstock.com, Inc. and James Hyde, dated May 30, 2001.10.31 Credit Agreement dated February 13, 2004 between Overstock.com, Inc. and Wells FargoBank National Association21 Subsidiaries of the Registrant 23.1 Consent of Independent Accountants24.1 Power of Attorney (see signature page)31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1 Section 1350 Certification of Chief Executive Officer32.2 Section 1350 Certification of Chief Financial Officer*We obtained confidential treatment from the Commission with respect to certain portions of this exhibit. A complete version of this exhibithas been filed separately with the Commission. (a)Incorporated by reference to exhibits of the same number filed with our Form 10-Q (File No. 000-49799), filed on August 13, 2002. (b)Incorporated by reference to exhibits of the same number filed with our Registration Statement on Form S-1 (File No. 333-83728), whichbecame effective on May 29, 2002. (c)Incorporated by reference to exhibits of the same number filed with our Registration Statement on Form S-1 (File No. 333-102763), whichbecame effective on February 12, 2003. (b)Reports on Form 8-K. During the last quarter of 2003, we filed a Report on Form 8-K on November 10, 2003.67 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized, on February 20, 2004. OVERSTOCK.COM, INC. By:/s/ PATRICK M. BYRNE Patrick M. ByrneChairman and President POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each ofPatrick M. Byrne, Jonathan E. Johnson III and David K. Chidester, his or her attorneys-in-fact, each with the power of substitution, for him or herin any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and otherdocuments in connection therewith, with the Securities and Exchange Commission, hereby ratifying and conforming all that said attorney-in-fact, orhis or their substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf ofthe registrant and in the capacities and on the dates indicated.Signature Title Date /s/ PATRICK M. BYRNE Patrick M. Byrne President and Chairman of the Board (PrincipalExecutive Officer) February 20, 2004/s/ DAVID K. CHIDESTER David K. Chidester Vice President, Finance (Principal Financial Officerand Principal Accounting Officer) February 20, 2004/s/ GORDON S. MACKLIN Gordon S. Macklin Director February 20, 2004 /s/ ALLISON H. ABRAHAM Allison H. Abraham Director February 20, 2004/s/ JOHN A. FISHER John A. Fisher Director February 20, 200468 EXHIBIT INDEX Exhibit Number Description of Document3.1(a)Amended and Restated Certificate of Incorporation of the Registrant currently in effect3.2(a)Amended and Restated Bylaws of the Registrant currently in effect4.1(b)Form of specimen certificate for Overstock.com, Inc.'s common stock4.2(b)Investor Rights Agreement, dated March 4, 200210.1(b)Form of Indemnification Agreement between Overstock.com, Inc. and each of its directors and officers10.2(b)Amended and Restated 1999 Stock Option Plan and form of agreements thereunder10.3(b)2001 Stock Purchase Plan and form of agreements thereunder10.4(b)Gear.com, Inc. Restated 1998 Stock Option Plan and form of agreements thereunder10.5(b)2002 Stock Option Plan, as amended, and form of agreements thereunder10.6(b)Agreement and Plan of Merger dated November 3, 2000 by and between Overstock.com, Inc. and Gear.com, Inc.10.7(b)Form of Guaranty of Credit agreement entered into by John J. Byrne, John J. Byrne III, Patrick M. Byrne, J. Gregory Hale,and Cirque Property LC in connection with the Norwich Associates, LC $7.0 million line of credit established onSeptember 17, 200110.8(b)Lease Agreement dated January 23, 2002 between Overstock.com, Inc. and Holladay Building East L.L.C.10.9(b)Lease Agreement dated November 27, 2001 between Overstock.com and Holladay Building East L.L.C.10.10(b)First Lease Extension Agreement dated January 25, 2002 by and between Overstock.com, Inc. and Holladay Building EastL.L.C.10.11(b)Lease Agreement, as amended, between 2855 E. Cottonwood Parkway, L.C., and Discountsdirect, dated December 21,199810.12(b)Lease Agreement by and between Overstock.com, Inc. and Marvin L. Oates Trust dated March 15, 200010.13(b)Severance Package Agreement with Douglas Greene dated June 17, 199910.14(b)Intellectual Property Assignment Agreement with Douglas Greene dated February 28, 200210.15(b)*Strategic Alliance and Product Sales Agreement dated February 26, 2002 between Overstock.com, Inc. and Safeway, Inc.10.16(b)Irrevocable Letter of Credit dated August 24, 2001 from Wells Fargo Bank, N.A. for the account of Patrick M. Byrne in favorof Wells Fargo Merchant Services, LLC10.17(b)Lease Termination Agreement dated March 27, 2002 by and between Overstock.com, Inc. and 2855 E. CottonwoodParkway, L.C.10.18(b)Amendment No. 1, dated April 29, 2002 to Intellectual Property Assignment Agreement dated February 28, 2002 by andbetween Overstock.com, Inc. and Douglas Greene10.19(b)Registration and Expenses Agreement dated May 3, 2002 among Overstock.com, Inc. and Amazon.com NV InvestmentHoldings, Inc.10.20(b)Form of Warrant to purchase Overstock.com, Inc. common stock10.21(b)Form of Series A Preferred Stock Purchase Agreement dated March 4, 2002 among Overstock.com, Inc., The Gordon S.Macklin Family Trust, Haverford Internet, LLC, John J. Byrne Jr., and twelve other purchasers of Series A Preferred Stock 6910.22(c)Lease Amendment #1 by and between Overstock.com, Inc. and Marvin L. Oates Trust, dated August 28, 200010.23(c)Commencement of Lease Amendment #1 by and between Overstock.com, Inc. and Marvin L. Oates Trust, datedOctober 25, 200010.24(c)Lease Amendment #2 by and between Overstock.com, Inc. and Marvin L. Oates Trust, dated November 12, 200110.25(c)Lease Amendment #3 by and between Overstock.com, Inc. and Marvin L. Oates Trust, dated July 23, 200210.26(c)Lease Amendment #4 by and between Overstock.com, Inc. and Marvin L. Oates Trust, dated August 19, 200210.27(c)Lease Amendment #5 by and between Overstock.com, Inc. and Marvin L. Oates Trust, dated October 11, 200210.28(c)Lease Amendment #6 by and between Overstock.com, Inc. and Marvin L. Oates Trust, dated December 23, 200210.29(c)Old Mill Corporate Center First Amendment to the Lease Agreement by and between Overstock.com, Inc. and HolladayBuilding East L.L.C., dated September 1, 200210.30(c)Letter Agreement by and between Overstock.com, Inc. and James Hyde, dated May 30, 200110.31 Credit Agreement dated February 13, 2004 between Overstock.com, Inc. and Wells Fargo Bank National Association21 Subsidiaries of the Registrant23.1 Consent of Independent Accountants24.1 Power of Attorney (see signature page)31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1 Section 1350 Certification of Chief Executive Officer 32.2 Section 1350 Certification of Chief Financial Officer*We obtained confidential treatment from the Commission with respect to certain portions of this exhibit. A complete version of this exhibithas been filed separately with the Commission. (a)Incorporated by reference to exhibits of the same number filed with our Form 10-Q (File No. 000-49799), filed on August 13, 2002. (b)Incorporated by reference to exhibits of the same number filed with our Registration Statement on Form S-1 (File No. 333-83728), whichbecame effective on May 29, 2002. (c)Incorporated by reference to exhibits of the same number filed with our Registration Statement on Form S-1 (File No. 333-102763), whichbecame effective on February 12, 2003.70INDEX TO CONSOLIDATED FINANCIAL STATEMENTSReport of Independent AuditorsConsolidated Balance SheetsConsolidated Statements of OperationsConsolidated Statement of Stockholders' Equity and Comprehensive IncomeConsolidated Statements of Cash FlowsNotes to Consolidated Financial StatementsSchedule II Valuation and Qualifying AccountsF-1 Report of Independent AuditorsTo the Board of Directors andStockholders of Overstock.com, Inc. In our opinion, the consolidated financial statements listed in the index appearing on page F-1 present fairly, in all material respects, thefinancial position of Overstock.com, Inc. and its subsidiaries (the "Company") at December 31, 2002 and 2003, and the results of their operationsand their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generallyaccepted in the United States of America. In addition, in our opinion the financial statement schedule listed in the index appearing on page F-1presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financialstatements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibilityis to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of thesestatements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significantestimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonablebasis for our opinion. As discussed in Note 2 to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accountingfor goodwill in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets./s/ PricewaterhouseCoopers LLPSalt Lake City, UtahFebruary 20, 2004F-2 Overstock.com, Inc. Consolidated Balance Sheets December 31, 2002 2003 (in thousands) Assets Current assets: Cash and cash equivalents $11,059 $28,846 Marketable securities 21,603 11,500 Accounts receivable, net 6,994 10,183 Inventories, net 13,954 29,926 Prepaid expenses and other assets 2,333 4,583 Total current assets 55,943 85,038 Property and equipment, net 4,945 9,483 Goodwill 2,784 2,784 Other long-term assets, net 284 427 Total assets $63,956 $97,732 Liabilities, Redeemable Securities and Stockholders' Equity Current liabilities: Accounts payable $13,731 $30,363 Accrued liabilities 6,409 9,316 Capital lease obligations, current 124 75 Total current liabilities 20,264 39,754 Capital lease obligations, non-current 58 86 Total liabilities 20,322 39,840 Commitments and contingencies (notes 10, 11 and 12) Redeemable common stock, $0.0001 par value, 683 and 460 shares issued and outstanding as ofDecember 31, 2002 and 2003, respectively 4,363 2,978 Stockholders' equity: Common stock, $0.0001 par value, 100,000 shares authorized, 13,866 and 16,060 shares issued asof December 31, 2002 and 2003, respectively 1 2 Additional paid-in capital 97,282 123,934 Accumulated deficit (55,666) (67,815) Unearned stock-based compensation (2,327) (1,094) Treasury stock, 35 shares at cost (100) (100) Accumulated other comprehensive income (loss) 81 (13) Total stockholders' equity 39,271 54,914 Total liabilities, redeemable securities and stockholders' equity $63,956 $97,732 The accompanying notes are an integral part of these consolidated financial statements.F-3 Overstock.com, Inc. Consolidated Statements of Operations Year ended December 31, 2001 2002 2003 (in thousands, except per share data) Direct revenue $35,243 $77,943 $136,592 Fulfillment partner revenue 3,965 12,379 100,811 Warehouse revenue 795 1,462 1,542 Total revenue 40,003 91,784 238,945 Cost of goods sold (includes amortization of stock-based compensation of $78, $373,and $90, respectively) 34,640 73,441 213,492 Gross profit 5,363 18,343 25,453 Operating expenses: Sales and marketing expenses (excludes amortization of stock-based compensation of$14, $83, and $22, respectively) 5,784 8,669 20,173 General and administrative expenses (excludes amortization of stock-basedcompensation of $635, $2,820, and $734, respectively) 9,441 10,825 16,911 Amortization of goodwill 3,056 — — Amortization of stock-based compensation 649 2,903 756 Total operating expenses 18,930 22,397 37,840 Operating loss (13,567) (4,054) (12,387)Interest income 461 403 461 Interest expense (729) (465) (76)Other income (expense), net 29 (444) 115 Net loss (13,806) (4,560) (11,887)Deemed dividend related to redeemable common stock (404) (406) (262)Deemed dividend related to beneficial conversion feature of preferred stock — (6,607) — Net loss attributable to common shares $(14,210)$(11,573)$(12,149) Net loss per common share—basic and diluted $(1.29)$(0.88)$(0.75)Weighted average common shares outstanding—basic and diluted 10,998 13,108 16,198 The accompanying notes are an integral part of these consolidated financial statements.F-4 Overstock.com, Inc. Consolidated Statements of Stockholders' Equityand Comprehensive Income Common stock AccumulatedOtherComprehensiveIncome AdditionalPaid-in capital Accumulateddeficit Unearnedstock-basedcompensation Treasurystock Shares Amount Total (amounts in thousands) Balance at December 31, 2000 9,096 $1 $42,231 $(29,883)$— $— $— $12,349 Issuance of common stock 1,210 — 6,915 — — — — 6,915 Exercise of stock options 14 — 73 — — — — 73 Purchase of treasury stock — — — — — (100) — (100)Unearned stock-based compensationfrom options issued to employees — — 2,534 — (2,534) — — — Amortization of stock-basedcompensation — — — — 727 — — 727 Issuance of stock options toconsultants in exchange for services — — 384 — (208) — — 176 Lapse of rescission rights onredeemable common stock 7 — 50 — — — — 50 Deemed dividend related toredeemable common stock — — — (404) — — — (404)Net loss — — — (13,806) — — — (13,806) Balance at December 31, 2001 10,327 1 52,187 (44,093) (2,015) (100) — 5,980 Issuance of common stock 7 — 212 — — — — 212 Exercise of stock options andwarrants 149 — 615 — — — — 615 Deemed dividend related to beneficialconversion feature of preferred stock — — 6,607 (6,607) — — — — Conversion of Series A redeemablepreferred stock to common stock 959 — 6,582 — — — — 6,582 Issuance of common stock in IPO 2,256 — 26,140 — — — — 26,140 Unearned stock-based compensationfrom options issued to employees — — 3,481 — (3,481) — — — Amortization of stock-basedcompensation — — — — 3,276 — — 3,276 Issuance of stock options toconsultants in exchange for services — — 131 — (107) — — 24 Lapse of rescission rights onredeemable common stock 168 — 1,327 — — — — 1,327 Deemed dividend related toredeemable common stock — — — (406) — — — (406)Net loss — — — (4,560) — — — (4,560)Unrealized gain on marketablesecurities — — — — — — 81 81 Total comprehensive loss (4,479) Balance at December 31, 2002 13,866 1 97,282 (55,666) (2,327) (100) 81 39,271 Exercise of stock options andwarrants 247 — 1,227 — — — — 1,227 Issuance of common stock in Follow-on offering 1,725 1 23,967 — — — — 23,968 Issuance of common stock — — 21 — — — — 21 Forfeitures of unearned stock-basedcompensation from options issued toemployees — — (478) — 478 — — — Amortization of stock-basedcompensation — — — — 846 — — 846 Issuance of stock options toconsultants in exchange for services — — 268 — (91) — — 177 Lapse of rescission rights onredeemable common stock 222 — 1,647 — — — — 1,647 Deemed dividend related toredeemable common stock — — — (262) — — — (262)Net loss — — — (11,887) — — — (11,887)Realized gain on marketablesecurities — — — — — — (15) (15)Unrealized loss on marketablesecurities — — — — — — (78) (78)Cumulative translation adjustment — — — — — — (1) (1) Total comprehensive loss (11,981) Balance at December 31, 2003 16,060 $2 $123,934 $(67,815)$(1,094)$(100)$(13)$54,914 The accompanying notes are an integral part of these consolidated financial statements.F-5 Overstock.com, Inc. Consolidated Statements of Cash Flows Year ended December 31, 2001 2002 2003 (in thousands) Cash flows from operating activities: Net loss $(13,806)$(4,560)$(11,887) Adjustments to reconcile net loss to net cash (used in) provided by operatingactivities: Depreciation and amortization 1,735 1,873 2,325 Amortization of goodwill 3,056 — — Amortization of unearned stock-based compensation 727 3,276 846 Realized loss (gain) on marketable securities — 55 (15) Stock options issued to consultants for services 176 24 177 Stock issued to employees 63 181 21 Amortization of debt discount 291 242 — Selling shareholder fees — 439 — Changes in operating assets and liabilities: Accounts receivable (774) (5,429) (3,189) Inventories, net 1,081 (6,368) (15,972) Prepaid expenses and other assets 920 (1,857) (2,250) Other long-term assets (263) 246 (7) Accounts payable (1,532) 10,051 16,632 Accrued liabilities (2,133) 4,316 2,907 Net cash (used in) provided by operating activities (10,459) 2,489 (10,412) Cash flows from investing activities: Purchases of marketable securities — (34,819) (41,363) Sales of marketable securities — 13,243 51,388 Expenditures for property and equipment (1,669) (1,746) (6,707) Expenditures for other long-term assets (35) (5) (172) Net cash provided by (used in) investing activities (1,704) (23,327) 3,146 Cash flows from financing activities: Payments on capital lease obligations (248) (261) (141) Borrowings on related party note payables 4,500 1,160 — Payments on related party note payables (3,000) (5,660) — Issuance of redeemable preferred stock — 6,582 — Issuance of common stock in offerings, net of issuance costs — 26,140 23,968 Payment of selling shareholder fees — (439) — Issuance of common stock 6,319 31 — Exercise of stock options and warrants 73 615 1,227 Purchase of treasury stock (100) — — Net cash provided by financing activities 7,544 28,168 25,054 Effect of exchange rate changes on cash — — (1) Net increase (decrease) in cash and cash equivalents (4,619) 7,330 17,787 Cash and cash equivalents, beginning of year 8,348 3,729 11,059 Cash and cash equivalents, end of year $3,729 $11,059 $28,846 Supplemental disclosures of cash flow information: Interest paid $271 $222 $51 Equipment acquired under capital leases 75 25 120 Deemed dividend on redeemable common stock 404 406 262 Deemed dividend related to beneficial conversion feature of redeemablepreferred stock — 6,607 — Conversion of Series A preferred stock to common stock — 6,582 — Unearned stock-based compensation (forfeitures) 2,534 3,481 (478) Lapse of rescission rights on redeemable common stock 50 1,327 1,647 The accompanying notes are an integral part of these consolidated financial statements.F-6 Overstock.com, Inc. Notes to Consolidated Financial Statements (all amounts in thousands, except per share data) 1. BUSINESS AND ORGANIZATION Overstock.com, Inc. (the "Company") is an online "closeout" retailer offering discount, brand-name merchandise for sale primarily over theInternet. The Company's merchandise offerings include bed-and-bath goods, kitchenware, watches, jewelry, electronics, sporting goods anddesigner accessories. The Company also sells books, magazines, CDs, DVDs, videocassettes and video games ("BMV") The Company was formed on May 5, 1997 as D2—Discounts Direct, a limited liability company. On December 30, 1998, the Company wasreorganized as a C Corporation in the State of Utah and reincorporated in Delaware in May 2002. On October 25, 1999, the Company changed its name to Overstock.com, Inc. On November 20, 2000, the Company acquired Gear.com, Inc. On July 23, 2003, the Company formed OverstockMexico, S. de R. L. de C.V., a wholly owned subsidiary to distribute its products in Mexico. The Company is subject to risks common to rapidly growing Internet-based companies, including rapid technological change, growth andconsumer acceptance of the Internet, dependence on principal products, new product development, new product introductions and other activitiesof competitors, and a limited operating history in Internet related e-commerce activities.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESPrinciples of consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significantintercompany account balances and transactions have been eliminated in consolidation.Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from thoseestimates.Fair value of financial instruments Cash equivalents include short-term, highly liquid instruments with original maturities of 90 days or less. At December 31, 2002 and 2003,three banks held the Company's cash and cash equivalents. The Company does not believe that, as a result of this concentration, it is subject toany unusual financial risk beyond the normal risk associated with commercial banking relationships. The Company's financial instruments,including cash, cash equivalents, accounts receivable, and accounts payable are carried at cost, which approximates their fair value because ofthe short-term maturity of these instruments. Marketable securities consist of funds deposited into capital management accounts managed by two financial institutions. The financialinstitutions have invested these funds in municipal, government and corporate bonds which are classified as available-for-sale and reported at fairvalue using the specific identification method. Realized gains and losses are included in other income (expense), net inF-7 the Statement of Operations. Unrealized gains and losses are excluded from earnings and reported as a component of other comprehensiveincome (loss), net of related estimated tax provisions or benefits.Accounts receivable Accounts receivable consist of amounts due from customers and from credit cards billed but not yet received at period end. The Companyrecorded an allowance for doubtful accounts of $145 and $650 at December 31, 2002 and 2003, respectively.Concentration of credit risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash equivalents,investment securities, and receivables. The Company invests its cash primarily in money market, government and corporate securities which areuninsured. The Company's accounts receivable are derived primarily from revenue earned from customers located in the United States. The Companymaintains an allowance for doubtful accounts based upon the expected collectibility of accounts receivable. During the years ended December 31,2002 and 2003, the Company recorded sales to its most significant customer totaling $14,620 and $21,044, respectively. There were no sales tothis customer during 2001. At December 31, 2002 and 2003, the Company had a receivable of $3,577 and $5,345, respectively, from thiscustomer. No other customer accounted for greater than 10% of revenues or receivables during 2001, 2002 or 2003.Inventories Inventories consist of merchandise purchased for resale and are stated at the lower of average cost or market. The Company establishesreserves for estimated obsolescence or damage equal to the difference between the cost of inventory and the estimated market value based uponassumptions about future demand and market conditions.Property and equipment Property and equipment, which includes capitalized leases, are recorded at cost and depreciated using the straight-line method over theestimated useful lives of the related assets or the term of the related lease, whichever is shorter, as follows: YearsComputer software 3Computer hardware 5Furniture and equipment 5 Leasehold improvements are amortized over the shorter of the term of the related leases or estimated service lives. Upon sale or retirementof assets, cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in operations. F-8 Other long-term assets Other long-term assets include deposits and the cost of acquiring the Overstock.com and other related domain names. The cost of thedomain names is being amortized using the straight-line method over 5 years.Goodwill Goodwill represents the excess of the purchase price paid over the fair value of the tangible net assets acquired for the purchase ofGear.com. From November 28, 2000, the date of the Gear.com acquisition, through December 2001, the Company amortized its goodwill on astraight-line basis using a 2 year estimated life. Effective January 1, 2002, Overstock.com adopted Statement of Financial Accounting Standards No. 142 Goodwill and Other IntangibleAssets. SFAS 142 applies to all goodwill and identified intangible assets acquired in a business combination. Under this standard, all goodwill andlong-lived intangible assets, including those acquired before initial application of the standard will not be amortized, but will be tested forimpairment at least annually. Accordingly, the Company ceased amortization of its goodwill in January 2002. The Company evaluated the $2,784of unamortized goodwill during 2002 and 2003, and determined that no impairment charge should be recorded. The following table shows what the Company's net loss and net loss per common share would have been for the years ended December 31,2001, 2002 and 2003 exclusive of the amortization expense: Year ended December 31, 2001 2002 2003 Reported net loss $(13,806)$(4,560)$(11,887)Add back: Goodwill amortization 3,056 — — Adjusted net loss $(10,750)$(4,560)$(11,887) Basic and diluted loss per share: Reported net loss per common share $(1.29)$(0.88)$(0.75)Add back: Goodwill amortization 0.28 — — Adjusted net loss per common share $(1.01)$(0.88)$(0.75) Impairment of long-lived assets The Company reviews property and equipment and other long-lived assets for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the assets' carrying amount tofuture undiscounted net cash flows the assets are expected to generate. Cash flow forecasts are based on trends of historical performance andmanagement's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. If suchassets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assetsexceeds the projected discounted future cash flows arising from the assets or their fair values, whichever is more determinable.F-9 Revenue recognition The Company derives its revenue from three sources: direct revenue, fulfillment partner revenue, and warehouse revenue. Revenue from allthree sources is recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) theproduct has been shipped and the customer takes ownership and assumes the risk of loss; (3) the selling price is fixed or determinable; and(4) collection of the resulting receivable is reasonably assured. Direct revenue consists of merchandise sales made to individual consumers and businesses that are fulfilled from our warehouse. TheCompany generally requires payment by credit card at the point of sale. From time to time, the Company grants credit to its business customerson normal credit terms. Amounts received prior to shipment of goods to customers are recorded as deferred revenue. Direct revenue is recordednet of returns, chargebacks and coupons redeemed by customers and other discounts to obtain such sales. Fulfillment partner revenue consists of sales of merchandise of third parties on the Company's Website, and is recognized when serviceshave been rendered (generally when verification of the shipment of the product is communicated to the Company from the third party that shippedthe product). Prior to July 1, 2003, the Company did not physically handle the merchandise sold in these transactions, as the merchandise wasshipped directly by a third party vendor, who also handled all customer returns related to these fulfillment partner sales. During that period, theCompany recognized as revenue only the commission portion of the price customers paid for the purchased products since the Company acted asan agent in such transactions. Beginning July 1, 2003, the Company took responsibility for all returned items relating to these sales and beganaccepting returned items relating to these sales into the Company's warehouse, and the Company now handles the possible resale of any returneditems. As a result, beginning July 1, 2003, the Company is considered to be the primary obligor for these sales transactions, and assumes the riskof loss on the returned items. As a consequence, the Company now records revenue from sales transactions involving fulfillment partners on agross basis, rather than recording a commission on sales as was recorded prior to July 1, 2003. During the fourth quarter of 2003, the Company added a discount travel store to the Company's Website. Fulfillment partners are used tosupply the travel products (flights, hotels, rental cars, etc.) in the store. For the products sold in the travel store, the Company does not currentlyhave inventory risk or pricing control, and does not provide customer service. Therefore, for these sales the Company is not considered to be theprimary obligor, and therefore, records only the commission as revenue. Fulfillment partner revenue is reduced by the impact of returns, chargebacks and coupons redeemed by customers and other discounts toobtain such sales. The Company's total gross sales values for its fulfillment partner revenue were $25,657, $65,526 and $156,624 during 2001,2002, and 2003, respectively; however, it recognized $3,965, $12,379 and $100,811 in related fulfillment partner revenue during 2001, 2002 and2003, respectively. Revenue from warehouse sales is recognized when the customer takes ownership, carries the products from the warehouse and assumesthe risk of loss. For warehouse sales, the Company generally requires payment by cash or credit card at the point of sale. Gross sales arereduced by chargebacks and discounts to obtain such sales. The Company closed its warehouse store in January 2004.F-10 Cost of goods sold Cost of goods sold include product costs, warehousing costs, inbound and outbound shipping costs, handling and fulfillment costs, customerservice costs and credit card fees, and are recorded in the same period in which related revenues have been recorded.Income taxes Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the futuretax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and theirrespective tax basis using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuationallowances are established when necessary to reduce deferred tax assets to the amounts expected to be ultimately realized. Income tax expense(benefit) is the tax payable (receivable) for the period and the change during the period in the deferred tax assets and liabilities.Stock-based compensation The Company measures compensation expense to employees for its equity incentive plan using the intrinsic value method prescribed byAccounting Principles Board Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees,and provides pro forma disclosures of netincome as if the fair value based method prescribed by Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, had been applied (Note 14). The following table provides a reconciliation of net loss to pro forma net loss as if the fair valuemethod had been applied to all awards. Year ended December 31, 2001 2002 2003 Net loss, as reported $(13,806)$(4,560)$(11,887)Add: Stock-based employee compensation expense included in reported netincome net of related tax effects 727 3,276 846 Deduct: Total stock-based employee compensation expense determined underfair value based method for all awards, net of related tax effects (1,057) (4,404) (2,714) Pro forma net loss $(14,136)$(5,688)$(13,755) Net loss per common share Basic and diluted—as reported $(1.29)$(0.88)$(0.75) Basic and diluted—pro forma $(1.32)$(0.97)$(0.87) The weighted average grant-date fair value of options granted during 2001, 2002 and 2003 was $5.97, $8.21 and $8.27 per share,respectively, and was estimated using the assumptions discussed in Note 14.F-11 Stock-based awards to non-employees are accounted for under the provisions of FAS 123 and Emerging Issues Task Force Issue 96-18,Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.Earnings (loss) per share Earnings (loss) per share is computed by dividing net income (loss) attiributable to common shares by the weighted average number ofcommon shares outstanding during the period. Diluted earnings (loss) per share assumes the exercise of all options and warrants which aredilutive, whether exercisable or not. The following table sets forth the computation of basic and diluted earnings (loss) per share for the periods indicated: Year ended December 31, 2001 2002 2003 Net loss attributable to common shares $(14,210)$(11,573)$(12,149) Weighted average common shares outstanding—basic 10,998 13,108 16,198 Effective of dilutive securities: Warrants — — — Employee stock options — — — Weighted average common shares outstanding—diluted 10,998 13,108 16,198 Earnings (loss) per common share—basic: $(1.29)$(0.88)$(0.75)Earnings (loss) per common share—diluted: $(1.29)$(0.88)$(0.75) The stock options and warrants outstanding were not included in the computation of diluted earnings per share because to do so would havebeen antidilutive. The number of shares of stock options and warrants outstanding at each year-end was 2,283 shares, 2,535 shares and 2,849shares for 2001, 2002 and 2003, respectively.Internal use software The Company expenses all costs incurred for the development of internal use software that relate to the planning and post implementationphases of the development. Direct costs incurred in the development phase are capitalized and recognized over the software's estimated usefullife of 3 years. There were no website development costs or software costs capitalized in 2002 and 2003. Research and development costs andother computer software maintenance costs related to software development are expensed as incurred.Advertising expense The Company recognizes advertising expenses in accordance with SOP 93-7 Reporting on Advertising Costs. As such, the Companyexpenses the costs of producing advertisements at the time production occurs, and expenses the cost of communicating advertising in the periodduring which theF-12 advertising space or airtime is used. Internet advertising expenses are recognized based on the terms of the individual agreements, which isgenerally: 1) during the period customers are acquired; or 2) based on the number of clicks generated during a given period over the term of thecontract. Advertising expenses totaled $4,802, $7,043 and $18,552 during the years ended December 31, 2001, 2002 and 2003, respectively.Foreign currency translation One of the Company's subsidiaries is located in Mexico where that subsidiary's local currency is considered its functional currency. All ofthat subsidiary's assets and liabilities are translated into U.S. dollars at exchange rates existing at the balance sheet dates, revenue and expensesare translated at weighted average exchange rates, and stockholders' equity is recorded at historical exchange rates. The resulting foreigncurrency translation adjustments are recorded as a separate component of stockholders' equity in the consolidated balance sheets as part ofaccumulated other comprehensive income (loss). Transaction gains and losses are included in other income (expense) in the consolidatedfinancial statements and have not been significant for any periods presented.Recently issued accounting pronouncements The Financial Accounting Standards Board issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of BothLiabilities and Equity. SFAS 150 establishes standards on the classification and measurement of certain financial instruments with characteristicsof both liabilities and equity. The provisions of SFAS 150 are effective for financial instruments entered into or modified after May 31, 2003 and toall other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. The adoption of thisstandard did not have a material effect on the Company's financial statements.3. PUBLIC OFFERINGS On June 4, 2002, the Company closed its initial public offering, pursuant to which it sold 2,155 shares of its common stock, and a sellingshareholder sold 845 shares of common stock at a price of $13.00 per share. The offering resulted in proceeds to the Company of approximately$24,880, net of $2,014 of issuance costs. As part of the offering, the Company granted the underwriter the right to purchase up to 450 additionalshares within thirty days after the offering to cover over-allotments. On June 27, 2002, the underwriter purchased an additional 101 shares of stockfor $1,260. At the closing of the offering, all issued and outstanding shares of the Company's redeemable convertible preferred stock wereautomatically converted into common stock on a 1:1 basis. As part of the initial public offering, the Company paid $439 of selling costs on behalf of the selling shareholder. This amount was recorded inother income (expense) in the statement of operations for the year ended December 31, 2002. In February 2003, the Company closed its follow-on public offering, pursuant to which it sold 1,725 shares of common stock, with proceedsto the Company of approximately $23,968, net of $613 of issuance costs. The number of shares issued includes 225 additional shares that theCompany granted the underwriter the right to purchase to cover any over-allotments F-134. MARKETABLE SECURITIES The Company's marketable securities consist of funds deposited into capital management accounts managed by two financial institutions.The financial institutions invested these funds in municipal, government, and corporate bonds at December 31, 2002, as follows: CostBasis UnrealizedGains UnrealizedLosses EstimatedMarket ValueU.S. government and government agency securities $18,114 $72 $— $18,186Asset backed and agency securities 386 — (2) 384Corporate securities 979 — (1) 978Money market securities 442 2 — 444Mortgage based securities 1,601 10 — 1,611 $21,522 $84 $(3)$21,603 The financial institutions have invested these funds in municipal, government, and corporate bonds at December 31, 2003, as follows: CostBasis UnrealizedGains UnrealizedLosses EstimatedMarket ValueU.S. government and government agency securities $9,299 $1 $(7)$9,293Corporate securities 296 — — 296Money market securities 748 1 — 749Mortgage based securities 1,169 — (7) 1,162 $11,512 $2 $(14)$11,500 All marketable securities mature between 2004 and 2006. The components of gains and losses on sales of marketable securities for the years ended December 31, 2001, 2002 and 2003 were: Year ended December 31, 2001 2002 2003 Gross gains $— $— $19 Gross losses — — (4) Net realized gain on sales of marketable securities $— $— $15 F-145. INVENTORIES Inventories consist of the following: December 31, 2002 2003 Product inventory $14,965 $31,064 Less: allowance for obsolescence (1,011) (1,138) $13,954 $29,926 6. PREPAID EXPENSES AND OTHER ASSETS Prepaid expenses and other assets consist of the following: December 31, 2002 2003Inventory paid for in advance of receipt $1,362 $2,946Other prepaid expenses 971 1,637 $2,333 $4,583 7. PROPERTY AND EQUIPMENT Property and equipment consists of the following: December 31, 2002 2003 Computer hardware and software $5,386 $9,249 Furniture and equipment 3,908 6,738 Leasehold improvements 12 146 9,306 16,133 Less: accumulated depreciation (4,361) (6,650) $4,945 $9,483 Depreciation of property and equipment totaled $1,712, $1,842, and $2,289 for the years ended December 31, 2001, 2002 and 2003,respectively. Property and equipment included assets under capital leases of $856 and $976 at December 31, 2002 and 2003, respectively andaccumulated amortization related to assets under capital leases of $691 and $824, respectively.F-15 8. OTHER LONG-TERM ASSETS Other long-term assets consist of the following: December 31, 2002 2003 Domain names $151 $323 Deposits 213 220 364 543 Less: accumulated amortization (80) (116) $284 $427 Amortization for other long-term assets totaled $23, $31 and $36 for the years ended December 31, 2001, 2002 and 2003, respectively.9. ACCRUED LIABILITIES Accrued liabilities consist of the following: December 31, 2002 2003Inventory received but not invoiced $2,734 $1,126Reserve for returns 465 1,110Accrued payroll and other related costs 673 850Other accrued expenses 604 1,582Accrued marketing expenses 1,233 2,674Merchant processing accrual 444 1,313Accrued freight 24 661Deferred revenue 232 — $6,409 $9,316 10. BORROWINGS On May 22, 2002, the Company entered into a $1,000 revolving credit agreement (the "Revolving Credit Facility") with Wells Fargo Bank,N.A. The proceeds are to be used for issuing standby and commercial letters of credit for the purchase of inventory. The Revolving Credit Facilitywas increased to $2,000 on October 9, 2003. The Revolving Credit Facility expires on June 30, 2004. As of December 31, 2003, there were noborrowings under this agreement; however, the Company has issued letters of credit totaling $1,882 under this facility. Effective February 23,2004, the Company increased this Revolving Credit Facility to $3,500.F-16 Capital leases Future minimum lease payments under capital leases are as follows:Year EndingDecember 31, 2004 $85 2005 42 2006 23 2007 20 2008 7 Thereafter — Total minimum lease payments 177 Less: amount representing interest (16) Present value of capital lease obligations 161 Less: current portion (75) Capital lease obligations, non-current $86 11. COMMITMENTS AND CONTINGENCIES The Company leases 33 square feet of office space and 354 square feet for its warehouse facility in Salt Lake City, Utah. The Company alsohas lease obligations under non-cancelable operating leases for computer equipment. Minimum future payments under these leases are as follows:Year EndingDecember 31, 2004 $1,5752005 1,3272006 7812007 65Thereafter — $3,748 Rental expense for operating leases totaled $1,180, $1,639 and $1,955 for the years ended December 31, 2001, 2002 and 2003, respectively. The Company is involved in various legal matters arising in the normal course of business. In the opinion of management, the Company'sliability, if any, arising from regulatory matters and legal proceedings related to these matters is not expected to have a material adverse impact onthe Company's financial position, results of operations and cash flows. The outcomes of legal matters in which the Company is presently involvedare not probable and reasonably estimable.F-17 12. REDEEMABLE SECURITIES In March 2002, the Company sold approximately 959 shares of mandatorily redeemable convertible preferred stock ("preferred stock") forapproximately $6,582, net of issuance costs. The preferred stock automatically converted to common stock on a 1:1 basis in connection with theinitial public offering. As the fair value of the common stock to be received upon conversion was greater than the conversion price of the preferredstock at the date the preferred stock was issued, a beneficial conversion feature resulted in the amount of $6,607, which was calculated inaccordance with Emerging Issues Task Force No. 98-5 Accounting for Convertible Securities with Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios. This beneficial conversion feature was reflected as a deemed dividend in the statement of operations during the year ended December 31, 2002. Redeemable common stock relates to warrants and securities that are subject to rescission. Sales of 858 shares of the common stock andthe issuance of 185 warrants to certain individuals did not fully comply with certain requirements under applicable State Blue Sky Laws. The offerand sale of these securities were not made pursuant to a registration statement and the Securities Act of 1933, nor were the offer and saleregistered or qualified under any state security laws. Although the Company believed at the time that such offers, sales and conversion wereexempt from such registration or qualification, they may not have been exempt in several states. As a result, purchasers of our common stock insome states have the right under federal or state securities laws to rescind their purchases for an amount equal to the purchase price paid for theshares, plus interest from the date of purchase until the rescission offer expires, at the annual rate mandated by the state in which such shareswere purchased. These interest rates range from 8% to 10% per annum. The rescission rights lapse on various dates through September 2006. At December 31, 2002 and 2003, the Company has classified $4,363 and $2,978, respectively, related to the rescission rights outside ofshareholders' equity, because the redemption features are not within the control of the Company. However, management does not anticipate thatholders of the redeemable common stock will exercise their rescission rights. Interest attributable to these securities is recorded as a deemeddividend and reflected as a deduction from net loss to arrive at net loss attributable to common shares in the Statements of Operations.13. STOCKHOLDERS' EQUITYReverse stock split On March 4, 2002, the Company's Board of Directors approved a proposal to amend the Company's certificate of incorporation to effect areverse stock split. On April 15, 2002, the Company's Board of Directors approved a 1-for-28.34 reverse split. The authorized common shareshave decreased from 450,000 to 100,000, effective May 20, 2002. All share amounts and per share data reflected in these consolidated financialstatements are shown after giving retroactive effect to the 1-for-28.34 reverse stock split.Reincorporation In May 2002, the Company reincorporated in Delaware. As a result of the reincorporation, the Company is authorized to issue 100,000 sharesof $0.0001 par value common stock and 5,000 shares ofF-18 $0.0001 par value preferred stock. The Board of Directors may issue the undesignated preferred stock in one or more series and determinepreferences, privileges and restrictions thereof.Common Stock Each share of common stock has the right to one vote. The holders of common stock are also entitled to receive dividends whenever fundsare legally available and when declared by the Board of Directors, subject to prior rights of holders of all classes of stock outstanding havingpriority rights as to dividends. No dividends have been declared or paid on the Company's common stock through December 31, 2003. InOctober 2001, the Company's Board of Directors authorized the purchase of 35 treasury shares from a former employee for $100.Warrants In 2000, the Company issued warrants to certain shareholders in connection with the purchase of additional shares of common stock. AtDecember 31, 2003, warrants to purchase 1,069 shares of common stock of the Company were outstanding, as follows:Issuance Date ExercisePriceper Share WarrantsOutstanding ExpirationDateMay 1, 2000 $7.09 237 April 30, 2005May 15, 2000 $7.09 258 May 14, 2005June 22, 2000 $7.09 7 June 21, 2005September 21, 2000 $4.26 567 September 20, 2005 No warrants were exercised in 2001, 3 warrants were exercised in 2002 and 50 warrants were exercised in 2003. The Company has reserved sufficient shares of common stock to meet its stock option and warrant obligations. As stated in Note 12, 112 ofthese warrants are subject to rescission. At December 31, 2002 and 2003, related parties held 850 of the total warrants outstanding.14. STOCK OPTION PLANS The Company's board of directors adopted the Amended and Restated 1999 Stock Option Plan and the 2002 Stock Option Plan (collectively,the "Plans"), in May 1999 and April 2002, respectively. Under these Plans, the Board of Directors may issue incentive stock options to employeesand directors of the Company and non-qualified stock options to consultants of the Company. Options granted under these Plans generally expireat the end of five years and vest in accordance with a vesting schedule determined by the Company's Board of Directors, usually over four yearsfrom the grant date. As of the initial public offering, the Amended and Restated 1999 Stock Option Plan was terminated. Future shares will begranted under the 2002 Stock Option Plan. As of December 31, 2003, 328 shares are available for future grants under these Plans.F-19 The following is a summary of stock option activity: 2001 2002 2003 Shares WeightedAverageExercisePrice WeightedAverageFair Value Shares WeightedAverageExercisePrice WeightedAverageFair Value Shares WeightedAverageExercisePriceOutstanding—beginning of year 415 $5.03 1,161 $4.68 1,415 $5.37 Granted at fair value — — 245 8.05 854 12.77 Granted at price below fair value 1,020 4.71 $5.97 543 5.07 $9.61 — — Exercised (14) 5.06 (146) 4.22 (197) 4.69 Canceled/forfeited (260) 4.82 (388) 5.15 (292) 9.12 Outstanding—end of year 1,161 4.68 1,415 5.37 1,780 8.39 Options exercisable at year-end 260 4.61 388 4.93 614 5.44 The following table summarizes information about stock options as of December 31, 2003: Options Outstanding atDecember 31, 2003 Options Exercisable atDecember 31, 2003Range of Exercise Prices Shares WeightedAverageExercisePrice WeightedAverageRemainingContract Life Shares WeightedAverageExercisePrice$2.00-$4.99 240 $3.95 2.7 125 $3.78$5.00-$6.99 684 5.07 2.6 396 5.07$7.00-$9.99 170 8.09 3.2 56 7.25$10.00-$12.99 222 12.54 4.3 34 11.90$13.00-$22.68 464 13.69 4.4 3 15.46 1,780 8.39 3.3 614 5.44 The weighted-average grant-date fair value of options granted during 2001, 2002 and 2003 was $5.97, $8.21 and $8.27 per share, respectively(see Note 2). The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the followingweighted-average assumptions: 2001 2002 2003 Risk-free interest rate 5.17%3.31%2.63%Expected life (in years) 4 3 3 Expected volatility 100%100%104%Expected dividend yield 0%0%0%F-20Stock-based compensation In connection with certain stock option grants to employees during the years ended December 31, 2001 and 2002, the Company recognizedapproximately $2,534 and $3,481, respectively, of unearned stock-based compensation for the excess of deemed fair value of shares of commonstock subject to such options over the exercise price of these options at the date of grant. In 2003, the company reversed $478 of unearned stock-based compensation due to forfeitures of unvested options. Such amounts are included as a component of stockholders' equity and are beingamortized over the vesting period in accordance with FASB Interpretation Number 28, Accounting for Stock Appreciation Rights and Other VariableStock Option or Award Plan. The Company recorded stock-based compensation expense of $727, $3,276 and $846 during the years endedDecember 31, 2001, 2002 and 2003, respectively. During the years ended December 31, 2001, 2002 and 2003, the Company granted 42, 177 and 18 options to consultants, respectively. TheCompany recorded unearned stock-based compensation of $384, $131 and $268 related to these grants, of which $176, $24 and $177 wasrecognized in operations in 2001, 2002 and 2003, respectively. The fair value for these options was measured at the grant date and is remeasuredat the end of each quarter until vesting is complete. At December 31, 2002 and 2003, the fair value of these options was calculated using a Black-Scholes option pricing model using risk-free rates of 3.31% and 2.59% and an expected life of 3 years and 3 years, respectively, expectedvolatility of 100% and 105%, respectively, and a dividend yield of 0%.15. EMPLOYEE STOCK PURCHASE PLAN Effective January 24, 2001, the Company adopted an Employee Stock Purchase Plan (the "ESPP") to provide certain employees, directorsand consultants an opportunity to purchase shares of its common stock annually, up to 5% of eligible compensation. During a specified openperiod as determined the Board of Directors, participants can purchase shares of stock at a value determined by the Company's board of directorswhich approximates the deemed fair market value of the stock. As of the initial public offering, the ESPP was terminated. Future shares will begranted under the 2002 Stock Option Plan There were 14 and 6 shares issued under the ESPP during 2001 and 2002, respectively. The Company recognized approximately $63, $51 and $0 of stock-based compensation for the excess of the fair value of the shares of common stock over thepurchase price during 2001, 2002 and 2003, respectively.16. EMPLOYEE RETIREMENT PLAN The Company has a 401(k) defined contribution plan which permits participating employees to defer up to a maximum of 15% of theircompensation, subject to limitations established by the Internal Revenue Code. Employees who have completed a half-year of service and are21 years of age or older are qualified to participate in the plan. The Company matches 50% of the first 6% of each participant's contributions to theplan. Participant contributions are immediately vested. Company contributions vest based on the participant's years of service at 20% per yearover five years. The Company's cash contribution totaled $68, $88 and $99 during 2001, 2002 and 2003, respectively.F-21 17. INCOME TAXES The components of the Company's deferred tax assets and liabilities as of December 31, 2002 and 2003 are as follows: December 31, 2002 2003 Deferred tax assets: Net operating loss carryforwards $19,771 $24,072 Accrued expenses 1,193 1,371 Reserves and other 768 1,208 21,732 26,651 Deferred tax liabilities: Depreciation (163) (986)Valuation allowance (21,569) (25,665) Net asset $— $— As a result of the Company's history of losses, a valuation allowance has been provided for the full amount of the Company's net deferredtax assets. Based on the weight of available evidence, it is more likely than not that such benefits will not be realized. At December 31, 2002 and 2003, the Company had net operating loss carryforwards of approximately $36,869 and $48,018, respectively,which may be used to offset future taxable income. An additional $14,386 of net operating losses are limited under Internal Revenue CodeSection 382 to $799 a year. These carryforwards begin to expire in 2019. The income tax benefit differs from the amount computed by applying the U.S. federal income tax rate of 35% to loss before income taxesfor the following reasons: Year ended December 31, 2001 2002 2003 U.S. federal income tax benefit at statutory rate $4,832 $1,596 $4,166 State income tax benefit, net of federal expense 338 38 385 Nondeductible goodwill amortization (1,070) — — Stock compensation expense (119) (1,216) (384)Other (336) (611) (71)Unrecognized benefit due to valuation allowance (3,645) 193 (4,096) Income tax benefit $— $— $— 18. RELATED PARTY TRANSACTIONS In July 2001, the Company's Chief Executive Officer, who is also a significant shareholder in the Company, agreed to personally guaranteethe Company's merchant account with a bank. The bank agreed to accept this personal guarantee in lieu of a demand deposit of $1,000 with thebank. In exchange for his personal guarantee, the Company compensated the Chief Executive Officer with options to purchase 35 shares of theCompany's common stock at an exercise price of $5.07 per share.F-22 These options vested over a three-year period based on the renewal of the guarantee. The Company recognized $151 and $39 of expense in 2001and 2002, respectively, related to this arrangement. In 2003, the bank no longer required the guarantee. As a result, the Company cancelled theassociated unvested options and reversed $52 of expense which it had previously recorded. As indicated in Note 12, the Company sold shares of mandatorily redeemable convertible preferred stock in March 2002, for which a deemeddividend was recorded as a result of the beneficial conversion feature. The total deemed dividend recorded for the year ended December 31, 2002was $6,607, of which $1,000 is attributable to preferred shares purchased by Haverford Internet, $1,200 is attributable to preferred sharespurchased by members of the board of directors, and $1,500 is attributable to preferred shares purchased by family members of management. On occasion, Haverford-Valley, L.C. (an entity owned by the Company's president) and certain affiliated entities make travel arrangements forour executives and pay the travel related expenses incurred by our executives on Company business. In 2001, 2002, and 2003 we reimbursedHaverford-Valley L.C. $251, $273, and $236, respectively, for these expenses.19. LEASE TERMINATION SETTLEMENT In February 2002, the Company relocated its corporate headquarters. At the time the Company relocated, it had 23 months remaining underthe facilities lease for the former headquarters location. In March 2002, the Company settled its remaining obligation under the lease by paying theformer landlord $340 and relinquishing the right to sublease the facilities. The settlement payment is recorded in the statement of operations for theyear ended December 31, 2002 under general and administrative expenses.20. BUSINESS SEGMENTS Segment information has been prepared in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and RelatedInformation. Segments were determined based on products and services provided by each segment. Accounting policies of the segments are thesame as those described in Note 2. There were no intersegment sales or transfers during 2001, 2002 or 2003. The CompanyF-23 evaluates the performance of its segments and allocates resources to them based primarily on gross profit. The table below summarizesinformation about reportable segments. Direct Fulfillmentpartner Warehouse Consolidated 2001 Revenue $35,243 $3,965 $795 $40,003 Cost of goods sold 31,776 1,143 1,721 34,640 Gross profit (loss) 3,467 2,822 (926) 5,363 Operating expenses (18,930)Other income, net (239) Net loss $(13,806) 2002 Revenue $77,943 $12,379 $1,462 $91,784 Cost of goods sold 69,004 2,755 1,682 73,441 Gross profit (loss) 8,939 9,624 (220) 18,343 Operating expenses (22,397)Other income, net (506) Net loss $(4,560) 2003 Revenue $136,592 $100,811 $1,542 $238,945 Cost of goods sold 123,064 89,190 1,238 213,492 Gross profit 13,528 11,621 304 25,453 Operating expenses (37,840)Other income, net 500 Net loss $(11,887) The direct segment includes revenues, direct costs, and allocations associated with sales fulfilled from our warehouse. Costs for thissegment 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's third party fulfillmentpartner sales and are earned from selling the merchandise of third parties over the Company's Websites. Prior to July 1, 2003, this was reported asthe "commission revenue" segment, as only the commission portion of the sales transactions were recorded as revenue (i.e., recorded "net"). Thecosts for the previous commission segment only included credit card fees and customer service costs. From July 1, 2003 forward, due to achange in the company's business practices, including the partner sales return process, these sales transactions are now recorded gross. As a result, this segment's name has been changed to the "fulfillment partner" segment, and the costs for this segment include product costs,warehousing and fulfillment costs, credit card fees and customer service costs.F-24 The warehouse segment includes revenues, direct costs, and cost allocations associated with sales made to individual consumers at theCompany's warehouse store. Costs for this segment include product costs, warehousing and credit card fees. The Company closed the warehousestore in January 2004. Assets have not been allocated between the segments for management purposes, and as such, they are not presented here. In 2001, 2002 and 2003, virtually all sales were made to customers in the United States of America. No individual geographical areaaccounted for more than 10% of net sales in any of the periods presented. At December 31, 2002 and 2003, all of the Company's fixed assetswere located in the United States of America.21. QUARTERLY RESULTS OF OPERATIONS (unaudited) The following tables set forth our unaudited quarterly results of operations data for the eight most recent quarters for the period endedDecember 31, 2003. We have prepared this information on the same basis as the Consolidated Statements of Operations and the informationincludes all adjustments,F-25 consisting only of normal recurring adjustments, that we consider necessary for a fair statement of our financial position and operating results forthe quarters presented. Three Months Ended Mar. 31,2002 June 30,2002 Sept. 30,2002 Dec. 31,2002 Mar. 31,2003 June 30,2003 Sept. 30,2003 Dec. 31,2003 (unaudited) Consolidated Statement of Operations Data: Direct revenue $10,029 $11,853 $20,759 $35,302 $24,962 $25,159 $29,011 $57,460 Commission revenue 1,659 2,230 2,857 5,633 3,966 3,431 28,504 64,910 Warehouse revenue 379 297 192 594 236 243 273 790 Total revenue 12,067 14,380 23,808 41,529 29,164 28,833 57,788 123,160 Cost of goods sold(1) 9,990 11,831 19,238 32,382 24,539 24,030 53,537 111,386 Gross profit 2,077 2,549 4,570 9,147 4,625 4,803 4,251 11,774 Operating expenses: Sales and marketing expenses(2) 1,219 1,313 2,083 4,054 3,848 2,572 3,855 9,898 General and administrative expenses(2) 2,802 2,195 2,372 3,456 4,545 3,367 4,059 4,940 Amortization of stock-based compensation 846 806 674 577 328 112 171 145 Total operating expenses 4,867 4,314 5,129 8,087 8,721 6051 8,085 14,983 Operating income (loss) (2,790) (1,765) (559) 1,060 (4,096) (1,248) (3,834) (3,209)Interest income 22 49 229 103 152 142 98 69 Interest expense (240) (208) (7) (10) (7) (55) (8) (6)Other income (expense), net 1 (442) 63 (66) 10 25 79 1 Net income (loss) (3,007) (2,366) (274) 1,087 (3,941) (1,136) (3,665) (3,145)Deemed dividend related to redeemable commonstock (111) (106) (97) (92) (77) (78) (58) (49)Deemed dividend related to beneficial conversionfeature of preferred stock (6,607) — — — — — — — Net income (loss) attributable to common shares $(9,725)$(2,472)$(371)$995 $(4,018)$(1,214)$(3,723)$(3,194) Net income (loss) per common share —basic $(0.87)$(0.20)$(0.03)$0.07 $(0.26)$(0.07)$(0.23)$(0.19) —diluted $(0.87)$(0.20)$(0.03)$0.06 $(0.26)$(0.07)$(0.23)$(0.19)Weighted average common shares outstanding —basic 11,171 12,280 14,447 14,486 15,486 16,384 16,419 16,473 —diluted 11,171 12,280 14,447 15,696 15,486 16,384 16,419 16,473 (1) Amounts include stock based compensation of $102 $96 $93 $82 $39 $13 $20 $18 (2) Amounts exclude stock-based compensation asfollows: Sales and marketing expenses $22 $21 $21 $19 $11 $3 $5 $3 General and administrative expenses 824 785 653 558 317 109 166 142 $846 $806 $674 $577 $328 $112 $171 $145 F-26 Schedule II Valuation and Qualifying Accounts (dollars in thousands) Balance atBeginning ofYear Charged toExpense Deductions Balance at End ofYearYear ended December 31, 2001 Deferred tax valuation allowance $18,117 $3,645 $— $21,762 Reserve for sales returns 350 6,121 5,975 496 Allowance for inventory obsolescence 1,750 1,135 1,942 943Year ended December 31, 2002 Deferred tax valuation allowance $21,762 $— $193 $21,569 Reserve for sales returns 496 3,994 4,025 465 Allowance for inventory obsolescence 943 164 96 1,011 Allowance for doubtful accounts — 145 — 145Year ended December 31, 2003 Deferred tax valuation allowance $21,569 $4,096 $— $25,665 Reserve for sales returns 465 11,463 10,818 1,110 Allowance for inventory obsolescence 1,011 1,763 1,636 1,138 Allowance for doubtful accounts 145 529 24 650F-27 QuickLinks -- Click here to rapidly navigate through this documentExhibit 10.31 CREDIT AGREEMENT THIS AGREEMENT is entered into as of February 13, 2004, by and between OVERSTOCK.COM, INC., a Delaware corporation ("Borrower"),and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").RECITALS Borrower has requested that Bank extend or continue credit to Borrower as described below, and Bank has agreed to provide such credit toBorrower on the terms and conditions contained herein. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank and Borrower herebyagree as follows:ARTICLE ICREDIT TERMS SECTION 1.1. LETTER OF CREDIT LINE. (a) Letter of Credit Line. Subject to the terms and conditions of this Agreement, Bank hereby agrees to establish a letter of credit line("Letter of Credit Line") under which Bank shall issue or cause an affiliate to issue commercial/standby letters of credit for the account of Borrowerto finance working capital (each, a "Letter of Credit" and collectively, "Letters of Credit") from time to time up to and including June 30, 2005;provided however, that the aggregate of all undrawn amounts, and all amounts drawn and unreimbursed, under any Letters of Credit issued underthe Letter of Credit Line shall not at any time exceed the principal amount of Three Million Five Hundred Thousand Dollars ($3,500,000.00). Theform and substance of each Letter of Credit shall be subject to approval by Bank, in its sole discretion. No Letter of Credit shall have an expirationdate subsequent to June 30, 2005. Each Letter of Credit shall be subject to the additional terms of the Letter of Credit agreements, applicationsand any related documents required by Bank in connection with the issuance thereof (each, a "Letter of Credit Agreement"). (b) Repayment of Drafts. Each drawing paid under any Letter of Credit shall be repaid by Borrower in accordance with the provisions of theapplicable Letter of Credit Agreement. SECTION 1.2. INTEREST/FEES. (a) Interest. The outstanding principal balance of each credit subject hereto shall bear interest, and the amount of each drawing paid underthe Commercial/Standby Letter of Credit shall bear interest from the date such drawing is paid to the date such amount is fully repaid by Borrower,at the rate of interest set forth in each promissory note or other instrument or document executed in connection therewith. (b) Computation and Payment. Interest shall be computed on the basis of a 360-day year, actual days elapsed. Interest shall be payable atthe times and place set forth in each promissory note or other instrument or document required hereby. (c) Commitment Fee. Borrower shall pay to Bank a non-refundable commitment fee for the Letter of Credit Line equal to one quarter of onepercent (0.250%), which fee shall be due and payable in full upon the execution of this agreement. (d) Unused Commitment Fee. Borrower shall pay to Bank a fee equal to one eighth of one percent (0.125%) per annum (computed on thebasis of a 360-day year, actual days elapsed) on the average daily unused amount of the Letter of Credit Line, which fee shall be calculated on aquarterly basis by Bank and shall be due and payable by Borrower in arrears each May 1, August 1 and November 1. (e) Letter of Credit Fees. Borrower shall pay to Bank fees upon the issuance of each Letter of Credit, upon the payment or negotiation ofeach drawing under any Letter of Credit and upon the occurrence of any other activity with respect to any Letter of Credit (including withoutlimitation, the transfer, amendment or cancellation of any Letter of Credit) determined in accordance with Bank's standard fees and charges then ineffect for such activity. SECTION 1.3. COLLATERAL. As security for all indebtedness of Borrower to Bank subject hereto, Borrower hereby grants to Bank security interests of first priority in allBorrower's securities account #12050000 maintained with Wells Capital Management. All of the foregoing shall be evidenced by and subject to the terms of such security agreements, financing statements, deeds of trust andother documents as Bank shall reasonably require, all in form and substance satisfactory to Bank. Borrower shall reimburse Bank immediatelyupon demand for all costs and expenses incurred by Bank in connection with any of the foregoing security, including without limitation, filing andrecording fees and costs of appraisals, audits and title insurance.ARTICLE IIREPRESENTATIONS AND WARRANTIES Borrower makes the following representations and warranties to Bank, which representations and warranties shall survive the execution ofthis Agreement and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations ofBorrower to Bank subject to this Agreement. SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized and existing and in good standing under the laws of the State of Delaware, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in whichsuch qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower. SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement and each promissory note, contract, instrument and other documentrequired hereby or at any time hereafter delivered to Bank in connection herewith (collectively, the "Loan Documents") have been duly authorized,and upon their execution and delivery in accordance with the provisions hereof will constitute legal, valid and binding agreements and obligations ofBorrower or the party which executes the same, enforceable in accordance with their respective terms. SECTION 2.3. NO VIOLATION. The execution, delivery and performance by Borrower of each of the Loan Documents do not violate anyprovision of any law or regulation, or contravene any provision of the Articles of Incorporation or By-Laws of Borrower, or result in any breach of ordefault under any contract, obligation, indenture or other instrument to which Borrower is a party or by which Borrower may be bound. SECTION 2.4. LITIGATION. There are no pending, or to the best of Borrower's knowledge threatened, actions, claims, investigations, suitsor proceedings by or before any governmental authority, arbitrator, court or administrative agency which could have a material adverse effect onthe financial condition or operation of Borrower other than those disclosed by Borrower to Bank in writing prior to the date hereof. SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statements of Borrower as of December 31, 2003 and for theperiods then ended, a true copy of which have been delivered by Borrower to Bank prior to the date hereof, (a) are complete and correct andpresent fairly the financial condition of Borrower, (b) disclose all liabilities of Borrower that are required to be2 reflected or reserved against under generally accepted accounting principles, whether liquidated or unliquidated, fixed or contingent, and (c) havebeen prepared in accordance with generally accepted accounting principles consistently applied. Since the date of such financial statements therehas been no material adverse change in the financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a security interest in orotherwise encumbered any of its assets or properties except in favor of Bank or as otherwise permitted by Bank in writing. SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any pending assessments or adjustments of its income tax payablewith respect to any year. SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture, contract or instrument to which Borrower is a party or by whichBorrower may be bound that requires the subordination in right of payment of any of Borrower's obligations subject to this Agreement to any otherobligation of Borrower. SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will hereafter possess, all permits, consents, approvals, franchises andlicenses required and rights to all trademarks, trade names, patents, and fictitious names, if any, necessary to enable it to conduct the business inwhich it is now engaged in compliance with applicable law. SECTION 2.9. ERISA. Borrower is in compliance in all material respects with all applicable provisions of the Employee Retirement IncomeSecurity Act of 1974, as amended or recodified from time to time ("ERISA"); Borrower has not violated any provision of any defined employeepension benefit plan (as defined in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event as defined in ERISAhas occurred and is continuing with respect to any Plan initiated by Borrower; Borrower has met its minimum funding requirements under ERISAwith respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents andunder generally accepted accounting principles. SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any obligation for borrowed money, any purchase money obligation orany other material lease, commitment, contract, instrument or obligation. SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank in writing prior to the date hereof, Borrower is incompliance in all material respects with all applicable federal or state environmental, hazardous waste, health and safety statutes, and any rules orregulations adopted pursuant thereto, which govern or affect any of Borrower's operations and/or properties, including without limitation, theComprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986,the Federal Resource Conservation and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as any of the same may beamended, modified or supplemented from time to time. None of the operations of Borrower is the subject of any federal or state investigationevaluating whether any remedial action involving a material expenditure is needed to respond to a release of any toxic or hazardous waste orsubstance into the environment. Borrower has no material contingent liability in connection with any release of any toxic or hazardous waste orsubstance into the environment.ARTICLE IIICONDITIONS SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Bank to extend any credit contemplated by thisAgreement is subject to the fulfillment to Bank's satisfaction of all of the following conditions: (a) Approval of Bank Counsel. All legal matters incidental to the extension of credit by Bank shall be satisfactory to Bank's counsel.3 (b) Documentation. Bank shall have received, in form and substance satisfactory to Bank, each of the following, duly executed: (i) This Agreement and each promissory note or other instrument or document required hereby. (ii) Corporate Resolution: Borrowing. (iii) Certificate of Incumbency. (iv) Security Agreement Securities Account. (v) Addendum to Securities Agreement Securities Account. (vi) Securities Account Control Agreement. (vii) Such other documents as Bank may require under any other Section of this Agreement. (c) Financial Condition. There shall have been no material adverse change, as determined by Bank, in the financial condition or business ofBorrower, nor any material decline, as determined by Bank, in the market value of any collateral required hereunder or a substantial or materialportion of the assets of Borrower. (d) Insurance. Borrower shall have delivered to Bank evidence of insurance coverage on all Borrower's property, in form, substance,amounts, covering risks and issued by companies satisfactory to Bank, and where required by Bank, with loss payable endorsements in favor ofBank. SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank to make each extension of credit requested byBorrower hereunder shall be subject to the fulfillment to Bank's satisfaction of each of the following conditions: (a) Compliance. The representations and warranties contained herein and in each of the other Loan Documents shall be true on and as ofthe date of the signing of this Agreement and on the date of each extension of credit by Bank pursuant hereto, with the same effect as thoughsuch representations and warranties had been made on and as of each such date, and on each such date, no Event of Default as defined herein,and no condition, event or act which with the giving of notice or the passage of time or both would constitute such an Event of Default, shall haveoccurred and be continuing or shall exist. (b) Documentation. Bank shall have received all additional documents which may be required in connection with such extension of credit.ARTICLE IVAFFIRMATIVE COVENANTS Borrower covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct orcontingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of allobligations of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in writing: SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal, interest, fees or other liabilities due under any of the Loan Documentsat the times and place and in the manner specified therein. SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records in accordance with generally accepted accounting principlesconsistently applied, and permit any representative of Bank, at any reasonable time, to inspect, audit and examine such books and records, tomake copies of the same, and to inspect the properties of Borrower.4 SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank, in form and detail satisfactory to Bank such information as Bank mayreasonably request. SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchisesnecessary for the conduct of its business; and comply with the provisions of all documents pursuant to which Borrower is organized and/or whichgovern Borrower's continued existence and with the requirements of all laws, rules, regulations and orders of any governmental authority applicableto Borrower and/or its business. SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the types and in amounts customarily carried in lines of businesssimilar to that of Borrower, including but not limited to fire, extended coverage, public liability, flood, property damage and workers' compensation,with all such insurance carried with companies and in amounts satisfactory to Bank, and deliver to Bank from time to time at Bank's requestschedules setting forth all insurance then in effect. SECTION 4.6. FACILITIES. Keep all properties useful or necessary to Borrower's business in good repair and condition, and from time totime make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained. SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due any and all indebtedness, obligations, assessments andtaxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments,except such (a) as Borrower may in good faith contest or as to which a bona fide dispute may arise, and (b) for which Borrower has madeprovision, to Bank's satisfaction, for eventual payment thereof in the event Borrower is obligated to make such payment. SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of any litigation pending or threatened against Borrower. SECTION 4.9. NOTICE TO BANK. Promptly (but in no event more than five (5) days after the occurrence of each such event or matter) givewritten notice to Bank in reasonable detail of: (a) the occurrence of any Event of Default, or any condition, event or act which with the giving ofnotice or the passage of time or both would constitute an Event of Default; (b) any change in the name or the organizational structure of Borrower;(c) the occurrence and nature of any Reportable Event or Prohibited Transaction, each as defined in ERISA, or any funding deficiency with respectto any Plan; or (d) any termination or cancellation of any insurance policy which Borrower is required to maintain, or any uninsured or partiallyuninsured loss through liability or property damage, or through fire, theft or any other cause affecting Borrower's property.ARTICLE V NEGATIVE COVENANTS Borrower further covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whetherdirect or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in fullof all obligations of Borrower subject hereto, Borrower will not without Bank's prior written consent: SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any credit extended hereunder except for the purposes stated in Article I hereof. SECTION 5.2. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or consolidate with any other entity; make anysubstantial change in the nature of Borrower's business as conducted as of the date hereof; acquire all or substantially all of the assets of anyother entity; nor sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Borrower's assets except in the ordinarycourse of its business.5 ARTICLE VIEVENTS OF DEFAULT SECTION 6.1. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: (a) Borrower shall fail to pay when due any principal, interest, fees or other amounts payable under any of the Loan Documents. (b) Any financial statement or certificate furnished to Bank in connection with, or any representation or warranty made by Borrower or anyother party under this Agreement or any other Loan Document shall prove to be incorrect, false or misleading in any material respect whenfurnished or made. (c) Any default in the performance of or compliance with any obligation, agreement or other provision contained herein or in any other LoanDocument (other than those referred to in subsections (a) and (b) above), and with respect to any such default which by its nature can be cured,such default shall continue for a period of twenty (20) days from its occurrence. (d) Any default in the payment or performance of any obligation, or any defined event of default, under the terms of any contract orinstrument (other than any of the Loan Documents) pursuant to which Borrower, any guarantor hereunder or any general partner or joint venturer inany Borrower which is a partnership or joint venture (with each such guarantor, general partner and/or joint venturer referred to herein as a "ThirdParty Obligor") has incurred any debt or other liability to any person or entity, including Bank. (e) Borrower or any Third Party Obligor shall become insolvent, or shall suffer or consent to or apply for the appointment of a receiver,trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall make a generalassignment for the benefit of creditors; Borrower or any Third Party Obligor shall file a voluntary petition in bankruptcy, or seeking reorganization,in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Reform Act, Title 11 of the United StatesCode, as amended or recodified from time to time ("Bankruptcy Code"), or under any state or federal law granting relief to debtors, whether now orhereafter in effect; or any involuntary petition or proceeding pursuant to the Bankruptcy Code or any other applicable state or federal law relating tobankruptcy, reorganization or other relief for debtors is filed or commenced against Borrower or any Third Party Obligor, or Borrower or any ThirdParty Obligor shall file an answer admitting the jurisdiction of the court and the material allegations of any involuntary petition; or Borrower or anyThird Party Obligor shall be adjudicated a bankrupt, or an order for relief shall be entered against Borrower or any Third Party Obligor by any courtof competent jurisdiction under the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or otherrelief for debtors. (f) There shall exist or occur any event or condition which Bank in good faith believes impairs, or is substantially likely to impair, theprospect of payment or performance by Borrower of its obligations under any of the Loan Documents. (g) The death or incapacity of any individual Borrower or Third Party Obligor. The dissolution or liquidation of any Borrower or Third PartyObligor which is a corporation, partnership, joint venture or other type of entity; or Borrower or any such Third Party Obligor, or any of its directors,stockholders or members, shall take action seeking to effect the dissolution or liquidation of such Borrower or Third Party Obligor. SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default: (a) all indebtedness of Borrower under each of the LoanDocuments, any term thereof to the contrary notwithstanding, shall at Bank's option and without notice become immediately due and payablewithout presentment,6 demand, protest or notice of dishonor, all of which are hereby expressly waived by each Borrower; (b) the obligation, if any, of Bank to extend anyfurther credit under any of the Loan Documents shall immediately cease and terminate; and (c) Bank shall have all rights, powers and remediesavailable under each of the Loan Documents, or accorded by law, including without limitation the right to resort to any or all security for any creditsubject hereto and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. All rights, powers and remediesof Bank may be exercised at any time by Bank and from time to time after the occurrence of an Event of Default, are cumulative and notexclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity.ARTICLE VIIMISCELLANEOUS SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in exercising any right, power or remedy under any of the LoanDocuments shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power orremedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by Bank of any breach of or default under any of the Loan Documents must be in writing and shall beeffective only to the extent set forth in such writing. SECTION 7.2. NOTICES. All notices, requests and demands which any party is required or may desire to give to any other party under anyprovision of this Agreement must be in writing delivered to each party at the following address:BORROWER: OVERSTOCK.COM, INC.Attention: General Counsel6322 South 3000 East, Suite #100Salt Lake City, Utah 84121BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION299 South Main, 4th FloorSalt Lake City, Utah 84111or to such other address as any party may designate by written notice to all other parties. Each such notice, request and demand shall be deemedgiven or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days afterdeposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank immediately upon demand the full amount of allpayments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costsof Bank's in-house counsel), expended or incurred by Bank in connection with (a) the negotiation and preparation of this Agreement and the otherLoan Documents, Bank's continued administration hereof and thereof, and the preparation of any amendments and waivers hereto and thereto,(b) the enforcement of Bank's rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents, and(c) the prosecution or defense of any action in any way related to any of the Loan Documents, including without limitation, any action fordeclaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoingincurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion broughtby Bank or any other person) relating to any Borrower or any other person or entity.7 SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors,administrators, legal representatives, successors and assigns of the parties; provided however, that Borrower may not assign or transfer itsinterest hereunder without Bank's prior written consent. Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all orany part of, or any interest in, Bank's rights and benefits under each of the Loan Documents. In connection therewith, Bank may disclose alldocuments and information which Bank now has or may hereafter acquire relating to any credit subject hereto, Borrower or its business, or anycollateral required hereunder. SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other Loan Documents constitute the entire agreementbetween Borrower and Bank with respect to each credit subject hereto and supersede all prior negotiations, communications, discussions andcorrespondence concerning the subject matter hereof. This Agreement may be amended or modified only in writing signed by each party hereto. SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and entered into for the sole protection and benefit of theparties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or haveany direct or indirect cause of action or claim in connection with, this Agreement or any other of the Loan Documents to which it is not a party. SECTION 7.7. TIME. Time is of the essence of each and every provision of this Agreement and each other of the Loan Documents. SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be prohibited by or invalid under applicable law,such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or anyremaining provisions of this Agreement. SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when executed anddelivered shall be deemed to be an original, and all of which when taken together shall constitute one and the same Agreement. SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Utah. SECTION 7.11. ARBITRATION. (a) Arbitration. The parties hereto agree, upon demand by any party, to submit to binding arbitration all claims, disputes and controversiesbetween or among them (and their respective employees, officers, directors, attorneys, and other agents), whether in tort, contract or otherwisearising out of or relating to in any way (i) the loan and related Loan Documents which are the subject of this Agreement and its negotiation,execution, collateralization, administration, repayment, modification, extension, substitution, formation, inducement, enforcement, default ortermination; or (ii) requests for additional credit. (b) Governing Rules. Any arbitration proceeding will (i) proceed in a location in Utah selected by the American Arbitration Association("AAA"); (ii) be governed by the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provisionin any of the documents between the parties; and (iii) be conducted by the AAA, or such other administrator as the parties shall mutually agreeupon, in accordance with the AAA's commercial dispute resolution procedures, unless the claim or counterclaim is at least $1,000,000.00exclusive of claimed interest, arbitration fees and costs in which case the arbitration shall be conducted in accordance with the AAA's optionalprocedures for large, complex commercial disputes (the commercial dispute resolution procedures or the optional procedures for large, complexcommercial disputes to be referred to, as8 applicable, as the "Rules"). If there is any inconsistency between the terms hereof and the Rules, the terms and procedures set forth herein shallcontrol. Any party who fails or refuses to submit to arbitration following a demand by any other party shall bear all costs and expenses incurred bysuch other party in compelling arbitration of any dispute. Nothing contained herein shall be deemed to be a waiver by any party that is a bank ofthe protections afforded to it under 12 U.S.C. §91 or any similar applicable state law. (c) No Waiver of Provisional Remedies, Self-Help and Foreclosure. The arbitration requirement does not limit the right of any party to(i) foreclose against real or personal property collateral; (ii) exercise self-help remedies relating to collateral or proceeds of collateral such as setoffor repossession; or (iii) obtain provisional or ancillary remedies such as replevin, injunctive relief, attachment or the appointment of a receiver,before during or after the pendency of any arbitration proceeding. This exclusion does not constitute a waiver of the right or obligation of any partyto submit any dispute to arbitration or reference hereunder, including those arising from the exercise of the actions detailed in sections (i), (ii) and(iii) of this paragraph. (d) Arbitrator Qualifications and Powers. Any arbitration proceeding in which the amount in controversy is $5,000,000.00 or less will bedecided by a single arbitrator selected according to the Rules, and who shall not render an award of greater than $5,000,000.00. Any dispute inwhich the amount in controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel of three arbitrators; provided however, that allthree arbitrators must actively participate in all hearings and deliberations. The arbitrator will be a neutral attorney licensed in the State of Utah or aneutral retired judge of the state or federal judiciary of Utah, in either case with a minimum of ten years experience in the substantive lawapplicable to the subject matter of the dispute to be arbitrated. The arbitrator will determine whether or not an issue is arbitratable and will giveeffect to the statutes of limitation in determining any claim. In any arbitration proceeding the arbitrator will decide (by documents only or with ahearing at the arbitrator's discretion) any pre-hearing motions which are similar to motions to dismiss for failure to state a claim or motions forsummary adjudication. The arbitrator shall resolve all disputes in accordance with the substantive law of Utah and may grant any remedy or reliefthat a court of such state could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award. Thearbitrator shall also have the power to award recovery of all costs and fees, to impose sanctions and to take such other action as the arbitratordeems necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the Utah Rules of Civil Procedure or otherapplicable law. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction. The institution andmaintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party,including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. (e) Discovery. In any arbitration proceeding discovery will be permitted in accordance with the Rules. All discovery shall be expresslylimited to matters directly relevant to the dispute being arbitrated and must be completed no later than 20 days before the hearing date and within180 days of the filing of the dispute with the AAA. Any requests for an extension of the discovery periods, or any discovery disputes, will besubject to final determination by the arbitrator upon a showing that the request for discovery is essential for the party's presentation and that noalternative means for obtaining information is available. (f) Class Proceedings and Consolidations. The resolution of any dispute arising pursuant to the terms of this Agreement shall bedetermined by a separate arbitration proceeding and such dispute shall not be consolidated with other disputes or included in any classproceeding. (g) Payment Of Arbitration Costs And Fees. The arbitrator shall award all costs and expenses of the arbitration proceeding.9 (h) Real Property Collateral; Judicial Reference. Notwithstanding anything herein to the contrary, no dispute shall be submitted to arbitrationif the dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage,lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefitsthat might accrue to them by virtue of the single action rule statute of Utah, thereby agreeing that all indebtedness and obligations of the parties,and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any suchdispute is not submitted to arbitration, the dispute shall be referred to a master in accordance with Utah Rule of Civil Procedure 53, and thisgeneral reference agreement is intended to be specifically enforceable. A master with the qualifications required herein for arbitrators shall beselected pursuant to the AAA's selection procedures. Judgment upon the decision rendered by a master shall be entered in the court in which suchproceeding was commenced in accordance with Utah Rule of Civil Procedure 53(e). (i) Miscellaneous. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to concludeany arbitration proceeding within 180 days of the filing of the dispute with the AAA. No arbitrator or other party to an arbitration proceeding maydisclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business orby applicable law or regulation. If more than one agreement for arbitration by or between the parties potentially applies to a dispute, the arbitrationprovision most directly related to the Loan Documents or the subject matter of the dispute shall control. This arbitration provision shall survivetermination, amendment or expiration of any of the Loan Documents or any relationship between the parties. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above.OVERSTOCK. COM, INC. WELLS FARGO BANK, NATIONAL ASSOCIATIONBy: /s/ DAVID K. CHIDESTER David K. ChidesterVice President, Finance By: /s/ LISBETH HOPPER Lisbeth Hopper,Relationship Manager10 QuickLinksCREDIT AGREEMENT QuickLinks -- Click here to rapidly navigate through this documentExhibit 21 SUBSIDIARIES OF THE REGISTRANT Name Jurisdiction of Formation Trade NamesOverstock Mexico, S. de R.L. de C.V. Mexico Overstock MexicoQuickLinksSUBSIDIARIES OF THE REGISTRANT QuickLinks -- Click here to rapidly navigate through this documentExhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-89890) of Overstock.com, Inc. ofour report dated February 20, 2004 relating to the financial statements and financial statement schedule, which appears in this Form 10-K./s/ PricewaterhouseCoopers LLPSalt Lake City, UtahFebruary 20, 2004QuickLinksCONSENT OF INDEPENDENT ACCOUNTANTS QuickLinks -- Click here to rapidly navigate through this documentExhibit 31.1 CERTIFICATION I, Patrick M. Byrne, certify that:1.I have reviewed this Annual Report on Form 10-K of Overstock.com, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to theperiod covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) and internal control over financial reporting (as defined in Exchange ActRules 13a-15(f) and 15(d)-15(f)) for the registrant and have: (a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which this report is being prepared; (b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accounting principles; (c)evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and (d)disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's mostrecent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant's internal control over financial reporting; and 5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalentfunctions): (a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably 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 a significant role in the registrant'sinternal control over financial reporting.Date: February 20, 2004 /s/ PATRICK M. BYRNE Patrick M. ByrnePresident (principal executive officer)QuickLinksCERTIFICATION QuickLinks -- Click here to rapidly navigate through this documentExhibit 31.2 CERTIFICATION I, David K. Chidester, certify that:1.I have reviewed this Annual Report on Form 10-K of Overstock.com, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to theperiod covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) and internal control over financial reporting (as defined in Exchange ActRules 13a-15(f) and 15(d)-15(f)) for the registrant and have: (a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which this report is being prepared; (b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accounting principles; (c)evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and (d)disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's mostrecent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant's internal control over financial reporting; and 5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalentfunctions): (a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably 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 a significant role in the registrant'sinternal control over financial reporting.Date: February 20, 2004 /s/ DAVID K. CHIDESTER David K. ChidesterVice President, Finance (principal financial officer)QuickLinksCERTIFICATION QuickLinks -- Click here to rapidly navigate through this documentEXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICERPURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Patrick M. Byrne, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, thatthe Annual Report of Overstock.com, Inc. on Form 10-K for the year ended December 31, 2003 fully complies with the requirements ofSection 13(a) or 15(d) of the Securities Exchange Act of 1934, as applicable, and that information contained in such Report fairly presents in allmaterial respects the financial condition and results of operations of Overstock.com, Inc. /s/ PATRICK M. BYRNE Name: Patrick M. ByrneTitle: President (principal executive officer)QuickLinksCERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906OF THE SARBANES-OXLEY ACT OF 2002 QuickLinks -- Click here to rapidly navigate through this documentEXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICERPURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, David K. Chidester, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to 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, 2003 fully complies with the requirements ofSection 13(a) or 15(d) of the Securities Exchange Act of 1934, as applicable, and that information contained in such Report fairly presents in allmaterial respects the financial condition and results of operations of Overstock.com, Inc. /s/ DAVID K. CHIDESTER Name: David K. ChidesterTitle: Vice President, Finance (principal financial officer)QuickLinksCERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OFTHE SARBANES-OXLEY ACT OF 2002
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