Overstock Annual Report 2012

Plain-text annual report

Use these links to rapidly review the documentTABLE OF CONTENTS PART IVTable 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 of1934 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 such(Mark One)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2012ORo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to filing 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, 2012), was approximately $59.6 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 18, 2013 there were 23,648,271 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 2013 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 oTable of ContentsOVERSTOCK.COM, INC.ANNUAL REPORT ON FORM 10-KINDEX O, Overstock.com, O.com, O.co, Main Street Revolution, Worldstock Fair Trade and Worldstock are registered trademarks, and Club O and O.bizare trademarks of Overstock.com, Inc. The Overstock.com, Club O, and Worldstock Fair Trade logos are also registered trademarks ofOverstock.com, Inc. Other service marks, trademarks and trade names referred to in this Form 10-K are property of their respective 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 28 Item 2. Properties 28 Item 3. Legal Proceedings 28 Item 4. Mine Safety Disclosures 28 Part II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities 29 Item 6. Selected Financial Data 32 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 34 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 61 Item 8. Financial Statements and Supplementary Data 61 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 61 Item 9A. Controls and Procedures 62 Item 9B. Other Information 65 Part III Item 10. Directors, Executive Officers and Corporate Governance 66 Item 11. Executive Compensation 66 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related StockholderMatters 66 Item 13. Certain Relationships and Related Transactions, and Director Independence 67 Item 14. Principal Accounting Fees and Services 67 Part IV Item 15. Exhibits, Financial Statement Schedules 68 Signatures 71 Financial Statements F-2 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 ofthe Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to future events or our future financial or operatingperformance, and involve risks and uncertainties. All statements made herein, other than statements of historical fact, including, without limitation, allstatements regarding the matters described below, are forward-looking statements:•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 any debt we may have; •our plans for international markets, our expectations for our international sales efforts and the anticipated results of internationaloperations; •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, cyber-security 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 and expectations regarding the adequacy of our office and warehouse facilities; •our expectations regarding our car listing service and our community site, and the anticipated functionality and results of operations ofthem; •our belief that we and our fulfillment partners will be able to maintain inventory levels at appropriate levels despite the seasonal natureof our business; •our belief that our sales through other ecommerce marketplace channels will be successful and become an important part of ourbusiness; and •our belief that we can successfully offer and sell a constantly changing mix of products and services.iiTable of Contents Further, 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 from those contemplated by forward-looking statements for a variety of reasons, includingamong others, the matters discussed herein under Item 1A—Risk Factors, as well as the following:•changes in U.S. and global economic conditions and consumer spending; •world events; •the rate of growth of the Internet and online commerce, and the occurrence of any event that would discourage or prevent consumersfrom shopping online; •any failure to maintain our existing relationships or build new relationships with fulfillment partners on acceptable terms; •any difficulties we may encounter maintaining optimal levels of product quality and selection or in attracting sufficient consumer interestin our product offerings; •modifications we may make to our business model from time to time, including aspects relating to our product mix and the mix ofdirect/fulfillment partner sourcing of the products we offer; •the mix of products purchased by our customers; •problems with cyber security or data breaches or the costs of preventing or responding to any such problems; •problems with or affecting our credit card processors, including cyber-attacks, Internet or other infrastructure or communicationsimpairment or other events that could interrupt the normal operation of the credit card processors; •problems with the facility where substantially all of our computer and communications hardware is located or other problems thatresult in the unavailability of our Website or reduced performance of our transaction systems; •difficulties we may have in responding to technological changes; •problems with fraudulent purchases; •problems we may encounter as a result of the listing or sale of pirated, counterfeit or illegal items by third parties; •difficulties we may have financing our operations or expansion with either internally generated funds or external sources of financing; •the extent to which we owe income taxes or are required to collect sales taxes or to modify our business model in order to avoid beingrequired to collect sales taxes; •competition; •management of growth; •fluctuations in our operating results; •our efforts to expand internationally; •the outcomes of legal proceedings, investigations and claims; •optimization of our warehouse operations; •risks of inventory management and seasonality.iiiTable of Contents In evaluating all forward-looking statements, you should specifically consider the risks outlined above and those described in Item 1A under thecaption "Risk Factors." These factors may cause our actual results to differ materially from those contemplated by any forward-looking statement.Except as otherwise required by law, we expressly disclaim any obligation to release publicly any update or revisions to any forward-lookingstatements to reflect any changes in our expectations or any change in events, conditions or circumstances on which any of our forward-lookingstatements are based. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee futureresults, levels of activity, performance, achievements or other events.ivTable of ContentsPART IITEM 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 described in this 10-K, including thoseset forth in the Special Note Regarding Forward-Looking Statements or in Section 1A under the heading "Risk Factors" or elsewhere in this Form 10-K.Introduction We are an online retailer offering discount brand name, non-brand name and closeout merchandise, including furniture, home décor, bedding andbath, housewares, jewelry and watches, apparel and designer accessories, electronics and computers, and sporting goods, 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. 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, and sometimes limited, inventory to our Website in order to create an atmosphere that encourages customers to visit frequently andpurchase products before our inventory sells out. We sell products primarily in the United States, with a small amount of products (less than 1% of ourtotal net revenue) 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 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. The merchandise offered on our Website is from avariety of sources including well-known, brand-name manufacturers. We have organized our shopping business (sales of product offered through theShopping Section of our Website) into two principal segments—a "direct" business and a "fulfillment partner" business. We currently offerapproximately 344,000 non-BMMG products and approximately 641,000 BMMG products. Consumers and businesses are able to access andpurchase our products 24 hours a day from the convenience of a computer, Internet-enabled mobile telephone or other Internet-enabled devices. Ourteam of customer service representatives assists customers by telephone, instant online chat and e-mail. We also derive revenue from other businessesadvertising products or services on our Website. Nearly all of our sales are to customers located in the United States. During the years endedDecember 31, 2012 and 2011 no single customer accounted for more than 1% of our total net revenue.1Table of ContentsDirect business Our direct business includes sales made to individual consumers and businesses, which are fulfilled from our warehouse in Salt Lake City, Utah.During the year ended December 31, 2012, we fulfilled approximately 14% of our order volume through our warehouse. Our warehouse generallyships between 4,000 and 7,000 orders per day and up to approximately 10,000 orders per day during peak periods, using overlapping daily shifts.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 2,100 third parties who supply approximately 338,000 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.Consignment In September 2009, we began offering a consignment service to suppliers where the suppliers' merchandise is stored in and shipped from ourwarehouses. We pay the consignment supplier upon sale of the consigned merchandise to our customer. Revenue from our consignment servicebusiness in 2012, 2011 and 2010 were less than 1% of total net revenues and are included in the fulfillment partner segment.International business As of December 31, 2012, we were offering products to customers in over 100 countries and non-U.S. territories. We do not have sales operationsoutside the United States, and are using a U.S.-based third party to provide logistics and fulfillment for all international orders. Revenue generated fromour international business is included in either direct or fulfillment partner revenue, depending on whether the product is shipped from our warehousesor from a fulfillment partner. Less than 1% of our 2012, 2011 and 2010 revenues were from international customers.Ecommerce marketplace channels During 2012, we began offering some of our products for sale in on-line marketplaces of other Internet retailers' websites, which allows us toreach a broader potential customer base. Under the2Table of Contentsterms of our agreements with these ecommerce marketplace retailers, the retailers typically earn a fee that is a percentage of the selling price of the ordersthey send us. Revenue generated from these ecommerce marketplace channels is included in either direct or fulfillment partner revenue, depending onwhether the product is shipped from our warehouses or from a fulfillment partner. Ecommerce marketplace channels were approximately 1% of our2012 total net revenues.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 and post offers to purchase, and provides the means for prospective purchasers to contact sellers for further information andnegotiations on the purchase of an advertised vehicle. We also earn advertisement revenue derived from our cars business. Revenue from the carsbusinesses is included in the fulfillment partner segment on a net basis. 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.Products Our Website Shopping section is organized into 21 main product lines: For the Home, Furniture, Bedding & Bath, Clothing & Shoes, Electronics,Jewelry, Watches, Sports and Outdoors, Books Media Music & Games, Luggage, Worldstock Fair Trade, Health & Beauty, Baby, Crafts & Sewing,Office, Gifts & Flowers, Toys & Hobbies, Pets, Main Street Revolution, Emergency Preparedness, and As Seen on TV. Worldstock Fair Trade is oursocially-responsible, online marketplace through which artisans in the United States and around the world can sell their products and gain access to abroader market. We have specialty departments, such as Main Street Revolution, which is a marketplace that enables small businesses to offer theirproducts to a mass audience by selling on our websites. From time to time, as the number of products and product categories change, we mayreorganize our departments and/or categories to better reflect our current product offerings. For the years ended December 31, 2012, 2011 and 2010, the percentages of gross revenues contributed by similar classes of products were asfollows:3Product Lines 2012 2011 2010 Home and garden(1) 66% 58% 55%Jewelry, watches, clothing and accessories 16% 20% 23%BMMG, electronics and computers 6% 10% 11%Other 12% 12% 11% Total 100% 100% 100% (1)Home and garden includes home décor, bedding, bath, furniture, housewares, garden, patio and other related products.Table of ContentsSales 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 and viral and social media campaigns. We also do brandadvertising through television, radio, and print ads. We generally hire third parties to develop our campaigns and advertising.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.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 is located in a co-location facility in Salt Lake City. We also have a second data center near our corporate headquarterswhich we use primarily for backups, redundancy, development, testing, and our corporate systems infrastructure.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; •online general retailers with discount; •private sale sites; •online specialty retailers; and •traditional general merchandise and specialty retailers and liquidators which also have an online presence.4Table of Contents 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 or service suppliers that could deny us accessto key products or needed services, or acquisitions of our suppliers or service providers, having the same effect. Many of them do or could devotegreater resources to marketing and promotional campaigns and devote substantially more resources to their website and systems development than wedo. Many have supply chain operations that decrease product shipping times to their customers, or have options for in-store product pick-up options orallow in-store returns and offer other delivery and returns options that we do not have. New technologies and the continued enhancement of existingtechnologies and developments in related areas, such as same-day product deliveries, also may increase competitive pressures on us. We cannot ensurethat we will be able to compete successfully against current or future competitors or address increased competitive pressures (see Item 1A—"RiskFactors").Seasonality Our business is affected by seasonality because of the holiday retail season, which historically has resulted in higher sales volume during ourfourth quarter, which ends December 31. We recognized 31.1%, 29.8% and 32.0% of our annual revenue during the fourth quarter of 2012, 2011, and2010, respectively.Financial Information about Business Segments and Geographic Areas See Item 15 of Part IV, "Financial Statements"—Note 22—"Business Segments" for information regarding our business segments andgeographical areas.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 litigation iscostly and time consuming and can divert our management and key personnel from our business operations. The uncertainty of litigation increases theserisks. In connection with such litigation, we may be subject5Table of Contentsto significant damages, associated costs, or equitable remedies relating to the operation of our business and the sale of products on our Website. Anysuch litigation may materially harm our business, prospects, results of operations, 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"). For further information, see the information set forth under Item 15 of Part IV, "Financial Statements—Note 13—Commitments andContingencies, subheading Legal Proceedings," 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 to consumers 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. Further, thegrowth and demand for online commerce could result in more stringent consumer protection laws that impose additional compliance burdens on onlinecompanies. These consumer protection laws could result in substantial compliance costs. New disclosure and reporting requirements, established under existing or new state or federal laws, such as rules regarding requirements toidentify the origin and existence of certain "conflict minerals" or regarding the disclosure of abusive labor practices in portions of our supply chain,could increase the cost of doing business, adversely affecting our results of operations. 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. In addition, new state tax regulations in states where we do notnow collect state and local taxes may subject us to the obligation to collect and remit state and local taxes, or subject us to additional state and local salesand income taxes, or to requirements intended to assist states with their tax collection efforts. New legislation or regulation, the application of laws andregulations from jurisdictions whose laws do not currently apply to our business or the application of existing laws and regulations to the Internet andcommercial online services could result in significant additional taxes on our business. These taxes or tax collection obligations could have an adverseeffect on our cash flows and results of operations. Further, there is a possibility that we may be subject to significant fines or other payments for anypast failures to comply with these requirements.Employees At December 31, 2012, 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.6Table of ContentsCompetition for qualified personnel in our industry has historically been intense, particularly for software engineers, computer scientists, and othertechnical staff.Executive Officers of the Registrant The following persons were executive officers of Overstock.com as of February 18, 2013: On February 12, 2013 we announced that our Chief Executive Officer and Chairman of the Board, Dr. Patrick M. Byrne, will be taking a personalleave of absence for medical reasons. Our President, Jonathan E. Johnson III, will serve as Acting Chief Executive Officer during Dr. Byrne's leave ofabsence. Dr. Byrne will remain Chairman of the Board. 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 of directors from February 2001 through October 2005, and since July 2006. From September 1997 to May 1999, Dr. Byrne served asPresident and Chief Executive Officer of Fechheimer Brothers, Inc., a manufacturer and distributor of uniforms. From 1995 until its sale in September1999, Dr. Byrne was Chairman, President and Chief Executive Officer of Centricut, LLC, a manufacturer and distributor of industrial torch parts. From1994 to 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. Mr. Jonathan E. Johnson III joined Overstock.com in September 2002 and has served as our President and Corporate Secretary since July 2008and is Acting Chief Executive Officer since February 12, 2013. He has also served as our General Counsel and as our Vice President, Strategic Projectsand Legal, and Senior Vice President, Corporate Affairs and Legal. From May 1999 to September 2002, Mr. Johnson held various positions withTenFold Corporation, a software company, including General Counsel, Executive Vice President and Chief Financial Officer. From October 1997 toApril 1999, Mr. Johnson practiced law with Milbank, Tweed, Hadley & McCloy and from September 1994 to September 1997, he practiced law withGraham & James. From February 1994 to August 1994, 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 January 1994, Mr. Johnson served as a judicial clerk at the Utah Court of Appeals for Judge LeonardH. Russon. Mr. Johnson holds a Bachelor's Degree in Japanese from Brigham Young University, studied for a year at Osaka University of ForeignStudies 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, Business7Executive Officers Age PositionPatrick M.Byrne 50 Chairman of the Board of DirectorsJonathan E.Johnson III 46 President, Acting Chief Executive Officer and CorporateSecretaryStephen J.Chesnut 53 Senior Vice President, Finance and Risk ManagementTimothy D.Dilworth 37 Senior Vice President, MarketingDavid J.Nielsen 43 Senior Vice President, Merchandising and Supply ChainBhargav J.Shah 37 Senior Vice President, TechnologyStormy D.Simon 44 Senior Vice President, Customer and Partner Care andDirectorStephen P.Tryon 51 Senior Vice President, Human Capital Management andInternationalTable of ContentsDevelopment for HD Supply (prior to its sale by Home Depot); Director, Finance and Chief Financial Officer for Home Depot Supply; Director, NewConcept Development; and Director, Strategic Planning. Prior to joining The Home Depot from 1986 to 1998, Mr. Chesnut served in a variety ofoperational, planning and financial positions for Target Stores Inc. Mr. Chesnut holds a Bachelor's of Science Degree in Accounting and BusinessManagement from Southern Utah University and a Master of Business Administration Degree, Finance and Strategic Planning, from Brigham YoungUniversity. Mr. Timothy D. Dilworth joined Overstock.com in March 2012, and serves as Senior Vice President, Marketing. Prior to joining Overstock.com,Mr. Dilworth worked for Coldwater Creek, a specialty retailer of women's apparel, accessories, jewelry and gift items, since 2000 in various positionswithin the company's marketing group and last held the position of Coldwater Creek's Senior Vice President of Marketing. He holds Bachelor's Degreein Business and Information Technology from Montana Tech of the University of Montana and a Masters of Business Administration Degree from theUniversity of Idaho. Mr. David J. Nielsen currently serves as our Senior Vice President, Merchandising & Supply Chain. Mr. Nielsen previously served as the VicePresident, Merchandising from August 2009. Prior to joining Overstock.com in 2009, Mr. Nielsen was with Payless ShoeSource, Inc., a shoe retailerfrom 2005 through 2009. At Payless he held a variety of positions, most recently serving as the Vice President of Merchandise Distribution.Additionally, Mr. Nielsen worked at Old Town Imports, LLC, a retail company, where he served as President and CEO. Mr. Nielsen holds a Bachelor'sDegree in Business Management with an emphasis in Marketing from Brigham Young University. Mr. Bhargav J. Shah currently serves as our Senior Vice President, Technology. Prior to joining Overstock.com, Mr. Shah served as a director inKPMG LLP's IT advisory group since 2009. Prior to that, Mr. Shah held various positions with Bearing Point (formerly KPMG Consulting) includingconsulting senior manager. Mr. Shah holds a Chemical Engineering Degree from K.E.S Engineering College in Mumbai, India and a Master's ofBusiness Administration Degree in Finance from Bentley University. 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 and International.Prior to joining Overstock.com, Mr. Tryon was the Legislative Assistant to the Chief of Staff of the United States Army. During his 21 years with theArmy, his assignments included director of plans for the 10th Mountain Division, Congressional Fellow for United States Senator Max Cleland,Assistant Professor of Philosophy at the United States Military Academy, and commander of a company of paratroopers. Mr. Tryon received aBachelor's of Science Degree in Applied Sciences from the U.S. Military Academy and a Master's Degree of Arts in Philosophy from StanfordUniversity.Available Information Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports filed or furnished pursuantto Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our the Investor Relations sections of our mainwebsite www.overstock.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities andExchange Commission. Our Internet Website and the information contained therein or connected thereto are not a part of or incorporated into thisAnnual Report on Form 10-K.8Table of ContentsITEM 1A. RISK FACTORS Please consider the following risk factors carefully. If any of the following risks were to occur, it could have a material adverse effect on ourbusiness, prospects, financial condition and results of operations, and the market price of our securities could decrease significantly. Statements belowto the effect that an event could harm our business (or similar statements) mean that the event could have a material adverse effect on our business,prospects, financial condition and results of operations. These are not the only risks we face.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. At December 31, 2012, our accumulated deficitwas $247 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$14.7 million in 2012, we incurred a net loss of $19.4 million in 2011. We may be unable to maintain profitability in the future. If our revenues growmore slowly than we anticipate or decline, or if our expenses exceed our expectations, our financial results would be harmed and our business,prospects, financial condition and results of operations could fall below the expectations of public market analysts and investors.We are an e-commerce business and we depend on the continued use of the Internet and the adequacy of the Internet infrastructure. Our business depends upon the widespread use of the Internet and e-commerce. Factors which could reduce the widespread use of the Internet fore-commerce include:•actual or perceived lack of security of information or privacy protection; •cyber attacks or other disruptions or damage to the Internet or to users' computers; •significant increases in the costs of transportation of goods; and •taxation and governmental regulation.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, 2012, we had relationships with approximately 2,100 independent fulfillment partners whose products we offer for sale on ourWebsite. Products provided by our fulfillment partners accounted for 86% of our net revenues for the year ended December 31, 2012. If we do notmaintain our existing relationships or build new relationships with fulfillment partners on acceptable commercial terms, we may not be able to maintain abroad selection of merchandise, and our business and prospects would suffer severely. Our agreements with fulfillment partners are generallyterminable at will by either party upon short notice.We depend on our fulfillment partners to perform certain services regarding the products that we offer. 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, including maintaining inventory, preparing merchandise for shipment to individualcustomers and delivering purchased merchandise on a timely basis. We may be unable to ensure that these third parties will continue to perform theseservices to our satisfaction or on commercially reasonable terms. In addition, because we do not take possession of these fulfillment parties' products(other than on the return of such products), we are generally unable to fulfill these9Table of Contentstraditional retail operations ourselves. If our customers become dissatisfied with the services provided by these third parties, our business and reputationand the Overstock.com brand could suffer.Risks associated with the suppliers from whom our products are sourced and the safety of those products could adversely affect our financialperformance. Global sourcing of many of the products we sell is an important aspect of our business. We depend on our ability to access products from qualifiedsuppliers in a timely and efficient manner. Political and economic instability, the financial stability of suppliers, suppliers' ability to meet our standards,labor problems experienced by our suppliers, the availability of raw materials, merchandise quality issues, currency exchange rates, transport availabilityand cost, transport security, inflation, and other factors relating to the suppliers and the countries in which they are located are beyond our control.Further, our customers count on us to provide them with safe products. Concerns regarding the safety of products that we source from our suppliersand then sell could cause shoppers to avoid purchasing certain products from us, or to seek alternative sources of supply for all of their needs, even ifthe basis for the concern is outside of our control. Any lost confidence on the part of our customers would be difficult and costly to reestablish. Assuch, any issue regarding the safety of any items we sell, regardless of the cause, could adversely affect our financial performance. Further, we sellproducts manufactured for us by third parties, some of which may be defective. If any product that we sell were to cause physical injury or injury toproperty, the injured party or parties might bring claims against us as the manufacturer and/or retailer of the product. Our insurance coverage may not beadequate to cover claims that could be asserted. Even unsuccessful claims could result in the expenditure of funds and management time and could havea negative impact on our business.Manufacturers may refuse to sell to us or through our site. 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 could result in suppliers choosing to limit or suspend doing business with us or require us to prepay for our purchases. Further,some manufacturers are unwilling to offer products for sale on the Internet or on sites like ours. Our inability to source and offer popular products couldbe a significant problem for us.Our business depends on our Website, network infrastructure and transaction-processing systems. As an e-commerce company, we are completely dependent on our infrastructure. Any system interruption that results in the unavailability of ourWebsite or reduced performance of our transaction systems could reduce our ability to conduct our business. We use internally and externally developedsystems for our Website and our transaction processing systems, including personalization databases used for internal analytics, recommendations andorder verifications. We have experienced periodic systems interruptions due to server failure and power failure in the past, which we expect willcontinue to occur from time to time. We have also experienced and may continue to experience temporary capacity constraints due to sharply increasedtraffic during sales or other promotions and during the holiday shopping season. Capacity constraints can cause system disruptions, slower responsetimes, delayed page presentation, degradation in levels of customer service and other problems. In the past we have also experienced difficulties withour infrastructure upgrades. Any future difficulties with our transaction processing systems or difficulties upgrading, expanding or integrating aspectsof our systems may cause system disruptions, slower response times, and degradation in levels of customer service, additional expense, impairedquality and speed of order fulfillment or other problems.10Table of ContentsIf 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 if we suffer an interruption or degradationof services at the facility for any reason, our business could be harmed. Our success, and in particular, our ability to successfully receive and fulfillorders and provide high-quality customer service, largely depends on the efficient and uninterrupted operation of our computer and communicationssystems. Substantially all of our computer and communications hardware is located at a single co-location facility in Salt Lake City, Utah, with apartially 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 anyother cause of interruption of service, both our primary and back-up sites could be adversely affected. Although we have designed our back-up systemin an effort to minimize service interruptions in the event of a failure of our main facility, our systems and operations are vulnerable to damage orinterruption from fire, flood, power loss, telecommunications failure, terrorist attacks, cyber-attacks, acts of war, break-ins, earthquake and similarevents. In the event of a failure of our primary facility, the failover to our back-up facility would take at least several hours, during which time ourWebsite 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 notadequate to support sales at a high level. The back-up facility may not process effectively during time of higher traffic to our Website and may processtransactions more slowly and may not support all of the functionality of our primary site. These limitations could have an adverse effect on ourconversion rate and sales. Our disaster recovery plan may be inadequate, and we do not carry business interruption insurance sufficient to compensateus for the losses that could occur. Despite our implementation of network security measures, our servers are vulnerable to computer viruses, physical orelectronic break-ins and similar disruptions, the occurrence of any of which could lead to interruptions, delays, loss of critical data or the inability toaccept and fulfill customer orders. The occurrence of any of the foregoing risks could harm our business.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 third party delivery providers for the shipment of products to customers. We cannot be sure that these relationships will continue onterms we find acceptable, or at all. Increases in shipping costs or delivery times, particularly during the holiday season, could harm our business. 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 carrier from performing its delivery services, whichcan have an adverse effect on our customers' satisfaction with us. In any of these circumstances, we may be unable to engage alternative carriers on atimely basis, upon terms we find acceptable, or at all. Changing carriers, or absence of carrier availability, could have a material adverse effect on ourbusiness.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 or increase a reserve based ontheir assessment of the inherent risks of credit card processing and their assessment of the risks of11Table of Contentsprocessing our customers' credit cards at any time, and have done so from time to time in the past. We are also subject to payment card associations'operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult orimpossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose ourability to accept credit and debit card payments from our customers, process electronic funds transfers, or facilitate other types of online payments. Inaddition, events affecting our credit card processors, including cyber-attacks, Internet or other infrastructure or communications impairment or otherevents that could interrupt the normal operation of the credit card processors, could have a material adverse effect on our business.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 use 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 used by these sites. If these rules and guidelinesor the search engine algorithms change, or if we fail to present, or improperly present, our site information for use by natural search engine companies,or if any of these natural search engine companies determine that we have violated their rules or guidelines, as Google did in February 2011 throughApril 2011, or if others improperly present our site information to these search engine companies, we may fail to achieve an optimum ranking in naturalsearch engine listing results, or we may be penalized in a way that could harm our business.We 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 suffered security breaches, some of which have involvedintentional attacks. From time to time we and many other Internet businesses also experience denial of service attacks wherein attackers attempt to blockcustomers' access to our Website. If we are unable to avert a denial of service attack for any significant period, we could sustain substantial revenue lossfrom lost sales and customer dissatisfaction. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types ofcyber-attacks. Cyber attacks may target us, our customers, our suppliers, banks, credit card processors, delivery services, e-commerce in general or thecommunication infrastructure on which we depend. If an actual or perceived attack or breach of our security occurs, customer and/or supplier perceptionof the effectiveness of our security measures could be harmed and we could lose customers, suppliers or both. Actual or anticipated attacks and risksmay cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees, and engage thirdparty experts and consultants. A person who is able to circumvent our security measures might be able to misappropriate our or our users' proprietary information, causeinterruption in our operations, damage our computers or12Table of Contentsthose of our users, or otherwise damage our reputation and business. Any compromise of our security could result in a violation of applicable privacyand other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence in our security measures, which could harmour 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 and the servers of our suppliers may also be vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions,including denial-of-service attacks. We may need to expend significant resources to protect against attacks or security breaches or to address problemscaused by attacks or breaches. Any attack or breach incident involving us or persons with whom we have commercial relationships, that results in theunauthorized release of our users' personal information, could damage our reputation and expose us to a risk of loss or litigation and possible liability. Third parties have demonstrated that they can breach the security of customer transaction data of large sophisticated Internet retailers, governmentorganizations and others. Any breach, whether it affects us directly or not, could cause our customers to lose confidence in the security of our site or theuse of the Internet and e-commerce in general. If third parties are able to penetrate our network security or otherwise misappropriate our customers'personal information or credit card information, or if we give third parties improper access to our customers' personal information or credit cardinformation, we could be subject to liability. This liability could include claims for unauthorized purchases with credit card information, impersonationor other similar fraud claims or damages for alleged violations of state or federal laws governing security protocols for the safekeeping of customers'personal or credit card information. This liability could also include claims for other misuses of personal information, including unauthorized marketingpurposes. These claims could result in litigation. Liability for misappropriation of this information could adversely affect our business.Credit card fraud and our response to it 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 our failure toadequately control fraudulent credit card transactions could reduce our net revenues and our gross profit. We have implemented technology to help usdetect and reject the fraudulent use of credit card information. However, we may in the future suffer losses as a result of orders placed with fraudulentcredit card data even if the associated financial institution approved payment of the orders. Under current credit card practices, we may be liable forfraudulent credit card transactions because we do not obtain a cardholder's signature. If we are unable to detect or control credit card fraud, our liabilityfor these transactions could harm our business, prospects, financial condition and results of operation. Further, to the extent that our efforts to preventfraudulent orders result in our inadvertent refusal to fill legitimate orders, we would lose the benefit of legitimate potential sales and risk the alienation oflegitimate customers.13Table of ContentsCyber-attacks affecting our suppliers, delivery services or other service providers 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. We also depend on delivery services to deliver products, and on other service providers, including suppliers of serviceswhich support Website operations, including payment systems, customer service support, and communications. Cyber-attacks affecting our deliveryservices or any of our most significant suppliers or affecting a significant number of our suppliers of products or services could have a material adverseeffect on our business. The adverse effects could include our inability to source product or fulfill orders, our customers' or suppliers' inability to contactus or access our Website or call centers or chat lines, or the compromise of our customers' confidential data.Natural disasters and geo-political events could adversely affect our business. Natural disasters, including hurricanes, cyclones, typhoons, tropical storms, floods, earthquakes and tsunamis, weather conditions, includingwinter storms, droughts and tornados, whether as a result of climate change or otherwise, and geo-political events, including civil unrest or terroristattacks, that affect us or our delivery services, suppliers, credit card processors or other service providers could adversely affect our business.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.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; •online retailers with discount departments such as Amazon.com, Inc., eBay, Inc. and Rakuten.com, Inc. (formerly 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. Penny Company, Inc., Sears Holding Corporation, Target Corporation, Best Buy Co., Inc., Home Depot, Inc. andBarnes and Noble, Inc., all of which also have an online presence.14Table of Contents We expect the online retail market to become even more competitive as traditional liquidators and online retailers continue to develop and improveservices that compete with our services. In addition, more traditional manufacturers and retailers may continue to add or improve their e-commerceofferings. Traditional or online retailers may create proprietary, store-based distribution and returns channels. Competitive pressures, including theintroduction of same-day delivery capabilities, from any of our competitors, many of whom have longer operating histories, larger customer bases,greater brand recognition and significantly greater financial, marketing and other resources than we do, could harm our business. Further, as a strategic response to changes in the competitive environment, we may from time to time make competitive pricing, service, marketingor other decisions that could harm our business. For example, to the extent that we enter new lines of businesses such as third-party logistics, ordiscount brick and mortar retail, we would be competing with large established businesses such as APL Logistics and Ross Stores, Inc. In the past wehave entered the online auctions, car listing and real estate listing businesses in which we compete or competed with large established businessesincluding eBay, Inc., AutoTrader.com, Inc. and Realtor.com. We no longer offer online auctions services or real estate listing services.If 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 have no duty to do so under federalcourt decisions construing applicable constitutional law. One or more local, state or foreign jurisdictions may seek to impose sales tax collectionobligations on us because we are engaged in online commerce, even though to do so would be contrary to existing court decisions. The future locationof our fulfillment or customer service centers networks, or any other operation, service contracts with third parties located in another state, channeldistribution arrangements or other agreements with third party sellers, or any act that may be deemed by a state to have established a physical presencein states where we are not now present, may result in additional sales and other tax obligations. New York and other states have passed so-called"Internet affiliate advertising" statutes, which require a remote seller, with no physical presence in the state, to collect state sales tax if the remote sellercontracted for advertising services with an Internet advertiser in that state. In New York and states passing similar laws, we have terminated our use oflocally based Internet advertisers. Several other states currently have similar tax proposals under consideration. In a case that is now on appeal, anIllinois state court struck down on constitutional grounds a similar Illinois statute. If such laws survive constitutional challenge, we may elect todiscontinue in those states valuable marketing through the use of affiliates based in those states, or may begin to collect taxes in those states. In eitherevent, our business could be harmed. Further, our business could be harmed if one or more states or any foreign country successfully asserts that weshould collect sales or other taxes on the sale of our merchandise. In September 2009, we received a letter of determination from the Ohio Departmentof Taxation noting the Department's determination that we are required to register for remitting of the Commercial Activity Tax, and owe $612,784 intaxes, interest, and penalties as of June 30, 2009. The Ohio Department of Taxation has issued additional estimated assessments of estimated tax,interest and penalties totaling $146,162 as of December 31, 2012. We have filed protests to challenge the Department's Assessments on constitutionalgrounds and the matter is currently pending before the Ohio Department of Taxation's Legal Division for administrative review and determination. Ahearing on these matters was held November 18, 2011. No administrative ruling has been issued following the hearing. We believe the determinationsto be unlawful and erroneous and are vigorously contesting the determination. If Ohio is successful and its assessment withstands constitutionalchallenge in both administrative and judicial appeals, the enforcement of the assessment15Table of Contentscould harm our business. If other states similarly enact and are successful in enforcing similar commercial activity tax laws, these also could harm ourbusiness. Several other states have enacted laws requiring remote vendors to notify resident purchasers in those states of their obligation to pay a use tax ontheir purchases and, in some instances, to report untaxed purchases to the state tax authorities. In Colorado, a federal court on constitutional groundsgranted a preliminary injunction against the state's enforcement its tax-notice and reporting law. However, other states may enact legislation similar tothese laws. Such laws could harm our business by imposing unreasonable notice burdens upon us, by interposing burdensome transaction notices thatnegatively affect conversion, or by discouraging customer purchases by requiring detailed purchase reporting.Economic 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 license fees or create new fees all of which may directly orindirectly harm our business. Similarly, administrative agencies may apply more rigorous enforcement efforts or take inflexible positions respecting thelaws they administer, especially if the laws permit the imposition of monetary penalties and fines which either the state or the administrative agency mayuse to balance their budgets. To the extent that states pass additional revenue measures, or significantly increase their enforcement efforts, these activitiescould directly or indirectly harm our business.If we do not respond to rapid technological changes, our services could become obsolete and we could lose customers. The Internet and the online commerce industry are changing rapidly. To remain competitive, we must continue to enhance and improve thefunctionality and features of our e-commerce businesses. If we fail to do so, we may lose customers. If competitors introduce new products or servicesusing new technologies or if new industry standards and practices emerge, our 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.We have an evolving business model. Our business model has evolved in the past and continues to do so. In prior years we have added additional types of services and product offeringsand in some cases we have modified or discontinued those offerings. We may continue to try to offer additional types of products or services, and wecannot offer any assurance that any of them will be successful. From time to time we have also modified aspects of our business model relating to ourproduct mix and the mix of direct/fulfillment partner sourcing of the products we offer. We may continue to modify this aspect of our business as wellas other significant aspects of our business. We cannot offer any assurance that these or any other modifications will be successful or will not result inharm to the 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. Further, any new business or website we launch that is not favorablyreceived by consumers could damage our reputation or the Overstock.com brand.16Table of ContentsWe 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 transactions in the future, any negative impact on our international operations could negatively impactour business. To date, most of our international sales have been denominated in U.S. dollars, and we have not had significant foreign currency risk onthose sales. However, in the future, gains and losses on the conversion of foreign payments into U. S. dollars may contribute to fluctuations in ourresults of 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.Our foreign brand domain name may cause confusion. 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 did not occur as quickly as we had hoped. Whilewe have returned domestically to the Overstock.com brand and principal domain address, there is no assurance that the use of Overstock.com or O.cowill gain acceptance or have success in foreign markets.We may incur substantial indebtedness. At December 31, 2012, we had no indebtedness for borrowed money, and our only credit facility was a $3 million facility for the issuance ofletters of credit. Although we have reduced our indebtedness substantially over the last several years, in the future we may again incur substantialindebtedness. Any such indebtedness would increase our business risks, including our vulnerability to industry downturns and competitive pressures.Further, financing may not be available to us on acceptable terms, or at all.Existing or future government regulation could harm our business. We are subject to regulation at the federal, state and international levels, including regulation relating to privacy, security, retention, transfer and useof personal user information and telemarketing laws. Increasing regulation, along with increased governmental or private enforcement, may increase thecost of our business. Compliance with existing and new privacy and security laws may be difficult and costly and may further restrict our ability tocollect demographic and personal information from17Table of Contentsusers, which could harm our marketing efforts, and could require us to implement new and potentially costly processes, procedures and/or protectivemeasures. The expansion of these and other laws, both in terms of their number and their applicability to the Internet could also harm our business.Many laws, adopted prior to the advent of the Internet, do not contemplate or address the unique issues raised thereby. Consequently, courts orregulators may apply these laws to Internet commerce in ways that may present difficult or impossible compliance challenges. Many of those laws thatdo reference the Internet are still being interpreted by the courts and their applicability and reach are therefore uncertain. Moreover, Internet advancesand innovations may result in new questions about the applicability and reach of these laws. Additionally, laws governing the permissible contents ofproducts 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, and mandated website disclosures about programs to eliminate abusive labor practices in our supplychain. The laws not only apply to future manufacture of consumer product, but also apply to existing inventories and may cause us to incur losses forany non-compliant items in our inventory, or which we may have sold which may subject us to regulatory or civil actions. Some of the products we sellor manufacture may, under statutory or common law, from time to time expose us to claims related to personal injury, death, environmental or propertydamage and may from time to time require product recalls or other actions which may not be covered, in whole or in part, by our liability insurance.These current and future laws and regulations could harm 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 otherwise adversely affect our operations and operating results. These factors affect not only our operations, but also theoperations of suppliers from whom we purchase goods, a condition that can result in an increase in the cost to us of the goods and services we sell.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. Slowdowns in the U.S. or global economy, or an uncertain economicoutlook, could materially adversely affect consumer spending habits and our operating results.18Table 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 (including allowances for returns, credit card chargebacks, doubtful accounts and obsolete and damaged inventory), internal use software andwebsite development (acquired and developed internally), accounting for income taxes, valuation of long-lived and intangible assets and goodwill,stock-based compensation and loss contingencies, are highly complex and involve many subjective assumptions, estimates and judgments by ourmanagement. 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.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 and because we sometimes make largepurchases of particular types of inventory. 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 adiscount or loss. To the extent that we rely on purchased inventory, our success will depend on our ability to sell our inventory rapidly, the ability of ourbuying staff to purchase inventory at attractive prices relative to its resale value and our ability to manage customer returns and other costs. If we areunsuccessful in any of these areas, we may be forced to sell our inventory at a discount or loss. Further, we purchase some of our inventory fromforeign suppliers and pay for inventory with U.S. dollars. If the dollar weakens with respect to foreign currencies, foreign suppliers may require us topay higher prices for products, which could negatively affect our profit margins.If 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 from time to time in the past, and expectthat we will continue to do so. If we do not successfully optimize and operate our warehouse and customer service operations, it could significantly limitour ability to meet customer demand or result in excessive costs and expenses for the size of our business. Because it is difficult to predict demand, wemay not manage our facilities in an optimal way, which may result in excess or insufficient inventory or warehousing capacity. We may also fail to staff19Table of Contentsour fulfillment and customer service centers at optimal levels. Our failure to do so could negatively impact our operating results and customerexperience.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 and short-term investments in accounts with a small number of major financial institutionswithin the United States, in the form of demand deposits, money market accounts, time deposits, U.S. Treasury Bills and other short-term investments.Our deposits in these institutions generally exceed the amounts of insurance provided, and some deposits may not be covered by insurance at all. Wekeep our precious metals in a secure third party facility. If any of these institutions were to become insolvent, we could lose some, or all, of suchdeposits, which would have a material adverse effect on our financial condition. Our investment in precious metals is also subject to price movements inthe precious metals markets.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. We are continuing to upgrade and furtherexpand these and other components of our infrastructure. In the past, we have experienced difficulties with upgrades of our infrastructure, and haveincurred increased expenses as a result of these difficulties. As a result of these expenditures on our infrastructure, our ability to reduce spending islimited. Therefore, any significant shortfall in the revenues for which we have built and are continuing to build our infrastructure would likely harm ourbusiness.The 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 are otherwise unable to source productssufficient to meet customer demand, our business would be adversely affected. If we liquidate products, as we have in the past, we may be required totake significant inventory markdowns or write-offs, which could reduce gross profits. We may experience an increase in our net shipping cost due tocomplimentary upgrades, split-shipments, and additional long-zone shipments necessary to ensure timely delivery for the holiday season. If too manycustomers access our Website within a short period of time due to increased holiday demand, we may experience system interruptions that make ourWebsite unavailable or prevent us from efficiently fulfilling orders, which may reduce the volume of goods we sell and the attractiveness of ourproducts and services. In addition, we may be unable to adequately staff our fulfillment and customer service centers during peak periods, and deliveryservices and other fulfillment companies and customer service providers may be unable to meet the seasonal demand.Significant merchandise returns could harm our business. 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.20Table of ContentsOur 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 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.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 our officers and key employees. The loss of the services of any of our executiveofficers or other key employees for any reason could harm our business. Occasionally, members of senior management or key employees may find itnecessary to take a leave of absence due to medical or other causes. On February 12, 2013 we announced that our Chief Executive Officer andChairman of the Board, Dr. Patrick M. Byrne, will be taking a personal leave of absence for medical reasons. Leaves of absence for temporary orextended periods may harm our business. We do not have employment agreements with any of our key personnel and we do not maintain "key person"life insurance policies. Our future success also depends on our ability to identify, attract, hire, train, retain and motivate other highly-skilled technical,managerial, editorial, merchandising, marketing and customer service personnel. Competition for such personnel is intense. Our failure to retain andattract the necessary technical, managerial, editorial, merchandising, marketing, and customer service personnel could harm our business.In order to obtain future revenue growth 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 our Website and to generate new customers. Inthe past we have terminated affiliate marketing websites as a result of efforts by certain states to require us to collect sales taxes based on the presence ofthose third party Internet advertising affiliates in those states, and we are likely to do so again in the future if necessary. If we are unable to develop ormaintain these relationships on acceptable terms, our ability21Table of Contentsto attract new customers and our financial condition would suffer. In addition, certain of our online marketing agreements may require us to pay upfrontfees and make other payments prior to the realization of the sales, if any, associated with those payments. Current or future relationships or agreementsmay fail to produce the sales that we anticipate. We periodically conduct national television and radio branding and advertising campaigns. Suchcampaigns are expensive and may not result in the cost-effective acquisition of customers.We may be unable to protect our proprietary technology or keep up with that of our competitors. Our success depends to a significant degree upon the protection of our software and other proprietary intellectual property rights. We may beunable to deter misappropriation of our proprietary information, detect unauthorized use or take appropriate steps to enforce our intellectual propertyrights. In addition, our competitors may now have or may in the future develop technologies that are as good as or better than our technology withoutviolating our proprietary rights. Our failure to protect our software and other proprietary intellectual property rights or to utilize technologies that are asgood 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 saleon our Website to protect their intellectual property rights, including their domain names, could impair our operations. These failures could harm ourbusiness.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 obtain trademark registration, could harm our business.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.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 we22Table of Contentscurrently use or may need to use in the future, or requiring us to obtain licenses from third parties when such licenses may not be available onfinancially 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 rightswith respect to intellectual property we do not own in providing e-commerce services to other businesses and individuals under commercial agreements.Our business and reputation may be harmed by the offering 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 items offered 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 offering and selling unlawful goods, and wemay be subject to allegations of civil or criminal liability for unlawful activities carried out by third parties through our Website. We may implementmeasures in an effort to protect against these potential liabilities that could require us to spend substantial resources and/or to reduce revenues bydiscontinuing certain service offerings. Any costs incurred as a result of liability or asserted liability relating to the sale of unlawful goods or theunlawful sale of goods could harm our business. Resolving litigation or claims regarding patents or other intellectual property, whether meritorious ornot, could be costly, time-consuming, cause service delays, divert our management and key personnel from our business operations, require expensiveor unwanted changes in our methods of doing business or require us to enter into costly royalty or licensing agreements, if available. As a result, theseclaims could harm our business. Negative publicity generated as a result of the foregoing could damage our reputation, harm our business and diminishthe value of our brand name.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 individual 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 business. The harm may be immediate without affording us an opportunity for redress or correction. Such platformsalso could be used for the dissemination of trade secret information or compromise of other valuable company assets, any of which could harm ourbusiness.Our car listing service may be subject to a variety of regulatory requirements and risks. 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." We have no ability to know whether the information sellers provide is correct. While our site terms and conditionsof usage prohibit unlawful acts, we cannot assure that sellers will comply with all laws and regulations applicable23Table of Contentsto them and their transactions. The application of these regulations to online car listing service providers is not clear. Although we do not expect theselaws 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 required tomake changes in our service that may increase our costs, reduce our revenues, cause us to prohibit certain listing or advertising practices, or make otherchanges that may adversely affect our car listing service. Further, like our shopping business, our car listing service is subject to most of the same lawsand regulations that apply to other companies conducting business on and off the Internet. To the extent that current or future laws or regulationsprevent users from selling items on our car listing site, they could harm our business. In addition, any negative publicity we receive regarding anyallegations of unlawful or deceptive conduct may damage our reputation, our ability to attract new customers to our main shopping site, and theOverstock.com brand name generally.We 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.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 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. To the extent that any such adverse effects exceed any benefits we may realize from thelitigation, it could harm our business, prospects, financial condition and results of operation.24Table of ContentsPublic statements we or our chairman of the board of directors, Patrick M. Byrne, have made or may make in the future may antagonizeregulatory officials or others. We and our chairman of the board of directors, Patrick M. Byrne, have from time to time made public statements regarding our or his beliefs aboutmatters of public interest, including statements regarding naked short selling. Some of those public statements have been critical of the Securities andExchange Commission and other regulatory agencies. These public statements may have consequences for us, whether as a result of increasedregulatory scrutiny or otherwise.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.Our quarterly operating results are volatile and may adversely affect the market price of our securities. Our future revenues and operating results have varied in the past and may continue to vary significantly from quarter to quarter due to a number offactors, many of which are outside our control, and any of which could harm our business. As a result, we believe that quarterly comparisons of ouroperating results are not necessarily meaningful and that you should not rely on the results of one quarter as an indication of our future performance. Inaddition to the other risk factors described in this report, additional factors that have caused and/or could cause our quarterly operating results tofluctuate and in turn affect the market price of our securities include:•increases in the cost of advertising and changes in our sales and marketing expenditures; •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 the25Table of Contentsfourth quarter sales do exceed those of the preceding quarters, that we will be able to manage the increased sales effectively. Further, we generallyincrease our inventories substantially in anticipation of holiday season shopping activity, which has a negative effect on our cash flow. Securitiesanalysts and investors may inaccurately estimate the effects of seasonality on our results of operations in one or more future quarters and, consequently,our operating results may fall below expectations, causing the market price of our securities to decline.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 involving our company or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control ofour company.26Table of ContentsThe 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 have appealed 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 any reports we file with the SEC after we file this Form 10-K, before deciding whether to purchaseor hold our securities. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also become importantfactors that may harm our business. The occurrence of any of the risks described in this Form 10-K could harm our business. The trading price of oursecurities could decline due to any of these risks and uncertainties, and investors may lose part or all of their investment.27Table of ContentsITEM 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.Warehouse and customer service space We lease approximately 687,000 square feet for our warehouse and customer service operations in Salt Lake City, Utah for a term expiring inFebruary 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 27,000 square feet for product liquidation in Sandy, Utah on a month-by-month basis. We lease approximately 51,500 square feet of warehouse space in Hebron, Kentucky beginning in March 2013, for a term expiring in March 2016.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 potential seasonalrequirements for additional 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.28Table 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, thehigh and low sales prices per share for our common stock as reported by Nasdaq.Stock Performance Graph The stock performance graph is included in Part III, Item 12.Holders As of February 7, 2013, there were 180 holders of record of our common stock. Many of our shares of common stock are held by brokers andother institutions on behalf of the beneficial owners.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 of directorsdeems relevant.Recent sales of unregistered securities We maintain a Non-Qualified Deferred Compensation plan for senior management. The plan allows eligible members of senior management todefer their receipt of compensation, subject to the restrictions contained in the plan. To the extent that interests in the plan constitute securities, webelieve that the issuance of the interests was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant toSection 4(2) thereof and Rule 506 of Regulation D thereunder as a transaction not involving a public offering. The interests were not sold for cash orother consideration, and there were no proceeds to us.29 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, 2012 First Quarter 7.71 5.17 Second Quarter 6.95 5.01 Third Quarter 10.55 6.21 Fourth Quarter 15.90 10.11 Table of ContentsIssuer 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 2012, 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.Stock based compensationStock options Our board of directors adopted the 2005 Equity Incentive Plan, in April 2005, and it was most recently amended and restated and re-approved bythe stockholders on May 3, 2012 (as so amended and restated, the "Plan"). Under the Plan, the board of directors may issue incentive stock options toour employees and directors and non-qualified stock options to our consultants, as well as restricted stock units and other types of equity awards of theCompany. Options granted under the Plan generally expire at the end of ten years and vest on a straight line basis in accordance with a vesting scheduledetermined by our board of directors, usually over four years from the grant date. At December 31, 2012, 2.8 million shares of stock remained availablefor future grants under the Plan. The following is a summary of stock option activity (amounts in thousands, except per share data):30Period (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, 2012to October 31,2012 — $— — $— November 1,2012 toNovember 30,2012 479 15.20 — — December 1,2012 toDecember 31,2012 — — — — Total 479(1) — $— (1)Represents 479 shares withheld for minimum tax withholding purposes upon the vesting of a portion of restricted stock units. 2012 2011 2010 Shares WeightedAverageExercisePrice Shares WeightedAverageExercisePrice Shares WeightedAverageExercisePrice Outstanding—beginning of year 405 $17.58 496 $18.09 721 $20.29 Granted at fair value — — — — — — Exercised — — — — (90) 17.05 Expired/Forfeited (41) 20.06 (91) 20.55 (135) 30.41 Outstanding—end of year 364 $17.34 405 $17.58 496 $18.09 Options exercisable at year-end 364 $17.34 404 $17.59 472 $18.08 Table of Contents 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, 2012,2011 and 2010, we recorded stock based compensation related to stock options of $3,000, $200,000 and $1.6 million, respectively.Restricted stock units activity During the years ended December 31, 2012, 2011 and 2010, we granted 795,000, 268,000 and 302,000 restricted stock units, respectively, underthe Plan. The cost of restricted stock units is determined using the fair value of our common stock on the date of the grant and compensation expense isrecognized on a straight line basis over the three year vesting schedule. The weighted average grant date fair value of restricted stock units grantedduring the years ended December 31, 2012, 2011 and 2010 was $6.75, $15.47 and $13.17, respectively. The following is a summary of restricted stock unit activity (amounts in thousands, except per share data): Restricted stock units granted in or prior to 2012 vest over three years at 25% at the end of the first year, 25% at the end of the second year and50% at the end of the third year. Each restricted stock unit represents the right to one share of common stock upon vesting. During the years endedDecember 31, 2012, 2011 and 2010, we recorded stock based compensation related to restricted stock units of $3.5 million, $2.8 million and$3.5 million, respectively. On January 14, 2013, we granted 240,000 additional restricted stock units. These restricted stock units vest over three years at 40% at the end ofthe first year, and 30% at the end of the second and third years.31 2012 2011 2010 Units WeightedAverageGrant DateFair Value Units WeightedAverageGrant DateFair Value Units WeightedAverageGrant DateFair Value Outstanding—beginning of year 522 $13.40 685 $12.08 640 $11.35 Granted at fair value 795 6.75 268 15.47 302 13.17 Vested (240) 12.11 (318) 12.20 (185) 11.52 Forfeited (74) 8.25 (113) 13.88 (72) 11.50 Outstanding—end of year 1,003 $8.81 522 $13.40 685 $12.08 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.32 Year ended December 31, 2012 2011 2010 2009 2008 (in thousands, except per share data) Consolidated Statement of Operations Data: Revenue, net Direct $155,516 $163,609 $209,646 $150,901 $173,687 Fulfillment partner 943,773 890,668 880,227 725,868 656,163 Total net revenue 1,099,289 1,054,277 1,089,873 876,769 829,850 Cost of goods sold Direct 140,536 149,660 187,124 130,890 153,967 Fulfillment partner 760,323 725,529 713,109 581,127 531,647 Total cost of goods sold 900,859 875,189 900,233 712,017 685,614 Gross profit 198,430 179,088 189,640 164,752 144,236 Operating expenses: Sales and marketing 63,467 61,813 61,334 55,549 57,668 Technology 65,467 67,043 58,260 52,336 56,677 General and administrative 57,259 67,766 55,650 48,906 39,348 Restructuring(1) 76 — (569) (66) (299) Total operating expenses 186,269 196,622 174,675 156,725 153,394 Operating income (loss) 12,161 (17,534) 14,965 8,027 (9,158)Interest income 116 161 157 170 3,163 Interest expense (809) (2,485) (2,962) (3,470) (3,565)Other income (expense), net 3,686 278 2,088 3,277 (1,446) Income (loss) before income taxes 15,154 (19,580) 14,248 8,004 (11,006)Provision (benefit) for income taxes 485 (142) 359 257 — Net income (loss) $14,669 $(19,438)$13,889 $7,747 $(11,006) Deemed dividend related to redeemable common stock — (12) (112) (48) (77) Net income (loss) attributable to common shares $14,669 $(19,450)$13,777 $7,699 $(11,083) Net income (loss) per common share—basic: Net income (loss) attributable to common share—basic $0.63 $(0.84)$0.60 $0.34 $(0.48)Weighted average common shares outstanding—basic 23,387 23,259 23,019 22,821 22,901 Net income (loss) per common share—diluted: Net income (loss) attributable to common shares—diluted $0.62 $(0.84)$0.59 $0.33 $(0.48)Weighted average common shares outstanding—diluted 23,672 23,259 23,366 23,067 22,901 (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 Contents33 As of December 31, 2012 2011 2010 2009 2008 (in thousands) Balance Sheet Data: Cash and cash equivalents $93,547 $96,985 $124,021 $139,757 $96,457 Restricted cash 1,905 2,036 2,542 4,414 4,262 Marketable securities — — — — 8,989 Working capital 7,497 (14,129) 14,746 51,236 41,780 Total assets 181,985 179,559 217,959 216,500 181,136 Total indebtedness 1,848 18,619 52,845 61,687 67,821 Redeemable common stock — — 570 744 1,263 Stockholders' equity (deficit) 30,962 13,237 30,658 10,800 (2,246)Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis contains forward-looking statement relating to future events or our future financial or operating performancethat involve risks and uncertainties, as set forth above under "Special Note Regarding Forward-Looking Statements." Our actual results could differmaterially from those anticipated in these forward-looking statements as a result of certain factors described in this Form 10-K, including those set forthin the Special Note Regarding Forward-Looking Statements or in Item 1A under the heading "Risk Factors" or elsewhere in this Form 10-K.Introduction We are an online retailer offering discount brand name, non-brand name and closeout merchandise, including furniture, home décor, bedding andbath, housewares, jewelry and watches, apparel and designer accessories, electronics and computers, and sporting goods, 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. 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 to our Website in order to create an atmosphere that encourages customers to visit frequently andpurchase products before our inventory sells out. We sell products primarily in the United States, with a small amount of products (less than 1% of ourtotal net revenue) 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 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. The merchandise offered on our Website is from avariety of sources including well-known, brand-name manufacturers. We have organized our shopping business (sales of product offered through theShopping Section of our Website) into two principal segments—a "direct" business and a "fulfillment partner" business. We currently offerapproximately 344,000 non-BMMG products and approximately 641,000 BMMG products. Consumers and businesses are able to access andpurchase our products 24 hours a day from the convenience of a computer, Internet-enabled mobile telephone or other Internet-enabled devices. Ourteam of customer service representatives assists customers by telephone, instant online chat and e-mail. We also derive revenue from other businessesadvertising products or services on our Website. Nearly all of our sales are to customers located in the United States. During the years endedDecember 31, 2012 and 2011 no single customer accounted for more than 1% of our total net revenue.Direct business Our direct business includes sales made to individual consumers and businesses, which are fulfilled from our warehouse in Salt Lake City, Utah.During the year ended December 31, 2012, we fulfilled approximately 14% of our order volume through our warehouses. Our warehouse generallyships between 4,000 and 7,000 orders per day and up to approximately 10,000 orders per day during peak periods, using overlapping daily shifts.34Table of ContentsFulfillment 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 2,100 third parties who supply approximately 338,000 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 warehouse, 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.Consignment In September 2009, we began offering a consignment service to suppliers where the suppliers' merchandise is stored in and shipped from ourwarehouse. We pay the consignment supplier upon sale of the consigned merchandise to our customer. Revenue from our consignment service businessin 2012, 2011 and 2010 were less than 1% of total net revenues and are included in the fulfillment partner segment.International business At December 31, 2012, we were offering products to customers in over 100 countries and non-U.S. territories. We do not have sales operationsoutside the United States, and are using a U.S. based third party to provide logistics and fulfillment for all international orders. Revenue generated fromour international business is included in either direct or fulfillment partner revenue, depending on whether the product is shipped from our warehousesor from a fulfillment partner. Less than 1% of our 2012, 2011 and 2010 revenues were from international customers.Ecommerce marketplace channels During 2012, we also began offering some of our products for sale in on-line marketplaces of other Internet retailers' websites, which allows us toreach a broader potential customer base. Under the terms of our agreements with these ecommerce marketplace retailers, the retailers typically earn a feethat is a percentage of the selling price of the orders they send us. Revenue generated from these ecommerce marketplace channels is included in eitherdirect or fulfillment partner revenue, depending on whether the product is shipped from our warehouses or from a fulfillment partner. Ecommercemarketplace channels were approximately 1% of our 2012 total net revenues.35Table 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 and post offers to purchase, and provides the means for prospective purchasers to contact sellers for further information andnegotiations on the purchase of an advertised vehicle. We also earn advertisement revenue derived from our cars business. Revenue from the carsbusinesses is included in the fulfillment partner segment on a net basis. Revenue from our other businesses is less than 1% of total net revenues.Critical 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 15 of Part IV, "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 direct revenue and fulfillment partner revenue from merchandise sales. We also earn revenue fromadvertising on our shopping and other pages, and previously from listing fees and commissions collected from products being listed and sold throughthe Auctions tab, which we removed from our site in July 2011. We have organized our operations into two principal segments based on the primarysource of revenue: direct revenue and fulfillment 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 following36Table of Contentsfactors: (i) the type of shipping carrier (as carriers have different in-transit times); (ii) the fulfillment source (either our warehouses or those of ourfulfillment partners); (iii) the delivery destination; and (iv) actual transit time experience, which shows that delivery date is typically one to eightbusiness 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. 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, 2012 (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 warehouses. Direct revenuecomes from sales that occur primarily through our Website, but may also occur through offline and other channels.Fulfillment partner revenue Fulfillment partner revenue is derived from merchandise sales that occur primarily through our Website which fulfillment partners ship directly toconsumers and businesses from warehouses maintained by our fulfillment partners.Consignment We offer a consignment service to suppliers where the suppliers' merchandise is stored in and shipped from our warehouse. We pay theconsignment supplier upon shipment of the consigned merchandise to the consumer. Revenue from consignment service business in 2012, 2011 and2010 were less than 1% of total net revenues and are included in fulfillment partner segment on a gross basis.37 Year ended December 31, 2012 Change in the Estimate of Average Transit Times (Days) Increase(Decrease)Revenue Increase(Decrease)Net Income 2 $(5,724)$(818)1 $(2,779)$(391)As reported As reported As reported -1 $4,597 $659 -2 $8,856 $1,266 Table of ContentsInternational business At December 31, 2012, we were offering products to customers in over 100 countries and non-U.S. territories. We do not have sales operationsoutside the United States, and are using a U.S.-based third party to provide logistics and fulfillment for all international orders. Revenue generated fromour international business is included in either direct or fulfillment partner revenue, depending on whether the product is shipped from our warehousesor from a fulfillment partner. Less than 1% of our 2012, 2011 and 2010 revenues were from international customers.Ecommerce marketplace channels During 2012, we also began offering some of our products for sale in on-line marketplaces of other Internet retailers' websites, which allows us toreach a broader potential customer base. Under the terms of our agreements with these ecommerce marketplace retailers, the retailers typically earn a feethat is a percentage of the selling price of the orders they send us. Revenue generated from these ecommerce marketplace channels is included in eitherdirect or fulfillment partner revenue, on a gross basis, depending on whether the product is shipped from our warehouses or from a fulfillment partner.Ecommerce marketplace channels were approximately 1% of our 2012 total net revenues.Other businesses 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 and post offers to purchase, and provides the means for prospective purchasers to contact sellers for furtherinformation and negotiations on the purchase of an advertised vehicle. Revenue from the cars listing business is included in the fulfillment partnersegment on a net basis. Revenue from our other businesses is less than 1% of total net revenues.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 revenue to the elements using their relative fair values. Weinclude the 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 customers redeem their reward dollars as part of a purchase at our Website. We recognizeother income when Club O reward dollars expire or the likelihood of reward dollars being redeemed by a customer is remote ("reward dollarbreakage"). Due to the loyalty program's short history, currently no reward dollar breakage is recognized until the reward dollars expire. However, inthe future we plan to recognize such breakage 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.38Table of ContentsCo-branded credit card revenue We have a co-branded credit card agreement with a commercial bank for the issuance of credit cards bearing the Overstock.com brand, underwhich the bank pays us fees for new accounts and for customer usage of the cards. The agreement also provides for a customer loyalty programoffering reward points that customers will accrue from card usage and can use to make purchases on our Website (See "Club O loyalty program" abovefor more information). New account fees are recognized as revenue on a straight-line basis over the estimated life of the credit card relationship. Creditcard usage fees are recognized as revenues as actual credit card usage occurs.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 recognize otherincome 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 other 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. Our actual product returns have not differed materially from our estimates atDecember 31, 2011 and 2010. The allowance for returns was $10.6 million and $10.9 million at December 31, 2012 and 2011, 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 $182,000 and $187,000 at December 31, 2012 and 2011,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 and39Table of Contentspayment history and maintain an allowance for doubtful accounts receivable based upon our historical collection experience and expected collectabilityof accounts receivable. The allowance for doubtful accounts receivable was $797,000 and $574,000 at December 31, 2012 and 2011, respectively.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 Our income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect our best assessment of estimatedfuture taxes to be paid. We are subject to taxation from federal and state jurisdictions. Significant judgments and estimates are required in determiningthe consolidated income tax expense. We are not under audit by United States income taxing authorities. Tax periods within the statutory period of limitations not previously audited arepotentially open for examination by the taxing authorities. Potential liabilities associated with these years will be resolved when an event occurs towarrant closure, primarily through the completion of audits by the taxing jurisdictions and/or the expiration of the statutes of limitation. To the extentaudits or other events result in a material adjustment to the accrued estimates, the effect would be recognized during the period of the event. 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, 2012 and 2011, wehave recorded a full valuation allowance of $79.7 million and $83.6 million, respectively, against our net deferred tax assets consisting primarily of netoperating loss carry forwards. In evaluating our ability to recover 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 whichbenefits 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 assumptions40Table of Contentsregarding 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. The large operating loss in the prior year and significant economic uncertainties in the market have made the projection of future taxable incomeuncertain. Accordingly, we have a valuation allowance recorded against our deferred tax assets as it is not "more likely than not" that the assets will berealized. To the extent that we remain profitable during the forseeable future, the full or partial release of the valuation allowance could occur in the nearterm.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, 2012, 2011 and 2010.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, 2012 and 2011. There were no impairments to goodwillrecorded during the years ended December 31, 2012, 2011 and 2010.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."Comparison of Years Ended December 31, 2012 and 2011Executive 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 this Form 10-K.41Table of Contents We had positive net income in each of the four fiscal quarters of this year. 2012 net income was $14.7 million versus a net loss of $19.4 million in2011, a $34.1 million, or $1.46 per diluted share, improvement. The year-over-year improvement in net income resulted primarily from revenue growthof 4%, a 110 basis point improvement in gross margin and $10.5 million of lower general and administrative expenses. Revenues in 2012 increased 4% compared to 2011, largely due to increasing growth rates in the second half of the year; we posted 9% revenuegrowth in Q4 2012 compared to Q4 2011. The primary reason for the improvement this year was an increase of 10% in the average order size, from$123 to $135, which is largely due to a sales mix shift into the home and garden category. This increase more than offset the impact of a 3% decrease incustomer orders due to lower conversion rates. Gross profit in 2012 increased 11% compared to 2011 primarily as a result of 4% revenue growth and a 110 basis point expansion in grossmargin. Approximately $8.1 million of the $19.3 million increase in gross profit was due to higher revenue growth, while the other $11.2 million wasdue to the improvement in gross margin percentage. The increase in gross margin was primarily due to the sales mix shift referenced above. While wespent $1.7 million more in sales and marketing in 2012, as a percentage of revenue, sales and marketing expenses declined to 5.8% from 5.9% last year.The result of higher gross profit and a decrease in marketing spend was 15% growth in Contribution (see "Non-GAAP Financial Measures" below fora reconciliation of Contribution to Gross Profit) in 2012, and a 120 basis point improvement in Contribution margin which increased to 12.3% for2012. Technology expense in 2012 decreased $1.6 million compared to 2011, primarily due to decreases in compensation and recruiting-related costsfrom lower headcount earlier in the year. However, technology expenses increased during Q4 2012 following investments we made in technology-related initiatives and personnel. We anticipate this trend will continue through 2013. General and administrative expenses in 2012 decreased$10.5 million compared to 2011, primarily due to lower legal fees. Our fulfillment partner business continues to make up a large percentage of our total revenues, expanding to nearly 86% of total net revenue in2012. Our decision to shift sales from the Apparel & Shoes category away from the direct business and into the fulfillment partner business contributedto this shift in 2012. We are converting revenues into cash on average five days before we pay our suppliers. This has reduced the capital requirementsneeded to operate our business, and has helped us to generate positive operating cash flows on a trailing twelve month basis for the past several years. We ended the year with $93.5 million of cash and cash equivalents compared to $97.0 million at December 31, 2011, and working capitalimproved to $7.5 million from $(14.1) million for the same periods, respectively. In November 2012, we fully paid the $17.0 million in advances underthe U.S. Bank Financing Agreement and the facility expired at the end of 2012. In December 2012, we entered into a $3.0 million credit agreement withU.S. Bank to provide a line of credit to support letters of credit. 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.42Table of ContentsResults of Operations The following table sets forth our results of operations expressed as a percentage of total net revenue for 2012, 2011 and 2010:Revenue The following table reflects our net revenue for the years ended December 31, 2012 and 2011 (in thousands): The primary reason for the increase in total revenue for the year ended December 31, 2012 was an increase of 10% in average order size, from$123 to $135, primarily due to a sales mix shift into more home and garden products, partially offset by a decrease of 3% in customer orders due tolower conversion rates compared to last year.43 Year ended December 31 2012 2011 2010 (as a percentage of totalrevenue) Revenue, net Direct 14.1% 15.5% 19.2%Fulfillment partner 85.9 84.5 80.8 Total net revenue 100.0 100.0 100.0 Cost of goods sold Direct 12.8 14.2 17.2 Fulfillment partner 69.2 68.8 65.4 Total cost of goods sold 81.9 83.0 82.6 Gross profit 18.1 17.0 17.4 Operating expenses: Sales and marketing 5.8 5.9 5.6 Technology 6.0 6.4 5.3 General and administrative 5.2 6.4 5.1 Restructuring — — (0.1) Total operating expenses 17.0 18.7 16.0 Operating income (loss) 1.1 (1.7) 1.4 Interest income — — — Interest expense (0.1) (0.2) (0.3)Other income, net 0.3 — 0.2 Income (loss) before income taxes 1.3 (1.9) 1.3 Provision (benefit) for income taxes — — — Net income (loss) 1.3% (1.9)% 1.3% Year ended December 31, 2012 2011 $ Change % Change Revenue, net Direct $155,516 $163,609 $(8,093) (4.9)%Fulfillment partner 943,773 890,668 53,105 6.0% Total revenue, net $1,099,289 $1,054,277 $45,012 4.3% Table of Contents The primary reason for the decrease in direct revenue for the year ended December 31, 2012 was a shift in sales mix, particularly in Apparel andShoes, from a direct inventory-based model to a fulfillment partner-based model to reduce exposure from seasonal inventory and mark downs; partiallyoffset by an increase in sales of home and garden products. The primary reason for the increase in fulfillment partner revenue for the year ended December 31, 2012 was an increase in sales of home andgarden products; partially offset by decreases in sales of electronics, jewelry and watches and books and media. Total revenues from other businesses were $657,000 and $1.7 million for the years ended December 31, 2012 and 2011, respectively. Totalrevenues from international sales were $10.2 million and $8.8 million for the years ended December 31, 2012 and 2011, 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, 2012 and 2011 (in thousands): Gross margins for the past eight quarterly periods and years ending December 31, 2012 and 2011 were: 44 Year ended December 31, 2012 2011 $ Change % Change Revenue, net Direct $155,516 $163,609 $(8,093) (4.9)%Fulfillment partner 943,773 890,668 53,105 6.0% Total net revenues $1,099,289 $1,054,277 $45,012 4.3% Cost of goods sold Direct $140,536 $149,660 $(9,124) (6.1)%Fulfillment partner 760,323 725,529 34,794 4.8% Total cost of goods sold $900,859 $875,189 $25,670 2.9% Gross Profit Direct $14,980 $13,949 $1,031 7.4%Fulfillment partner 183,450 165,139 18,311 11.1% Total gross profit $198,430 $179,088 $19,342 10.8% Q1 2012 Q2 2012 Q3 2012 Q4 2012 FY 2012 Direct 8.0% 8.3% 10.3% 11.5% 9.6%Fulfillment Partner 20.0% 19.6% 19.4% 18.9% 19.4%Combined 18.1% 18.0% 18.2% 17.9% 18.1% 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%Table of Contents The 110 and 90 basis point increases in direct and fulfillment gross margins, respectively, for the year ended December 31, 2012 when comparedto the same period in 2011 are primarily due to shifts in the sales mix into higher margin home and garden products and lower credit card fees, partiallyoffset by higher returns-related and freight costs. 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 our direct Apparel and Shoes category to a fulfillment partner model to reduce our seasonal inventory risks, wedo not currently foresee any material shifts in mix between the direct and fulfillment partner. The other factors described above, such as coupons, promotions and operational costs did not have a significant impact on the change in grossmargin. Cost of goods sold includes stock-based compensation expense of $272,000 and $193,000 for the years ended December 31, 2012 and 2011,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. 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 were no significant changes in our fulfillment and related costs as a percentage ofnet revenue during the year ended December 31, 2012. See "Gross profit" above for additional discussion.45 Year ended December 31, 2012 2011 Total net revenue $1,099,289 100%$1,054,277 100% Cost of goods sold Product costs and other cost of goods sold 848,842 77% 821,739 78%Fulfillment and related costs 52,017 5% 53,450 5% Total cost of goods sold 900,859 82% 875,189 83% Gross profit $198,430 18%$179,088 17% Table of ContentsOperating 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, 2012 and 2011 (in thousands): Sales and marketing expenses as a percentage of revenue decreased slightly for the year ended December 31, 2012, when compared to the sameperiod in 2011. Sales and marketing expenses include stock-based compensation expense of $318,000 and $377,000 for the years ended December 31, 2012 and2011, 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, such as ournew policy of free shipping on orders over $50 introduced in early January 2013, as an effective marketing tool, and intend to continue to offer them aswe deem appropriate as part of our overall marketing plan.Technology expenses We seek to invest efficiently 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, 2012 and 2011 (in thousands): The decrease for the year ended December 31, 2012 is primarily due to decreases in compensation and recruiting-related costs primarily fromlower headcount earlier in the year; partially offset by an increase in third party technology services. Technology expenses in Q4 2012 increased by$2.2 million compared to Q4 2011 largely due to investments made in new personnel and third party technology services. Technology expenses include stock-based compensation expense of $799,000 and $628,000 for the years ended December 31, 2012 and 2011,respectively.46 Year endedDecember 31, 2012 2011 $ Change % Change Sales and marketing expenses $63,467 $61,813 $1,654 2.7%Sales and marketing expenses as a percent of net revenues 5.8% 5.9% Year endedDecember 31, 2012 2011 $ Change % Change Technology expenses $65,467 $67,043 $(1,576) (2.4)%Technology expenses as a percent of net revenues 6.0% 6.4% Table of ContentsGeneral and administrative expenses The following table reflects our general and administrative expenses for the years ended December 31, 2012 and 2011 (in thousands): The decrease in general and administrative expenses for the year ended December 31, 2012 is primarily due to a decrease in legal fees. General and administrative expenses include stock-based compensation expense of approximately $2.1 million and $1.9 million for the years endedDecember 31, 2012 and 2011, respectively.Restructuring We incurred $76,000 of restructuring charges during the year ended December 31, 2012 due to ceasing the use of some of our office facilities,changes in our estimate of sublease income as a result of our entering into a new sublease agreement and termination of an existing sublease. There wereno restructuring charges or reversals during the year ended December 31, 2011.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 and cash equivalents. Interest income for the years endedDecember 31, 2012 and 2011 totaled $116,000 and $161,000, respectively.Interest expense Interest expense is primarily related to interest incurred on our Senior Notes, finance obligations, line of credit and our capital leases. Interestexpense for the years ended December 31, 2012 and 2011 totaled $809,000 and $2.5 million, respectively. The decrease in interest expense is primarilya result of extinguishments of our Senior Notes and finance obligations in 2011, partially offset by an increase in interest expense on our line of credit.47 Year endedDecember 31, 2012 2011 $ Change % Change General and administrative expenses $57,259 $67,766 $(10,507) (15.5)%General and administrative expenses as a percent of net revenues 5.2% 6.4% Year endedDecember 31, 2012 2011 Cost of goods sold—direct $470 $714 Technology 14,177 14,433 General and administrative 1,362 1,203 Total depreciation and amortization, including internal-use software andwebsite development $16,009 $16,350 Table of ContentsOther income, net Other income, net for the years ended December 31, 2012 and 2011 totaled $3.7 million and $278,000, respectively. The increase was primarilydue to an increase in Club O rewards breakage. Additionally, 2011 included a $1.2 million loss on early retirement of our finance obligations resultingfrom a prepayment premium. There were no losses on early retirement of debt in 2012.Income taxes Our provision (benefit) for income taxes for the years ended December 31, 2012 and 2011 of $485,000 and ($142,000) is for federal alternativeminimum tax and certain income tax uncertainties, including interest and penalties. As of December 31, 2012 and December 31, 2011 we had federal netoperating loss carry forwards of approximately $174.1 million and $192.5 million, respectively, and state net operating loss carry forwards ofapproximately $151.6 million and $176.1 million, respectively, which may be used to offset future taxable income. We are currently reviewing whetherwe had any ownership changes. Ownership changes under Internal Revenue Code Section 382 would limit the amount of net operating losses thatcould be used in any annual period. Our net operating loss carry forwards 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 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 2012, 2011 and 2010 (in thousands):Comparison 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 this Form 10-K. 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 quarterswhen48 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter 2012 $262,367 $239,536 $255,352 $342,034 2011 $265,470 $234,992 $239,738 $314,077 2010 $264,330 $231,253 $245,420 $348,870 Table of ContentsGoogle Inc. notified us that it was penalizing us in natural search results for noncompliance with some of Google's natural search guidelines. Duringthis penalty period, we dropped significantly in some Google natural search result rankings. We made changes to conform to Google's guidelines and,on April 21, 2011, Google ended its penalization of our natural search results. We were able to offset some of the negative impact to revenue byincreasing 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 to lower gross profit and higher sales and marketing expenses, while combined technology andgeneral and administrative expenses increased by 18% driven by increases in technology-related personnel growth, depreciation expense and higherlegal 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 2011.49Table of Contents 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.Results of Operations The following table sets forth our results of operations expressed as a percentage of total revenue for 2011 and 2010:Revenue The following table reflects our net revenue for the years ended December 31, 2011 and 2010 (in thousands):50 Year endedDecember 31 2011 2010 Revenue, net Direct 15.5% 19.2%Fulfillment partner 84.5 80.8 Total net revenue 100.0 100.0 Cost of goods sold Direct 14.2 17.2 Fulfillment partner 68.8 65.4 Total cost of goods sold 83.0 82.6 Gross profit 17.0 17.4 Operating expenses: Sales and marketing 5.9 5.6 Technology 6.4 5.3 General and administrative 6.4 5.1 Restructuring — (0.1) Total operating expenses 18.7 16.0 Operating income (loss) (1.7) 1.4 Interest income — — Interest expense (0.2) (0.3)Other income (expense), net — 0.2 Net income (loss) before income taxes (1.9) 1.3 Provision for income taxes — — Net income (loss) (1.9)% 1.3% 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 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. 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.51Table of Contents The following table reflects our net revenues, cost of goods sold and gross profit for the years ended December 31, 2011 and 2010 (in thousands): 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 under billed our fulfillment partners for certain fees andcharges related to returns of approximately $157,000 and52 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)% 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$822,000 for the years ended December 31, 2011 and 2010, respectively. Since our business model is reliant on our relationships with our fulfillmentpartners and the problem related to an internal record keeping issue on our part, we made the determination to not seek recovery of these amounts fromour fulfillment partners and consequently have not recognized any related recoveries in our consolidated 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. 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.53 Year ended December 31, 2011 2010 Total net revenue $1,054,277 100%$1,089,873 100% Cost of goods sold Product costs and other cost of goods sold 821,739 78% 842,064 78%Fulfillment and related costs 53,450 5% 58,169 5% Total cost of goods sold 875,189 83% 900,233 83% Gross profit $179,088 17%$189,640 17% Table of Contents 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.Technology 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,respectively.54 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 net revenues 5.9% 5.6% 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% Table of ContentsGeneral 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 sub lessee 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%.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, 2011 and 2010 totaled $161,000 and $157,000, respectively.55 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 net revenues 6.4% 5.1% Year endedDecember 31, 2011 2010 Cost of goods sold—direct $714 $1,179 Technology 14,433 12,489 General and administrative 1,203 912 Total depreciation and amortization, including internal-use software andwebsite development $16,350 $14,580 Table of ContentsInterest 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.Liquidity While we believe that the cash and cash equivalents currently on hand and expected cash flows from future operations will be sufficient to continueoperations for at least the next twelve months; we may require additional financing. Although we may attempt to obtain additional financing, there canbe no assurance we will be able to do so. There can be no assurance that if additional financing is necessary it will be available, or, if available, that suchfinancing can be obtained on satisfactory terms. Our failure to generate sufficient revenues or profits or to obtain additional financing or raise additionalcapital could have a material adverse effect on our operations and on our ability to achieve our intended business objectives. Any projections of futurecash needs and cash flows 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, 2012,our only available credit facility was a $3.0 million facility solely to support letters of credit. At December 31, 2012, our cash and cash equivalentsbalance was $93.5 million. Cash flow information is as follows:56 Year endedDecember 31 2012 2011 Cash provided by (used in): Operating activities $28,145 $25,663 Investing activities (13,764) (8,905)Financing activities (17,819) (43,794)Table of ContentsFree Cash Flow "Free cash flow" (a non-GAAP measure) for the years ended December 31, 2012, and 2011, was $15.7 million and $16.9 million, respectively.See "Non-GAAP financial measures" below for a reconciliation of Free Cash Flow to net cash provided by operating activities.Cash provided by operating activities For the years ended December 31, 2012 and 2011, our operating activities resulted in net cash inflows of $28.1 million and $25.7 million,respectively. 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 typically paid. The $28.1 million of net cash provided by operating activities during the year ended December 31, 2012 was primarily due to net income of$14.7 million, non-cash depreciation, amortization and stock compensation expense of $19.5 million, and an increase in deferred revenue of$10.4 million primarily due to strong sales growth at the end of year and an increase in the amount of orders sold but not yet delivered to our customersdue to shipping holidays near year-end, partially offset by a decrease in accounts payable of $7.9 million, an increase in accounts receivable of$5.8 million and an increase in inventory of $3.5 million primarily for home and garden products. 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 increase in accrued liabilities of $7.0 million primarilyrelated to marketing and legal expenses, an increase in deferred revenue of $4.0 million primarily due to continued growth of our Club O loyaltyprogram and an increase in accounts payable of $2.9 million.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, 2012 and 2011, investing activities resulted innet cash outflows of $13.8 million and $8.9 million, respectively. The $13.8 million used in investing activities during the year ended December 31, 2012 resulted primarily from expenditures for fixed assets of$12.5 million, which largely consisted of software and hardware purchases, and a $1.4 million investment in precious metals in an effort to diversifyour investments. 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.57Table of ContentsCash used in financing activities For the years ended December 31, 2012 and 2011, financing activities resulted in net cash outflows of $17.8 million and $43.8 million,respectively. Financing activities for the year ended December 31, 2012 resulted in net cash outflows of $17.8 million primarily from $17.0 million used forrepayment of our line of credit. 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 for retirement of finance obligations, partially offset by $17.0 million in proceeds from a draw on ourline of credit (which was used for the retirement of long-term debt).Stock Repurchase Program At present we do not have an authorized stock repurchase program, and we did not repurchase any shares of our common stock in the market orany of our debt during 2012. Our board of directors may authorize a stock repurchase program in the future. During the years ended December 31,2012 and 2011, we withheld from vesting restricted stock awards a total of 68,000 and 100,000 shares of our common stock for $471,000 and$1.6 million, respectively. The shares withheld represented the minimum tax withholdings upon the vesting of those restricted stock award grants tosatisfy the minimum tax withholdings owed by the grantee of the restricted stock award grant. None of these shares were repurchased in the openmarket.Contractual obligations and commitments The following table summarizes our contractual obligations as of December 31, 2012 and the effect such obligations and commitments areexpected to have on our liquidity and cash flow in future periods (in thousands): Operating leases From time to time we enter into operating leases for facilities and equipment for use in our operations.Naming rights During 2011, we entered into a six-year agreement with the Oakland-Alameda County Coliseum Authority ("OACCA") for the right to name theOakland Alameda County Coliseum. Amounts represent annual payments due OACCA for the naming rights. We have the right to terminate thisagreement at our sole option, subject to payment of a termination fee.58 Payments Due by Period Contractual Obligations 2013 2014 2015 2016 2017 Thereafter Total Operating leases 9,452 9,899 8,320 1,630 183 — 29,484 Naming rights 1,273 1,311 1,351 1,391 — — 5,326 Purchase obligations 15,114 — — — — — 15,114 Other 1,974 2,424 4,398 Total contractual cashobligations $27,813 $13,634 $9,671 $3,021 $183 $— $54,322 Amounts of Commitment Expiration Per Period Other Commercial Commitments 2013 2014 2015 2016 2017 Thereafter Total Letters of credit $1,780 $— $— $— $— $— $1,780 Table of ContentsPurchase 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, 2012. 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.Other From time to time we enter into long-term contractual agreements for marketing, technology, or other services.Tax Contingencies Our contractual obligations presented above exclude unrecognized tax contingencies, including interest and penalties, of $329,000 for which wecannot make a reasonably reliable estimate of the period of payment. For further information regarding the application of ASC 740-10-5, see theinformation set forth under Item 15 of Part IV, "Financial Statements—Note 20—Income Taxes," contained in the "Notes to Consolidated FinancialStatements" of this Annual Report on Form 10-K.BorrowingsU.S. Bank Financing Agreement In November 2012, we repaid all amounts outstanding under our Financing Agreement with U.S. Bank National Association ("U.S. Bank"). TheFinancing Agreement expired in accordance with its terms on December 31, 2012; and we entered into a $3 million cash-collateralized line of creditagreement (the "Credit Agreement") with U.S. Bank for the issuance of letters of credit. Advances under the Credit Agreement bear interest at one-month LIBOR plus 1.0%. The Credit Agreement matures on December 31, 2013. There were no amounts outstanding on the Credit Agreement atDecember 31, 2012. Amounts outstanding under the Financing Agreement at December 31, 2012 and December 31, 2011 were zero and $17.0 million, respectively,and letters of credit totaling $1.8 million and $2.0 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.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, 2012, $3.9 million was outstanding and $1.1 million was available under thePurchasing Card. At December 31, 2011, $3.4 million was outstanding and $1.6 million was available under the Purchasing Card.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.59Table of ContentsNon-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 together with our GAAP results, we believe Contribution and Contribution margin provides management and users of the financialstatements information about our ability to cover our operating costs, such as technology and general and administrative expenses. Contribution andContribution Margin are used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to theexclusion of GAAP financial measures. You should review our financial statements and publicly-filed reports in their entirety and not rely on any singlefinancial measure. The material limitation associated with the use of Contribution is that it is an incomplete measure of profitability as it does not includeall operating expenses or non-operating income and expenses. Management compensates for these limitations when using this measure by looking atother 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 "Net cash 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 mandatory debt service and financing obligations, changes in our capital structure, and future investments after we have paidall of our operating expenses. Therefore, we60 Year ended December 31, 2012 2011 2010 Total revenue $1,099,289 $1,054,277 $1,089,873 Cost of goods sold 900,859 875,189 900,233 Gross profit 198,430 179,088 189,640 Less: Sales and marketing expense 63,467 61,813 61,334 Contribution $134,963 $117,275 $128,306 Contribution margin 12.3% 11.1% 11.8%Table of Contentsbelieve it is important to view free cash flow as a complement to our entire consolidated statements of cash flows as calculated below (in thousands):ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not use derivative financial instruments in our investment portfolio, except, prior to January 1, 2013, for an interest rate cap agreement onour line of credit (which expired on December 31, 2012), and we have no foreign exchange contracts. Our financial instruments consist of cash andcash equivalents, trade accounts and contracts receivable, accounts payable and long-term obligations. We consider investments in highly-liquidinstruments with a remaining maturity of 90 days or less 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, 2012, we had $93.5 million in cash and cash equivalents. Hypothetically, an increase or decrease in interest rates of one hundredbasis points would have an estimated impact of $935,000 on our earnings or loss or cash flows of these instruments. At December 31, 2012, letters of credit totaling $1.8 million were outstanding under our credit facility. Hypothetically, an increase or decrease ininterest rates of one hundred basis points would have an estimated impact of $18,000 on our earnings or loss or cash flows of these instruments, if theletters of credit were fully drawn.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.61 Year ended December 31, 2012 2011 2010 Net cash provided by operating activities $28,145 $25,663 $16,322 Expenditures for fixed assets, including internal-use software andwebsite development (12,489) (8,741) (20,511) Free cash flow $15,656 $16,922 $(4,189) 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 "Exchange Act"). The term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure thatinformation required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act isaccumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performingsimilar functions, as appropriate to allow timely decisions regarding required disclosure. We carried out an evaluation required by the Exchange Act under the supervision and with the participation of our principal executive officer andprincipal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the1934 Act, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officerconcluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us inthe reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in theSEC's rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including ourprincipal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. 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, 2012. 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, 2012, our internal control over financial reporting was effective.62Table 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, 2012 has been audited by KPMG LLP, an independentregistered public accounting firm, as stated in their report which is in Item 9A(c).63Table of Contents(c) Independent Registered Public Accounting Firm's Report on Internal Control Over Financial ReportingReport of Independent Registered Public Accounting FirmThe Board of Directors and StockholdersOverstock.com, Inc.: We have audited Overstock.com, Inc.'s internal control over financial reporting as of December 31, 2012, 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. In our opinion, Overstock.com, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012,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, 2012 and 2011, and the related consolidated statements of operations andcomprehensive income (loss), changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2012,and our report dated February 21, 2013 expressed an unqualified opinion on those consolidated financial statements./s/ KPMG LLPSalt Lake City, UtahFebruary 21, 201364Table of Contents(d) Changes in Internal Control Over Financial Reporting During the fiscal quarter ended December 31, 2012, there has not occurred any change in our internal control over financial reporting that hasmaterially affected, or is reasonably likely to materially affect, our internal control over financial reporting.ITEM 9B. OTHER INFORMATION None.65Table 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 under "Business—Executive Officersof the Registrant." Information required by Item 10 of Part III regarding our board of directors and any material changes to the process by whichsecurity holders may recommend nominees to the board of directors will be included in our definitive proxy statement for our 2013 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 2013 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 in the Investor Relations section of our Website, www.overstock.com. Wewill provide a copy of the relevant portion to any person without any charge upon request in writing addressed to Overstock.com. Attn: InvestorRelations, 6350 South 3000 East, Salt Lake City, UT 84121.ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to our definitive proxy statement for the 2013 annual meeting of stockholders.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND RELATED STOCKHOLDER MATTERS Except as set forth herein, the information required by this Item is incorporated by reference to our definitive proxy statement for the 2013 annualmeeting of stockholders. 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, 2008 through December 31, 2012. The graph assumes a $100 investment at the beginning of the period in our commonstock, the NASDAQ Market Index and the Morningstar Group Index, and the reinvestment of any dividends. Historic stock price performance is notnecessarily indicative of future stock price performance.66Table of ContentsCOMPARISON OF YEAR CUMULATIVE TOTAL RETURN 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 2013 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 2013 annual meeting of stockholders.67Table 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 and Comprehensive Income (Loss) F-3 Consolidated Statements of Changes in Stockholders' Equity F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-6 Schedule II Valuation and Qualifying Accounts F-40 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. 10.2 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). 10.3 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). 10.4 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). 10.5 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). 10.6 Sublease Agreement by and between Overstock.com, Inc., Document Controls Systems, Inc., andOld Mill 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).68Table of ContentsExhibit Number Description of Document 10.7 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/A filed on December 7, 2004). 10.8 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). 10.9 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). 10.10 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) 10.11 2005 Equity Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to our Report onForm 8-K (File No. 000-49799) filed on May 7, 2012). *10.12 Form of Restricted Stock Unit Grant Notice and Restricted Stock Agreement under the 2005 EquityIncentive Plan 10.13 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). 10.14 First Amendment to Lease amending the terms of the Lease Agreement with Natomas Meadows,LLC dated December 16, 2008 (incorporated by reference to Exhibit 10.1 to our Report on Form 8-K(File No. 000-49799) filed on December 17, 2008). 10.15 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). *10.16(c)Summary of unwritten compensation arrangements with Directors. *21 Subsidiaries of the Registrant. *23 Consent of Independent Registered Public Accounting Firm 24 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, 2012 and 2011;(ii) Consolidated Statement of Operations and Comprehensive Income (Loss) for the years endedDecember 31 2012, 2011, and 2010; (iii) Consolidated Statements of Changes in Stockholder'sEquity for the years ended December 31, 2012, 2011, and 2010; (iv) Consolidated Statements ofCash Flows for the years ended December 31, 2012, 2011, and 2010; and (v) Notes to ConsolidatedFinancial Statements. Users of this data are advised pursuant to Rule 406T of Regulation S-T that this69interactive data file is deemed not filed or part of a registration statement or prospectus for purposesof sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 ofthe Securities and Exchange Act of 1934, and otherwise is not subject to liability under thesesections.(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.Table of Contents70(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. *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 February 21, 2013. 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 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 all capacities, to sign anyamendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with theSecurities and Exchange Commission, hereby ratifying and conforming all that said attorney-in-fact, or his or their substitute or substitutes, may do orcause to be done by virtue hereof.71 OVERSTOCK.COM, INC. By: /s/ JONATHAN E. JOHNSON IIIJonathan E. Johnson IIIActing Chief Executive OfficerSignature Title Date /s/ JONATHAN E. JOHNSON IIIJonathan E. Johnson III Acting Chief Executive Officer (PrincipalExecutive Officer), President and CorporateSecretary February 21, 2013/s/ STEPHEN J. CHESNUTStephen J. Chesnut Senior Vice President, Finance and RiskManagement (Principal Financial Officer andPrincipal Accounting Officer) February 21, 2013/s/ PATRICK M. BYRNEPatrick M. Byrne Chairman of the Board and Director February 21, 2013/s/ STORMY D. SIMONStormy D. Simon Senior Vice President, Customer and PartnerCare and Director February 21, 2013/s/ ALLISON H. ABRAHAMAllison H. Abraham Director February 21, 2013Table of Contents72Signature Title Date /s/ BARCLAY F. CORBUSBarclay F. Corbus Director February 21, 2013/s/ JOSEPH J. TABACCO, JR.Joseph J. Tabacco, Jr. Director February 21, 2013/s/ SAMUEL A. MITCHELLSamuel A. Mitchell Director February 21, 2013Table of ContentsReport of Independent Registered Public Accounting FirmThe 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, 2012 and 2011, andthe related consolidated statements of operations and comprehensive income (loss), changes in stockholders' equity, and cash flows for each of the yearsin the three-year period ended December 31, 2012. 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, 2012 and 2011, and the results of their operations and their cash flows for each of the years inthe three-year period ended December 31, 2012, 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, 2012, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 21, 2013expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting./s/ KPMG LLPSalt Lake City, UtahFebruary 21, 2013F-1Table of ContentsOverstock.com, Inc. Consolidated Balance Sheets (in thousands) See accompanying notes to consolidated financial statements.F-2 December 31,2012 December 31,2011 Assets Current assets: Cash and cash equivalents $93,547 $96,985 Restricted cash 1,905 2,036 Accounts receivable, net 19,273 13,501 Inventories, net 26,464 22,993 Prepaid inventories, net 1,912 1,027 Prepaids and other assets 12,897 12,651 Total current assets 155,998 149,193 Fixed assets, net 21,037 25,322 Goodwill 2,784 2,784 Other long-term assets, net 2,166 2,260 Total assets $181,985 $179,559 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $62,416 $70,332 Accrued liabilities 47,674 47,902 Deferred revenue 38,411 27,978 Line of credit — 17,000 Capital lease obligations, current — 110 Total current liabilities 148,501 163,322 Capital lease obligations, non-current — 2 Other long-term liabilities 2,522 2,998 Total liabilities 151,023 166,322 Commitments and contingencies (Note 13) 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—26,481 and 26,241 Outstanding shares—23,451 and 23,279 2 2 Additional paid-in capital 356,895 353,368 Accumulated deficit (247,096) (261,765)Treasury stock: Shares at cost—3,030 and 2,962 (78,839) (78,368) Total stockholders' equity 30,962 13,237 Total liabilities and stockholders' equity $181,985 $179,559 Table of ContentsOverstock.com, Inc. Consolidated Statements of Operations and Comprehensive Income (Loss) (in thousands, except per share data) Year ended December 31 2012 2011 2010 Revenue, net Direct $155,516 $163,609 $209,646 Fulfillment partner 943,773 890,668 880,227 Total net revenue 1,099,289 1,054,277 1,089,873 Cost of goods sold Direct(1) 140,536 149,660 187,124 Fulfillment partner 760,323 725,529 713,109 Total cost of goods sold 900,859 875,189 900,233 Gross profit 198,430 179,088 189,640 Operating expenses: Sales and marketing(1) 63,467 61,813 61,334 Technology(1) 65,467 67,043 58,260 General and administrative(1) 57,259 67,766 55,650 Restructuring 76 — (569) Total operating expenses 186,269 196,622 174,675 Operating income (loss) 12,161 (17,534) 14,965 Interest income 116 161 157 Interest expense (809) (2,485) (2,962)Other income, net 3,686 278 2,088 Income (loss) before income taxes 15,154 (19,580) 14,248 Provision (benefit) for income taxes 485 (142) 359 Net income (loss) $14,669 $(19,438)$13,889 Deemed dividend related to redeemable common stock — (12) (112) Net income (loss) attributable to common shares $14,669 $(19,450)$13,777 Net income (loss) per common share—basic: Net income (loss) attributable to common shares—basic $0.63 $(0.84)$0.60 Weighted average common shares outstanding—basic 23,387 23,259 23,019 Net income (loss) per common share—diluted: Net income (loss) attributable to common shares—diluted $0.62 $(0.84)$0.59 Weighted average common shares outstanding—diluted 23,672 23,259 23,366 Comprehensive income (loss) $14,669 $(19,438)$13,889 (1)Includes stock-based compensation as follows (Note 17):Cost of goods sold—direct $272 $193 $212 Sales and marketing 318 377 608 Technology 799 628 1,071 General and administrative 2,138 1,853 3,165 Total $3,527 $3,051 $5,056 See accompanying notes to consolidated financial statements.F-3Table of ContentsOverstock.com, Inc. Consolidated Statements of Changes in Stockholders' Equity (in thousands) Common stock Treasury stock AdditionalPaid-inCapital AccumulatedDeficit Shares Amount Shares Amount Total Balances atDecember 31,2009 25,583 $2 $343,040 $(256,056) 2,807 $(76,186)$10,800 Net income 13,889 13,889 Exercise ofstock options 90 1,503 1,503 Stock-basedcompensationto employeesand directors — — 5,056 — — — 5,056 Common stockissued uponvesting ofrestrictedstock 185 — — — — — — Purchase oftreasury stock — — — — 63 (825) (825)Treasury stockissued for401(k)matchingcontributions — — — (160) (7) 247 87 Redeemablecommonstockrepurchasedunderrescissionoffer 1 — — — (1) — — Lapse ofrescissionrights ofredeemablecommonstock 18 — 260 — — — 260 Deemeddividendrelated toredeemablecommonstock — — (112) — — — (112) Balances atDecember 31, See accompanying notes to consolidated financial statementsF-42010 25,877 $2 $349,747 $(242,327) 2,862 $(76,764)$30,658 Net loss (19,438) (19,438)Stock-basedcompensationto employeesand directors — — 3,051 — — — 3,051 Common stockissued uponvesting ofrestrictedstock 318 — — — — — — Purchase oftreasury stock — — — — 100 (1,604) (1,604)Lapse ofrescissionrights ofredeemablecommonstock 46 — 582 — — — 582 Deemeddividendrelated toredeemablecommonstock — — (12) — — — (12) Balance atDecember 31,2011 26,241 $2 $353,368 $(261,765) 2,962 $(78,368)$13,237 Net income — — — 14,669 — — 14,669 Stock-basedcompensationto employeesand directors — — 3,527 — — — 3,527 Common stockissued uponvesting ofrestrictedstock 240 — — — — — — Purchase oftreasury stock — — — — 68 (471) (471) Balance atDecember 31,2012 26,481 $2 $356,895 $(247,096) 3,030 $(78,839)$30,962 Table of ContentsOverstock.com, Inc. Consolidated Statements of Cash Flows (in thousands) See accompanying notes to consolidated financial statements. Year ended December 31 2012 2011 2010 Cash flows from operating activities: Net income (loss) $14,669 $(19,438)$13,889 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 16,009 16,350 14,580 Realized gain on marketable securities (9) — — Loss on disposition of fixed assets 72 — — Stock-based compensation to employees and directors 3,527 3,051 5,056 Amortization of debt discount and deferred loan costs 73 127 391 (Gain) loss from early extinguishment of debt — 1,253 (346)Restructuring charge (reversals) 76 — (569)Changes in operating assets and liabilities: Restricted cash 131 506 1,872 Accounts receivable, net (5,772) 59 (1,920)Inventories, net (3,471) 9,121 (8,739)Prepaid inventories, net (885) 1,055 797 Prepaids and other assets 1,294 (456) 368 Other long-term assets, net (267) (160) (215)Accounts payable (7,902) 2,944 (9,315)Accrued liabilities (459) 6,952 (2,575)Deferred revenue 10,433 3,951 3,362 Other long-term liabilities 626 348 (314) Net cash provided by operating activities 28,145 25,663 16,322 Cash flows from investing activities: Purchases of marketable securities (82) (160) (136)Purchases of intangible assets (6) (4) (396)Sale of marketable securities prior to maturity 154 — — Investment in precious metals (1,397) — (1,657)Expenditures for fixed assets, including internal-use software and website development (12,489) (8,741) (20,511)Proceeds from sale of fixed assets 56 — — Net cash provided used in investing activities (13,764) (8,905) (22,700) Cash flows from financing activities: Payments on capital lease obligations (112) (730) (490)Drawdowns on line of credit — 17,000 — Payments on line of credit (17,000) — — Capitalized financing costs — (140) — Proceeds from finance obligations — 1,429 16,383 Payments on finance obligations — (24,918) (841)Paydown on direct financing arrangement (236) (216) (197)Payments to retire convertible senior notes — (34,615) (24,865)Purchase of redeemable stock — — (26)Purchase of treasury stock (471) (1,604) (825)Exercise of stock options — — 1,503 Net cash used in financing activities (17,819) (43,794) (9,358) Net decrease in cash and cash equivalents (3,438) (27,036) (15,736)Cash and cash equivalents, beginning of period 96,985 124,021 139,757 Cash and cash equivalents, end of period $93,547 $96,985 $124,021 Supplemental disclosures of cash flow information: Cash paid during the year: Interest paid $582 $2,369 $2,534 Taxes paid 299 260 187 Non-cash investing and financing activities: Fixed assets, including internal-use software and website development, costs financed through accountspayable and accrued liabilities $502 $(33)$795 Equipment acquired under finance obligations — 5,077 599 Equipment and software acquired under capital lease obligations — — 6 Lapse of rescission rights of redeemable stock — 582 260 Issuance of common stock from treasury for 401(k) matching contribution — — 87 F-5Table 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 furniture, home décor, bedding andbath, housewares, jewelry and watches, apparel and designer accessories, electronics and computers, and sporting goods, 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, intangiblevaluation, income taxes, stock-based compensation, performance-based compensation, restructuring liabilities and contingencies. Actual results coulddiffer 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, 2012 and December 31, 2011 were $76.2 million and $81.2 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, 2012 and 2011, restricted cash was $1.9 million and $2.0 million, respectively, and was held primarily in cash or money market accounts.F-6Table 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, restricted cash, accounts receivable, accounts payable and accrued liabilities are carriedat cost, which approximates their fair value because of the short-term maturity of these instruments. 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, 2012 (in thousands):F-7 Fair Value Measurements atDecember 31, 2012: Total Level 1 Level 2 Level 3 Assets: Cash equivalents and restricted cash—Money market mutual funds $76,248 $76,248 $— $— Trading securities held in a "rabbi trust"(1) 264 264 Total assets $76,512 $76,512 $— $— Liabilities: Deferred compensation accrual "rabbi trust"(2) $266 $266 $— $— Restructuring(3) 65 — — 65 Total liabilties $331 $266 $— $65 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, 2011 (in thousands):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 $264,000 and $302,000 at December 31, 2012 and December 31, 2011, respectively, and are included in Othercurrent and long-term assets in the consolidated balance sheets. Gains and losses on these investments were immaterial for the years endedDecember 31, 2012 and 2011.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.F-8 Fair Value Measurements atDecember 31, 2011: Total Level 1 Level 2 Level 3 Assets: Cash equivalents and restricted cash—Money market mutual funds $81,159 $81,159 $— $— Trading securities held in a "rabbi trust"(1) 302 302 Total assets $81,461 $81,461 $— $— Liabilities: Deferred compensation accrual "rabbi trust"(3) 302 302 — — Total liabilities $302 $302 $— $— (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)—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). (3)—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.Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)Allowance for doubtful accounts From time to time, we grant credit to some of our business customers on normal credit terms (typically 30 days). We perform credit evaluations ofour business customers' financial condition and payment history and maintain an allowance for doubtful accounts receivable based upon our historicalcollection experience and expected collectability of accounts receivable. The allowance for doubtful accounts receivable was $797,000 and $574,000 atDecember 31, 2012 and December 31, 2011, respectively.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, 2012and 2011, 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. Reversal of the allowance is recognized only when the related inventory has beensold or scrapped.Prepaid inventories, net Prepaid inventories represent inventories paid for in advance of receipt. Prepaid inventories at December 31, 2012 and 2011 were $1.9 million and$1.0 million respectively.Prepaids and other assets Prepaids and other assets represent expenses paid prior to receipt of the related goods or services, including advertising, license fees, maintenance,packaging, insurance, and other miscellaneous costs, as well as investments in precious metals. Total prepaids and other assets at December 31, 2012and 2011 were $12.9 million and $12.7 million, respectively.F-9Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)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 capital 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, 2012 and 2011, we capitalized $8.2 million and $9.6 million, respectively, of costs associated with internal-use software and website development, both developed internally and acquired externally. Amortization of costs associated with internal-use softwareand website development was $8.2 million and $8.0 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 recognizeF-10 Life (years) Computer software 2 - 3 Computer hardware 3 Furniture and equipment 3 - 5 Year ended December 31, 2012 2011 2010 Cost of goods sold—direct $470 $714 $1,179 Technology 14,177 14,433 12,489 General and administrative 1,362 1,203 912 Total depreciation and amortization, including internal-use software and websitedevelopment $16,009 $16,350 $14,580 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)lease costs on a straight-line basis without regard to deferred payment terms, such as rent holidays that defer the commencement date of requiredpayments. Additionally, tenant improvement allowances are amortized as a reduction in rent expense over the term of the lease. Leasehold improvementsare capitalized at cost and amortized over the lesser of their expected useful life or the life of the lease, without assuming renewal features, if any, areexercised.Treasury stock We account for treasury stock under the cost method and include treasury stock as a component of stockholders' equity.Other long-term assets Other long-term assets consist primarily of long-term prepaid expenses.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, 2012, 2011, and 2010.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 make a qualitativeassessment to determine if it is more likely than not that its fair value is less than its carrying amount. If the qualitative assessment determines that it ismore likely than not that its fair value is less than its carrying amount, we compare the fair value of the reporting unit to which the goodwill is assignedto its carrying amount. If the carrying amount exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss, ifany, is calculated by comparing the implied fair value of the goodwill to its carrying amount. In calculating the implied fair value of goodwill, the fairvalue of the reporting unit is allocated to the other assets and liabilities within the reporting unit based on estimated fair value. The excess of the fairvalue of a reporting unit over the amount allocated to its other assets and liabilities is the implied fair value of goodwill. An impairment loss isrecognized when the carrying amount of goodwill exceeds its implied fair value. 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, 2012 andF-11Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)2011. There were no impairments to goodwill recorded during the years ended December 31, 2012, 2011, and 2010.Revenue recognition We derive our revenue primarily from direct revenue and fulfillment partner revenue from merchandise sales. We also earn revenue fromadvertising on our shopping and other pages, and previously from listing fees and commissions collected from products being listed and sold throughthe Auctions tab, which we removed from our site in July 2011. We have organized our operations into two principal segments based on the primarysource of revenue: direct revenue and fulfillment 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 basisbased on our actual transit time experience. However, actual shipping times may differ from 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.Direct revenue Direct revenue is derived from merchandise sales to individual consumers and businesses that are fulfilled from our warehouses. Direct revenuecomes from merchandise sales that occur primarily through our Website, but may also occur through offline and other channels.F-12Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)Fulfillment partner revenue Fulfillment partner revenue is derived from merchandise sales that occur primarily through our Website which fulfillment partners ship directly toconsumers and businesses from warehouses maintained by our fulfillment partners.Consignment We offer a consignment service to suppliers where the suppliers' merchandise is stored in and shipped from our warehouses. We pay theconsignment supplier upon shipment of the consigned merchandise to the consumer. Revenue from consignment service business in 2012, 2011 and2010 were less than 1% of total net revenues and are included in fulfillment partner segment on a gross basis.International business At December 31, 2012, we were offering products to customers in over 100 countries and non-U.S. territories. We do not have sales operationsoutside the United States, and are using a U.S. based third party to provide logistics and fulfillment for all international orders. Revenue generated fromour international business is included in either direct or fulfillment partner revenue, depending on whether the product is shipped from our warehousesor from a fulfillment partner. Less than 1% of our 2012, 2011 and 2010 revenues were from international customers. Total revenues from International sales were $10.2 million, $8.8 million, and $9.4 million for the years ended December 31, 2012, 2011 and 2010respectively.Ecommerce marketplace channels During 2012, we began offering some of our products for sale in on-line marketplaces of other Internet retailers' websites, which allows us toreach a broader potential customer base. Under the terms of our agreements with these ecommerce marketplace retailers, the retailers typically earn a feethat is a percentage of the selling price of the orders they send us. Revenue generated from these ecommerce marketplace channels is included in eitherdirect or fulfillment partner revenue, on a gross basis, depending on whether the product is shipped from our warehouses or from a fulfillment partner.Ecommerce marketplace channels were approximately 1% of our 2012 total net revenues.Other businesses 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 and post offers to purchase, and provides the means for prospective purchasers to contact sellers for furtherinformation and negotiations on the purchase of an advertised vehicle. Revenue from the cars listing business is included in the fulfillment partnersegment on a net basis. Revenue from our other businesses is less than 1% of total net revenues.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 purchasesF-13Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)made 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 revenue to the elements using their relative fair values. Weinclude the 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 customers redeem their reward dollars as part of a purchase at our Website. We recognizeother income when Club O reward dollars expire or the likelihood of reward dollars being redeemed by a customer is remote ("reward dollarbreakage"). Due to the program's short history, currently no reward dollar breakage is recognized until the reward dollars expire. However, in the futurewe plan to recognize such breakage 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.Co-branded credit card revenue We have entered into a co-branded credit card agreement with a commercial bank for the issuance of credit cards bearing the Overstock.com brand,under which the bank pays us fees for new accounts and for customer usage of the cards. The agreement also provides for a customer loyalty programoffering reward points that customers will accrue from card usage and can use to make purchases on our Website (See "Club O loyalty program" abovefor more information). New account fees are recognized as revenue on a straight-line basis over the estimated life of the credit card relationship. Creditcard usage fees are recognized as revenues as actual credit card usage occurs.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 recognize otherincome 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 other 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.F-14Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued) 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. The allowance for returns was $10.6 million and $10.9 million at December 31, 2012 and 2011, respectively.Credit card chargeback allowance Revenue is recorded net of credit card chargebacks. We maintain an allowance for credit card chargebacks based on current period revenues andhistorical chargeback experience. The allowance for chargebacks was $182,000 and $187,000 at December 31, 2012 and 2011, respectively.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 andF-15 Year ended December 31, 2012 2011 2010 Total net revenue $1,099,289 100%$1,054,277 100%$1,089,873 100% Cost of goods sold Product costs and other cost ofgoods sold 848,842 77% 821,739 78% 842,064 78%Fulfillment and related costs 52,017 5% 53,450 5% 58,169 5% Total cost of goods sold 900,859 82% 875,189 83% 900,233 83% Gross profit $198,430 18%$179,088 17%$189,640 17% Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)totaled $55.6 million, $52.5 million and $53.2 million during the years ended December 31, 2012, 2011 and 2010, respectively. Prepaid advertising,which consists primarily of prepaid advertising airtime, (included in Prepaids and other assets in the accompanying consolidated balance sheets) was$1.2 million and $1.4 million at December 31, 2012 and 2011, 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, and historical experience. Actual results may differ substantiallyfrom 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 probable 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.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 include the terms that may be negotiated to exit certain contractual obligations (see Note 3—Restructuring Expense).Income taxes Income taxes are accounted for under the asset and liability method. Deferred income taxes arise from temporary differences between the tax andfinancial statement recognition of revenue and expenses. In evaluating our ability to recover our deferred tax assets within the jurisdiction from whichthey arise, we consider all available positive and negative evidence, including projected future taxable income, scheduled reversals of our deferred taxliabilities, tax planning strategies and results of recent operations. At December 31, 2012 and December 31, 2011, we have a full valuation allowance against our deferred tax assets, net of expected reversals ofexisting deferred tax liabilities, as we believe it is more likely than not that these benefits will not be realized. Significant judgment is required in makingthis assessment, and it is very difficult to predict when our assessment may conclude that the remaining portion of the deferred tax assets is realizable.F-16Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued) We have tax deductions from stock-based compensation that exceed the stock-based compensation recorded for such instruments. To the extentsuch excess tax benefits are ultimately realized, they will increase shareholders' equity. We utilize the with-and without approach in determining if andwhen such excess tax benefits are realized, and under this approach excess tax benefits related to stock based compensation are the last to be realized.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. 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 shares outstanding as their effect would have been anti-dilutive (in thousands):Accounting pronouncements adopted We adopted ASU 2011-04, which amends current guidance to achieve common fair value measurement and disclosure requirements inU.S. GAAP and International Financial ReportingF-17 Year ended December 31 2012 2011 2010 Net income (loss) $14,669 $(19,438)$13,889 Deemed dividend related to redeemable common stock — (12) (112) Net income (loss) attributable to common shares $14,669 $(19,450)$13,777 Net income (loss) per common share—basic: Net income (loss) attributable to common shares—basic $0.63 $(0.84)$0.60 Weighted average common shares outstanding—basic 23,387 23,259 23,019 Effect of dilutive securities: Stock options and restricted stock awards 285 — 347 Convertible senior notes — — — Weighted average common shares outstanding—diluted 23,672 23,259 23,366 Net income (loss) attributable to common shares—diluted $0.62 $(0.84)$0.59 Year ended December 31 2012 2011 2010 Stock options and restricted stock units 537 927 551 Convertible senior notes — — 454 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)2. ACCOUNTING POLICIES (Continued)Standards. The amendments generally represent clarification of FASB ASC Topic 820, but also include instances where a particular principle orrequirement for measuring fair value or disclosing information about fair value measurements has changed. The adoption of ASU 2011-04 did not havea material effect on our consolidated financial statements. We adopted ASU 2011-05, which provided new guidance on the presentation of comprehensive income (FASB ASC Topic 220) in financialstatements. Entities are required to present total comprehensive income either in a single, continuous statement of comprehensive income or in twoseparate, but consecutive, statements. Under the single-statement approach, entities must include the components of net income, a total for net income,the components of other comprehensive income and a total for comprehensive income. Under the two-statement approach, entities must report anincome statement and, immediately following, a statement of other comprehensive income. The adoption of ASU 2011-05 did not have a material effecton our consolidated financial statements. We adopted ASU 2011-08, which allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-stepquantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless theentity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendmentsinclude a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The adoption of ASU 2011-08 did nothave a material effect on our consolidated financial statements.Accounting pronouncements issued not yet adopted In July 2011, the Financial Accounting Standards Board ("FASB") issued ASU No. 2012-02, Intangibles—Goodwill and Other (FASBAccounting Standards Codification Topic 350) which permits an entity to make a qualitative assessment to determine whether it is more likely than notthat an indefinite-lived intangible asset, other than goodwill, is impaired. The Accounting Standard Update applies to both public and nonpublic entitiesand is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. We do not expect thispronouncement 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 programare as follows (in thousands):F-18 Balance atBeginning ofYear AccretionExpense Net CashPayments Adjustments Balance atEnd of Year Year ended December 31, 2012 $1,491 $143 $(513)$76 $1,197 Year ended December 31, 2011 $1,797 $166 $(472)$— $1,491 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)3. RESTRUCTURING EXPENSE (Continued) We incurred $76,000 of restructuring charges during the year ended December 31, 2012 due to ceasing the use of some of our office facilities andchanges in the estimate of sublease income as a result of our entering into a new sublease agreement and terminating another sublease agreement. Therewere no restructuring charges or reversals during the year ended December 31, 2011.4. 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):F-19 Year ended December 31, 2012 2011 2010 Net income (loss) $14,669 $(19,438)$13,889 Components of other comprehensive income, net of tax — — — Comprehensive income (loss) $14,669 $(19,438)$13,889 December 31, 2012 2011 Accounts receivable, other $10,888 $8,033 Credit card receivables 9,182 6,042 20,070 14,075 Less: allowance for doubtful accounts (797) (574) Accounts receivable, net $19,273 $13,501 December 31, 2012 2011 Product inventory $18,044 $14,904 Inventory in-transit 8,420 8,089 Total inventories, net $26,464 $22,993 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)7. PREPAIDS AND OTHER ASSETS Prepaids and other assets consist of the following (in thousands):8. FIXED ASSETS Fixed assets consist of the following (in thousands): Depreciation and amortization of property and equipment totaled $16.0 million, $16.4 million, and $14.6 million for the years ended December 31,2012, 2011 and 2010, 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 $1.7 million and $1.5 million at December 31, 2012 and 2011, respectively.9. OTHER LONG-TERM ASSETS Other long-term assets consist of the following (in thousands):F-20 December 31, 2012 2011 Prepaid maintenance $6,494 $6,995 Investment in precious metals 3,055 1,657 Prepaid other 2,148 2,592 Prepaid advertising 1,200 1,407 Total prepaids and other assets $12,897 $12,651 December 31, 2012 2011 Computer hardware and software, including internal-use software andwebsite development $151,155 $141,435 Furniture and equipment 14,283 13,945 Leasehold improvements 6,339 5,445 171,777 160,825 Less: accumulated depreciation and amortization (150,740) (135,503) Total fixed assets, net $21,037 $25,322 December 31, 2012 2011 Prepaid expenses, long-term portion $1,816 $1,762 Prepaid other 350 498 Total other long-term assets, net $2,166 $2,260 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 On December 26, 2012, we entered into a $3.0 million cash-collateralized line of credit agreement (the "Credit Agreement") with U.S. BankNational Association ("U.S. Bank") for the issuance of letters of credit. Advances under the Credit Agreement bear interest at one-month LIBOR plus1.0%. The Credit Agreement matures on December 31, 2013. There were no amounts outstanding on the Credit Agreement at December 31, 2012. Until December 31, 2012, we were party to a Financing Agreement with U.S. Bank (the "Financing Agreement"). In November 2012, we repaidall amounts outstanding under the Financing Agreement. The Financing Agreement expired in accordance with its terms on December 31, 2012. Themaximum credit potentially available under the revolving facility was $20 million. Our obligations underF-21 December 31, 2012 2011 Allowance for returns $10,618 $10,899 Accrued compensation and other related costs 9,135 6,819 Accounts payable accrual 8,416 8,284 Accrued marketing expenses 6,172 7,632 Other accrued expenses 4,034 3,416 Accrued freight 2,761 2,392 Accrued taxes 2,349 1,540 Facility lease accruals 1,653 1,841 Accrued professional expenses 760 3,013 Inventory received but not invoiced 700 1,069 Credit card processing fee accrual 584 535 Short term portion of restructuring accrual (Note 3) 492 462 Total accrued liabilities $47,674 $47,902 December 31, 2012 2011 Payments owed or received prior to product delivery $29,280 $17,691 Club O membership fees and reward points 3,579 5,193 Unredeemed gift cards 2,973 3,738 Other 2,579 1,356 Total deferred revenue $38,411 $27,978 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)12. BORROWINGS (Continued)the Financing Agreement and all related agreements were secured by all or substantially all of our assets, excluding our interest in certain litigation. Advances under the Financing Agreement bore interest at one-month LIBOR plus 2.5%. We had also entered into an interest rate cap agreementwith U.S. Bank with an effective date of October 1, 2011 which limited our exposure for one-month LIBOR at 0.5% for the term of the FinancingAgreement. Amounts outstanding under the Financing Agreement at December 31, 2012 and December 31, 2011 were zero and $17.0 million, respectively,and letters of credit totaling $1.8 million and $2.0 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. 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 were 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 no amounts under thefinance obligations remained outstanding.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, 2012, $3.9 million was outstanding and $1.1 million was available under thePurchasing Card. At December 31, 2011, $3.4 million was outstanding and $1.6 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 amortizedusing the straight-line method which approximated the effective interest method. We recordedF-22Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)12. BORROWINGS (Continued)amortization of discount and debt issuance costs related to this offering totaling zero, $77,000 and $228,000 during the years ended December 31, 2012,2011 and 2010, respectively. Interest on the Senior Notes was payable semi-annually on June 1 and December 1 of each year. The Senior Notes werescheduled to mature on December 1, 2011 and were unsecured and ranked equally in right of payment with all existing and future unsecured,unsubordinated debt and senior in right of payment to any existing and future subordinated indebtedness. We retired all of the 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, 2012 and December 31, 2011, no amount of Senior Notes were outstanding.13. COMMITMENTS AND CONTINGENCIESSummary of future minimum lease payments for all operating leases Minimum future payments under all operating leases as of December 31, 2012, are as follows (in thousands): Rental expense for operating leases totaled $8.5 million, $8.9 million and $8.0 million for the years ended December 31, 2012, 2011 and 2010,respectively. Estimated sublease income of $117,000 is expected over the next five years of which $117,000 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 name theOakland Alameda County Coliseum. Amounts shown below represent annual payments due OACCA for the naming rights. We have the right toterminate this agreement at our sole option, subject to payment of a termination fee.F-23Payments due by period 2013 $9,452 2014 9,899 2015 8,320 2016 1,630 2017 183 Thereafter — $29,484 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)13. COMMITMENTS AND CONTINGENCIES (Continued) Minimum future payments under naming rights agreement as of December 31, 2012, 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 penalties and equitable remedies that could force us to alterimportant business practices. Such litigation could be costly and time consuming and could divert or distract our management and key personnel fromour business operations. Due to the uncertainty of litigation and depending on the amount and the timing, an unfavorable resolution of some or all ofthese matters could materially affect our business, results of operations, financial position, or cash flows. 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 SachsF-24Payments due by period 2013 $1,273 2014 1,311 2015 1,351 2016 1,391 2017 — Thereafter — $5,326 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)13. COMMITMENTS AND CONTINGENCIES (Continued)Group, 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 and the judgment has been entered. We have appealed. The defendants applied to the courtfor reimbursement from us of their allowable court costs in the collective amount of $2.4 million. We challenged the application as excessive underCalifornia law, and, following hearing, the amount was reduced to $689,471, which will be payable only if we do not succeed on our appeal of thesummary judgment. The nature of the loss contingencies relating to any court costs ordered 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 the decision and on November 4, 2010 the New York Appellate Division upheld part of the lower court's rulingrejecting our claims that the law is unconstitutional on its face, but remanded our claims that the law is unconstitutional as applied, for further discoveryand 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 decisionupholding the lower court's ruling. On March 15, 2011, the Appellate Division of the New York State Court of Appeals denied our motion for leave toappeal to the New York State Court of Appeals. We have determined not to pursue at the trial court level our claims that the law is unconstitutional asapplied. We proceeded with an appeal to the New York State Court of Appeals of the Appellate Division's ruling on our claim that the statute isunconstitutional on its face. The Court heard oral argument on the appeal on February 6, 2013 but has not yet issued its decision. 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, overF-25Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)13. COMMITMENTS AND CONTINGENCIES (Continued)objections lodged by some parties, the Court entered an order accepting settlement. Various parties appealed and on September 20, 2012 the FederalAppeals Court for the 9th Circuit upheld the settlement. Appealing parties have petitioned for a rehearing. The Court has not yet ruled on the petition.The nature of the loss contingencies relating to claims that have been asserted against us are described above. 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$146,162 as of December 31, 2012. 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 others similarly situated, seeks damages under claims for breach of contract, common law fraud and NewYork consumer fraud laws. The Plaintiff alleges we failed 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 a motion to dismiss based upon assertions that our agreement with our customers requires all suchactions 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 ofUtah, so that arbitration may be compelled in that district. On September 8, 2009 the motion to dismiss or transfer was denied, the court stating that ourbrowsewrap agreement was insufficient under 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 the court's ruling. The appeal was denied. On December 31, 2010 Hines filed an amended complaint. The amendedcomplaint eliminated common law fraud claims and breach of contract claims and added claims for breach of Utah's consumer protection statute andvarious other state consumer protection statutes. The amended complaint also asks for an injunction. We filed motions to dismiss and to decertify theclass. The court has not ruled on these motions. The nature of the loss contingencies relating to claims that have been asserted against us are describedabove. However, no estimate of the loss or range of loss can be made. 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 patentF-26Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)13. COMMITMENTS AND CONTINGENCIES (Continued)covering search and categorization software. We believe that certain third party vendors of products and services sold to us are contractually obligated toindemnify us in this action. On November 11, 2009, the parties stipulated to stay all proceedings in the case until resolution of a reexamination of thepatent in question, and also until a previously filed infringement action against Wal-Mart Stores, Inc. and other retailers resulted either in judgment ordismissal. Subsequently, the parties agreed to extend the time for defendants' complaint answer until 21 days following a court order to lift the stay towhich the parties stipulated. The United States Patent and Trademark Office resolved the reexamination of the patent in question in favor ofSpeedTrack, Inc. The case remains stayed, pending the outcome and appeal 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 courtalso granted Speedtrack's motion for summary judgment on patent validity. Speedtrack is appealing the ruling. It is not known whether the summaryjudgments granted in the Wal-Mart Stores case will have an effect on the Speedtrack case in which we are named as one of the defendants. 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. We intend to vigorously defend this action and pursue our indemnification 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-Lucent patent, having to do with a communications protocol.On November 29, 2011, Alcatel-Lucent filed a motion for a new trial which was denied. Alcatel-Lucent has filed an appeal which we will oppose. Theappeal is now in the briefing stage. 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 $2.3 million and received in return transfers totaling at least $2.5 million. 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 joined the suit. These district attorneysseek damages and an injunction under claims for violations of California consumer protection laws, allegingF-27Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)13. COMMITMENTS AND CONTINGENCIES (Continued)we made untrue or misleading statements concerning our pricing, price reductions, sources of products and shipping charges. The complaint asks fordamages in the amount of not less than $15 million. The suit is in the discovery stage. Trial has been set tentatively for September 9, 2013. The nature ofthe loss contingencies relating to claims that have been asserted against us are described above. We intend to vigorously defend this action. 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 filed a motion to dismiss which wasdenied. 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, if any,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 tendered the defense of this action to an indemnitor which accepted the defense. We have answered the complaint. The case is in its earlystages. The nature of the loss contingencies relating to claims that have been asserted against us are described above. However, no estimate of the lossor range of loss can be made. We intend to vigorously defend 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 haveanswered the complaint. We tendered the defense of the case to an indemnitor, who has accepted the defense and moved to stay the case against uspending the disposition of a declaratory action which the indemnitor brought against Pragmatus Telecom. The case against us was stayed July 10, 2012,pending resolution of the declaratory action. The nature of the loss contingencies relating to claims that have been asserted against us are describedabove. However, no estimate of the loss or range of loss can be made. We intend to vigorously defend this action and pursue our indemnification rightswith 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 answered the complaint. The case is inits early stages. The nature of the loss contingencies relating to claims that have been asserted against us areF-28Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)13. COMMITMENTS AND CONTINGENCIES (Continued)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, if any, with our vendors. On May 2, 2012, Execware LLC filed suit against us in the United States District Court for the District of Delaware for infringement of a patententitled: "Integrated Dialog Box for Rapidly Altering Presentation of Parametric Text Data Objects on a Computer Display." 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 May 10, 2012, Lodsys Group, LLC filed suit against us and seven other defendants in the United States District Court for the Eastern Districtof Texas for infringement of a patent covering method and system for gathering information from units of a commodity across a network. We tenderedthe defense of this action to an indemnitor which resolved the matter with no payment from us. The case has been dismissed. On July 16, 2012, Digitech Image Technologies, LLC filed against us and forty-five other defendants in the United States District Court for theCentral District of California for infringement of a patent covering the imaging technology that facilitates prediction of color and location within digitalcameras. We tendered defense of the case to an indemnitor which accepted the defense. Following a ruling in our favor, the case was dismissed and inSeptember 2012, Digitech filed a new complaint in the same court on the same infringement claims. In the new action, our indemnitor continues todefend the case. The case is in its early stages. The nature of the loss contingencies relating to claims that have been asserted against us are describedabove. However, no estimate of the loss or range of loss can be made. We intend to cooperate with our indemnitor and vigorously defend this action. On July 19, 2012, Data Carriers, LLC filed suit against us in the United States District Court for the District of Delaware for infringement of apatent covering the "autocomplete" features of our website. We believe a third party vendor is contractually obligated to indemnify us in this action. Wehave answered the complaint. The case is in its early stages. 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 and pursue ourindemnification rights with our vendors. We establish liabilities when a particular contingency is probable and estimable. At December 31, 2012, we have accrued $2.9 million in light ofthese probable and estimable liabilities. It is reasonably possible that the actual losses may exceed our accrued liabilities. We have other contingencieswhich are reasonably possible; however, the reasonably possible exposure to losses cannot currently be estimated. We recognized a reduction in legal expenses of $88,000, zero and $4.5 million during the years ended December 31, 2012, 2011 and 2010respectively, related to the settlement of legal matters.F-29Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)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, 2012.16. STOCK AND 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 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.17. STOCK-BASED AWARDSStock Option Awards Our board of directors adopted the 2005 Equity Incentive Plan and it was most recently amended and restated and re-approved by the stockholderson May 3, 2012 (as so amended and restated, the "Plan"). Under the Plan, the board of directors may issue incentive stock options to employees anddirectors of the Company and non-qualified stock options to consultants, as well as restricted stock units and other types of equity awards of theCompany. Options granted under this Plan generally expire at the end of ten years and vest on a straight line basis in accordance with a vesting scheduledetermined by our board of directors, usually over four years from the grant date. We did not grant any options during the years ended December 31,2012, 2011 and 2010. At December 31, 2012, 2.8 million shares of stock remained available for future grants under the Plan. We settle stock optionexercises with newly issued common shares.F-30Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)17. STOCK-BASED AWARDS (Continued) The following is a summary of stock option activity (in thousands): The following table summarizes information about stock options as of December 31, 2012 (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, 2012,2011 and 2010, we recorded stock based compensation related to stock options of $3,000, $200,000 and $1.6 million, respectively. Total unrecognized compensation costs related to nonvested stock option awards was approximately zero, $3,000 and $239,000 as ofDecember 31, 2012, 2011 and 2010, respectively. The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our stock price of $14.31 as of December 31,2012, which would have been received by the option holders had all option holders exercised their options as of that date. The total intrinsic value of options exercised during the years ended December 31, 2012, 2011 and 2010 was zero, zero, and $381,000,respectively. The total cash received from employees as a result of employee stock option exercises during the years ended December 31, 2012, 2011and 2010 were approximately zero, zero, and $1.5 million, respectively. In connection with these exercises, there was no tax benefit realized due to ournet operating loss position.Restricted Stock Unit Activity For the years ended December 31, 2012, 2011 and 2010, we granted 795,000, 268,000 and 302,000 restricted stock units, 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 recognizedstraight-line over the three year vesting schedule. The weighted average grant date fair value of restricted stock units granted during the years endedDecember 31, 2012, 2011 and 2010 was $6.75, $15.47 and $13.17, respectively.F-31 2012 2011 2010 Shares WeightedAverageExercisePrice Shares WeightedAverageExercisePrice Shares WeightedAverageExercisePrice Outstanding—beginning of year 405 $17.58 496 $18.09 721 $20.29 Granted at fair value — — — — — — Exercised — — — — (90) 17.05 Expired/Forfeited (41) 20.06 (91) 20.55 (135) 30.41 Outstanding—end of year 364 $17.34 405 $17.58 496 $18.09 Options exercisable at year-end 364 $17.34 404 $17.59 472 $18.08 Options Outstanding Options Exercisable Shares WeightedAverageExercisePrice WeightedAverageRemainingContract Life AggregateIntrinsicValue Shares WeightedAverageExercisePrice WeightedAverageRemainingContract Life AggregateIntrinsicValue 364 $17.34 4.16 $13 364 $17.34 4.16 $13 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 granted in or prior to 2012 vest over three years at 25% at the end of the first year, 25% at the end of the second year and50% at the end of the third year. Each restricted stock unit represents the right to one share of common stock upon vesting. During the years endedDecember 31, 2012, 2011 and 2010, we recorded stock based compensation related to restricted stock units of $3.5 million, $2.8 million and$3.5 million, respectively. Changes to the estimated forfeiture rate are accounted for as a cumulative effect of change in the period of such change. On January14, 2013, we granted 240,000 additional restricted stock units. These restricted stock units vest over three years at 40% at the end ofthe first year, and 30% at the end of the second and third years.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 subject to IRS limits. Participant contributions areimmediately vested. Our contributions vest based on the participant's years of service at 20% per year over five years. Our matching contribution totaled$653,000, $991,000 and $770,000 for the years ended December 31, 2012, 2011 and 2010, respectively. In addition, discretionary contributionstotaling zero, zero, and $471,000 for the years ended December 31, 2012, 2011 and 2010, respectively, were made to eligible participants as of the endof each respective 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, 2012, 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 theirF-32 2012 2011 2010 Units WeightedAverageGrant DateFair Value Units WeightedAverageGrant DateFair Value Units WeightedAverageGrant DateFair Value Outstanding—beginning of year 522 $13.40 685 $12.08 640 $11.35 Granted at fair value 795 6.75 268 15.47 302 13.17 Vested (240) 12.11 (318) 12.20 (185) 11.52 Forfeited (74) 8.25 (113) 13.88 (72) 11.50 Outstanding—end of year 1,003 $8.81 522 $13.40 685 $12.08 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)18. EMPLOYEE RETIREMENT PLAN (Continued)initial deferral contribution is made. Deferred compensation amounts are held in a "rabbi trust," which invests primarily in mutual funds. The trustassets, which consist primarily of mutual funds, are recorded in our consolidated balance sheets because they are subject to the claims of our creditors.The corresponding deferred compensation liability represents the amounts deferred by the plan participants plus or minus any earnings or losses on thetrust assets. The trust's assets totaled $264,000 and $302,000 at December 31, 2012 and December 31, 2011, respectively, and are included in Othercurrent and long-term assets in the consolidated balance sheets. Gains and losses on these investments were immaterial for the years endedDecember 31, 2012, 2011 and 2010.19. 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-33 Years ended December 31, 2012 2011 2010 Gift card and Club-O rewards breakage $3,308 $971 $909 Sublease income 355 573 575 Gain (loss) from early retirement of convertible senior notes — (54) 346 Loss from early retirement of finance obligations — (1,199) — Other 23 (13) 258 Total other income, net $3,686 $278 $2,088 Years ended December 31, 2012 2011 2010 Current: Federal $416 $(254)$226 State 39 69 133 Foreign 30 43 — Total current 485 (142) 359 Deferred: Federal $— $— $— State — — — Total deferred — — — Total provision (benefit) for income taxes $485 $(142)$359 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, 2012 and 2011 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 provision of $485,000 for the year ended December 31, 2012, forfederal alternative minimum taxes, state and foreign taxes. At December 31, 2012 and 2011, we had U.S. federal net operating loss carry-forwards of approximately $174.1 million and $192.5 million andstate net operating loss carry-forwards of approximately $151.6 million and $176.1 million, respectively, which may be used to offset future taxableincome. We are currently reviewing whether we had any ownership changes. Ownership changes under IRS Code Section 382 would limit the amountof 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):F-34 December 31, 2012 2011 Deferred tax assets and liabilities: Net operating loss carry-forwards $69,158 $76,455 Temporary differences: Accrued expenses 4,469 3,317 Reserves and other 7,464 5,705 Depreciation and amortization (1,398) (1,860) 79,693 83,617 Valuation allowance (79,693) (83,617) Net asset $— $— Year ended December 31, 2012 2011 2010 U.S. federal income tax provision (benefit) at statutory rate $5,303 $(6,853)$4,940 State income tax expense, net of federal benefit 44 45 86 Stock based compensation expense 1 70 484 Other (1,764) 30 73 Change in valuation allowance (3,099) 6,566 (5,224) Income tax provision (benefit) $485 $(142)$359 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)20. INCOME TAXES (Continued) 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. 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, 2012 and 2011 were $97,000 and $82,000, respectively. Tax yearsbeginning in 2010 are subject to examination by taxing authorities, although net operating loss and credit carry forwards 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 occasion, Haverford-Valley, L.C. (an entity owned by our Chairman of the Board) and certain affiliated entities make travel arrangements forour executives and pay the travel related expenses incurred by our executives on company business. During the years ended December 31, 2012, 2011and 2010 we reimbursed Haverford-Valley L.C. $93,000, $122,000, and $139,000, respectively, for these expenses. 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.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, 2012, 2011 and 2010. We evaluate theperformance of our segments and allocate resources to them based primarily on gross profit. The table belowF-35 Year ended December 31, 2012 2011 2010 Beginning balance $231 $191 $112 Additions for tax positions related to the current year — — — Additions for tax positions taken in prior years — 40 79 Ending balance $231 $231 $191 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)22. BUSINESS SEGMENTS (Continued)summarizes information about reportable segments for the years ended December 31, 2012, 2011 and 2010 (in thousands): The direct segment includes revenues, direct costs, and cost allocations associated with sales fulfilled from our warehouses. Costs for this segmentinclude product costs, 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 fulfilled from warehouses maintained byour fulfillment partners. Costs for this segment include product costs, outbound freight and fulfillment costs, credit card fees and customer service costs. Assets have not been allocated between the segments for our internal management purposes and, as such, they are not presented here.F-36 Year ended December 31, Direct Fulfillmentpartner Total 2012 Revenue, net $155,516 $943,773 $1,099,289 Cost of goods sold 140,536 760,323 900,859 Gross profit $14,980 $183,450 $198,430 Operating expenses (186,269)Other income (expense), net 2,993 Provision (benefit) for income taxes 485 Net income $14,669 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 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)22. BUSINESS SEGMENTS (Continued) For the years ended December 31, 2012, 2011 and 2010, over 99% of sales were made to customers in the United States of America. AtDecember 31, 2012 and December 31, 2011, 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, 2012. We have prepared this information on the same basis as the consolidated statements of operations and the information includes alladjustmentsF-37Table 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-38 Three Months Ended March 31,2012 June 30,2012 September 30,2012 December 31,2012 (in thousands, except per share data) Consolidated Statement of Operations Data: Revenue, net Direct $40,897 $33,936 $34,215 $46,468 Fulfillment partner 221,470 205,600 221,137 295,566 Total net revenue 262,367 239,536 255,352 342,034 Cost of goods sold Direct 37,630 31,108 30,684 41,114 Fulfillment partner 177,229 165,259 178,126 239,709 Total cost of goods sold 214,859 196,367 208,810 280,823 Gross profit 47,508 43,169 46,542 61,211 Operating expenses: Sales and marketing 14,475 13,512 14,899 20,581 Technology 15,638 15,122 16,085 18,622 General and administrative 14,822 14,516 13,828 14,093 Restructuring 98 — (45) 23 Total operating expenses 45,033 43,150 44,767 53,319 Operating income 2,475 19 1,775 7,892 Interest income 29 27 30 30 Interest expense (208) (253) (194) (154)Other income (expense), net 432 719 1,213 1,322 Net income before income taxes 2,728 512 2,824 9,090 Provision for income taxes 9 42 131 303 Net income $2,719 $470 $2,693 $8,787 Deemed dividend related to redeemable common stock — — — — Net income attributable to common shares $2,719 $470 $2,693 $8,787 Net income per common share—basic: Net income per share—basic $0.12 $0.02 $0.11 $0.37 Weighted average common shares outstanding—basic 23,392 23,437 23,447 23,450 Net income per common share—diluted: Net income per share—diluted $0.12 $0.02 $0.11 $0.37 Weighted average common shares outstanding—diluted 23,414 23,464 23,754 24,064 Comprehensive income $2,719 $470 $2,693 $8,787 Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements (Continued)23. QUARTERLY RESULTS OF OPERATIONS (unaudited) (Continued) F-39 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 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 Comprehensive loss $(444)$(7,798)$(7,787)$(3,409) Table of ContentsSchedule IIValuation and Qualifying Accounts(dollars in thousands) F-40 Balance atBeginning ofYear Charged toExpense Deductions Balance atEnd of Year Year ended December 31, 2012 Deferred tax valuation allowance $83,617 $— $3,924 $79,693 Allowance for sales returns 10,899 79,785 80,066 10,618 Allowance for doubtful accounts 574 249 26 797 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 QuickLinks -- Click here to rapidly navigate through this documentExhibit 10.12 OVERSTOCK.COM, INC.RESTRICTED STOCK UNIT GRANT NOTICE(2005 Equity Incentive Plan) Overstock.com, Inc. (the "Company"), pursuant to its 2005 Equity Incentive Plan (the "Plan"), hereby grants to the participant under the Plan (the"Participant") restricted stock units ("RSUs") constituting the right to purchase the number of shares of the Company's common stock (the "CommonStock") set forth below (the "Award"). This Award is subject to all of the terms and conditions as set forth in this Restricted Stock Unit Grant Notice(the "Grant Notice"), the Restricted Stock Unit Agreement attached hereto and the Plan, a copy of which has previously been furnished to theParticipant, all of which are incorporated herein in their entirety. Additional Terms/Acknowledgements: The undersigned Participant acknowledges receipt of, and understands and agrees to the terms andconditions of this Grant Notice, the Restricted Stock Unit Agreement and the Plan, and agrees that his or her signature of this Grant Notice shall also bedeemed his or her signature of the attached Restricted Stock Unit Agreement. Participant further acknowledges that as of the Date of Grant, this GrantNotice, the Restricted Stock Unit Agreement and the Plan set forth the entire understanding between Participant and the Company regarding the mattersaddressed herein and therein and supersede all prior oral and written agreements relating thereto, with the exception of any other awards previouslygranted and delivered to Participant under the Plan.Participant: [Name]Date of Grant: [Date]Number of Shares Subject to Award: [Number of Shares]Purchase Price per Share: $0.0001Total Purchase Price: $Vesting Schedule: [Participant will vest in [vest percentage] of the RSUs awarded by thisAgreement at the close of business on [date or dates], subject to the provisionsof the Restricted Stock Unit Agreement attached hereto and the Plan.]Payment: As described in the Restricted Stock Unit Agreement, the par value for theshares must be paid in cash, by check or as consideration for past services tothe Company. Overstock.com, Inc. Participant:By: Signature SignatureTitle: Date: Date: OVERSTOCK.COM, INC.RESTRICTED STOCK UNIT AGREEMENT(2005 Equity Incentive Plan) 1. Grant. The Company hereby grants to the Participant named in the Restricted Stock Unit Grant Notice attached hereto an award ofRestricted Stock Units ("RSUs"), as set forth in the Restricted Stock Unit Grant Notice and subject to the terms and conditions in this Agreement andthe Company's 2005 Equity Incentive Plan (the "Plan"). When the Shares are issued pursuant to RSUs which vest in accordance with the terms hereof,the par value per Share will be deemed paid by the Participant as a result of services rendered by the Participant prior to the applicable vesting date.Terms used but not defined herein have the meanings given them in the Plan. 2. Company's Obligation. Each RSU represents the right to receive one Share on the vesting date of that RSU. Unless and until the RSUs vest,the Participant will have no right to receive any Shares under such RSUs. Prior to actual distribution of Shares pursuant to any vested RSUs, suchRSUs will represent an unsecured obligation of the Company, payable (if at all) only from the general assets of the Company. 3. Vesting Schedule. Subject to paragraph 4, the Participant will vest in the RSUs awarded by this Agreement according to the vesting schedulespecified in the Restricted Stock Unit Grant Notice. Accordingly, such vesting may be tied to the attainment of established Performance Goals and/orthe completion of a specified period of Service Provider status. 4. Administrator Discretion. The Administrator, in its discretion, may accelerate the vesting of any or all of the RSUs at any time, subject to theterms of the Plan. If so accelerated, such RSUs will be considered as having vested as of the date specified by the Administrator. If the Administrator,in its discretion, accelerates the vesting of any or all of the RSUs, the Shares underlying those accelerated RSUs shall nevertheless be issued at the sametime or times as if such RSUs had vested in accordance with the vesting schedule set forth in the Restricted Stock Unit Grant Notice (whether or not theParticipant remains in Service Provider status as of such date(s)). Accordingly, there shall be no acceleration of the issuance date of the Sharesunderlying the RSUs for which vesting is accelerated pursuant to this paragraph 4. 5. Forfeiture upon Termination as Service Provider. Notwithstanding any contrary provision of this Agreement or the Restricted Stock UnitGrant Notice, if the status of the Participant as a Service Provider is terminated for any reason or no reason prior to vesting, the unvested RSUsawarded by this Agreement will thereupon terminate and be forfeited at no cost to the Company and without any payment (in Shares, cash or otherwise)to the Participant. 6. Payment upon Vesting. Any RSUs that vest in accordance with paragraph 3 will be paid to the Participant (or in the event of the Participant'sdeath, to his or her estate or designated beneficiaries) in Shares on the date those RSUs vest in accordance with the vesting schedule set forth in theRestricted Stock Unit Grant Notice or as soon thereafter as practicable, subject to the tax withholding provisions of paragraph 8. Any RSUs that vest inaccordance with paragraph 4 will be paid in Shares to the Participant (or in the event of the Participant's death, to his or her estate or designatedbeneficiaries) in accordance with the provisions of such paragraph, subject to tax withholding provisions of paragraph 8. In the event of any acceleratedvesting of the RSUs pursuant to the provisions of Section 16(c)(ii) of the Plan, the Shares underlying those accelerated RSUs shall be issued on theaccelerated vesting date or as soon thereafter as administratively practicable, subject to the tax withholding provisions of paragraph 8. For each RSU thatvests, the Participant will receive one Share. In no event shall the Shares be issued later than the later of (i) the close of the calendar year in which theShares vest or (for vesting-accelerated RSUs under paragraph 4) would have vested in the absence of such acceleration or (ii) the fifteenth (15th) day ofthe third (3rd) calendar month following such actual or deemed vesting date. Notwithstanding anything herein to the contrary, the Participant shall notbe permitted, directly or indirectly, to designate the taxable year in which the Shares shall be issued. 7. Payments after Death. Any distribution or delivery of Shares to be made to the Participant in accordance with the provisions of thisAgreement will, if the Participant is then deceased, be made to the administrator or executor of the Participant's estate or the designated beneficiary orbeneficiaries of the RSUs. The Shares shall be issued on the issuance date determined in accordance with the provisions of paragraph 6. Any suchadministrator, executor or beneficiary must furnish the Company with (a) written notice of his or her status as such and (b) evidence satisfactory to theCompany to establish the validity of the transfer and compliance with any laws or regulations pertaining to said transfer. The Participant may make abeneficiary designation with respect to the RSUs by filing the appropriate form with the Administrator or its designate 8. Adjustment in Shares. Should any event described in Section 16(a) of the Plan occur, then equitable adjustments shall be made by theAdministrator to the total number and/or class of securities issuable pursuant to this Award as permitted by the Plan. Such adjustments shall be made insuch manner as the Administrator deems appropriate so as to prevent dilution or enlargement of the benefits intended to be made available hereunder. 9. Withholding of Taxes. When the Shares are issued as payment for vested RSUs, the Company will withhold a portion of the Shares thathave an aggregate Fair Market Value sufficient to pay the minimum federal, state and local income, employment and any other applicable taxes requiredto be withheld by the Company, unless the Company, in its sole discretion, either requires or otherwise permits the Participant to make alternatearrangements satisfactory to the Company for such withholdings in advance of the arising of any withholding obligations. The number of Shareswithheld pursuant to the prior sentence will be rounded up to the nearest whole Share, with no cash payment due the Participant for the value of anyShare withheld in excess of the tax obligation as a result of such rounding. Notwithstanding any contrary provision of this Agreement, no Shares willbe issued unless and until satisfactory arrangements (as determined by the Company) have been made by the Participant with respect to the payment ofany income and other taxes which the Company determines must be withheld or collected with respect to such Shares. In addition and to the maximumextent permitted by law, the Company (or the employing Subsidiary) has the right to retain without notice from salary or other amounts payable to theParticipant, cash having a sufficient value to satisfy any tax withholding obligations that the Company determines cannot be satisfied through thewithholding of otherwise deliverable Shares. All income and other taxes related to the RSU award and any Shares delivered in payment thereof are thesole responsibility of the Participant. By accepting this RSU award, the Participant expressly consents to the withholding of Shares and to anyadditional cash withholding as provided for in this paragraph 9. 10. Rights as Stockholder. Neither the Participant nor any person claiming under or through the Participant will have any of the rights orprivileges of a stockholder of the Company in respect of any Shares deliverable hereunder unless and until certificates representing such Shares areissued, recorded on the records of the Company or its transfer agents or registrars, and delivered to the Participant or Participant's broker. 11. No Right to Employment. The Participant's employment or other Service Provider status with the Company and its Subsidiaries is on an at-will basis only. Accordingly, the terms of the Participant's employment or other Service Provider status with the Company and its Subsidiaries will bedetermined from time to time by the Company or the Subsidiary employing or retaining the Participant (as the case may be), and the Company or theSubsidiary will have the right, which is hereby expressly reserved, to terminate or change the terms of the employment or service relationship of theParticipant at any time for any reason whatsoever, with or without good cause or notice. 12. Address for Notices. Any notice to be given to the Company under the terms of this Agreement must be addressed to the Company at 6350South 3000 East, Salt Lake City, Utah 84121, Attn: [Stock Administration], or at such other address as the Company may hereafter designate in writingor electronically. 13. Grant Not Transferable. Except to the limited extent provided in paragraph 7, this grant and the rights and privileges conferred hereby shallnot be transferred, assigned, pledged or hypothecated inany way (whether by operation of law or otherwise) and shall not be subject to sale under execution, attachment or similar process. Upon any attempt totransfer, assign, pledge, hypothecate or otherwise dispose of this grant, or any right or privilege conferred hereby, or upon any attempted sale under anyexecution, attachment or similar process, this grant and the rights and privileges conferred hereby immediately will become null and void. 14. Restrictions on Sale of Securities. Subject to the provisions of paragraph 16, the Company shall use its reasonable efforts to assure that theoffering of Shares to be issued in payment of the vested RSUs is registered under the federal securities laws or qualifies for an available exemptionfrom such registration requirements. However, any sale of any Shares by the Participant will be subject to the Company's Insider Trading Policy asamended from time to time and any other policies adopted by the Company relating to the sale of Company Common Stock and any market blackout-period that may be imposed by the Company. Further, the Participant is solely responsible for ensuring that any sale complies with all applicablesecurities laws. 15. Binding Agreement. Subject to the limitation on the transferability of this grant contained herein, this Agreement will be binding upon andinure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto. 16. Additional Conditions to Issuance of Stock. If at any time the Company determines, in its discretion, that the listing, registration orqualification of the Shares upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatoryauthority is necessary or desirable as a condition to the issuance of Shares to the Participant (or his or her estate or beneficiary), such issuance will notoccur unless and until such listing, registration, qualification, consent or approval have been effected or obtained, free of any conditions not acceptableto the Company. The Company will make all reasonable efforts to meet the requirements of any such state or federal law or securities exchange and toobtain any such consent or approval of any such governmental authority. In no event, however, shall any Shares be issued in contravention ofapplicable federal and state securities laws or other regulatory requirements. 17. Plan Governs. This Agreement and the Restricted Stock Unit Grant Notice are subject to all terms and provisions of the Plan. In the eventof a conflict between one or more provisions of this Agreement or the Restricted Stock Unit Grant Notice and one or more provisions of the Plan, theprovisions of the Plan will govern. 18. Administrator Authority. The Administrator will have the power to interpret the Plan and this Agreement and the Restricted Stock UnitGrant Notice and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret orrevoke any such rules (including, but not limited to, the determination of whether or not any RSUs have vested). All actions taken and all interpretationsand determinations made by the Administrator in good faith will be final and binding upon Participant, the Company and all other persons. No memberof the Administrator will be personally liable for any action, determination or interpretation made in good faith with respect to the Plan, the RestrictedStock Unit Grant Notice or this Agreement. 19. Captions. Captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of thisAgreement. 20. Agreement Severable. In the event that any provision in this Agreement will be held invalid or unenforceable, such provision will beseverable from, and such invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Agreement. 21. Modifications to the Agreement. This Agreement constitutes the entire understanding of the parties regarding the subjects covered. TheParticipant expressly warrants that he or she is not accepting this Agreement in reliance on any promises, representations, or inducements other thanthose contained herein. Modifications to this Agreement or the Plan can be made only in an express written contract executed by a duly authorizedofficer of the Company. Notwithstanding anything to the contrary in the Plan or this Agreement, the Company reserves the right to amend thisAgreement as it deems necessary or advisable, in its sole discretion and without the consent of the Participant, tocomply with applicable law, including without limitation Section 409A of the Code or to otherwise avoid imposition of any additional tax or incomerecognition under Section 409A of the Code prior to the actual payment of Shares pursuant to this RSU award. 22. Amendment, Suspension or Termination of the Plan. By accepting this RSU award, the Participant expressly warrants that he or she hasreceived a right to purchase stock under the Plan, and has received, read and understood a description of the Plan. The Participant understands that thePlan is discretionary in nature and may be modified, suspended or terminated by the Company at any time. 23. Electronic Delivery. The Company may, in its sole discretion, decide to deliver any notices required or permitted hereunder or under thePlan and any documents related to RSUs awarded under the Plan or future RSUs that may be awarded under the Plan by electronic means or request theParticipant's consent to participate in the Plan by electronic means. By accepting this RSU award, the Participant hereby consents to receive suchdocuments by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by theCompany or another third party designated by the Company. 24. Notice of Governing Law. This RSU award shall be governed by, and construed in accordance with, the laws of the State of Utah withoutregard to principles of conflict of laws. 25. Section 409A. Payments under this Agreement are intended to be exempt from, or comply with, the provisions of Section 409A of theInternal Revenue Code of 1986 ("Section 409A") and this Agreement shall be administered and construed accordingly. If any payment, compensationor other benefit provided to the Participant in connection with his or her employment termination is determined, in whole or in part, to constitute"nonqualified deferred compensation" within the meaning of Section 409A and the Participant is a specified employee as defined inSection 409A(2)(B)(i), no part of such payments shall be paid before the day that is six (6) months plus one (1) day after the date of termination (the"New Payment Date"). The aggregate of any payments that otherwise would have been paid to the Participant during the period between the date oftermination and the New Payment Date shall be paid to the Participant in a lump sum on such New Payment Date.QuickLinksExhibit 10.12OVERSTOCK.COM, INC. RESTRICTED STOCK UNIT GRANT NOTICE (2005 Equity Incentive Plan)OVERSTOCK.COM, INC. RESTRICTED STOCK UNIT AGREEMENT (2005 Equity Incentive Plan)QuickLinks -- Click here to rapidly navigate through this documentExhibit 10.16 Summary of Unwritten Compensation ArrangementsApplicable to Non-Employee Directors of Overstock.com, Inc. During 2012 the Company paid its non-employee directors $50,000 annually, at the rate of $12,500 per quarter. During 2013 the Company willpay its non-employee directors $60,000 annually, at the rate of $15,000 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 2012, 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 3, 2012 17,500 Barclay F. Corbus May 3, 2012 17,500 Joseph J. Tabacco, Jr. May 3, 2012 17,500 Samuel A. Mitchell May 3, 2012 17,500 (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 10.16Summary of Unwritten Compensation Arrangements Applicable to Non-Employee Directors of Overstock.com, Inc.QuickLinks -- Click here to rapidly navigate through this documentExhibit 21 Name Jurisdiction of Formation Trade NamesOverstock.com Services, Inc. Utah Overstock.com ServicesMarket Partner Holdings, Inc. Utah Market Partner Operations, Inc. Utah Market Partner SR, Inc. Utah Market Partner BB, Inc. Utah Market Partner BC, Inc. Utah Market Partner EB, Inc. Utah Market Partner NE, Inc. Utah My Current, Inc. Utah My CurrentQuickLinksExhibit 21QuickLinks -- Click here to rapidly navigate through this documentExhibit 23 Consent of Independent Registered Public Accounting Firm The Board of DirectorsOverstock.com, Inc.: We consent to the incorporation by reference in the registration statements on Form S-8 (Nos. 333-181422, 333-184344, 333-162674, 333-160512, 333-124441, and 333-123540) and on Form S-3 (No. 333-178390) of Overstock.com, Inc. of our reports dated February 21, 2013, withrespect to the consolidated balance sheets of Overstock.com, Inc. as of December 31, 2012 and 2011, and the related consolidated statements ofoperations and comprehensive income (loss), changes in stockholders' equity, and cash flows for each of the years in the three-year period endedDecember 31, 2012, and the related financial statement schedule, and the effectiveness of internal control over financial reporting as of December 31,2012, which reports appear in the December 31, 2012 annual report on Form 10-K of Overstock.com, Inc./s/ KPMG LLPSalt Lake City, UtahFebruary 21, 2013QuickLinksExhibit 23Consent of Independent Registered Public Accounting FirmQuickLinks -- Click here to rapidly navigate through this documentExhibit 31.1 CERTIFICATION I, Jonathan E. Johnson III, 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: February 21, 2013 /s/ JONATHAN E. JOHNSON IIIJonathan E. Johnson IIIActing Chief Executive Officer(principal executive officer)QuickLinksExhibit 31.1CERTIFICATIONQuickLinks -- 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: February 21, 2013 /s/ STEPHEN J. CHESNUTStephen J. ChesnutSenior Vice President, Finance and RiskManagement (principal financial officer)QuickLinksExhibit 31.2CERTIFICATIONQuickLinks -- 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, Jonathan E. Johnson III, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,that the Annual Report of Overstock.com, Inc. on Form 10-K for the year ended December 31, 2012 fully complies with the requirements ofSection 13(a) or 15(d) of the Securities Exchange Act of 1934, as applicable, and that information contained in such Report fairly presents in all materialrespects the financial condition and results of operations of Overstock.com, Inc.Date: February 21, 2013 /s/ JONATHAN E. JOHNSON III Name: Jonathan E. Johnson III Title: Acting 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 2002QuickLinks -- 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, 2012 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: February 21, 2013 /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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