BORROWINGS

9 Months Ended

Sep. 30, 2011

BORROWINGS

BORROWINGS

4. BORROWINGS

U.S. Bank Financing Agreements

We are a party to a Financing and Security Agreement with U.S. Bank dated December 22, 2009 (as amended on August 19, 2011, the “Financing Agreement”). The maximum credit potentially available under the revolving facility is $20 million. Our obligations under the Financing Agreement and all related agreements are secured by all or substantially all of our assets, excluding our interest in certain litigation. Subject to certain exceptions, the full amount of the revolving facility is expected to be available to us as long as $30 million in the aggregate (which amount includes any minimum liquidity required under the Master Lease Agreement) is maintained on deposit with U.S. Bank. The obligation of U.S. Bank to make advances under the Financing Agreement is subject to the conditions set forth in the Financing Agreement. Concurrent to signing the amendment to the Financing Agreement, we also obtained a waiver from U.S. Bank, which prohibited us from forming any subsidiaries, in regards to our formed subsidiary Overstock.com Services, Inc.

The stated termination date of the Financing Agreement is December 31, 2012. The maximum amount potentially available under the Financing Agreement is $20 million, limited to $3 million for cash-collateralized revolving loans and other financial accommodations, and $17 million for advances supported by our non-cash collateral. As permitted by the Financing Agreement, during the quarter ended September 30, 2011, we used the entire $17 million available for advances supported by our non-cash collateral to fund the redemption of our then-outstanding Senior Convertible Notes due December 1, 2011. Our obligations under the Financing Agreement and all related agreements are secured by all or substantially all of our assets, excluding our interest in certain litigations.

Advances under the amended Financing Agreement bear interest at one-month LIBOR plus 2.5%. The interest rate for borrowings under the amended Financing Agreement was 2.75% at September 30, 2011. We have also entered into an interest rate cap agreement with U.S. Bank with an effective date of October 1, 2011 limiting our exposure for one-month LIBOR at 0.5% for the term of the Financing Agreement.

In addition to the Financing Agreement, we are a party to a Master Lease Agreement and a Financial Covenants Rider and related documents (collectively, the “Master Lease Agreement”) with U.S. Bancorp Equipment Finance, Inc. — Technology Finance Group (“Lessor”), an affiliate of U.S. Bank National Association, which requires us to maintain a minimum liquidity (defined as cash plus marketable securities) of $30 million in the aggregate (which amount includes any minimum liquidity required under the Financing Agreement) at all times on deposit with U.S. Bank National Association until all amounts owed under the Master Lease Agreement are paid in full. The Master Lease Agreement provides that we are permitted to withdraw the funds on deposit with U.S. Bank National Association at our discretion, although our failure to maintain a minimum liquidity of $30 million would be an Event of Default under the Master Lease Agreement, and an Event of Default under the Master Lease Agreement would cause an Event of Default under the Financing Agreement. Consequently, our failure to keep at least $30 million on deposit in certain accounts with U.S. Bank would constitute a “triggering event” under the Financing Agreement. If a triggering event occurs, we would become subject to financial covenants (i) limiting our capital expenditures to $20 million annually, and (ii) requiring us to maintain a Financing Agreement defined fixed charges coverage ratio of at least 1.10 to 1.00 as of the end of any fiscal quarter for the period of the prior four quarters. The occurrence of a triggering event could also result in a decrease in the amount available to us under the non cash-collateralized portion of the facility, as availability would then depend, in part, on the Borrowing Base (as defined in the Financing Agreement). At September 30, 2011, we had $30.0 million in compensating cash balances held at U.S. Bank.

The Financing Agreement includes affirmative covenants and negative covenants that prohibit a variety of actions without the approval of U.S. Bank, including, without limitation, covenants that (subject to certain exceptions) limit our ability to (a) incur or guarantee debt or enter into indemnity agreements, (b) create or permit liens, (c) enter into any merger or consolidation or purchase or otherwise acquire all or substantially all of the assets of another person or the assets comprising any line of business or business unit of another person, (d) except for permitted acquisitions, purchase the securities of, create, invest in, or form any subsidiary or other entity, (e) make loans or advances, (f) purchase, acquire or redeem shares of our capital stock or other securities, (g) change our capital structure or issue any new class of capital stock, (h) change our business objectives, purposes or operations in a manner which could reasonably be expected to have a material adverse effect, (i) change our fiscal year, (j) enter into transactions with affiliates, (k) sell assets except for the sale of inventory in the ordinary course of business, (l) permit judgments to be rendered against us in excess of certain limits or having specified effects, depending in part on whether a triggering event has occurred or would occur, (m) take certain actions regarding our receivables, and (n) take certain actions regarding our inventory.

With certain exceptions, a termination fee of up to 0.75% of the non cash-collateralized portion of the facility is payable by us if we terminate the facility prior to its stated termination date.

The obligation of U.S. Bank to make advances under the Financing Agreement is subject to the conditions set forth in the Financing Agreement. In addition to the transactions contemplated by the Amendments and the Financing Agreement, we are a party to the Master Lease Agreement described herein, and use or intend to utilize other commercial banking services from U.S. Bank or its affiliates, including treasury management services, investment management services, and purchase card services.

Amounts outstanding under the Financing Agreement at September 30, 2011 and December 31, 2010 were $17.0 million and zero, respectively. Letters of credit totaling $2.4 million and $2.4 million, respectively, were issued on our behalf collateralized by compensating cash balances held at U.S. Bank, which are included in Restricted cash in the accompanying consolidated balance sheets.

On September 17, 2010 we entered into a Master Lease Agreement and a Financial Covenants Rider (collectively, the “Master Lease Agreement”) with U.S. Bancorp Equipment Finance, Inc.-Technology Finance Group (“Lessor”), an affiliate of U.S. Bank. Under the Master Lease Agreement we entered into four separate leases, pursuant to which we sold certain information technology hardware (the “IT Assets”) to Lessor, which were simultaneously leased back for a period of 48 months and financed certain software licenses for a period of 48 months for proceeds totaling approximately $16.4 million. Subsequently, we entered into eleven additional leases; whereby we leased $8.2 million in IT Assets and financed certain software licenses for a period of 48 months directly from the Lessor. We have the right to repurchase the IT Assets at the end of the 48-month term for $1.00. In addition, we have the right to repurchase the IT Assets and terminate the Master lease Agreement twelve months following the initial term, or under certain situations where there is a change in control of the Lessor, defined as a circumstance where the Lessor merges, or sells substantially all of its assets, or another entity acquires more than 25% of the ownership interests of Lessor or Lessor’s parent. Payments on the Master Lease Agreement are due monthly. The weighted average effective interest rate under the Master Lease Agreement is 6.29%. We have accounted for the Master Lease Agreement as a financing transaction and amounts owed are included in Finance Obligations, current and non-current in the consolidated balance sheets. We recorded no gain or loss on these leasing transactions.

The Master Lease Agreement requires us to maintain a minimum Total Fixed Charge Coverage annualized ratio of at least 1.20:1.00, based on operating results, measured at the end of each fiscal quarter. “Total Fixed Charge Coverage” is defined as our EBITDAR (which is defined to mean earnings before interest expense, tax expense or benefit, depreciation expense, amortization expense and rent (defined as payments for real property leases and other operating leases)) less the aggregate amount of federal, state, local and/or foreign income taxes accrued less declared dividends less 50% of depreciation expense divided by our (rental expense plus interest expense plus required principal payments including capitalized leases, excluding principal payments made for retirements of Senior Notes, on a trailing twelve-month basis). The “annualized ratio” shall be based on a four-quarter, rolling average of the current fiscal quarter and the immediately preceeding three fiscal quarters.

U.S. Bank has the contractual right to demand payment of all amounts outstanding under the Financing Agreement and Master Lease Agreement if we fail to comply with certain loan covenants. At September 30, 2011 our Total Fixed Charge Coverage annualized ratio was in excess of the required 1.20:1.00. However, based on the results for the first three quarters of 2011, it is likely that we will be out of compliance with the Total Fixed Charge Coverage ratio at December 31, 2011 unless current trends improve substantially. We have held initial and collegial discussions with U.S. Bank regarding this potential non-compliance.

Fixed assets included assets under finance obligations of $21.6 million and $16.0 million and accumulated depreciation of $8.4 million and $3.7 million at September 30, 2011 and December 31, 2010, respectively. Depreciation expense of assets recorded under finance obligations was $1.7 million and $952,000 for the three months ended September 30, 2011 and 2010, respectively and $4.6 million and $2.3 for the nine months ended September 30, 2011 and 2010, respectively.

Future principal payments of finance obligations as of September 30, 2011 are as follows (in thousands):

Payments due by period
2011 (remainder)	$	1,428
2012	5,942
2013	6,327
2014	5,646
2015	986
	$	20,329

U.S. Bank Commercial Purchasing Card Agreement

We have a commercial purchasing card (the “Purchasing Card”) agreement with U.S. Bank. We use the Purchasing Card for business purpose purchasing and must pay it in full each month. At September 30, 2011, $1.9 million was outstanding and $3.1 million was available under the Purchasing Card. At December 31, 2010, $2.7 million was outstanding and $2.3 million was available under the Purchasing Card.

Capital leases

We have leased certain software and computer equipment, under non-cancelable leases that expire on various dates through 2013.

Fixed assets included assets under capital leases of $1.7 million and accumulated depreciation of $1.2 million and $902,000, at September 30, 2011 and December 31, 2010, respectively. Depreciation expense of assets recorded under capital leases was $135,000 and $145,000 for the three months ended September 30, 2011 and 2010, respectively and $425,000 and $435,000 for the nine months ended September 30, 2011 and 2010, respectively.

Future payments of capital lease obligations as of September 30, 2011 are as follows (in thousands):

Payments due by period
2011 (remainder)	$	82
2012	115
2013	3
Total minimum lease payments	200
Less: amount representing interest	12
Present value of capital lease obligations	188
Less: current portion	185
Capital lease obligations, non-current	$	3

3.75% Convertible Senior Notes

In November 2004, we completed an offering of $120.0 million of 3.75% Convertible Senior Notes due 2011 (the “Senior Notes”). Proceeds to us were $116.2 million, net of $3.8 million of initial purchaser’s discount and debt issuance costs. The discount and debt issuance costs were being amortized using the straight-line method which approximates the effective interest method. We recorded amortization of discount and debt issuance costs related to this offering totaling $44,000 and $56,000 during the three months ended September 30, 2011 and 2010, respectively and $104,000 and $190,000 during the nine months ended September 30, 2011 and 2010, respectively. Interest on the Senior Notes was payable semi-annually on June 1 and December 1 of each year. The Senior Notes were scheduled to mature on December 1, 2011 and were unsecured and ranked equally in right of payment with all existing and future unsecured, unsubordinated debt and senior in right of payment to any existing and future subordinated indebtedness.

We retired all of the Senior Notes that remained outstanding on September 21, 2011 for $24.5 million in cash, resulting in a loss of $26,000 on early extinguishment of debt, net of $26,000 of associated unamortized discount. We retired $34.6 million of the Senior Notes during the nine months ended September 30, 2011, for $34.6 million in cash, resulting in a loss of $54,000 on early extinguishment of debt, net of $77,000 of associated unamortized discount. Of the $34.6 million in Senior Notes retired during the nine months ended September 30, 2011, $10.1 million were held by Chou Associates Management Inc. (“Chou”) or an affiliate of Chou and $21.7 million were held by Fairfax Financial Holdings Limited (“Fairfax”) or an affiliate of Fairfax. Chou and Fairfax are beneficial owners of more than 5% of our common stock. We retired $16.1 million of the Senior Notes during the three months ended September 30, 2010 for $15.8 million in cash, resulting in a gain of $141,000 on early extinguishment of debt, net of $92,000 of associated unamortized discount. We retired $25.4 million of the Senior Notes during the nine months ended September 30, 2010 for $24.9 million in cash, resulting in a gain of $346,000 on early extinguishment of debt, net of $158,000 of associated unamortized discount.

As of September 30, 2011 and December 31, 2010, zero and $34.5 million of the Senior Notes, net of debt discount remained outstanding, respectively.