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com
Thursday, December 29, 2011

Overstock Follow-up
By: BClark, Lone Wolf, and ADavian
info@davianletter.com

New Information
Those of you following the story of OSTK or who have read our latest article about it might have noticed the 8-K filed today with the SEC. If not, here is the overview: The Company paid approximately $20.1 million to Lessor in connection with the amendment and agreement to terminate the Master Lease Agreement, including approximately $1.2 million in prepayment premiums. . The Company amended the Master Lease Agreement in order to eliminate the total fixed charge coverage ratio covenant under the Master Lease Agreement. As disclosed in the Companys Form 10-Q for the quarter ended September 30, 2011, based on the Companys results for the first three quarters of 2011, management considered it likely at that time that the Company would be out of compliance with the Master Lease Agreements total fixed charge coverage ratio covenant at December 31, 2011. In order to avoid a covenant violation, the Company amended the Master Lease Agreement to eliminate the financial covenants.

In Focus:
New information What it did Immediate impact and questions Future implications

http://sec.gov/Archives/edgar/data/1130713/000110465911071476/a11- 32343_18k.htm
The filing has confirmed our prior thesis, and has a few implications for the future we st would like to address, lest you think it was good news that they avoided the December 31 deadline.

What it did
Essentially what they have done is bought back the IT equipment that had been sold and re-leased back to them in 2010 and additional amounts in 2011. The Master Lease Agreement had two clauses in it, which were becoming troublesome, and they had admitted st would have caused them to default on December 31 if not negotiated away. The largest problem was that the agreement contained a limitation of their Fixed Charge Coverage Ratio, which they were violating, and it was tied to the main Finance Agreement and would have caused both to default. It also forced them to maintain a balance of $30 million of Cash Equivalents (including their Marketable Securities). By essentially buying the Master Lease out they no longer have to abide by the fixed charge ratio, and now their collateral balance requirement is down to $20 million to secure the Financing Agreement. This seems like good news on the surface, but deeper not so much.

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DL | davianletter.com
Thursday, December 29, 2011

Immediate impact and questions

The immediate impact is that they will not default on the 31 , but at a cost. They had to pay $1.2 million in fees for early redemption. Along with the income taxes they would have paid initially, lost depreciation, and the interest (6.3%), this Master Lease has turned out to be a very bad deal for them. Worse yet they had to use $20 million in cash of some sort to buy it back, and that begs the question of where did that come from? It could have come from a great Q4, but that has been addressed in the prior article, and will be further addressed below. The other options are that the SEC has given them early notice that their shelf offering has been approved. It is also possible that they could use some of the money/securities that would have been available due to the drop in collateral requirements. As noted in the previous article, Mr. Chou has been deftly supporting the stock price at $7.75; you can see this in the price action, the SEC filings, and this Volume by Price chart below.
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We propose he was doing this in order to make sure the Marketable Securities held at US Bank to keep their balance above the $30 million requirement, now that the requirement is reduced down to $20 million he no longer will need to offer this support, and the recent floor in the stock price will be broken.

Future Implications
We have held initial and collegial discussions with U.S. Bank regarding this potential non-compliance. Q3 2011 p. 17 The largest implication is from the fact that US Bank chose not to negotiate, or they at least offered terms that were worse than OSTK would/could take. US Bank likely has one of the best pictures of how healthy OSTK really is, they have been their main bank and creditor for years, and have inside information probably beyond anyone but the board. By US Bank making sure this didnt get negotiated to better terms is possibly the biggest vote of no confidence imaginable. The fact that this was done with 3 days to go in negotiations also shows that there was no chance of getting this done.

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DL | davianletter.com
Thursday, December 29, 2011 The reluctance from US Bank also implies that Q4 is not going well for them, and by OSTK sacrificing desperately needed liquidity, how weak they are at the negotiation table. This happening right after the Christmas buying season means they knew the Q4 results at this point, and that they were not good enough. This means the cash to pay-off the Master Lease agreement is not coming from Q4 sales, unless they choose to string out their suppliers, or pay it off and file Chapter 11 to get out of the payables associated. In 2010, they had a $14 million dollar float between Q3/Q4, due to clients/credit card transactions clearing quickly and their payables having more time till payment, so this is historically their strongest cash time of year, for a few weeks until they have to pay, so assuming this year is close they could use that cash temporarily and buy themselves a few weeks time. The options remaining are: Get approval from SEC for shelf and go to open market for financing, but they will need to be careful assuming their securities are likely collateral for the remaining Financing Agreement, so would need to add more there to keep it in check. Get another bank to give them a subordinate loan to fund it, but this subordinate loan would be at very unfavorable terms. Issue new notes or bonds. Again these would need to be subordinate to the US Bank, and they also would be in a time crunch to get these done in time, and there have been no filings to support this idea. This results in the shelf offering being the most likely candidate. Though they have authorized up to $200 million, they only need approx. $50 million to alleviate immediate needs, so let us be conservative and assume they only issue $50 million worth. Current Market Cap: Current Share Price: New Shares Issued: 181 Million $7.77 6.4 Million

Approx. New Share Price: $6.09

Without Mr. Chou supporting it, and the confidence hit the share price would likely go well under $6. DISCLAIMER The information contained herein reflects the views of The Davian Letter LLC and its affiliates (collectively "TDL") as of the date of publication. These views are subject to change without notice at any time subsequent to the date of issue. TDL has an economic interest in the price movement of the securities discussed in this research note, but TDL's economic interest is subject to change without notice. All information provided in this research note is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented. In addition, there can be no guarantee that any projection, forecast or opinion in this research note will be realized. All trade names, trademarks, service marks, and logos herein are the property of their respective owners who retain all proprietary rights over their use.

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