Overstock
Annual Report 2011

Plain-text annual report

Use these links to rapidly review the documentTABLE OF CONTENTS PART IV INDEX TO CONSOLIDATED FINANCIAL STATEMENTSTable of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-KCommission file number 000-49799OVERSTOCK.COM, INC.(Exact name of Registrant as specified in its charter)Delaware(State or other jurisdiction ofincorporation ororganization) 87-0634302(I.R.S. EmployerIdentification Number)6350 South 3000 EastSalt 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:Title of Each Class Name of Each Exchange on WhichRegisteredCommon Stock, $0.0001 par value Nasdaq Global Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No  Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No  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 Exchange Act of(Mark One)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2011ORo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes  No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for suchshorter period that the registrant was required to submit and post such files). Yes  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. o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reportingcompany. See the definitions of "large accelerated filer", "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.(Check one): Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the act). Yes o No  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, 2011), was approximately $162.4 million based upon the last sales price reported byNASDAQ. For purposes of this disclosure, shares of Common Stock held by persons who hold more than 5% of the outstanding shares of CommonStock and shares held by officers and directors of the registrant have been excluded in that such persons may be deemed to be affiliates. Thisdetermination is not necessarily conclusive. As of February 10, 2012 there were 23,387,288 shares of the registrant's Common Stock outstanding.DOCUMENTS INCORPORATED BY REFERENCE Certain information required by Part III of Form 10-K is incorporated by reference to the Registrant's proxy statement for the 2012 AnnualStockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which thisReport relates. Large accelerated filer o Accelerated filer  Non-accelerated filer o(Do not check if asmaller reporting company) Smaller reporting company oTable of ContentsOVERSTOCK.COM, INC.ANNUAL REPORT ON FORM 10-KINDEX O, Overstock.com, O.com, O.co, Omail, Club O rewards, Main Street Revolution, Worldstock Fair Trade, Worldstock are registered trademarks,and Club O, O.biz, Savings Engine are trademarks of Overstock.com, Inc. The Overstock.com, Club O, and Worldstock Fair Trade logos are alsoregistered trademarks of Overstock.com, Inc. Other service marks, trademarks and trade names referred to in this Form 10-K are property of theirrespective owners.i Page Special Note Regarding Forward-Looking Statements ii Part I Item 1. Business 1 Item 1A. Risk Factors 9 Item 1B. Unresolved Staff Comments 35 Item 2. Properties 35 Item 3. Legal Proceedings 35 Item 4. Mine Safety Disclosures 35 Part II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities 36 Item 6. Selected Financial Data 41 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 43 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 78 Item 8. Financial Statements and Supplementary Data 78 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 78 Item 9A. Controls and Procedures 79 Item 9B. Other Information 81 Part III Item 10. Directors, Executive Officers and Corporate Governance 82 Item 11. Executive Compensation 82 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related StockholderMatters 82 Item 13. Certain Relationships and Related Transactions, and Director Independence 82 Item 14. Principal Accounting Fees and Services 82 Part IV Item 15. Exhibits, Financial Statement Schedules 83 Signatures 86 Financial Statements 88 Table of ContentsSPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are therefore entitled to theprotection of the safe harbor provisions of these laws. These forward-looking statements involve risks and uncertainties, and relate to future events orour future financial or operating performance. The forward-looking statements include all statements other than statements of historical fact, including,without limitation, all statements regarding:•the anticipated benefits and risks of our business and plans; •our ability to attract and retain customers in a cost-efficient manner; •the effectiveness of our marketing; •our future operating and financial results; •the competition we face and will face in our business; •the effects of government regulation; •our future capital requirements and our ability to satisfy our capital needs; •our expectations regarding the adequacy of our liquidity; •our ability to retire or refinance our debt; •our plans for international markets; •our plans for changes to our business; •our beliefs regarding current or future litigation or regulatory actions; •our beliefs and expectations regarding existing and future tax laws and related laws and the application of those laws to our business; •our beliefs regarding the adequacy of our insurance coverage; •the adequacy of our infrastructure, including our backup facilities and our disaster planning; •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 beliefs regarding the adequacy of our order processing systems and our fulfillment and distribution capabilities; •our beliefs regarding the adequacy of our customer service capabilities; •our beliefs and expectations regarding the adequacy of our office and warehouse facilities; •our expectations regarding our travel shopping service, our insurance shopping service, our international sales efforts, our car listingservice and our community site, and the anticipated functionality and results of operations of any of them; •our belief that we and our fulfillment partners will be able to maintain inventory levels at appropriate levels despite the seasonal nature ofour business; and •our belief that we can successfully offer and sell a constantly changing mix of products and services.iiTable of Contents 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 statements are onlypredictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider the risks outlined in thisAnnual Report on Form 10-K for the year ended December 31, 2011, including those described in Item 1A under the caption "Risk Factors." Thesefactors may cause our actual results to differ materially from those contemplated by any forward-looking statement. Except as otherwise required bylaw, we expressly disclaim any obligation to release publicly any update or revisions to any forward-looking statements to reflect any changes in ourexpectations or any change in events, conditions or circumstances on which any of our forward-looking statements are based. Although we believe thatthe expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance orachievements. These forward-looking statements speak only as of the date of this report and, except as required by law, we undertake no obligation to updateforward-looking statements to reflect events or circumstances occurring after the date of this report.iiiTable of ContentsPART I 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 above 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 in Section 1Aunder the heading "Risk Factors" and elsewhere in this Form 10-K.Introduction We are an online retailer offering discount brand name, non-brand name and closeout merchandise, including bed-and-bath goods, home décor,kitchenware, furniture, watches and jewelry, apparel, electronics and computers, sporting goods, and designer accessories, among other products. Weare also a channel through which customers can purchase cars, insurance and travel products and services. We sell advertising. We also sell hundreds ofthousands of best seller and current run books, magazines, CDs, DVDs and video games ("BMMG"). We sell these products and services through ourInternet websites located at www.overstock.com, www.o.co and www.o.biz ("Website"). Although our three websites are located at different domainaddresses, the technology and equipment and processes supporting the three websites and the process of order fulfillment described herein are the samefor all three websites. Our company, based in Salt Lake City, Utah, was founded in 1997. We launched our initial website in March 1999. Our Website offers ourcustomers an opportunity to shop for bargains conveniently, while offering our suppliers an alternative inventory liquidation or sales channel. Wecontinually add new, sometimes limited, inventory products to our Website in order to create an atmosphere that encourages customers to visitfrequently and purchase products before our inventory sells out. We sell products primarily in the United States, with a small amount of products (lessthan 1% of sales) sold internationally. As used herein, "Overstock," "Overstock.com," "O.co," "we," "our" and similar terms include Overstock.com, Inc. and its subsidiaries, unless thecontext indicates otherwise.Our Business We deal primarily in discount, replenishable, and closeout merchandise and we use the Internet to aggregate both supply and demand to create anefficient marketplace for selling these products. We provide manufacturers with a one-stop liquidation channel to sell both large and small quantities ofexcess, closeout and replenishable inventory without disrupting sales through traditional channels, which can result in weaker pricing and decreasedbrand strength. The merchandise offered on our Website is from a variety of sources including well-known, brand-name manufacturers. We haveorganized our shopping business (sales of product offered through the Shopping Section of our Website) into two principal segments—a "direct"business and a "fulfillment partner" business. We currently offer approximately 251,000 non-BMMG products and approximately 637,000 BMMGproducts. Consumers and businesses are able to access and purchase our products 24 hours a day from the convenience of a computer, Internet-enabledmobile telephone or other Internet-enabled devices. Our team of customer service representatives assists customers by telephone, instant online chat ande-mail. We also derive revenue from other businesses advertising products or services on our Website. We have car, insurance and travel listingbusinesses through which cars, insurance and travel-related products and services may be purchased from vendors. Nearly all of our sales are tocustomers located in the United States. During the years ended December 31, 2011 and 2010 no single customer accounted for more than 1% of ourtotal revenue.1Table of ContentsDirect business Our direct business includes sales made to individual consumers and businesses, which are fulfilled from our leased warehouses in Salt Lake City,Utah. During the year ended December 31, 2011, we fulfilled approximately 16% of our order volume through our warehouses. Our warehousesgenerally ship between 4,000 and 7,000 orders per day and up to approximately 10,000 orders per day during peak periods, using overlapping dailyshifts.Fulfillment partner business For our fulfillment partner business, we sell merchandise of other retailers, cataloguers or manufacturers ("fulfillment partners") through ourWebsite. We are considered to be the primary obligor for the majority of these sales transactions and we record revenue from the majority of these salestransactions on a gross basis. Our use of the term "partner" or "fulfillment partner" does not mean that we have formed any legal partnerships with anyof our fulfillment partners. We currently have relationships with approximately 2,000 third parties who supply approximately 242,000 non-BMMGproducts, as well as most of the BMMG products, on our Website. These third-party fulfillment partners perform essentially the same fulfillmentoperations as our warehouses, such as order picking and shipping; however, we handle returns and customer service related to substantially all ordersplaced through our Website. Revenue generated from sales on our Shopping site from both the direct and fulfillment partner businesses is recorded netof returns, coupons and other discounts. Both direct and fulfillment partner revenues are seasonal, with revenues historically being the highest in the fourth quarter, which endsDecember 31, reflecting higher consumer holiday spending. We anticipate this will continue in the foreseeable future. Generally, we require verification of receipt of payment, or authorization from credit card or other payment vendors whose services we offer to ourcustomers (such as PayPal and BillMeLater), before we ship products to consumers or business purchasers. From time to time we grant credit to ourbusiness purchasers with normal credit terms (typically 30 days). For sales in our fulfillment partner business, we generally receive payments from ourcustomers before our payments to our suppliers are due.International business We began selling products through our Website to customers outside the United States in late August 2008. As of December 31, 2011, we wereoffering products to customers in over 105 countries and non-U.S. territories. We do not have sales operations outside the United States, and are usinga U.S. based third party to provide logistics and fulfillment for all international orders. Revenue generated from our international business is included ineither direct or fulfillment partner revenue, depending on whether the product is shipped from our warehouses or from a fulfillment partner. Less than1% of our sales are made to international customers.Consignment In September 2009, we began offering a consignment service to suppliers where the suppliers' merchandise is stored in and shipped from ourleased warehouses. We pay the consignment supplier upon sale of the consigned merchandise to our customer. Revenue from our consignment service business is less than 1% of total net revenue and is included in the fulfillment partner segment.2Table of ContentsOther businesses We operate an online car listing service as part of our Website. The car listing service allows sellers to list vehicles for sale and allows buyers toreview vehicle descriptions, post offers to purchase, and provides the means for purchasers to contact sellers for further information and negotiations onthe purchase of an advertised vehicle. We also earn advertisement revenue derived from our cars business. Revenue from the cars businesses is includedin the fulfillment partner segment on a net basis. We operate an online site, O.biz, a website where customers and businesses can shop for bulk and business related items, while offeringmanufacturers, distributors and other retailers an alternative sales channel for liquidating their inventory. Revenue generated from our O.biz is includedin either direct or fulfillment partner revenue, depending on whether the product is shipped from our warehouses or from a fulfillment partner. In April 2011, we again began operating a travel shopping site as part of our Website where customers can purchase discount travel packages,flights, rental cars and other travel-related products and services. We also earn advertisement revenue from our travel business. Revenue from the travelbusinesses is included in the fulfillment partner segment on a net basis. In July 2011, we began operating an insurance shopping service as part of our Website where customers can shop for auto and home insuranceand compare quotes from various insurance providers. We also earn advertisement revenue from our insurance business. Revenue generated from ourinsurance shopping site is included in fulfillment partner segment on a net basis. Prior to July 2011, we operated an online auction service as part of our Website. In July 2011, we removed our Marketplace tab for auctions fromour Website and no longer provide auction services. The financial results and related assets of the online auction service were not significant to ourbusiness. Our Marketplace tab allowed sellers to list items for sale, buyers to bid on items of interest, and users to browse through listed items online.We recorded only our listing fees and commissions for items sold as revenue. From time to time, we also sold items returned from our shoppingbusiness through our auction service, and for these sales, we recorded the revenue on a gross basis. Revenue from the auctions is included in thefulfillment partner segment. Prior to June 2011, we operated an online site for listing real estate for sale as part of our Website. In June 2011, we removed our online site forlisting real estate for sale from our Website and no longer provide these real estate listing services. The financial results and related assets of the onlinesite for listing real estate for sale were not significant to our business. The real-estate listing service allowed customers to search active listings acrossthe country. Revenue from the real estate business is included in the fulfillment partner segment on a net basis. Prior to June 2011, we operated Eziba.com, a private sale website featuring home décor products, jewelry, apparel and accessories from manyleading brands. In June 2011, we turned off the Eziba.com website; however, we continue to sell the type of products that were listed on Eziba.comthrough our websites, O.co and Overstock.com. Revenue from our other businesses is less than 1% of total net revenues.Manufacturer, Supplier and Distribution Relationships To date, we have not entered into contracts with manufacturers or other suppliers that guarantee the availability of merchandise for a set duration.Our manufacturer and supplier relationships are based on historical experience with manufacturers and other suppliers and do not obligate or entitle usto receive merchandise on a long-term or short-term basis. In our direct business, we purchase the products from manufacturers or other suppliers usingstandard purchase orders. Generally, suppliers do not control the terms under which products are sold through our Website.3Table of ContentsProductsOnline Products Our Website is organized into five main sections: Shopping, Cars, Travel, Insurance, and Business to Business. The Shopping section is organizedinto 18 main departments: Home & Garden, Furniture, Bedding & Bath, Clothing & Shoes, Electronics, Jewelry, Watches, Sports and Outdoors, BooksMedia Music & Games, Luggage, Worldstock Fair Trade, Health & Beauty, Baby, Crafts & Sewing, Office, Gifts & Flowers, Toys & Hobbies, andPets. Worldstock Fair Trade is our socially-responsible, online marketplace through which artisans in the United States and around the world can selltheir products and gain access to a broader market. We have specialty departments, such as Main Street Revolution. Main Street Revolution is ourmarketplace that enables small and minority-owned businesses to offer their products to a mass audience by selling on our websites. For the years ended December 31, 2011, 2010 and 2009, the percentages of gross sales contributed by similar classes of products were as follows: From time-to-time, as the number of products and product categories change, we may reorganize our departments and/or categories to better reflectour current product offerings.Sales and Marketing We use a variety of methods to target our consumer audience, including online campaigns, such as advertising through portals, keywords, searchengines, affiliate marketing programs, social coupon websites, banners, e-mail, direct mail, viral and social media campaigns, and we are able to monitorand evaluate their results. We seek to identify and eliminate campaigns that do not meet our expectations. We also do brand advertising throughtelevision, radio, and print ads. We generally develop these campaigns internally.Customer Service We are committed to providing superior customer service. We staff our customer service department with dedicated in-house and outsourcedprofessionals who respond to phone, instant online chat and e-mail inquiries on products, ordering, shipping status, returns and other areas of customerinquiry. As a result of this commitment, in each of the last six years we have ranked in the top four companies in customer service rankings among allU.S. retailers, according to rankings published in the NRF Foundation/American Express Customer Service Survey.Technology We use our internally developed Websites and a combination of proprietary technologies and commercially available licensed technologies andsolutions to support our operations. We use the services of multiple telecommunications companies to obtain connectivity to the Internet. Currently, ourprimary computer infrastructure resides at a co-location facility in Salt Lake City. We also have a4Product Class 2011 2010 2009 Home and garden(1) 58% 55% 53%Jewelry, watches, clothing and accessories 20% 23% 24%BMMG, electronics and computers 10% 11% 14%Other 12% 11% 9% Total 100% 100% 100% (1)Home and garden includes home décor, bedding, bath, furniture, housewares, garden, patio and other related products.Table of Contentssecond data center near our corporate headquarters which we use primarily for backups, redundancy, development, testing, and our corporate systemsinfrastructure.Competition Internet retail is intensely competitive and has relatively low barriers to entry. We believe that competition in this industry is based predominantlyon:•price; •product quality and selection; •shopping convenience; •website organization and load speed; •order processing and fulfillment; •order delivery time; •customer service; and •brand recognition. We compete with other online retailers, traditional retailers and liquidation "brokers," some of which may specifically adopt our methods and targetour customers. We currently or potentially compete with a variety of companies that can be divided into several broad categories:•liquidation e-tailers such as SmartBargains; •online general retailers with discount departments such as Amazon.com, Inc., eBay, Inc. and Buy.com, Inc.; •private sale sites such as Rue La La and Gilt Groupe; •online specialty retailers such as Bluefly, Inc., Blue Nile, Inc. and Zappos.com; and •traditional general merchandise and specialty retailers and liquidators such as Ross Stores, Inc., Wal-Mart Stores, Inc., Costco WholesaleCorporation, J.C. Penney Company, Inc., Sears Holding Corporation, Target Corporation, Best Buy Co., Inc., Home Depot, Inc. andBarnes and Noble, Inc., which also have an online presence. Many of our current and potential competitors have greater brand recognition, longer operating histories, larger customer bases and significantlygreater financial, marketing and other resources than we do. Further, any of them may enter into strategic or commercial relationships with larger, moreestablished and well-financed companies, including exclusive distribution arrangements with our vendors that could deny us access to their products.Many of them could devote greater resources to marketing and promotional campaigns and devote substantially more resources to their website andsystems development than we do. New technologies and the continued enhancement of existing technologies also may increase competitive pressureson us. We cannot ensure that we will be able to compete successfully against current and future competitors or address increased competitive pressures(see Item 1A—"Risk Factors").Seasonality Our business is affected by seasonality because of the holiday retail reason, which historically has resulted in higher sales volume during ourfourth quarter, which ends December 31. We recognized 29.8%, 32.0% and 36.8% of our annual revenue during the fourth quarter of 2011, 2010, and2009, respectively.5Table of ContentsFinancial Information about Geographic Areas See Item 15 of Part IV, "Financial Statements"—Note 22—"Business Segments" for more information.Intellectual Property and Trade Secrets 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, affiliates and others to establish and protect our proprietary rights, including the law pertaining totrade secrets. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our intellectual property or trade secretswithout authorization. In addition, we cannot ensure that others will not independently develop similar intellectual property. Although we haveregistered and are pursuing the registration of our key trademarks in the United States and some other countries, some of our trade names may not beeligible to receive registered trademark protection. In addition, effective trademark protection may not be available or we may not seek protection inevery country in which we market or sell our products and services, including in the United States. Additionally our efforts to protect our trade secretsmay not succeed. Third parties have in the past recruited 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 and those hiring them will misappropriate and exploit our intellectualproperty and trade secrets.Legal and Regulatory Matters From time to time, we receive claims and become subject to regulatory investigations or actions, consumer protection, employment, intellectualproperty and other commercial litigation related to the conduct of our business. We also prosecute lawsuits to enforce our legal rights. Such litigationcould be costly and time consuming and could divert our management and key personnel from our business operations. The uncertainty of litigationincreases these risks. In connection with such litigation, we may be subject to significant damages, associated costs, or equitable remedies relating to theoperation of our business and the sale of products on our Website. Any such litigation may materially harm our business, prospects, results ofoperations, financial condition or cash flows. These and other types of claims could result in increased costs of doing business through legal expenses, adverse judgments or settlements orrequire us to change our business practices in expensive and significant ways. In addition, litigation could result in interpretations of the law that requireus to change our business practices or otherwise increase our costs. 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 diversion ofmanagement and technical resources, any of which could materially harm our business (see Item 1A—"Risk Factors"). See the information set forth under Item 15 of Part IV, "Financial Statements—Note 13—Commitments and Contingencies, subheading LegalProceedings," contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K.Government Regulation Our services are subject to federal and state consumer protection laws including laws protecting the privacy of consumer information andregulations prohibiting unfair and deceptive trade practices. In particular, under federal and state financial privacy laws and regulations, we must providenotice to6Table of Contentsconsumers of our policies on sharing non-public information with third parties, advance notice of any changes to our policies and, with limitedexceptions, we must give consumers the right to prevent sharing of their non-public personal information with unaffiliated third parties. Furthermore,the growth and demand for online commerce could result in more stringent consumer protection laws that impose additional compliance burdens ononline companies. These consumer protection laws could result in substantial compliance costs and could interfere with the conduct of our business. In many states, there is currently great uncertainty whether or how existing laws governing issues such as property ownership, sales and othertaxes, libel and personal privacy apply to the Internet and commercial online services. These issues may take years to resolve. In addition, new state taxregulations in states where we do not now collect state and local taxes, may subject us to the obligation to collect and remit state and local taxes, orsubject us to additional state and local sales and income taxes, or to requirements intended to assist states with their tax collection efforts. Newlegislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business or the applicationof existing laws and regulations to the Internet and commercial online services could result in significant additional taxes on our business. These taxesor tax collection obligations could have an adverse effect on our cash flows and results of operations. Furthermore, there is a possibility that we may besubject to significant fines or other payments for any past failures to comply with these requirements.Employees As of December 31, 2011, we had approximately 1,300 full-time employees. We seasonally augment our workforce with temporary employeesduring our fourth quarter to handle increased workload in both our warehouse and customer service operations. We have never had a work stoppage,and none of our employees are represented by a labor union. We consider our employee relationships to be good. Competition for qualified personnel inour industry has historically been intense, particularly for software engineers, computer scientists, and other technical staff.Executive Officers of the Registrant The following persons were executive officers of Overstock.com as of December 31, 2011: Dr. Patrick M. Byrne has served as our Chief Executive Officer (principal executive officer) and as a Director since October 1999, as Chairman ofthe Board from February 2001 through October 2005, and since July 2006. 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 1994to the present, Dr. Byrne has served as a Manager of the Haverford Group, an investment company and an affiliate of Overstock. Dr. Byrne has aBachelor 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.7Executive Officers Age PositionPatrick M.Byrne 49 Chief Executive Officer and Chairman of the Board of DirectorsJonathan E.Johnson III 45 President and Corporate SecretaryStephen J.Chesnut 52 Senior Vice President, Finance and Risk ManagementSamuel J.Peterson 36 Senior Vice President, TechnologyStormy D.Simon 43 Senior Vice President, Customer and Partner Care and DirectorStephen P.Tryon 50 Senior Vice President, Human Capital ManagementTable of Contents Mr. Jonathan E. Johnson III joined Overstock.com in September 2002 and has served as our President and Corporate Secretary since July 2008.He has served as our General Counsel and as our Vice President, Strategic Projects and Legal, and Senior Vice President, Corporate Affairs and Legal.From May 1999 to September 2002, Mr. Johnson held various positions with TenFold Corporation, a software company, including positions asGeneral Counsel, Executive Vice President and Chief Financial Officer. From October 1997 to April 1999, Mr. Johnson practiced law with Milbank,Tweed, Hadley & McCloy and from September 1994 to September 1997, he practiced law with Graham & James. From February 1994 to August1994, Mr. Johnson served as a judicial clerk at the Utah Supreme Court for Justice Leonard H. Russon, and prior to that, from August 1993 to January1994, Mr. Johnson served as a judicial clerk at the Utah Court of Appeals for Judge Leonard H. Russon. Mr. Johnson holds a Bachelor's Degree inJapanese from Brigham Young University, studied for a year at Osaka University of Foreign Studies in Japan, and received his law degree from the J.Reuben Clark, Jr. Law School at Brigham Young University. Mr. Stephen J. Chesnut (principal financial and accounting officer) currently serves as our Senior Vice President, Finance and Risk Management.He previously served as our Senior Vice President, Finance from January 2009 to February 2010. From August 2007 to August 2008, Mr. Chesnutserved as Vice President, Strategy/Market Development/Sales for HD Supply, Inc., a privately-held wholesale distribution company based in Atlanta,Georgia. From December 1998 to August 2007, Mr. Chesnut served in a variety of capacities for The Home Depot or its subsidiaries, includingDirector, Business Development for HD Supply (prior to its sale by Home Depot); Director, Finance and Chief Financial Officer for Home DepotSupply; Director, New Concept Development; and Director, Strategic Planning. Prior to joining The Home Depot from 1986 to 1998, Mr. Chesnutserved in a variety of operational, planning and financial positions for Target Stores Inc. Mr. Chesnut holds a Bachelor's of Science Degree inAccounting and Business Management from Southern Utah University and a Master of Business Administration Degree, Finance and StrategicPlanning, from Brigham Young University. Mr. Samuel J. Peterson currently serves as our Senior Vice President, Technology. Mr. Peterson previously served as the Vice President,Software Development from early 2005, and was appointed as Director, Network and Systems Engineering in 2003. Prior to joining Overstock.com in1999, Mr. Peterson was involved in creating several start-up Internet ventures, including Fitnesoft, Inc. Ms. Stormy D. Simon currently serves as our Senior Vice President, Customer and Partner Care. Ms. Simon has also served as a member of ourBoard of Directors since May 2011. Ms. Simon previously served as our Senior Vice President, Marketing, Vice President, BMMG; Travel and Off-Line Advertising; Chief of Staff and as our Director of B2B. Prior to joining Overstock.com in 2001, Ms. Simon worked in the media and travelindustries. Mr. Stephen P. Tryon joined Overstock.com in August 2004, and serves as Senior Vice President, Human Capital Management. Prior to joiningOverstock.com, Mr. Tryon was the Legislative Assistant to the Chief of Staff of the United States Army. During his 21 years with the Army, hisassignments included director of plans for the 10th Mountain Division, Congressional Fellow for United States Senator Max Cleland, AssistantProfessor of Philosophy at the United States Military Academy, and commander of a company of paratroopers. Mr. Tryon received a Bachelor's ofScience Degree in Applied Sciences from the U.S. Military Academy and a Master's Degree of Arts in Philosophy from Stanford University.Available Information Our Internet Website addresses are www.overstock.com, www.o.co and www.o.biz. Our Annual Report on Form 10-K, Quarterly Reports onForm 10-Q, Current Reports on Form 8-K and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of1934 are available free of charge through our Internet Website as soon as reasonably practicable after we electronically file such material with, or furnishit to, the Securities and Exchange Commission. Our Internet Website and the information contained therein or connected thereto are not a part of orincorporated into this Annual Report on Form 10-K.8Table of ContentsITEM 1A. RISK FACTORS Please consider the following risk factors carefully. If any one of the following risks were to occur, our business, prospects, financial conditionand results of operations could be materially adversely affected, and the market price of our securities could decrease. These are not the only risks weface. In addition, the global economic climate amplifies many of these risks.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 or through other means. Althoughthere are relatively few laws specifically directed at Internet businesses, the number of such laws is increasing and many additional laws and regulationsrelating to the Internet are being debated at the state and federal levels. These laws and regulations cover issues such as user privacy, behavioraladvertising, auto-renewability of contract, freedom of expression, pricing, fraud, mandated disclosures concerning foreign manufacturer workingconditions, quality of products and services, taxation, advertising, intellectual property rights and information security. Applicability to the Internet ofexisting laws governing issues such as property ownership, copyrights and other intellectual property issues, taxation, libel, obscenity and personalprivacy could also harm our business. For example, United States and foreign laws regulate our ability to use customer information and to develop, buyand sell mailing lists. Many of these laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raisedthereby. Consequently, laws adopted for the regulation of commerce that is not Internet based, may present difficult or impossible compliancechallenges, may be applied to us in an adverse way, or the judicial interpretation of the application of these laws to our Internet-based business may beadverse to our interests. Many of those laws that do reference the Internet are still being interpreted by the courts and their applicability and reach aretherefore uncertain. Moreover, Internet advances and innovations may result in new questions about the applicability and reach of these laws.Additionally, laws governing the permissible contents of products may adversely affect us, and we are subject to federal and state consumer laws,including those governing advertising, product labeling, product content requirements and product safety. The laws not only apply to future manufactureof consumer product, but also apply to existing inventories and may cause us to incur losses for any non-compliant items in our inventory, or which wemay have sold which may subject us to regulatory or civil actions. Some of the products we sell or manufacture may, under statutory or common law,from time to time expose us to claims related to personal injury, death, environmental or property damage and may from time to time require productrecalls or other actions which may not be covered, in whole or in part, by our liability insurance. These current and future laws and regulations couldharm our business, prospects, financial condition and results of operation.General economic factors may adversely affect our financial performance. General economic conditions may adversely affect our financial performance. In the United States, changes in interest rates, changes in fuel andother energy costs, weakness in the housing market, inflation or deflation or expectations of either inflation or deflation, higher levels of unemployment,unavailability or limitations of consumer credit, higher consumer debt levels or efforts by consumers to reduce debt levels, higher tax rates and otherchanges in tax laws, overall economic slowdown, changes in consumer desires affecting demand for the products and services we sell and othereconomic factors could adversely affect consumer demand for the products and services we sell, change the mix of products we sell to a mix with alower average gross margin and result in slower inventory turnover and greater markdowns on inventory. Higher interest rates, transportation costs,inflation, higher costs of labor, insurance and healthcare, foreign exchange rates fluctuations, higher tax rates and other changes in tax laws, changes inother laws and regulations and other economic factors in the United States can increase our cost of sales and operating, selling, general andadministrative expenses, and otherwise9Table of Contentsadversely affect our operations and operating results. These factors affect not only our operations, but also the operations of suppliers from whom wepurchase goods, a condition that can result in an increase in the cost to us of the goods we sell to our customers.Decreases in discretionary consumer spending may have an adverse effect on us. A substantial portion of the products and services we offer are products or services that consumers may view as discretionary items rather thannecessities. As a result, our results of operations are sensitive to changes in macro-economic conditions that impact consumer spending, includingdiscretionary spending. Difficult macro-economic conditions, particularly high levels of unemployment, also impact our customers' ability to obtainconsumer credit. Other factors, including consumer confidence, employment levels, interest rates, tax rates, consumer debt levels, and fuel and energycosts could reduce consumer spending or change consumer purchasing habits. A continued slowdown in the U.S. or global economy, or an uncertaineconomic outlook, could materially adversely affect consumer spending habits and our operating results.We have a history of significant losses. If we do not maintain profitability, our financial condition and our stock price could suffer. We have a history of losses and we may incur operating and net losses in the foreseeable future. As of December 31, 2011, our accumulated deficitwas $262 million. We need to generate significant revenues to maintain profitability, and we may not be able to do so. Although we had net income of$13.9 million and $7.7 million in 2010 and 2009, respectively, we incurred a net loss of $19.4 million in 2011. We may not be able to achieveprofitability on a quarterly or annual basis in the future. If our revenues grow more slowly than we anticipate or decline, or if our expenses exceed ourexpectations, our financial results would be harmed and our business, prospects, financial condition and results of operations could fall below theexpectations of public market analysts and investors. We will continue to incur significant operating expenses and capital expenditures to:•further enhance our distribution and order fulfillment capabilities; •further improve our order processing systems and capabilities; •develop enhanced technologies and features; •continue to expand our customer service capabilities to better serve our customers' needs; •expand or modify our product offerings; •increase our general and administrative functions to support our operations and activities; and •maintain or increase our sales, branding and marketing activities, including maintaining existing or entering into new online marketing ormarketing analytics arrangements, and continuing or increasing our national television and radio advertising, direct mail and/or othermarketing campaigns. Because we will incur many of these expenses before we receive any revenues from our improvement and enhancement efforts, our losses may begreater than the losses we would incur if we developed our business more slowly. Further, we base our expenses in large part on our operating plansand future revenue projections. Many of our expenses are fixed in the short term, and we may not be able to reduce spending quickly or at all if ourrevenues are lower than we project. Therefore, any significant shortfall in revenues would likely harm our business, prospects, financial condition andresults of operations. In addition, we may find that these efforts are more expensive than we anticipate which would adversely affect our profitability.Also, the timing of these expenses may contribute to fluctuations in our quarterly results of operations.10Table of ContentsWe may need to implement additional finance and accounting systems, procedures and controls as we grow our business and organization and tosatisfy new reporting requirements. We are required to comply with a variety of reporting, accounting and other rules and regulations. Compliance with existing requirements isexpensive. Further requirements may increase our costs and require additional management time and resources. We may need to implement additionalfinance and accounting systems, procedures and controls to satisfy our reporting requirements. If our internal control over financial reporting isdetermined to be ineffective, such failure could cause investors to lose confidence in our reported financial information, negatively affect the marketprice of our common stock, subject us to regulatory investigations and penalties, and adversely impact our business and financial condition.Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matterscould significantly affect our financial results. Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to awide range of matters that are relevant to our business, including but not limited to, revenue recognition, estimating valuation allowances and accruedliabilities (specifically, the allowances for returns, credit card chargebacks, doubtful accounts and obsolete and damaged inventory), internal usesoftware and website development (acquired and developed internally), accounting for income taxes, valuation of long-lived and intangible assets andgoodwill, stock-based compensation, and loss contingencies are highly complex and involve many subjective assumptions, estimates and judgments byour management. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management couldsignificantly change our reported or expected financial performance.Our cash, cash equivalents, investments in precious metals and short-term investments are subject to a risk of loss based upon the solvency of thefinancial institutions in which they are maintained and movement in the precious metals markets. We maintain the majority of our cash, cash equivalents, investments in precious metals and short-term investments in accounts with major financialinstitutions within the United States, in the form of demand deposits, money market accounts, time deposits, U.S. Treasury Bills and other short-terminvestments. Our deposits in these institutions may generally exceed the amounts of insurance provided, or deposits may not at all be covered byinsurance. If any of these institutions becomes insolvent, or there is a significant decline in the price of precious metals, it could substantially harm ourfinancial condition and we may lose some, or all, of such deposits.If we fail to accurately forecast our expenses and revenues, our business, prospects, financial condition and results of operations may suffer andthe price of our securities may decline. The rapidly evolving nature of our industry and the constantly evolving nature of our business, make forecasting operating results difficult. Since2005, we have completed several large, complex and expensive infrastructure upgrades in order to increase our ability to handle larger volumes of salesand to develop or increase our ability to perform a variety of analytical procedures relating to our business, and we are continuing the work to upgradeand further expand these and other components of our infrastructure. In the past, we have experienced difficulties with the implementation of variousaspects of the upgrades of our infrastructure, and have incurred increased expenses as a result of these difficulties. As a result of these expenditures, ourability to reduce spending if our revenues are lower than we project is limited. Therefore, any significant shortfall in the revenues for which we havebuilt and are continuing to build our infrastructure would likely harm our business, prospects, financial condition and results of operations and causeour results of operation to fall below the expectations of public market analysts and investors.11Table of ContentsThe seasonality of our business places increased strain on our operations. A disproportionate amount of our sales normally occur during our fourth quarter. If we do not stock or restock popular products in sufficientamounts to meet customer demand, this could significantly affect our revenue and our future growth. If we liquidate products, as we have in the past,we may be required to take significant inventory markdowns or write-offs, which could reduce gross profits. We may experience an increase in our netshipping cost due to complimentary upgrades, split-shipments, and additional long-zone shipments necessary to ensure timely delivery for the holidayseason. If too many customers access our Website within a short period of time due to increased holiday demand, we may experience systeminterruptions that make our Website unavailable or prevent us from efficiently fulfilling orders, which may reduce the volume of goods we sell and theattractiveness of our products and services. In addition, we may be unable to adequately staff our fulfillment and customer service centers during thesepeak periods and delivery and other fulfillment companies and customer service co-sourcers may be unable to meet the seasonal demand.We depend on our relationships with independent fulfillment partners for a large portion of the products that we offer for sale on our Website. Ifwe fail to maintain these relationships, our business will suffer. At December 31, 2011, we had relationships with approximately 2,000 independent fulfillment partners whose products we offer for sale on ourWebsite. We depend on our fulfillment partners to provide a large portion of the product selection we offer, as these products accounted for 84% of ournet revenues for the year ended December 31, 2011. We may expand the number of fulfillment partner relationships and the number of products offeredfor sale by our fulfillment partners on our Website. If we do not maintain our existing relationships or build new relationships with fulfillment partnerson acceptable commercial terms, we may not be able to maintain a broad selection of merchandise, and customers may not shop at or purchase from ourWebsite. In addition, manufacturers may decide not to offer particular products for sale on the Internet or on sites like ours. If we are unable to maintainour existing or build new fulfillment partner relationships or if product manufacturers refuse or restrict sale of their products via the Internet, thoughsites like ours, or to us, our business and prospects would suffer severely. In general, we agree to offer the fulfillment partners' products on our Website and these fulfillment partners agree to conduct a number of othertraditional retail operations with respect to their respective products that we offer for sale on our Website, including maintaining inventory, preparingmerchandise for shipment to individual customers and timely distribution of purchased merchandise. We have no effective means to ensure that thesethird parties will continue to perform these services to our satisfaction or on commercially reasonable terms. In addition, because we do not takepossession of these fulfillment parties' products, (other than on the return of such products), we are unable to fulfill these traditional retail operationsourselves. Our customers could become dissatisfied and cancel their orders or decline to make future purchases if these third parties are unable todeliver products on a timely basis. If our customers become dissatisfied with the services provided by these third parties, our reputation and theOverstock.com brand could suffer. We do not have any long-term agreements with any of these fulfillment partners. Our agreements with fulfillment partners are terminable at will byeither party upon short notice.Cyber-attacks affecting our suppliers could adversely affect us We depend on our fulfillment partners to provide a large portion of the product selection we offer and on vendors for the products we purchaseand offer in our direct business. Cyber-attacks affecting any of our most significant suppliers or affecting a significant number of our suppliers couldhave adverse effects on our business, prospects, financial condition and results of operations. The adverse12Table of Contentseffects could include our inability to source product or fulfill orders or the compromise of our customers' confidential data.We rely on our relationships with manufacturers, retailers and other suppliers to obtain sufficient quantities of quality merchandise on acceptableterms. If we fail to maintain our supplier relationships on acceptable terms, our sales and profitability could suffer. We do not have contracts with manufacturers or liquidation wholesalers that guarantee the availability of merchandise for a set duration. Ourcontracts or arrangements with suppliers do not provide for the continuation of particular pricing practices and may be terminated by either party uponshort notice. Our current suppliers may not continue to sell their excess inventory to us on current terms or at all and we may not be able to establishnew supply relationships. For example, it is difficult for us to maintain high levels of product quality and selection because none of the manufacturers,suppliers and liquidation wholesalers from whom we purchase products on a purchase order by purchase order basis have a continuing obligation toprovide us with merchandise at historical levels or at all. In most cases, our relationships with our suppliers do not restrict the suppliers from sellingtheir respective inventory to other traditional or online merchandise liquidators or retailers, which could in turn limit the selection of products availableon our Website. If we are unable to develop and maintain relationships with suppliers that will allow us to obtain sufficient quantities of merchandise onacceptable commercial terms, such inability could harm our business, prospects, financial condition and results of operation.Risks associated with the suppliers from whom our products are sourced and the safety of those products could adversely affect our financialperformance. The products we sell are sourced from a wide variety of domestic and international suppliers. Global sourcing of many of the products we sell isan important factor in our financial performance. Our ability to find qualified suppliers who meet our standards, and to access products in a timely andefficient manner is a significant challenge, especially with respect to suppliers located and goods sourced outside the United States. Political andeconomic instability in the countries in which foreign suppliers are located, the financial instability of suppliers, suppliers' failure to meet our supplierstandards, labor problems experienced by our suppliers, the availability of raw materials to suppliers, merchandise quality issues, currency exchangerates, transport availability and cost, transport security, inflation, and other factors relating to the suppliers and the countries in which they are located arebeyond our control. In addition, the United States' foreign trade policies, tariffs and other impositions on imported goods, trade sanctions imposed oncertain countries, the limitation on the importation of certain types of goods or of goods containing certain materials from other countries and otherfactors relating to foreign trade are beyond our control. These and other factors affecting our suppliers and our access to products could adversely affectour financial performance. Our customers count on us to provide them with safe products. Concerns regarding the safety of products that we source from our suppliers andthen sell could cause shoppers to avoid purchasing certain products from us, or to seek alternative sources of supply for all of their needs, even if thebasis for the concern is outside of our control. Any lost confidence on the part of our customers would be difficult and costly to reestablish. As such,any issue regarding the safety of any items we sell, regardless of the cause, could adversely affect our financial performance.We depend upon third-party delivery services to deliver products to our customers on a timely and consistent basis. Deterioration in ourrelationship with any one of these third parties could decrease our ability to track shipments, cause shipment delays, and increase our shippingcosts and the number of damaged products. We rely upon multiple third parties for the shipment of products to customers. We cannot be sure that these relationships will continue on terms wefind acceptable, or at all. Increases in shipping costs13Table of Contentsor delivery 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 as a result of laborshortage, slow down or stoppage, deteriorating financial or business condition, terrorist attacks, cyber-attacks, internet or other infrastructure orcommunications impairment, natural disasters, or for any other reason, we would be required to use alternative carriers for the shipment of products toour customers. In addition, conditions such as adverse weather or natural disasters can prevent any carriers from performing their delivery services,which can have an adverse effect on our customers' satisfaction with us. In any of these circumstances, we may be unable to engage alternative carrierson a timely basis, upon terms we find acceptable, or at all. Changing carriers, or absence of carrier availability, could have a negative effect on ourbusiness, prospects, financial condition and results of operations. Potential adverse consequences effecting customer satisfaction include:•reduced visibility and accuracy of order status and package tracking; •delays in order processing and product delivery; •increased delivery costs, resulting in reduced profit margins; and •reduced shipment quality, which may result in delivery of damaged products.Financial performance concerns may cause fulfillment partners or other suppliers to limit or suspend doing business with us, or requireprepayments. We rely upon our fulfillment partners and other suppliers for the product offerings sold on our website and other products and services we use torun our business. Our ability to retain or attract new fulfillment partners and other suppliers may depend in part on our financial performance. Poorfinancial performance may create concern about our creditworthiness, which could result in suppliers choosing to limit or suspend doing business withus or require us to prepay for our purchases, which could harm our business, prospects, financial condition and results of operations.We depend upon our credit card processors and payment card associations. Our customers primarily use credit cards to buy from us. We are dependent upon our credit card processors to process the sales transactions andremit the proceeds to us. The credit card processors have the right to withhold funds otherwise payable to us to establish a reserve based on theirassessment of the inherent risks of credit card processing and their assessment of the risks of processing our customers' credit cards, and have done sofrom time to time in the past. The credit card processors may establish, increase or decrease the amount of any reserve at any time. Any increase in theamounts of the reserves established by the processors would have an adverse effect on our cash flow and liquidity, and any material unexpectedincrease could have a material adverse effect on our business, prospects, financial condition and results of operations. We are also subject to payment card associations' operating rules, certification requirements and rules governing electronic funds transfers, whichcould change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may besubject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our customers, process electronic fundstransfers, or facilitate other types of online payments, could have a material adverse effect on our business, prospects, financial condition and results ofoperations. Events affecting our credit card processors, including cyber-attacks, internet or other infrastructure or communications impairment or other eventsthat could interrupt the normal operation of the credit card processors, could have a material adverse effect on our business, prospects, financialcondition and results of operations.14Table of ContentsA significant number of merchandise returns could harm our business, financial condition and results of operations. We allow our customers to return products, subject to our returns policies. If merchandise returns are significant, our business, prospects, financialcondition and results of operations could be harmed. Further, we modify our policies relating to returns from time to time and any policies intended toreduce the number of product returns may result in customer dissatisfaction and fewer repeat customers.Our pricing strategy may not meet customers' price expectations or result in net income. Demand for our products is generally highly sensitive to price. Our pricing strategies have had, and may continue to have, a significant impact onour net sales and net income. We often offer discounted prices, and free or discounted shipping as a means of attracting customers and encouragingrepeat purchases. Such offers and discounts reduce our margins. In addition, our competitors' pricing and marketing strategies are beyond our controland can significantly impact the results of our pricing strategies. If we fail to meet our customers' price expectations, or if we are unable to competeeffectively with our competitors when they engage in aggressive pricing strategies or other competitive activities, our business, prospects, financialcondition and results of operations would suffer.If the products that we offer on our Website do not reflect our customers' tastes and preferences, our sales and profit margins would decrease. 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 some of the products that we sell consist of manufacturers' and retailers' excessinventory, we have limited control over some of the products that we are able to offer for sale. If our merchandise fails to satisfy customers' tastes orrespond to changes in customer preferences, our sales could suffer and we could be required to mark down unsold inventory, as we have in the past,which 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, prospects, financial condition and results of operations.We face risks relating to our inventory. In our direct business, we sell merchandise that we have purchased and hold in inventory. We assume the risks of inventory damage, theft andobsolescence, as well as risks of price erosion for these products. These risks are especially significant because some of the merchandise we sell ischaracterized by seasonal trends, fashion trends, rapid technological change, obsolescence and price erosion (for example, computer hardware, softwareand consumer electronics) and because we sometimes make large purchases of particular types of inventory. In addition, we often do not receivewarranties on the merchandise we purchase. Subject to our returns policies, we accept returns of products sold through our fulfillment partners and wehave the risk of reselling the returned products. In the past we have recorded charges for obsolete inventory and have had to sell certain merchandise at a discount or loss. It is impossible todetermine with certainty whether an item will sell for more than our cost. To the extent that we rely on purchased inventory, our success will depend onour ability to sell our inventory rapidly, the ability of our buying staff to purchase inventory at attractive prices relative to its resale value and our abilityto manage customer returns and other costs. If we are unsuccessful in any of these areas, we may be forced to sell our inventory at a discount or loss. We purchase some of our inventory from foreign suppliers and pay for inventory with U.S. dollars. If the dollar weakens with respect to foreigncurrencies, foreign suppliers may require us to pay higher prices for products, which could negatively affect our profit margins.15Table of ContentsIf we do not successfully optimize and operate our warehouse and customer service operations, our business could be harmed. We have expanded, contracted and otherwise modified our warehouse and customer service operations in the past, and expect that we will continueto do so. If we do not successfully optimize and operate our warehouse and customer service operations, it could significantly limit our ability to meetcustomer demand or result in excessive costs and expenses for the size of our business. Because it is difficult to predict demand, we may not manageour facilities in an optimal way, which may result in excess or insufficient inventory or warehousing capacity. We may fail to staff our fulfillment andcustomer service centers at optimal levels. In addition, we rely on a limited number of companies to deliver inventory to us and to ship orders to ourcustomers. If we are not able to negotiate acceptable terms with these companies, or they experience performance problems or other difficulties, it couldnegatively impact our operating results and customer experience.The loss of key personnel or any inability to attract and retain additional personnel could affect our ability to successfully grow our business. Our performance is substantially dependent on the continued services and on the performance of our senior management and other key personnel.Our performance also depends on our ability to retain and motivate other officers and key employees. The loss of the services of any of our executiveofficers or other key employees for any reason, including without limitation, illness or call to military service, or loss to competitors as a result ofcompensation differentials or other reasons, could harm our business, prospects, financial condition and results of operations. We do not haveemployment agreements with any of our key personnel and we do not maintain "key person" life insurance policies. Our future success also depends onour ability to identify, attract, hire, train, retain and motivate other highly-skilled technical, managerial, editorial, merchandising, marketing and customerservice personnel. Competition for such personnel is intense, and we cannot assure that we will be able to successfully attract, assimilate or retainsufficiently qualified personnel. Our failure to retain and attract the necessary technical, managerial, editorial, merchandising, marketing and customerservice personnel could harm our business, prospects, financial condition and results of operations.We have an evolving business model. Our business model has evolved and continues to do so. In the past we have added additional types of services and product offerings and, in somecases, we have modified or discontinued those offerings. We may continue to try to offer additional types of products or services and we cannot offerany assurance that any of them will be successful. From time to time we have also modified aspects of our business model relating to our product mixand the mix of direct/fulfillment partner sourcing of the products we offer. We may continue to modify this aspect of our business as well as othersignificant aspects of our business. We cannot offer any assurance that these or any other modifications will be successful or will not result in harm tothe business. The additions and modifications to our business have increased the complexity of our business and placed significant strain on ourmanagement, personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting functions. Futureadditions to or modifications of our business are likely to have similar effects. We may not be able to manage growth effectively, which could damageour reputation, limit our growth and negatively affect our operating results.Our foreign brand domain name may cause confusion in foreign markets. In July, 2010, we undertook an effort to associate our brand globally with the domain address: www.O.co. We did this in part because in manyforeign markets the word "Overstock" lacked a good foreign cognate. Following a period of testing for the O.co brand and domain address, we returnedto the Overstock.com name as our primary brand domestically because domestic consumer acceptance did16Table of Contentsnot occur as quickly as we had hoped. While we have returned domestically to the Overstock.com brand and principal domain address, there is noassurance that the use of Overstock.com or O.co will gain acceptance or have success in foreign markets.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 to offer additional types of products and services. We may not be able to expandour business in this manner. Our failure to succeed in these markets or businesses or in other product or service offerings may harm our business,prospects, financial condition and results of operation. We cannot give any assurance that we will be able to expand our operations in a cost-effective ortimely manner or that our efforts to expand will be successful. Furthermore, any new business or website we launch that is not favorably received byconsumers could damage our reputation or the Overstock.com brand. We may expand the number of categories of products we carry on our Websiteand these and any other expansions of our operations would also require significant additional expenses and development and would strain ourmanagement, financial and operational resources. The lack of market acceptance of such efforts or our inability to generate satisfactory revenues fromsuch expanded services or products to offset their cost could harm our business, prospects, financial condition and results of operations.We are attempting to expand our international business, which may cause our business to become increasingly susceptible to numerousinternational business risks and challenges that could affect our profitability. We sell products in international markets, and in the future we may expand into these markets more aggressively. International sales andtransactions are subject to inherent risks and challenges that could adversely affect our profitability, including:•the need to develop new supplier and manufacturer relationships; •the need to comply with additional U.S. and foreign laws and regulations to the extent applicable, including but not limited to, restrictionson advertising practices, regulations governing online services, restrictions on importation of specified or proscribed items, importationquotas, consumer protection laws, enforcement of intellectual property rights, laws dealing with consumer and data protection, privacy,encryption, and restrictions on pricing or discounts; •changes in international laws, regulatory requirements, taxes and tariffs; and •geopolitical events such as war and terrorist attacks. To the extent we generate international sales and transactions in the future, any negative impact on our international operations could negativelyimpact our business. In particular, gains and losses on the conversion of foreign payments into U. S. dollars may contribute to fluctuations in our resultsof operations and fluctuating exchange rates could cause reduced gross revenues and/or gross profit percentages from non-dollar-denominatedinternational sales. Additionally, penalties for non-compliance with laws applicable to international business and trade, such as the U.S. Foreign CorruptPractices Act, could negatively impact our business.In order to obtain future revenue growth and achieve and sustain profitability, we will have to attract and retain customers on cost-effective terms. Our success depends on our ability to attract and retain customers on cost-effective terms. We have relationships with online services, searchengines, affiliate marketing websites, directories and other website and e-commerce businesses to provide content, advertising banners and other linksthat direct customers to our Website. We rely on these relationships as significant sources of traffic to our17Table of ContentsWebsite and to generate new customers. As discussed below, in the past we have terminated affiliate marketing websites as a result of efforts by certainstates to require us to collect sales taxes. If we are unable to develop or maintain these relationships on acceptable terms, our ability to attract newcustomers and our financial condition could be harmed. If the underlying technology's development evolves in a manner that is no longer beneficial tous our financial condition could be harmed. In addition, certain of our online marketing agreements may require us to pay upfront fees and make otherpayments prior to the realization of the sales, if any, associated with those payments. Accordingly, if these relationships or agreements that we may enterinto in the future fail to produce the sales that we anticipate, our results of operations will be adversely affected. We cannot give any assurance that wewill be able to increase our revenues, if at all, in a cost-effective manner. We periodically conduct national television and radio branding and advertisingcampaigns. Such campaigns 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. Failure toachieve sufficient traffic or generate sufficient revenue from purchases originating from third parties may result in termination of these relationships bythese third parties. Further, in the past we have terminated our relationships with third party Internet advertising affiliates in certain states as a result ofefforts by those states to require us to collect sales taxes based on the presence of those third party Internet advertising affiliates in those states, and weare likely do so again in the future if necessary. Without these relationships, our business, prospects, financial condition and results of operations couldsuffer.We rely upon paid and natural search engines like Google, Bing, and Yahoo to rank our product offerings and may at times be subject to rankingpenalties if they believe we are not in compliance with their guidelines. We rely on paid and natural search engines to attract consumer interest in our product offerings. Potential and existing customers use searchengines provided by search engine companies, including Google, Bing, and Yahoo, which use algorithms and other devices to provide users a naturalranked listing of relevant Internet sites matching a user's search criteria and specifications. Generally, Internet sites ranked higher in the paid and naturalsearch results lists furnished to users attract the largest visitor share among similar Internet sites. Among retail internet sites, those sites achieving thehighest natural search ranking often benefit from increased sales. Natural search engine algorithms utilize information available throughout the Internet,including information available on our site. Rules and guidelines of these natural search engine companies govern our participation on their sites andhow we share relevant Internet information that may be considered or incorporated into the algorithms utilized by these sites. If these rules andguidelines, or the search engine algorithms shift suddenly or dramatically, or if we fail to present, or improperly present, our site information for use bynatural search engine companies, or if any of these natural search engine companies determine that we have violated their rules or guidelines, as Googledid in February 2011 through April 2011, or if others improperly present our site information to these search engine companies, we may fail to achievean optimum ranking in natural search engine listing results, or we may be penalized in a way that could harm our business, prospects, financialcondition and results of operations.We may not be able to compete successfully against existing or future competitors. The online retail market is rapidly evolving and intensely competitive. Barriers to entry are minimal, and current and new competitors can launchnew websites at a relatively low cost. We currently compete with numerous competitors, including:•liquidation e-tailers such as SmartBargains;18Table of Contents•online retailers with discount departments such as Amazon.com, Inc., eBay, Inc. and Buy.com, Inc.; •private sale sites such as Rue La La and Gilt Groupe; •online specialty retailers such as Bluefly, Inc., Blue Nile, Inc. and Zappos.com; and traditional general merchandise and specialty retailersand liquidators such as Ross Stores, Inc., Wal-Mart Stores, Inc., Costco Wholesale Corporation, J.C. Penny Company, Inc., SearsHolding Corporation, Target Corporation, Best Buy Co., Inc., Home Depot, Inc. and Barnes and Noble, Inc., all of which also have anonline presence. We expect the online retail market to become even more competitive as traditional liquidators and online retailers continue to develop services thatcompete with our services. In addition, more traditional manufacturers and retailers may decide to create their own websites to sell their own excessinventory and the excess inventory of third parties. Conversely, online retailers may create proprietary, store-based distribution channels, or incombination with traditional retailers arrange for their online products to be available to the customers of traditional retailers. Competitive pressurescreated by any one of our competitors, or by our competitors collectively, or in combination one with another, 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 or marketingdecisions or acquisitions that could harm our business, prospects, financial condition and results of operations. For example, to the extent that we enternew lines of businesses such as third-party logistics, or discount brick and mortar retail, we would be competing with large established businesses suchas APL Logistics and Ross Stores, Inc. In the past we have entered the online auctions, car listing and real estate listing businesses, travel and insuranceshopping businesses in which we compete or competed with large established businesses including eBay, Inc., AutoTrader.com, Inc. and Realtor.com.We no longer offer online auctions services or real estate listing services. Many of our current and potential competitors described above have longer operating histories, larger customer bases, greater brand recognitionand significantly greater financial, marketing and other resources than we do. In addition, online retailers and liquidation e-tailers may be acquired by,receive investments from, or enter into other commercial relationships with larger, well-established and well-financed companies. Some of ourcompetitors may be able to secure merchandise from manufacturers on more favorable terms, devote greater resources to marketing and promotionalcampaigns, adopt more aggressive pricing or inventory availability policies and devote substantially more resources to website and systemsdevelopment than we do. Increased competition may result in reduced operating margins, loss of market share and a diminished brand franchise. Wecannot provide assurance that we will be able to compete successfully against current or future competitors.Our operating results depend on our Website, network infrastructure and transaction-processing systems. Capacity constraints or system failureswould harm our business, prospects, financial condition, and results of operations. Any system interruptions that result in the unavailability of our Website or reduced performance of our transaction systems would reduce ourtransaction volume and the attractiveness of the services that we provide to suppliers and third parties and would harm our business, prospects, financialcondition and results of operations. We use internally and externally developed systems for our Website and our transaction processing systems, including personalization databasesused for internal analytics, recommendations and order verifications. We have experienced periodic systems interruptions due to server failure andpower failure, which we believe will continue to occur from time to time. If the volume of traffic on our19Table of ContentsWebsite or the number of purchases made by customers increases substantially, we will need to further expand and upgrade our technology, transactionprocessing systems and network infrastructure. We have experienced and may continue to experience temporary capacity constraints due to sharplyincreased traffic during sales or other promotions and during the holiday shopping season. Capacity constraints can cause unanticipated systemdisruptions, slower response times, delayed page presentation, degradation in levels of customer service, impaired quality and delays in reportingaccurate financial information. Our transaction processing systems and network infrastructure may be unable to accommodate increases in traffic in the future. We may be unableto project accurately the rate or timing of traffic increases or successfully upgrade our systems and infrastructure to accommodate future traffic levels onour Website. In addition, we may be unable to upgrade and expand our transaction processing systems in an effective and timely manner or to integrateany newly developed or purchased functionality with our existing systems. For example, in the past we have experienced difficulties with ourimplementation of infrastructure upgrades, which resulted in our inability to upload new products to our Website for a period of time. Any suchdifficulties with our transaction processing systems or other difficulties upgrading, expanding or integrating various aspects of our systems may causeunanticipated system disruptions, slower response times, and degradation in levels of customer service, additional expense, impaired quality and speedof order fulfillment or delays in reporting accurate financial information.If the facility where substantially all of our computer and communications hardware is located fails, our business, prospects, financial conditionand results of operations could be harmed. If the facility where substantially all of our computer and communications hardware is located fails, or we suffer an interruption or degradation ofservices through the facility for any reason, our business, prospects, financial condition and results of operations could be harmed. Our success, and in particular, our ability to successfully receive and fulfill orders and provide high-quality customer service, largely depends onthe efficient and uninterrupted operation of our computer and communications systems. Substantially all of our computer and communications hardwareis located at a single co-location facility in Salt Lake City, Utah, with a partially redundant back-up system located less than six miles from the co-location facility. In the event of an earthquake or major local disaster, or any other man-made or natural cause of interruption of service, both ourprimary and back-up sites could be adversely affected. Although we have designed our back-up system in an effort to minimize service interruptions inthe event of a failure of our main facility, our systems and operations are vulnerable to damage or interruption from fire, flood, power loss,telecommunications failure, terrorist attacks, cyber-attacks, acts of war, break-ins, earthquake and similar events. In the event of a failure of our primaryfacility, the failover to our back-up facility would take at least several hours, during which time our Website would be completely shut down. Our back-up facility is designed to support sales at a level slightly above our average daily sales, but is not adequate to support sales at a high level. The back-upfacility may not process effectively during time of higher traffic to our Website and may process transactions more slowly and may not support all of thefunctionality of our primary site. These limitations could have an adverse effect on our conversion rate and sales. Our disaster recovery plan may beinadequate, and we do not carry business interruption insurance sufficient to compensate us for losses that could occur. Despite the implementation ofnetwork security measures, our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, the occurrence ofany of which could lead to interruptions, delays, loss of critical data or the inability to accept and fulfill customer orders. The occurrence of any of theforegoing risks could harm our business, prospects, financial condition and results of operations.20Table of ContentsWe 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 intellectual propertyrights. In addition, our competitors could, without violating our proprietary rights, develop technologies that are as good as or better than ourtechnology. Our failure to protect our software and other proprietary intellectual property rights or to develop technologies that are as good as our competitors'could put us at a disadvantage to our competitors. In addition, the failure of the third parties whose products we offer for sale on our Website to protecttheir intellectual property rights, including their domain names, could impair our operations. These failures could harm our business, prospects, financialcondition and results of operations.We may be accused of infringing intellectual property rights of third parties. Other parties have claimed and may claim that we infringe their intellectual property rights. We have been and are subject to, and expect to continueto be subject to, legal claims of alleged infringement of the intellectual property rights of third parties. The ready availability of damages, royalties andthe potential for injunctive relief has increased the defense litigation costs of patent infringement claims, especially those asserted by third parties whosesole or primary business is to assert such claims. Such claims, even if not meritorious, may result in significant expenditure of financial and managerialresources, and the payment of damages or settlement amounts. Additionally, we may become subject to injunctions prohibiting us from using softwareor business processes we currently use or may need to use in the future, or requiring us to obtain licenses from third parties when such licenses may notbe available on financially feasible terms or terms acceptable to us or at all. In addition, we may not be able to obtain on favorable terms, or at all,licenses or other rights with respect to intellectual property we do not own in providing e-commerce services to other businesses and individuals undercommercial agreements.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 may facematerial delays in introducing new services, products and enhancements. If this happens, our customers may forego the use of our Website and usethose of our competitors. The Internet and the online commerce industry are rapidly changing. If competitors introduce new products and services usingnew technologies or if new industry standards and practices emerge, our existing Website and our proprietary technology and systems may becomeobsolete. Our failure to respond to technological change or to adequately maintain, upgrade and develop our computer network and the systems used toprocess customers' orders and payments could harm our business, prospects, financial condition and results of operations.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 and trademarks. There canbe no assurance that our applications will be successful or that we will be able to secure significant protection for our service marks or trademarks in theUnited States or elsewhere as we expand internationally. Our competitors or others could adopt product or service marks similar to our marks, or try toprevent us from using our marks, thereby impeding our ability to build brand identity and possibly leading to customer confusion. Any claim by anotherparty against us or customer confusion related to our trademarks, or our failure to obtain21Table of Contentstrademark registration, could negatively affect our business, prospects, financial condition and results of operations.We may not be able to enforce protection of our intellectual property rights under the laws of other countries. We sell products internationally and consequently we are subject to risks of doing business internationally as related to our intellectual property,including:•legal uncertainty regarding liability for the listings and other content provided by our users, including uncertainty as a result of lessInternet-friendly legal systems, unique local laws, and lack of clear precedent or applicable law; and •differing intellectual property laws, which may provide insufficient protection for our intellectual property.Use of social media may adversely impact our reputation. There has been a marked increase in use of social media platforms and similar devices, including weblogs (blogs), social media websites, and otherforms of Internet-based communications which allow individuals access to a broad audience of consumers and other interested persons. Consumersvalue readily available information concerning retailers, manufacturers, and their goods and services and often act on such information without furtherinvestigation, authentication and without regard to its accuracy. The availability of information on social media platforms and devices is virtuallyimmediate as is its impact. Social media platforms and devices immediately publish the content their subscribers and participants post, often withoutfilters or checks on accuracy of the content posted. The opportunity for dissemination of information, including inaccurate information, is virtuallylimitless. Information concerning or affecting us may be posted on such platforms and devices at any time. Information posted may be inaccurate andadverse to us, and it may harm our performance, prospects or business. The harm may be immediate without affording us an opportunity for redress orcorrection. Such platforms also could be used for the dissemination of trade secret information or compromise of other valuable company assets, any ofwhich could harm our business, prospects, financial condition and results of operations.Our business and reputation may be harmed by the listing or sale of pirated, counterfeit or illegal items by third parties, and by intellectualproperty litigation. We have received in the past, and we anticipate we will receive in the future, communications alleging that certain items listed or sold through ourWebsite infringe third-party copyrights, trademarks and trade names or other intellectual property rights or that we have otherwise infringed thirdparties' past, current or future intellectual property rights. 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 Website. In the future, we may implement measures to protect against these potential liabilitiesthat could require us to spend substantial resources and/or to reduce revenues by discontinuing certain service offerings. Any costs incurred as a resultof liability or asserted liability relating to the sale of unlawful goods or the unlawful sale of goods could harm our business, prospects, financialcondition and results of operations. Resolving litigation or claims regarding patents or other intellectual property, whether meritorious or not, could be costly, time-consuming, causeservice delays, divert our management and key personnel from our business operations, require expensive or unwanted changes in our methods ofdoing business or require us to enter into costly royalty or licensing agreements, if available. As a result, these claims could harm our business. Negative publicity generated as a result of the foregoing could damage our reputation, harm our business and diminish the value of our brandname.22Table of ContentsWe are involved in substantial litigation. From time to time we receive claims of and become subject to consumer protection, employment, intellectual property and other commerciallitigation related to the conduct and operation of our business and the sale of products on our Website. In connection with such litigation, we may besubject to significant damages or equitable remedies. In addition, we have in the past been, are now, and in the future may be, involved in substantiallitigation in which we are the plaintiff, including litigation regarding the constitutionality of certain state tax laws, and the prime broker litigationdescribed below. Any of such litigation, whether as plaintiff or defendant, could be costly and time consuming and could divert management and keypersonnel from our regular business operations. We do not currently believe that any of our outstanding litigation will have a material adverse effect onour business, prospects, financial condition or results of operations. However, due to the uncertainty of litigation and depending on the amount and thetiming, an unfavorable resolution of some or all of these matters could materially affect our business, prospects, financial condition and results ofoperations.Our prime broker litigation may have an adverse effect on our business and financial condition. We remain involved in substantial litigation against Goldman Sachs Group, Inc., Goldman Sachs & Co., Goldman Sachs Execution &Clearing L.P., Merrill Lynch, Pierce, Fenner & Smith, Inc., and Merrill Lynch Professional Clearing Corporation, and the use of management's time andattention in connection with the litigation and related matters may reduce the time management is able to spend on other aspects of our business, whichmay have adverse effects on other aspects of our business. We may be ordered to pay allowable court costs which could be substantial. To the extentthat any such adverse effects exceed any benefits we may realize from the litigation, it could harm our business, prospects, financial condition andresults of operation.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 ordamages for alleged violations of state or federal laws governing security protocols for the safekeeping of customers' personal or credit cardinformation. This liability could also include claims for other misuses of personal information, including unauthorized marketing purposes. These claimscould result in litigation. Liability for misappropriation of this information could adversely affect our business. In addition, the Federal TradeCommission and state agencies have been investigating various Internet companies regarding their use of personal information. We could incuradditional expenses if new regulations regarding the use of personal information are introduced or if government agencies investigate our privacypractices. We rely on encryption and authentication technology licensed from third parties as well internally developed technology to provide the security andauthentication necessary to effect secure transmission of confidential information such as customer credit card numbers. We cannot provide assurancethat our technology can prevent breaches of the systems that we use to protect customer data. If any such compromise of our security were to occur, itcould harm our business, prospects, financial condition and results of operations. A party who is able to circumvent our security measures couldmisappropriate proprietary information or cause interruptions in our operations. We may be required to expend significant capital and other resources toprotect against such security breaches or to alleviate problems caused by such breaches. We cannot give any assurance that our security measures willprevent security breaches or that failure to prevent such security breaches will not harm our business, prospects, financial condition and results ofoperations.23Table of ContentsWe may be subject to product liability claims that could be costly and time consuming. We sell products manufactured for us 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 manufacturer and/or retailer of the product. Our insurance coveragemay not be adequate to cover claims 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 negative impacton our business.We have indebtedness. As of December 31, 2011, we had indebtedness of $18.6 million. Although we have reduced our indebtedness substantially over the last severalyears, the degree to which we are indebted could materially and adversely affect our ability to obtain additional financing for working capital,acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures. Our ability to meet our debt serviceobligations is dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many ofwhich are beyond our control. Our ability to generate cash flow from operations to make interest and principal payments on our debt obligations will depend on our futureperformance, which will be affected by a range of economic, competitive and business factors. We cannot control many of these factors, includinggeneral economic conditions and the health of the Internet retail industry. If our operations do not generate sufficient cash flow from operations tosatisfy our indebtedness, we may need to borrow additional funds to make these payments or undertake alternative financing plans, such as refinancingour debt, or reducing or delaying capital investments and acquisitions. Additional funds or alternative financing may not be available to us on acceptableterms, or at all. Our inability to generate sufficient cash flow from operations or obtain additional funds or alternative financing on acceptable termscould have a material adverse effect on our business, prospects, financial condition and results of operations.Public statements we or our chief executive officer, Patrick M. Byrne, have made or may make in the future may antagonize regulatory officials orothers. We and our chief executive officer, Patrick M. Byrne, have from time to time made public statements regarding our or his beliefs about matters ofpublic interest, including statements regarding naked short selling. Some of those public statements have been critical of the Securities and ExchangeCommission and other regulatory agencies. These public statements may have consequences for us, whether as a result of increased regulatory scrutinyor otherwise.We remain subject to an investigation by the Securities and Exchange Commission. As disclosed previously, we have received a notice from the Securities and Exchange Commission stating that the SEC is conducting aninvestigation concerning our previously-announced financial restatements of 2006 and 2008 and other matters. The subpoena accompanying the noticecovers documents related to the restatements and also to our billings to our partners in the fourth quarter of 2008 and related collections, and ouraccounting for and implementation of software relating to our accounting for customer refunds and credits, including offsets to partners, and relatedmatters. Prior to October 2010, we were asked for information in the form of records connected to this matter, all of which we provided. The SEC hasinterviewed several witnesses. However we do not know the present status of the investigation. We have not heard formally from the SEC on thismatter after October 2010, and we know of no person interviewed since that time related to this matter. We have been cooperating and intend to continueto cooperate fully with the investigation. However, an unfavorable24Table of Contentsresolution of this matter could materially affect our business, prospects, financial condition and results of operations.California District Attorneys have sued us for alleged violations of California law. In April 2008, we received a letter from the Office of the District Attorney of Marin County, California, stating that the District Attorneys of Marinand four other counties in Northern California had begun an investigation into the way we advertise products for sale. In November 2010, DistrictAttorneys for the California Counties of Alameda, Marin, Monterey, Napa, Santa Clara, Shasta and Sonoma filed a lawsuit seeking damages and aninjunction, alleging violations of California consumer protection laws, alleging we made untrue or misleading statements concerning our pricing, pricereductions, sources of products and shipping charges. The complaint asks for damages in the amount of not less than $15 million. We dispute theallegations and intend to defend ourselves vigorously. However, an unfavorable resolution of this matter could materially affect our business, prospects,financial condition and results of operations.Our car listing service may be subject to a variety of regulatory requirements. Many states and other jurisdictions, including Utah, where we are located, have regulations governing the conduct of car sellers and publicadvertisement for car sales. Generally, these regulations govern the conduct of those sellers advertising their automobiles for sale and are not directlyapplicable to those providing the medium through which the advertisement is made available to the public. Sellers are often subject to regulations in thenature of "truth in advertising laws." The application of these regulations to online car listing service providers is not clear. Although we do not expectthese laws to have a significant effect on our listing service, we will incur costs in complying with these laws, and we may from time to time be requiredto make changes in our service that may increase our costs, reduce our revenues, cause us to prohibit certain listing or advertising practices, or makeother changes that may adversely affect our car listing service.Current and future laws could affect our car listing business. Like our shopping business, our car listing service is subject to most of the same laws and regulations that apply to other companies conductingbusiness on and off the Internet. In addition, our car listing service may be affected by other laws and regulations, such as those that expressly apply toadvertising automobiles for sale. To the extent that such current or future laws or regulations prevent users from selling items on our car listing site, theycould harm our business.Our business may be harmed if our car listing site is used for unlawful transactions. The law regarding the potential liability of an online listing service for automobile sales is not clear. The platforms of the listing services areaccessible to subscribers who have the ability to feature their cars listings for sale and supply the descriptions of the vehicles, including the generalcondition of the vehicle and other important information. We have no ability to know whether the information sellers provide is correct. While our siteterms and conditions of usage prohibit unlawful acts, we cannot rule out the possibility that users of our car listing site will engage in unlawfultransactions, or fail to comply with all laws and regulations applicable to them and their transactions. We may be subject to allegations of civil orcriminal liability for any unlawful activities conducted by such users. Any costs we incur as a result of any such allegations, as a result of actual oralleged unlawful transactions using our site, or in our efforts to prevent any such transactions, may harm our business. In addition, any negativepublicity we receive regarding any such transactions or allegations may damage our reputation, our ability to attract new customers to our mainshopping site, and the Overstock.com brand name generally.25Table of ContentsFraudulent activities using our car listing site and disputes between users of our car listing site may harm our business. We are aware that other companies operating online car listing service have periodically received complaints from users alleging improprieties inconnection with listings and occasionally these complaints may result in regulatory action. With any online listing service there is the possibility thatsellers may attempt to employ "bait and switch" techniques, attracting consumers with advertisements of low cost, good condition vehicles in hopes ofswitching buyer interest to another less favorable vehicle once a potential purchaser responds. Additionally, sellers may attempt to sell vehicles withoutaccurate descriptions of the condition of the vehicles. We have occasionally received complaints of this nature regarding our car listing service. Inresponse to serious or repeat complaints concerning a car dealer, we may take action to prohibit such persons from listing inventory, but we do not havethe ability to require users of our services to fulfill their obligations to make accurate disclosures or comply with consumer laws prohibiting "bait andswitch" or other prohibited seller tactics. We are aware that other companies providing similar services periodically are threatened or by or subject tolegal actions against the listing service for damages because of user conduct. We may encounter similar legal actions in connection with our cars listingservice, which may harm our business or reputation among consumers.Our insurance coverage and indemnity rights may not adequately protect us against loss. Although we maintain liability and other types of insurance, including but not limited to, property, workers compensation, general liability, productliability, and security and privacy breach insurance, we cannot be certain that the types, coverage, or the amounts of coverage we maintain will beadequate for losses actually incurred, or that the insurance will continue to be available to us on economically reasonable terms. Similarly, although weare indemnified by most of our suppliers and vendors for product liability for products they supply us, and we have indemnification agreements withsoftware and hardware suppliers for losses we might incur as a result of the use of the technology products they supply, we are not indemnified by allour suppliers, nor can we be certain that our indemnification rights are enforceable or adequate to cover actual losses we may incur as a result of the saleor use of products our indemnitors provide to us. Actual losses for which we are not insured or indemnified, or which exceed our insurance coverage orthe capacity of our indemnitors, could harm our business, prospects, financial condition and results of operations.Our travel site service is a relatively new business that may not succeed. Our travel site began operation in April 2011. The listing site hosted by Priceline Partner Network Limited ("Priceline.com") is for travel and travelrelated products and services. While we have offered vacation package services and products previously, the online travel business is a relatively newbusiness for us. We cannot ensure that our expansion into the business will succeed. Our entry into the business will require us to devote financial,technical, managerial and other resources to this travel site. It also exposes us to additional risks, including legal and regulatory risks, and it requires usto compete with established businesses having substantially greater experience in the travel service business and substantially greater resources than wehave.Current and future laws could affect our travel site business. Like our shopping business, our travel site business is subject to most of the same laws and regulations that apply to other companies conductingbusiness on and off the Internet. In addition, our travel site business may be affected by other laws and regulations, such as those that expressly apply tosales of travel-related products or services. Our failure or the failure of Priceline.com to follow current or future laws or regulations could harm ourbusiness.26Table of ContentsNatural disasters and geo-political events could adversely affect our financial performance. The occurrence of one or more natural disasters, such as hurricanes, cyclones, typhoons, tropical storms, floods, earthquakes, tsunamis, weatherconditions such as major or extended winter storms, droughts and tornados, whether as a result of climate change or otherwise, or geo-political events,such as civil unrest or terrorist attacks in a country in which our suppliers are located, could adversely affect our suppliers in the areas in which thesetypes of events occur. The occurrence of any of these events could materially affect our business, prospects, financial condition and results ofoperations.Our insurance business is a relatively new business that may not succeed in the long-term. Our insurance business site began operation in July 2011. The insurance site allows customer to comparison shop for home and auto insurance.The online insurance business site is a relatively new business for us. We cannot ensure that our expansion into this business will succeed. Our entryinto the business will require us to devote financial, technical, managerial and other resources to this insurance business site. It will also expose us toadditional risks, including legal and regulatory risks, and it will require us to compete with established businesses having substantially greaterexperience in the online insurance business, including insurance business comparison shopping sites which have substantially greater resources than wehave.Our insurance business may be subject to a variety of regulatory requirements. Many states and other jurisdictions, including Utah, where we are located, have regulations governing the conduct of insurance sellers and publicadvertisement insurance sales. Generally, these regulations govern the conduct of those sellers advertising their insurance products for sale and are notdirectly applicable to those providing the medium through which the advertisement is made available to the public. Sellers are often subject toregulations in the nature of "truth in advertising laws." The application of these regulations to a service providing advertisement or comparison shoppingservices for insurance products is not clear. Although we do not expect these laws to have a significant effect on our insurance businesses site, we willincur costs in researching and complying with these laws, and we may from time to time be required to make changes in our businesses that mayincrease our costs, reduce our revenues, cause us to prohibit certain listing or advertising practices, or make other changes that may adversely affect ourinsurance business site.Current and future laws could affect our insurance business. Like our shopping business, our insurance business is subject to most of the same laws and regulations that apply to other companies conductingbusiness on and off the Internet. In addition, our insurance business may be affected by other laws and regulations, such as those that expressly apply toadvertising insurance products for sale. To the extent that such current or future laws or regulations prevent insurance companies from offering orselling products on our insurance business site, they could harm our business.Our business may be harmed if our insurance business site is used for unlawful transactions. The law regarding the potential liability of an online service providing a platform for sales of insurance products is not clear. The platform of theinsurance business site is accessible to insurance product vendors who have insurance products for sale, and which describe these products to customerand inform them of other important information related to the insurance products and the companies which sell them. We have no ability to knowwhether the information insurance sellers provide is correct. While our site terms and conditions of usage prohibit unlawful acts, we cannot rule out thepossibility that insurance sellers will engage in unlawful transactions, or fail to comply with all laws and regulations applicable to them and theirtransactions. We may be subject to allegations of civil or27Table of Contentscriminal liability for any unlawful activities conducted by such users. Any costs we incur as a result of any such allegations, as a result of actual oralleged unlawful transactions using our site, or in our efforts to prevent any such transactions, may harm our business. In addition, any negativepublicity we receive regarding any such transactions or allegations may damage our reputation, our ability to attract new customers to our mainshopping site, and the O.co and Overstock.com brand names generally.Our 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 of businessand 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; •significant increases in the costs of transportation of goods; and •governmental regulation.Customers 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. Though e-commerceis widely accepted as a means of purchasing consumer goods and services, we cannot give any assurance that it will continue to be widely accepted. Thedemand for and acceptance of products sold over the Internet are still uncertain and most e-commerce businesses have a short track record. If consumersare unwilling to use the Internet to conduct business, it would materially adversely impact our business, prospects, financial condition and results ofoperations.The security risks or perception of risks of e-commerce may discourage customers from purchasing goods from us. In order for the e-commerce market to continue to develop successfully, we and other market participants must be able to protect and transmitconfidential information securely over public networks. Third parties have demonstrated that they can breach the security of customer transaction data oflarge sophisticated internet retailers, government organizations and others. Any breach of our e-commerce security systems could cause customers tolose confidence in the security of our Website and choose not to purchase from our Website. Similarly, if there are additional breaches of e-commercesecurity systems operated by other large e-commerce retailers, whether or not the breaches affect us or the systems we operate such breaches couldcause could also cause our customers to lose confidence in the security of our site. If someone is able to circumvent our security measures, he or shecould destroy or steal valuable information or disrupt our operations. Concerns about the security and privacy of transactions over the Internet couldinhibit the use of the Internet and e-commerce. Our security measures may not effectively prohibit others from obtaining improper access to ourinformation. Third parties may target our customers directly with fraudulent identity theft schemes designed to appear as legitimate communicationsfrom us. Any security breach or fraud perpetrated on our customers could expose us to increased costs and to risks of loss, litigation and liability andcould seriously disrupt our operations. Similar activities targeting other large e-commerce sites, if successful, could similarly cause serious disruption toour operations and business.28Table of ContentsWe are subject to cyber security risks and may incur increasing costs in an effort to minimize those risks and to respond to cyber incidents. Our business is entirely dependent on the secure operation of our website and systems as well as the operation of the internet generally. Ourbusiness involves the storage and transmission of users' proprietary information, and security breaches could expose us to a risk of loss or misuse ofthis information, litigation, and potential liability. A number of large internet companies have disclosed security breaches, some of which have involvedintentional attacks. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks. Attacksmay be targeted at us, our customers, or both. If an actual or perceived breach of our security occurs, customer and/or supplier perception of theeffectiveness of our security measures could be harmed and we could lose customers, suppliers or both. Actual or anticipated attacks and risks maycause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third partyexperts and consultants. A person who is able to circumvent our security measures could misappropriate our or our users' proprietary information, cause interruption in ouroperations, damage our computers or those of our users, or otherwise damage our reputation and business. Any compromise of our security couldresult in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence inour security measures, which could harm our business. Most of our customers use credit cards to pay for their purchases. We rely on encryption and authentication technology licensed from third partiesto provide the security and authentication to effectively secure transmission of confidential information, including customer payment card numbers. Wecannot provide assurance that our technology can prevent breaches of the systems that we use to protect customer data. Data breaches can also occur asa result of non-technical issues. Under payment card rules and our contracts with our card processors, if there is a breach of payment card information that we store, we could beliable to the payment card issuing banks for their cost of issuing new cards and related expenses. In addition, if we fail to follow payment card industrysecurity standards, even if there is no compromise of customer information, we could incur significant fines or lose our ability to give customers theoption of using payment cards to fund their payments or pay their fees. If we were unable to accept payment cards, our business would be seriouslydamaged. Our servers are also vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions, including "denial-of-service" typeattacks. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. Security breaches,including any breach by us or by persons with whom we have commercial relationships that result in the unauthorized release of our users' personalinformation, could damage our reputation and expose us to a risk of loss or litigation and possible liability.Credit card fraud could adversely affect our business. We routinely receive orders placed with fraudulent credit card data. We do not carry insurance against the risk of credit card fraud, so the failure toadequately control fraudulent credit card transactions could reduce our net revenues and our gross profit percentage. We have implemented technologyto help us detect and reject the fraudulent use of credit card information. However, we may in the future suffer losses as a result of orders placed withfraudulent credit card data even though the associated financial institution approved payment of the orders. Under current credit card practices, we maybe liable for fraudulent credit card transactions because we do not obtain a cardholder's signature. If we are unable to detect or control credit card fraud,our liability for these transactions could harm our business, prospects, financial condition and results of operation. Further, to the extent that our effortsto prevent fraudulent orders result in our inadvertent refusal to fill legitimate orders, we would lose the benefit of legitimate potential sales and risk thealienation of legitimate customers.29Table of ContentsIf one or more states successfully assert that we should collect sales or other taxes on the sale of our merchandise or the merchandise of thirdparties that we offer for sale on our Website, or that we should pay commercial activity taxes, our business could be harmed. We do not currently collect sales or other similar taxes for physical shipments of goods into states where we do not have a physical presence or"nexus." One or more local, state or foreign jurisdictions may seek to impose sales tax collection obligations on us because we are engaged in onlinecommerce, even though we have no physical presence in those jurisdictions. The future location of our fulfillment or customer service centers networks,or any other operation of the company, service contracts with third parties located in another state, channel distribution arrangements or otheragreements with third party sellers, or any act that may be deemed by a state to have established a physical presence in states where we are not nowpresent, may result in additional sales and other tax obligations. We challenged the constitutionality of a New York state law which requires Internetretailers to collect and remit New York sales taxes on their New York sales who have no physical presence or "tax nexus" in New York, if the retaileruses the services of New York based Internet advertisers. The trial court dismissed our challenge, and on appeal, the appellate court has partiallyaffirmed the trial court. We dismissed a portion of the challenge remanded to the trial court and continue to appeal the other portion of the trial court'sruling. As a result of the enactment of the New York law, we terminated our relationship with New York based advertising affiliates. Other states havepassed similar Internet affiliate advertising statutes, and in those states we have terminated our use of locally based Internet advertisers. Moreover, thereare other states that currently have similar tax proposals under consideration. If such laws survive constitutional challenge, we may have to elect todiscontinue in those states valuable marketing through the use of affiliates based in those states, or begin in those states the collection of the taxes. Ineither event, our business could be harmed and our business could be adversely affected if one or more states or any foreign country successfullyasserts that we should collect sales or other taxes on the sale of our merchandise in compliance with these or any other state law. At least one state,Ohio, asserts that we should pay a commercial activity tax because we sell merchandise in Ohio, even though we have no physical presence there. Wechallenged in Ohio state court the constitutionality of the commercial activity tax; however, the court declined the case for the reason that it was not aripe controversy. The State of Ohio has since assessed us $612,784 in taxes, interest, and penalties as of June 30, 2009, which assessment we are nowcontesting through administrative procedures. The Ohio Department of Taxation issued additional estimated assessments of estimated tax, interest andpenalties totaling $97,768 as of December 31, 2011.We believe the assessment to be wrong and are contesting the assessment. If Ohio is successful andits assessment withstands constitutional challenge in both administratively and in court appeals, the enforcement of the assessment could harm ourbusiness. If other states similarly enact and are successful in enforcing similar commercial activity tax laws, these also could harm our business. The States of Colorado, Oklahoma and South Dakota have enacted laws requiring remote vendors to notify resident purchasers in those states oftheir obligation to pay a use tax on their purchases. In Colorado, the law requires vendors to notify Colorado purchasers annually by U.S. mail of alltheir annual purchases, and provide to the State of Colorado the same information in the first quarter of the year for previous year's purchases. OnJanuary 26, 2011, a federal court in Colorado, citing constitutional concerns and noting that a party challenging the constitutionality of the Colorado lawwould have a likelihood of success at trial, granted a preliminary injunction preventing the Colorado Department of Revenue from enforcing theprovisions of the Colorado law. Notwithstanding, other states may enact legislation similar to these laws. Such laws could harm our business byimposing unreasonable notice burdens upon us, by interposing burdensome transaction notices that negatively affect conversion, or discouragecustomer purchases by requiring detailed purchase reporting which would threaten customers with an invasion of their privacy.30Table of ContentsEconomic pressure on states could harm our business. The current economic climate has resulted in a sharp decline in state revenues, and states have projected large state budget shortfalls in the yearsahead. These shortfalls require state legislatures and agencies to examine the means to increase state revenues. States may increase sales and use taxrates, create new tax laws covering previously untaxed activities, or increase existing licenses or create new fees all of which may directly or indirectlyharm our business. Similarly, administrative agencies and executive agencies may apply more rigorous enforcement efforts, take inflexible,unreasonable or unprecedented positions respecting these laws they administer, especially if the laws they administer carry monetary penalties and fineswhich either the state or the administrative agency may use to balance their budgets. To the extent that states pass additional revenue measures, orsignificantly increase their enforcement efforts of existing laws, these activities could directly or indirectly harm our business.Laws or regulations relating to privacy and data protection may adversely affect the growth of our Internet business or our marketing efforts. We are subject to increasing regulation at the federal, state and international levels relating to privacy, security, retention, transfer and use ofpersonal user information. For example, we are subject to various telemarketing laws that regulate the manner in which we may solicit future suppliersand customers. Such statutes and regulations, along with increased governmental or private enforcement, may increase the cost of our business. Inaddition, many jurisdictions have laws that limit the uses of personal user information gathered online or offline or require companies to establishprivacy policies. For example, Federal Trade Commission regulations restrict the collection and use of personal identifying information obtained fromchildren under 13. Laws affecting privacy, security, retention, transfer and use of personal user information have been passed by several jurisdictions,both domestic and foreign, including laws that require us to establish procedures to notify users of privacy and security policies, obtain consent fromusers for collection and use of personal information, and/or provide users with the ability to access, correct and delete personal information stored by us.Compliance with new and existing privacy and security laws is difficult and costly, as interpretation and application of these laws evolves over time.Additional restrictions and requirements regarding data security and privacy are under nearly continuous consideration by foreign countries, Congressand various states. These data protection statutes, regulations and interpretations may further restrict our ability to collect demographic and personalinformation from users, which could be costly or harm our marketing efforts, and could require us to implement new and potentially costly processes,procedures and/or protective measures.The price of our securities may be volatile and you may lose all or a part of your investment. The market price of our common stock historically has been subject to significant fluctuations. These fluctuations could continue. It is possible thatin future periods our results of operations may be below the expectations of public market analysts and investors. If this occurs, the market price of oursecurities may decline. Some of the factors that could affect the market price of our securities are as follows:•changes in securities analysts' recommendations or estimates of our financial performance or publication of research reports by analysts; •changes in market valuations of similar companies; •announcements by us or our competitors of significant contracts, acquisitions, commercial relationships, joint ventures or capitalcommitments; •general market conditions;31Table of Contents•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 or other securities. In addition, the securities markets have experienced significant price and trading volume fluctuations. These broad market fluctuations mayadversely affect the trading price of our securities. In the past, following periods of volatility in the market price of a public company's securities,securities class action litigation has often been instituted against that company. Such litigation could result in substantial cost and a diversion ofmanagement's attention and resources.Our quarterly operating results are volatile and may adversely affect the market price of our securities. 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 other riskfactors described in this report, additional factors that have caused and/or could cause our quarterly operating results to fluctuate and in turn affect themarket price of our securities include:•increases in the cost of advertising; •our inability to retain existing customers or encourage repeat purchases; •the extent to which our existing and future marketing campaigns 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 and infrastructure;•the amount and timing of our purchases of inventory; •our inability to manage distribution operations or provide adequate levels of customer service; •increases in the cost of fuel and transportation; •our ability to successfully integrate operations and technologies from acquisitions or other business combinations; •our efforts to offer new lines of products and services; and •our ability to attract users to our shopping and other sites.Our operating results may fluctuate depending on the season, and such fluctuations may affect the market price of our securities. We have experienced and expect to continue to experience fluctuations in our operating results because of seasonal fluctuations in traditional retailpatterns. Sales in the retail and wholesale industry tend to be significantly higher in the fourth calendar quarter of each year than in the preceding threequarters due primarily to increased shopping activity during the holiday season. However, there can be no assurance that our sales in the fourth quarterwill exceed those of the preceding quarters or, if the fourth quarter sales do exceed those of the preceding quarters, that we will be able to manage theincreased sales effectively. Further, we generally increase our inventories substantially in anticipation of32Table of Contentsholiday season shopping activity, which has 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 themarket price of our securities to decline. We generally have payment terms with our fulfillment partners that extend beyond the amount of timenecessary to collect proceeds from our customers. As a result of holiday sales, at December 31 of each year, our cash, cash equivalents, and marketablesecurities balances typically reach their highest level (other than as a result of cash flows provided by or used in investing and financing activities). Thisoperating cycle results in a corresponding increase in accounts payable at December 31. Our accounts payable balance generally declines during the firstthree months of the year, resulting in a corresponding decline in our cash, cash equivalents, and marketable securities balances.Sales by our significant stockholders could have an adverse effect on the market price of our stock. Several of our stockholders own significant portions of our common stock. If one or more of stockholders were to sell all or a portion of theirholdings of our common stock, the market price of our common stock could be negatively impacted. The effect of such sales, or of significant portionsof our stock being offered or made available for sale, could result in strong downward pressure on our stock price. Investors should be aware that theycould experience significant short-term volatility in our stock if such stockholders decide to sell all or a portion of their holdings of our common stock atonce or within a short period of time. In addition, the transfer of ownership of 50% or more of our outstanding shares within a three year period couldadversely affect our ability to use our net operating losses to offset future taxable net income.We do not intend to pay dividends on our common stock and you may lose the entire amount of your investment in our common stock. We have never declared or paid any cash dividends on our common stock and do not intend to pay dividends on our common stock for theforeseeable future. We intend to invest our future earnings, if any, to fund our growth. Therefore, you will not receive any funds without selling yourshares. We cannot assure that you will receive a positive return on your investment when you sell your shares or that you will not lose the entire amountof your investment.Our Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws and the Delaware General Corporation Law containanti-takeover provisions which could discourage or prevent a takeover, even if an acquisition would be beneficial to our stockholders. 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 is elected at each of our annual meetings of stockholders, which will make it moredifficult for a potential acquirer to change the management of our company, even after acquiring a majority of the shares of our common stock. Theseprovisions, which cannot be amended without the approval of two-thirds of our stockholders, could diminish the opportunities for a stockholder toparticipate in tender offers, including tender offers at a price above the then current market value of our common stock. In addition, our board ofdirectors, without further stockholder approval, may issue preferred stock, with such terms as the board of directors may determine, that could have theeffect of delaying or preventing a change in control of our company. The issuance of preferred stock could also adversely affect the voting powers ofthe holders of common stock, including the loss of voting control to others. We are also afforded the protections of Section 203 of the DelawareGeneral Corporation Law, which could delay or prevent a change in control of our company or could impede a merger, consolidation, takeover or otherbusiness combination involving33Table of Contentsour company or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.The price of our stock may be vulnerable to manipulation. We filed an unfair business practice lawsuit against Morgan Stanley & Co. Incorporated, Goldman Sachs & Co., Bear Stearns Companies, Inc.,Bank of America Securities LLC, Bank of New York, Citigroup Inc., Credit Suisse (USA) Inc., Deutsche Bank Securities, Inc., Merrill Lynch, Pierce,Fenner & Smith, Inc., and UBS Financial Services, Inc., and settled the case with respect to all defendants except Goldman Sachs Group, Inc.,Goldman Sachs & Co., Goldman Sachs Execution & Clearing L.P.; Merrill Lynch, Pierce, Fenner & Smith, Inc., and Merrill Lynch ProfessionalClearing Corporation. In January, the trial court granted the remaining defendants' motion for summary judgment. We intend to appeal the ruling. We believe these remaining defendants engaged in unlawful actions and have caused substantial harm to Overstock, and that certain of thedefendants have made efforts to drive the market price of Overstock's common stock down. To the extent that the defendants or other persons engage inany such actions or take any other actions to interfere with or destroy or harm Overstock's existing and/or prospective business relationships with itssuppliers, bankers, customers, lenders, investors, prospective investors or others, our business, prospects, financial condition and results of operationcould be harmed, and the price of our common stock may be more volatile than it might otherwise be and/or may trade at prices below those that mightprevail in the absence of any such efforts. The practice of "abusive naked short selling" continues to place our stock at risk for manipulative attacks bylarge investment pools and prime brokers. Abusive naked short selling is the practice by which short sellers place large short sell orders for shares without first borrowing the shares to besold, or without having first adequately located such shares and arranged for a firm contract to borrow such shares prior to the delivery date set to closethe sale. While selling broker dealers are by rule required to deliver shares to close a transaction by a certain date, and while purchasing broker-dealersare obligated by rule to purchase the sold quantity of shares when they are not delivered to close the sale, these rules are often ignored. Abusive nakedshort selling has a depressive effect on share prices when it is allowed to persist because the economic effect of abusive naked short selling is theoversupply of counterfeit stock to the market. We believe the regulations designed to address this abusive practice are both inadequately structured andinadequately enforced. Consequently, we believe that without the enactment of adequate regulations and the enforcement necessary to curb these abuses,the manipulations achieved through abusive naked short selling are likely to continue. We believe that our stock has been subject to these abusivepractices by those attempting to manipulate its price downward. To the extent that our stock is subject to these practices in the future, our stock may bemore volatile than it might otherwise be and/or may trade at prices below those that might prevail in the absence of such abuses.In the past, our stock has consistently been on the Regulation SHO threshold list. Regulation SHO requires the stock exchanges to publish daily a list of companies whose stock has failures-to-deliver above a certain threshold. Italso requires mandatory close-outs for open fail-to-deliver positions in threshold securities persisting for over 13 days, with the aim that no securitywould appear on the threshold for any extended period. Despite that aim, our common stock has frequently appeared on the Regulation SHO thresholdlist for extended and continuous periods and, while we do not currently appear on the Regulation SHO threshold list, in the past our stock has been onthe list for more trading days than any other company. Any investment in our securities involves a high degree of risk. Investors should consider carefully the risks and uncertainties described above,and all other information in this Form 10-K and in any34Table of Contentsreports we file with the SEC after we file this Form 10-K, before deciding whether to purchase or hold our securities. Additional risks and uncertaintiesnot currently known to us or that we currently deem immaterial may also become important factors that may harm our business. The occurrence of anyof the risks described in this Form 10-K could harm our business. The trading price of our securities could decline due to any of these risks anduncertainties, and investors may lose part or all of their investment.ITEM 1B. UNRESOLVED STAFF COMMENTS None.ITEM 2. PROPERTIES Corporate office space We lease approximately 128,000 square feet in the Old Mill Corporate Center III in Salt Lake City, Utah for a term expiring in 2015. We lease approximately 12,000 square feet in Provo, Utah for a term expiring in 2016. We ceased using this space in January 2012 and areseeking to sub-lease the space for the remainder of its term.Warehouse and customer service space We lease a combined 1,041,000 square feet for our warehouse and customer service operations in two facilities in Salt Lake City, Utah for termsexpiring in August 2012 and February 2016. We lease approximately 15,000 square feet for customer service operations in Tooele, Utah for a term expiring in May 2015. We lease approximately 18,000 square feet for product liquidation in Sandy, Utah for a term expiring in May 2012. We lease approximately 400 square feet for our procurement staff in Shanghai, China for a term expiring in October 2012.Co-location data center We lease approximately 4,000 square feet at Old Mill Corporate Center I in Salt Lake City, Utah for a data center for a term expiring in May 2017. We lease approximately 3,000 square feet in Salt Lake City, Utah for a data center for a term expiring in April 2016. We believe that the above listed facilities will be sufficient for our needs for at least the next twelve months, subject to seasonal requirements foradditional warehouse and customer service space during the fourth quarter.ITEM 3. LEGAL PROCEEDINGS The information set forth under Item 15 of Part IV, "Financial Statements—Note 13—Commitments and Contingencies, subheading LegalProceedings," contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K is incorporated by reference inanswer to this Item.ITEM 4. MINE SAFETY DISCLOSURES Not applicable.35Table of ContentsPART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES Market information Our common stock is traded on the NASDAQ Global Market under the symbol "OSTK." The following table sets forth, for the periods indicated,the high and low sales prices per share for our common stock as reported by NASDAQ.STOCK PERFORMANCE GRAPH The following graph compares the total cumulative stockholder return, on our common stock with the total cumulative return of the NASDAQMarket Index—U.S. ("NASDAQ Market Index") and the Morningstar Specialty Retail Index ("Morningstar Group Index") during the periodcommencing on January 1, 2006 through December 31, 2011. The graph assumes a $100 investment at the beginning of the period in our commonstock, the NASDAQ Market Index and the Morningstar Group Index, and36 CommonStock Price High Low Year Ended December 31, 2011 First Quarter 17.18 13.68 Second Quarter 15.93 13.34 Third Quarter 15.93 8.91 Fourth Quarter 10.81 7.57 Year Ended December 31, 2010 First Quarter 16.23 11.10 Second Quarter 23.92 16.90 Third Quarter 20.82 13.53 Fourth Quarter 17.30 12.69 Table of Contentsthe reinvestment of any dividends. Historic stock price performance is not necessarily indicative of future stock price performance.Comparison of Year Cumulative Total Return Holders As of February 10, 2012, there were 195 holders of record of our common stock. Because many of our shares of common stock are held bybrokers and other institutions on behalf of shareholders, we are unable to estimate the number of beneficial shareholders.Dividends We have never declared or paid any cash dividends on our common stock. We currently intend to retain any earnings for future growth and do notanticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board ofdirectors and will depend on our results of operations, financial conditions, contractual and legal restrictions and other factors the board deems relevant.Our Financing Agreement with U.S. Bank National Association prohibits dividend payments and other distributions following the occurrence of a"Triggering Event," as defined in the Financing Agreement. A "Triggering Event" would include any failure by us to keep $20 million in certainaccounts with U.S. Bank, as well as any Event of Default under the Financing Agreement.Recent sales of unregistered securities In June 2009, we discovered that we had inadvertently issued 203,737 more shares of our common stock in connection with our 401(k) plan thanhad been registered with the Securities and Exchange Commission for offer in connection with the 401(k) plan. These shares were contributed to orotherwise acquired by participants in the 401(k) plan between August 16, 2006, and June 17, 2009. As a result, certain participants in the 401(k) planmay have had rescission rights relating to the unregistered shares, although we believe that the federal statute of limitations applicable to any suchrescission rights would be one year, and that the statute of limitations had already expired at June 30, 2009 with respect to most of the inadvertentissuances.37Table of Contents On August 31, 2009, we entered into a Tolling and Standstill Agreement (the "Tolling Agreement") with the Overstock.com, Inc. EmployeeBenefits Committee (the "Committee") relating to the 401(k) plan. We entered into the Tolling Agreement in order to preserve certain rights, if any, ofplan participants who acquired shares of Overstock common stock in the plan between July 1, 2008 and June 30, 2009 (the "Purchase Period"). InAugust 2010, we made a registered rescission offer to affected participants in the plan who acquired shares of Overstock common stock during thePurchase Period. The rescission offer applied to shares purchased during the Purchase Period at prices ranging from $6.77 per share to $21.17 pershare. On October 6, 2010, our rescission offer expired. As a result of the offer, we repurchased 1,202 shares of common stock for $26,000. OnOctober 14, 2010 we terminated the Tolling Agreement. At December 31, 2011 none of our shares were classified outside stockholder's equity due tothe expiration of potential rescission rights associated with those common shares. At December 31, 2010 approximately 46,000 shares or $570,000 ofour common stock plus interest were classified outside stockholders' equity, respectively. In December 2009, we implemented a Non Qualified Deferred Compensation plan for senior management. The plan allows eligible members ofsenior management to defer their receipt of compensation from us beginning in 2010, subject to the restrictions contained in the plan. To the extent thatinterests in the plan constitute securities, we believe that the issuance of the interests was exempt from the registration requirements of the Securities Actof 1933, as amended, pursuant to Section 4(2) thereof and Rule 506 of Regulation D thereunder as a transaction not involving a public offering. Theinterests were not sold for cash or other consideration, and there were no proceeds to us.Issuer purchases of equity securities The following table sets forth all purchases made by us or on our behalf or any "affiliated purchaser" as defined in Rule 10b-18(a)(3) under theExchange Act, of shares of our common stock made during each month within the fourth quarter of 2011, including all purchases made pursuant topublicly announced plans or programs and those not made pursuant to publicly announced plans or programs. Column (a) sets forth the total number ofshares purchased, and the footnotes to the table disclose the number of shares purchased other than pursuant to a publicly announced plan or programand the nature of any such purchases. Column (b) sets forth the average price paid per share. Column (c) sets forth the total number of shares purchasedas part of publicly announced repurchase plans or programs. Column (d) sets forth the maximum number (or approximate dollar value) of shares thatmay yet be purchased under the plans or programs.38Period (a)Total Number ofShares (or Units)Purchased (b)Average PricePaid per Shareor Unit (c)Total Number ofShares (or Units)Purchased as Partof PubliclyAnnounced Plansor Programs (d)Maximum Number(or ApproximateDollar Value) ofShares (or Units) thatMay Yet Be PurchasedUnder the Plans orPrograms October 1, 2011to October 31,2011 180 $10.04 — $— November 1,2011 toNovember 30,2011 — — — — December 1,2011 toDecember 31,2011 — — — — Total 180(1) — $— (1)Represents 180 shares withheld for minimum tax withholding purposes upon the vesting of a portion of restricted stock units.Table of ContentsStock based compensationStock options Our board of directors adopted the 2005 Equity Incentive Plan (the "Plan"), in April 2005. Under this Plan, the Board of Directors may issueincentive stock options to our employees and directors and non-qualified stock options to our consultants, as well as other types of awards under the2005 Equity Incentive Plan. Options granted under these Plans generally expire at the end of ten years and vest on a straight line basis in accordancewith a vesting schedule determined by our Board of Directors, usually over four years from the grant date. As of December 31, 2011, 1.0 million sharesof stock based awards were available for future grants under the 2005 Equity Incentive Plan. The following is a summary of stock option activity (amounts in thousands, except per share data): Stock options vest over four years at 28% at the end of the first year and 2% each month thereafter. During the years ended December 31, 2011,2010 and 2009, we recorded stock based compensation related to stock options of $200,000, $1.6 million and $2.2 million, respectively.Restricted stock units activity During the years ended December 31, 2011, 2010 and 2009, we granted 268,000, 302,000 and 366,000 restricted stock units, respectively. Thecost of restricted stock units is determined using the fair value of our common stock on the date of the grant and compensation expense is recognized ona straight line basis over the three year vesting schedule. The weighted average grant date fair value of restricted stock units granted during the yearsended December 31, 2011, 2010 and 2009 was $15.47, $13.17 and $10.15, respectively. The following is a summary of restricted stock unit activity (amounts in thousands, except per share data):39 2011 2010 2009 Shares WeightedAverageExercisePrice Shares WeightedAverageExercisePrice Shares WeightedAverageExercisePrice Outstanding—beginning ofyear 496 $18.09 721 $20.29 974 $21.27 Granted at fairvalue — — — — — — Exercised — — (90) 17.05 (2) 15.82 Expired/Forfeited (91) 20.55 (135) 30.41 (251) 24.12 Outstanding—endof year 405 $17.58 496 $18.09 721 $20.29 Options exercisableat year-end 404 $17.59 472 $18.08 543 $21.17 2011 2010 2009 Units WeightedAverageGrant DateFair Value Units WeightedAverageGrant DateFair Value Units WeightedAverageGrant DateFair Value Outstanding—beginningof year 685 $12.08 640 $11.35 449 $12.69 Granted atfair value 268 15.47 302 13.17 366 10.15 Vested (318) 12.20 (185) 11.52 (110) 12.64 Forfeited (113) 13.88 (72) 11.50 (65) 11.55 Outstanding—end ofyear 522 $13.40 685 $12.08 640 $11.35 Table of Contents Restricted stock units vest over three years at 25% at the end of the first year, 25% at the end of the second year and 50% at the end of the thirdyear. During the years ended December 31, 2011, 2010 and 2009, we recorded stock based compensation related to restricted stock units of$2.8 million, $3.5 million and $2.6 million, respectively. At December 31, 2011, approximately 522,000 restricted stock units were outstanding. On January 24, 2012, we granted 681,000 additionalrestricted stock units.40Table of ContentsITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data presented below should be read in conjunction with the consolidated financial statements ofOverstock.com, Inc. and subsidiaries and related footnotes included elsewhere in this annual report on Form 10-K and the discussion underItem 7—"Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected consolidated financial data has beenderived from our audited consolidated financial statements included elsewhere in this Form 10-K. The historical financial and operating information maynot be indicative of our future performance. Year ended December 31, 2011 2010 2009 2008 2007 (in thousands, except per share data) Consolidated Statement of Operations Data: Revenue, net Direct $163,609 $209,646 $150,901 $173,687 $197,088 Fulfillment partner 890,668 880,227 725,868 656,163 568,814 Total net revenue 1,054,277 1,089,873 876,769 829,850 765,902 Cost of goods sold Direct 149,660 187,124 130,890 153,967 168,008 Fulfillment partner 725,529 713,109 581,127 531,647 473,344 Total cost of goods sold 875,189 900,233 712,017 685,614 641,352 Gross profit 179,088 189,640 164,752 144,236 124,550 Operating expenses: Sales and marketing 61,813 61,334 55,549 57,668 55,458 Technology 67,043 58,260 52,336 56,677 59,453 General and administrative 67,766 55,650 48,906 39,348 41,976 Restructuring(1) — (569) (66) (299) 12,283 Total operating expenses 196,622 174,675 156,725 153,394 169,170 Operating income (loss) (17,534) 14,965 8,027 (9,158) (44,620)Interest income 161 157 170 3,163 4,788 Interest expense (2,485) (2,962) (3,470) (3,565) (4,188)Other income (expense), net 278 2,088 3,277 (1,446) (92) Income (loss) from continuing operations before incometaxes (19,580) 14,248 8,004 (11,006) (44,112)Provision (benefit) for income taxes (142) 359 257 — — Income (loss) from continuing operations (19,438) 13,889 7,747 (11,006) (44,112)Loss from discontinued operations(2) — — — — (3,924) Net income (loss) (19,438) 13,889 7,747 (11,006) (48,036)Deemed dividend related to redeemable common stock (12) (112) (48) (77) — Net income (loss) attributable to common shares $(19,450)$13,777 $7,699 $(11,083)$(48,036) Net income (loss) per common share—basic: Income (loss) from continuing operations afterdividend related to redeemable common stock $(0.84)$0.60 $0.34 $(0.48)$(1.86)Loss from discontinued operations $— $— $— $— $(0.17)Net income (loss) attributable to common share—basic $(0.84)$0.60 $0.34 $(0.48)$(2.03)Weighted average common shares outstanding—basic 23,259 23,019 22,821 22,901 23,704 Net income (loss) per common share—diluted: Income (loss) from continuing operations afterdividend related to redeemable common stock $(0.84)$0.59 $0.33 $(0.48)$(1.86)Loss from discontinued operations $— $— $— $— $(0.17)Net income (loss) attributable to common shares—diluted $(0.84)$0.59 $0.33 $(0.48)$(2.03)41Weighted average common shares outstanding—diluted 23,259 23,366 23,067 22,901 23,704 (1)During the fourth quarter of 2006, we commenced implementation of a facilities consolidation and restructuring programdesigned to reduce the overall expense structure in an effort to improve future operating performance (see Item 15 of Part IV,"Financial Statements"—Note 3—"Restructuring Expense").Table of Contents42(2)As part of the program to reduce our expense structure and sell non-core businesses, we decided during the fourth quarter of2006 to sell our travel subsidiary ("OTravel"). As a result, OTravel's operations have been classified as a discontinued operationand therefore are not included in the results of continuing operations. The loss from discontinued operations for OTravel was$3.9 million for the year ended December 31, 2007 (including a goodwill impairment charge of $3.8 million). As of December 31, 2011 2010 2009 2008 2007 (in thousands) Balance Sheet Data: Cash and cash equivalents $96,985 $124,021 $139,757 $96,457 $92,809 Restricted cash 2,036 2,542 4,414 4,262 8,634 Marketable securities — — — 8,989 46,000 Working capital (14,129) 14,746 51,236 41,780 62,621 Total assets 179,559 217,959 216,500 181,136 231,143 Total indebtedness 18,619 52,845 61,687 67,821 78,418 Redeemable common stock — 570 744 1,263 — Stockholders' equity (deficit) 13,237 30,658 10,800 (2,246) 18,212 Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are therefore entitled to theprotection of the safe harbor provisions of these laws. These forward-looking statements involve risks and uncertainties, and relate to future events orour future financial or operating performance. The forward-looking statements include all statements other than statements of historical fact, including,without limitation, all statements regarding:•the anticipated benefits and risks of our business and plans; •our ability to attract and retain customers in a cost-efficient manner; •the effectiveness of our marketing; •our future operating and financial results; •the competition we face and will face in our business; •the effects of government regulation; •our future capital requirements and our ability to satisfy our capital needs; •our expectations regarding the adequacy of our liquidity; •our ability to retire or refinance our debt; •our plans for international markets; •our plans for changes to our business; •our beliefs regarding current or future litigation or regulatory actions; •our beliefs and expectations regarding existing and future tax laws and related laws and the application of those laws to our business; •our beliefs regarding the adequacy of our insurance coverage; •the adequacy of our infrastructure, including our backup facilities and our disaster planning; •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 beliefs regarding the adequacy of our order processing systems and our fulfillment and distribution capabilities; •our beliefs regarding the adequacy of our customer service capabilities; •our beliefs and expectations regarding the adequacy of our office and warehouse facilities; •our expectations regarding our travel shopping service, our insurance shopping service, our international sales efforts, our car listingservice and our community site, and the anticipated functionality and results of operations of any of them; •our belief that we and our fulfillment partners will be able to maintain inventory levels at appropriate levels despite the seasonal nature ofour business; and43Table of Contents•our belief that we can successfully offer and sell a constantly changing mix of products and services. 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 statements are onlypredictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider the risks outlined in thisAnnual Report on Form 10-K for the year ended December 31, 2011, including those described in Item 1A under the caption "Risk Factors." Thesefactors may cause our actual results to differ materially from those contemplated by any forward-looking statement. Except as otherwise required bylaw, we expressly disclaim any obligation to release publicly any update or revisions to any forward-looking statements to reflect any changes in ourexpectations or any change in events, conditions or circumstances on which any of our forward-looking statements are based. Although we believe thatthe expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance orachievements. These forward-looking statements speak only as of the date of this report and, except as required by law, we undertake no obligation to updateforward-looking statements to reflect events or circumstances occurring after the date of this report.Introduction We are an online retailer offering discount brand name, non-brand name and closeout merchandise, including bed-and-bath goods, home décor,kitchenware, furniture, watches and jewelry, apparel, electronics and computers, sporting goods, and designer accessories, among other products. Weare also a channel through which customers can purchase cars, insurance and travel products and services. We sell advertising. We also sell hundreds ofthousands of best seller and current run books, magazines, CDs, DVDs and video games ("BMMG"). We sell these products and services through ourInternet websites located at www.overstock.com, www.o.co and www.o.biz ("Website"). Although our three websites are located at different domainaddresses, the technology and equipment and processes supporting the three websites and the process of order fulfillment described herein are the samefor all three websites. Our company, based in Salt Lake City, Utah, was founded in 1997. We launched our initial website in March 1999. Our Website offers ourcustomers an opportunity to shop for bargains conveniently, while offering our suppliers an alternative inventory liquidation or sales channel. Wecontinually add new, sometimes limited, inventory products to our Website in order to create an atmosphere that encourages customers to visitfrequently and purchase products before our inventory sells out. We sell products primarily in the United States, with a small amount of products (lessthan 1% of sales) sold internationally. As used herein, "Overstock," "Overstock.com," "O.co," "we," "our" and similar terms include Overstock.com, Inc. and its subsidiaries, unless thecontext indicates otherwise.Our Business We deal primarily in discount, replenishable, and closeout merchandise and we use the Internet to aggregate both supply and demand to create anefficient marketplace for selling these products. We provide manufacturers with a one-stop liquidation channel to sell both large and small quantities ofexcess, closeout and replenishable inventory without disrupting sales through traditional channels, which can result in weaker pricing and decreasedbrand strength. The merchandise offered on our Website is from a variety of sources including well-known, brand-name manufacturers. We haveorganized our shopping business (sales of product offered through the Shopping Section of our Website) into two44Table of Contentsprincipal segments—a "direct" business and a "fulfillment partner" business. We currently offer approximately 251,000 non-BMMG products andapproximately 637,000 BMMG products. Consumers and businesses are able to access and purchase our products 24 hours a day from theconvenience of a computer, Internet-enabled mobile telephone or other Internet-enabled devices. Our team of customer service representatives assistscustomers by telephone, instant online chat and e-mail. We also derive revenue from other businesses advertising products or services on our Website.We have car, insurance and travel listing businesses through which cars, insurance and travel-related products and services may be purchased fromvendors. Nearly all of our sales are to customers located in the United States. During the years ended December 31, 2011 and 2010 no single customeraccounted for more than 1% of our total revenue.Direct business Our direct business includes sales made to individual consumers and businesses, which are fulfilled from our leased warehouses in Salt Lake City,Utah. During the year ended December 31, 2011, we fulfilled approximately 16% of our order volume through our warehouses. Our warehousesgenerally ship between 4,000 and 7,000 orders per day and up to approximately 10,000 orders per day during peak periods, using overlapping dailyshifts.Fulfillment partner business For our fulfillment partner business, we sell merchandise of other retailers, cataloguers or manufacturers ("fulfillment partners") through ourWebsite. We are considered to be the primary obligor for the majority of these sales transactions and we record revenue from the majority of these salestransactions on a gross basis. Our use of the term "partner" or "fulfillment partner" does not mean that we have formed any legal partnerships with anyof our fulfillment partners. We currently have relationships with approximately 2,000 third parties who supply approximately 242,000 non-BMMGproducts, as well as most of the BMMG products, on our Website. These third-party fulfillment partners perform essentially the same fulfillmentoperations as our warehouses, such as order picking and shipping; however, we handle returns and customer service related to substantially all ordersplaced through our Website. Revenue generated from sales on our Shopping site from both the direct and fulfillment partner businesses is recorded netof returns, coupons and other discounts. Both direct and fulfillment partner revenues are seasonal, with revenues historically being the highest in the fourth quarter, which endsDecember 31, reflecting higher consumer holiday spending. We anticipate this will continue in the foreseeable future. Generally, we require verification of receipt of payment, or authorization from credit card or other payment vendors whose services we offer to ourcustomers (such as PayPal and BillMeLater), before we ship products to consumers or business purchasers. From time to time we grant credit to ourbusiness purchasers with normal credit terms (typically 30 days). For sales in our fulfillment partner business, we generally receive payments from ourcustomers before our payments to our suppliers are due.International business We began selling products through our Website to customers outside the United States in late August 2008. As of December 31, 2011, we wereoffering products to customers in over 105 countries and non-U.S. territories. We do not have sales operations outside the United States, and are usinga U.S. based third party to provide logistics and fulfillment for all international orders. Revenue generated from our international business is included ineither direct or fulfillment partner revenue, depending on whether the product is shipped from our warehouses or from a fulfillment partner. Less than1% of our sales are made to international customers.45Table of ContentsConsignment In September 2009, we began offering a consignment service to suppliers where the suppliers' merchandise is stored in and shipped from ourleased warehouses. We pay the consignment supplier upon sale of the consigned merchandise to our customer. Revenue from our consignment service business is less than 1% of total net revenue and is included in the fulfillment partner segment.Other businesses We operate an online car listing service as part of our Website. The car listing service allows sellers to list vehicles for sale and allows buyers toreview vehicle descriptions, post offers to purchase, and provides the means for purchasers to contact sellers for further information and negotiations onthe purchase of an advertised vehicle. We also earn advertisement revenue derived from our cars business. Revenue from the cars businesses is includedin the fulfillment partner segment on a net basis. We operate an online site, O.biz, a website where customers and businesses can shop for bulk and business related items, while offeringmanufacturers, distributors and other retailers an alternative sales channel for liquidating their inventory. Revenue generated from our O.biz is includedin either direct or fulfillment partner revenue, depending on whether the product is shipped from our warehouses or from a fulfillment partner. In April 2011, we again began operating a travel shopping site as part of our Website where customers can purchase discount travel packages,flights, rental cars and other travel-related products and services. We also earn advertisement revenue from our travel business. Revenue from the travelbusinesses is included in the fulfillment partner segment on a net basis. In July 2011, we began operating an insurance shopping service as part of our Website where customers can shop for auto and home insuranceand compare quotes from various insurance providers. We also earn advertisement revenue from our insurance business. Revenue generated from ourinsurance shopping site is included in the fulfillment partner segment on a net basis. Prior to July 2011, we operated an online auction service as part of our Website. In July 2011, we removed our Marketplace tab for auctions fromour Website and no longer provide auction services. The financial results and related assets of the online auction service were not significant to ourbusiness. Our Marketplace tab allowed sellers to list items for sale, buyers to bid on items of interest, and users to browse through listed items online.We recorded only our listing fees and commissions for items sold as revenue. From time to time, we also sold items returned from our shoppingbusiness through our auction service, and for these sales, we recorded the revenue on a gross basis. Revenue from the auctions is included in thefulfillment partner segment. Prior to June 2011, we operated an online site for listing real estate for sale as part of our Website. In June 2011, we removed our online site forlisting real estate for sale from our Website and no longer provide these real estate listing services. The financial results and related assets of the onlinesite for listing real estate for sale were not significant to our business. The real-estate listing service allowed customers to search active listings acrossthe country. Revenue from the real estate business is included in the fulfillment partner segment on a net basis. Prior to June 2011, we operated Eziba.com, a private sale website featuring home décor products, jewelry, apparel and accessories from manyleading brands. In June 2011, we turned off the Eziba.com website; however, we continue to sell the type of products that were listed on Eziba.comthrough our websites, O.co and Overstock.com. Revenue from our other businesses is less than 1% of total net revenues.46Table of ContentsCritical Accounting Policies and Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires estimates andassumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilitiesin the consolidated financial statements and accompanying notes. The Securities and Exchange Commission ("SEC") has defined a company's criticalaccounting policies as the ones that are most important to the portrayal of the company's financial condition and results of operations, and which requirethe company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain.Based on this definition, we have identified the critical accounting policies, estimates and judgments addressed below. We also have other keyaccounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additionalinformation, see Item 1 of Part I, "Financial Statements"—Note 2—"Accounting Policies." Although we believe that our estimates, assumptions, andjudgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates. Our criticalaccounting policies are as follows:•revenue recognition; •estimating valuation allowances and accrued liabilities (specifically, the allowances for returns, credit card chargebacks, doubtfulaccounts and obsolete and damaged inventory); •internal use software and website development (acquired and developed internally); •accounting for income taxes; •valuation of long-lived and intangible assets and goodwill; and •loss contingencies.Revenue recognition We derive our revenue primarily from two sources: direct revenue and fulfillment partner revenue, including listing fees and commissions collectedfrom products being listed and sold through the Auctions tab, which we removed from our site in July 2011, advertisement revenue derived from ourreal estate listing business, which we removed from our site in June 2011, from our cars listing business, and from advertising on our shopping, traveland insurance pages. We have organized our operations into two principal segments based on the primary source of revenue: direct revenue andfulfillment partner revenue. Revenue is recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery hasoccurred or the service has been provided; (3) the selling price or fee revenue earned is fixed or determinable; and (4) collection of the resultingreceivable is reasonably assured. Revenue related to merchandise sales is recognized upon delivery to our customers. As we ship high volumes ofpackages through multiple carriers, it is not practical for us to track the actual delivery date of each shipment. Therefore, we use estimates to determinewhich shipments are delivered and, therefore, recognized as revenue at the end of the period. Our delivery date estimates are based on average shippingtransit times, which are calculated using the following factors: (i) the type of shipping carrier (as carriers have different in-transit times); (ii) thefulfillment source (either our warehouses or those of our fulfillment partners); (iii) the delivery destination; and (iv) actual transit time experience, whichshows that delivery date is typically one to eight business days from the date of shipment. We review and update our estimates on a quarterly basis based on our actual transit time experience. However, actual shipping times may differfrom our estimates.47Table of Contents The following table shows the effect that hypothetical changes in the estimate of average shipping transit times would have had on the reportedamount of revenue and net loss for the year ended December 31, 2011 (in thousands): When we are the primary obligor in a transaction, are subject to inventory risk, have latitude in establishing prices and selecting suppliers, or haveseveral but not all of these indicators, revenue is recorded gross. If we are not the primary obligor in the transaction and amounts earned are determinedusing a fixed percentage, revenue is recorded on a net basis. Currently, the majority of both direct revenue and fulfillment partner revenue is recorded ona gross basis, as we are the primary obligor. In our statements of operations, we present revenue net of sales taxes. We periodically provide incentive offers to our customers to encourage purchases. Such offers include current discount offers, such as percentagediscounts off current purchases and other similar offers, which, when used by our customers, are treated as a reduction of revenue.Direct revenue Direct revenue is derived from merchandise sales to individual consumers and businesses that are fulfilled from our leased warehouses. Directrevenue comes from sales that occur primarily through our Website, but may also occur through offline channels.Fulfillment partner revenue Fulfillment partner revenue is derived from merchandise sales through our Website which fulfillment partners ship directly to consumers andbusinesses from warehouses maintained by our fulfillment partners. We operate an online site for listing cars for sale as a part of our Website. The cars listing service allows dealers to list vehicles for sale and allowsbuyers to review vehicle descriptions, post offers to purchase, and provides the means for purchasers to contact sellers for further information andnegotiations on the purchase of an advertised vehicle. Revenue from the cars listing business is included in the fulfillment partner segment on a netbasis. We offer a consignment service to suppliers where the suppliers' merchandise is stored in and shipped from our leased warehouses. We pay theconsignment supplier upon sale of the consigned merchandise to the consumer. Revenue from consignment service to suppliers is included infulfillment partner segment on a gross basis. In April 2011, we again began operating a travel shopping site as part of our Website where customers can purchase discount travel packages,flights, rental cars and other travel-related products and services. We also earn advertisement revenue from our travel business. Revenue from the travelbusinesses is included in the fulfillment partner segment on a net basis. In July 2011, we began an insurance shopping service as part of our Website where customers can shop for auto and home insurance and comparequotes from various insurance providers. We also earn advertisement revenue from our insurance business. Revenue generated from our insuranceshopping site is included in the fulfillment partner segment on a net basis.48 Year ended December 31, 2011 Change in the Estimate of Average Transit Times (Days) Increase(Decrease)Revenue (Increase)Decrease NetLoss 2 $(8,537)$(1,116)1 $(6,073)$(821)As reported As reported As reported -1 $4,310 $537 -2 $7,138 $913 Table of Contents Prior to July 2011, we operated an online auction service on our Website. In July 2011, we removed our Marketplace tab from our Website and nolonger provide auction services. The financial results and related assets of the online auction service were not significant to our business. TheMarketplace tab allowed sellers to list items for sale, buyers to bid on items of interest, and users to browse through listed items online. Except inlimited circumstances where our auction site listed returned merchandise, we were not the seller of auction-listed items and had no control over thepricing of those items. Therefore, the listing fees for items sold at auction by sellers were recorded as revenue during the period these items were listedor sold on a net basis. The revenue for the returned merchandise that we sold at auction was recorded on a gross basis. Revenue from the auctionsbusiness is included in the fulfillment partner segment. Prior to June 2011, we operated an online site for listing real estate for sale as a part of our Website. In June 2011, we removed our online site forlisting real estate for sale from our Website and no longer provide these real estate listing services. The financial results and related assets of the onlinesite for real estate for sale were not significant to our business. The real estate listing service allowed customers to search active listings across thecountry. Revenue from the real estate listing business is included in the fulfillment partner segment, on a net basis. Prior to June 2011, we operated Eziba.com, a private sale website featuring home décor products, jewelry, apparel and accessories from manyleading brands. In June 2011, we turned off the Eziba.com website; however, we continue to sell the type of products that were listed on Eziba.comthrough our websites, O.co and Overstock.com. Revenue from our other businesses is less than 1% of total net revenues.International business We began selling products through our Website to customers outside the United States in late August 2008. As of December 31, 2011, we wereoffering products to customers in over 105 countries and non-U.S. territories. We do not have sales operations outside the United States, and are usinga U.S. based third party to provide logistics and fulfillment for all international orders. Revenue generated from our international business is included ineither direct or fulfillment partner revenue, depending on whether the product is shipped from our warehouses or from a fulfillment partner. Less than1% of our sales are made to international customers.Club O loyalty program We have a customer loyalty program called Club O for which we sell annual memberships. We record membership fees as deferred revenue andwe recognize revenue ratably over the membership period. The Club O loyalty program allows members to earn reward dollars for qualifying purchasesmade on our Website. We also have a co-branded credit card program (see "Co-branded credit card revenue" below for more information). Co-brandedcardholders are also Club O members and earn additional reward dollars for purchases made on our Website, and from other merchants. Reward dollarsearned may be redeemed on future purchases made through our Website. Club O reward dollars expire 90 days after the customer's Club O membershipexpires. We account for these transactions as multiple element arrangements and allocate value to the elements using their relative fair values. We includethe value of reward dollars earned in deferred revenue and we record it as a reduction of revenue at the time the reward dollars are earned. We recognize revenue for Club O reward dollars when: (i) customers redeem their reward dollars as part of a purchase at our Website, (ii) rewarddollars expire or (iii) the likelihood of reward dollars being redeemed by a customer is remote ("reward dollar breakage"). Due to the loyalty program'sshort history, currently no reward dollar breakage is recognized until the reward dollars expire. However, in the future we plan to recognize suchbreakage based upon historical redemption patterns.49Table of Contents In instances where customers receive free Club O reward dollars not associated with any purchases, we account for these transactions as salesincentives such as coupons and record a reduction of revenue at the time the reward dollars are redeemed.Co-branded credit card revenue During the year ended December 31, 2009, we had a co-branded credit card agreement with a commercial bank, for the issuance of credit cardsbearing the Overstock brand, under which the bank paid us fees for new accounts, renewed accounts and card usage. New and renewed account feeswere recognized as revenues on a straight-line basis over the estimated life of the credit card relationship. Credit card usage fees were recognized asrevenues as actual credit card usage occurred. Our co-branded credit card agreement with this bank terminated effective August 30, 2009. In March 2010, we entered into a co-branded credit card agreement with a different commercial bank for the issuance of credit cards bearing theOverstock.com brand, under which the bank pays us fees for new accounts and for customer usage of the cards. The agreement also provides for acustomer loyalty program offering reward points that customers will accrue from card usage and can use to make purchases on our Website (See "ClubO loyalty program" above for more information). We launched this co-branded card in September 2010. New account fees are recognized as revenue ona straight-line basis over the estimated life of the credit card relationship. Credit card usage fees are recognized as revenues as actual credit card usageoccurs.Deferred revenue Customer orders are recorded as deferred revenue prior to delivery of products or services ordered. We record amounts received for Club Omembership fees as deferred revenue and we recognize it ratably over the membership period. We record Club O reward dollars earned from purchasesas deferred revenue at the time they are earned and we recognize it as revenue upon redemption. If reward dollars are not redeemed, we recognizerevenue upon expiration. In addition, we sell gift cards and record related deferred revenue at the time of the sale. We sell gift cards without expirationdates and we recognize revenue from a gift card upon redemption of the gift card. If a gift card is not redeemed, we recognize income when thelikelihood of its redemption becomes remote based on our historical redemption experience. We consider the likelihood of redemption to be remote after36 months.Sales returns allowance We inspect returned items when they arrive at our processing facility. We refund the full cost of the merchandise returned and all original shippingcharges if the returned item is defective or we or our fulfillment partners have made an error, such as shipping the wrong product. If the return is not a result of a product defect or a fulfillment error and the customer initiates a return of an unopened item within 30 days ofdelivery, for most products we refund the full cost of the merchandise minus the original shipping charge and actual return shipping fees. However, wereduce refunds for returns initiated more than 30 days after delivery or that are received at our returns processing facility more than 45 days after initialdelivery. If our customer returns an item that has been opened or shows signs of wear, we issue a partial refund minus the original shipping charge andactual return shipping fees. Revenue is recorded net of estimated returns. We record an allowance for returns based on current period revenues and historical returnsexperience. We analyze actual historical returns, current economic trends and changes in order volume and acceptance of our products when evaluatingthe adequacy of the sales returns allowance in any accounting period.50Table of Contents During the three months ended December 31, 2009, we had a change in estimate for our sales returns allowance that reduced the allowance byapproximately $3.0 million from the prior quarter-end balance and $3.2 million from the prior year-end balance that was recorded in accordance withASC 250 "Accounting Changes and Error Corrections" on a prospective basis. The change in estimate for our sales returns allowance had thefollowing impact on our financial results for the three and twelve months ended December 31, 2009 (amounts in thousands, except per share data): The reasons for the change in estimate in the fourth quarter of 2009 were as follows. We made improvements to our information systems during2008 and 2009 that enabled enhanced reporting and analysis of our returns data used in the estimation process. In early 2009, we implementedinitiatives to reduce overall return rates in several of our product categories. In September 2009, we entered into a new master supplier agreement withour fulfillment partners that provided financial incentives for suppliers to reduce returns. These initiatives resulted in a sustained decrease in our productreturn trends resulting in the change in estimate of sales returns allowance during the three months ended December 31, 2009. Although we believe that our estimates, assumptions, and judgments are reasonable, actual results have historically differed from our estimates.Based on our actual returns experience through December 31, 2011, had our estimated returns equaled our actual returns, our net loss would havedecreased approximately $1.5 million for the year ended December 31, 2007, our net loss would have increased approximately $725,000 for the yearended December 31, 2008, and our net income would have decreased approximately $805,000 for the year ended December 31, 2009. Based on theimprovements and initiatives discussed above, we believe that our estimates, assumptions and judgments have improved and our actual product returnshave not differed materially from our estimates at December 31, 2010 and during 2011. The allowance for returns was $10.9 million and $11.5 million at December 31, 2011 and 2010, respectively.Credit card chargeback allowance Revenue is recorded net of estimated credit card chargebacks. We maintain an allowance for credit card chargebacks based on current periodrevenues and historical chargeback experience. The allowance for chargebacks was $187,000 and $125,000 at December 31, 2011 and 2010,respectively.Allowance for doubtful accounts From time to time, we grant credit to certain of our business customers on normal credit terms (typically 30 days). We perform credit evaluationsof our business customers' financial condition and payment history and maintain an allowance for doubtful accounts receivable based upon ourhistorical collection experience and expected collectability of accounts receivable. The allowance for doubtful accounts receivable was $574,000 and$2.0 million at December 31, 2011 and December 31, 2010, respectively. The decrease in the allowance for doubtful accounts was primarily due towrite-offs of51 Three monthsendedDecember 31,2009 Twelve monthsendedDecember 31,2009 ($ Change) ($ Change) Revenue, net $2,995 $3,208 Gross profit 752 805 Income from continuing operations before income taxes 752 805 Net income 752 805 Net income attributable to common shares—basic $0.04 $0.04 Net income attributable to common shares—diluted $0.04 $0.03 Table of Contentsaccounts receivable during the year ended December 31, 2011, which had no significant effect on results of operations for the period as most of theitems had been previously reserved.Valuation of inventories We write down our inventory for estimated obsolescence and to lower of cost or market value based upon assumptions about future demand andmarket conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may berequired. Once established, the original cost of the inventory less the related inventory allowance represents the new cost basis of such products.Internal-use software and website development Included in fixed assets is the capitalized cost of internal-use software and website development, including software used to upgrade and enhanceour Website and processes supporting our business. We capitalize costs incurred during the application development stage of internal-use software andamortize these costs over the estimated useful life of two to three years. Costs incurred related to design or maintenance of internal-use software areexpensed as incurred.Accounting for income taxes We are subject to taxation from federal and state jurisdictions. A significant amount of judgment is involved in preparing our annual provision forincome taxes and the calculation of resulting deferred tax assets and liabilities. As of December 31, 2011, we were not under audit by United Statesincome taxing authorities. Tax periods within the statutory period of limitations not previously audited are potentially open for examination by the taxingauthorities. Potential liabilities associated with these years will be resolved when an event occurs to warrant closure, primarily through the completion ofaudits by the taxing jurisdictions and/or the expiration of the statutes of limitation. To the extent audits or other events result in a material adjustment tothe accrued estimates, the effect would be recognized during the period of the event. We follow the asset and liability method of accounting for income taxes. Under this method, deferred taxes are determined based on the temporarydifferences between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to be in effect during the years inwhich the bases differences reverse. A valuation allowance is recorded to reduce deferred tax assets when it is more likely than not that some portion, orall of the deferred tax assets may not be realized. Since inception, we determined that it was more likely than not that our historic and current year income tax benefits may not be realized and a fullvaluation allowance should be recorded against our deferred tax assets in excess of our deferred tax liabilities. As of December 31, 2011 and 2010, wehave recorded a full valuation allowance of $83.6 million and $77.1 million, respectively, against our net deferred tax assets consisting primarily of netoperating loss carryforwards. In assessing the realizability of our deferred tax assets, we considered the four sources of taxable income. Because wehave no carryback ability and have not identified any viable tax planning strategies, two of the sources are not available. Reversing taxable temporarydifferences have been properly considered as the deferred tax liabilities reverse in the same period as existing deferred tax assets. However, reversingthe deferred tax liabilities is insufficient to fully recover existing deferred tax assets. Our valuation allowance is net of deferred tax liabilities and thereare no deferred tax assets or liabilities that have an indefinite reversal period. Therefore, future taxable income, the most subjective of the four sources, isthe remaining source available for realization of our net deferred tax assets. We consider future taxable income and evaluate the need for a valuation allowance on a regular basis. The determination of recording or releasingtax valuation allowances is made, in part, pursuant to an assessment regarding the likelihood that we will generate future taxable income against which52Table of Contentsbenefits of our deferred tax assets may be realized. This assessment requires us to exercise significant judgment and make estimates with respect to ourability to generate revenues, gross profits, operating income and taxable income in future periods. Among other factors, we must make assumptionsregarding overall business and retail industry conditions, operating efficiencies, the competitive environment and changes in regulatory requirementswhich may impact our ability to generate taxable income and, in turn, realize the value of our deferred tax assets. Operating losses in some prior periodsand significant economic uncertainties in the market have made the projection of future taxable income uncertain. Accordingly, we have a valuationallowance recorded against our deferred tax assets as it is not "more likely than not" that the assets will be realized. A change in our assessment of thelikelihood that we will generate future taxable income may result in a full or partial release of the valuation allowance against our deferred tax assets infuture periods.Impairment of long-lived assets We review property and equipment and other long-lived assets for impairment whenever events or changes in circumstances indicate that thecarrying amount of an asset group may not be recoverable. Recoverability is measured by comparison of the assets' carrying amount to futureundiscounted net cash flows the asset group is 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 such asset groupis considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fairvalues. There were no impairments to long-lived assets recorded during the years ended December 31, 2011, 2010, and 2009.Valuation of goodwill Goodwill is not amortized, but must be tested for impairment at least annually. We test for impairment of goodwill in the fourth quarter or when wedeem that a triggering event has occurred. Goodwill totaled $2.8 million at December 31, 2011 and 2010. There were no impairments to goodwillrecorded during the years ended December 31, 2011, 2010, and 2009.Loss contingencies In the normal course of business, we are involved in legal proceedings and other potential loss contingencies. We accrue a liability for such matterswhen it is probable that a loss has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be estimated, themost probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimumamount in the range is accrued. We expense legal fees as incurred.Accounting pronouncements issued not yet adopted See Item 15 of Part IV, "Financial Statements"—Note 2—"Accounting Policies" subheading "Accounting Pronouncements Issued Not YetAdopted."53Table of ContentsComparison of Years Ended December 31, 2011 and 2010Executive Commentary This executive commentary is intended to provide investors with a view of our business through the eyes of our management. As an executivecommentary, it necessarily focuses on selected aspects of our business. This executive commentary is intended as a supplement to, but not a substitutefor, the more detailed discussion of our business included elsewhere herein. Investors are cautioned to read our entire "Management's Discussion andAnalysis of Financial Condition and Results of Operations", as well as our interim and audited financial statements, and the discussion of ourbusiness and risk factors and other information included elsewhere or incorporated in this report. This executive commentary includes forward-looking statements, and investors are cautioned to read the "Special Note Regarding Forward-Looking Statements" at the beginning of Item 2,"Management's Discussion and Analysis of Financial Condition and Results of Operations." The key factors that affected financial results for the year ended December 31, 2011 were declining revenue, lower gross margin, and increasedoperating expenses (including increases in personnel-related and legal expenses), all of which resulted in a net loss for the year. Revenue for 2011 decreased by $35.6 million (3%), compared to 2010. Visits to our website were down 1% and new customer growth fell 9%which was partially offset by a slightly higher average order size. We believe our revenues were adversely impacted during the first and second quarterswhen Google Inc. notified us that it was penalizing us in natural search results for noncompliance with some of Google's natural search guidelines.During this penalty period, we dropped significantly in some Google natural search result rankings. We made changes to conform to Google'sguidelines and, on April 21, 2011, Google ended its penalization of our natural search results. We were able to offset some of the negative impact torevenue by increasing expenditures in other marketing channels. Revenues were hurt by a shift of marketing resources into our Club O loyalty program and away from coupons and other site-wide promotions,which were less effective in generating revenues during the second and third quarter of 2011. We also believe that our efforts to rebrand ourselves from Overstock.com to O.co hurt revenue growth in 2011 as it confused some prospectivecustomers who had trouble finding our website. Revenues declined by 22% in our direct business due primarily to a transition of some of our clothing and shoes category to a fulfillment partnermodel. Revenue from our fulfillment partner business increased by 1%. The direct business declined to 16% of total revenue in 2011 from 19% in2010, while our fulfillment partner business generated 84% of our total revenue in 2011 compared to 81% in 2010. Gross profit declined by 6% while gross margin declined by 40 basis points from 2010 to 2011. Direct gross margin declined by 220 basis pointsdue largely to fixed costs increasing as a percentage of revenue due to declining direct revenues, higher inbound and outbound freight and higherproduct costs of returned goods due to a sales mix shift to the home and garden category. Fulfillment partner gross margin declined by 50 basis points,largely due to competitive pricing initiatives. Sales and marketing expenses as a percentage of revenue increased by 30 basis points in 2011. This was largely due to an increase in online searchmarketing throughout the year. We increased our online search marketing in the first and second quarter of 2011 to help offset the lower natural searchrevenue following the Google penalty, and online marketing spending increased in the second half of the year to compensate for lower revenues as aresult of the customer confusion from our O.co rebranding campaign. Operating expense outpaced gross profit and Contribution (see "Non-GAAP Financial Measures" below for a reconciliation of Contribution toGross Profit) in 2011. Contribution declined by 9% due to54Table of Contentslower gross profit and higher sales and marketing expenses, while combined technology and general and administrative expenses increased by 18%driven by increases in technology-related personnel growth, depreciation expense and higher legal fees. As a result, we incurred a net loss of$19.4 million for 2011. We completed the redemption of our Senior Notes on September 21, 2011 through a combination of cash on hand and a $17 million borrowingunder our Financing Agreement with U.S. Bank National Association. On December 27, 2011, we terminated our Master Lease Agreement dated September 17, 2010 and all related schedules with U.S. BancorpEquipment Finance, Inc.—Technology Finance Group. We paid approximately $20.1 million to terminate the agreement, including approximately$1.2 million in prepayment premiums. We ended the year with $97.0 million of cash and cash equivalents and working capital of ($14.1) million. This includes the $17.0 millionborrowed under the Financing Agreement with U.S. Bank that matures on December 31, 2012. We experienced a $21.1 million year over year increase in free cash flow (See "Non-GAAP Financial Measures" below for a reconciliation of FreeCash Flow to net cash provided by operating activities), from ($4.2) million in 2010 to $16.9 million in 2011. This was due primarily to a $9.3 millionimprovement in operating cash flows and an $11.8 million reduction in capital expenditures in 2011. In early January 2012, we reduced technology and general and administrative staff and contract labor positions, which will reduce annualcompensation costs by approximately $8.5 million. The balance of our Management's Discussion and Analysis of Financial Condition and Results of Operations provides further information aboutthe matters discussed above and other important matters affecting our business.55Table of ContentsResults of Operations The following table sets forth our results of operations expressed as a percentage of total revenue for 2011, 2010 and 2009:Revenue The following table reflects our net revenue for the years ended December 31, 2011 and 2010 (in thousands): Revenues declined by 22% in our direct business due primarily to a transition of some of our clothing and shoes category to a fulfillment partnermodel to reduce seasonal inventory risks. Revenue from our fulfillment partner business increased by 1%. The direct business declined to 16% of totalrevenue in 2011 from 19% in 2010, while our fulfillment partner business generated 84% of our total revenue in 2011 compared to 81% in 2010.56 Year ended December 31 2011 2010 2009 (as a percentage of totalrevenue) Revenue, net Direct 15.5% 19.2% 17.2%Fulfillment partner 84.5 80.8 82.8 Total net revenue 100.0 100.0 100.0 Cost of goods sold Direct 14.2 17.2 14.9 Fulfillment partner 68.8 65.4 66.3 Total cost of goods sold 83.0 82.6 81.2 Gross profit 17.0 17.4 18.8 Operating expenses: Sales and marketing 5.9 5.6 6.3 Technology 6.4 5.3 6.0 General and administrative 6.4 5.1 5.6 Restructuring — (0.1) — Total operating expenses 18.7 16.0 17.9 Operating income (loss) (1.7) 1.4 0.9 Interest income — — — Interest expense (0.2) (0.3) (0.4)Other income, net — 0.2 0.4 Income (loss) before income taxes (1.9) 1.3 0.9 Provision (benefit) for income taxes — — — Net income (loss) (1.9)% 1.3% 0.9% Year ended December 31, 2011 2010 $ Change % Change Revenue, net Direct $163,609 $209,646 $(46,037) (22.0)%Fulfillment partner 890,668 880,227 10,441 1.2% Total revenue, net $1,054,277 $1,089,873 $(35,596) (3.3)% Table of Contents The decrease in net revenue for the year ended December 31, 2011 was primarily due to visits to our website decreasing 1% and new customergrowth decreasing 9%, partially offset by a slightly higher average order size. We believe our revenues were negatively impacted during the first and second quarters of 2011 when Google Inc. notified us that it was penalizingus in natural search results for noncompliance with some of Google's natural search guidelines. During this penalty period, we dropped significantly insome of Google's natural search result rankings. We made changes to conform to Google's guidelines and on April 21, 2011 Google ended itspenalization of our natural search results. We were able to offset some of the negative impact to revenue by increasing expenditures in other marketingchannels. Revenues were also hurt by a shift of marketing resources into our Club O loyalty program and away from coupons and other site-widepromotions, which were less effective in generating revenues during the second and third quarter of 2011. We also believe that our efforts to rebrand ourselves from Overstock.com to O.co hurt revenue growth in 2011 as it confused some prospectivecustomers who had trouble finding our website. Total revenues from the Auctions, Cars, Insurance, Travel and Real Estate businesses were $1.7 million and $2.9 million for the years endedDecember 31, 2011 and 2010, respectively. Total revenues from International sales were $8.8 million and $9.4 million for the years endedDecember 31, 2011 and 2010, respectively. See "Executive Commentary" above for additional discussion regarding revenue.Gross profit Our overall gross margins fluctuate based on our sales volume mix between our direct business and fulfillment partner business; changes invendor and / or customer pricing, including competitive pricing; inventory management decisions within the direct business; sales coupons andpromotions; product mix of sales; and operational and fulfillment costs. The following table reflects our net revenues, cost of goods sold and gross profit for the year ended December 31, 2011 and 2010 (in thousands):57 Year ended December 31, 2011 2010 $ Change % Change Revenue, net Direct $163,609 $209,646 $(46,037) (22.0)%Fulfillment partner 890,668 880,227 10,441 1.2% Total net revenues $1,054,277 $1,089,873 $(35,596) (3.3)% Cost of goods sold Direct $149,660 $187,124 $(37,464) (20.0)%Fulfillment partner 725,529 713,109 12,420 1.7% Total cost of goods sold $875,189 $900,233 $(25,044) (2.8)% Gross Profit Direct $13,949 $22,522 $(8,573) (38.1)%Fulfillment partner 165,139 167,118 (1,979) (1.2)% Total gross profit $179,088 $189,640 $(10,552) (5.6)% Table of Contents Gross margins for the past eight quarterly periods and years ending December 31, 2011 and 2010 were: The decrease in direct gross margin for the year ended December 31, 2011 is primarily due to fixed costs increasing as a percentage of revenue dueto declining direct sales, higher inbound and outbound freight and higher product costs from returned goods due to a sales mix shift to the home andgarden category. The decrease in fulfillment partner gross margin for the year ended December 31, 2011 is primarily due to competitive pricing initiatives. Thedecrease in fulfillment partner gross margin for the three months ended December 31, 2011 is primarily due to competitive pricing initiatives, partiallyoffset by a decline in credit card processing fees. The shift of business between direct to fulfillment partner (or vice versa) is an economic decision based on the economics of each particularproduct offering at the time and we do not have particular goals for "appropriate" mix or percentages for the size of either. We believe that the mix of thebusiness between direct and fulfillment partner is consistent with our strategic objectives for our business model in the current economic environmentand, with the exception of a transition of some of our direct clothing and shoes category to a fulfillment partner model to reduce our seasonal inventoryrisks, we do not currently foresee any material shifts in mix. During reviews of our partner billing system for returns, we discovered that we had underbilled our fulfillment partners for certain fees andcharges related to returns of approximately $157,000 and $822,000 for the years ended December 31, 2011 and 2010, respectively. Since our businessmodel is reliant on our relationships with our fulfillment partners and the problem related to an internal record keeping issue on our part, we made thedetermination to not seek recovery of these amounts from our fulfillment partners and consequently have not recognized any related recoveries in ourconsolidated financial statements. The other factors described above, such as operational and fulfillment costs did not have a significant impact on the change in gross margin. Cost of goods sold includes stock-based compensation expense of $193,000 and $212,000 for the years ended December 31, 2011 and 2010. See "Executive Commentary" above for additional discussion.Fulfillment costs Fulfillment costs include all warehousing costs, including fixed overhead and variable handling costs (excluding packaging costs), as well as creditcard fees and customer service costs, all of which we include as costs in calculating gross margin. We believe that some companies in our industry,including some of our competitors, account for fulfillment costs within operating expenses, and therefore exclude fulfillment costs from gross margin.As a result, our gross margin may not be directly comparable to others in our industry.58 Q1 2011 Q2 2011 Q3 2011 Q4 2011 FY 2011 Direct 10.7% 9.6% 6.6% 7.0% 8.5%Fulfillment Partner 20.7% 18.1% 17.6% 17.8% 18.5%Combined 18.9% 16.9% 16.0% 16.2% 17.0% Q1 2010 Q2 2010 Q3 2010 Q4 2010 FY 2010 Direct 13.8% 11.7% 9.1% 9.0% 10.7%Fulfillment Partner 18.8% 19.4% 18.7% 19.0% 19.0%Combined 17.9% 18.0% 16.9% 17.0% 17.4%Table of Contents The following table has been included to provide investors additional information regarding our classification of fulfillment costs, gross profit andmargin, thus enabling investors to better compare our gross margin with others in our industry (in thousands): Fulfillment costs as a percentage of sales may vary due to several factors, such as our ability to manage costs at our warehouses, significantchanges in the number of units received and fulfilled, the extent to which we use third party fulfillment services and warehouses, and our ability toeffectively manage customer service costs and credit card fees. There have been no significant changes in our fulfillment and related costs as apercentage of revenue during the year ended December 31, 2011. See "Gross profit" above for additional discussion.Operating expensesSales and marketing expenses We advertise through a number of targeted online marketing channels, such as sponsored search, affiliate marketing, portal advertising, e-mailcampaigns, and other initiatives. We also use nationwide television, print and radio advertising campaigns to promote sales. The following table reflects our sales and marketing expenses for the years ended December 31, 2011 and 2010 (in thousands): The increase in sales and marketing expenses as a percentage of net revenues is primarily due to increased spending in search marketing, increasedin part to offset the negative impact of the Google penalty on revenues as described above, partially offset by a decline in spending for affiliatemarketing and television advertising. Sales and marketing expenses include stock-based compensation expense of $377,000 and $608,000 for the years ended December 31, 2011 and2010, respectively Costs associated with our discounted shipping and other promotions, such as coupons, are not included in marketing expense. Rather they areaccounted for as a reduction of revenue and therefore affect sales and gross margin. We consider discounted shipping and other promotions as aneffective marketing tool, and intend to continue to offer them as we deem appropriate as part of our overall marketing plan.59 Year ended December 31, 2011 2010 2009 Total net revenue $1,054,277 100%$1,089,873 100%$876,769 100% Cost of goods sold Product costs and other cost of goodssold 821,739 78% 842,064 78% 664,537 76%Fulfillment and related costs 53,450 5% 58,169 5% 47,480 5% Total cost of goods sold 875,189 83% 900,233 83% 712,017 81% Gross profit $179,088 17%$189,640 17%$164,752 19% Year endedDecember 31, 2011 2010 $ Change % Change Sales and marketing expenses $61,813 $61,334 $479 0.8%Sales and marketing expenses as a percent of netrevenues 5.9% 5.6% Table of ContentsTechnology expenses We seek to efficiently invest in technology, including web services, customer support solutions and website search, and in expansion of new andexisting product categories, and in investments in technology to enhance the customer experience, improve our process efficiency and support ourlogistics infrastructure. The following table reflects our technology expenses for the years ended December 31, 2011 and 2010 (in thousands): The increase for the year ended December 31, 2011 is primarily due to a $4.7 million increase in compensation expense (primarily due to increasesin staffing), and a $1.9 million increase in depreciation expense. Technology expenses include stock-based compensation expense of $628,000 and $1.1 million for the years ended December 31, 2011 and 2010,respectivelyGeneral and administrative expenses The following table reflects our general and administrative expenses for the years ended December 31, 2011 and 2010 (in thousands): The increase in general and administrative expenses for the year ended December 31, 2011 is primarily due to a $12.3 million increase in legal fees.See Legal Proceedings for more information. General and administrative expenses include stock-based compensation expense of approximately $1.9 million and $3.2 million for the years endedDecember 31, 2011 and 2010, respectively.Restructuring There were no restructuring charges or reversals during the year ended December 31, 2011. We reversed $569,000 of lease termination costsliability during the year ended December 31, 2010 due to changes in our estimate of sublease income, primarily as a result of our entering intoagreements with a sublessee to terminate the subleases and have us re-occupy a portion of the space previously abandoned (see Item 15 of Part IV,"Financial Statements"—Note 3—"Restructuring Expense").Operating Expenses Overall, our total operating expenses increased 12.6% to $196.6 million for the year ended December 31, 2011 from $174.7 million for the yearended December 31, 2010, while total net revenues decreased 3.3% and gross profit decreased 5.6%.60 Year endedDecember 31, 2011 2010 $ Change % Change Technology expenses $67,043 $58,260 $8,783 15.1%Technology expenses as a percent of net revenues 6.4% 5.3% Year endedDecember 31, 2011 2010 $ Change % Change General and administrative expenses $67,766 $55,650 $12,116 21.8%General and administrative expenses as a percent of netrevenues 6.4% 5.1% Table of ContentsDepreciation expense Depreciation expense is classified within the corresponding operating expense categories on the consolidated statements of operations as follows(in thousands):Non-operating income (expense)Interest income Interest income is primarily derived from the investment of our cash in cash equivalents and short-term investments. Interest income for the yearsended December 31, 2011 and 2010 totaled $161,000 and $157,000, respectively.Interest expense Interest expense is related to interest incurred on our Senior Notes, finance obligations, line of credit and our capital leases. Interest expense for theyear ended December 31, 2011 and 2010 totaled $2.5 million and $3.0 million, respectively. The decrease in interest expense is primarily a result ofextinguishments of our Senior Notes, partially offset by an increase from our finance obligations and line of credit.Other income, net Other income, net for the years ended December 31, 2011 and 2010 totaled $278,000 and $2.1 million, respectively. The decrease was primarilydue to a $1.2 million loss on early retirement of our finance obligations resulting from a prepayment premium in 2011 and a $346,000 decrease due togains on Senior Notes buybacks in 2010.Income taxes Our provision (benefit) for income taxes for the years ended December 31, 2011 and 2010 of ($142,000) and $359,000 is for federal alternativeminimum tax and certain income tax uncertainties, including interest and penalties. As of December 31, 2011 and December 31, 2010 we had federal netoperating loss carry forwards of approximately $192.5 and $166.7 million, respectively, and state net operating loss carry forwards of approximately$176.1 and $150.7 million, respectively, which may be used to offset future taxable income. We are currently reviewing whether we had any ownershipchanges. The result of having ownership changes under Internal Revenue Code Section 382 would limit the amount of net operating losses that could beused in any annual period. Our net operating loss carryforwards will begin to expire in 2018.Seasonality Based upon our historical experience, revenue typically increases during the fourth quarter because of the holiday retail season. The actual quarterlyresults for each quarter could differ materially depending upon consumer preferences, availability of product and competition, among other risks and61 Year ended December 31, 2011 2010 2009 Cost of goods sold—direct $714 $1,179 $1,264 Technology 14,433 12,489 10,943 General and administrative 1,203 912 676 Total depreciation and amortization, including internal-usesoftware and website development $16,350 $14,580 $12,883 Table of Contentsuncertainties. Accordingly, there can be no assurances that seasonal variations will not materially affect our results of operations in the future. Thefollowing table reflects our total net revenues for each of the quarters in 2011 and 2010 (in thousands):Comparison of Years Ended December 31, 2010 and 2009Executive Commentary This executive commentary is intended to provide investors with a view of our business through the eyes of our management. As an executivecommentary, it necessarily focuses on selected aspects of our business. This executive commentary is intended as a supplement to, but not a substitutefor, the more detailed discussion of our business included elsewhere herein, Investors are cautioned to read our entire "Management's Discussion andAnalysis of Financial Condition and Results of Operations", as well as our interim and audited financial statements, and the discussion of ourbusiness and risk factors and other information included elsewhere or incorporated in this report. This executive commentary includes forward-looking statements, and investors are cautioned to read the "Special Note Regarding Forward-Looking Statements" at the beginning of Item 2,"Management's Discussion and Analysis of Financial Condition and Results of Operations." The key factors that affected financial results for the year ended December 31, 2010, were revenue growth, lower gross margin resulting frompricing and marketing initiatives, expense management, and general improvement in Internet commerce. Revenues in 2010 increased by 24% compared to 2009. Our pricing and marketing initiatives drove improvement in several key components ofrevenue growth, including new customer growth, visits to our Website, conversion and average order size. Growth was broadly distributed across mostof our major product categories, and in both our direct and fulfillment partner business. Our direct business increased by 39%, and our fulfillmentpartner business increased by 21%. The direct business was 19% of total revenue in 2010 compared to 17% in 2009, while our fulfillment partnerbusiness generated 81% of our total revenue compared to 83% in 2009. Revenue growth slowed over 2010 from 42% in Q1 to 8% in Q4. While this is partly explained by an increasing revenue growth pattern in 2009,we also experienced softness during the holiday selling season that we believe was due in part to our decision to focus on contribution growth ratherthan revenue growth, (see discussion of the non-GAAP financial measure "contribution" below), particularly by not heavily promoting our BMMG andconsumer electronics categories, both of which are popular holiday categories that typically have lower gross margin. Gross margin fell by 140 basis points in 2010, although gross profit growth in 2010 was 15% compared to 14% in 2009. While we believe thatpricing initiatives had a positive effect on our revenue growth, they had the opposite effect on gross margin. This was offset somewhat by supply chainefficiencies resulting from initiatives focused on returns and fulfillment, and from a favorable sales mix shift this year away from BMMG and consumerelectronics into home and garden products. Sales and marketing expense as a percentage of revenue in 2010 fell 70 basis points to 5.6%. We believe that we used relatively effectiveadvertising campaigns and maintained a disciplined approach to marketing expenditures, and that our pricing and other promotional activities were alsoeffective in generating revenues. We believe that our primary focus of increasing contribution has been an important factor in improving our marketingefficiency.62 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter 2011 $265,470 $234,992 $239,738 $314,077 2010 264,330 $231,253 $245,420 $348,870 Table of Contents Although we made significant investments in 2010 through increases in IT, marketing and merchandising related personnel and through increasedcapital expenditures, technology and G&A expenses increased at a slower rate than contribution. Contribution growth was 17% in 2010, whilecombined technology and G&A expenses increased by 13%. Net income improved by $6.1 million in 2010 to $13.8 million, or $0.59 per fully diluted share, compared to $0.33 per diluted share in 2009. We retired $25.4 million face amount of our Senior Notes throughout the year, using $24.9 million of cash. As of December 31, 2010,$34.6 million face amount of the Senior Notes remained outstanding and are a current liability at year-end. As a result, working capital decreased to$14.7 million at year-end. We experienced a $43.0 million year over year decrease in free cash flow (See "Non-GAAP Financial Measures" below for a reconciliation ofFree Cash Flow to net cash provided by operating activities), from $38.8 million in 2009 to ($4.2) million in 2010. This was due primarily to$13.2 million of incremental capital expenditures in 2010 over 2009 and a $29.8 million decrease in operating cash flow due primarily to changes andtiming differences in inventory, accounts payable and accrued liabilities that were partially offset by changes in net income, depreciation andamortization, and gains on the early retirement of our Senior Notes. The balance of our Management's Discussion and Analysis of Financial Condition and Results of Operations provides further information aboutthe matters discussed above and other important matters affecting our business.63Table of ContentsResults of Operations The following table sets forth our results of operations expressed as a percentage of total revenue for 2010 and 2009:Revenue The following table reflects our net revenue for the years ended December 31, 2010 and 2009 (in thousands): Total net revenue increased 24% to $1,090 million for the year ended December 31, 2010, from $877 million for the year ended December 31,2009. Direct revenue increased 39% to $210 million in 2010 from $151 million in 2009, and fulfillment partner revenue increased 21% to $880 millionfrom $726 million.64 Year endedDecember 31 2010 2009 Revenue, net Direct 19.2% 17.2%Fulfillment partner 80.8 82.8 Total net revenue 100.0 100.0 Cost of goods sold Direct 17.2 14.9 Fulfillment partner 65.4 66.3 Total cost of goods sold 82.6 81.2 Gross profit 17.4 18.8 Operating expenses: Sales and marketing 5.6 6.3 Technology 5.3 6.0 General and administrative 5.1 5.6 Restructuring (0.1) — Total operating expenses 16.0 17.9 Operating income (loss) 1.4 0.9 Interest income — — Interest expense (0.3) (0.4)Other income (expense), net 0.2 0.4 Net income (loss) before income taxes 1.3 0.9 Provision for income taxes — — Net income (loss) 1.3% 0.9% Year ended December 31, 2010 2009 $ Change % Change Revenue, net Direct $209,646 $150,901 $58,745 38.9%Fulfillment partner 880,227 725,868 154,359 21.3% Total revenue, net $1,089,873 $876,769 $213,104 24.3% Table of Contents Total net revenue increased 8% to $349 million for the three months ended December 31, 2010, from $322 million for the three months endedDecember 31, 2009. Direct revenue increased 26% to $69.2 million for the three months ended December 31, 2010, from $55.1 million for the threemonths ended December 31, 2009. Fulfillment partner revenue increased 5% to $280 million for the three months ended December 31, 2010, from$267 million for the three months ended December 31, 2009. Total revenues from Auctions, Cars and Real Estate businesses were $2.9 million and $2.1 million for the years ended December 31, 2010 and2009, respectively. Total revenues from International sales were $9.4 million and $5.1 million for the years ended December 31, 2010 and 2009,respectively. See "Executive Commentary" above for additional discussion regarding revenue and revenue growth.Gross profit Our overall gross margins fluctuate based on our sales volume mix between our direct business and fulfillment partner business; changes invendor and / or customer pricing, including competitive pricing, and inventory management decisions within the direct business; sales coupons andpromotions; product mix of sales; and operational and fulfillment costs. The following table reflects our net revenues, cost of goods sold and gross profit for the year ended December 31, 2010 and 2009 (in thousands): Gross margins for the past eight quarterly periods and years ending December 31, 2010 and 2009 were: 65 Year ended December 31, 2010 2009 $ Change % Change Revenue, net Direct $209,646 $150,901 $58,745 38.9%Fulfillment partner 880,227 725,868 154,359 21.3% Total net revenues $1,089,873 $876,769 $213,104 24.3% Cost of goods sold Direct $187,124 $130,890 $56,234 43.0%Fulfillment partner 713,109 581,127 131,982 22.7% Total cost of goods sold $900,233 $712,017 $188,216 26.4% Gross Profit Direct $22,522 $20,011 $2,511 12.5%Fulfillment partner 167,118 144,741 22,377 15.5% Total gross profit $189,640 $164,752 $24,888 15.1% Q1 2010 Q2 2010 Q3 2010 Q4 2010 FY 2010 Direct 13.8% 11.7% 9.1% 9.0% 10.7%Fulfillment Partner 18.8% 19.4% 18.7% 19.0% 19.0%Combined 17.9% 18.0% 16.9% 17.0% 17.4% Q1 2009 Q2 2009 Q3 2009 Q4 2009 FY 2009 Direct 12.9% 18.0% 11.8% 11.9% 13.3%Fulfillment Partner 21.0% 21.3% 20.7% 18.1% 19.9%Combined 19.5% 20.7% 19.3% 17.1% 18.8%Table of Contents Direct Gross Profit and Gross Margin—Gross profit for our direct business increased 12.5% to $22.5 million for the year ended December 31,2010, from $20.0 million for 2009. Gross margin for the direct business decreased to 10.7% for the year ended December 31, 2010, from 13.3% 2009.The decrease in gross margin for the year ended December 31, 2010 is primarily due to pricing initiatives that were implemented beginning in the thirdquarter of 2009 and an increase in returns related costs, partially offset by leverage gained on fixed warehousing costs due to increased revenues. Grossprofit for our direct business was essentially unchanged at $6.3 million for the three months December 31, 2010, and $6.6 million for the same period in2009. Gross margin for the direct business decreased to 9.0% for the three months ended December 31, 2010, from 11.9% for the same period in 2009.The decrease in gross margin for three months ended December 31, 2010 is primarily due to pricing initiatives including holiday promotions and mark-downs of slow-moving inventory (primarily on apparel and shoes), partially offset by a shift in sales mix to higher margin products along with leveragegained on fixed warehousing costs due to increased revenues. Fulfillment Partner Gross Profit and Gross Margin—Gross profit for our fulfillment partner business increased 15.5% to $167.1 million for theyear ended December 31, 2010, from $144.7 million for 2009. Gross margin for the fulfillment partner business decreased to 19.0% for the year endedDecember 31, 2010, from 19.9% for 2009. The decrease in gross margin for the year ended December 31, 2010 is primarily due to pricing initiativesthat were implemented beginning in the third quarter of 2009, partially offset by a shift in sales mix to higher margin products as well as lower returns-related costs. Gross profit for our fulfillment partner business increased 9.7% to $53.2 million for the three months ended December 31, 2010,compared to $48.5 million for the same period in 2009. Gross margin for the fulfillment partner business increased to 19.0% for the three months endedDecember 31, 2010 compared to 18.1% for the same period in 2009. The increase in gross margin was primarily due to a reduction in product costs,including reductions from suppliers participating in promotions, along with a shift in sales mix to higher margin products, partially offset by pricinginitiatives. During reviews of our partner billing system for returns, we discovered that we had underbilled our fulfillment partners for certain fees andcharges related to returns of approximately $822,000 and $1.6 million for the years ended December 31, 2010 and 2009, respectively. Since ourbusiness model is reliant on our relationships with our fulfillment partners and the problem related to an internal record keeping issue on our part, wehave made the determination to not seek recovery of these amounts from our fulfillment partners and consequently have not recognized any relatedrecoveries in our consolidated financial statements. The other factors described above, did not have a significant effect on the change in gross profit. Cost of goods sold includes stock-based compensation expense of $212,000 and $167,000 for the years ended December 31, 2010 and 2009,respectively. See "Executive Commentary" above for additional discussion.Fulfillment costs Fulfillment costs include all warehousing costs, including fixed overhead and variable handling costs (excluding packaging costs), as well as creditcard fees and customer service costs, all of which we include as costs in calculating gross margin. We believe that some companies in our industry,including some of our competitors, account for fulfillment costs within operating expenses, and therefore exclude fulfillment costs from gross margin.As a result, our gross margin may not be directly comparable to others in our industry.66Table of Contents The following table has been included to provide investors additional information regarding our classification of fulfillment costs, gross profit andmargin, thus enabling investors to better compare our gross margin with others in our industry (in thousands): Fulfillment costs as a percentage of sales may vary due to several factors, such as our ability to manage costs at our warehouses, significantchanges in the number of units received and fulfilled, the extent to which we use third party fulfillment services and warehouses, and our ability toeffectively manage customer service costs and credit card fees. There have been no significant changes in our fulfillment costs during the year endedDecember 31, 2010. See "Gross profit" above for additional discussion.Operating expensesSales and marketing expenses We advertise through a number of targeted online marketing channels, such as sponsored search, affiliate marketing, portal advertising, e-mailcampaigns, and other initiatives. We also use nationwide television, print and radio advertising campaigns to promote sales. The following table reflects our sales and marketing expenses for the years ended December 31, 2010 and 2009 (in thousands): The decrease in sales and marketing costs as a percentage of total net revenue was primarily due to more efficient marketing spending. Sales and marketing expenses also include stock-based compensation expense of $608,000 and $634,000 for the years ended December 31, 2010and 2009, respectively. Costs associated with our discounted shipping and other promotions, such as coupons, are not included in marketing expense. Rather they areaccounted for as a reduction of revenue and therefore affect sales growth and gross margin. We consider discounted shipping and other promotions asan effective marketing tool, and intend to continue to offer them as we deem appropriate as part of our overall marketing plan.67 Year ended December 31, 2010 2009 Total net revenue $1,089,873 100%$876,769 100% Cost of goods sold Product costs and other cost of goods sold 842,064 78% 664,537 76%Fulfillment and related costs 58,169 5% 47,480 5% Total cost of goods sold 900,233 83% 712,017 81% Gross profit $189,640 17%$164,752 19% Year endedDecember 31, 2010 2009 $ Change % Change Sales and marketing expenses $61,334 $55,549 $5,785 10.4%Sales and marketing expenses as a percent of netrevenues 5.6% 6.3% Table of ContentsTechnology expenses We seek to efficiently invest in technology, including web services, customer support solutions, website search, and expansion of new and existingproduct categories, as well as continuing to enhance the customer experience, improving our process efficiency and supporting our logisticsinfrastructure. The following table reflects our technology expenses for the years ended December 31, 2010 and 2009 (in thousands) The $5.9 million increase is primarily due to a $6.5 million increase in salaries and benefits expense (primarily due to increases in staffing), and a$1.5 million increase in depreciation expense as result of investments in information technology assets in 2010, partially offset by a $1.4 milliondecrease in bonus expense in 2010 as a result of lower than expected financial performance for the year ended December 31, 2010. Technology expenses include stock-based compensation expense of $1.1 million and $961,000 for the years ended December 31, 2010 and 2009,respectivelyGeneral and administrative expenses The following table reflects our general and administrative expenses for the years ended December 31, 2010 and 2009 (in thousands): The $6.7 million increase is due to a $5.1 million increase in salaries and benefits expense (primarily due to increases in staffing), a $2.3 millionincrease in professional service fees for our external auditors and a $2.0 million increase in legal fees, partially offset by a $3.2 million decrease inbonus expense in 2010 as a result of lower than expected financial performance for the year ended December 31, 2010. The increase in legal feesprimarily resulted from a $2.6 million reduction in payments received from the settlement of legal matters during 2010 compared to 2009. Werecognized a reduction in general and administrative expenses of $4.5 million and $7.1 million during the years ended December 31, 2010 and 2009,respectively, related to the settlement of legal matters. General and administrative expenses include stock-based compensation expense of approximately $3.2 million and $3.0 million for the years endedDecember 31, 2010 and 2009, respectively.Restructuring There were no restructuring charges during the years ended December 31, 2010 and 2009. We reversed $569,000 of lease termination costsliability during the year ended December 31, 2010 due to changes in our estimate of sublease income, primarily as a result of our entering intoagreements with a sublessee to terminate the subleases and have us re-occupy a portion of the space previously68 Year endedDecember 31, 2010 2009 $ Change % Change Technology expenses $58,260 $52,336 $5,924 11.3%Technology expenses as a percent of net revenues 5.3% 6.0% Year endedDecember 31, 2010 2009 $ Change % Change General and administrative expenses $55,650 $48,906 $6,744 13.8%General and administrative expenses as a percent of netrevenues 5.1% 5.6% Table of Contentsabandoned, due to our growth and need for additional space. During the year ended December 31, 2009, we reversed $66,000 of lease termination costsliability due to changes in our estimate of sublease income, primarily as a result of entering into a sublease agreement for previously vacant space (seeItem 15 of Part IV, "Financial Statements"—Note 3—"Restructuring Expense").Operating Expenses Overall, our total operating expenses increased 11.5% to $174.7 million for the year ended December 31, 2010 from $156.7 million for the yearended December 31, 2009, while total net revenues increased 24.3% and gross profit increased 15.1%.Depreciation expense Depreciation expense is classified within the corresponding operating expense categories on the consolidated statements of operations as follows(in thousands):Non-operating income (expense)Interest income Interest income is primarily derived from the investment of our cash in cash equivalents and short-term investments. Interest income for the yearsended December 31, 2010 and 2009 totaled $157,000 and $170,000, respectively.Interest expense Interest expense is related to interest incurred on our Senior Notes, our finance obligations and our capital leases. Interest expense for the yearended December 31, 2010 and 2009 totaled $3.0 million and $3.5 million, respectively. The decrease in interest expense is primarily a result ofextinguishments of long-term debt.Other income, net Other income, net for the years ended December 31, 2010 and 2009 totaled $2.1 million and $3.3 million, respectively. The decrease was primarilydue to lower gains on extinguishment of long-term debt, partially offset by an increase in gift card breakage income for the year ended December 31,2010.Income taxes Our provision for income taxes for the years ended December 31, 2010 and 2009 of $359,000 and $257,000 is for federal alternative minimum taxand certain income tax uncertainties, including interest and penalties.69 Year endedDecember 31, 2010 2009 Cost of goods sold—direct $1,179 $1,264 Technology 12,489 10,943 General and administrative 912 676 Total depreciation and amortization, including internal-use software andwebsite development $14,580 $12,883 Table of ContentsSeasonality Based upon our historical experience, revenue typically increases during the fourth quarter because of the holiday retail season. The actual quarterlyresults for each quarter could differ materially depending upon consumer preferences, availability of product and competition, among other risks anduncertainties. Accordingly, there can be no assurances that seasonal variations will not materially affect our results of operations in the future. Thefollowing table reflects our total net revenues for each of the quarters in 2010 and 2009 (in thousands):Liquidity and Capital Resources While we believe that the cash and cash equivalents currently on hand, amounts available under our credit facility and expected cash flows fromfuture operations will be sufficient to continue operations for at least the next twelve months; we may require additional financing. Our $20 millioncredit facility with U.S. Bank is scheduled to terminate on December 31, 2012. Although we have $20 million on deposit with U.S. Bank, and mayrepay and terminate the facility, we may attempt to renegotiate the facility or replace it. There can be no assurance we will be able to do so. In December2011, we paid $20.1 million to terminate our obligations under our Master Lease Agreement, resulting in a significant decrease in cash on hand atDecember 31, 2011 (see "Borrowings" below). 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, profits or to raise additional capital could have amaterial adverse effect on our operations and on our ability to achieve our intended business objectives. Any projections of future cash needs and cashflows are subject to substantial uncertainty. Our principal sources of liquidity are cash flows generated from operations, and our existing cash and cash equivalents. At December 31, 2011,our cash and cash equivalents balance was $97.0 million. Cash flow information is as follows:Free Cash Flow "Free Cash Flow" (a non-GAAP measure) for the years ended December 31, 2011, 2010 and 2009, was $16.9 million, $(4.2) million and$38.8 million, respectively. See "Non-GAAP Financial Measures" below for a reconciliation of Free Cash Flow to net cash provided by operatingactivities.Cash provided by operating activities For the years ended December 31, 2011 and 2010, our operating activities resulted in net cash inflows of $25.7 million and $16.3 million,respectively.70 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter 2010 $264,330 $231,253 $245,420 $348,870 2009 185,729 174,898 193,783 322,359 Year ended December 31 2011 2010 2009 Cash provided by (used in): Operating activities $25,663 $16,322 $46,117 Investing activities (8,905) (22,700) 2,868 Financing activities (43,794) (9,358) (5,685)Table of Contents Cash received from customers generally corresponds to our net revenues as our customers primarily use credit cards to buy from us causing ourreceivables from these sales transactions to settle quickly. We have payment terms with our fulfillment partners that generally extend beyond the amountof time necessary to collect proceeds from our customers. As a result, following our typically seasonally strong fourth quarter sales, at December 31 ofeach year, our cash, cash equivalents and accounts payable balances normally reach their highest level (other than as a result of cash flows provided byor used in investing and financing activities). However, our accounts payable balance normally declines during the first three months following year-end, which normally results in a decline in our cash and cash equivalents balances from the year-end balance. The seasonality of our business causespayables and accruals to grow significantly in the fourth quarter, and then decrease in the first quarter when they are paid. The $25.7 million of net cash provided by operating activities during the year ended December 31, 2011 was primarily due to a decrease ininventory of $9.1 million from an effort to maintain lower inventory levels and a shift in sales mix, particularly in clothing and shoes, from a directinventory-based model to a fulfillment partner-based model to reduce seasonal inventory risks, an increases in accrued liabilities of $7.0 millionprimarily related to marketing and legal expenses, an increase in deferred revenue of $4.0 million primarily due to continued growth of our Club Oloyalty program and an increase in accounts payable of $2.9 million. The $16.3 million of net cash provided by operating activities during the year ended December 31, 2010 was primarily due to positive net incomeof $13.9 million for the year ended December 31, 2010. Net cash was also provided by increases of deferred revenue of $3.4 million primarily due toour launch of our Club O loyalty program. The cash inflows were offset by cash outflows of $8.7 million due to an increase in inventory and$9.3 million due to a decrease in accounts payable. The increase in inventory was a result of increased purchases of inventory to meet holiday salesdemand and support growth in the business. The decrease in accounts payable balance is due to increased and earlier sales and holiday shipmentsresulting in increased payments to suppliers prior to year-end when compared to the same period in 2009.Cash (used in) provided by investing activities Cash provided by investing activities corresponds with purchases, sales, and maturities of marketable securities and cash expenditures for fixedassets, including internal-use software and website development costs. For the years ended December 31, 2011 and 2010, investing activities resulted innet cash outflows of $8.9 million and $22.7 million, respectively. The $8.9 million used in investing activities during the year ended December 31, 2011 resulted primarily from expenditures for fixed assets of$8.7 million, which largely consisted of software and hardware purchases. The $22.7 million used in investing activities during the year ended December 31, 2010 resulted primarily from expenditures for fixed assets of$20.5 million, which largely consisted of software and hardware purchases for our data warehouse and other data storage infrastructure in order tosupport our growth, and a $1.7 million investment in precious metals in an effort to diversify our investments.Cash used in financing activities For the years ended December 31, 2011 and 2010, financing activities resulted in net cash outflows of $43.8 million and $9.4 million, respectively. Financing activities for the year ended December 31, 2011 resulted in net cash outflows of $43.8 million primarily from $34.6 million used forretirement of long-term debt, $24.9 million used for71Table of Contentsretirement of finance obligations, partially offset by $17.0 million in proceeds from a draw down on our line of credit (which was used for theretirement of long-term debt). Financing activities for the year ended December 31, 2010 resulted in net cash outflows of $9.4 million primarily from $24.9 million used forretirement of long-term debt, partially offset by $16.4 million in proceeds from finance obligations (which were primarily used for retirement of long-term debt) and $1.5 million in proceeds from the exercise of stock options.Redeemable common stock In June 2009, we discovered that we had inadvertently issued 203,737 more shares of our common stock in connection with our 401(k) plan thanhad been registered with the Securities and Exchange Commission for offer in connection with the 401(k) plan. These shares were contributed to orotherwise acquired by participants in the 401(k) plan between August 16, 2006, and June 17, 2009. As a result, certain participants in the 401(k) planmay have had rescission rights relating to the unregistered shares, although we believe that the federal statute of limitations applicable to any suchrescission rights would be one year, and that the statute of limitations had already expired at June 30, 2009 with respect to most of the inadvertentissuances. On August 31, 2009, we entered into a Tolling and Standstill Agreement (the "Tolling Agreement") with the Overstock.com, Inc. EmployeeBenefits Committee (the "Committee") relating to the 401(k) plan. We entered into the Tolling Agreement in order to preserve certain rights, if any, ofplan participants who acquired shares of Overstock common stock in the plan between July 1, 2008 and June 30, 2009 (the "Purchase Period"). InAugust 2010, we made a registered rescission offer to affected participants in the plan who acquired shares of Overstock common stock during thePurchase Period. The rescission offer applied to shares purchased during the Purchase Period at prices ranging from $6.77 per share to $21.17 pershare. On October 6, 2010, our rescission offer expired. As a result of the offer, we repurchased 1,202 shares of common stock for $26,000. OnOctober 14, 2010 we terminated the Tolling Agreement. At December 31, 2011 none of our shares were classified outside stockholder's equity due tothe expiration of potential rescission rights associated with those common shares. At December 31, 2010 approximately 46,000 shares or $570,000 ofour common stock plus interest were classified outside stockholders' equity, respectively.Stock and Debt Repurchase Program We retired $34.6 million of the Senior Notes during the year ended December 31, 2011, for $34.6 million in cash, resulting in a loss of $54,000 onearly extinguishment of debt, net of $77,000 of associated unamortized discount. Of the $34.6 million in Senior Notes retired during the year endedDecember 31, 2011, $10.1 million were held by Chou Associates Management Inc. or an affiliate of Chou ("Chou") and $21.7 million were held byFairfax Financial Holdings Limited or an affiliate of Fairfax ("Fairfax"). Chou and Fairfax are beneficial owners of more than 5% of our common stock.We retired $25.4 million of the Senior Notes during the year ended December 31, 2010 for $24.9 million in cash, resulting in a gain of $346,000 onearly extinguishment of debt, net of $158,000 of associated unamortized discount. As of December 31, 2011 and December 31, 2010, zero and $34.5 million of the Senior Notes, net of debt discount remained outstanding,respectively. During the years ended December 31, 2011 and 2010, we withheld from vesting restricted stock awards a total of 100,000 and 63,000 shares ofour common stock for $1.6 million and $825,000, respectively. The shares withheld represented the minimum tax withholdings upon the vesting ofthose restricted stock award grants to satisfy the minimum tax withholdings owed by the grantee of the restricted stock award grant. None of theseshares were repurchased in the open market.72Table of ContentsContractual obligations and commitments The following table summarizes our contractual obligations as of December 31, 2011 and the effect such obligations and commitments areexpected to have on our liquidity and cash flow in future periods (in thousands): Naming rights During 2011, we entered into a six-year agreement with the Oakland-Alameda County Coliseum Authority ("OACCA") for the right to nameOakland Alameda County Coliseum. Amounts represent annual payments due OACCA for the naming rights and we may terminate this agreement atour sole option, subject to its termination fee.Purchase Obligations The amount of purchase obligations shown above is based on assumptions regarding the legal enforceability against us of purchase orders we hadoutstanding at December 31, 2011. Under different assumptions regarding our rights to cancel our purchase orders or different assumptions regardingthe enforceability of the purchase orders under applicable law, the amount of purchase obligations shown in the table above would be less.Tax Contingencies Our contractual obligations presented above exclude unrecognized tax contingencies, including interest and penalties, of $313,000 for which wecannot make a reasonably reliable estimate of the amount and period of payment. For further information regarding the application of ASC 740-10-5,see the information set forth under Item 15 of Part IV, "Financial Statements—Note 20—Income Taxes," contained in the "Notes to ConsolidatedFinancial Statements" of this Annual Report on Form 10-K.Recommendation Algorithm Development Costs During 2011, we announced two contests offering cash prizes of up to $1.3 million for each contest period to the researcher or research team whocan design and develop a recommendation algorithm which provides a minimum of 1% increase in sales as compared to our existing algorithm. Thecontest periods end March 31, 2012 and September 30, 2012 and the cash prizes, if any, would be awarded at those times.73 Payments Due by Period Contractual Obligations 2012 2013 2014 2015 2016 Thereafter Total Capital leaseobligations 116 3 — — — — 119 Line of credit 17,000 — — — — — 17,000 Interest on line ofcredit 519 — — — — — 519 Operating leases 8,916 8,206 8,404 6,818 1,381 183 33,908 Naming rights 1,236 1,273 1,311 1,351 1,391 — 6,562 Purchase obligations 14,342 — — — — — 14,342 Total contractual cashobligations $42,129 $9,482 $9,715 $8,169 $2,772 $183 $72,450 Amounts of Commitment Expiration Per Period Other Commercial Commitments 2012 2013 2014 2015 2016 Thereafter Total Letters of credit $2,028 $— $— $— $— $— $2,028 Table of ContentsBorrowingsU.S. Bank Financing Agreements We are a party to a Financing Agreement with U.S. Bank National Association ("U.S. Bank") dated December 22, 2009 (as amended to date, the"Financing Agreement"). The maximum credit potentially available under the revolving facility is $20 million. Our obligations under the FinancingAgreement and all related agreements are secured by all or substantially all of our assets, excluding our interest in certain litigation. Subject to certainexceptions, the full amount of the revolving facility is expected to be available to us as long as $20 million in the aggregate is maintained on deposit withU.S. Bank. At December 31, 2011 and at the date of this report we maintained $20 million on deposit with U.S. Bank. The obligation of U.S. Bank tomake advances under the Financing Agreement is subject to the conditions set forth in the Financing Agreement. Our failure to keep at least $20 million on deposit in certain accounts with U.S. Bank would constitute a "triggering event" under the FinancingAgreement. 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 quarterfor 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 noncash-collateralized portion of the facility, as availability would then depend, in part, on the Borrowing Base (as defined in the Financing Agreement). The stated termination date of the Financing Agreement is December 31, 2012. The maximum amount potentially available under the FinancingAgreement is $20 million, limited to $3 million for cash-collateralized letters of credit and other financial accommodations, and $17 million for advancessupported by our non-cash collateral. As permitted by the Financing Agreement, during the year ended December 31, 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 dueDecember 1, 2011. Advances under the Financing Agreement bear interest at one-month LIBOR plus 2.5%. The interest rate for borrowings under the FinancingAgreement was 2.75% at December 31, 2011. We have also entered into an interest rate cap agreement with U.S. Bank with an effective date ofOctober 1, 2011 limiting our exposure for one-month LIBOR at 0.5% for the term of the Financing Agreement. 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 indemnityagreements, (b) create or permit liens, (c) enter into any merger or consolidation or purchase or otherwise acquire all or substantially all of the assets ofanother person or the assets comprising any line of business or business unit of another person, (d) except for permitted acquisitions, purchase thesecurities of, create, invest in, or form any subsidiary or other entity, (e) make loans or advances, (f) purchase, acquire or redeem shares of our capitalstock or other securities, (g) change our capital structure or issue any new class of capital stock, (h) change our business objectives, purposes oroperations in a manner which could reasonably be expected to have a material adverse effect, (i) change our fiscal year, (j) enter into transactions withaffiliates, (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 ofcertain limits or having specified effects, depending in part on whether a triggering event has occurred or would occur, (m) take certain actions regardingour receivables, and (n) take certain actions regarding our inventory. During 2011, we were out of compliance with two covenants and obtained waiversfrom U.S. Bank for these covenant violations.74Table of Contents Amounts outstanding under the Financing Agreement at December 31, 2011 and December 31, 2010 were $17.0 million and zero, respectively,and letters of credit totaling $2.0 million and $2.4 million, respectively, were issued on our behalf collateralized by compensating cash balances held atU.S. Bank, which are included in Restricted cash in the accompanying consolidated balance sheets. At December 31, 2011, we had $20.0 million incompensating cash balances held at U.S. Bank. If we draw on the $20.0 million compensating cash balance, it will constitute a triggering event andresult in additional and more restrictive covenants. Prior to December 27, 2011, we were a party to a Master Lease Agreement and a Financial Covenants Rider and related documents (collectively,the "Master Lease Agreement") dated September 17, 2010 with U.S. Bancorp Equipment Finance, Inc.—Technology Finance Group ("Lessor"), anaffiliate of U.S. Bank National Association. Under the Master Lease Agreement we entered into four separate leases, pursuant to which we sold certaininformation technology hardware ("IT Assets") to Lessor, which were simultaneously leased back for a period of 48 months and financed certainsoftware licenses for a period of 48 months for proceeds totaling $16.4 million. Subsequently, we entered into eleven additional leases; whereby weleased $8.2 million in IT Assets and financed certain software licenses directly from the Lessor. We had the right to repurchase the IT Assets at the endof the 48-month term for $1.00. Payments on the Master Lease Agreement were due monthly. The weighted average effective interest rate under theMaster Lease Agreement was 6.29%. We had accounted for the Master Lease Agreement as a financing transaction and amounts owed are included inFinance Obligations, current and non-current in the consolidated balance sheets. We recorded no gain or loss as a result of entering into thesetransactions. On December 27, 2011, we and the Lessor agreed to terminate the Master Lease Agreement and all related schedules. We paid approximately$20.1 million to Lessor in connection with the amendment and agreement to terminate the Master Lease Agreement, resulting in a $1.2 million loss onearly retirement of debt included in Other income (expense), net in our consolidated statements of operations. As of December 31, 2011 andDecember 31, 2010, zero and $16.1 million of the finance obligations remained outstanding, respectively.U.S. Bank Purchasing Card Agreement We have a commercial purchasing card (the "Purchasing Card") agreement with U.S. Bank. We use the Purchasing Card for business purposepurchasing and must pay it in full each month. At December 31, 2011, $3.4 million was outstanding and $1.6 million was available under thePurchasing Card. At December 31, 2010, $2.7 million was outstanding and $2.3 million was available under the Purchasing Card.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 uswere $116.2 million, net of $3.8 million of initial purchaser's discount and debt issuance costs. The discount and debt issuance costs were beingamortized using the straight-line method which approximates the effective interest method. We recorded amortization of discount and debt issuancecosts related to this offering totaling $77,000, $228,000 and $331,000 during the years ended December 31, 2011, 2010 and 2009, respectively. Intereston 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 ofpayment to any existing and future subordinated indebtedness. We retired all of the remaining $34.6 million of the Senior Notes during the year ended December 31, 2011, for $34.6 million in cash, resulting ina loss of $54,000 on early extinguishment of75Table of Contentsdebt, net of $77,000 of associated unamortized discount. Of the $34.6 million in Senior Notes retired during the year ended December 31, 2011,$10.1 million were held by Chou and $21.7 million were held by Fairfax. Chou and Fairfax are beneficial owners of more than 5% of our commonstock. We retired $25.4 million of the Senior Notes during the year ended December 31, 2010 for $24.9 million in cash, resulting in a gain of $346,000on early extinguishment of debt, net of $158,000 of associated unamortized discount. As of December 31, 2011 and December 31, 2010, zero and $34.5 million of the Senior Notes, net of debt discount remained outstanding,respectively.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 our financial condition,changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that would be material toinvestors.Non-GAAP financial measures Regulation G, Conditions for Use of Non-GAAP Financial Measures, and other SEC regulations regulate the disclosure of certain non-GAAPfinancial information. Contribution (a non-GAAP financial measure) (which we reconcile to "Gross profit" in our statement of operations) consists of gross profit lesssales and marketing expense and reflects an additional way of viewing our results. Contribution Margin is Contribution as a percentage of revenues.When viewed with our GAAP gross profit less sales and marketing expenses, we believe Contribution and Contribution margin provides managementand users of the financial statements information about our ability to cover our operating costs, such as technology and general and administrativeexpenses. Contribution and Contribution Margin are used in addition to and in conjunction with results presented in accordance with GAAP and shouldnot be relied upon to the exclusion of GAAP financial measures. You should review our financial statements and publicly-filed reports in their entiretyand not rely on any single financial measure. The material limitation associated with the use of Contribution is that it is an incomplete measure ofprofitability as it does not include all operating expenses or non-operating income and expenses. Management compensates for these limitations whenusing this measure by looking at other GAAP measures, such as operating income (loss) and net income (loss). For further details on Contribution, see the calculation of this non-GAAP measure below (in thousands):Free Cash Flow Free cash flow (a non-GAAP financial measure) reflects an additional way of viewing our cash flows and liquidity that, when viewed with ourGAAP results, provides a more complete understanding of factors and trends affecting our cash flows and liquidity. Free cash flow, which we reconcileto "Net76 Year ended December 31, 2011 2010 2009 Total revenue $1,054,277 $1,089,873 $876,769 Cost of goods sold 875,189 900,233 712,017 Gross profit 179,088 189,640 164,752 Less: Sales and marketing expense 61,813 61,334 55,549 Contribution $117,275 $128,306 $109,203 Contribution margin 11.1% 11.8% 12.5%Table of Contentscash provided by (used in) operating activities", is cash flows from operations reduced by "Expenditures for fixed assets, including internal-usesoftware and website development." We believe that cash flows from operating activities is an important measure, since it includes both the cash impactof the continuing operations of the business and changes in the balance sheet that impact cash. However, we believe free cash flow is a useful measureto evaluate our business since purchases of fixed assets are a necessary component of ongoing operations and free cash flow measures the amount ofcash we have available for future investment, debt retirement or other changes to our capital structure after we have paid all of our expenses. Therefore,we believe it is important to view free cash flow as a complement to our entire consolidated statements of cash flows as calculated below (in thousands):77 Year ended December 31, 2011 2010 2009 Net cash provided by operating activities $25,663 $16,322 $46,117 Expenditures for fixed assets, including internal-use software andwebsite development (8,741) (20,511) (7,275) Free cash flow $16,922 $(4,189)$38,842 Table of ContentsITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not use derivative financial instruments in our investment portfolio, except for an interest rate cap agreement on our line of credit, and wehave no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents, marketable securities, trade accounts and contractsreceivable, accounts payable and long-term obligations. We consider investments in highly-liquid instruments with a remaining maturity of 90 days orless at the date of purchase to be cash equivalents. Our exposure to market risk for changes in interest rates relates primarily to our short-term investments and short-term obligations; thus,fluctuations in interest rates would not have a material impact on the fair value of these securities. However, the fair values of our investments may besubject to fluctuations due to volatility of the stock market in general, investment-specific circumstances, and changes in general economic conditions. At December 31, 2011, we had $99.0 million in cash and cash equivalents including restricted cash. Hypothetically, an increase or decrease ininterest rates of one hundred basis points would have an estimated impact of $990,000 on our earnings or loss or cash flows of these instruments. At December 31, 2011, we had $17.0 million outstanding under our line of credit, and letters of credit totaling $2.0 million were outstanding underour credit facility. Hypothetically, an increase or decrease in interest rates of one hundred basis points would have an estimated impact of $190,000 onour earnings or loss or cash flows of these instruments. We have entered into an interest rate cap agreement with U.S. Bank with an effective date ofOctober 1, 2011 limiting our exposure for one-month LIBOR at 0.5% for the term of the Financing Agreement.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.78Table of ContentsITEM 9A. CONTROLS AND PROCEDURES (a) Disclosure Controls and Procedures We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934(the "Act" or "Exchange Act"). The term disclosure controls and procedures means controls and other procedures of an issuer that are designed toensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78a et seq.) is recorded,processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure controls and proceduresinclude, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files orsubmits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, orpersons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. We carried out an evaluation required by the Securities Exchange Act of 1934 (the "1934 Act"), under the supervision and with the participation ofour principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures,as defined in Rule 13a-15(e) of the 1934 Act, as of the end of the period covered by this report. Based on this evaluation, our principal executive officerand principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that informationrequired to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized and reported within the timeperiods specified in the SEC's rules and forms and to provide reasonable assurance that such information is accumulated and communicated to ourmanagement, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding requireddisclosure. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Managementdoes not expect, however, that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how welldesigned and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met.Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues andinstances of fraud, if any, within the Company have been detected.(b) Management's Report on Internal Control over Financial Reporting Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined inRules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations,internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of internal controlover financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate. Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2011. In making our assessment ofthe effectiveness of internal control over financial reporting, management used the criteria set forth in Internal Control—Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this assessment, management has concluded that, asof December 31, 2011, our internal control over financial reporting was effective.79Table of Contents Our internal control over financial reporting is designed to provide reasonable assurance of achieving its objectives as specified above.Management does not expect, however, that our internal control over financial reporting will prevent or detect all error and fraud. Any control system,no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that itsobjectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or thatall control issues and instances of fraud, if any, within the Company have been detected. The effectiveness of our internal control over financial reporting as of December 31, 2011 has been audited by KPMG LLP, an independentregistered public accounting firm, as stated in their report which is in Item 9A(c).(c) Independent Registered Public Accounting Firm's Report on Internal Control Over Financial ReportingReport of Independent Registered Public Accounting Firm The Board of Directors and StockholdersOverstock.com, Inc.: We have audited Overstock.com, Inc.'s internal control over financial reporting as of December 31, 2011, based on criteria established in InternalControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Overstock.com Inc.'smanagement is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting (Item 9A(b)). Ourresponsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that amaterial weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit alsoincluded performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis forour opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'sinternal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have amaterial effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.80Table of Contents In our opinion, Overstock.com, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011,based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the TreadwayCommission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidatedbalance sheets of Overstock.com, Inc. and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations,stockholders' equity (deficit) and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2011,and our report dated March 2, 2012 expressed an unqualified opinion on those consolidated financial statements./s/ KPMG LLPSalt Lake City, UtahMarch 2, 2012(d) Changes in Internal Control Over Financial Reporting No change in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934)was identified during the quarter ended December 31, 2011, that has materially affected, or is reasonably likely to materially affect, the Company'sinternal control over financial reporting.ITEM 9B. OTHER INFORMATION As previously reported, on May 4, 2011 we held our 2011 Annual Meeting of Stockholders. We reported the matters submitted to thestockholders at the Annual Meeting and the results of the voting in a Form 8-K filed on May 5, 2011 and amended on May 24, 2011. On January 6,2012, we filed an amendment to the Form 8-K to report that, consistent with our Board's recommendation and consistent with the stockholders' advisoryvote on this matter, we intend to hold future stockholder advisory votes on executive compensation once every three years until the next required voteon the frequency of stockholder votes on executive compensation.81Table of ContentsPART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information regarding our Executive Officers required by Item 10 of Part III is set forth in Item 1 of Part I "Business—Executive Officers." Otherinformation required by Item 10 of Part III, including information regarding our Directors and any material changes to the process by which securityholders may recommend nominees to the Board of Directors will be included in our definitive proxy statement for our 2012 annual meeting ofstockholders, and is incorporated herein by reference. Information relating to compliance with Section 16(a) of the 1934 Act will be set forth in ourdefinitive proxy statement for our 2012 annual meeting of stockholders and is incorporated herein by reference. We have adopted a Code of Business Conduct and Ethics ("Code"), which is applicable to all employees of the Company, including the principalexecutive officer, principal financial officer, and principal accounting officer. The Code includes provisions that are specifically applicable to our seniorfinancial officers. We intend to disclose any amendments to these provisions and any waivers from any of these provisions granted to our principalexecutive officer, principal financial officer or principal accounting officer on our Website, www.overstock.com. We will provide a copy of the relevantportion to any person without any charge upon request in writing addressed to Overstock.com. Attn: Investor Relations, 6350 South 3000 East, SaltLake City, UT 84121.ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to our definitive proxy statement for the 2012 annual meeting of stockholders.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND RELATED STOCKHOLDER MATTERS The information required by this Item is incorporated by reference to our definitive proxy statement for the 2012 annual meeting of stockholders.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this Item is incorporated by reference to our definitive proxy statement for the 2012 annual meeting of stockholders.ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this Item is incorporated by reference to our definitive proxy statement for the 2012 annual meeting of stockholders.82Table of ContentsPART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 1. Financial StatementsINDEX TO CONSOLIDATED FINANCIAL STATEMENTS 2. Financial Statement Schedule Schedule II Valuation and Qualifying Accounts listed in (1) above is included herein. Schedules other than those listed above have been omitted asthey are either not required, not applicable, or the information has otherwise been shown in the consolidated financial statements or notes thereto.3. Exhibits The exhibits listed below are filed as part of, or incorporated by reference into, this Form 10-K.Report of Independent Registered Public Accounting Firm F-1 Consolidated Balance Sheets F-2 Consolidated Statements of Operations F-3 Consolidated Statement of Stockholders' Equity (Deficit) and Comprehensive Income (Loss) F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-6 Schedule II Valuation Qualifying Accounts F-44 Exhibit Number Description of Document 3.1(a)Amended and Restated Certificate of Incorporation 3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to our Report on Form 8-K(File No. 000-49799) filed on February 5, 2009). 4.1(b)Form of specimen common stock certificate. 10.1(b)Form of Indemnification Agreement between Overstock.com, Inc. and each of its directors andofficers. 10.3 Form of agreements under 2002 Stock Option Plan, as amended (incorporated by reference toExhibit 10.5 to our Registration Statement on Form S-1 (File No. 333-83728), which became effectiveon May 29, 2002). 10.4 Lease Agreement dated January 23, 2002 between Overstock.com, Inc. and Holladay Building EastL.L.C. (incorporated by reference to Exhibit 10.8 to our Registration Statement on Form S-1 (FileNo. 333-83728), which became effective on May 29, 2002). 10.5 Intellectual Property Assignment Agreement with Douglas Greene dated February 28, 2002(incorporated by reference to Exhibit 10.14 to our Registration Statement on Form S-1 (File No. 333-83728), which became effective on May 29, 2002). 10.6 Amendment No. 1, dated April 29, 2002 to Intellectual Property Assignment Agreement datedFebruary 28, 2002 by and between Overstock.com, Inc. and Douglas Greene. (incorporated byreference to Exhibit 10.18 to our Registration Statement on Form S-1 (File No. 333-83728), whichbecame effective on May 29, 2002). 10.7 Sublease Agreement by and between Overstock.com, Inc., Old Mill Technology Center, LLC, andOld Mill Building LLC (incorporated by reference to Exhibit 99.1 to our Report on Form 8-K/A (FileNo. 000-49799) filed on December 7, 2004).83 Table of ContentsExhibit Number Description of Document 10.8 Sublease Agreement by and between Overstock.com, Inc., Document Controls Systems, Inc., and OldMill Building LLC (incorporated by reference to Exhibit 99.2 to our Report on Form 8-K/A (FileNo. 000-49799) filed on December 7, 2004). 10.9 Sublease Agreement by and between Overstock.com, Inc., Information Technology International, Inc.,and Old Mill Building LLC (incorporated by reference to Exhibit 99.3 to our Report on Form 8-K/Afiled on December 7, 2004). 10.10 Old Mill Corporate Center Fourth Amendment to the Lease Agreement (incorporated by reference toExhibit 99.4 to our Report on Form 8-K/A filed on December 7, 2004). 10.11 Co-location Center Agreement (incorporated by reference to Exhibit 99.5 to our Report on Form 8-K/A (File No. 000-49799) filed on December 7, 2004). 10.12 2002 Stock Option Plan, as amended (incorporated by reference to Exhibit 99.6 to our Report onForm 8-K (File No. 000-49799) filed May 7, 2004) 10.13 2005 Equity Incentive Plan (incorporated by reference to Appendix A to Overstock.com, Inc.'sdefinitive proxy statement (File No. 000-49799) filed with the SEC on March 28, 2008. 10.14 Form of Restricted Stock Unit Grant Notice and Restricted Stock Agreement under the 2005 EquityIncentive Plan (incorporated by reference to Exhibit 10.1 to our Report on Form 8-K (File No. 000-49799) filed on January 15, 2008) 10.15 Lease Agreement with Natomas Meadows, LLC dated April 8, 2008 (incorporated by reference toExhibit 10.1 to our Report on Form 8-K filed (File No. 000-49799) on April 11, 2008). 10.16 First Amendment to Lease amending the terms of the Lease Agreement with Natomas Meadows, LLCdated December 16, 2008 (incorporated by reference to Exhibit 10.1 to our Report on Form 8-K (FileNo. 000-49799) filed on December 17, 2008). 10.17 Offer Letter to Stephen J. Chesnut dated December 18, 2008 (incorporated by reference to exhibit 10.1to our Report on Form 8-K (File No. 000-49799) dated January 5, 2009). 10.18 Lease Termination Agreement with Landmark Building One, LLC dated March 20, 2009(incorporated by reference to exhibit 10.1 to our Report on Form 8-K (File No. 000-49799) datedMarch 23, 2009). 10.19 Financing Agreement with U.S. Bank National Association dated as of December 22, 2009(incorporated by reference to exhibit 10.1 to our Report on Form 8-K (File No. 000-49799) datedDecember 23, 2009). 10.20 Security Agreement with U.S. Bank National Association dated as of December 22, 2009(incorporated by reference to exhibit 10.2 to our Report on Form 8-K (File No. 000-49799) datedDecember 23, 2009). 10.21 Consent and Waiver with U.S. Bank National Association dated as of September 17, 2010(incorporated by reference to exhibit 10.2 to our Report on Form 8-K (File No. 000-49799) datedSeptember 21, 2010). 10.22 First Amendment to Financing Agreement and Waiver dated as of August 19, 2011 (incorporated byreference to exhibit 10.1 to our Report on Form 8-K filed August 22, 2011 (File No. 000-49799) 84 10.23 Revolving Note (Regular Advances) dated as of August 19, 2011 (incorporated by reference toexhibit 10.2 to our Report on Form 8-K filed August 22, 2011 (File No. 000-49799)Table of ContentsExhibit Number Description of Document 10.24 Revolving Note (Cash Secured Advances) dated as of August 19, 2011 (incorporated by reference toexhibit 10.3 to our Report on Form 8-K filed August 22, 2011 (File No. 000-49799) 10.25 Letter agreement dated December 27, 2011 terminating the Master Lease Agreement datedSeptember 17, 2010 with U.S. Bancorp Equipment Finance, Inc.—Technology Finance Group(incorporated by reference to exhibit 10.1 to our Report on Form 8-K filed December 28, 2011 (FileNo. 000-49799) 10.26 Second Amendment to Finance Agreement and Waiver dated February 15, 2012 betweenOverstock.com, Inc. and U.S. Bank National Association (incorporated by reference to exhibit 10.1 toour Report on Form 8-K filed February 17, 2012 (File No. 000-497990)) *10.27(c)Summary of unwritten compensation arrangements with Directors. *21 Subsidiaries of the Registrant. *23.1 Consent of Independent Registered Public Accounting Firm 24.1 Powers of Attorney (see signature page) *31.1 Exhibit 31 Certification of Chief Executive Officer *31.2 Exhibit 31 Certification of Chief Financial Officer *32.1 Section 1350 Certification of Chief Executive Officer *32.2 Section 1350 Certification of Chief Financial Officer 101(d)Attached as Exhibit 101 to this report are the following documents formatted in XBRL (ExtensibleBusiness Reporting Language): (i) Consolidated Balance Sheets at December 31, 2011 and 2010;(ii) Consolidated Statement of Operations for the years ended December 31 2011, 2010, and 2009;(iii) Consolidated Statements of Stockholder's Equity (Deficit) and Comprehensive Income (Loss) forthe years ended December 31, 2011, 2010, and 2009; (iv) Consolidated Statements of Cash Flows forthe years ended December 31, 2011, 2010, and 2009; and (v) Notes to Consolidated FinancialStatements. Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactivedata file is deemed not filed or part of a registration statement or prospectus for purposes ofsections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of theSecurities and Exchange Act of 1934, and otherwise is not subject to liability under these sections.(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), which became effective on May 29, 2002. (c)Management contract or compensatory plan or arrangement. (d)Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement orprospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 andotherwise are not subject to liability under these sections 85*Filed herewith.Table of ContentsSIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this Form 10-K to be signed on itsbehalf by the undersigned, thereunto duly authorized, on March 2, 2012. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Patrick M.Byrne, Jonathan E. Johnson III and Stephen J. Chesnut, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and allcapacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connectiontherewith, with the Securities and Exchange Commission, hereby ratifying and conforming all that said attorney-in-fact, or his or their substitute orsubstitutes, may do or cause to be done by virtue hereof.86 OVERSTOCK.COM, INC. By: /s/ PATRICK M. BYRNEPatrick M. ByrneChief Executive OfficerSignature Title Date /s/ PATRICK M. BYRNEPatrick M. Byrne Chief Executive Officer (Principal ExecutiveOfficer), Chairman of the Board March 2, 2012/s/ STEPHEN J. CHESNUTStephen J. Chesnut Senior Vice President, Finance and RiskManagement (Principal Financial Officer andPrincipal Accounting Officer) March 2, 2012/s/ STORMY D. SIMONStormy D. Simon Senior Vice President, Customer and PartnerCare and Director March 2, 2012/s/ ALLISON H. ABRAHAMAllison H. Abraham Director March 2, 2012/s/ BARCLAY F. CORBUSBarclay F. Corbus Director March 2, 2012Table of Contents87Signature Title Date /s/ JOSEPH J. TABACCO, JR.Joseph J. Tabacco, Jr. Director March 2, 2012/s/ SAMUEL A. MITCHELLSamuel A. Mitchell Director March 2, 2012Table of ContentsINDEX TO CONSOLIDATED FINANCIAL STATEMENTS 88Report of Independent Registered Public Accounting Firm F-1Consolidated Balance Sheets F-2Consolidated Statements of Operations F-3Consolidated Statement of Stockholders' Equity (Deficit) and Comprehensive Income (Loss) F-4Consolidated Statements of Cash Flows F-5Notes to Consolidated Financial Statements F-6Schedule II Valuation Qualifying Accounts F-44Table of ContentsReport of Independent Registered Public Accounting Firm The Board of Directors and StockholdersOverstock.com, Inc.: We have audited the accompanying consolidated balance sheets of Overstock.com, Inc. and subsidiaries as of December 31, 2011 and 2010, andthe related consolidated statements of operations, stockholders' equity (deficit) and comprehensive income (loss), and cash flows for each of the years inthe three-year period ended December 31, 2011. In connection with our audits of the consolidated financial statements, we also have audited financialstatement schedule II. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management.Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessingthe accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Webelieve that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position ofOverstock.com, Inc. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years inthe three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the relatedfinancial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all materialrespects, the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),Overstock.com, Inc.'s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 2, 2012expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting./s/ KPMG LLPSalt Lake City, UtahMarch 2, 2012F-1Table of ContentsOverstock.com, Inc. Consolidated Balance Sheets (in thousands) December 31,2011 December 31,2010 Assets Current assets: Cash and cash equivalents $96,985 $124,021 Restricted cash 2,036 2,542 Accounts receivable, net 13,501 13,560 Inventories, net 22,993 32,114 Prepaid inventories, net 1,027 2,082 Prepaids and other assets 12,651 11,651 Total current assets 149,193 185,970 Fixed assets, net 25,322 27,800 Goodwill 2,784 2,784 Other long-term assets, net 2,260 1,405 Total assets $179,559 $217,959 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $70,332 $67,311 Accrued liabilities 47,902 40,751 Deferred revenue 27,978 24,027 Convertible senior notes, net of debt discount—$0 and $141 — 34,484 Line of credit 17,000 — Finance obligations, current — 3,922 Capital lease obligations, current 110 729 Total current liabilities 163,322 171,224 Capital lease obligations, non-current 2 113 Finance obligations, non-current — 12,219 Other long-term liabilities 2,998 3,175 Total liabilities 166,322 186,731 Commitments and contingencies (Note 13) Redeemable common stock, $0.0001 par value: Outstanding—0 and 46 — 570 Stockholders' equity: Preferred stock, $0.0001 par value: Authorized shares—5,000 Issued and outstanding shares—none — — Common stock, $0.0001 par value Authorized shares—100,000 Issued shares—26,241 and 25,877 Outstanding shares—23,279 and 23,015 2 2 Additional paid-in capital 353,368 349,747 Accumulated deficit (261,765) (242,327)Treasury stock: Shares at cost—2,962 and 2,862 (78,368) (76,764) Total stockholders' equity 13,237 30,658  See accompanying notes to consolidated financial statements.F-2Total liabilities and stockholders' equity $179,559 $217,959 Table of ContentsOverstock.com, Inc. Consolidated Statements of Operations (in thousands, except per share data) See accompanying notes to consolidated financial statements. Year ended December 31 2011 2010 2009 Revenue, net Direct $163,609 $209,646 $150,901 Fulfillment partner 890,668 880,227 725,868 Total net revenue 1,054,277 1,089,873 876,769 Cost of goods sold Direct(1) 149,660 187,124 130,890 Fulfillment partner 725,529 713,109 581,127 Total cost of goods sold 875,189 900,233 712,017 Gross profit 179,088 189,640 164,752 Operating expenses: Sales and marketing(1) 61,813 61,334 55,549 Technology(1) 67,043 58,260 52,336 General and administrative(1) 67,766 55,650 48,906 Restructuring — (569) (66) Total operating expenses 196,622 174,675 156,725 Operating income (loss) (17,534) 14,965 8,027 Interest income 161 157 170 Interest expense (2,485) (2,962) (3,470)Other income, net 278 2,088 3,277 Income (loss) before income taxes (19,580) 14,248 8,004 Provision (benefit) for income taxes (142) 359 257 Net income (loss) (19,438) 13,889 7,747 Deemed dividend related to redeemable common stock (12) (112) (48) Net income (loss) attributable to common shares $(19,450)$13,777 $7,699 Net income (loss) per common share—basic: Net income (loss) attributable to common shares—basic $(0.84)$0.60 $0.34 Weighted average common shares outstanding—basic 23,259 23,019 22,821 Net income (loss) per common share—diluted: Net income (loss) attributable to common shares—diluted $(0.84)$0.59 $0.33 Weighted average common shares outstanding—diluted 23,259 23,366 23,067 (1)Includes stock-based compensation as follows (Note 17):Cost of goods sold—direct $193 $212 $167 Sales and marketing 377 608 634 Technology 628 1,071 961 General and administrative 1,853 3,165 3,023 Total $3,051 $5,056 $4,785 F-3Table of ContentsOverstock.com, Inc. Consolidated Statements of Stockholders' Equity (Deficit)and Comprehensive Income (Loss) (in thousands) Common stock Treasury stock AccumulatedOtherComprehensiveIncome (loss) AdditionalPaid-inCapital AccumulatedDeficit Shares Amount Shares Amount Total Balances atDecember 31,2008 25,438 $2 $337,707 $(263,333) 2,793 $(76,670)$48 $(2,246) Stock-basedcompensation toemployees anddirectors — — 4,775 — — — — 4,775 Stock-basedcompensation toconsultants inexchange forservices — — 10 — — — — 10 Common stockissued uponvesting ofrestricted stock 110 — — — — — — — Exercise of stockoptions 2 — 29 — — — — 29 Purchase of treasurystock — — — — 36 (340) — (340)Treasury stockissued for 401(k)matchingcontributions — — — (470) (22) 824 — 354 Issuance ofredeemablecommon stock(Note 15) (39) — (400) — — — — (400)Lapse of rescissionrights ofredeemablecommon stock(Note 15) 72 — 967 — — — — 967 Deemed dividendrelated toredeemablecommon stock(Note 15) — (48) — — — — (48)Comprehensiveincome : Net income — — — 7,747 — — — 7,747 Reclassificationadjustmentincluded in netincome — — — — — — (48) (48) Totalcomprehensiveincome — — — — — — — 7,699 Balances atDecember 31,2009 25,583 $2 $343,040 $(256,056) 2,807 $(76,186)$— $10,800 Exercise of stockoptions 90 1,503 1,503 Stock-basedcompensation toemployees anddirectors — — 5,056 — — — — 5,056 Common stockissued uponvesting of See accompanying notes to consolidated financial statementsF-4restricted stock 185 — — — — — — — Purchase of treasurystock — — — — 63 (825) — (825)Treasury stockissued for 401(k)matchingcontributions — — — (160) (7) 247 — 87 Redeemablecommon stockrepurchased underrescission offer 1 — — — (1) — — — Lapse of rescissionrights ofredeemablecommon stock(Note 15) 18 — 260 — — — — 260 Deemed dividendrelated toredeemablecommon stock(Note 15) — — (112) — — — — (112)Comprehensiveincome: Net income — — — 13,889 — — — 13,889 Totalcomprehensiveincome — — — — — — — 13,889 Balances atDecember 31,2010 25,877 $2 $349,747 $(242,327) 2,862 $(76,764)$— $30,658 Stock-basedcompensation toemployees anddirectors — — 3,051 — — — — 3,051 Common stockissued uponvesting ofrestricted stock 318 — — — — — — — Purchase of treasurystock — — — — 100 (1,604) — (1,604)Lapse of rescissionrights ofredeemablecommon stock(Note 15) 46 — 582 — — — — 582 Deemed dividendrelated toredeemablecommon stock(Note 15) — — (12) — — — — (12)Comprehensiveincome: Net loss — — — (19,438) — — — (19,438) Totalcomprehensiveloss — — — — — — — (19,438) Balance atDecember 31,2011 26,241 $2 $353,368 $(261,765) 2,962 $(78,368)$— $13,237 Table of ContentsOverstock.com, Inc. Consolidated Statements of Cash Flows (in thousands) Year ended December 31 2011 2010 2009 Cash flows from operating activities: Net income (loss) $(19,438)$13,889 $7,747 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 16,350 14,580 12,883 Realized loss on marketable securities — — 48 Loss on disposition of fixed assets — — 183 Stock-based compensation to employees and directors 3,051 5,056 4,775 Stock-based compensation to consultants for services — — 10 Amortization of debt discount and deferred loan costs 127 391 331 (Gain) loss from early extinguishment of debt 1,253 (346) (2,810)Restructuring reversals — (569) (66)Changes in operating assets and liabilities: Restricted cash 506 1,872 (152)Accounts receivable, net 59 (1,920) (4,540)Inventories, net 9,121 (8,739) 1,344 Prepaid inventories, net 1,055 797 (2,118)Prepaids and other assets (456) 368 (604)Other long-term assets, net (160) (215) (120)Accounts payable 2,944 (9,315) 18,642 Accrued liabilities 6,952 (2,575) 9,131 Deferred revenue 3,951 3,362 1,433 Other long-term liabilities 348 (314) — Net cash provided by operating activities 25,663 16,322 46,117 Cash flows from investing activities: Purchases of marketable securities (160) (136) — Purchases of intangible assets (4) (396) — Sale of marketable securities prior to maturity — — 8,893 Investment in precious metals — (1,657) — Expenditures for fixed assets, including internal-use software and website development (8,741) (20,511) (7,275)Collection of note receivable — — 1,250 Net cash provided by (used in) investing activities (8,905) (22,700) 2,868 Cash flows from financing activities: Payments on capital lease obligations (730) (490) (348)Drawdowns on line of credit 17,000 — 1,612 Payments on line of credit — — (1,612)Capitalized financing costs (140) — (245)Proceeds from finance obligations 1,429 16,383 — Payments on finance obligations (24,918) (841) — Paydown on direct financing arrangement (216) (197) (218)Payments to retire convertible senior notes (34,615) (24,865) (4,563)Purchase of redeemable stock — (26) — Purchase of treasury stock (1,604) (825) (340)Exercise of stock options — 1,503 29 Net cash used in financing activities (43,794) (9,358) (5,685) Net increase (decrease) in cash and cash equivalents (27,036) (15,736) 43,300 Cash and cash equivalents, beginning of period 124,021 139,757 96,457 Cash and cash equivalents, end of period $96,985 $124,021 $139,757 Supplemental disclosures of cash flow information: Cash paid during the year: Interest paid $2,369 $2,534 $3,006 Taxes paid 260 187 — Non-cash investing and financing activities: Fixed assets, including internal-use software and website development, costs financed through accountspayable and accrued liabilities $(33)$795 $— Equipment acquired under finance obligations 5,077 599 — Equipment and software acquired under capital lease obligations — 6 1,632 Issuance of redeemable common stock — — 400 Lapse of rescission rights of redeemable stock 582 260 967 Issuance of common stock from treasury for 401(k) matching contribution — 87 354 See accompanying notes to consolidated financial statements.F-5Table of ContentsOverstock.com, Inc. Notes to Consolidated Financial Statements 1. BUSINESS AND ORGANIZATION As used herein, "Overstock," "Overstock.com," "O.co," "we," "our" and similar terms include Overstock.com, Inc. and its subsidiaries, unless thecontext indicates otherwise. We were formed on May 5, 1997 as D2-Discounts Direct, a limited liability company. On December 30, 1998, we werereorganized as a C Corporation in the State of Utah and reincorporated in Delaware in May 2002. On October 25, 1999, we changed our name toOverstock.com, Inc. We are an online retailer offering discount brand name, non-brand name and closeout merchandise, including bed-and-bath goods, home décor,kitchenware, furniture, watches and jewelry, apparel, electronics and computers, sporting goods, and designer accessories, among other products. Wealso sell hundreds of thousands of best seller and current run books, magazines, CDs, DVDs and video games ("BMMG"). We sell these productsthrough our Internet websites located at www.overstock.com, www.o.co and www.o.biz ("Website"). Although our three websites are located atdifferent domain addresses, the technology and equipment and processes supporting the Website and the process of order fulfillment described hereinare the same for all three websites.2. ACCOUNTING POLICIESPrinciples of consolidation The accompanying consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. All intercompanyaccount balances and transactions have been eliminated in consolidation.Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires estimates and assumptions that affectthe reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the consolidated financialstatements and accompanying notes. Estimates are used for, but not limited to, investment valuation, receivables valuation, revenue recognition, salesreturns, incentive discount offers, inventory valuation, depreciable lives of fixed assets and internally-developed software, goodwill valuation, long livedasset valuation, income taxes, stock-based compensation, performance-based compensation, restructuring liabilities and contingencies. Actual resultscould differ materially from those estimates.Cash equivalents We classify all highly liquid instruments, including money market funds with a remaining maturity of three months or less at the time of purchase,as cash equivalents. Cash equivalents as of December 31, 2011 and December 31, 2010 were $81.2 million and $121.8 million, respectively.Restricted cash We consider cash that is legally restricted and cash that is held as a compensating balance for letter of credit arrangements as restricted cash. AtDecember 31, 2011 and 2010, restricted cash was $2.0 million and $2.5 million, respectively, and was held primarily in money market accounts.F-6Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)Fair value of financial instruments Our financial instruments, including cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities are carried at cost, whichapproximates their fair value because of the short-term maturity of these instruments. We are party to a Financing Agreement with U.S. Bank datedDecember 22, 2009 (as amended to date, the "Financing Agreement"). Our Financing Agreement is also carried at face value, which approximates itsfair value due to its variable interest rate. We account for our assets and liabilities using a hierarchy of valuation techniques based on whether the inputs to those valuation techniques areobservable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our marketassumptions. These two types of inputs have created the following fair-value hierarchy:•Level 1—Quoted prices for identical instruments in active markets; •Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are notactive, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and •Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers areunobservable. This hierarchy requires us to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. The fair value of these financial instruments was determined using the following levels of inputs as of December 31, 2011 (in thousands):F-7 Fair Value Measurements atDecember 31, 2011: Total Level 1 Level 2 Level 3 Assets: Cash equivalents and restricted cash—Money market mutual funds $83,195 $83,195 $— $— Trading securities held in a "rabbi trust"(1) 302 302 Total assets $83,497 $83,497 $— $— Liabilities: Deferred compensation accrual "rabbi trust"(3) $302 $302 $— $— Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued) The fair value of these financial instruments was determined using the following levels of inputs as of December 31, 2010 (in thousands): The estimated fair value of our 3.75% Convertible Senior Notes due 2011 ("Senior Notes") outstanding at December 31, 2010 was $33.2 millionon a carrying value of $34.5 million. The fair value of the Senior Notes was derived using a convertible debt pricing model with observable marketinputs, which include stock price, dividend payments, borrowing costs, equity volatility, interest rates and interest spread. On September 21, 2011 weretired all of the outstanding Senior Notes (Note 12—Borrowings).Restricted investments In December 2009, we implemented a Non Qualified Deferred Compensation Plan (the "NQDC Plan") for senior management (Note 18—Employee Retirement Plan). Deferred compensation amounts are invested in mutual funds held in a "rabbi trust" and are restricted for payment to theparticipants of the NQDC Plan. We account for our investments held in the trust in accordance with Accounting Standards Codification ("ASC")No. 320 "Investments—Debt and Equity Securities". The investments held in the trust are classified as trading securities. The fair value of theinvestments held in the trust totaled $302,000 and $148,000 at December 31, 2011 and December 31, 2010, respectively, and are included in Othercurrent and long-term assets in the consolidated balance sheets. Our gains and losses on these investments were immaterial for the years endedDecember 31, 2011 and 2010.F-8 Fair Value Measurements atDecember 31, 2010: Total Level 1 Level 2 Level 3 Assets: Cash equivalents and restricted cash—Money market mutual funds $124,313 $124,313 $— $— Trading securities held in a "rabbi trust"(1) 148 148 Total assets $124,461 $124,461 $— $— Liabilities: Restructuring accrual(2) $1,797 $— $— $1,797 Deferred compensation accrual "rabbi trust"(3) 154 154 — — Total liabilities $1,951 $154 $— $1,797 (1)—Trading securities held in a rabbi trust are included in Other current and long-term assets in the consolidated balance sheets(Note 18—Employee Retirement Plan). (2)—The fair value was determined based on the income approach, in which we used internal cash flow projections over the life ofthe underlying lease agreements discounted based on a credit adjusted risk-free rate of return. See the roll forward related to therestructuring accrual at Note 3—Restructuring Expense. (3)—Non Qualified deferred compensation for rabbi trust is included in Accrued liabilities and Other long-term liabilities in theconsolidated balance sheets (Note 18—Employee Retirement Plan).Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)Accounts receivable Accounts receivable consist primarily of trade amounts due from customers and from uncleared credit card transactions at period end. Accountsreceivable are recorded at invoiced amounts and do not bear interest.Allowance for doubtful accounts From time to time, we grant credit to certain of our business customers on normal credit terms (typically 30 days). We perform credit evaluationsof our business customers' financial condition and payment history and maintain an allowance for doubtful accounts receivable based upon ourhistorical collection experience and expected collectability of accounts receivable. The allowance for doubtful accounts receivable was $574,000 and$2.0 million at December 31, 2011 and December 31, 2010, respectively. The decrease in the allowance for doubtful accounts was primarily due towrite-offs of accounts receivable during the year ended December 31, 2011, which had no significant effect on results of operations for the period asmost of the items had been previously reserved.Concentration of credit risk Cash equivalents include short-term, highly liquid instruments with maturities at date of purchase of three months or less. At December 31, 2011and 2010, two banks held the majority of our cash and cash equivalents. We do not believe that, as a result of this concentration, we are subject to anyunusual financial risk beyond the normal risk associated with commercial banking relationships. Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash equivalents and receivables. Weinvest our cash primarily in money market securities which are uninsured. Our accounts receivable are derived primarily from revenue earned from customers located in the United States. We maintain an allowance fordoubtful accounts based upon the expected collectability of accounts receivable.Valuation of inventories Inventories, consisting of merchandise purchased for resale, are accounted for using a standard costing system which approximates the first-in-first-out ("FIFO") method of accounting, and are valued at the lower of cost or market. We write down our inventory for estimated obsolescence and tolower of cost or 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. Once established, the original cost of the inventory less the relatedinventory allowance represents the new cost basis of such products.Prepaid inventories, net Prepaid inventories represent inventories paid for in advance of receipt. Prepaid inventories at December 31, 2011 and 2010 were $1.0 million and$2.1 million respectively.F-9Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)Prepaids and other assets Prepaids and other assets represent expenses paid prior to receipt of the related goods or services, including advertising, maintenance, packaging,insurance, and other miscellaneous costs, as well as investments in precious metals. Total prepaids and other assets at December 31, 2011 and 2010were $12.7 million and $11.7 million, respectively.Fixed assets Fixed assets, which include assets such as technology infrastructure, internal-use software, website development, furniture and fixtures andleasehold improvements, are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets or theterm of the related lease, whichever is shorter, as follows: Leasehold improvements are amortized over the shorter of the term of the related leases or estimated useful lives. Depreciation and amortization expense is classified within the corresponding operating expense categories on the consolidated statements ofoperations as follows (in thousands): Upon sale or retirement of assets, cost and related accumulated depreciation and amortization are removed from the balance sheet and the resultinggain or loss is reflected in the consolidated statements of operations.Internal-use software and website development Included in fixed assets is the capitalized cost of internal-use software and website development, including software used to upgrade and enhanceour Website and processes supporting our business. We capitalize costs incurred during the application development stage of internal-use software andamortize these costs over the estimated useful life of two to three years. Costs incurred related to design or maintenance of internal-use software areexpensed as incurred. During the years ended December 31, 2011 and 2010, we capitalized $9.6 million and $8.2 million, respectively, of costs associated with internal-use software and website development, both developedF-10 Life (years) Computer software 2 - 3 Computer hardware 3 Furniture and equipment 3 - 5 Year ended December 31, 2011 2010 2009 Cost of goods sold—direct $714 $1,179 $1,264 Technology 14,433 12,489 10,943 General and administrative 1,203 912 676 Total depreciation and amortization, including internal-use software and websitedevelopment $16,350 $14,580 $12,883 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)internally and acquired externally. Amortization of costs associated with internal-use software and website development was $8.0 million and$6.7 million for those respective periods.Leases We account for lease agreements as either operating or capital leases depending on certain defined criteria. In certain of our lease agreements, wereceive rent holidays and other incentives. We recognize lease costs on a straight-line basis without regard to deferred payment terms, such as rentholidays that defer the commencement date of required payments. Additionally, tenant improvement allowances are amortized as a reduction in rentexpense over the term of the lease. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the life ofthe lease, without assuming renewal features, if any, are exercised.Treasury stock We account for treasury stock under the cost method and include treasury stock as a component of stockholders' equity (deficit).Other long-term assets Other long-term assets include long-term prepaid expenses and deposits.Impairment of long-lived assets We review property and equipment and other long-lived assets for impairment whenever events or changes in circumstances indicate that thecarrying amount of an asset group may not be recoverable. Recoverability is measured by comparison of the assets' carrying amount to futureundiscounted net cash flows the asset group is 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 such asset groupis considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fairvalues. There were no impairments to long-lived assets recorded during the years ended December 31, 2011, 2010, and 2009.Goodwill Goodwill represents the excess of the purchase price paid over the fair value of the tangible net assets acquired in business combinations. Goodwill is not amortized but is tested for impairment at least annually. When evaluating whether goodwill is impaired, we compare the fair valueof the reporting unit to which the goodwill is assigned to its carrying amount. If the carrying amount exceeds its fair value, then the amount of theimpairment loss must be measured. The impairment loss, if any, is calculated by comparing the implied fair value of the goodwill to its carrying amount.In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to the other assets and liabilities within the reporting unitbased on estimated fair value. The excess of the fair value of a reporting unit over the amount allocated to its other assets and liabilities is the implied fairvalue of goodwill. An impairment loss is recognized when the carrying amount of goodwill exceeds its implied fair value.F-11Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued) In accordance with this guidance, we test for impairment of goodwill in the fourth quarter or when we deem that a triggering event has occurred.Goodwill totaled $2.8 million at December 31, 2011 and 2010. There were no impairments to goodwill recorded during the years ended December 31,2011, 2010, and 2009.Revenue recognition We derive our revenue primarily from two sources: direct revenue and fulfillment partner revenue, including listing fees and commissions collectedfrom products being listed and sold through the Auctions tab, which we removed from our site in July 2011, advertisement revenue derived from ourreal estate listing business, which we removed from our site in June 2011, from our cars listing business, and from advertising on our shopping, traveland insurance pages. We have organized our operations into two principal segments based on the primary source of revenue: direct revenue andfulfillment partner revenue (see Note 22 "Business Segments"). Revenue is recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery hasoccurred or the service has been provided; (3) the selling price or fee revenue earned is fixed or determinable; and (4) collection of the resultingreceivable is reasonably assured. Revenue related to merchandise sales is recognized upon delivery to our customers. As we ship high volumes ofpackages through multiple carriers, it is not practical for us to track the actual delivery date of each shipment. Therefore, we use estimates to determinewhich shipments are delivered and, therefore, recognized as revenue at the end of the period. Our delivery date estimates are based on average shippingtransit times, which are calculated using the following factors: (i) the type of shipping carrier (as carriers have different in-transit times); (ii) thefulfillment source (either our warehouses or those of our fulfillment partners); (iii) the delivery destination; and (iv) actual transit time experience, whichshows that delivery date is typically one to eight business days from the date of shipment. We review and update our estimates on a quarterly basis based on our actual transit time experience. However, actual shipping times may differfrom our estimates. We evaluate the criteria outlined in ASC Topic 605-45, Principal Agent Considerations, in determining whether it is appropriate to record thegross amount of product sales and related costs or the net amount earned as commissions. When we are the primary obligor in a transaction, are subjectto inventory risk, have latitude in establishing prices and selecting suppliers, or have several but not all of these indicators, revenue is recorded gross. Ifwe are not the primary obligor in the transaction and amounts earned are determined using a fixed percentage, revenue is recorded on a net basis.Currently, the majority of both direct revenue and fulfillment partner revenue is recorded on a gross basis, as we are the primary obligor. We presentrevenue net of sales taxes. We periodically provide incentive offers to our customers to encourage purchases. Such offers include current discount offers, such as percentagediscounts off current purchases and other similar offers, which, when used by customers, are treated as a reduction of revenue. Based upon our historical experience, revenue typically increases during the fourth quarter because of the holiday retail season.F-12Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)Direct revenue Direct revenue is derived from merchandise sales to individual consumers and businesses that are fulfilled from our leased warehouses. Directrevenue comes from sales that occur primarily through our Website, but may also occur through offline channels.Fulfillment partner revenue Fulfillment partner revenue is derived from merchandise sales through our Website which fulfillment partners ship directly to consumers andbusinesses from warehouses maintained by our fulfillment partners. We operate an online site for listing cars for sale as a part of our Website. The cars listing service allows dealers to list vehicles for sale and allowsbuyers to review vehicle descriptions, post offers to purchase, and provides the means for purchasers to contact sellers for further information andnegotiations on the purchase of an advertised vehicle. Revenue from the cars listing business is included in the fulfillment partner segment on a netbasis. We offer a consignment service to suppliers where the suppliers' merchandise is stored in and shipped from our leased warehouses. We pay theconsignment supplier upon sale of the consigned merchandise to the consumer. Revenue from consignment service to suppliers is included infulfillment partner segment on a gross basis. In April 2011, we again began operating a travel shopping site as part of our Website where customers can purchase discount travel packages,flights, rental cars and other travel-related products and services. We also earn advertisement revenue from our travel business. Revenue from the travelbusinesses is included in the fulfillment partner segment on a net basis. In July 2011, we began an insurance shopping service as part of our Website where customers can shop for auto and home insurance and comparequotes from various insurance providers. We also earn advertisement revenue from our insurance business. Revenue generated from our insuranceshopping site is included in the fulfillment partner segment on a net basis. Prior to July 2011, we operated an online auction service on our Website. In July 2011, we removed our Marketplace tab from our Website and nolonger provide auction services. The financial results and related assets of the online auction service were not significant to our business. TheMarketplace tab allowed sellers to list items for sale, buyers to bid on items of interest, and users to browse through listed items online. Except inlimited circumstances where our auction site listed returned merchandise, we were not the seller of auction-listed items and had no control over thepricing of those items. Therefore, the listing fees for items sold at auction by sellers were recorded as revenue during the period these items were listedor sold on a net basis. The revenue for the returned merchandise that we sold at auction was recorded on a gross basis. Revenue from the auctionsbusiness is included in the fulfillment partner segment. We operated an online site for listing real estate for sale as a part of our Website. In June 2011, we removed our online site for listing real estate forsale from our Website and no longer provide these real estate listing services. The financial results and related assets of the online site for real estate forsale were not significant to our business. The real estate listing service allowed customers to searchF-13Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)active listings across the country. Revenue from the real estate listing business is included in the fulfillment partner segment, on a net basis. Prior to June 2011, we operated Eziba.com, a private sale website featuring home décor products, jewelry, apparel and accessories from manyleading brands. In June 2011, we turned off the Eziba.com website; however, we continue to sell the type of products that were listed on Eziba.comthrough our websites, O.co and Overstock.com. Revenue from our other businesses is less than 1% of total net revenues.International business We began selling products through our Website to customers outside the United States in late August 2008. As of December 31, 2011, we wereoffering products to customers in over 105 countries and non-U.S. territories. We do not have sales operations outside the United States, and are usinga U.S. based third party to provide logistics and fulfillment for all international orders. Revenue generated from our international business is included ineither direct or fulfillment partner revenue, depending on whether the product is shipped from our warehouses or from a fulfillment partner. Less than1% of our sales are made to international customers. Total revenues from International sales were $8.8 million $9.4 million and $5.1 million for the years ended December 31, 2011, 2010 and 2009respectively.Club O loyalty program We have a customer loyalty program called Club O for which we sell annual memberships. We record membership fees as deferred revenue andwe recognize revenue ratably over the membership period. The Club O loyalty program allows members to earn reward dollars for qualifying purchasesmade on our Website. We also have a co-branded credit card program (see "Co-branded credit card revenue" below for more information). Co-brandedcardholders are also Club O members and earn additional reward dollars for purchases made on our Website, and from other merchants. Reward dollarsearned may be redeemed on future purchases made through our Website. Club O reward dollars expire 90 days after the customer's Club O membershipexpires. We account for these transactions as multiple element arrangements and allocate value to the elements using their relative fair values. We includethe value of reward dollars earned in deferred revenue and we record it as a reduction of revenue at the time the reward dollars are earned. We recognize revenue for Club O reward dollars when: (i) customers redeem their reward dollars as part of a purchase at our Website, (ii) rewarddollars expire or (iii) the likelihood of reward dollars being redeemed by a customer is remote ("reward dollar breakage"). Due to the loyalty program'sshort history, currently no reward dollar breakage is recognized until the reward dollars expire. However, in the future we plan to recognize suchbreakage based upon historical redemption patterns. In instances where customers receive free Club O reward dollars not associated with any purchases, we account for these transactions as salesincentives such as coupons and record a reduction of revenue at the time the reward dollars are redeemed.F-14Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)Co-branded credit card revenue During the year ended December 31, 2009, we had a co-branded credit card agreement with a commercial bank, for the issuance of credit cardsbearing the Overstock brand, under which the bank paid us fees for new accounts, renewed accounts and card usage. New and renewed account feeswere recognized as revenues on a straight-line basis over the estimated life of the credit card relationship. Credit card usage fees were recognized asrevenues as actual credit card usage occurred. Our co-branded credit card agreement with this bank terminated effective August 30, 2009. In March 2010, we entered into a co-branded credit card agreement with a different commercial bank for the issuance of credit cards bearing theOverstock.com brand, under which the bank pays us fees for new accounts and for customer usage of the cards. The agreement also provides for acustomer loyalty program offering reward points that customers will accrue from card usage and can use to make purchases on our Website (See "ClubO loyalty program" above for more information). We launched this co-branded card in September 2010. New account fees are recognized as revenue ona straight-line basis over the estimated life of the credit card relationship. Credit card usage fees are recognized as revenues as actual credit card usageoccurs.Deferred revenue Customer orders are recorded as deferred revenue prior to delivery of products or services ordered. We record amounts received for Club Omembership fees as deferred revenue and we recognize it ratably over the membership period. We record Club O reward dollars earned from purchasesas deferred revenue at the time they are earned and we recognize it as revenue upon redemption. If reward dollars are not redeemed, we recognizerevenue upon expiration. In addition, we sell gift cards and record related deferred revenue at the time of the sale. We sell gift cards without expirationdates and we recognize revenue from a gift card upon redemption of the gift card. If a gift card is not redeemed, we recognize income when thelikelihood of its redemption becomes remote based on our historical redemption experience. We consider the likelihood of redemption to be remote after36 months.Sales returns allowance We inspect returned items when they arrive at our processing facility. We refund the full cost of the merchandise returned and all original shippingcharges if the returned item is defective or we or our fulfillment partners have made an error, such as shipping the wrong product. If the return is not a result of a product defect or a fulfillment error and the customer initiates a return of an unopened item within 30 days ofdelivery, for most products we refund the full cost of the merchandise minus the original shipping charge and actual return shipping fees. However, wereduce refunds for returns initiated more than 30 days after delivery or that are received at our returns processing facility more than 45 days after initialdelivery. If our customer returns an item that has been opened or shows signs of wear, we issue a partial refund minus the original shipping charge andactual return shipping fees. Revenue is recorded net of estimated returns. We record an allowance for returns based on current period revenues and historical returnsexperience. We analyze actual historical returns, currentF-15Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)economic trends and changes in order volume and acceptance of our products when evaluating the adequacy of the sales returns allowance in anyaccounting period. During the three months ended December 31, 2009, we had a change in estimate for our sales returns allowance that reduced the allowance byapproximately $3.0 million from the prior quarter-end balance and $3.2 million from the prior year-end balance that was recorded in accordance withASC 250 "Accounting Changes and Error Corrections" on a prospective basis. The change in estimate for our sales returns allowance had thefollowing impact on our financial results for the three and twelve months ended December 31, 2009 (amounts in thousands, except per share data): The reasons for the change in estimate in the fourth quarter of 2009 were as follows. We made improvements to our information systems during2008 and 2009 that enabled enhanced reporting and analysis of our returns data used in the estimation process. In early 2009, we implementedinitiatives to reduce overall return rates in several of our product categories. In September 2009, we entered into a new master supplier agreement withour fulfillment partners that provided financial incentives for suppliers to reduce returns. These initiatives resulted in a sustained decrease in our productreturn trends resulting in the change in estimate of sales returns allowance during the three months ended December 31, 2009. Although we believe that our estimates, assumptions, and judgments are reasonable, actual results have historically differed from our estimates.Based on our actual returns experience through December 31, 2011, had our estimated returns equaled our actual returns, our net income would havedecreased approximately $805,000 for the year ended December 31, 2009. Based on the improvements and initiatives discussed above, we believe thatour estimates, assumptions and judgments have improved and our actual product returns have not differed materially from our estimates atDecember 31, 2010 and during 2011. The allowance for returns was $10.9 million and $11.5 million at December 31, 2011 and 2010, respectively.Credit card chargeback allowance Revenue is recorded net of estimated credit card chargebacks. We maintain an allowance for credit card chargebacks based on current periodrevenues and historical chargeback experience. The allowance for chargebacks was $187,000 and $125,000 at December 31, 2011 and 2010,respectively.F-16 Three months endedDecember 31, 2009 Twelve months endedDecember 31, 2009 ($ Change) ($ Change) Revenue, net $2,995 $3,208 Gross profit 752 805 Income from continuing operations before income taxes 752 805 Net income 752 805 Net income attributable to common shares—basic $0.04 $0.04 Net income attributable to common shares—diluted $0.04 $0.03 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)Cost of goods sold Cost of goods sold includes product costs, warehousing costs, outbound shipping costs, handling and fulfillment costs, customer service costs andcredit card fees, and is recorded in the same period in which related revenues have been recorded. Cost of goods sold, including product cost and othercosts and fulfillment and related costs are as follows (in thousands):Advertising expense We expense the costs of producing advertisements the first time the advertising takes place and expense the cost of communicating advertising inthe period during which the advertising space or airtime is used. Internet advertising expenses are recognized as incurred based on the terms of theindividual agreements, which are generally: 1) a commission for traffic driven to the Website that generates a sale or 2) a referral fee based on thenumber of clicks on keywords or links to our Website generated during a given period. Advertising expense is included in sales and marketingexpenses and totaled $52.5 million, $53.2 million and $48.9 million during the years ended December 31, 2011, 2010 and 2009, respectively. Prepaidadvertising, which consists primarily of prepaid advertising airtime, (included in Prepaids and other assets in the accompanying consolidated balancesheets) was $1.4 million and $2.9 million at December 31, 2011 and 2010, respectively.Stock-based compensation We measure compensation expense for all outstanding unvested share-based awards at fair value on date of grant and recognize compensationexpense over the service period for awards expected to vest on a straight line basis. The estimation of stock awards that will ultimately vest requiresjudgment, and to the extent actual results differ from estimates, such amounts will be recorded as an adjustment in the period estimates are revised. Weconsider many factors when estimating expected forfeitures, including types of awards, recipients of awards and historical experience. Actual resultsmay differ substantially from these estimates (see Note 17 "Stock-Based Awards").Loss contingencies In the normal course of business, we are involved in legal proceedings and other potential loss contingencies. We accrue a liability for such matterswhen it is probable that a loss has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be estimated, themost probable amount in the range is accrued. If no amount within this range is a better estimate thanF-17 Year ended December 31, 2011 2010 2009 Total net revenue $1,054,277 100%$1,089,873 100%$876,769 100% Cost of goods sold Product costs and other cost of goodssold 821,739 78% 842,064 78% 664,537 76%Fulfillment and related costs 53,450 5% 58,169 5% 47,480 5% Total cost of goods sold 875,189 83% 900,233 83% 712,017 81% Gross profit $179,088 17%$189,640 17%$164,752 19% Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)any other amount within the range, the minimum amount in the range is accrued. We expense legal fees as incurred.Restructuring Restructuring expenses are primarily comprised of lease termination costs. ASC Topic 420, Accounting for Costs Associated with Exit or DisposalActivities, requires that when an entity ceases using a property that is leased under an operating lease before the end of the contractual term, thetermination costs should be recognized and measured at fair value when the entity ceases using the facility. Key assumptions in determining therestructuring expenses and related liability include the terms that may be negotiated to exit certain contractual obligations (see Note 3 "RestructuringExpense").Income taxes Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basisusing enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Deferred tax assets are evaluated for future realization and are reduced by a valuation allowance to the extent that it is more likely than not that thedeferred tax asset will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred assets includingexpectations of future taxable income, the carry-forward periods available for tax reporting purposes, the reversals of our deferred tax liabilities and taxplanning strategies, to the extent available. At December 31, 2011 and December 31, 2010, we have a full valuation allowance against our deferred taxassets, net of expected reversals of existing deferred tax liabilities, as we believe it is more likely than not that these benefits will not be realized.Significant judgment is required in making this assessment, and it is very difficult to predict when, if ever, our assessment may conclude that theremaining portion of the deferred tax assets are realizable.Earnings (loss) per share Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common shares by the weighted average number ofcommon shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) attributable to commonshares for the period by the weighted average number of common and potential common shares outstanding during the period. Potential commonshares, comprising incremental common shares issuable upon the exercise of stock options, restricted stock awards and convertible senior notes areincluded in the calculation of diluted earnings (loss) per common share to the extent such shares are dilutive.F-18Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued) The following table sets forth the computation of basic and diluted net income (loss) per common share for the periods indicated (in thousands,except per share data): The following shares were excluded from the calculation of diluted weighted average shares outstanding as their effect would have been anti-dilutive (in thousands):Accounting pronouncements adopted We adopted ASU 2009-13, which amends ASC Topic 605, Revenue Recognition, on January 1, 2011. ASU 2009-13 requires companies toallocate revenue in multiple-element arrangements based on an element's estimated selling price if vendor-specific or other third-party evidence of valueis not available. ASU 2009-13 is effective for annual reporting periods after December 15, 2010. The adoption of ASU 2009-13 did not have a materialimpact on our consolidated financial statements.Accounting pronouncements issued not yet adopted In May 2011, the Financial Accounting Standards Board ("FASB") issued an accounting pronouncement related to fair value measurement (FASBASC Topic 820), which amends current guidance to achieve common fair value measurement and disclosure requirements in U.S. GAAP andInternational Financial Reporting Standards. The amendments generally represent clarification of FASB ASC Topic 820, but also include instanceswhere a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. Thispronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We will adopt thispronouncement for our fiscal year beginning January 1, 2012. We do not expect this pronouncement to have a material effect on our consolidatedfinancial statements.F-19 Year ended December 31 2011 2010 2009 Net income (loss) $(19,438)$13,889 $7,747 Deemed dividend related to redeemable common stock (12) (112) (48) Net income (loss) attributable to common shares $(19,450)$13,777 $7,699 Net income (loss) per common share—basic: Net income (loss) attributable to common shares—basic $(0.84)$0.60 $0.34 Weighted average common shares outstanding—basic 23,259 23,019 22,821 Effect of dilutive securities: Stock options and restricted stock awards — 347 246 Convertible senior notes — — — Weighted average common shares outstanding—diluted 23,259 23,366 23,067 Net income (loss) attributable to common shares—diluted $(0.84)$0.59 $0.33 Year endedDecember 31 2011 2010 2009 Stock options and restricted stock units 927 551 740 Convertible senior notes — 454 787 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued) In June 2011, the FASB issued an accounting pronouncement that provides new guidance on the presentation of comprehensive income (FASBASC Topic 220) in financial statements. Entities are required to present total comprehensive income either in a single, continuous statement ofcomprehensive income or in two separate, but consecutive, statements. Under the single-statement approach, entities must include the components of netincome, a total for net income, the components of other comprehensive income and a total for comprehensive income. Under the two-statementapproach, entities must report an income statement and, immediately following, a statement of other comprehensive income. The provisions for thispronouncement are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted.We will adopt this pronouncement for our fiscal year beginning January 1, 2012. We do not expect this pronouncement to have a material effect on ourconsolidated financial statements. In September 2011, the FASB issued accounting pronouncement No. 2011-08, Intangibles—Goodwill and Other (FASB ASC Topic 350) thatwill allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on aqualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events andcircumstances for an entity to consider in conducting the qualitative assessment. The provisions for this pronouncement are effective for fiscal years,and interim periods beginning after December 15, 2011, with early adoption permitted. We will adopt this pronouncement for our fiscal year beginningJanuary 1, 2012. We do not expect this pronouncement to have a material effect on our consolidated financial statements.3. RESTRUCTURING EXPENSE During the fourth quarter of 2006, we began a facilities consolidation and restructuring program designed to reduce the overall expense structure inan effort to improve future operating performance. The facilities consolidation and restructuring program was substantially completed by the end of thesecond quarter of 2007. Restructuring liabilities along with charges (credits) to expense and payments associated with the facilities consolidation and restructuring programfor lease and contract termination costs are as follows (in thousands): There were no restructuring charges or reversals during the year ended December 31, 2011. We reversed $569,000 of lease termination costsliability during the year ended December 31, 2010 due to changes in the estimate of sublease income, primarily as a result of our entering intoagreements with a sublessee to terminate their subleases and re-occupy a portion of the space previously ceased to be used by us, due to our growth andneed for additional space.F-20 Balance atBeginning ofYear AccretionExpense Net CashPayments Adjustments Balance at Endof Year Year ended December 31,2011 $1,797 $166 $(472)$— $1,491 Year ended December 31,2010 $2,685 $240 $(559)$(569)$1,797 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)4. COMPREHENSIVE INCOME (LOSS) Our comprehensive income (loss) is as follows (in thousands):5. ACCOUNTS RECEIVABLE Accounts receivable consist of the following (in thousands):6. INVENTORIES Inventories consist of the following (in thousands):7. PREPAIDS AND OTHER ASSETS Prepaids and other assets consist of the following (in thousands):F-21 Year ended December 31, 2011 2010 2009 Net income (loss) $(19,438)$13,889 $7,747 Reclassification adjustment included in net income (loss) — — (48) Comprehensive income (loss) $(19,438)$13,889 $7,699 December 31, 2011 2010 Credit card receivables $6,042 $7,679 Accounts receivable, other 8,033 7,929 14,075 15,608 Less: allowance for doubtful accounts (574) (2,048) Accounts receivable, net $13,501 $13,560 December 31, 2011 2010 Product inventory $14,904 $24,900 Inventory in-transit 8,089 7,214 Total inventories, net $22,993 $32,114 December 31, 2011 2010 Prepaid maintenance $6,995 $5,446 Prepaid advertising 1,407 2,922 Prepaid other 2,592 1,626 Investment in precious metals 1,657 1,657 Total prepaids and other assets $12,651 $11,651 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)8. FIXED ASSETS Fixed assets consist of the following (in thousands): Depreciation and amortization of property and equipment totaled $16.4 million, $14.6 million, and $12.9 million for the years ended December 31,2011, 2010 and 2009, respectively. Fixed assets included assets under capital leases of $1.7 million and $1.7 million, and accumulated amortizationrelated to assets under capital leases of $1.5 million and $902,000 at December 31, 2011 and 2010, respectively.9. OTHER LONG-TERM ASSETS Other long-term assets consist of the following (in thousands):F-22 December 31, 2011 2010 Computer hardware and software, including internal-use software andwebsite development $141,435 $129,953 Furniture and equipment 13,945 13,204 Leasehold improvements 5,445 5,206 160,825 148,363 Less: accumulated depreciation and amortization (135,503) (120,563) Total fixed assets $25,322 $27,800 December 31, 2011 2010 Prepaid expenses, long-term portion $1,762 $807 Prepaid other 498 598 Total other long-term assets $2,260 $1,405 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)10. ACCRUED LIABILITIES Accrued liabilities consist of the following (in thousands):11. DEFERRED REVENUE Deferred revenue consists of the following (in thousands):12. BORROWINGSU.S. Bank Financing Agreement We are a party to a Financing Agreement with U.S. Bank National Association ("U.S. Bank") dated December 22, 2009 (as amended to date, the"Financing Agreement"). The maximum credit potentially available under the revolving facility is $20 million. Our obligations under the FinancingAgreement and all related agreements are secured by all or substantially all of our assets, excluding our interest in certain litigation. Subject to certainexceptions, the full amount of the revolving facility is expected to be available to us as long as $20 million in the aggregate is maintained on deposit withU.S. Bank. At December 31, 2011 and at the date of this report we maintain $20 million on deposit with U.S. Bank. The obligation of U.S. Bank tomake advances under the Financing Agreement is subject to the conditions set forth in the Financing Agreement.F-23 December 31, 2011 2010 Allowance for returns $10,899 $11,525 Accounts payable accrual 8,284 7,626 Accrued marketing expenses 7,632 2,484 Accrued compensation and other related costs 6,819 8,279 Other accrued expenses 3,416 1,734 Accrued professional expenses 3,013 1,877 Accrued freight 2,392 2,491 Facility lease accruals 1,841 1,811 Accrued taxes 1,540 1,400 Inventory received but not invoiced 1,069 452 Credit card processing fee accrual 535 625 Short term portion of restructuring accrual (Note 3) 462 447 Total accrued liabilities $47,902 $40,751 December 31, 2011 2010 Payments owed or received prior to product delivery $17,691 $16,938 Club O membership fees and reward points 5,193 2,428 Unredeemed gift cards 3,738 3,899 Other 1,356 762 Total deferred revenue $27,978 $24,027 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)12. BORROWINGS (Continued) Our failure to keep at least $20 million on deposit in certain accounts with U.S. Bank would constitute a "triggering event" under the FinancingAgreement. 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 quarterfor 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 noncash-collateralized portion of the facility, as availability would then depend, in part, on the Borrowing Base (as defined in the Financing Agreement). The stated termination date of the Financing Agreement is December 31, 2012. The maximum amount potentially available under the FinancingAgreement is $20 million, limited to $3 million for cash-collateralized letters of credit and other financial accommodations, and $17 million for advancessupported by our non-cash collateral. As permitted by the Financing Agreement, during the year ended December 31, 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 dueDecember 1, 2011. Advances under the Financing Agreement bear interest at one-month LIBOR plus 2.5%. The interest rate for borrowings under the FinancingAgreement was 2.75% at December 31, 2011. We have also entered into an interest rate cap agreement with U.S. Bank with an effective date ofOctober 1, 2011 limiting our exposure for one-month LIBOR at 0.5% for the term of the Financing Agreement. 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 indemnityagreements, (b) create or permit liens, (c) enter into any merger or consolidation or purchase or otherwise acquire all or substantially all of the assets ofanother person or the assets comprising any line of business or business unit of another person, (d) except for permitted acquisitions, purchase thesecurities of, create, invest in, or form any subsidiary or other entity, (e) make loans or advances, (f) purchase, acquire or redeem shares of our capitalstock or other securities, (g) change our capital structure or issue any new class of capital stock, (h) change our business objectives, purposes oroperations in a manner which could reasonably be expected to have a material adverse effect, (i) change our fiscal year, (j) enter into transactions withaffiliates, (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 ofcertain limits or having specified effects, depending in part on whether a triggering event has occurred or would occur, (m) take certain actions regardingour receivables, and (n) take certain actions regarding our inventory. During 2011, we were out of compliance with two covenants and obtained waiversfrom U.S. Bank for these covenant violations. Amounts outstanding under the Financing Agreement at December 31, 2011 and December 31, 2010 were $17.0 million and zero, respectively,and letters of credit totaling $2.0 million and $2.4 million, respectively, were issued on our behalf collateralized by compensating cash balances held atU.S. Bank, which are included in Restricted cash in the accompanying consolidated balance sheets. At December 31, 2011, we had $20.0 million incompensating cash balances held at U.S. Bank. If we draw on the $20.0 million compensating cash balance, it will constitute a triggering event andresult in additional and more restrictive covenants.F-24Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)12. BORROWINGS (Continued) Prior to December 27, 2011, we were a party to a Master Lease Agreement and a Financial Covenants Rider and related documents (collectively,the "Master Lease Agreement") dated September 17, 2010 with U.S. Bancorp Equipment Finance, Inc.—Technology Finance Group ("Lessor"), anaffiliate of U.S. Bank National Association. Under the Master Lease Agreement we entered into four separate leases, pursuant to which we sold certaininformation technology hardware ("IT Assets") to Lessor, which were simultaneously leased back for a period of 48 months and financed certainsoftware licenses for a period of 48 months for proceeds totaling $16.4 million. Subsequently, we entered into eleven additional leases; whereby weleased $8.2 million in IT Assets and financed certain software licenses directly from the Lessor. We had the right to repurchase the IT Assets at the endof the 48-month term for $1.00. Payments on the Master Lease Agreement were due monthly. The weighted average effective interest rate under theMaster Lease Agreement was 6.29%. We had accounted for the Master Lease Agreement as a financing transaction and amounts owed are included inFinance Obligations, current and non-current in the consolidated balance sheets. We recorded no gain or loss as a result of entering into thesetransactions. On December 27, 2011, we and the Lessor agreed to terminate the Master Lease Agreement and all related schedules. We paid approximately$20.1 million to Lessor in connection with the amendment and agreement to terminate the Master Lease Agreement, resulting in a $1.2 million loss onearly retirement of debt included in Other income, net in our consolidated statements of operations. As of December 31, 2011 and December 31, 2010,zero and $16.1 million of the finance obligations remained outstanding, respectively.U.S. Bank Purchasing Card Agreement We have a commercial purchasing card (the "Purchasing Card") agreement with U.S. Bank. We use the Purchasing Card for business purposepurchasing and must pay it in full each month. At December 31, 2011, $3.4 million was outstanding and $1.6 million was available under thePurchasing 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 totaling $1.7 million at December 31, 2011 and 2010 with accumulated depreciation of$1.5 million and $902,000, respectively. Depreciation expense of assets recorded under capital leases was $554,000 and $580,000 for the years endedDecember 31, 2011 and 2010, respectively.F-25Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)12. BORROWINGS (Continued) Future payments of capital lease obligations are as follows (in thousands):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 uswere $116.2 million, net of $3.8 million of initial purchaser's discount and debt issuance costs. The discount and debt issuance costs were beingamortized using the straight-line method which approximated the effective interest method. We recorded amortization of discount and debt issuancecosts related to this offering totaling $77,000, $228,000 and $331,000 during the years ended December 31, 2011, 2010 and 2009, respectively. Intereston 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 ofpayment to any existing and future subordinated indebtedness. We retired all of the remaining $34.6 million of the Senior Notes during the year ended December 31, 2011, for $34.6 million in cash, resulting ina 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 retiredduring the year ended December 31, 2011, $10.1 million were held by Chou Associates Management, Inc. or an affiliate of Chou ("Chou") and$21.7 million were held by Fairfax Financial Holdings Limited or an affiliate of Fairfax ("Fairfax"). Chou and Fairfax are beneficial owners of morethan 5% of our common stock. We retired $25.4 million of the Senior Notes during the year ended December 31, 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 December 31, 2011 and December 31, 2010, zero and $34.5 million of the Senior Notes, net of debt discount remained outstanding,respectively.F-26Payments due by period 2012 $116 2013 3 Total minimum lease payments 119 Less: amount representing interest (7) Present value of capital lease obligations 112 Less: current portion (110) Capital lease obligations, non-current $2 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)13. COMMITMENTS AND CONTINGENCIESSummary of future minimum lease payments for all operating leases Minimum future payments under all operating leases as of December 31, 2011, are as follows (in thousands): Rental expense for operating leases totaled $8.9 million, $8.0 million and $7.5 million for the years ended December 31, 2011, 2010 and 2009,respectively. Estimated sublease income of $584,000 is expected over the next five years of which $162,000 is anticipated to be received in the next12 months.Naming rights During 2011, we entered into a six-year agreement with the Oakland-Alameda County Coliseum Authority ("OACCA") for the right to nameOakland Alameda County Coliseum. Amounts represent annual payments due OACCA for the naming rights and we may terminate this agreement atour sole option, subject to its termination fee. Minimum future payments under naming rights agreement as of December 31, 2011, are as follows (in thousands):Legal Proceedings From time to time, we are involved in litigation concerning consumer protection, employment, intellectual property and other commercial mattersrelated to the conduct and operation of our business and the sale of products on our Website. In connection with such litigation, we may be subject tosignificant damages. In some instances other parties may have contractual indemnification obligations to us. However, such contractual obligations mayprove unenforceable or non-collectible, and in the event we cannot enforce or collect on indemnification obligations, we may bear the full responsibilityfor damages, fees and costs resulting from such litigation. We may also be subject to equitable remedies and penalties. Such litigation could be costlyand time consuming and could divertF-27Payments due by period 2012 $8,916 2013 8,206 2014 8,404 2015 6,818 2016 1,381 Thereafter 183 $33,908 Payments due by period 2012 $1,236 2013 1,273 2014 1,311 2015 1,351 2016 1,391 $6,562 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)13. COMMITMENTS AND CONTINGENCIES (Continued)or distract our management and key personnel from our business operations. Due to the uncertainty of litigation and depending on the amount and thetiming, an unfavorable resolution of some or all of these matters could materially affect our business, results of operations, financial position, or cashflows. On February 2, 2007, along with five shareholder plaintiffs, we filed a lawsuit in the Superior Court of California, County of San Franciscoagainst Morgan Stanley & Co. Incorporated, Goldman Sachs & Co., Bear Stearns Companies, Inc., Bank of America Securities LLC, Bank of NewYork, Citigroup Inc., Credit Suisse (USA) Inc., Deutsche Bank Securities, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., and UBS FinancialServices, Inc., and later amended the complaint to add Lehman Brothers Holdings Inc. as a defendant. The suit alleged that the defendants, whocontrolled over 80% of the prime brokerage market, participated in an illegal stock market manipulation scheme and that the defendants had no intentionof covering short sell orders with borrowed stock, as they are required to do, causing what are referred to as "fails to deliver" and that the defendants'actions caused and continued to cause dramatic declines in the share price of our stock and that the amount of "fails to deliver" often exceeded our entiresupply of outstanding shares. The suit accused the defendants of violations of California securities laws and common law and violations of California'sUnfair Business Practices Act. After it filed for bankruptcy on September 2008, we elected not to pursue our claims against Lehman Brothers Holdings.On July 23, 2009, the court sustained defendants' demurrer to our amended causes of action for conversion and trespass to chattels. On December 15,2010, we and the other plaintiffs in the case entered into a settlement agreement with certain of the defendants requiring these defendants to pay in theaggregate $4.5 million to plaintiffs. Other terms of settlement are confidential. At that time, remaining defendants in the suit were Goldman SachsGroup, Inc., Goldman Sachs & Co., Goldman Sachs Execution & Clearing L.P., ("Goldman Defendants") Merrill Lynch, Pierce, Fenner & Smith, Inc.,Merrill Lynch Professional Clearing Corporation ("Merrill Lynch Defendants), and Bank of America Securities LLC. On December 15, 2010, we fileda motion to amend our complaint against the Goldman and Merrill Lynch Defendants to add a cause of action based on the New Jersey RacketeerInfluenced and Corrupt Organization (RICO) Act. Defendants challenged the RICO claim by demurrer and eventually the court sustained the demurrer.We thereafter entered a settlement agreement with Bank of America Securities LLC, the terms of which are confidential, and have dismissed the actionas to that defendant. On August 19, 2011, the remaining defendants filed a motion for summary judgment. On January 10, 2012 the court granted themotion for summary judgment as to all remaining defendants. We intend to appeal the court's ruling. The defendants have the right to apply to the court(but have not yet done so) to seek reimbursement from us of their allowable court costs. The nature of the loss contingencies relating to any court costsordered against us are described above. On May 30, 2008 we filed a complaint in New York state court against the New York State Department of Taxation and Finance, itsCommissioner, the State of New York and its governor, alleging that a New York state tax law is unconstitutional. The effect of the New York law is torequire Internet sellers to collect and remit New York sales taxes on their New York sales even if the seller has no New York tax "nexus" other thanwith New York based independent contractors who are Internet advertising affiliates. The complaint asks for the court to declare the lawunconstitutional and enjoin its application to us. New York filed a motion to dismiss. We responded to the motion and filed a motion for summaryjudgment, and both motions were heard simultaneously. On January 12, 2009, the court granted New York's motion to dismiss and denied our motionfor summary judgment. We appealed theF-28Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)13. COMMITMENTS AND CONTINGENCIES (Continued)decision and on November 4, 2010 the New York Appellate Division upheld part of the lower court's ruling rejecting our claims that the law isunconstitutional on its face, but remanded our claims that the law is unconstitutional as applied, for further discovery and proceedings in the lower court.We filed with the New York State Court of Appeals a motion of leave to appeal the portions of the decision upholding the lower court's ruling. OnMarch 15, 2011, the Appellate Division of the New York State Court of Appeals denied our motion for leave to appeal to the New York State Court ofAppeals. We have determined not to pursue at the trial court level our claims that the law is unconstitutional as applied. We are proceeding with anappeal to the New York State Court of Appeals of the Appellate Division's ruling on our claim that the statute is unconstitutional on its face. On August 12, 2008, we along with seven other defendants, were sued in the United States District Court for the Northern District of California,by Sean Lane, and seventeen other individuals, on their own behalf and for others similarly in a class action suit, alleging violations of the ElectronicCommunications Privacy Act, Computer Fraud and Abuse Act, Video Privacy Protection Act, and California's Consumer Legal Remedies Act andComputer Crime Law. The complaint relates to our use of a product known as Facebook Beacon, created and provided to us by Facebook, Inc.Facebook Beacon provided the means for Facebook users to share purchasing data among their Facebook friends. The parties extended by agreementthe time for defendants' answer, including our answer, and thereafter, the Plaintiff and Facebook proposed a stipulated settlement to the court forapproval, which would resolve the case without requirement of financial contribution from us. On March 17, 2010, over objections lodged by someparties, the court accepted the proposed settlement. Various parties objecting to the settlement have appealed and their appeal is now pending. The natureof the loss contingencies relating to claims that have been asserted against us are described above. However, no estimate of the loss or range of loss canbe made. On November 14, 2008, we filed suit in Ohio state court against the Ohio Tax Commissioner, the Ohio Attorney General and the Governor ofOhio, alleging the Ohio Commercial Activity Tax is unconstitutional. Enacted in 2005, Ohio's Commercial Activity Tax is based on activities in Ohiothat contribute to production or gross income for a company whether or not the company has a physical presence in or nexus within the state. Ourcomplaint asked for a judgment declaring the tax unconstitutional and for an injunction preventing any enforcement of the tax. The defendants moved todismiss the case. On July 28, 2009, the trial court ruled that there was no justiciable controversy in the case, as we had not yet been assessed a tax, andit granted the defendants' motions to dismiss. In September 2009, we received a letter of determination from the Ohio Department of Taxation noting theDepartment's determination that we are required to register for remitting of the Commercial Activity Tax, and owe $612,784 in taxes, interest, andpenalties as of June 30, 2009. The Ohio Department of Taxation issued additional estimated assessments of estimated tax, interest and penalties totaling$97,768 as of December 31, 2011.We have filed protests to challenge the Department's Assessments on constitutional grounds and the matter iscurrently pending before the Ohio Department of Taxation's Legal Division for administrative review and determination. A hearing on these matters washeld November 18, 2011. No administrative ruling has been issued following the hearing. The nature of the loss contingencies relating to claims thathave been asserted against us are described above. We believe the determinations to be unlawful and erroneous and are vigorously contesting thedetermination. On March 10, 2009, we were sued in a class action filed in the United States District Court, Eastern District of New York. Cynthia Hines, thenominative plaintiff on behalf of herself and othersF-29Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)13. COMMITMENTS AND CONTINGENCIES (Continued)similarly situated, seeks damages under claims for breach of contract, common law fraud and New York consumer fraud laws. The Plaintiff alleges wefailed to properly disclose our returns policy to her and that we improperly imposed a "restocking" charge on her return of a vacuum cleaner. We filed amotion to dismiss based upon assertions that our agreement with our customers requires all such actions to be arbitrated in Salt Lake City, Utah.Alternatively, we asked that the case be transferred to the United States District Court for the District of Utah, so that arbitration may be compelled inthat district. On September 8, 2009 the motion to dismiss or transfer was denied, the court stating that our browsewrap agreement was insufficientunder New York law to establish an agreement with the customer to arbitrate disputes in Utah. On October 8, 2009, we filed a Notice of Appeal of thecourt's ruling. The appeal was denied. On December 31, 2010 Hines filed an amended complaint. The amended complaint eliminated common law fraudclaims and breach of contract claims and added claims for breach of Utah's consumer protection statute and various other state consumer protectionstatutes. The amended complaint also asks for an injunction. The nature of the loss contingencies relating to claims that have been asserted against us aredescribed above. However, no estimate of the loss or range of loss can be made. The suit is in final discovery stages. We filed motions to dismiss and todecertify the class. The court has not ruled on these motions. We intend to vigorously defend this action. On September 23, 2009, SpeedTrack, Inc. sued us along with 27 other defendants in the United States District Court in the Northern District ofCalifornia. We are alleged to have infringed a patent covering search and categorization software. We believe that certain third party vendors of productsand services sold to us are contractually obligated to indemnify us in this action. On November 11, 2009, the parties stipulated to stay all proceedings inthe case until resolution of a the United States Patent and Trademark Office had concluded and resolved a reexamination of the patent in question, andalso until a previously filed infringement action against Wal-Mart Stores, Inc. and other retailers resulted either in judgment or dismissal. Subsequently,the parties agreed to extend the time for defendants' complaint answer until 21 days following a court order to lift the stay to which the parties stipulated.The United States Patent and Trademark Office resolved the reexamination of the patent in question in favor of SpeedTrack, Inc. The case remainsstayed, pending the outcome of the infringement action against Wal-Mart Stores, Inc. and other retailers. On February 22, 2012, the court in the Wal-Mart Stores case granted Wal-Mart Stores' motion for summary judgment of non-infringement. The court also granted Speedtrack's motion forsummary judgment on patent validity. It is not known whether the summary judgments granted in the Wal-Mart Stores case will have an effect on theSpeedtrack case in which we are named as one of the defendants. The nature of the loss contingencies relating to claims that have been asserted againstus are described above. However no estimate of the loss or range of loss can be made. We intend to vigorously defend this action and pursue ourindemnification rights with our vendors. On or about September 25, 2009, Alcatel-Lucent USA, Inc. filed suit against us and 12 other defendants in the United States District Court in theEastern District of Texas. We are alleged to have infringed three patents purportedly related to a communications protocol between a user and serverterminals, text input functionalities and search processes. We believe a third party vendor of search products and services sold to us is contractuallyobligated to indemnify us in this action as it pertains to the search patent. On October 14, 2011, a jury returned a verdict in our favor, finding non-infringement on all asserted claims, on all patents, and finding of invalidity of the Alcatel-LucentF-30Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)13. COMMITMENTS AND CONTINGENCIES (Continued)patent, having to do with a communications protocol. On November 29, 2011, Alcatel-Lucent filed a motion for a new trial. We have opposed themotion. The court has not ruled on the motion. On May 11, 2010, Site Update Solutions, LLC filed suit against us and 34 other defendants in the United States District Court in the EasternDistrict of Texas (now transferred to the Northern District of California) for infringement of a patent claiming "a process for maintaining ongoingregistration for pages on a given search engine . . . a method to actively cause an updating of a specific Internet search engine database regarding aparticular WWW resource." We, along with other defendants, filed a motion to transfer venue. The court granted the motion, and the case is nowtransferred to the Northern District of California. We have answered the complaint. The case is in its early stages. The nature of the loss contingenciesrelating to claims that have been asserted against us are described above. However, no estimate of the loss or range of loss can be made. We intend tovigorously defend this action and pursue our indemnification rights with our vendors, if any. On August 4, 2010, EON Corp. IP Holdings, LLC filed suit against us and 16 other defendants in the United States District Court in the EasternDistrict of Texas for infringement of a patent covering a system and method for communicating between local subscriber units and a local base stationrepeater cell in a two-way communication interactive video network. The case is in its early stages. The nature of the loss contingencies relating toclaims that have been asserted against us are described above. However, no estimate of the loss or range of loss can be made. We intend to vigorouslydefend this action and pursue our indemnification rights with our vendors, if any. On September 29, 2010, a trustee in bankruptcy filed against us an adversary proceeding in the matter of In re: Petters Company, Inc., a case filedin United States Bankruptcy Court, in the District of Minnesota. The complaint alleges principal causes of action against us under various BankruptcyCode sections and the Minnesota Fraudulent Transfer Act, to recover damages for alleged transfers of property from the Petters Company occurringprior to the filing of the case initially as a civil receivership in October 2008. The trustee's complaint alleges such transfers occurred in at least one notetransaction whereby we transferred at least $2,300,000 and received in return transfers totaling at least $2,547,406. The trustee does not specify a datefor the transactions; however we believe that any alleged transaction with the Petters Company would have taken place in excess of seven years fromthe date of the filing of the adversary proceeding. The case is in its early stages. We filed a motion to dismiss on statute of limitations and other grounds.The court has not ruled upon the motion to dismiss. The nature of the loss contingencies relating to claims that have been asserted against us aredescribed above. However, no estimate of the loss or range of loss can be made. We intend to vigorously defend this action. On November 17, 2010 we were sued in the Superior Court of California, County of Alameda, by District Attorneys for the California Countiesof Alameda, Marin, Monterey, Napa, Santa Clara, Shasta and Sonoma County, and the County of Santa Cruz recently joined the suit. These districtattorneys seek damages and an injunction under claims for violations of California consumer protection laws, alleging we made untrue or misleadingstatements concerning our pricing, price reductions, sources of products and shipping charges. The complaint asks for damages in the amount of notless than $15 million. The nature of the loss contingencies relating to claims that have been asserted against us are described above. The suit is in thediscovery stage. We intend to vigorously defend this action. On April 4, 2011, Walker Digital, LLC filed suit against us and 24 other defendants in the United States District Court for the District of Delawarefor infringement of a patent covering a system ofF-31Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)13. COMMITMENTS AND CONTINGENCIES (Continued)providing to purchasers a substitution recommendation for goods offered for purchase on a website. We answered the complaint and filed a declaratoryjudgment counterclaim. We have since settled this matter, providing plaintiff a declaration. No money was paid to Walker Digital in settlement of itsclaim. The case has been dismissed. On September 11, 2011, Droplets, Inc. filed suit against us and eight other defendants in the United States District Court in the Eastern District ofTexas for infringement of a patent covering strings of programming code downloaded from a server to a client computer. We have answered thecomplaint. The case is in its early stages. The nature of the loss contingencies relating to claims that have been asserted against us are described above.However, no estimate of the loss or range of loss can be made. We intend to vigorously defend this action and pursue our indemnification rights withour vendors. On September 13, 2011, Select Retrieval LLC filed suit against us and 79 other defendants in the United States District Court for the District ofDelaware for infringement of a patent covering the hierarchical display of interactive links on a webpage. We have answered the complaint. The case isin its early stages. The nature of the loss contingencies relating to claims that have been asserted against us are described above. However, no estimateof the loss or range of loss can be made. We intend to vigorously defend this action and pursue our indemnification rights with our vendors. On November 18, 2011 Smartfit Solutions, LLC filed suit against us and 43 other defendants in the United States District Court for the EasternDistrict of Texas for infringement of a patent covering certain "methods for presenting exercise protocols to a user and evaluating the effectiveness ofthe same." We have not answered the complaint. The case is in its early stages. The nature of the loss contingencies relating to claims that have beenasserted against us are described above. However, no estimate of the loss or range of loss can be made. We intend to vigorously defend this action andpursue our indemnification rights with our vendors. On December 29, 2011 The Tobin Family Education and Health Foundation filed suit against us in the United States District Court for the Districtof New Jersey for infringement of a patent covering a method and system for customizing marketing services on networks communication withhypertext tagging conventions. We have not answered the complaint. The case is in its early stages. The nature of the loss contingencies relating toclaims that have been asserted against us are described above. However, no estimate of the loss or range of loss can be made. We intend to vigorouslydefend this action and pursue our indemnification rights with our vendors. On January 27, 2012, Pragmatus Telecom, LLC filed suit against us in the United States District Court for the District of Delaware forinfringement of two patents covering a system for coordinating data and voice communications via customer contact channel changing system usingvoice over IP and infringement of one patent for coordinating data and voice communications via customer contact channel changing system. We havenot yet answered the complaint. The case is in its early stages. The nature of the loss contingencies relating to claims that have been asserted against usare described above. However, no estimate of the loss or range of loss can be made. We intend to vigorously defend this action and pursue ourindemnification rights with our vendors. On March 1, 2012, H-W Technology L.C. filed suit against us in the United States District Court in the Northern District of Texas forinfringement of a patent entitled "Internet Protocol (IP) Phone with Search and Advertising Capability." We have not been served, nor have weanswered the complaint.TheF-32Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)13. COMMITMENTS AND CONTINGENCIES (Continued)case is in its early stages. The nature of the loss contingencies relating to claims that have been asserted against us are described above. However, noestimate of the loss or range of loss can be made. We intend to vigorously defend this action and pursue our indemnification rights with our vendors, ifany. On September 15, 2009, we received a notice from the Securities and Exchange Commission ("SEC") stating that the SEC is conducting aninvestigation concerning our previously-announced financial restatements of 2006 and 2008 and other matters. The subpoena accompanying the noticecovers documents related to the restatements and also to our billings to our partners in the fourth quarter of 2008 and related collections, and ouraccounting for and implementation of software relating to our accounting for customer refunds and credits, including offsets to partners, and relatedmatters. Prior to October 2010, the SEC asked us for information in the form of records connected to this matter, all of which we have provided. TheSEC has interviewed several witnesses. However, we do not know the present status of the investigation. Since October 2010, we have not been askedfor more information, and we know of no person interviewed in this matter since October 2010. We have cooperated and intend to continue to cooperatefully with the investigation. We establish liabilities when a particular contingency is probable and estimable. We believe the $2.4 million accrued at December 31, 2011 in ourconsolidated financial statements is adequate in light of the probable and estimable liabilities. It is reasonably possible that the potential losses mayexceed our accrued liabilities for contingencies. We have other contingencies which are reasonably possible; however, the reasonably possible exposure to losses cannot currently be estimated. We recognized a reduction in legal expenses of zero, $4.5 million and $7.1 million during the years ended December 31, 2011, 2010 and 2009respectively, related to the settlement of legal matters.14. INDEMNIFICATIONS AND GUARANTEES During our normal course of business, we have made certain indemnities, commitments, and guarantees under which we may be required to makepayments in relation to certain transactions. These indemnities include, but are not limited to, indemnities to various lessors in connection with facilityleases for certain claims arising from such facility or lease, and indemnities to our directors and officers to the maximum extent permitted under the lawsof the State of Delaware. The duration of these indemnities, commitments, and guarantees varies, and in certain cases, is indefinite. In addition, themajority of these indemnities, commitments, and guarantees do not provide for any limitation of the maximum potential future payments we could beobligated to make. As such, we are unable to estimate with any reasonableness our potential exposure under these items. We have not recorded anyliability for these indemnities, commitments, and guarantees in the accompanying consolidated balance sheets. We do, however, accrue for losses forany known contingent liability, including those that may arise from indemnification provisions, when future payment is both probable and reasonablyestimable.15. STOCKHOLDERS' EQUITYCommon Stock Each share of common stock has the right to one vote. The holders of common stock are also entitled to receive dividends whenever funds arelegally available and when declared by the Board of Directors, subject to prior rights of holders of all classes of stock outstanding having priority rightsas to dividends. No dividends have been declared or paid on our common stock through December 31, 2011.F-33Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)15. STOCKHOLDERS' EQUITY (Continued)Redeemable Common Stock In June 2009, we discovered that we had inadvertently issued 203,737 more shares of our common stock in connection with our 401(k) plan thanhad been registered with the Securities and Exchange Commission for offer in connection with the 401(k) plan. These shares were contributed to orotherwise acquired by participants in the 401(k) plan between August 16, 2006, and June 17, 2009. As a result, certain participants in the 401(k) planmay have had rescission rights relating to the unregistered shares, although we believe that the federal statute of limitations applicable to any suchrescission rights would be one year, and that the statute of limitations had already expired at June 30, 2009 with respect to most of the inadvertentissuances. On August 31, 2009, we entered into a Tolling and Standstill Agreement (the "Tolling Agreement") with the Overstock.com, Inc. EmployeeBenefits Committee (the "Committee") relating to the 401(k) plan. We entered into the Tolling Agreement in order to preserve certain rights, if any, ofplan participants who acquired shares of Overstock common stock in the plan between July 1, 2008 and June 30, 2009 (the "Purchase Period"). InAugust 2010, we made a registered rescission offer to affected participants in the plan who acquired shares of Overstock common stock during thePurchase Period. The rescission offer applied to shares purchased during the Purchase Period at prices ranging from $6.77 per share to $21.17 pershare. On October 6, 2010, our rescission offer expired. As a result of the offer, we repurchased 1,202 shares of common stock for $26,000. OnOctober 14, 2010 we terminated the Tolling Agreement. At December 31, 2011 none of our shares were classified outside stockholder's equity due tothe expiration of potential rescission rights associated with those common shares. At December 31, 2010 approximately 46,000 shares or $570,000 ofour common stock plus interest were classified outside stockholders' equity, respectively.16. DEBT REPURCHASE PROGRAM We retired all of the remaining $34.6 million of the Senior Notes during the year ended December 31, 2011, for $34.6 million in cash, resulting ina 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 retiredduring the year ended December 31, 2011, $10.1 million were held by Chou or an affiliate of Chou and $21.7 million were held by Fairfax or anaffiliate of Fairfax. Chou and Fairfax are beneficial owners of more than 5% of our common stock. We retired $25.4 million of the Senior Notes duringthe year ended December 31, 2010 for $24.9 million in cash, resulting in a gain of $346,000 on early extinguishment of debt, net of $158,000 ofassociated unamortized discount. As of December 31, 2011 and December 31, 2010, zero and $34.5 million of the Senior Notes, net of debt discount remained outstanding,respectively.17. STOCK-BASED AWARDSStock Option Awards Our board of directors adopted the 2005 Equity Incentive Plan (the "Plan"), in April 2005. Under this Plan, the Board of Directors may issueincentive stock options to employees and directors of the Company and non-qualified stock options to consultants of the Company. Options grantedunder this Plan generally expire at the end of ten years and vest in accordance with a vesting schedule determined by our Board of Directors, usuallyover four years from the grant date. We did not grant any options during the years ended December 31, 2011, 2010 and 2009. As of December 31,2011, 1.0 millionF-34Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)17. STOCK-BASED AWARDS (Continued)shares of stock based awards are available for future grants under the 2005 Equity Incentive Plan. We settle stock option exercises with newly issuedcommon shares. The following is a summary of stock option activity (in thousands): The following table summarizes information about stock options as of December 31, 2011 (in thousands, except per share data): Stock options vest over four years at 28% at the end of the first year and 2% each month thereafter. During the years ended December 31, 2011,2010 and 2009, we recorded stock based compensation related to stock options of $200,000, $1.6 million and $2.2 million, respectively. Total unrecognized compensation costs related to nonvested stock option awards was approximately $3,000, $239,000 and $1.8 million as ofDecember 31, 2011, 2010 and 2009, respectively. Remaining unrecognized compensation costs related to nonvested awards are expected to berecognized over the weighted average period of one year. The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our stock price of $7.84 as of December 31,2011, which would have been received by the option holders had all option holders exercised their options as of that date. There were no in-the-moneyoptions exercisable as of December 31, 2011. The total intrinsic value of options exercised during the years ended December 31, 2011, 2010 and 2009 was zero, $381,000 and $2,000,respectively. The total cash received from employees as a result of employee stock option exercises during the years ended December 31, 2011, 2010and 2009 were approximately zero, $1.5 million and $29,000, respectively. In connection with these exercises, there was no tax benefit realized due toour current net operating loss position.Restricted Stock Unit Activity For the years ended December 31, 2011, 2010 and 2009, 268,000, 302,000 and 366,000 restricted stock units were granted, respectively. The costof restricted stock units is determined using the fair value of our common stock on the date of the grant and compensation expense is recognized 2011 2010 2009 Shares WeightedAverageExercisePrice Shares WeightedAverageExercisePrice Shares WeightedAverageExercisePrice Outstanding—beginning ofyear 496 $18.09 721 $20.29 974 $21.27 Granted at fairvalue — — — — — — Exercised — — (90) 17.05 (2) 15.82 Expired/Forfeited (91) 20.55 (135) 30.41 (251) 24.12 Outstanding—endof year 405 $17.58 496 $18.09 721 $20.29 Options exercisableat year-end 404 $17.59 472 $18.08 543 $21.17 Options Outstanding Options Exercisable Shares WeightedAverageExercisePrice WeightedAverageRemainingContractLife AggregateIntrinsicValue Shares WeightedAverageExercisePrice WeightedAverageRemainingContractLife AggregateIntrinsicValue 405 $17.58 5.04 $— 404 $17.59 5.04 $— straight-line over the three year vesting schedule. The weighted average grant date fair value of restricted stock units granted during the years endedDecember 31, 2011, 2010 and 2009 was $15.47, $13.17 and $10.15, respectively.F-35Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)17. STOCK-BASED AWARDS (Continued) The following is a summary of restricted stock unit activity (amounts in thousands, except per share data): The restricted stock units vest over three years at 25% at the end of the first year, 25% at the end of the second year and 50% at the end of the thirdyear. During the years ended December 31, 2011, 2010 and 2009, we recorded stock based compensation related to restricted stock units of$2.8 million, $3.5 million and $2.6 million, respectively. Changes to the forfeiture rate are accounted for as a cumulative effect of change in the period ofsuch change. At December 31, 2011, there were 522,000 restricted stock units that remained outstanding. On January 24, 2012, we granted 681,000 additionalrestricted stock units.18. EMPLOYEE RETIREMENT PLAN We have a 401(k) defined contribution plan which permits participating employees to defer a portion of their compensation, subject to limitationsestablished by the Internal Revenue Code. Employees who have completed a half-year of service and are 21 years of age or older are qualified toparticipate in the plan. We match 50% of the first 6% of each participant's contributions to the plan. Beginning in 2006 through January 2008, ourmatching contributions were made in common stock issued from treasury. For the remainder of 2008, the matching contributions were made in cash.Our matching contributions for 2011 and 2010 were made in cash and common stock issued from treasury. Participant contributions are immediatelyvested. Our contributions vest based on the participant's years of service at 20% per year over five years. Our matching contribution totaled $991,000,$770,000 and $647,000 for the years ended December 31, 2011, 2010 and 2009, respectively. In addition, discretionary contributions totaling zero,$471,000, and $885,000 for the years ended December 31, 2011, 2010 and 2009, respectively, were made to eligible participants as of the end of eachrespective calendar year. In December 2009, we implemented a Non Qualified Deferred Compensation plan for senior management. The plan allows eligible members ofsenior management to defer their receipt of compensation from us, subject to the restrictions contained in the plan. Participants are 100% vested in theirdeferred compensation amounts and the associated gains or losses. For our contributions, if any, and the associated gains or losses, the participants shallvest in those deferred compensation amounts according to a vesting schedule that we shall determine at the time our contribution is made. As ofDecember 31, 2011, we have not made any contributions into the NQDC Plan. Participants are generally eligible to receive distributions from the plantwo plan years subsequent to the plan year their initial deferral contribution is made. Deferred compensation amounts are held in a "rabbi trust," whichinvests primarily in mutual funds. The trust assets, which consist primarily of mutual funds, areF-36 2011 2010 2009 Units WeightedAverageGrant DateFair Value Units WeightedAverageGrant DateFair Value Units WeightedAverageGrant DateFair Value Outstanding—beginningof year 685 $12.08 640 $11.35 449 $12.69 Granted atfair value 268 15.47 302 13.17 366 10.15 Vested (318) 12.20 (185) 11.52 (110) 12.64 Forfeited (113) 13.88 (72) 11.50 (65) 11.55 Outstanding—end ofyear 522 $13.40 685 $12.08 640 $11.35 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)18. EMPLOYEE RETIREMENT PLAN (Continued)recorded in our consolidated balance sheets because they are subject to the claims of our creditors. The corresponding deferred compensation liabilityrepresents the amounts deferred by the plan participants plus or minus any earnings or losses on the trust assets. The trust's assets totaled $302,000 and$148,000 at December 31, 2011 and December 31, 2010, respectively, and are included in Other current and long-term assets in the consolidatedbalance sheets. Our gains and losses on these investments were immaterial for the years ended December 31, 2011, 2010 and 2009.19. OTHER INCOME, NET Other income, net consisted of the following (in thousands):20. INCOME TAXES The provision (benefit) for income taxes consists of the following (in thousands):F-37 Years ended December 31, 2011 2010 2009 Gift card and Club-O rewards breakage $971 $909 $343 Sublease income 573 575 269 Gain (loss) from early retirement of convertible senior notes (54)$346 2,810 Loss from early retirement of finance obligations (1,199) — — Other (13) 258 (145) Total other income, net $278 $2,088 $3,277 Years endedDecember 31, 2011 2010 2009 Current: Federal $(254)$226 $145 State 69 133 112 Foreign 43 — — Total current (142) 359 257 Deferred: Federal $— $— $— State — — — Total deferred — — — Total provision (benefit) for income taxes $(142)$359 $257 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)20. INCOME TAXES (Continued) The components of our deferred tax assets and liabilities as of December 31, 2011 and 2010 are as follows (in thousands): As a result of our history of losses, a valuation allowance has been provided for the full amount of our net deferred tax assets as we believe that itis more likely than not that these benefits will not be realized. We recorded a tax benefit of ($142,000) for the year ended December 31, 2011, forfederal alternative minimum taxes, state and foreign taxes. At December 31, 2011 and 2010, we had U.S. federal net operating loss carry-forwards of approximately $192.5 million and $166.7 million andstate net operating loss carry-forwards of approximately $176.1 million and $150.7 million, respectively, which may be used to offset future taxableincome. We are currently reviewing whether we had any ownership changes. The result of having ownership changes under IRS Code Section 382would limit the amount of net operating losses that could be used in any annual period. Our carry-forwards begin to expire in 2018. The income tax provision differs from the amount computed by applying the U.S. federal income tax rate of 35% to loss before income taxes forthe following reasons (in thousands): We are subject to audit by the IRS and various states for periods since inception. We do not believe there will be any material changes in ourunrecognized tax positions over the next 12 months. Our policy is to recognize interest and penalties accrued on any unrecognized tax positions as acomponent of income tax expense.F-38 December 31, 2011 2010 Deferred tax assets and liabilities: Net operating loss carry-forwards $76,455 $66,241 Temporary differences: Accrued expenses 3,317 5,536 Reserves and other 5,705 6,369 Depreciation and amortization (1,860) (1,095) 83,617 77,051 Valuation allowance (83,617) (77,051) Net asset $— $— Year ended December 31, 2011 2010 2009 U.S. federal income tax provision (benefit) at statutory rate $(6,853)$4,940 $2,762 State income tax expense, net of federal benefit 45 86 112 Stock based compensation expense 70 484 781 Other 30 73 64 Change in valuation allowance 6,566 (5,224) (3,462) Income tax provision (benefit) $(142)$359 $257 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)20. INCOME TAXES (Continued) A reconciliation of the beginning and ending tax contingencies, excluding interest and penalties, is as follows (in thousands): The interest and penalties accrued on tax contingencies as of December 31, 2011 and 2010 were $82,000 and $53,000, respectively. Tax yearsbeginning in 2007 are subject to examination by taxing authorities, although net operating loss and credit carryforwards from all years are subject toexaminations and adjustments for at least three years following the year in which the attributes are used.21. RELATED PARTY TRANSACTIONS On April 1, 2009, Mr. James V. Joyce resigned from his position as a member of the Board of Directors of the Company. Mr. Joyce's resignationwas not the result of a disagreement with us on any matter relating to our operations, policies or practices. Mr. Joyce and the Company concurrentlyended our consulting arrangement with Icent LLC, which is a management consulting company of which Mr. Joyce is the chief executive officer, andthrough which Mr. Joyce provided consulting services to us. In connection with the termination of the consulting arrangement, we accrued$1.25 million, which was paid to Mr. Joyce on April 1, 2009. On occasion, Haverford-Valley, L.C. (an entity owned by our Chairman and Chief Executive Officer) and certain affiliated entities make travelarrangements for our executives and pay the travel related expenses incurred by our executives on company business. During the years endedDecember 31, 2011, 2010 and 2009 we reimbursed Haverford-Valley L.C. $122,000, $139,000, and $79,000, respectively, for these expenses. We retired $34.6 million of the Senior Notes during the year ended December 31, 2011, for $34.6 million in cash, resulting in a loss of $54,000 onearly extinguishment of debt, net of $77,000 of associated unamortized discount. Of the $34.6 million in Senior Notes retired during the year endedDecember 31, 2011, $10.1 million were held by Chou or an affiliate of Chou and $21.7 million were held by Fairfax or an affiliate of Fairfax. Chou andFairfax are beneficial owners of more than 5% of our common stock. We retired $25.4 million of the Senior Notes during the year ended December 31,2010 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. During 2010, we repurchased a portion of our Senior Notes held by Fairfax or an affiliate of Fairfax having an aggregate principal amount of$15.2 million for $15.0 million in cash.F-39 Year endedDecember 31, 2011 2010 2009 Beginning balance $191 $112 $— Additions for tax positions related to the current year — — 112 Additions for tax positions taken in prior years 40 79 — Ending balance $231 $191 $112 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)22. BUSINESS SEGMENTS Segment information has been prepared in accordance with ASC Topic 280 Segment Reporting. Segments were determined based on how wemanage the business. There were no inter-segment sales or transfers during the years ended December 31, 2011, 2010 and 2009. We evaluate theperformance of our segments and allocate resources to them based primarily on gross profit. The table below summarizes information about reportablesegments for the years ended December 31, 2011, 2010 and 2009 (in thousands): The direct segment includes revenues, direct costs, and cost allocations associated with sales fulfilled from our leased warehouses. Costs for thissegment include product costs and outbound 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 sales of merchandise of third parties over ourWebsite, fulfilled from warehouses maintained by our fulfillment partners. Costs for this segment include product costs, outbound freight andfulfillment costs, credit card fees and customer service costs.F-40 Year ended December 31, Direct Fulfillmentpartner Total 2011 Revenue, net $163,609 $890,668 $1,054,277 Cost of goods sold 149,660 725,529 875,189 Gross profit $13,949 $165,139 $179,088 Operating expenses (196,622)Other income (expense), net (2,046)Provision (benefit) for income taxes (142) Net loss $(19,438) 2010 Revenue, net $209,646 $880,227 $1,089,873 Cost of goods sold 187,124 713,109 900,233 Gross profit $22,522 $167,118 $189,640 Operating expenses (174,675)Other income (expense), net (717)Provision (benefit) for income taxes 359 Net income $13,889 2009 Revenue, net $150,901 $725,868 $876,769 Cost of goods sold 130,890 581,127 712,017 Gross profit $20,011 $144,741 $164,752 Operating expenses (156,725)Other income (expense), net (23)Provision (benefit) for income taxes 257 Net income $7,747 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)22. BUSINESS SEGMENTS (Continued) Assets have not been allocated between the segments for our internal management purposes and, as such, they are not presented here. For the years ended December 31, 2011, 2010 and 2009, over 99% of sales were made to customers in the United States of America. AtDecember 31, 2011 and December 31, 2010, all of our fixed assets were located in the United States of America.23. 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, 2011. We have prepared this information on the same basis as the consolidated statements of operations and the information includes alladjustmentsF-41Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)23. QUARTERLY RESULTS OF OPERATIONS (unaudited) (Continued)that we consider necessary for a fair statement of its financial position and operating results for the quarters presented.F-42 Three Months Ended March 31,2011 June 30,2011 September 30,2011 December 31,2011 (in thousands, except per share data) Consolidated Statement of Operations Data: Revenue, net Direct $48,161 $33,443 $34,749 $47,256 Fulfillment partner 217,309 201,549 204,989 266,821 Total net revenue 265,470 234,992 239,738 314,077 Cost of goods sold Direct 43,030 30,231 32,472 43,927 Fulfillment partner 172,356 164,991 168,893 219,289 Total cost of goods sold 215,386 195,222 201,365 263,216 Gross profit 50,084 39,770 38,373 50,861 Operating expenses: Sales and marketing 15,425 13,655 13,822 18,911 Technology 16,660 16,808 17,171 16,404 General and administrative 17,986 16,725 15,321 17,734 Total operating expenses 50,071 47,188 46,314 53,049 Operating income (loss) 13 (7,418) (7,941) (2,188)Interest income 52 46 23 40 Interest expense (676) (630) (662) (517)Other income (expense), net 189 220 553 (684) Net loss before income taxes (422) (7,782) (8,027) (3,349) Provision (benefit) for income taxes 22 16 (240) 60 Net loss $(444)$(7,798)$(7,787)$(3,409) Deemed dividend related to redeemable common stock (10) (2) — — Net income (loss) attributable to common shares $(454)$(7,800)$(7,787)$(3,409) Net loss per common share—basic: Net loss per share—basic $(0.02)$(0.34)$(0.33)$(0.15)Weighted average common shares outstanding—basic 23,215 23,265 23,276 23,278 Net loss per common share—diluted: Net loss per share—diluted $(0.02)$(0.34)$(0.33)$(0.15)Weighted average common shares outstanding—diluted 23,215 23,265 23,276 23,278 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)23. QUARTERLY RESULTS OF OPERATIONS (unaudited) (Continued) F-43 Three Months Ended March 31,2010 June 30,2010 September 30,2010 December 31,2010 (in thousands, except per share data) Consolidated Statement of Operations Data: Revenue, net Direct $50,568 $42,382 $47,508 $69,188 Fulfillment partner 213,762 188,871 197,912 279,682 Total net revenue 264,330 231,253 245,420 348,870 Cost of goods sold Direct 43,584 37,434 43,174 62,932 Fulfillment partner 173,475 152,240 160,868 226,526 Total cost of goods sold 217,059 189,674 204,042 289,458 Gross profit 47,271 41,579 41,378 59,412 Operating expenses: Sales and marketing 14,279 14,179 15,626 17,250 Technology 13,948 14,178 14,186 15,948 General and administrative 14,906 14,503 14,742 11,499 Restructuring (136) — — (433) Total operating expenses 42,997 42,860 44,554 44,264 Operating income (loss) 4,274 (1,281) (3,176) 15,148 Interest income 16 40 55 46 Interest expense (802) (760) (668) (732)Other income (expense), net 371 652 387 678 Net income (loss) before income taxes 3,859 (1,349) (3,402) 15,140 Provision (benefit) for income taxes 129 (7) (44) 281 Net income (loss) $3,730 $(1,342)$(3,358)$14,859 Deemed dividend related to redeemable common stock (14) (63) (23) (12)Net income (loss) attributable to common shares $3,716 $(1,405)$(3,381)$14,847 Net income (loss) per common share—basic: Net income (loss) per share—basic $0.16 $(0.06)$(0.15)$0.64 Weighted average common shares outstanding—basic 22,941 23,013 23,060 23,060 Net income (loss) per common share—diluted: Net income (loss) per share—diluted $0.16 $(0.06)$(0.15)$0.63 Weighted average common shares outstanding—diluted 23,243 23,013 23,060 23,466 Table of ContentsSchedule IIValuation and Qualifying Accounts(dollars in thousands) F-44 Balance atBeginning ofYear Charged toExpense Deductions Balance atEnd of Year Year ended December 31, 2011 Deferred tax valuation allowance $77,051 $6,566 $— $83,617 Allowance for sales returns 11,525 83,129 83,755 10,899 Allowance for doubtful accounts 2,048 268 1,742 574 Year ended December 31, 2010 Deferred tax valuation allowance $80,245 $— $3,194 $77,051 Allowance for sales returns 11,923 88,473 88,871 11,525 Allowance for doubtful accounts 1,730 780 462 2,048 Year ended December 31, 2009 Deferred tax valuation allowance $86,443 $— $6,198 $80,245 Allowance for sales returns 14,820 72,407 75,304 11,923 Allowance for doubtful accounts 1,594 265 129 1,730 QuickLinks -- Click here to rapidly navigate through this documentExhibit 10.27 Summary of Unwritten Compensation ArrangementsApplicable to Non-Employee Directors of Overstock.com, Inc. During 2011 the Company paid its non-employee directors $60,000 annually, at the rate of $15,000 per quarter. During 2012 the Company willpay its non-employee directors $50,000 annually, at the rate of $12,500 per quarter. The Company also grants restricted stock units to directors,generally at the first Board meeting after the director first joins the Board, and periodically thereafter. In 2011, the Company granted restricted stockunits to non-employee directors as follows: The Company also reimburses directors for out-of-pocket expenses incurred in connection with attending Board and committee meetings.Haverford Valley, L.C., an affiliate of the Company, and certain affiliated entities which make travel arrangements for the Company's executives, alsooccasionally make travel arrangements for directors to attend Board meetings, for which the Company reimburses Haverford Valley at rates not inexcess of commercially available airline rates.Name Grant Date Number ofRestricted Stock UnitsGranted(1) Allison H. Abraham May 4, 2011 8,000 Barclay F. Corbus May 4, 2011 8,000 Joseph J. Tabacco, Jr. May 4, 2011 8,000 John J. Byrne May 4, 2011 8,000 Samuel A. Mitchell May 4, 2011 8,000 (1)Each restricted stock unit represents a contingent right to receive one share of Overstock.com, Inc. common stock. Therestricted stock units vest as to 25% at the close of business on the first anniversary of the date of grant, 25% at thesecond anniversary of the date of grant, and the remaining 50% at the third anniversary of the date of grant. Vested sharesare delivered promptly after the restricted stock units vest.QuickLinksExhibit 10.27Summary of Unwritten Compensation Arrangements Applicable to Non-Employee Directors of Overstock.com, Inc.QuickLinks -- Click here to rapidly navigate through this documentExhibit 21 SUBSIDIARIES OF THE REGISTRANT Name Jurisdiction of Formation Trade NamesOverstock.com Real Estate LLC Utah Overstock.com Real EstateOverstock.com Services, Inc. Utah Overstock.com ServicesMarket Partner Holdings, Inc. Utah Market Partner Operations, Inc. Utah Market Partner SR, Inc. Utah QuickLinksExhibit 21SUBSIDIARIES OF THE REGISTRANTQuickLinks -- Click here to rapidly navigate through this documentExhibit 23.1 Consent of Independent Registered Public Accounting Firm The Board of DirectorsOverstock.com, Inc.: We consent to the incorporation by reference in the registration statements (Nos. 333-162674, 333-160512, 333-124441, and 333-123540) onForm S-8 and (No. 333-178390) on Form S-3 of Overstock.com, Inc. of our reports dated March 2, 2012, with respect to the consolidated balancesheets of Overstock.com, Inc. as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders' equity (deficit)and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2011, and the related financialstatement schedule, and the effectiveness of internal control over financial reporting as of December 31, 2011, which reports appear in the December 31,2011 annual report on Form 10-K of Overstock.com, Inc./s/ KPMG LLPSalt Lake City, UtahMarch 2, 2012QuickLinksExhibit 23.1Consent of Independent Registered Public Accounting Firm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 to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial 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 (as definedin Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-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 us byothers 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 under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal 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 about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; 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 financial reporting,to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (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's internalcontrol over financial reporting.Date: March 2, 2012 /s/ PATRICK M. BYRNEPatrick M. ByrneChief Executive Officer (principal executive officer)QuickLinksExhibit 31.1CERTIFICATIONQuickLinks -- Click here to rapidly navigate through this documentExhibit 31.2 CERTIFICATION I, Stephen J. Chesnut, 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 to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial 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 (as definedin Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-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 us byothers 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 under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal 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 about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; 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 financial reporting,to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (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's internalcontrol over financial reporting.Date: March 2, 2012 /s/ STEPHEN J. CHESNUTStephen J. ChesnutSenior Vice President, Finance and RiskManagement (principal financial officer)QuickLinksExhibit 31.2CERTIFICATION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, that theAnnual Report of Overstock.com, Inc. on Form 10-K for the year ended December 31, 2011 fully complies with the requirements of Section 13(a) or15(d) of the Securities Exchange Act of 1934, as applicable, and that information contained in such Report fairly presents in all material respects thefinancial condition and results of operations of Overstock.com, Inc.Date: March 2, 2012 /s/ PATRICK M. BYRNE Name: Patrick M. Byrne Title: Chief Executive Officer (principal executive officer)QuickLinksEXHIBIT 32.1CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION906 OF 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, Stephen J. Chesnut, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that theAnnual Report of Overstock.com, Inc. on Form 10-K for the year ended December 31, 2011 fully complies with the requirements of Section 13(a) or15(d) of the Securities Exchange Act of 1934, as applicable, and that information contained in such Report fairly presents in all material respects thefinancial condition and results of operations of Overstock.com, Inc.Date: March 2, 2012 /s/ STEPHEN J. CHESNUT Name: Stephen J. Chesnut Title: Senior Vice President, Finance and RiskManagement (principal financial officer)QuickLinksEXHIBIT 32.2CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION906 OF THE SARBANES-OXLEY ACT OF 2002

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