Overstock
Annual Report 2013

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K (Mark One)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934 For the fiscal year ended December 31, 2013 Or ooTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934 For the transition period from to Commission file number: 000-49799 OVERSTOCK.COM, INC.(Exact name of registrant as specified in its charter) Delaware87-0634302(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification Number) 6350 South 3000 East Salt Lake City, Utah 84121 (801) 947-3100(Address, including zip code, of Registrant’s principal executive offices) (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 Which RegisteredCommon Stock, $0.0001 par value Nasdaq Global MarketSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate 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), (2) has been subject to such filingrequirements 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 such shorterperiod that the registrant was required to submit and post such files). Yes  No oTable of ContentsIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,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 amendmentto this Form 10-K.  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.Large accelerated filer oAccelerated filer x Non-accelerated filer oSmaller reporting company o(Do not check if a smaller reporting company)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, 2013), was approximately $255.8 million based upon the last sales price reported by Nasdaq.For purposes of this disclosure, shares of Common Stock held by persons who hold more than 5% of the outstanding shares of Common Stock and sharesheld by officers and directors of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination is not necessarilyconclusive.There were 23,959,419 shares of the Registrant’s common stock, par value $0.0001, outstanding on February 19, 2014.DOCUMENTS INCORPORATED BY REFERENCECertain information required by Part III of Form 10-K is incorporated by reference to the Registrant's proxy statement for the 2014 AnnualStockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Reportrelates.Table of ContentsTABLE OF CONTENTS Special Note Regarding Forward-Looking Statements3 Part I Item 1.Business5Item 1A.Risk Factors11Item 1B.Unresolved Staff Comments27Item 2.Properties27Item 3.Legal Proceedings27Item 4.Mine Safety Disclosures28 Part II29Item 5.Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities29Item 6.Selected Financial Data32Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations34Item 7A.Quantitative and Qualitative Disclosures About Market Risk55Item 8.Financial Statements and Supplementary Data56Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure56Item 9A.Controls and Procedures56Item 9B.Other Information60 Part III61Item 10.Directors, Executive Officers and Corporate Governance61Item 11.Executive Compensation61Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters62Item 13.Certain Relationships and Related Transactions, and Director Independence62Item 14.Principal Accounting Fees and Services62 Part IV63Item 15.Exhibits, Financial Statement Schedules63 Signatures66Financial Statements68O, Overstock.com, O.com, O.co, Club O, Main Street Revolution, Worldstock Fair Trade and Worldstock are registered trademarks. O.biz, ClubO Dollars, OGlobal and OVillage are trademarks of Overstock.com, Inc. The Overstock.com, Club O, and Worldstock Fair Trade logos are also registeredtrademarks of Overstock.com, Inc. Other service marks, trademarks and trade names referred to in this Form 10-K are the property of their respective owners.2Table of ContentsSPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K and the documents incorporated herein by reference, as well as our other public documents andstatements our officers and representatives may make from time to time, contain forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are therefore entitled to the protection of the safeharbor provisions of these laws. These forward-looking statements involve risks and uncertainties, and relate to future events or our future financialor operating performance. The forward-looking statements include all statements other than statements of historical fact, including, without limitation,all statements regarding:•the anticipated benefits and risks of our business and plans;•our ability to attract and retain customers in a cost-efficient manner;•the effectiveness of our marketing;•our future operating and financial results, including any projections of revenue, capital expenditures or other financial measures or amounts;•our decision to accept bitcoins as an acceptable payment for the goods and services we sell and our expectations regarding the advantagesand risks of doing so;•our plans to acquire and hold bitcoins and our expectations regarding the advantages and risks of doing so;•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;•our beliefs regarding the adequacy and anticipated functionality of our infrastructure, including our backup facilities and beliefs regardingthe adequacy of our disaster planning;•our beliefs regarding our cybersecurity efforts and measures;•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 and any plans for additional or modified office orwarehouse facilities;•our expectations regarding our other businesses including our car listing service, our community site and future other businesses and theanticipated functionality and results of operations of them;•our belief that we and our fulfillment partners will be able to maintain inventory levels at appropriate levels despite the seasonal nature of ourbusiness;•our belief that our sales through other ecommerce marketplace channels will be successful and will become an important part of ourbusiness; and•our belief that we can successfully offer and sell a constantly changing mix of products and services.Further, in some cases, you can identify forward-looking statements by terminology such as may, will, could, should, likely, expect, plan, seek,intend, anticipate, project, believe, estimate, predict, potential, goal, strategy, future or continue, the negative of such terms or other comparableterminology. These statements are only predictions. Actual events or results may differ materially from those contemplated by forward-lookingstatements for a variety of reasons, including among others:•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 consumers fromshopping online;•any failure to maintain our existing relationships or build new relationships with fulfillment partners on acceptable terms;3Table of Contents•any difficulties we may encounter maintaining optimal levels of product quality and selection or in attracting sufficient consumer interest inour 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 that result inthe 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 or sales taxes or are required to collect sales taxes or to modify our business model in order to avoidbeing required to collect sales taxes;•any difficulties we may encounter as a consequence of accepting or holding bitcoins, whether as a result of regulatory or legal issues,technological issues, value fluctuations, lack of widespread adoption of bitcoins as an acceptable medium of exchange or otherwise;•competition, including competition from well-established competitors including Amazon, and from others including competitors with businessmodels that may include extremely rapid delivery capabilities;•difficulties with the management of our growth and any periods in which we fail to grow in accordance with our plans;•fluctuations in our operating results;•our efforts to expand internationally;•our efforts to offer additional services to our customers, including insurance products and consumer financing;•the outcomes of legal proceedings, investigations and claims, including the outcome of the lawsuit and judgment against us by the DistrictAttorneys of a number of California counties described in this report;•our inability to optimize our warehouse operations;•risks of inventory management and seasonality; and•the other risks described in this report or in our other public filings.In evaluating all forward-looking statements, you should specifically consider the risks outlined above and in this Form 10-K in Part I, Item1A under the caption “Risk Factors” and elsewhere in this report. These factors may cause our actual results to differ materially from thosecontemplated by any forward-looking statement. Except as otherwise required by law, we expressly disclaim any obligation to release publicly anyupdate or revisions to any forward-looking statements to reflect any changes in our expectations or any change in events, conditions or circumstanceson which any of our forward-looking statements are based. Although we believe that the expectations reflected in the forward-looking statements arereasonable, we cannot guarantee future results, levels of activity, performance or achievements or other events.These forward-looking statements speak only as of the date of this report and, except as required by law, we undertake no obligation toupdate forward-looking statements to reflect events or circumstances occurring after the date of this report.4Table 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.IntroductionWe are an online retailer offering discount brand name, non-brand name and closeout merchandise, including furniture, home decor, bedding andbath, housewares, jewelry and watches, apparel and designer accessories, electronics and computers, and sporting goods, among other products. We also sellhundreds of thousands of best seller and current run books, magazines, CDs, DVDs and video games ("BMMG"). We sell these products through ourInternet websites located at www.overstock.com, www.o.co and www.o.biz ("Website"). Although our three websites are located at different domain addresses,the technology and equipment and processes supporting the Website and the process of order fulfillment described herein are 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. We continuallyadd new, and sometimes limited, inventory to our Website in order to create an atmosphere that encourages customers to visit frequently and purchaseproducts before our inventory sells out. We sell products primarily in the United States.As used herein, "Overstock," "Overstock.com," "O.co," "we," "our" and similar terms include Overstock.com, Inc. and its subsidiaries, unlessthe context indicates otherwise.Our BusinessWe deal primarily in discount, replenishable and closeout merchandise and use the Internet to aggregate both supply and demand to create an efficientmarketplace for selling these products. We provide manufacturers with a one-stop liquidation channel to sell both large and small quantities of excess, closeoutand replenishable inventory without disrupting sales through traditional channels. The merchandise offered on our Website is from a variety of sourcesincluding well-known, brand-name manufacturers. We have organized our shopping business (sales of product offered through the Shopping Section of ourWebsite) into two principal segments—a "direct" business and a "fulfillment partner" business. We currently offer approximately 491,000 non-BMMGproducts and approximately 805,000 BMMG products. Consumers and businesses are able to access and purchase our products 24 hours a day from theconvenience of a computer, or Internet-enabled mobile device. Our team of customer service representatives assists customers by telephone, instant online chatand e-mail. We also derive revenue from other businesses, advertising products or services on our Website. Nearly all of our sales are to customers located inthe United States. During the years ended December 31, 2013 and 2012 no single customer accounted for more than 1% of our total net revenue.Direct businessOur direct business includes sales made to individual consumers and businesses, which are fulfilled primarily from our warehouse in Salt LakeCity, Utah. During the year ended December 31, 2013, we fulfilled approximately 12% of our order volume through our warehouse which generally shipsbetween 3,000 and 5,000 packages per day and up to approximately 6,000 orders per day during peak periods, using overlapping daily shifts.Fulfillment partner businessFor our fulfillment partner business, we sell merchandise of other retailers, cataloguers or manufacturers ("fulfillment partners") primarily throughour Website. 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 any of ourfulfillment partners. We currently have relationships with approximately 2,400 third parties who supply approximately 488,000 non-BMMG products, as wellas most of the BMMG products, on our Website. These third party fulfillment partners perform essentially the same fulfillment operations as our warehouses,such as order picking and shipping; however, we handle returns and customer service related to substantially all orders placed through our Website. Revenuegenerated from sales on our Shopping site from both the direct and fulfillment partner businesses is recorded net of returns, coupons and other discounts.5Table of ContentsBoth direct and fulfillment partner revenues are seasonal, with revenues historically being the highest in the fourth quarter, which ends December 31,reflecting higher consumer holiday spending. We anticipate this will continue in the foreseeable future. To the extent possible we maintain supplierrelationships, and seek new supplier relationships, for both our direct and fulfillment partner businesses, and also use our working capital, to ensure acontinuous allotment of product offerings for our customers. Because a portion of our product offerings are closeout merchandise, some of our supplierscannot supply products to us on a continuous basis.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 our businesspurchasers with normal credit terms (typically 30 days). For sales in our fulfillment partner business, we generally receive payments from our customersbefore our payments to our suppliers are due.Other offeringsWithin our website, we offer additional products or services that complement our primary offerings, but are not significant to our revenues. Theseinclude:•Worldstock Fair Trade, a store within our website that offers handcrafted products made by artisans all over the world, which emphasizessustainability, fairness, and transparency, and which we attempt to run at 0% profit by donating net profits to fund philanthropic projects in severalcountries, including Guatemala, Kenya, Malawi, and Nepal;•Main Street Revolution, a store within our website that features products from small businesses across the United States who offer their productsusing our national marketing and distribution channels;•a consignment service for suppliers where the suppliers' merchandise is stored in and shipped from our warehouses;•ecommerce marketplace channels, where some of our products are offered for sale in on-line marketplaces of other Internet retailers' websites;•our international business where we offer products to customers outside the United States using U.S.-based third party logistics providers (we do nothave sales operations outside the U.S.); and•an online car listing service which allows sellers to list vehicles for sale and allows buyers to review vehicle descriptions and post offers to purchase,and provides the means for prospective purchasers to contact sellers for further information and negotiations on the purchase of an advertisedvehicle.Manufacturer, Supplier and Distribution RelationshipsTo 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 us toreceive 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.ProductsOur Website Shopping section is organized into 25 main product lines: For the Home, Furniture, Bedding & Bath, Clothing & Shoes, Electronics,Jewelry, Watches, Sports & Outdoors, Luggage & Bags, Worldstock Fair Trade, Health & Beauty, Baby, Crafts & Sewing, Office, Gifts & Flowers,Toys & Hobbies, Pets, Main Street Revolution, Emergency Preparedness, As Seen on TV, Business Supplies, Cars, Sales and Promotions, Books MoviesMusic Games and Farmers Market. Worldstock Fair Trade is our socially-responsible, online marketplace through which artisans in the United States andaround the world can sell their products and gain access to a broader market. We also have specialty departments, such as Main Street Revolution andFarmers Market, which enable small businesses and individual producers to offer their products to a mass audience by selling on our websites. From time totime, as the number of products and product categories change, we may reorganize our departments and/or categories to better reflect our current productofferings.6Table of ContentsFor the years ended December 31, 2013, 2012 and 2011, the percentages of gross revenues contributed by similar classes of products were asfollows:Product Lines 2013 2012 2011Home and garden(1) 72% 66% 58%Jewelry, watches, clothing and accessories 13% 16% 20%BMMG, electronics and computers 4% 6% 10%Other 11% 12% 12%Total 100% 100% 100%(1) Home and garden includes furniture, home decor, kitchen and dining, bedding, garden and patio, home improvement, housewares andother related products.Sales and MarketingWe use a variety of methods to target our consumer audience, including online campaigns, such as advertising through keywords, product listingads, display ads, search engines, affiliate marketing programs, social coupon websites, portals, banners, e-mail, direct mail and viral and social mediacampaigns. We also do brand advertising through television, radio, and print ads.Customer ServiceWe 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.TechnologyWe 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 headquarters whichwe use primarily for backups, redundancy, development, testing, and our corporate systems infrastructure.CompetitionInternet retail is intensely competitive and has relatively low barriers to entry. We believe that competition in this industry is based predominantly on:•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 discount general retailers;•private sale sites;•online specialty retailers; and•traditional general merchandise and specialty retailers and liquidators, some of which also have an online presence.Many of our current and potential competitors have greater brand recognition, longer operating histories, larger customer bases and significantlygreater financial, marketing and other resources than we do. Further, any of them may enter into strategic or commercial relationships with larger, moreestablished and well-financed companies, including exclusive distribution arrangements with our vendors or service suppliers that could deny us access tokey products or needed services, or acquisitions of our suppliers or service providers, having the same effect. Many of them do or could devote greaterresources to7Table of Contentsmarketing and promotional campaigns and devote substantially more resources to their website and systems development than we do. Many have supplychain operations that decrease product shipping times to their customers, or have options for in-store product pick-up options or allow in-store returns andoffer other delivery and returns options that we do not have. New technologies and the continued enhancement of existing technologies and developments inrelated areas, such as same-day product deliveries, also may increase competitive pressures on us. Our competitors include Amazon.com, Inc. We cannotensure that we will be able to compete successfully against current or future competitors or address increased competitive pressures (see Item 1A—"RiskFactors").SeasonalityOur business is affected by seasonality because of the holiday retail season, which historically has resulted in higher sales volume during our fourthquarter, which ends December 31. We recognized 30.5%, 31.1% and 29.8% of our annual revenue during the fourth quarter of 2013, 2012, and 2011,respectively.Financial Information about Business Segments and Geographic AreasSee Item 15 of Part IV, "Financial Statements"—Note 22—"Business Segments" for information regarding our business segments and geographicalareas.Intellectual Property and Trade SecretsWe 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 to tradesecrets. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our intellectual property or trade secrets withoutauthorization. In addition, we cannot ensure that others will not independently develop similar intellectual property. Although we have registered and arepursuing the registration of our key trademarks in the United States and some other countries, some of our trade names may not be eligible to receive registeredtrademark protection. In addition, effective trademark protection may not be available or we may not seek protection in every country in which we market orsell our products and services, including in the United States. Additionally our efforts to protect our trade secrets may 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 MattersFrom 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 is costlyand time consuming and can divert our management and key personnel from our business operations. The uncertainty of litigation increases these risks. Inconnection with such litigation, we may be subject to significant damages, associated costs, or equitable remedies relating to the operation of our business andthe sale of products on our Website. Any such 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 or requireus to change our business practices in expensive and significant ways. In addition, litigation could result in interpretations of the law that require us to changeour 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 the validityand scope of the proprietary rights of others. Any litigation, regardless of outcome or merit, could result in substantial costs and diversion of management andtechnical 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 and Contingencies,subheading Legal Proceedings," contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K.Government RegulationOur services are subject to federal and state consumer protection laws including laws protecting the privacy of consumer information and regulationsprohibiting unfair and deceptive trade practices. In particular, under federal and state financial privacy laws and regulations, we must provide notice toconsumers of our policies on sharing non-public information8Table of Contentswith third parties, advance notice of any changes to our policies and, with limited exceptions, we must give consumers the right to prevent sharing of theirnon-public personal information with unaffiliated third parties. Further, the growth and demand for online commerce could result in more stringent consumerprotection laws that impose additional compliance burdens on online companies. These consumer protection laws could result in substantial compliance costs.New disclosure and reporting requirements, established under existing or new state or federal laws, such as rules regarding requirements to identifythe origin and existence of certain "conflict minerals" or regarding the disclosure of abusive labor practices in portions of our supply chain, could increase thecost 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 other taxes,libel and personal privacy apply to the Internet and commercial online services. In addition, new state tax regulations in states where we do not now collect stateand local taxes may subject us to the obligation to collect and remit state and local taxes, or subject us to additional state and local sales and income taxes, or torequirements intended to assist states with their tax collection efforts. New legislation or regulation, the application of laws and regulations from jurisdictionswhose laws do not currently apply to our business or the application of existing laws and regulations to the Internet and commercial online services could resultin significant additional taxes on our business. These taxes or tax collection obligations could have an adverse effect on our cash flows and results ofoperations. Further, there is a possibility that we may be subject to significant fines or other payments for any past failures to comply with these requirements.EmployeesAt December 31, 2013, we had approximately 1,500 full-time employees. We seasonally augment our workforce with temporary employees duringour fourth quarter to handle increased workload in both our warehouse and customer service operations. We have never had a work stoppage, and none of ouremployees are represented by a labor union. We consider our employee relationships to be good. Competition for qualified personnel in our industry hashistorically been intense, particularly for software engineers and other technical staff.Executive Officers of the RegistrantThe following persons were executive officers of Overstock as of February 19, 2014:Executive Officers Age PositionPatrick M. Byrne 51 Chief Executive Officer and Chairman of the Board of DirectorsJonathan E. Johnson III 47 Executive Vice Chairman of the Board of Directors and Corporate SecretaryStormy D. Simon 45 Co-President and DirectorDavid J. Nielsen 44 Co-PresidentMark J. Griffin 58 Senior Vice President and General CounselRobert P. Hughes 54 Senior Vice President, Finance and Risk ManagementSam "Saum" Noursalehi 34 Senior Vice President, MarketingBrian L. Popelka 47 Senior Vice President, Customer and Product CareBhargav J. Shah 38 Senior Vice President, TechnologyStephen P. Tryon (1) 52 Senior Vice President, People Care(1) Mr. Tryon has given notice of his resignation effective February 28, 2014.Dr. Patrick M. Byrne has served as our Chief Executive Officer (principal executive officer) and as a Director since 1999, as Chairman of theboard of directors from 2001 through 2005, and since July 2006. From 1997 to 1999, Dr. Byrne served as President and Chief Executive Officer ofFechheimer Brothers, Inc., a manufacturer and distributor of uniforms. From 1995 until its sale in September 1999, Dr. Byrne was Chairman, Presidentand Chief Executive Officer of Centricut, LLC, a manufacturer and distributor of industrial torch parts. From 1994 to the present, Dr. Byrne has served as aManager of the Haverford Group, an investment company and an affiliate of Overstock. Dr. Byrne has a Bachelor of Arts Degree in Chinese studies fromDartmouth 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 in 2002 and has served as Executive Vice Chairman of the Board since May 2013. He also serves asCorporate Secretary. Mr. Johnson has previously served as Acting Chief Executive Officer, President, General Counsel and as our Vice President, StrategicProjects and Legal, and Senior Vice President, Corporate Affairs and Legal. From 1999 to 2002, Mr. Johnson held various positions with TenFoldCorporation, a software company, including General Counsel, Executive Vice President and Chief Financial Officer. Prior to this Mr. Johnson practiced law in9Table of ContentsLos Angeles, and served as a judicial clerk at the Utah Supreme Court and the Utah Court of Appeals. Mr. Johnson has served on the Board of Governors ofthe Salt Lake Chamber of Commerce for many years. He also serves on the Board of Trustees of the Utah Technology Council and is a member of theCouncil of Better Business Bureaus National Partner Leadership Circle. Mr. Johnson holds a Bachelor's Degree in Japanese from Brigham Young University,studied for a year at Osaka University of Foreign Studies in Japan, and holds a Juris Doctor from the J. Reuben Clark Law School at Brigham YoungUniversity.Ms. Stormy D. Simon has served as a Co-President since February 2013. Ms. Simon previously served as the Senior Vice President, Customer andPartner Care. Ms. Simon has also served as a member of our board of directors since 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 in 2001,Ms. Simon worked in the media and travel industries.Mr. David J. Nielsen has served as a Co-President since February 2013. Mr. Nielsen previously served as the Senior Vice President,Merchandising & Supply Chain. Prior to joining Overstock in 2009, Mr. Nielsen was with Payless ShoeSource, Inc., a shoe retailer from 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 OldTown Imports, LLC, a retail company, where he served as President and CEO. Mr. Nielsen holds a Bachelor's Degree in Business Management with anemphasis in Marketing from Brigham Young University.Mr. Mark J. Griffin was promoted to Senior Vice President, General Counsel in February 2014. He also serves as Assistant Corporate Secretary. Hebegan his service as a Vice President and General Counsel when he joined Overstock in 2006. Before joining Overstock, Mr. Griffin was a partner at the SaltLake City law firm, Woodbury & Kesler. Before private practice, Mr. Griffin was Director of the Utah Securities Division, Deputy Secretary of State for theState of Nevada, and has also served as an Assistant Utah Attorney General handling securities, antitrust cases and white collar fraud prosecutions. For manyyears, Mr. Griffin served in the leadership of the North American Securities Administrators Association, with offices in Washington, D.C., completing hiswork with NASAA as its 1996 President. Mr. Griffin is an active member of the Utah State Bar and holds Juris Doctor and Bachelor of Arts degrees fromBrigham Young University.Mr. Robert P. Hughes (principal financial and accounting officer) has served as our Senior Vice President, Finance and Risk Management sinceFebruary 2013. He previously served as Vice President and Controller. Prior to joining the Company in 2008, Mr. Hughes served as Chief Financial Officerand Chief of Staff of TenFold Corporation. Prior to working for TenFold, Mr. Hughes held a number of senior accounting and internal audit positions withOracle Corporation. He holds a B.S. in Business Administration with an emphasis in accounting and finance from the University of California Berkeley,Haas School of Business, and is a certified public accountant (CA - inactive status).Mr. Saum Noursalehi has served as our Senior Vice President, Marketing since February 2013. Mr. Noursalehi previously served as Vice Presidentof OLabs, an innovative research and development group within the Company, and previously as Vice President of new product development. Prior to hisappointment as a Vice President, Mr. Noursalehi was the Company’s senior director of website, mobile and search engine optimization. Mr. Noursalehi hasbeen with Overstock since 2005. Prior to joining Overstock Mr. Noursalehi worked as a software developer. Mr. Noursalehi holds a bachelor's degree inComputer Science from the University of Utah.Mr. Brian L. Popelka has served as our Senior Vice President, Customer and Product Care since June 2013. Mr. Popelka previously served as VicePresident of Customer Care. Since joining Overstock in 2002, Mr. Popelka has held several positions including the director of Books, Media, Movies andGames Department, and was the manager of the Business-to-Business Department. Mr. Popelka holds a bachelor's degree in Journalism, Broadcasting, Filmand History from the University of Nebraska in Lincoln.Mr. Bhargav J. Shah serves as our Senior Vice President, Technology. Prior to joining Overstock in 2012, 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 of BusinessAdministration Degree in Finance from Bentley University.Mr. Stephen P. Tryon serves as Senior Vice President, People Care. Mr. Tryon previously served as a Vice President in several departments includinglogistics, international, and human resources. Prior to joining Overstock in 2004, Mr. Tryon was the Legislative Assistant to the Chief of Staff of the UnitedStates Army. During his 21 years with the Army, his assignments included director of plans for the 10th Mountain Division, Congressional Fellow for UnitedStates Senator Max Cleland, Assistant Professor of Philosophy at the United States Military Academy, and commander of a company of paratroopers.Mr. Tryon received a Bachelor's of Science Degree in Applied Sciences from the U.S. Military Academy and a Master's Degree of Arts in Philosophy fromStanford University.10Table of ContentsAvailable InformationOur Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports filed or furnished pursuant toSection 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 main websitewww.overstock.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and ExchangeCommission. Our Internet Website and the information contained therein or connected thereto are not a part of or incorporated into this Annual Report onForm 10-K.ITEM 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 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 for e-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, 2013, we had relationships with approximately 2,400 independent fulfillment partners whose products we offer for sale on ourWebsite. Sales through our fulfillment partners accounted for 88% of our net revenues for the year ended December 31, 2013, respectively. 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 generally terminable atwill 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 such as maintaining inventory, preparing merchandise for shipment to our customers and delivering purchased merchandise on atimely basis. We may be unable to ensure that these third parties will continue to perform these services to our satisfaction or on commercially reasonableterms. In addition, because we do not take possession of these fulfillment parties’ products (other than on the return of such products), we are generally unableto fulfill these traditional retail operations ourselves. If our customers become dissatisfied with the services provided by these third parties, our business andreputation and 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 availability andcost, transport security, inflation, and other factors relating to the suppliers and the countries in which they are located are beyond our control. We also largelyrely on our supplier's representations of product content and quality. Concerns regarding product content or quality, or the safety of products that we sourcefrom our suppliers 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. As such, anyissue regarding the safety of11Table of Contentsany items we sell, regardless of the cause, could adversely affect our financial performance. Further, we sell products manufactured by third parties, some ofwhich may be defective. If any product that we sell were to cause physical injury or injury to property, the injured party or parties might bring claims againstus as the manufacturer and/or retailer of the product. Our insurance coverage may not be adequate to cover claims that could be asserted. Even unsuccessfulclaims could result in the expenditure of funds and management time and could have a 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 to runour business. Our ability to retain or attract new fulfillment partners and other suppliers may depend in part on our financial performance. Poor financialperformance could result in suppliers choosing to limit or suspend doing business with us or require us to prepay for our purchases. Further, somemanufacturers are unwilling to offer products for sale on the Internet or on sites like ours. Our inability to source and offer popular products could be asignificant 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 substantially reduce our ability to conduct our business. We use internally and externallydeveloped systems for our Website and our transaction processing systems, including personalization databases used for internal analytics, recommendationsand order verifications. We have experienced periodic systems interruptions due to server failure and power failure in the past, which we expect will continue tooccur from time to time. We have also experienced and may continue to experience temporary capacity constraints due to sharply increased traffic during salesor other promotions and during the holiday shopping season. Capacity constraints can cause system disruptions, slower response times, delayedpage presentation, degradation in levels of customer service and other problems. In the past we have also experienced difficulties with our infrastructureupgrades. Any future difficulties with our transaction processing systems or difficulties upgrading, expanding or integrating aspects of our systems maycause system disruptions, slower response times, and degradation in levels of customer service, additional expense, impaired quality and speed of orderfulfillment or other problems. If the facility where substantially all of our computer and communications hardware is located fails, our business, prospects, financial conditionand results of operations could be harmed. If the facility where substantially all of our computer and communications hardware is located fails, or if we suffer an interruption or degradation ofservices at the facility for any reason, our business could be harmed. Our success, and in particular, our ability to successfully receive and fulfill orders andprovide high-quality customer service, largely depends on the efficient and uninterrupted operation of our computer and communications systems.Substantially all of our computer and communications hardware is located at a single co-location facility in Salt Lake City, Utah, with a partially redundantback-up system located less than six miles from the co-location facility. In the event of an earthquake or major local disaster, or any other cause of interruptionof service, both our primary and back-up sites could be adversely affected. Although we have designed our back-up system in an effort to minimize serviceinterruptions in the event of a failure of our main facility, our systems and operations are vulnerable to damage or interruption from fire, flood, power loss,telecommunications failure, terrorist attacks, cyber-attacks, acts of war, break-ins, earthquake and similar events. In the event of a failure of our primaryfacility, the failover to our back-up facility would take at least several hours, during which time our Website would be completely shut down. Our back-upfacility is designed to support sales at a level slightly above our average daily sales, but is not adequate to support sales at a high level. The back-up facilitymay not process effectively during time of higher traffic to our Website and may process transactions more slowly and may not support all of the functionalityof our primary site. These limitations could have an adverse effect on our conversion rate and sales. Our disaster recovery plan may be inadequate, and we donot carry business interruption insurance sufficient to compensate us for the losses that could occur. Despite our implementation of network securitymeasures, our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, the occurrence of any of which could leadto interruptions, delays, loss of critical data or the inability to accept and fulfill customer orders. The occurrence of any of the foregoing risks could harm ourbusiness.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, particularly12Table of Contentsduring the holiday season, could harm our business. If our relationships with these third parties are terminated or impaired or if these third parties are unableto deliver products for us, whether as a result of labor shortage, slow down or stoppage, deteriorating financial or business condition, terrorist attacks, cyber-attacks, Internet or other infrastructure or communications impairment, natural disasters, or for any other reason, we would be required to use alternativecarriers for the shipment of products to our customers. In addition, conditions such as adverse weather or natural disasters can prevent any carrier fromperforming its delivery services, which can have an adverse effect on our customers’ satisfaction with us. In any of these circumstances, we may be unable toengage alternative carriers on a timely basis, upon terms we find acceptable, or at all. Changing carriers, or absence of carrier availability, could have amaterial adverse effect on our business. 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 on theirassessment of the inherent risks of credit card processing and their assessment of the risks of processing our customers’ credit cards at any time, and havedone so from time to time in the past. We are also subject to payment card associations’ operating rules, certification requirements and rules governingelectronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules orrequirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our customers, processelectronic funds transfers, or facilitate other types of online payments. In addition, events affecting our credit card processors, including cyber-attacks, Internet or other infrastructure or communications impairment or other events 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. Our financial results may suffer ifsearch engines change their ranking algorithms and our product offerings are ranked lower, and we may at times be subject to ranking penaltiesif search engines 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 search enginesprovided by search engine companies, including, but not limited to, Google, Bing, and Yahoo!, which use algorithms and other devices to provide users anatural ranked listing of relevant Internet sites matching a user’s search criteria and specifications. Generally, Internet sites ranked higher in the paid andnatural search results attract the largest visitor share among similar Internet sites, and often benefit from increased sales. Natural search engine algorithms useinformation available throughout the Internet, including information available on our site. If search engine companies change their natural search enginealgorithms, and our ranking in natural searches is adversely affected by those changes, our financial results may suffer from reduced revenues and fromincreased marketing expenses from seeking to replace such lost revenues from other sources.Rules and guidelines of these natural search engine companies govern our participation on their sites and how we share relevant Internet informationthat may be considered or incorporated into the algorithms used by these sites. If these rules and guidelines change, or if we fail to present, or improperlypresent, our site information for use by natural search engine companies, or if any of these natural search engine companies determine that we have violatedtheir rules or guidelines, as Google did in February 2011 through April 2011, or if others improperly present our site information to these search enginecompanies, we may fail to achieve an optimum ranking in natural search engine listing results, or we may be penalized in a way that could harm ourbusiness. In addition, large marketplace websites and sites which aggregate marketplace sellers with a large product selection are becoming increasingly popular,and we may not be able to place our products on these sites to take advantage of their internal search platforms. Our inability to place products on or accessthese sites may have a material adverse effect on our business. We are subject to cyber security risks and risks of data loss or other security breaches, and may incur increasing costs in an effort to minimizethose 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. Our businessinvolves the storage and transmission of users’ proprietary information, and security breaches could expose us to a risk of loss or misuse of this information,litigation, and potential liability. A number of large Internet companies have suffered security breaches, some of which have involved intentional attacks. Fromtime to time we and many other Internet businesses also experience denial of service attacks wherein attackers attempt to block customers’ access to ourWebsite. If we are unable to avert a denial of service attack for any significant period, we could sustain substantial revenue loss from lost sales and customerdissatisfaction. We may not have the resources or technical sophistication to anticipate or prevent13Table of Contentsrapidly evolving types of cyber-attacks. Cyber-attacks may target us, our customers, our suppliers, banks, credit card processors, delivery services, e-commerce in general or the communication infrastructure on which we depend. If an actual or perceived attack or breach of our security occurs, customerand/or supplier perception of the effectiveness of our security measures could be harmed and we could lose customers, suppliers or both. Actual or anticipatedattacks and risks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees, andengage third party 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 or those of our users, or otherwise damage our reputation and business. Any compromise of our securitycould result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence inour security measures, which could harm our business. Most of our customers use credit cards to pay for their purchases. We rely on encryption and authentication technology licensed from third parties toprovide the security and authentication to effectively secure transmission of confidential information, including customer payment card numbers. We cannotprovide assurance that our technology can prevent breaches of the systems that we use to protect customer data. Data breaches can also occur as a result ofnon-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 the option ofusing payment cards to fund their payments or pay their fees. If we were unable to accept payment cards, our business would be seriously damaged. 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 problems causedby attacks or breaches. Any attack or breach incident involving us or persons with whom we have commercial relationships, that results in the unauthorizedrelease 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 the use ofthe Internet and e-commerce in general. If third parties are able to penetrate our network security or otherwise misappropriate our customers’ personalinformation or credit card information, or if we give third parties improper access to our customers’ personal information or credit card information, we couldbe subject to liability. This liability could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claimsor 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 marketing purposes. These claims could result inlitigation. Liability for misappropriation of this information could adversely affect our business. Cyber-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 purchase andoffer in our direct business. We also depend on delivery services to deliver products, and on other service providers, including suppliers of services whichsupport Website operations, including payment systems, customer service support, and communications. Cyber-attacks affecting our delivery services or anyof our most significant suppliers or affecting a significant number of our suppliers of products or services could have a material adverse effect on ourbusiness. The adverse effects could include our inability to source product or fulfill orders, our customers’ or suppliers’ inability to contact us or access ourWebsite or call centers or chat lines, or the compromise of our customers’ confidential data.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 may suffer losses as a result of orders placedwith fraudulent credit card data even if the associated financial institution approved payment of the orders. Under current credit card practices, we may beliable for fraudulent credit card transactions because we do not obtain a cardholder’s signature. If we are unable to detect or control credit card fraud, ourliability for these transactions could harm our business, prospects, financial condition and results of operation. Further, to the14Table of Contentsextent that our efforts to prevent fraudulent orders result in our inadvertent refusal to fill legitimate orders, we would lose the benefit of legitimate potential salesand risk the alienation of legitimate customers.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 terrorist attacks,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 certain types of 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 we areindemnified by most of our suppliers and vendors for product liability for products they supply us, and we have indemnification agreements with softwareand hardware suppliers for losses we might incur as a result of the use of the technology products they supply, we are not indemnified by all our 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 sale or use of productsour indemnitors provide to us. Actual losses for which we are not insured or indemnified, or which exceed our insurance coverage or the capacity of ourindemnitors, 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., T.J. Maxx, Wal-Mart Stores, Inc., CostcoWholesale Corporation, J.C. Penny Company, Inc., Sears Holding Corporation, Target Corporation, Best Buy Co., Inc., Home Depot, Inc.and Barnes and Noble, Inc., all of which also have an online presence. 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-commerce offerings.Traditional or online retailers may create proprietary, store-based distribution and returns channels. Competitive pressures, including same-day deliverycapabilities, from any of our competitors, many of whom have longer operating histories, larger customer bases, greater brand recognition and significantlygreater 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, marketing orother decisions that could harm our business. For example, to the extent that we enter new lines of businesses such as third party logistics, insurance sales ordiscount brick and mortar retail, we would be competing with large established businesses such as APL Logistics and Ross Stores, Inc. In the past we haveentered the online auctions, car listing and real estate listing businesses in which we compete or competed with large established businesses includingeBay, Inc., AutoTrader.com, Inc. and Realtor.com. We no longer offer online auctions services or real estate listing services.15Table of ContentsIf one or more states successfully assert that we should collect sales or other taxes on the sale of our merchandise or the merchandise of thirdparties that we offer for sale on our Website, or that we should pay commercial activity taxes, our business could be harmed. We do not currently collect sales or other similar taxes for physical shipments of goods into states where we have no duty to do so under federal courtdecisions construing applicable constitutional law. One or more local, state or foreign jurisdictions may seek to impose sales tax collection obligations on usbecause we are engaged in online commerce, even though to do so would be contrary to existing court decisions. The future location of our fulfillment orcustomer service centers networks, or any other operation, service contracts with third parties located in another state, channel distribution arrangements orother agreements with third party sellers, or any act that may be deemed by a state to have established a physical presence in states where we are not nowpresent, may result in additional sales and other tax obligations. 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 seller contracted for advertising services with anInternet advertiser in that state. In New York and states passing similar laws, we have terminated our use of locally based Internet advertisers. Several otherstates currently have similar tax proposals under consideration. In a case that went up on appeal, an Illinois state court struck down on constitutional groundsa similar Illinois statute, and the Illinois Supreme Court has upheld that decision. If such laws survive constitutional challenge, we may elect to discontinue inthose states valuable marketing through the use of affiliates based in those states, or may begin to collect taxes in those states. In either event, our businesscould be harmed. Further, our business could be harmed if one or more states or any foreign country successfully asserts that we should collect sales or othertaxes on the sale of our merchandise.The United States Senate has passed the Marketplace Fairness Act of 2013 (“MFA”) which if also passed by the United States House ofRepresentatives and not vetoed, would permit states which comply with the requirements of the MFA to force remote sellers like us to collect taxes in stateswhere we have no physical presence. If the MFA becomes law our business could be harmed.Other states have enacted forms of economic taxes to which we may be subject. In September 2009, we received a letter of determination from theOhio Department of Taxation noting the Department’s determination that we are required to register for remitting of the Commercial Activity Tax, and that weowed $612,784 in taxes, interest, and penalties as of June 30, 2009 since which time the Ohio Department of Taxation issued additional estimatedassessments totaling $170,322 as of September 30, 2013. After contesting the estimates, we later reached an agreement which required our payment of adiminished amount of the estimated assessments, a reduction of interest and a waiver of penalties. Other businesses have continued in lawsuits contesting theconstitutionality of the tax and, if successful, we will reassess our position respecting the Ohio tax. If other states enact and commence enforcement of similarcommercial activity tax laws, these could harm our business. 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 grounds granted apreliminary injunction against the state’s enforcement of its tax-notice and reporting law. Colorado appealed, and the injunction was overturned onjurisdictional grounds. The ruling is being appealed to the United States Supreme Court, and the plaintiff has also commenced an action in Colorado statecourt, challenging the law. The Colorado state court has issued a preliminary injunction suspending the law's enforcement on constitutional grounds. Otherstates have enacted similar legislation and more states may enact these laws. Such laws could harm our business by imposing unreasonable notice burdensupon us, by interposing burdensome transaction notices that negatively affect conversion, or by discouraging customer purchases by requiring detailedpurchase 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 tax rates,create new tax laws covering previously untaxed activities, or increase existing license fees or create new fees all of which may directly or indirectly harm ourbusiness. Similarly, administrative agencies may apply more rigorous enforcement efforts or take inflexible positions respecting the laws they administer,especially if the laws permit the imposition of monetary penalties and fines which either the state or the administrative agency may use to balance their budgets.To the extent that states pass additional revenue measures, or significantly increase their enforcement efforts, these activities could directly or indirectly harmour business. 16Table of ContentsIf 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 services usingnew technologies or if new industry standards and practices emerge, our Website and our proprietary technology and systems may become obsolete. Ourfailure to respond to technological change or to adequately maintain, upgrade and develop our computer network and the systems used to process 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 we cannotoffer any assurance that any of them will be successful. From time to time we have also modified aspects of our business model relating to our product mixand the mix of direct/fulfillment partner sourcing of the products we offer. We may continue to modify this aspect of our business as well as other significantaspects of our business. We cannot offer any assurance that these or any other modifications will be successful or will not result in harm to the business. Theadditions and modifications to our business have increased the complexity of our business and placed significant strain on our management, personnel,operations, systems, technical performance, financial resources, and internal financial control and reporting functions. Future additions to or modifications ofour business are likely to have similar effects. We may not be able to manage growth effectively, which could damage our reputation, limit our growth andnegatively affect our operating results. Further, any new business or website we launch that is not favorably received by consumers could damage ourreputation or the Overstock.com brand.We are attempting to expand our international business, which may cause our business to become increasingly susceptible to numerousinternational business risks and challenges that could affect our profitability. We sell products in international markets, and in the future we may expand into these markets more aggressively. International sales and transactionsare 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 impact ourbusiness. To date, most of our international sales have been denominated in U.S. dollars, and we have not had significant foreign currency risk on thosesales. However, in the future, gains and losses on the conversion of foreign payments into U. S. dollars may contribute to fluctuations in our results ofoperations and fluctuating exchange rates could cause reduced gross revenues and/or gross profit percentages from non-dollar-denominated international sales.Additionally, penalties for non-compliance with laws applicable to international business and trade, such as the U.S. Foreign Corrupt Practices Act, couldnegatively 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 returned to theOverstock.com name as our primary brand domestically because domestic consumer acceptance did not occur as quickly as we had hoped. While we havereturned domestically to the Overstock.com brand and principal domain address, there is no assurance that the use of Overstock.com or O.co will gainacceptance or have success in foreign markets.17Table of ContentsWe may incur substantial indebtedness. At December 31, 2013, we had no indebtedness for borrowed money, and our only credit facility was a $3 million facility for the issuance of lettersof credit. However, in the future we may incur substantial indebtedness. Any such indebtedness would increase our business risks substantially, includingour 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 the cost ofour business. Compliance with existing and new privacy and security laws may be difficult and costly and may further restrict our ability to collectdemographic and personal information from users, which could harm our marketing efforts, and could require us to implement new and potentially costlyprocesses, procedures and/or protective measures. The expansion of these and other laws, both in terms of their number and their applicability to the Internetcould 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 or regulators may apply these laws to Internet commerce in ways that may present difficult or impossible compliance challenges. Manyof those laws that do reference the Internet are still being interpreted by the courts and their applicability and reach are therefore uncertain. Moreover, Internetadvances and innovations may result in new questions about the applicability and reach of these laws. Additionally, laws governing the permissible contentsof products may adversely affect us, and we are subject to federal and state consumer laws, including those governing advertising, product labeling, productcontent requirements and product safety, and mandated website disclosures about programs to eliminate abusive labor practices in our supply chain. The lawsnot only apply to future manufacture of consumer product, but also apply to existing inventories and may cause us to incur losses for any non-compliantitems in our inventory, or which we may have sold which may subject us to regulatory or civil actions. Some of the products we sell or manufacture may,under statutory or common law, from time to time expose us to claims related to personal injury, death, environmental or property damage and may from timeto 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 andregulations 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 other changesin tax laws, overall economic slowdown, changes in consumer desires affecting demand for the products and services we sell and other economic factors couldadversely affect consumer demand for the products and services we sell, change the mix of products we sell to a mix with a lower average gross margin andresult in slower inventory turnover and greater markdowns on inventory. Higher interest rates, transportation costs, inflation, higher costs of labor, insuranceand healthcare, foreign exchange rates fluctuations, higher tax rates and other changes in tax laws, changes in other laws and regulations and other economicfactors in the United States can increase our cost of sales and operating, selling, general and administrative expenses, and otherwise adversely affect ouroperations and operating results. These factors affect not only our operations, but also the operations of suppliers from whom we purchase goods, a conditionthat 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 energy costscould reduce consumer spending or change consumer purchasing habits. Slowdowns in the U.S. or global economy, or an uncertain economic outlook, couldmaterially adversely affect consumer spending habits and our operating results.18Table of ContentsWe recently reversed the valuation allowance for our deferred tax assets, and we may not be able to realize these assets in the future. Our deferredtax assets may also be subject to additional valuation allowances, which could adversely affect our operating results.Since our inception, we established a valuation allowance for our deferred tax assets, primarily due to realized losses and uncertainty regarding ourfuture taxable income. Determining whether a valuation allowance for deferred tax assets is appropriate requires significant judgment and an evaluation of allpositive and negative evidence. At each reporting period, we assess the need for, or the sufficiency of, a valuation allowance against deferred tax assets. AtDecember 31, 2013, based on the weight of all the positive and negative evidence, we concluded that it was more likely than not that we will realize our netdeferred tax assets based upon future taxable income. Therefore we reversed the valuation allowance at December 31, 2013.Our conclusion at December 31, 2013 that it is more likely than not that we will realize our net deferred tax assets is primarily based on our estimateof future taxable income. Our estimate of future taxable income is based on internal projections which primarily consider historical performance, but alsoinclude various internal estimates and assumptions as well as certain external data. We believe all of these inputs to be reasonable, although inherently subjectto significant judgment. If actual results differ significantly from these estimates of future taxable income, a valuation allowance may need to be reestablishedfor some or all of our deferred tax assets. Establishing an allowance on our net deferred tax assets could have a material adverse effect on our financialcondition and operating results. We 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 additional financeand accounting systems, procedures and controls to satisfy our reporting requirements. If our internal control over financial reporting is determined to beineffective, such failure could cause investors to lose confidence in our reported financial information, negatively affect the market price 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 a widerange of matters that are relevant to our business, including but not limited to revenue recognition, estimating valuation allowances and accrued liabilities(including allowances for returns, credit card chargebacks, doubtful accounts and obsolete and damaged inventory), internal use software and websitedevelopment (acquired and developed internally), accounting for income taxes, valuation of long-lived and intangible assets and goodwill, stock-basedcompensation and loss contingencies, are highly complex and involve many subjective assumptions, estimates and judgments by our management. Changesin these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reportedor 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 large purchasesof particular types of inventory. Subject to our returns policies, we accept returns of products sold through our fulfillment partners and we have the risk ofreselling the returned products. In the past we have recorded charges for obsolete inventory and have had to sell certain merchandise at a discount or loss. Tothe extent that we rely on purchased inventory, our success will depend on our ability to sell our inventory rapidly, the ability of our buying staff to purchaseinventory at attractive prices relative to its resale value and our ability to manage customer returns and other costs. If we are unsuccessful in any of these areas,we may be forced to sell our inventory at a discount or loss. Further, we purchase some of our inventory from foreign suppliers and pay for inventory withU.S. dollars. If the dollar weakens with respect to foreign currencies, foreign suppliers may require us to pay higher prices for products, which couldnegatively affect our profit margins.19Table of ContentsIf we do not successfully optimize and operate our warehouse and customer service operations, our business could be harmed. We have expanded, contracted and otherwise modified our warehouse and customer service operations from time to time in the past, and expect thatwe will continue to do so. If we do not successfully optimize and operate our warehouse and customer service operations, it could significantly limit our abilityto meet customer demand, customer shipping or return time expectations, or result in excessive costs and expenses for the size of our business. Because it isdifficult to predict demand, we may not manage our facilities in an optimal way, which may result in excess or insufficient inventory or warehousing capacity.We may also fail to staff our fulfillment and customer service centers at optimal levels. Our failure to do so could negatively impact our operating results andcustomer experience.Our cash, cash equivalents and short-term investments are subject to a risk of loss based upon the solvency of the financial institutions in whichthey are maintained. 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. Ourdeposits in these institutions generally exceed the amounts of insurance provided, and some deposits may not be covered by insurance at all. If any of theseinstitutions were to become insolvent, we could lose some, or all, of such deposits, which would have a material adverse effect on our financial condition.Our decision to accept bitcoins as a form of payment for purchases on our website may subject us to exchange risk and additional tax andregulatory requirements.In January 2014, we began accepting bitcoins as a form of payment for purchases on our website. Bitcoin is a digital currency that usescryptography to control the creation and transfer of the currency between individual parties. Bitcoin is not considered legal tender or backed by anygovernment. Since inception in 2009, bitcoins have experienced price volatility, technological glitches and various law enforcement and regulatoryinterventions.Since we began accepting bitcoins as a form of payment, less than 1% of customer purchases have been made using the currency. At present we donot accept bitcoin payments directly, but use a third party vendor to accept bitcoin payments on our behalf. That third party vendor then immediately convertsthe bitcoin payments into U.S. dollars so that we receive payment for the product sold at the sales price in U.S. dollars. We do not hold any amount ofbitcoins as a result of these transactions and are not subject to exchange risk. An insolvency of our third party vendor, however, may result in our holdingbitcoins which could subject us to exchange risk.In the future, we expect to transact in bitcoins directly and intend to hold bitcoins. This will subject us to exchange risk which may have an adverseeffect on our results. There is also uncertainty regarding the current and future accounting treatment and tax, legal, and regulatory requirements relating tobitcoin or transactions utilizing bitcoin. Such accounting, legal, regulatory, and tax developments or other requirements may adversely affect us.We may be adversely affected by fluctuations in precious metal prices. At December 31, 2013 our investment in precious metals was $9.7 million. Our financial results may be adversely affected by declines in the priceof precious metals. During the year ending December 31, 2013 our loss on our investment in precious metals was $1.5 million. The prices of precious metalsmay fluctuate widely in the future and are affected by numerous factors beyond our control such as interest rates, exchange rates, inflation or deflation,fluctuation in the value of the United States dollar and foreign currencies, global and regional supply and demand, and the political and economic conditionsof mineral producing countries throughout the world. Our investment consists of actual precious metals, rather than financial instruments. We store ourprecious metals off-site in a third party facility. Consequently, we are subject to the risks of physical storage with a third party that we do not control.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, 2013, our accumulated deficit was$158.6 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 $88.5million for the year ended December 31, 2013 and $14.7 million in 2012, we incurred a net loss of $19.4 million in 2011. We may be unable to maintainprofitability in the future. If our revenues grow more slowly than we anticipate or decline, or if our expenses exceed our expectations, our financial20Table of Contentsresults would be harmed and our business, prospects, financial condition and results of operations could fall below the expectations of public market analystsand investors. 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 sales and todevelop or increase our ability to perform a variety of analytical procedures relating to our business. We are continuing to upgrade and further expand these andother components of our infrastructure. In the past, we have experienced difficulties with upgrades of our infrastructure, and have incurred increased expensesas a result of these difficulties. As a result of these expenditures on our infrastructure, our ability to reduce spending is limited. Therefore, any significantshortfall in the revenues for which we have built and are continuing to build our infrastructure would likely harm our business. 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 to takesignificant 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 our Websiteunavailable or prevent us from efficiently fulfilling orders, which may reduce the volume of goods we sell and the attractiveness of our products and services.In addition, we may be unable to adequately staff our fulfillment and customer service centers during peak periods, and delivery services and other fulfillmentcompanies 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 to reducethe number of product returns may result in customer dissatisfaction and fewer repeat customers. Our pricing strategy may not meet customers’ price expectations or result in net income. Demand for our products is generally highly sensitive to price. Our pricing strategies have had, and may continue to have, a significant impact onour net sales and net income. We often offer discounted prices, and free or discounted shipping as a means of attracting customers and encouraging repeatpurchases. Such offers and discounts reduce our margins. In addition, our competitors’ pricing and marketing strategies are beyond our control and cansignificantly impact the results of our pricing strategies. If we fail to meet our customers’ price expectations, or if we are unable to compete effectively with ourcompetitors 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 to frequent,significant and sometimes unpredictable changes. Because some of the products that we sell consist of manufacturers’ and retailers’ excess inventory, we havelimited control over some of the products that we are able to offer for sale. If our merchandise fails to satisfy customers’ tastes or respond to changes incustomer 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 profitmargins. In addition, any failure to offer products in line with customers’ preferences could allow our competitors to gain market share. This could have anadverse effect on our business. 21Table of ContentsThe 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 executive officers orother key employees for any reason could harm our business. Occasionally, members of senior management or key employees may find it necessary to take aleave of absence due to medical or other causes. On February 12, 2013 we announced that our Chief Executive Officer and Chairman of the Board,Dr. Patrick M. Byrne, was taking a personal leave of absence for medical reasons. On April, 15, 2013, we announced that Dr. Patrick M. Byrne had resumedhis duties as Chief Executive Officer. Leaves of absence for temporary or extended periods may harm our business. We do not have employment agreementswith 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. Competitionfor such personnel is intense. Our failure to retain and attract the necessary technical, managerial, editorial, merchandising, marketing, and customer servicepersonnel 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 links thatdirect customers to our Website. We rely on these relationships as significant sources of traffic to our Website and to generate new customers. In the past wehave terminated affiliate marketing websites as a result of efforts by certain states to require us to collect sales taxes based on the presence of those third partyInternet advertising affiliates in those states, and we are likely to do so again in the future if necessary. If we are unable to develop or maintain theserelationships on acceptable terms, our ability to attract new customers and our financial condition would suffer. In addition, certain of our online marketingagreements may require us to pay upfront fees and make other payments prior to the realization of the sales, if any, associated with those payments. Current orfuture relationships or agreements may fail to produce the sales that we anticipate. We periodically conduct national television and radio branding andadvertising campaigns. Such campaigns 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 be unableto deter misappropriation of our proprietary information, detect unauthorized use or take appropriate steps to enforce our intellectual property rights. Inaddition, our competitors may now have or may in the future develop technologies that are as good as or better than our technology without violating ourproprietary rights. Our failure to protect our software and other proprietary intellectual property rights or to utilize technologies that are as good as ourcompetitors’ could put us at a disadvantage to our competitors. In addition, the failure of the third parties whose products we offer for sale on our Website toprotect their intellectual property rights, including their domain names, could impair our operations. These failures could harm our business. We may not be able to obtain trademark protection for our marks, which could impede our efforts to build brand identity. We have filed trademark applications with the Patent and Trademark Office seeking registration of certain service marks 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: 22Table of Contents•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 continue tobe subject to, legal claims of alleged infringement of the intellectual property rights of third parties. The ready availability of damages, royalties and thepotential for injunctive relief has increased the defense litigation costs of patent infringement claims, especially those asserted by third parties whose sole orprimary business is to assert such claims. Such claims, even if not meritorious, may result in significant expenditure of financial and managerial resources,and the payment of damages or settlement amounts. Additionally, we may become subject to injunctions prohibiting us from using software or businessprocesses we currently 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 rights withrespect 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 our Websiteinfringe third party copyrights, trademarks and trade names or other intellectual property rights or that we have otherwise infringed third parties’ past, currentor future intellectual property rights. We may be unable to prevent third parties from offering and selling unlawful goods, and we may be subject to allegationsof civil or criminal liability for unlawful activities carried out by third parties through our Website. We may implement measures in an effort to protect againstthese potential liabilities that could require us to spend substantial resources and/or to reduce revenues by discontinuing certain service offerings. Any costsincurred as a result of liability or asserted liability relating to the sale of unlawful goods or the unlawful sale of goods could harm our business. Resolvinglitigation or claims regarding patents or other intellectual property, whether meritorious or not, could be costly, time-consuming, cause service delays, divertour management and key personnel from our business operations, require expensive or unwanted changes in our methods of doing business or require us toenter into costly royalty or licensing agreements, if available. As a result, these claims could harm our business. Negative publicity generated as a result of theforegoing could damage our reputation, harm our business and diminish the 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. Consumers valuereadily 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 virtually immediateas is its impact. Social media platforms and devices immediately publish the content their subscribers and participants post, often without filters or checks onaccuracy of the content posted. The opportunity for dissemination of information, including inaccurate information, is virtually limitless. Informationconcerning or affecting us may be posted on such platforms and devices at any time. Information posted may be inaccurate and adverse to us, and it mayharm our business. The harm may be immediate without affording us an opportunity for redress or correction. Such platforms also could be used for thedissemination of trade secret information or compromise of other valuable company assets, any of which could harm our business. 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 directly applicableto those providing the medium through which the advertisement is made available to the public. Sellers are often subject to regulations in the nature of “truth inadvertising laws.” We have no ability to know whether the information sellers provide is correct. While our site terms and conditions of usage prohibitunlawful acts, we cannot assure that sellers will comply with all laws and regulations applicable to them and their transactions. The application of theseregulations to online car listing service providers is not clear. Although we do not expect these laws to23Table of Contentshave 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 to make changes inour service that may increase our costs, reduce our revenues, cause us to prohibit certain listing or advertising practices, or make other changes that mayadversely affect our car listing service. Further, like our shopping business, our car listing service is subject to most of the same laws and regulations thatapply to other companies conducting business on and off the Internet. To the extent that current or future laws or regulations prevent users from selling itemson our car listing site, they could harm our business. In addition, any negative publicity we receive regarding any allegations of unlawful or deceptive conductmay damage our reputation, our ability to attract new customers to our main shopping site, and the Overstock.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 commercial litigationrelated 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 or equitable remedies. In addition, we have in the past been, are now, and in the future may be, involved in substantial litigation in whichwe are the plaintiff, including litigation regarding the constitutionality of certain state tax laws, and the prime broker litigation described below. Any of suchlitigation, whether as plaintiff or defendant, could be costly and time consuming and could divert management and key personnel from our regular businessoperations. We do not currently believe that any of our outstanding litigation will have a material adverse effect on our business, prospects, financial conditionor results of operations. However, 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, prospects, financial condition and results of operations. California District Attorneys have obtained a judgment against us for alleged violations of California law. In November 2010, District Attorneys for the California Counties of Alameda, Marin, Monterey, Napa, Santa Clara, Shasta and Sonoma filed alawsuit seeking damages and an injunction, alleging violations of California consumer protection laws, alleging we made untrue or misleading statementsconcerning our pricing, price reductions, sources of products and shipping charges. The complaint asked for damages in the amount of not less than$15 million. We disputed the allegations and tried the case to the Judge of the court in September 2013. On January 3, 2014, the court issued a tentative rulingin favor of the District Attorneys, which became a final Statement of Decision on February 5, 2014. The decision provides for an injunction that prescribesdisclosures necessary for certain types of price advertising and price reductions and imposes civil penalties of $3,500 per day for practices from March 2006through September 2008, and $2,000 per day for September 2008 through September 2013, totaling $6.8 million. The court issued a Final Judgment February19, 2014 reflecting the Court’s Statement of Decision. Plaintiff may apply to the court for a reimbursement of costs. It is unknown whether the plaintiff willrequest or have entitlement to an award of attorneys fees, or whether the court would grant any such request. While we intend to comply with the judgment, wewill appeal. We will likely have to post an appeal bond under California rules or alternatively, by agreement, provide some form of surety in the amount of theordered penalty. An unfavorable resolution of this matter on appeal could materially affect our business, prospects, financial condition and results ofoperations. Our prime broker litigation may have an adverse effect on our business and financial condition. We remain involved in substantial litigation against Goldman Sachs Group, Inc., Goldman Sachs & Co., Goldman Sachs Execution &Clearing L.P., Merrill Lynch, Pierce, Fenner & Smith, Inc., and Merrill Lynch Professional Clearing Corporation, and the use of management’s time andattention in connection with the litigation and related matters may reduce the time management is able to spend on other aspects of our business, which mayhave adverse effects on other aspects of our business. To the extent that any such adverse effects exceed any benefits we may realize from the litigation, it couldharm our business, prospects, financial condition and results of operation. Public 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 and regulatory capture. Some of those public statements have been critical of theSecurities and Exchange Commission and other regulatory agencies. These public statements may have consequences for us, whether as a result of increasedregulatory scrutiny or otherwise. 24Table of ContentsThe 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 to fluctuate andin 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 three quartersdue primarily to increased shopping activity during the holiday season. However, there can be no assurance that our sales in the fourth quarter will exceedthose of the preceding quarters or, if the fourth quarter sales do exceed those of the preceding quarters, that we will be able to manage the increased saleseffectively. Further, we generally increase our inventories substantially in anticipation of holiday season shopping activity, which has a negative effect on ourcash flow. Securities analysts and investors may inaccurately estimate the effects of seasonality on our results of operations in one or more future quartersand, 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 portions of ourstock being offered or made available for sale, could result in strong downward pressure on our stock price. Investors should be aware that they couldexperience significant short-term volatility in our stock if such stockholders decide to sell all or a portion of their holdings of our common stock at once orwithin a short25Table of Contentsperiod of time. In addition, the transfer of ownership of 50% or more of our outstanding shares within a three year period could adversely affect our ability touse 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 your shares.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 amount of yourinvestment. 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 our stockholders. Forexample, only one-third of our board of directors is elected at each of our annual meetings of stockholders, which will make it more difficult for a potentialacquirer to change the management of our company, even after acquiring a majority of the shares of our common stock. These provisions, which cannot beamended without the approval of two-thirds of our stockholders, could diminish the opportunities for a stockholder to participate in tender offers, includingtender offers at a price above the then current market value of our common stock. In addition, our board of directors, without further stockholder approval,may issue preferred stock, with such terms as the board of directors may determine, that could have the effect of delaying or preventing a change in control ofour company. The issuance of preferred stock could also adversely affect the voting powers of the holders of common stock, including the loss of votingcontrol to others. We are also afforded the protections of Section 203 of the Delaware General Corporation Law, which could delay or prevent a change incontrol of our company or could impede a merger, consolidation, takeover or other business combination involving our company or discourage a potentialacquirer from making a tender offer or otherwise attempting to obtain control of our company. The price of our stock may be vulnerable to manipulation. We filed an unfair business practice lawsuit against Morgan Stanley & Co. Incorporated, Goldman Sachs & Co., Bear Stearns Companies, Inc.,Bank of America Securities LLC, Bank of New York, Citigroup Inc., Credit Suisse (USA) Inc., Deutsche Bank Securities, Inc., Merrill Lynch, Pierce,Fenner & Smith, Inc., and UBS Financial Services, Inc., and settled the case with respect to all defendants except Goldman Sachs Group, Inc., GoldmanSachs & Co., Goldman Sachs Execution & Clearing L.P.; Merrill Lynch, Pierce, Fenner & Smith, Inc., and Merrill Lynch Professional ClearingCorporation. In January 2012, 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 in anysuch actions or take any other actions to interfere with or destroy or harm Overstock’s existing and/or prospective business relationships with its suppliers,bankers, customers, lenders, investors, prospective investors or others, our business, prospects, financial condition and results of operation could beharmed, 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 might prevail in theabsence of any such efforts. The practice of “abusive naked short selling” continues to place our stock at risk for manipulative attacks by large investmentpools 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 be sold,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 close the sale.While selling broker dealers are by rule required to deliver shares to close a transaction by a certain date, and while purchasing broker-dealers are obligated byrule to purchase the sold quantity of shares when they are not delivered to close the sale, these rules are often ignored. Abusive naked short selling has adepressive effect on share prices when it is allowed to persist because the economic effect of abusive naked short selling is the oversupply of counterfeit stockto the market. We believe the regulations designed to address this abusive practice are both inadequately structured and inadequately enforced. Consequently,we believe that without the enactment of adequate regulations and the enforcement necessary to curb these abuses, the manipulations achieved through abusivenaked short selling are likely to continue. We believe that our stock has been subject to these abusive practices by those attempting to manipulate26Table of Contentsits price downward. To the extent that our stock is subject to these practices in the future, our stock may be more volatile than it might otherwise be and/ormay 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. It alsorequires mandatory close-outs for open fail-to-deliver positions in threshold securities persisting for over 13 days, with the aim that no security would appearon the threshold for any extended period. Despite that aim, our common stock has frequently appeared on the Regulation SHO threshold list for extended andcontinuous periods and, while we do not currently appear on the Regulation SHO threshold list, in the past our stock has been on the list for more tradingdays 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, andall 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 purchase or hold oursecurities. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also become important factors that mayharm our business. The occurrence of any of the risks described in this Form 10-K could harm our business. The trading price of our securities could declinedue to any of these risks and uncertainties, and investors may lose part or all of their investment.ITEM 1B. UNRESOLVED STAFF COMMENTSNone.ITEM 2. PROPERTIESCorporate office spaceWe 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 are exploringthe short-term extension of this lease and relocating this corporate facility to a different location.We lease approximately 872 square feet in The Institute of Technology in Sligo, Ireland for a term expiring in 2014.Warehouse and customer service spaceWe lease approximately 687,000 square feet for our warehouse and customer service operations in Salt Lake City, Utah for a term expiring in 2026.We lease approximately 15,000 square feet for customer service operations in Tooele, Utah for a term expiring in 2015.We lease approximately 51,500 square feet of warehouse space in Hebron, Kentucky beginning in March 2013, for a term expiring in 2016.We lease approximately 100,000 square feet of warehouse space in Jonestown, Pennsylvania beginning in October 2013, for a term expiring in 2014.Co-location data centerWe 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 2017.We lease approximately 3,000 square feet in Salt Lake City, Utah for a data center for a term expiring in 2016.We use all of our properties in both our direct and fulfillment partner businesses. We believe that the above listed facilities will be sufficient for ourneeds for at least the next twelve months, subject to potential seasonal requirements for additional warehouse and customer service space during the fourthquarter.ITEM 3. LEGAL PROCEEDINGSThe 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 in answer to thisItem.27Table of ContentsITEM 4. MINE SAFETY DISCLOSURES Not applicable.28Table of ContentsPART IIITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIESMarket informationOur 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. CommonStock Price High LowYear Ended December 31, 2013 First Quarter 16.50 11.29Second Quarter 28.20 11.46Third Quarter 34.97 25.65Fourth Quarter 30.83 23.22Year Ended December 31, 2012 First Quarter 7.71 5.17Second Quarter 6.95 5.01Third Quarter 10.55 6.21Fourth Quarter 15.90 10.11Stock Performance GraphThe stock performance graph is included in Part III, Item 12.HoldersAs of February 17, 2014, there were 171 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.DividendsWe 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 of directors andwill depend on our results of operations, financial conditions, contractual and legal restrictions and other factors the board of directors deems relevant.Recent sales of unregistered securitiesWe maintain a Non-Qualified Deferred Compensation plan for senior management. The plan allows eligible members of senior management to defertheir receipt of compensation, subject to the restrictions contained in the plan. To the extent that interests in the plan constitute securities, we believe that theissuance of the interests was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof andRule 506 of Regulation D thereunder as a transaction not involving a public offering. The interests were not sold for cash or other consideration, and there wereno proceeds to us.Issuer purchases of equity securitiesThe 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 2013, including all purchases made pursuant to publiclyannounced plans or programs and those not made pursuant to publicly announced plans or programs. Column (a) sets forth the total number of sharespurchased, and the footnotes to the table disclose the number of shares purchased other than pursuant to a publicly announced plan or program and the natureof any such purchases. Column (b) sets forth the average price paid per share. Column (c) sets forth the total number of shares purchased as part of publiclyannounced repurchase plans or programs. Column (d) sets forth the maximum number (or approximate dollar value) of shares that may yet be purchasedunder the plans or programs.29Table of ContentsPeriod (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 orProgramsOctober 1, 2013 to October 31, 2013 95 $25.18 — $—November 1, 2013 to November 30, 2013 — — — —December 1, 2013 to December 31, 2013 — — — —Total 95 (1) — $—(1) Represents 95 shares withheld for minimum tax withholding purposes upon the vesting of a portion of restricted stock units.Stock based compensationStock optionsOur board of directors adopted the 2005 Equity Incentive Plan, in April 2005, and it was most recently amended and restated and re-approved by thestockholders on May 3, 2012 (as so amended and restated, the "Plan"). Under the Plan, the board of directors may issue incentive stock options to ouremployees and directors and non-qualified stock options to our consultants, as well as restricted stock units and other types of equity awards of the Company.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 schedule determined by ourboard of directors, usually over four years from the grant date. At December 31, 2013, 2.8 million shares of stock remained available for future grants underthe Plan.The following is a summary of stock option activity (amounts in thousands, except per share data): 2013 2012 2011 Shares WeightedAverageExercisePrice Shares WeightedAverageExercisePrice Shares WeightedAverageExercisePriceOutstanding—beginning of year 364 $17.34 405 $17.58 496 $18.09Exercised (89) 17.45 — — — —Expired/Forfeited (2) 17.08 (41) 20.06 (91) 20.55Outstanding—end of year 273 $17.30 364 $17.34 405 $17.58Options exercisable at year-end 273 $17.30 364 $17.34 404 $17.59Stock 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, 2013, 2012and 2011, we recorded stock based compensation related to stock options of $0, $3,000 and $200,000, respectively.Restricted stock units activityDuring the years ended December 31, 2013, 2012 and 2011, we granted 275,000, 795,000 and 268,000 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 is eitherrecognized on a straight line basis over the vesting schedule or on an accelerated schedule when vesting of restricted stock awards exceeds a straight-line basis.The weighted average grant date fair value of restricted stock units granted during the years ended December 31, 2013, 2012 and 2011 was $16.12, $6.75and $15.47, respectively.30Table of ContentsThe following is a summary of restricted stock unit activity (amounts in thousands, except per share data): 2013 2012 2011 Units WeightedAverageGrant DateFair Value Units WeightedAverageGrant DateFair Value Units WeightedAverageGrant DateFair ValueOutstanding—beginning of year 1,003 $8.81 522 $13.40 685 $12.08Granted at fair value 275 16.12 795 6.75 268 15.47Vested (339) 10.23 (240) 12.11 (318) 12.20Forfeited (235) 9.38 (74) 8.25 (113) 13.88Outstanding—end of year 704 $10.79 1,003 $8.81 522 $13.40Restricted stock units granted in 2013 vest over three years at 40% at the end of the first year, 30% at the end of the second year and 30% at the end ofthe third year. 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, 2013, 2012 and 2011, we recorded stock based compensation related to restricted stock units of $3.3 million, $3.5 million and $2.8 million,respectively.Subsequent to 2013, we granted 232,000 additional restricted stock units. These restricted stock units vest over three years with one-third at the endof each of the first, second and third years.31Table of ContentsITEM 6. SELECTED FINANCIAL DATAThe 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 may notbe indicative of our future performance. Year ended December 31, 2013 2012 2011 2010 2009 (in thousands, except per share data)Consolidated Statement of Operations Data: Revenue, net Direct $156,032 $155,516 $163,609 $209,646 $150,901Fulfillment partner 1,148,185 943,773 890,668 880,227 725,868Total net revenue 1,304,217 1,099,289 1,054,277 1,089,873 876,769Cost of goods sold Direct 136,282 140,536 149,660 187,124 130,890Fulfillment partner 920,275 760,323 725,529 713,109 581,127Total cost of goods sold 1,056,557 900,859 875,189 900,233 712,017Gross profit 247,660 198,430 179,088 189,640 164,752Operating expenses: Sales and marketing 91,609 63,467 61,813 61,334 55,549Technology 71,788 65,467 67,043 58,260 52,336General and administrative 68,169 57,259 67,766 55,650 48,906Restructuring (1) (471) 76 — (569) (66)Total operating expenses 231,095 186,269 196,622 174,675 156,725Operating income (loss) 16,565 12,161 (17,534) 14,965 8,027Interest income 127 116 161 157 170Interest expense (113) (809) (2,485) (2,962) (3,470)Other income (expense), net (235) 3,686 278 2,088 3,277Income (loss) before income taxes 16,344 15,154 (19,580) 14,248 8,004Provision (benefit) for income taxes (72,165) 485 (142) 359 257Net income (loss) $88,509 $14,669 $(19,438) $13,889 $7,747Deemed dividend related to redeemable common stock — — (12) (112) (48)Net income (loss) attributable to common shares $88,509 $14,669 $(19,450) $13,777 $7,699Net income (loss) per common share—basic: Net income (loss) attributable to common share—basic $3.73 $0.63 $(0.84) $0.60 $0.34Weighted average common shares outstanding—basic 23,714 23,387 23,259 23,019 22,821Net income (loss) per common share—diluted: Net income (loss) attributable to common shares—diluted $3.64 $0.62 $(0.84) $0.59 $0.33Weighted average common shares outstanding—diluted 24,294 23,672 23,259 23,366 23,067(1) During the fourth quarter of 2006, we commenced implementation of a facilities consolidation and restructuring program designed to reduce the overall expensestructure in an effort to improve future operating performance (see Item 15 of Part IV, "Financial Statements"-Note 3-"Restructuring Expense").32Table of Contents As of December 31, 2013 2012 2011 2010 2009 (in thousands)Balance Sheet Data: Cash and cash equivalents $148,665 $93,547 $96,985 $124,021 $139,757Restricted cash 1,580 1,905 2,036 2,542 4,414Working capital 25,709 7,497 (14,129) 14,746 51,236Total assets 319,767 181,985 179,559 217,959 216,500Total indebtedness 3,155 1,848 18,619 52,845 61,687Redeemable common stock — — — 570 744Stockholders' equity 122,891 30,962 13,237 30,658 10,80033Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe 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 forth in theSpecial Note Regarding Forward-Looking Statements or in Item 1A under the heading "Risk Factors" or elsewhere in this Form 10-K. IntroductionWe are an online retailer offering discount brand name, non-brand name and closeout merchandise, including furniture, home decor, bedding andbath, housewares, jewelry and watches, apparel and designer accessories, electronics and computers, and sporting goods, among other products. We also sellhundreds of thousands of best seller and current run books, magazines, CDs, DVDs and video games ("BMMG"). We sell these products through ourInternet websites located at www.overstock.com, www.o.co and www.o.biz ("Website"). Although our three websites are located at different domain addresses,the technology and equipment and processes supporting the Website and the process of order fulfillment described herein are 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. We continuallyadd new, and sometimes limited, inventory to our Website in order to create an atmosphere that encourages customers to visit frequently and purchaseproducts before our inventory sells out. We sell products primarily in the United States.As used herein, "Overstock," "Overstock.com," "O.co," "we," "our" and similar terms include Overstock.com, Inc. and its subsidiaries, unlessthe context indicates otherwise.Our BusinessWe deal primarily in discount, replenishable and closeout merchandise and use the Internet to aggregate both supply and demand to create an efficientmarketplace for selling these products. We provide manufacturers with a one-stop liquidation channel to sell both large and small quantities of excess, closeoutand replenishable inventory without disrupting sales through traditional channels. The merchandise offered on our Website is from a variety of sourcesincluding well-known, brand-name manufacturers. We have organized our shopping business (sales of product offered through the Shopping Section of ourWebsite) into two principal segments—a "direct" business and a "fulfillment partner" business. We currently offer approximately 491,000 non-BMMGproducts and approximately 805,000 BMMG products. Consumers and businesses are able to access and purchase our products 24 hours a day from theconvenience of a computer, Internet-enabled mobile telephone or other Internet-enabled devices. Our team of customer service representatives assists customersby telephone, instant online chat and e-mail. We also derive revenue from other businesses advertising products or services on our Website. Nearly all of oursales are to customers located in the United States. During the years ended December 31, 2013, 2012 and 2011 no single customer accounted for more than 1%of our total net revenue.Direct businessOur direct business includes sales made to individual consumers and businesses, which are fulfilled primarily from our warehouse in Salt LakeCity, Utah. During the year ended December 31, 2013, we fulfilled approximately 12% of our order volume through our warehouse, which generally shipsbetween 3,000 and 5,000 packages per day and up to approximately 6,000 orders per day during peak periods, using overlapping daily shifts.Fulfillment partner businessFor our fulfillment partner business, we sell merchandise of other retailers, cataloguers or manufacturers ("fulfillment partners") primarily throughour Website. 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 any of ourfulfillment partners. We currently have relationships with approximately 2,400 third parties who supply approximately 488,000 non-BMMG products, as wellas most of the BMMG products, on our Website. These third party fulfillment partners perform essentially the same fulfillment operations as our warehouses,such as order picking and shipping; however, we handle returns and customer service related to substantially all orders placed through our Website. Revenuegenerated from sales on our Shopping site from both the direct and fulfillment partner businesses is recorded net of returns, coupons and other discounts.34Table of ContentsBoth direct and fulfillment partner revenues are seasonal, with revenues historically being the highest in the fourth quarter, which ends December 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 our businesspurchasers with normal credit terms (typically 30 days). For sales in our fulfillment partner business, we generally receive payments from our customersbefore our payments to our suppliers are due.Other offeringsWithin our website, we offer additional products or services that complement our primary offerings, but are not significant to our revenues. Theseinclude:•Worldstock Fair Trade, a store within our website that offers handcrafted products made by artisans all over the world, which emphasizessustainability, fairness, and transparency, and which we attempt to run at 0% profit by donating net profits to fund philanthropic projects in severalcountries, including Guatemala, Kenya, Malawi, and Nepal;•Main Street Revolution, a store within our website that features products from small businesses across the United States who offer their productsusing our national marketing and distribution channels;•a consignment service for suppliers where the suppliers' merchandise is stored in and shipped from our warehouses;•ecommerce marketplace channels, where some of our products are offered for sale in on-line marketplaces of other Internet retailers' websites;•our international business where we offer products to customers outside the United States using U.S.-based third party logistics providers (we do nothave sales operations outside the U.S.); and•an online car listing service which allows sellers to list vehicles for sale and allows buyers to review vehicle descriptions and post offers to purchase,and provides the means for prospective purchasers to contact sellers for further information and negotiations on the purchase of an advertisedvehicle.Critical Accounting Policies and Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires estimates and assumptionsthat affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidatedfinancial statements and accompanying notes. The Securities and Exchange Commission ("SEC") has defined a company's critical accounting policies as theones that are most important to the portrayal of the company's financial condition and results of operations, and which require the company to make its mostdifficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we haveidentified the critical accounting policies, estimates and judgments addressed below. We also have other key accounting policies, which involve the use ofestimates, judgments, and assumptions that are significant to understanding our results. For additional information, see Item 15 of Part IV, "FinancialStatements"—Note 2—"Accounting Policies." Although we believe that our estimates, assumptions, and judgments are reasonable, they are based uponinformation presently available. Actual results may differ significantly from these estimates. Our critical accounting policies are as follows:•revenue recognition;•estimating valuation allowances and accrued liabilities (specifically, the allowances for returns 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 RecognitionWe derive our revenue primarily from direct revenue and fulfillment partner revenue from merchandise sales. We also earn revenue from advertisingon our shopping and other pages. We have organized our operations into two principal segments based on the primary source of revenue: direct revenue andfulfillment partner revenue (see Note 22—Business Segments). 35Table of ContentsRevenue 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 resulting receivable isreasonably assured. Revenue related to merchandise sales is recognized upon delivery to our customers. As we ship high volumes of packages through multiplecarriers, it is not practical for us to track the actual delivery date of each shipment. Therefore, we use estimates to determine which shipments are deliveredand, therefore, recognized as revenue at the end of the period. Our delivery date estimates are based on average shipping transit times, which are calculatedusing the following factors: (i) the type of shipping carrier (as carriers have different in-transit times); (ii) the fulfillment source (either our warehouses or thoseof our fulfillment 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, actualshipping times may differ from our estimates.Based upon our historical experience, revenue typically increases during the fourth quarter because of the holiday retail season.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 income for the year ended December 31, 2013 (in thousands): Year Ended December 31, 2013Change in the Estimate of Average Transit Times (Days) Increase (Decrease)Revenue Increase (Decrease)Net Income2 $(10,744) $(1,470)1 $(3,320) $(447)As reported As reported As reported(1) $3,336 $459(2) $7,072 $964When 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 determined using afixed 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. 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 merchandise 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 which fulfillment partners ship directly to consumers and businesses fromwarehouses maintained by our fulfillment partners. Fulfillment partner revenue comes from merchandise sales that occur primarily through our Website, butmay also occur through offline and other channels.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 and werecognize revenue ratably over the membership period. The Club O loyalty program allows members to earn reward dollars for qualifying purchases made onour Website. We also have a co-branded credit card program (see “Co-branded credit card revenue” below for more information). Co-branded cardholders arealso Club O members and earn additional reward dollars for purchases made on our Website, and from other merchants. Reward dollars earned may beredeemed on future purchases made through our Website. Club O reward dollars expire 90 days after the customer’s Club O36Table of Contentsmembership expires. 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 recognize otherincome when Club O reward dollars expire or the likelihood of reward dollars being redeemed by a customer is remote (“reward dollar breakage”). Rewarddollar breakage is currently recognized when the reward dollars expire. 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.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 purchases asdeferred revenue at the time they are earned and we recognize it as revenue upon redemption. If reward dollars are not redeemed, we recognize other income uponexpiration. In addition, we sell gift cards and record related deferred revenue at the time of the sale. We sell gift cards without expiration dates and we recognizerevenue from a gift card upon redemption of the gift card. If a gift card is not redeemed, we recognize other income when the likelihood of its redemptionbecomes remote based on our historical redemption experience. We consider the likelihood of redemption to be remote after 36 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 of delivery,for most products we refund the full cost of the merchandise minus the original shipping charge and actual return shipping fees. However, we reduce refundsfor returns initiated more than 30 days after delivery or that are received at our returns processing facility more than 45 days after initial delivery. 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 and actualreturn shipping fees. Revenue is recorded net of estimated returns. We record an allowance for returns based on current period revenues and historical returns experience.We analyze actual historical returns, current economic trends and changes in order volume and acceptance of our products when evaluating the adequacy ofthe sales returns allowance in any accounting period. The allowance for returns was $13.2 million and $10.6 million at December 31, 2013 and 2012 respectively.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 to lower of costor market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected bymanagement, additional inventory write-downs may be required. Once established, the original cost of the inventory less the related inventory allowancerepresents the new cost basis of such products. Reversal of the allowance is recognized only when the related inventory has been sold or scrapped.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 enhance ourWebsite and processes supporting our business. We capitalize costs incurred during the37Table of Contentsapplication development stage of internal-use software and amortize these costs over the estimated useful life of two to three years. Costs incurred related todesign or maintenance of internal-use software are expensed as incurred.Accounting for income taxesWe are subject to taxation from federal, state and international jurisdictions. A significant amount of judgment is involved in preparing our provisionfor income taxes and the calculation of resulting deferred tax assets and liabilities.We account for income taxes in accordance with ASC Topic 740, Income Taxes (“ASC 740”) which requires the asset and liability method ofaccounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporarydifferences between tax and financial reporting. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxableincome in effect for the years in which those tax assets are expected to be realized or settled. We use the with-and-without approach, disregarding indirect taximpacts, for determining the period in which tax benefits for excess share-based deductions are recognized. Net operating losses from prior years reducedfederal and state income tax obligations to the extent that we did not have significant income taxes payable at December 31, 2013 or 2012.Since inception, we determined that a valuation allowance should be recorded against all of our net deferred tax assets. This quarterly assessmentrequired us to exercise significant judgment and make estimates about our ability to generate revenue, gross profit, operating income and taxable income infuture periods. Due to strong operating results in the last two years, including eight consecutive quarters of taxable income, and increased confidence that wewill continue to generate taxable income into the foreseeable future, our assessment regarding whether it is more likely than not that we will realize our deferredtax assets has changed. The result was the full release of the $79.7 million valuation allowance on our deferred tax assets. In reaching this conclusion weconsidered, among other things, our recent financial and operating results (three years of cumulative income, eight consecutive quarters of profitability andstrong revenue growth). We gave the most significant weight in our evaluation to the objective, direct positive evidence related to our recent strong financialresults, particularly our positive levels of pre-tax income. Historically, our pre-tax income and our taxable income have not varied by much other than one timetax accounting method changes and the anomaly of the 2013 $6.8 million civil penalty assessed in a legal matter. Except as otherwise disclosed, there are noknown trends, events, transactions or other uncertainties that are expected to negatively impact the future levels of taxable income.We performed multiple sensitivity analyses to address how potential changes in significant assumptions would impact our ability to generate theminimum amount of taxable income required. We will continue to monitor the need for a valuation allowance against our federal and state deferred tax assetsquarterly, but at December 31, 2013 we believe it is more likely than not that these assets will be realized in future periods.Accounting Standards Codification ("ASC") 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financialstatements in accordance with GAAP. ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return. This statement also provides guidance on derecognition, classification, interest andpenalties, accounting in the interim periods and disclosure.The calculation of our tax liabilities is subject to legal and factual interpretation, judgment, and uncertainty in a multitude of jurisdictions.This includes addressing uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions in the U.S. and othertax jurisdictions based on recognition and measurement criteria prescribed by ASC 740. The liabilities are periodically reviewed for their adequacy andappropriateness. Changes to our assumptions could cause us to find a revision of estimates appropriate. Such a change in measurement would result in therecognition of a tax benefit or an additional charge to the tax provision.Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations,and court rulings. We recognize potential liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, andthe extent to which, additional taxes and interest will be due. We record an amount as an estimate of probable additional income tax liability at the largestamount that we determine is more likely than not, based upon the technical merits of the position, to be sustained upon audit by the relevant tax authority.As of December 31, 2013, we were not under audit by any income tax authorities. Tax periods within the statutory period of limitations notpreviously audited are potentially open for examination by the tax authorities. Potential liabilities associated with these years will be resolved when an eventoccurs to warrant closure, primarily through the completion of audits by the tax jurisdictions and/or the expiration of the statutes of limitation. To the extentaudits or other events result in a38Table of Contentsmaterial adjustment to the accrued estimates, the effect would be recognized during the period of the event. We believe that an appropriate estimated liability hasbeen established for potential exposures.Our net unrecognized tax benefits are recorded as a liability in our consolidated balance sheets. To the extent interest and penalties would be assessedby taxing authorities of any underpayment of income taxes, such amounts are accrued and classified as a component of income tax expense on ourconsolidated statement of operations and comprehensive income (loss). Realization of the unrecognized tax benefits results in a favorable impact to the effectivetax rate.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 the carryingamount of an asset group may not be recoverable. Recoverability is measured by comparison of the assets’ carrying amount to future undiscounted net cashflows the asset group is expected to generate. Cash flow forecasts are based on trends of historical performance and management’s estimate of futureperformance, giving consideration to existing and anticipated competitive and economic conditions. If such asset group is considered to be impaired, theimpairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair values. There were no impairments tolong-lived assets recorded during the years ended December 31, 2013, 2012 and 2011.Valuation of goodwillGoodwill is not amortized, but must be 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 is morelikely 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 assigned to itscarrying amount. If the carrying amount exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss, if any, iscalculated by comparing the implied fair value of the goodwill to its carrying amount. In calculating the implied fair value of goodwill, the fair value of thereporting unit is allocated to the other assets and liabilities within the reporting unit based on estimated fair value. The excess of the fair value of a reportingunit over the amount allocated to its other assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized when the carryingamount of goodwill exceeds its implied fair value.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 atDecember 31, 2013 and 2012. There were no impairments to goodwill recorded during the years ended December 31, 2013, 2012 and 2011.Accounting pronouncements issued not yet adoptedSee Item 15 of Part IV, "Financial Statements"—Note 2—"Accounting Policies" subheading "Accounting Pronouncements Issued Not Yet Adopted."Comparison of Years Ended December 31, 2013 and 2012Executive Commentary This executive commentary is intended to provide investors with a view of our business through the eyes of our management. As an executivecommentary, it necessarily focuses on selected aspects of our business. This executive commentary is intended as a supplement to, but not a substitutefor, the more detailed discussion of our business included elsewhere herein. Investors are cautioned to read our entire “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” as well as our interim and audited financial statements, and the discussion of ourbusiness and risk factors and other information included elsewhere or incorporated in this report. This executive commentary includes forward-looking statements, and investors are cautioned to read the “Special Note Regarding Forward-Looking Statements” at the beginning of Item 2,“Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Revenues in 2013 increased 19% compared to 2012. The growth in revenue was primarily due to a 17% increase in average order size, from $135 to$158, coupled with a 2% increase in orders. The increase in average order size is largely due to a sales mix shift into the home and garden category. Althoughthe trend towards our home and garden category has accelerated in recent years, we do not expect the sales mix shift to continue to increase at the same rate in2014. Gross profit in 2013 increased 25% compared to 2012 primarily as a result of that revenue growth and a shift in product sales mix into highermargin home and garden products. Approximately $37.0 million of the $49.2 million increase in39Table of Contentsgross profit was due to higher revenue, and $12.2 million due to the improvement in gross margin percentage. The increase in gross margin was primarily dueto the sales mix shift referenced above. Sales and marketing expenses as a percentage of revenue increased from 5.8% in 2012 to 7.0% for 2013, primarily due to increased spending in thesponsored search marketing channel due to a higher proportion of our revenue coming through that channel. In addition, during the last several weeks ofDecember 2013, we increased our marketing spending as a result of softer sales observed during this period. We continued to refine our marketing strategies inthe first quarter of 2014.In late 2012, Google, Inc. (“Google”) discontinued providing its free Google Base product listing service to retailers and instead offered retailers a newfee based product listing service. In addition, during Q3 2013, Google tested and later implemented changes to its search engine algorithms, which reduced ourranking in certain Google search results during some periods. While we worked on adapting to Google's changes, we emphasized other marketing channels,such as sponsored search, which generated revenue growth but with higher associated marketing expenses as a percentage of revenue than was the case forrevenue coming from Google Base and natural search. Technology expense in 2013 increased $6.3 million compared to 2012, primarily due to an increase in staff-related costs partially offset by a decreasein depreciation.We continue to seek opportunities for growth in our business, including expanding our international sales and our distribution capabilities. We alsointend to begin to broker insurance products, and offer consumer financing products through a third party, to our customers in 2014. As a result, we expect tocontinue to increase our technology expenses to support these initiatives.General and administrative expense in 2013 increased $10.9 million compared to 2012, primarily due to $10.1 million of increased activity on legalmatters, including our defense of a case brought by district attorneys in eight California counties, and for civil penalties assessed in an adverse judgmentreceived in the case (which we intend to appeal).Provision (benefit) for income taxes in 2013 was ($72.2) million compared to $485,000 in 2012. The large income tax benefit in 2013 was due to a$79.7 million deferred tax asset valuation release in 2013 after concluding that it was more likely than not that we will realize our deferred tax assets. The balance of our Management’s Discussion and Analysis of Financial Condition and Results of Operations provides further information about thematters discussed above and other important matters affecting our business.40Table of ContentsResults of Operations The following table sets forth our results of operations expressed as a percentage of total net revenue for the years ended December 31, 2013, 2012and 2011: Year ended December 31 2013 2012 2011 (as a percentage of total revenue)Revenue, net Direct 12.0 % 14.1 % 15.5 %Fulfillment partner 88.0 85.9 84.5Total net revenue 100.0 100.0 100.0Cost of goods sold Direct 10.4 12.8 14.2Fulfillment partner 70.6 69.2 68.8Total cost of goods sold 81.0 81.9 83.0Gross profit 19.0 18.1 17.0Operating expenses: Sales and marketing 7.0 5.8 5.9Technology 5.5 6.0 6.4General and administrative 5.2 5.2 6.4Restructuring — — —Total operating expenses 17.7 17.0 18.7Operating income (loss) 1.3 1.1 (1.7)Interest income — — —Interest expense — (0.1) (0.2)Other income, net — 0.3 —Net income (loss) before income taxes 1.3 1.3 (1.9)Provision (benefit) for income taxes (5.5) — —Net income (loss) 6.8 % 1.3 % (1.9)% RevenueThe following table reflects our net revenue for the years ended December 31, 2013 and 2012: Year ended December 31, 2013 2012 $ Change % ChangeRevenue, net Direct $156,032 $155,516 $516 0.3%Fulfillment partner 1,148,185 943,773 204,412 21.7%Total revenue, net $1,304,217 $1,099,289 $204,928 18.6% The primary reason for increased total net revenue for the year ended December 31, 2013 was an increase of 17% in average order size, from $135 to$158, coupled with a 2% increase in orders. The increase in average order size is largely due to a sales mix shift into home and garden products.The primary reason for increased direct revenue for the year ended December 31, 2013 was a continued shift in sales mix into our home and gardenproducts, partially offset by a decrease in sales of clothing and shoes due to our shift from a direct inventory-based model to a fulfillment partner-based modelto reduce exposure from seasonal inventory and mark downs. 41Table of ContentsThe primary reason for the increase in fulfillment partner revenue for the year ended December 31, 2013 was an increase in sales of home and gardenproducts.The shift of business from direct to fulfillment partner (or vice versa) is an economic decision based on the economics of each particular productoffering at the time and we generally do not have particular goals for an “appropriate” mix or percentage 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 environment and wedo not currently foresee any material shifts in mix. We continue to seek increased participation in our Club O loyalty program as revenue and average order size of customers with paid Club Omemberships is larger than from other customers. For additional information regarding our Club O loyalty program see Item 15 of Part IV, "FinancialStatements"—Note 2—"Accounting Policies” under the section “Club O loyalty program.” Gross profit and gross margin Our overall gross margins fluctuate based on our sales volume mix between our direct business and fulfillment partner business; changes in suppliercost and / or sales price, including competitive pricing; inventory management decisions within the direct business; sales coupons and promotions; productmix of sales; and operational and fulfillment costs.The following table reflects our net revenues, cost of goods sold and gross profit for the years ended December 31, 2013 and 2012 (in thousands): Year ended December 31, 2013 2012 $ Change % ChangeRevenue, net Direct $156,032 $155,516 $516 0.3 %Fulfillment partner 1,148,185 943,773 204,412 21.7 %Total net revenues 1,304,2171,099,289 204,928 18.6 %Cost of goods sold Direct 136,282 140,536 (4,254) (3.0)%Fulfillment partner 920,275 760,323 159,952 21.0 %Total cost of goods sold 1,056,557 900,859 155,698 17.3 %Gross Profit Direct 19,750 14,980 4,770 31.8 %Fulfillment partner 227,910 183,450 44,460 24.2 %Total gross profit $247,660 $198,430 $49,230 24.8 %Gross margins for the past eight quarterly periods and years ending December 31, 2013 and 2012 were: Q1 2013 Q2 2013 Q3 2013 Q4 2013 FY 2013Direct 11.4% 12.2% 13.7% 13.4% 12.7%Fulfillment Partner 20.0% 20.8% 20.4% 18.6% 19.8%Combined 18.9% 19.7% 19.6% 18.0% 19.0% Q1 2012 Q2 2012 Q3 2012 Q4 2012 FY 2012Direct 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%The increase in direct gross margin for the year ended December 31, 2013 when compared to the same period in 2012 is primarily due to a shift insales mix into higher margin home and garden products, lower warehousing costs, partially offset by higher freight costs.42Table of ContentsThe increase in fulfillment partner gross margin for the year ended December 31, 2013 is primarily due to higher revenue and a shift in product salesmix into higher margin home and garden products. Cost of goods sold includes stock-based compensation expense of $154,000 and $272,000 for the years ended December 31, 2013 and 2012,respectively. Fulfillment costsFulfillment 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, includingsome of our competitors, account for fulfillment costs within operating expenses, and therefore exclude fulfillment costs from gross margin. As a result, ourgross 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): Year ended December 31, 2013 2012Total revenue, net $1,304,217 100% $1,099,289 100%Cost of goods sold Product costs and other cost of goods sold 999,519 77% 848,842 77%Fulfillment and related costs 57,038 4% 52,017 5%Total cost of goods sold 1,056,557 81% 900,859 82%Gross profit $247,660 19% $198,430 18% Fulfillment costs as a percentage of sales may vary due to several factors, such as our ability to manage costs at our warehouses, significant changesin the number of units received and fulfilled, the extent to which we use third party fulfillment services and warehouses, and our ability to effectively managecustomer service costs and credit card fees. Fulfillment and related costs remained relatively flat during the year ended December 31, 2013 as compared to2012. See “Gross profit and gross margin” above for additional discussion. Operating expenses Sales and marketing expenses We use a variety of methods to target our consumer audience, including online campaigns, such as advertising through keywords, product listing ads,display ads, search engines, affiliate marketing programs, social coupon websites, portals, banners, e-mail, direct mail and viral and social mediacampaigns. We also do brand advertising through television, radio, and print ads.The following table reflects our sales and marketing expenses for the years ended December 31, 2013 and 2012 (in thousands): Year ended December 31, 2013 2012 $ Change % ChangeSales and marketing expenses $91,609 $63,467 $28,142 44.3%Sales and marketing expenses as a percent of net revenues 7.0% 5.8% Sales and marketing expenses as a percentage of revenue increased from 5.8% to 7.0% for the year ended December 31, 2013 as compared to thesame period in 2012, primarily due to increased expenditures in the sponsored search marketing channel due to a higher proportion of our revenue comingthrough that channel. 43Table of ContentsIn late 2012, Google, Inc. (“Google”) discontinued providing its free Google Base product listing service to retailers and instead offered retailers a newfee based product listing service. In addition, during Q3 2013, Google tested and later implemented changes to its search engine algorithms, which reduced ourranking in certain Google search results during some periods. While we worked on adapting to Google's changes, we emphasized other marketing channels,such as sponsored search, which generated revenue growth but with higher associated marketing expenses as a percentage of revenue than was the case forrevenue coming from Google Base and natural search. Sales and marketing expenses include stock-based compensation expense of $167,000 and $318,000 for the years ended December 31, 2013 and2012, 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 ourpolicy of free shipping on orders over $50 introduced in early January 2013, as an effective marketing tool, and intend to continue to offer them as we deemappropriate as part of our overall marketing plan.Technology expenses We seek to invest efficiently in technology, including web services, customer support solutions, website search, expansion of new and existingproduct categories, and in investments in technology to enhance the customer experience, improve our process efficiency and support our logisticsinfrastructure. We expect to continue to increase our technology expenses to support these initiatives.The following table reflects our technology expenses for the years ended December 31, 2013 and 2012 (in thousands): Year ended December 31, 2013 2012 $ Change % ChangeTechnology expenses $71,788 $65,467 $6,321 9.7%Technology expenses as a percent of net revenues 5.5% 6.0% The $6.3 million increase for the year ended December 31, 2013 is primarily due to an increase in staff related costs partially offset by a decrease indepreciation. Technology expenses include stock-based compensation expense of $352,000 and $799,000 for the years ended December 31, 2013 and 2012,respectively.General and administrative expenses The following table reflects our general and administrative expenses for the years ended December 31, 2013 and 2012 (in thousands): Year ended December 31, 2013 2012 $ Change % ChangeGeneral and administrative expenses $68,169 $57,259 $10,910 19.1%General and administrative expenses as a percent of net revenues 5.2% 5.2% The $10.9 million increase in general and administrative expenses (“G&A”) for the year ended December 31, 2013 is primarily due to a $10.1million increase in legal costs due to an increase in activity on legal matters, including our defense of a case brought by district attorneys in eight Californiacounties, and for civil penalties assessed in an adverse judgment received in the case (which we intend to appeal).G&A expenses include stock-based compensation expense of approximately $2.6 million and $2.1 million for the years ended December 31, 2013and 2012, respectively. 44Table of ContentsRestructuring During the year ended December 31, 2013 we reversed approximately $471,000 of lease termination costs primarily due to changes in ourrestructuring accrual as a result of our reoccupation of a portion of formerly restructured office space. We incurred $76,000 of restructuring charges during theyear ended December 31, 2012 due to changes in the estimate of sublease income as a result of our entering into a new sublease agreement and ceasing the useof some of our office facilities. Depreciation expense Depreciation expense is classified within the corresponding operating expense categories on the consolidated statements of operations as follows (inthousands): Year ended December 31, 2013 2012Cost of goods sold - direct $380 $470Technology 12,917 14,177General and administrative 1,225 1,362Total depreciation and amortization, including internal-use software and website development $14,522 $16,009 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, 2013 and 2012 totaled $127,000 and $116,000, respectively. Interest expense Interest expense is primarily related to interest incurred on line of credit and our capital leases. Interest expense for the years ended December 31, 2013and 2012 totaled $113,000 and $809,000, respectively. The decrease is primarily due to our repayment of the $17.0 million in advances under the U.S. BankFinancing Agreement in November 2012. Other income (expense), net Other income (expense), net for the year ended December 31, 2013 decreased to $(235,000) from $3.7 million in 2012 primarily related to $1.7million of decreased Club O rewards breakage due to fewer expiring promotional memberships and $1.5 million of losses on our investment in preciousmetals.Income taxes Our benefit for income taxes for the year ended December 31, 2013 of $72.2 million is primarily due to our decision to release our deferred tax assetvaluation allowance of $79.7 million at December 31, 2013. In our decision to release the valuation allowance we concluded that the positive evidenceoutweighed the negative evidence and that it was more likely than not that all of our federal and state deferred tax assets will be realized. See Item 15 of Part IV,"Financial Statements"—Note 20—"Income Taxes". Our provision for income taxes for the year ended December 31, 2012 of $485,000 was for federalalternative minimum tax and certain income tax uncertainties, including interest and penalties.Seasonality Based upon our historical experience, revenue typically increases during the fourth quarter because of the holiday retail season and gross margindecreases due to increased sales of certain lower margin products, such as electronics. The actual quarterly results for each quarter could differ materiallydepending upon consumer preferences, availability of product and competition, among other risks and uncertainties. Accordingly, there can be no assurancesthat seasonal variations will not materially affect our results of operations in the future. 45Table of ContentsThe following table reflects our total net revenues for each of the quarters in 2013, 2012 and 2011 (in thousands): FirstQuarter SecondQuarter ThirdQuarter FourthQuarter2013 $311,994 $293,204 $301,426 $397,5932012 $262,367 $239,536 $255,352 $342,0342011 $265,470 $234,992 $239,738 $314,077 Comparison of Years Ended December 31, 2012 and 2011Executive CommentaryThis 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.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 growth of4%, 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% revenue growthin 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 in customer orders dueto 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 gross margin.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 was due to theimprovement in gross margin percentage. The increase in gross margin was primarily due to the sales mix shift referenced above. While we spent $1.7 millionmore 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 highergross profit and a decrease in marketing spend was 15% growth in Contribution (see "Non-GAAP Financial Measures" below for a reconciliation ofContribution to Gross Profit) in 2012, and a 120 basis point improvement in Contribution margin which increased to 12.3% for 2012.Technology expense in 2012 decreased $1.6 million compared to 2011, primarily due to decreases in compensation and recruiting-related costs fromlower headcount earlier in the year. However, technology expenses increased during Q4 2012 following investments we made in technology-related initiativesand personnel. General and administrative expenses in 2012 decreased $10.5 million compared to 2011, primarily due to lower legal fees.Our fulfillment partner business continued to make up a large percentage of our total revenues, expanding to nearly 86% of total net revenue in 2012.Our decision to shift sales from the Apparel & Shoes category away from the direct business and into the fulfillment partner business contributed to this shiftin 2012. We converted revenues into cash on average five days before we pay our suppliers. This reduced the capital requirements needed to operate ourbusiness, and 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 under theU.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 with U.S. Bankto 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 about thematters discussed above and other important matters affecting our business.46Table of ContentsResults of OperationsThe following table sets forth our results of operations expressed as a percentage of total net revenue for 2012, 2011 and 2010: 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 80.8Total net revenue 100.0 100.0 100.0Cost of goods sold Direct 12.8 14.2 17.2Fulfillment partner 69.2 68.8 65.4Total cost of goods sold 81.9 83.0 82.6Gross profit 18.1 17.0 17.4Operating expenses: Sales and marketing 5.8 5.9 5.6Technology 6.0 6.4 5.3General and administrative 5.2 6.4 5.1Restructuring — — (0.1)Total operating expenses 17.0 18.7 16.0Operating income (loss) 1.1 (1.7) 1.4Interest income — — —Interest expense (0.1) (0.2) (0.3)Other income (expense), net 0.3 — 0.2Income (loss) before income taxes 1.3 (1.9) 1.3Provision (benefit) for income taxes — — —Net income (loss) 1.3% (1.9)% 1.3%RevenueThe following table reflects our net revenue for the years ended December 31, 2012 and 2011 (in thousands): Year ended December 31, 2012 2011 $ Change % ChangeRevenue, 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 %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 $123to $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 to lowerconversion rates compared to last year.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; partially offsetby an increase in sales of home and garden products.47Table of ContentsThe primary reason for the increase in fulfillment partner revenue for the year ended December 31, 2012 was an increase in sales of home and gardenproducts; partially offset by decreases in sales of electronics, jewelry and watches and books and media.Gross profitOur overall gross margins fluctuate based on our sales volume mix between our direct business and fulfillment partner business; changes in suppliercost and / or sales price, including competitive pricing; inventory management decisions within the direct business; sales coupons and promotions; productmix 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): Year ended December 31, 2012 2011 $ Change % ChangeRevenue, 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 %Gross margins for the past eight quarterly periods and years ending December 31, 2012 and 2011 were: Q1 2012 Q2 2012 Q3 2012 Q4 2012 FY 2012Direct 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 2011Direct 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%The 110 and 90 basis point increases in direct and fulfillment gross margins, respectively, for the year ended December 31, 2012 when compared tothe 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, partially offset byhigher returns-related and freight costs.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 costsFulfillment 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 gross48Table of Contentsmargin. We believe that some companies in our industry, including some of our competitors, account for fulfillment costs within operating expenses, andtherefore 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): Year ended December 31, 2012 2011Total 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%Fulfillment costs as a percentage of sales may vary due to several factors, such as our ability to manage costs at our warehouses, significant changesin the number of units received and fulfilled, the extent to which we use third party fulfillment services and warehouses, and our ability to effectively managecustomer service costs and credit card fees. There were no significant changes in our fulfillment and related costs as a percentage of net revenue during the yearended December 31, 2012.See "Gross profit" above for additional discussion.Operating expensesSales and marketing expensesWe 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): Year endedDecember 31, 2012 2011 $ Change % ChangeSales 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% Sales and marketing expenses as a percentage of revenue decreased slightly for the year ended December 31, 2012, when compared to the same periodin 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 our newpolicy of free shipping on orders over $50 introduced in early January 2013, as an effective marketing tool, and intend to continue to offer them as we deemappropriate as part of our overall marketing plan.49Table of ContentsTechnology expensesWe 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 our logisticsinfrastructure.The following table reflects our technology expenses for the years ended December 31, 2012 and 2011 (in thousands): Year endedDecember 31, 2012 2011 $ Change % ChangeTechnology expenses $65,467 $67,043 $(1,576) (2.4)%Technology expenses as a percent of net revenues 6.0% 6.4% The decrease for the year ended December 31, 2012 is primarily due to decreases in compensation and recruiting-related costs primarily from lowerheadcount earlier in the year; partially offset by an increase in third party technology services. Technology expenses in Q4 2012 increased by $2.2 millioncompared 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.General and administrative expensesThe following table reflects our general and administrative expenses for the years ended December 31, 2012 and 2011 (in thousands): Year endedDecember 31, 2012 2011 $ Change % ChangeGeneral 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% 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.RestructuringWe 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 were norestructuring charges or reversals during the year ended December 31, 2011.50Table of ContentsDepreciation expenseDepreciation expense is classified within the corresponding operating expense categories on the consolidated statements of operations as follows (inthousands): Year endedDecember 31, 2012 2011Cost of goods sold—direct $470 $714Technology 14,177 14,433General and administrative 1,362 1,203Total depreciation and amortization, including internal-use software and website development $16,009 $16,350Non-operating income (expense)Interest incomeInterest income is primarily derived from the investment of our cash in cash and cash equivalents. Interest income for the years ended December 31,2012 and 2011 totaled $116,000 and $161,000, respectively.Interest expenseInterest expense is primarily related to interest incurred on our Senior Notes, finance obligations, line of credit and our capital leases. Interest expensefor the years ended December 31, 2012 and 2011 totaled $809,000 and $2.5 million, respectively. The decrease in interest expense is primarily a result ofextinguishments of our Senior Notes and finance obligations in 2011, partially offset by an increase in interest expense on our line of credit.Other income, netOther income, net for the years ended December 31, 2012 and 2011 totaled $3.7 million and $278,000, respectively. The increase was primarily dueto an increase in Club O rewards breakage due to expiring promotional memberships. Additionally, 2011 included a $1.2 million loss on early retirement ofour finance obligations resulting from a prepayment premium. There were no losses on early retirement of debt in 2012.Income taxesOur 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 2011 we had federal net operating losscarryforwards of approximately $174.1 million and $192.5 million, respectively, and state net operating loss carryforwards of approximately $151.6 millionand $176.1 million, respectively, which may be used to offset future taxable income. As of December 31, 2012 and 2011 we had a full valuation allowanceagainst our deferred tax assets after concluding that it was not more likely than not that we would realize our deferred tax assets.Liquidity and Capital Resources Current sources of 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 can be noassurance that 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 additional capitalcould have a material adverse effect on our operations and on our ability to achieve our intended business objectives. Any projections of future cash needs andcash 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, 2013, ouronly available credit facility was a $3.0 million facility solely to support letters of credit. At December 31, 2013, we had cash and cash equivalents of $148.7million. 51Table of ContentsCash flow information is as follows (in thousands): Year ended December 31, 2013 2012Cash provided by (used in): Operating activities $83,645 $28,145Investing activities (26,000) (13,764)Financing activities (2,527) (17,819) Free Cash Flow “Free Cash Flow” (a non-GAAP measure) for the years ended December 31, 2013 and 2012, was $65.6 and $15.7 million, respectively. See “Non-GAAP Financial Measures” below for a reconciliation of Free Cash Flow to net cash provided by operating activities.Cash flows from operating activities For the years ended December 31, 2013 and 2012, our operating activities resulted in net cash inflows of $83.6 million and $28.1 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 amount oftime necessary to collect proceeds from our customers. As a result, following our typically seasonally strong fourth quarter sales, at December 31 of each year,our cash, cash equivalents and accounts payable balances normally reach their highest level (other than as a result of cash flows provided by or used ininvesting and financing activities). However, our accounts payable balance normally declines during the first three months following year-end, whichnormally results in a decline in our cash and cash equivalents balances from the year-end balance. The seasonality of our business causes payables andaccruals to grow significantly in the fourth quarter, and then decrease in the first quarter when they are typically paid. The $83.6 million of net cash provided by operating activities during the year ended December 31, 2013 was primarily from an increase in accountspayable and accrued liabilities of $28.2 million and $18.0 million, respectively. Accounts payable increased due to increased sales and in part due to a changein the timing of key holiday sales during Q4. In 2013, the holiday sales season began later than in 2012, and as a result some of our payments to oursuppliers for holiday sales were due in January rather than in December. Accrued liabilities increased due to the timing of some invoices outstanding at year-end 2013 as compared to 2012, in particular, accruals for marketing expenses and legal matters increased. Other reasons for the increase in net cash providedby operating activities were income before taxes of $16.3 million and non-cash depreciation and amortization expense of $14.5 million. 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 $14.7million, non-cash depreciation, amortization and stock compensation expense of $19.5 million, and an increase in deferred revenue of $10.4 million primarilydue to strong sales growth at the end of year and an increase in the amount of orders sold but not yet delivered to customers due 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. Cash flows from investing activities Cash provided by investing activities primarily corresponds with purchases, sales, and maturities of marketable securities, investments in preciousmetals and cash expenditures for fixed assets, including internal-use software and website development costs. For the year ended December 31, 2013, investingactivities resulted in net cash outflows of $26.0 million, primarily from expenditures for fixed assets of $18.1 million and investments in precious metals of$8.1 million. For the year ended December 31, 2012 investing activities resulted in net cash outflows of $13.8 million, resulting primarily from expendituresfor fixed assets. 52Table of ContentsCash flows from financing activities For the years ended December 31, 2013 and 2012, financing activities resulted in net cash outflows of $2.5 million and $17.8 million, respectively. The $2.5 million used in financing activities during the year ended December 31, 2013 resulted primarily from $2.6 million for prepayment ofcapital leases for computer equipment and $1.4 million for the purchase of shares of our common stock withheld for minimum tax withholdings upon thevesting of a portion of certain restricted stock award grants, partially offset by $1.6 million in proceeds for the exercise of stock options. The $17.8 million used in financing activities during the year ended December 31, 2012 resulted primarily from the $17.0 million repayment of ourline of credit. Contractual Obligations and Commitments The following table summarizes our contractual obligations as of December 31, 2013 and the effect such obligations and commitments are expected tohave on our liquidity and cash flow in future periods (in thousands): Payments Due by PeriodContractual Obligations 2014 2015 2016 2017 2018 Thereafter TotalOperating leases $11,004 $8,751 $4,859 $3,922 $3,826 $32,437 $64,799Naming rights 1,311 1,351 1,391 — — — 4,053Purchase obligations 13,306 — — — — — 13,306Marketing, technology and other services 7,026 3,008 1,683 — — — 11,717Total contractual cash obligations $32,647 $13,110 $7,933 $3,922 $3,826 $32,437 $93,875 Amounts of Commitment Expiration Per PeriodOther Commercial Commitments 2014 2015 2016 2017 2018 Thereafter TotalLetters of credit $1,580 $— $— $— $— $— $1,580Operating Leases From time to time we enter into operating leases for facilities and equipment for use in our operations. On May 13, 2013 we entered into a newoperating lease for a warehouse facility that we have leased since September 2008. This lease extends the term of occupancy to August 31, 2026. Theminimum future payments due under this new operating lease are included in the summary of future minimum lease payments for all operating leases in thetable above. Naming Rights During 2011, we entered into a six-year agreement with the Oakland-Alameda County Coliseum Authority (“OACCA”) for the right to nameOakland Alameda County Coliseum (now known as “O.co Coliseum”). Amounts represent annual payments due OACCA for the naming rights. We have theright to terminate this agreement at our sole option, subject to payment of a termination fee. Purchase obligations The amount of purchase obligations shown above is based on assumptions regarding the legal enforceability against us of inventory purchase orderswe had outstanding at December 31, 2013. 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. Marketing, technology and other services From time to time we enter into long-term contractual agreements for marketing, technology, or other services.53Table of Contents Tax Contingencies Our contractual obligations presented above exclude unrecognized tax contingencies, including interest and penalties, of $495,000 for which wecannot make a reasonably reliable estimate of the amount and period of payment. For further information regarding the application of ASC 740-10-5, see theinformation set forth under Item 15 of Part IV, "Financial Statements - Note 20 - Income Taxes," contained in the "Notes to Consolidated Financial Statements"of this Annual Report on Form 10-K. Borrowings U.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 $3.0 million cash-collateralized line of credit agreement(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 plus1.0%. The Credit Agreement matures on December 31, 2014. There were no amounts outstanding on the Credit Agreement at December 31, 2013 and 2012. At December 31, 2012, no amounts were outstanding under the Financing Agreement. At December 31, 2013 and 2012, letters of credit totaling $1.6million and $1.8 million, respectively, were issued on our behalf collateralized by compensating cash balances held at U.S. Bank, which are included inRestricted cash in the accompanying consolidated balance sheets. U.S. Bank Commercial Purchasing Card Agreement We have a commercial purchasing card (the “Purchasing Card”) agreement with U.S. Bank. We use the Purchasing Card for business purposepurchasing and must pay it in full each month. At December 31, 2013, $517,000 was outstanding and $4.5 million was available under the PurchasingCard. At December 31, 2012, $3.9 million was outstanding and $1.1 million was available under the Purchasing Card. Capital leases In March 2013, we entered into a capital lease arrangement for $2.6 million of computer equipment that will expire in 2017. We prepaid the entire$2.6 million shortly after entering into the agreement in order to obtain discounted pricing. As such, we have no future payment obligations under capitalleases at December 31, 2013. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition,changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that would be material toinvestors.Non-GAAP financial measuresRegulation 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 less salesand marketing expense and reflects an additional way of viewing our results. Contribution Margin is Contribution as a percentage of revenues. When viewedtogether with our GAAP results, we believe Contribution and Contribution margin provides management and users of the financial statements informationabout our ability to cover our operating costs, such as technology and general and administrative expenses. Contribution and Contribution Margin are used inaddition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures.You should review our financial statements and publicly-filed reports in their entirety and not rely on any single financial measure. The material limitationassociated with the use of Contribution is that it is an incomplete measure of profitability as it does not include all operating expenses or non-operating incomeand expenses. Management compensates for these limitations when using this measure by looking at other GAAP measures, such as operating income (loss)and net income (loss).54Table of ContentsFor further details on Contribution, see the calculation of this non-GAAP measure below (in thousands): Year ended December 31, 2013 2012 2011Total net revenue $1,304,217 $1,099,289 $1,054,277Cost of goods sold 1,056,557 900,859 875,189Gross profit 247,660 198,430 179,088Less: Sales and marketing expense 91,609 63,467 61,813Contribution $156,051 $134,963 $117,275Contribution margin 12.0% 12.3% 11.1%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 reconcile to“Net cash provided by operating activities”, is cash flows from operations reduced by “Expenditures for fixed assets, including internal-use software andwebsite development.” We believe that cash flows from operating activities is an important measure, since it includes both the cash impact of the continuingoperations of the business and changes in the balance sheet that impact cash. However, we believe free cash flow is a useful measure to evaluate our businesssince purchases of fixed assets are a necessary component of ongoing operations and free cash flow measures the amount of cash we have available formandatory debt service and financing obligations, changes in our capital structure, and future investments after we have paid all of our operating expenses.Therefore, we believe it is important to view free cash flow as a complement to our entire consolidated statements of cash flows as calculated below (inthousands): Year ended December 31, 2013 2012 2011Net cash provided by operating activities $83,645 $28,145 $25,663Expenditures for fixed assets, including internal-use software and website development (18,067) (12,489) (8,741)Free cash flow $65,578 $15,656 $16,922ITEM 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 on ourline of credit (which expired December 31, 2012), and we have no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents,trade accounts and contracts receivable, accounts payable and long-term obligations. We consider investments in highly-liquid instruments with a remainingmaturity 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 be subjectto fluctuations due to volatility of the stock market in general, investment-specific circumstances, and changes in general economic conditions. At December 31, 2013, we had $148.7 million in cash and cash equivalents. Hypothetically, an increase or decrease in interest rates of one hundredbasis points would have an estimated impact of $1.5 million on our earnings or loss, or the fair market value or cash flows of these instruments. At December 31, 2013, we had assets consisting of precious metals totaling $9.7 million. Hypothetically, an increase or decrease in the market valueof one hundred basis points would have an estimated impact of $97,000 on our earnings or loss, or the recorded value or cash flows of these instruments.Earnings resulting from increases in the market value of precious metals would be limited to losses incurred in the same fiscal year.55Table of ContentsAt December 31, 2013, letters of credit totaling $1.6 million were outstanding under our credit facilities. Hypothetically, an increase or decrease ininterest rates of one hundred basis points would have an estimated impact of $16,000 on our earnings or loss, or the cash flows of these instruments, if theletters of credit were fully drawn.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe financial statements and supplementary data required by this item are included in Part IV, Item 15 of this Form 10-K.ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A. CONTROLS AND PROCEDURES(a) Disclosure Controls and ProceduresWe 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, controls andprocedures 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 performing similarfunctions, 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 the 1934Act, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded thatour disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we fileor submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and toprovide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer andprincipal 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, noevaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, ifany, within the Company have been detected.(b) Management's Report on Internal Control over Financial ReportingManagement 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 control overfinancial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making our assessment of theeffectiveness of internal control over financial reporting, management used the criteria set forth in Internal Control—Integrated Framework (1992) issuedby the Committee of Sponsoring Organizations of the Treadway56Table of ContentsCommission ("COSO"). Based on this assessment, management has concluded that, as of December 31, 2013, our internal control over financial reportingwas effective.Our internal control over financial reporting is designed to provide reasonable assurance of achieving its objectives as specified above. Managementdoes not expect, however, that our internal control over financial reporting 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, noevaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, ifany, within the Company have been detected.The effectiveness of our internal control over financial reporting as of December 31, 2013 has been audited by KPMG LLP, an independent registeredpublic accounting firm, as stated in their report which is in Item 9A(c).57Table 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, 2013, based on criteria established in InternalControl—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Overstock.com Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness ofinternal control 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 was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performingsuch other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our 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's internalcontrol over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately andfairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material 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 the degree ofcompliance 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, 2013,based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO).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, 2013 and 2012, 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, 2013, and ourreport dated February 27, 2014 expressed an unqualified opinion on those consolidated financial statements./s/ KPMG LLPSalt Lake City, UtahFebruary 27, 201458Table of Contents(d) Changes in Internal Control Over Financial ReportingDuring the fiscal quarter ended December 31, 2013, 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.59Table of ContentsITEM 9B. OTHER INFORMATION None.60Table of ContentsPART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEInformation regarding our Executive Officers required by Item 10 of Part III is set forth in Item 1 of Part I under "Business—Executive Officers of theRegistrant." Information required by Item 10 of Part III regarding our board of directors and any material changes to the process by which security holders mayrecommend nominees to the board of directors will be included in our definitive proxy statement for our 2014 annual meeting of stockholders, and isincorporated herein by reference. Information relating to compliance with Section 16(a) of the 1934 Act will be set forth in our definitive proxy statement forour 2014 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 principal executiveofficer, principal financial officer or principal accounting officer in the Investor Relations section of our Website, www.overstock.com. We will provide a copyof the relevant portion to any person without any charge upon request in writing addressed to Overstock.com. Attn: Investor Relations, 6350 South 3000 East,Salt Lake City, UT 84121.ITEM 11. EXECUTIVE COMPENSATIONThe information required by this Item is incorporated by reference to our definitive proxy statement for the 2014 annual meeting of stockholders.61Table of ContentsITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND RELATED STOCKHOLDER MATTERSExcept as set forth herein, the information required by this Item is incorporated by reference to our definitive proxy statement for the 2014 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 period commencing onJanuary 1, 2009 through December 31, 2013. The graph assumes a $100 investment at the beginning of the period in our common stock, the NASDAQMarket Index and the Morningstar Group Index, and the reinvestment of any dividends. Historic stock price performance is not necessarily indicative offuture stock price performance.COMPARISON OF YEAR CUMULATIVE TOTAL RETURNITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this Item is incorporated by reference to our definitive proxy statement for the 2014 annual meeting of stockholders.ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESThe information required by this Item is incorporated by reference to our definitive proxy statement for the 2014 annual meeting of stockholders.62Table of ContentsPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES1. Financial StatementsINDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm67Consolidated Balance Sheets68Consolidated Statements of Operations and Comprehensive Income (Loss)69Consolidated Statements of Changes in Stockholders' Equity70Consolidated Statements of Cash Flows71Notes to Consolidated Financial Statements72Schedule II Valuation and Qualifying Accounts982. Financial Statement ScheduleSchedule 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 Exhibits(a)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 10, 2014). 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 and officers. 10.2 Lease Agreement dated January 23, 2002 between Overstock.com, Inc. and Holladay Building East L.L.C. (incorporatedby reference to Exhibit 10.8 to our Registration Statement on Form S-1 (File No. 333-83728), which became effective onMay 29, 2002). 10.3 Intellectual Property Assignment Agreement with Douglas Greene dated February 28, 2002 (incorporated by reference toExhibit 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 dated February 28, 2002 by andbetween Overstock.com, Inc. and Douglas Greene. (incorporated by reference to Exhibit 10.18 to our RegistrationStatement on Form S-1 (File No. 333-83728), which became effective on May 29, 2002). 10.5 Sublease Agreement by and between Overstock.com, Inc., Old Mill Technology Center, LLC, and Old Mill BuildingLLC (incorporated by reference to Exhibit 99.1 to our Report on Form 8-K/A (File No. 000-49799) filed on December 7,2004). 10.6 Sublease Agreement by and between Overstock.com, Inc., Document Controls Systems, Inc., and Old Mill BuildingLLC (incorporated by reference to Exhibit 99.2 to our Report on Form 8-K/A (File No. 000-49799) filed on December 7,2004). 63Table of ContentsExhibits(a)10.7 Sublease Agreement by and between Overstock.com, Inc., Information Technology International, Inc., and Old MillBuilding 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 to Exhibit 99.4 to ourReport 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 on Form 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 on Form 8-K (FileNo. 000-49799) filed on May 7, 2012). 10.12 Form of Restricted Stock Unit Grant Notice and Restricted Stock Agreement under the 2005 Equity Incentive Plan(incorporated by reference to Exhibit 10.12 to our Report on Form 10-K filed (File No. 000-49799) on February 21,2013). 10.13 Lease Agreement with Natomas Meadows, LLC dated April 8, 2008 (incorporated by reference to Exhibit 10.1 to ourReport 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 toexhibit 10.1 to our Report on Form 8-K (File No. 000-49799) dated March 23, 2009). *10.16 (c) Summary of unwritten compensation arrangements with Directors. 10.17 (c) Description of unwritten bonus pool plan adopted January 14, 2013 (incorporated by reference to our Report on Form 8-K(File No. 000-49799) filed on January 18, 2013). 10.18 Industrial Net Lease dated May 1, 2013 between Overstock.com, Inc. and Landmark 4, LLC ((incorporated by referenceto exhibit 10.1 to our Report on Form 8-K (File No. 000-49799) filed May 17, 2013). 10.19 (c) Description of unwritten bonus pool plan adopted January 28, 2014 (incorporated by reference to our Report on Form 8-K(File No. 000-49799) filed on January 29, 2014). *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 Principal Executive Officer *31.2 Exhibit 31 Certification of Principal Financial Officer *32.1 Section 1350 Certification of Principal Executive Officer *32.2 Section 1350 Certification of Principal Financial Officer64Table of ContentsExhibits(a)101(d)Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business ReportingLanguage): (i) Consolidated Balance Sheets at December 31, 2013 and 2012; (ii) Consolidated Statement of Operationsand Comprehensive Income (Loss) for the years ended December 31 2013, 2012, and 2011; (iii) Consolidated Statementsof Changes in Stockholder's Equity for the years ended December 31, 2013, 2012, and 2011; (iv) ConsolidatedStatements of Cash Flows for the years ended December 31, 2013, 2012, and 2011; and (v) Notes to ConsolidatedFinancial Statements. Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive datafile is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the SecuritiesAct of 1933, is deemed not filed for purposes of section 18 of the Securities and Exchange Act of 1934, and otherwise isnot subject to liability under these sections.___________________________________________(a)Incorporated by reference to exhibits of the same number filed with our Form 10-Q (File No. 000-49799), filed on August 13, 2002.(b)Incorporated by reference to exhibits of the same number filed with our Registration Statement on Form S-1 (File No. 333-83728), which becameeffective 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 or prospectus for purposesof Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability under thesesections.* Filed herewith.65Table of ContentsSIGNATURESPursuant 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 27, 2014. OVERSTOCK.COM, INC. By: /s/ PATRICK M. BYRNEPatrick M. ByrneChief Executive Officer(Principal Executive Officer)________________________________________________________________________________________________________________________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 ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Patrick M.Byrne and Robert P. Hughes, 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 the Securitiesand Exchange Commission, hereby ratifying and conforming all that said attorney-in-fact, or his or their substitute or substitutes, may do or cause to be doneby virtue hereof. Signature Title Date /s/ PATRICK M. BYRNEPatrick M. Byrne Chief Executive Officer and Chairman of the Board(Principal Executive Officer) February 27, 2014/s/ JONATHAN E. JOHNSON IIIJonathan E. Johnson III Executive Vice Chairman of the Board and CorporateSecretary February 27, 2014/s/ STORMY D. SIMONStormy D. Simon Co-President and Director February 27, 2014/s/ ROBERT P. HUGHESRobert P. Hughes Senior Vice President, Finance and Risk Management(Principal Financial Officer and Principal AccountingOfficer) February 27, 2014/s/ ALLISON H. ABRAHAMAllison H. Abraham Director February 27, 2014/s/ BARCLAY F. CORBUSBarclay F. Corbus Director February 27, 2014/s/ JOSEPH J. TABACCO, JR.Joseph J. Tabacco, Jr. Director February 27, 2014/s/ SAMUEL A. MITCHELLSamuel A. Mitchell Director February 27, 201466Table 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, 2013 and 2012, and therelated consolidated statements of operations and comprehensive income (loss), changes in stockholders' equity, and cash flows for each of the years in thethree-year period ended December 31, 2013. In connection with our audits of the consolidated financial statements, we also have audited financial statementschedule II. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibilityis 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. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe thatour 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, 2013 and 2012, and the results of their operations and their cash flows for each of the years in thethree-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financialstatement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, theinformation set forth therein.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Overstock.com, Inc.'sinternal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework (1992) issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 27, 2014 expressed an unqualifiedopinion on the effectiveness of the Company's internal control over financial reporting./s/ KPMG LLPSalt Lake City, UtahFebruary 27, 201467Table of ContentsOverstock.com, Inc.Consolidated Balance Sheets(in thousands) December 31, 2013 December 31, 2012Assets Current assets: Cash and cash equivalents$148,665 $93,547Restricted cash1,580 1,905Accounts receivable, net16,047 19,273Inventories, net27,043 26,464Prepaid inventories, net1,804 1,912Deferred tax assets, net of valuation allowance of $10.0 million at December 31, 201213,854 —Prepaids and other assets10,298 12,897Total current assets219,291 155,998Fixed assets, net27,194 21,037Precious metals9,678 —Deferred tax assets, net of valuation allowance of $69.7 million at December 31, 201258,797 —Goodwill2,784 2,784Other long-term assets, net2,023 2,166Total assets$319,767 $181,985Liabilities and Stockholders’ Equity Current liabilities: Accounts payable$90,582 $62,416Accrued liabilities65,679 47,674Deferred revenue37,321 38,411Total current liabilities193,582 148,501Other long-term liabilities3,294 2,522Total liabilities196,876 151,023Commitments 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 - 26,909 and 26,481 Outstanding shares - 23,785 and 23,4512 2Additional paid-in capital361,706 356,895Accumulated deficit(158,587) (247,096)Treasury stock: Shares at cost - 3,124 and 3,030(80,230) (78,839)Total stockholders’ equity122,891 30,962Total liabilities and stockholders’ equity$319,767 $181,985 See accompanying notes to consolidated financial statements.68Table of ContentsOverstock.com, Inc.Consolidated Statements of Operations and Comprehensive Income (Loss)(in thousands, except per share data) Year ended December 31,2013 2012 2011Revenue, net Direct$156,032 $155,516 $163,609Fulfillment partner1,148,185 943,773 890,668Total net revenue1,304,217 1,099,289 1,054,277Cost of goods sold Direct(1)136,282 140,536 149,660Fulfillment partner920,275 760,323 725,529Total cost of goods sold1,056,557 900,859 875,189Gross profit247,660 198,430 179,088Operating expenses: Sales and marketing(1)91,609 63,467 61,813Technology(1)71,788 65,467 67,043General and administrative(1)68,169 57,259 67,766Restructuring(471) 76 —Total operating expenses231,095 186,269 196,622Operating income (loss)16,565 12,161 (17,534)Interest income127 116 161Interest expense(113) (809) (2,485)Other income (expense), net(235) 3,686 278Income (loss) before income taxes16,344 15,154 (19,580)Provision (benefit) for income taxes(72,165) 485 (142)Net income (loss)88,509 14,669 (19,438) Deemed dividend related to redeemable common stock— — (12)Net income (loss) attributable to common shares$88,509 $14,669 $(19,450)Net income (loss) per common share—basic: Net income (loss) attributable to common shares—basic$3.73 $0.63 $(0.84)Weighted average common shares outstanding—basic23,714 23,387 23,259Net income (loss) per common share—diluted: Net income (loss) attributable to common shares—diluted$3.64 $0.62 $(0.84)Weighted average common shares outstanding—diluted24,294 23,672 23,259 Comprehensive income (loss)$88,509 $14,669 $(19,438)____________________________________________________________(1) Includes stock-based compensation as follows (Note 17): Cost of goods sold — direct$154 $272 $193 Sales and marketing167 318 377 Technology352 799 628 General and administrative2,578 2,138 1,853 Total$3,251 $3,527 $3,051See accompanying notes to consolidated financial statements.69Table of ContentsOverstock.com, Inc.Consolidated Statements of Changes in Stockholders’ Equity(in thousands) Additional Common stock Paid-in Accumulated Treasury stock Shares Amount Capital Deficit Shares Amount TotalBalances at December 31, 201025,877 $2 $349,747 $(242,327) 2,862 $(76,764) $30,658Net loss (19,438) (19,438)Stock-based compensation to employees anddirectors— — 3,051 — — — 3,051Common stock issued upon vesting of restrictedstock318 — — — — — —Purchase of treasury stock— — — — 100 (1,604) (1,604)Lapse of rescission rights of redeemable commonstock46 — 582 — — — 582Deemed dividend related to redeemable commonstock— — (12) — — — (12)Balance at December 31, 201126,241 $2 $353,368 $(261,765) 2,962 $(78,368) $13,237Net income— — — 14,669 — — 14,669Stock-based compensation to employees anddirectors— — 3,527 — — — 3,527Common stock issued upon vesting of restrictedstock240 — — — — — —Purchase of treasury stock— — — — 68 (471) (471)Balances at December 31, 201226,481 $2 $356,895 $(247,096) 3,030 $(78,839) $30,962Net income— — — 88,509 — — 88,509Stock-based compensation to employees anddirectors— — 3,251 — — — 3,251Common stock issued upon vesting of restrictedstock339 — — — — — —Exercise of stock options89 — 1,560 — — — 1,560Purchase of treasury stock— — — — 94 (1,391) (1,391)Balances at December 31, 201326,909 $2 $361,706 $(158,587) 3,124 $(80,230) $122,891 See accompanying notes to consolidated financial statements.70Table of ContentsOverstock.com, Inc.Consolidated Statements of Cash Flows(in thousands) Year ended December 31, 2013 2012 2011Cash flows from operating activities: Net income (loss)$88,509 $14,669 $(19,438)Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization14,522 16,009 16,350Realized gain from sale of marketable securities(33) (9) —Loss on disposition of fixed assets— 72 —Stock-based compensation to employees and directors3,251 3,527 3,051Deferred income taxes(72,651) — —Amortization of debt discount and deferred loan costs18 73 127Loss on investment in precious metals1,457 — —Loss from early extinguishment of debt— — 1,253Restructuring charges (reversals)(471) 76 —Changes in operating assets and liabilities: Restricted cash200 131 506Accounts receivable, net3,226 (5,772) 59Inventories, net(579) (3,471) 9,121Prepaid inventories, net108 (885) 1,055Prepaids and other assets(536) 1,294 (456)Other long-term assets, net2 (267) (160)Accounts payable28,180 (7,902) 2,944Accrued liabilities17,959 (459) 6,952Deferred revenue(1,090) 10,433 3,951Other long-term liabilities1,573 626 348Net cash provided by operating activities83,645 28,145 25,663Cash flows from investing activities: Purchases of marketable securities(132) (82) (160)Purchases of intangible assets(13) (6) (4)Sales of marketable securities292 154 —Investment in precious metals(8,080) (1,397) —Expenditures for fixed assets, including internal-use software and website development(18,067) (12,489) (8,741)Proceeds from sale of fixed assets— 56 —Net cash used in investing activities(26,000) (13,764) (8,905)Cash flows from financing activities: Payments on capital lease obligations(2,563) (112) (730)Drawdowns on line of credit— — 17,000Payments on line of credit— (17,000) —Capitalized financing costs— — (140)Proceeds from finance obligations— — 1,429Payments on finance obligations— — (24,918)Paydown on direct financing arrangement(258) (236) (216)Payments to retire convertible senior notes— — (34,615)Change in restricted cash125 — —Proceeds from exercise of stock options1,560 — —Purchase of treasury stock(1,391) (471) (1,604)Net cash used in financing activities(2,527) (17,819) (43,794)Net increase (decrease) in cash and cash equivalents55,118 (3,438) (27,036)Cash and cash equivalents, beginning of period93,547 96,985 124,021Cash and cash equivalents, end of period$148,665 $93,547 $96,985Continued on the following pageOverstock.com, Inc.Consolidated Statements of Cash Flows(Continued)(in thousands) Year ended December 31, 2013 2012 2011Supplemental disclosures of cash flow information: Cash paid during the period: Interest paid$71 $582 $2,369Taxes paid546 299 260Non-cash investing and financing activities: Fixed assets, including internal-use software and website development, costs financed through accounts payable and accruedliabilities$219 $502 $(33)Equipment acquired under capital lease obligations2,563 — 5,077Lapse of rescission rights of redeemable stock— — 582 See accompanying notes to consolidated financial statements.71Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements1. BUSINESS AND ORGANIZATIONAs used herein, "Overstock," "Overstock.com," "O.co," "we," "our" and similar terms include Overstock.com, Inc. and its subsidiaries, unlessthe context 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 decor, bedding andbath, housewares, jewelry and watches, apparel and designer accessories, electronics and computers, and sporting goods, among other products. We also sellhundreds of thousands of best seller and current run books, magazines, CDs, DVDs and video games ("BMMG"). We sell these products through ourInternet websites located at www.overstock.com, www.o.co and www.o.biz ("Website"). Although our three websites are located at different domain addresses,the technology and equipment and processes supporting the Website and the process of order fulfillment described herein are the same for all three websites.2. ACCOUNTING POLICIES Principles 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 financial statementsand accompanying notes. Estimates are used for, but not limited to, investment valuation, receivables valuation, revenue recognition, sales returns, incentivediscount offers, inventory valuation, depreciable lives of fixed assets and internally-developed software, goodwill valuation, intangible valuation, incometaxes, stock-based compensation, performance-based compensation, restructuring liabilities and contingencies. Actual results could differ materially fromthose 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 were $58.1 million and $76.2 million at December 31, 2013 and 2012, 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.Restricted cash was $1.6 million and $1.9 million at December 31, 2013 and 2012, respectively. Fair value of financial instruments Our financial instruments, including cash, cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities arecarried at 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; 72Table of Contents•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, 2013 (in thousands): Fair Value Measurements at December 31, 2013:Total Level 1 Level 2 Level 3Assets: Cash equivalents - Money market mutual funds$58,081 $58,081 $— $—Trading securities held in a “rabbi trust” (1)138 138 — —Total assets$58,219 $58,219 $— $—Liabilities: Deferred compensation accrual “rabbi trust” (2)$212 $212 $— $—Total liabilities$212 $212 $— $— The fair value of these financial instruments was determined using the following levels of inputs as of December 31, 2012 (in thousands): Fair Value Measurements at December 31, 2012:Total Level 1 Level 2 Level 3Assets: Cash equivalents - 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 — — 65Total liabilities$331 $266 $— $65 ___________________________________________(1) — Trading securities held in a rabbi trust are included in Other current and long-term assets in the consolidated balance sheets. (2)— Non qualified deferred compensation in a rabbi trust is included in Accrued liabilities and Other long-term liabilities in the consolidatedbalance sheets. (3)— The fair value was determined based on the income approach, in which we used internal cash flow projections over the life of the underlyinglease agreements discounted based on a credit adjusted risk-free rate of return. See the roll forward related to the restructuring accrual at Note 3—Restructuring Expense. Restricted investments We have a Non-Qualified Deferred Compensation Plan (the “NQDC Plan”) for senior management. Deferred compensation amounts are invested inmutual funds held in a “rabbi trust” and are restricted for payment to the participants of the NQDC Plan. We account for our investments held in the trust inaccordance with Accounting Standards Codification (“ASC”) No. 320 “Investments — Debt and Equity Securities”. The investments held in the trust areclassified as trading securities. The fair value of the investments held in the trust totaled $138,000 at December 31, 2013 and are included in Other current andlong-term assets in the consolidated balance sheets. Our gains and losses on these investments were immaterial for the years ended December 31, 2013 and2012.73Table of ContentsAccounts receivable Accounts receivable consist primarily of trade amounts due from customers and from uncleared credit card transactions at period end. Accountsreceivable are recorded at invoiced amounts and do not bear interest.Allowance for doubtful accounts From time to time, we grant credit to 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 $152,000 and $797,000 atDecember 31, 2013 and 2012, respectively. The decrease in the allowance for doubtful accounts was primarily due to write-offs of accounts receivable duringthe year ended December 31, 2013, which had no effect on results of operations for the period as the items had been previously reserved. Concentration of credit risk Cash equivalents include short-term, highly liquid instruments with maturities at date of purchase of three months or less. At December 31, 2013and 2012, 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 to lower of costor market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected bymanagement, additional inventory write-downs may be required. Once established, the original cost of the inventory less the related inventory allowancerepresents the new cost basis of such products. Reversal of the allowance is recognized only when the related inventory has been sold or scrapped. Prepaid inventories, net Prepaid inventories represent inventories paid for in advance of receipt. Prepaid inventories were $1.8 million and $1.9 million at December 31, 2013and 2012, 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. Total prepaids and other assets were $10.3 million at December 31, 2013 and $12.9 million, includingprecious metals of $3.1 million, at December 31, 2012. 74Table of ContentsFixed 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 the term of therelated capital lease, whichever is shorter, as follows: Life(years)Computer software2-4Computer hardware3-4Furniture and equipment3-5 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 and Comprehensive Income (Loss) as follows (in thousands): Year ended December 31,2013 2012 2011Cost of goods sold - direct$380 $470 $714Technology12,917 14,177 14,433General and administrative1,225 1,362 1,203Total depreciation and amortization, including internal-use software and website development$14,522 $16,009 $16,350 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 enhance ourWebsite and processes supporting our business. We capitalize costs incurred during the application development stage of internal-use software and amortizethese costs over the estimated useful life of two to three years. Costs incurred related to design or maintenance of internal-use software are expensed as incurred. During the years ended December 31, 2013 and 2012, we capitalized $11.4 million and $8.2 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 software andwebsite development was $8.0 million and $8.2 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, we receiverent holidays and other incentives. We recognize lease costs on a straight-line basis without regard to deferred payment terms, such as rent holidays, that deferthe commencement date of required payments. Additionally, tenant improvement allowances are amortized as a reduction in rent expense over the term of thelease. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the life of the lease, without assuming renewalfeatures, if any, are exercised. Treasury stock We account for treasury stock under the cost method and include treasury stock as a component of stockholders’ equity. Other long-term assets Other long-term assets consist primarily of long-term prepaid expenses. 75Table of ContentsImpairment of long-lived assets We review property and equipment and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carryingamount of an asset group may not be recoverable. Recoverability is measured by comparison of the assets’ carrying amount to future undiscounted net cashflows the asset group is expected to generate. Cash flow forecasts are based on trends of historical performance and management’s estimate of futureperformance, giving consideration to existing and anticipated competitive and economic conditions. If such asset group is considered to be impaired, theimpairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair values. There were no impairments tolong-lived assets recorded during the years ended December 31, 2013, 2012 and 2011. Precious Metals Our investments in precious metals were $9.7 million at December 31, 2013. At December 31, 2012, our investments in precious metals were $3.1million and were included in Prepaids and other assets in our Consolidated Balance Sheets. At December 31, 2013 these investments were comprised of $4.0million in gold and $5.7 million in silver and are stored at an off-site secure facility. Because these assets consist of actual precious metals, rather thanfinancial instruments, we account for them as a cost method investment initially recorded at cost (including transaction fees) and then adjusted to the lower ofcost of market based on an average unit cost. On an interim basis, we recognize decreases in the value of these assets caused by market declines. Subsequentincreases in the value of these assets through market price recoveries during the same fiscal year are recognized in the later interim period, but may not exceedthe total previously recognized decreases in value during the same year. Gains or losses resulting from changes in the value of our precious metal assets arerecorded in Other income (expense), net in our Consolidated Statements of Operations and Comprehensive Income (Loss). Losses on investments in preciousmetals were $1.5 million for the year ended December 31, 2013. There were no losses on investments in precious metals for the year ended December 31,2012. 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 is morelikely 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 assigned to itscarrying amount. If the carrying amount exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss, if any, iscalculated by comparing the implied fair value of the goodwill to its carrying amount. In calculating the implied fair value of goodwill, the fair value of thereporting unit is allocated to the other assets and liabilities within the reporting unit based on estimated fair value. The excess of the fair value of a reportingunit over the amount allocated to its other assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized when the carryingamount 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, 2013 and 2012. There were no impairments to goodwill recorded during the years ended December 31, 2013,2012 and 2011.Revenue recognition We derive our revenue primarily from direct revenue and fulfillment partner revenue from merchandise sales. We also earn revenue from advertisingon our shopping and other pages. We have organized our operations into two principal segments based on the primary source of revenue: direct revenue andfulfillment partner revenue (see Note 22—Business Segments). Revenue is recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery hasoccurred or the service has been provided; (3) the selling price or fee revenue earned is fixed or determinable; and (4) collection of the resulting receivable isreasonably assured. Revenue related to merchandise sales is recognized upon delivery to our customers. As we ship high volumes of packages through multiplecarriers, it is not practical for us to track the actual delivery date of each shipment. Therefore, we use estimates to determine which shipments are deliveredand, therefore, recognized as revenue at the end of the period. Our delivery date estimates are based on average shipping transit times, which are calculatedusing the following factors: (i) the type of shipping carrier (as carriers have different in-transit times); (ii) the fulfillment source (either our warehouses or thoseof our fulfillment partners); (iii) the76Table of Contentsdelivery destination; and (iv) actual transit time experience, which shows that delivery date is typically one to eight business days from the date of shipment.We review and update our estimates on a quarterly basis based on our actual transit time experience. However, actual shipping times may differ from ourestimates. We evaluate the criteria outlined in ASC Topic 605-45, Principal Agent Considerations, in determining whether it is appropriate to record the grossamount of product sales and related costs or the net amount earned as commissions. When we are the primary obligor in a transaction, are subject to inventoryrisk, have latitude in establishing prices and selecting suppliers, or have several but not all of these indicators, revenue is recorded gross. If we are not theprimary obligor in the transaction and amounts earned are determined using a fixed percentage, revenue is recorded on a net basis. Currently, the majority ofboth direct revenue and fulfillment partner revenue is recorded on a gross basis, as we are the primary obligor. 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 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. Fulfillment partner revenue Fulfillment partner revenue is derived from merchandise sales which fulfillment partners ship directly to consumers and businesses fromwarehouses maintained by our fulfillment partners. Fulfillment partner revenue comes from merchandise sales that occur primarily through our Website, butmay also occur through offline and other channels.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 and werecognize revenue ratably over the membership period. The Club O loyalty program allows members to earn reward dollars for qualifying purchases made onour Website. We also have a co-branded credit card program (see “Co-branded credit card revenue” below for more information). Co-branded cardholders arealso Club O members and earn additional reward dollars for purchases made on our Website, and from other merchants. Reward dollars earned may beredeemed on future purchases made through our Website. Club O reward dollars expire 90 days after the customer’s Club O membership expires. We accountfor these transactions as multiple element arrangements and allocate revenue to the elements using their relative fair values. We include the value of rewarddollars 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 recognize otherincome when Club O reward dollars expire or the likelihood of reward dollars being redeemed by a customer is remote (“reward dollar breakage”). Rewarddollar breakage is currently recognized when the reward dollars expire. 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 program We have a co-branded credit card agreement with a commercial bank for the issuance of credit cards bearing the Overstock.com brand, under whichthe bank pays us fees for new accounts and for customer usage of the cards. The agreement also provides for a customer loyalty program offering rewardpoints that customers will accrue from card usage and can use to make purchases on our Website (see “Club O loyalty program” above for more information).New account fees are recognized77Table of Contentsas revenue on a straight-line basis over the remaining life of the credit card relationship which runs through April 2015. Credit card usage fees are recognizedas revenues as actual credit card usage occurs. Revenues from new account and credit card usage fees were less than 1% of total net revenues for all periodspresented.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 purchases asdeferred revenue at the time they are earned and we recognize it as revenue upon redemption. If reward dollars are not redeemed, we recognize other income uponexpiration. In addition, we sell gift cards and record related deferred revenue at the time of the sale. We sell gift cards without expiration dates and we recognizerevenue from a gift card upon redemption of the gift card. If a gift card is not redeemed, we recognize other income when the likelihood of its redemptionbecomes remote based on our historical redemption experience. We consider the likelihood of redemption to be remote after 36 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 of delivery,for most products we refund the full cost of the merchandise minus the original shipping charge and actual return shipping fees. However, we reduce refundsfor returns initiated more than 30 days after delivery or that are received at our returns processing facility more than 45 days after initial delivery. 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 and actualreturn shipping fees. Revenue is recorded net of estimated returns. We record an allowance for returns based on current period revenues and historical returns experience.We analyze actual historical returns, current economic trends and changes in order volume and acceptance of our products when evaluating the adequacy ofthe sales returns allowance in any accounting period. The allowance for returns was $13.2 million and $10.6 million at December 31, 2013 and 2012 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 $94,000 and $182,000 at December 31, 2013 and 2012, 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 other costsand fulfillment and related costs are as follows (in thousands): Year ended December 31,2013 2012 2011Total revenue, net$1,304,217 100% $1,099,289 100% $1,054,277 100%Cost of goods sold Product costs and other cost of goods sold999,519 77% 848,842 77% 821,739 78%Fulfillment and related costs57,038 4% 52,017 5% 53,450 5%Total cost of goods sold1,056,557 81% 900,859 82% 875,189 83%Gross profit$247,660 19% $198,430 18% $179,088 17%78Table of Contents Advertising expense We expense the costs of producing advertisements the first time the advertising takes place and expense the cost of communicating advertising in theperiod during which the advertising space or airtime is used. Internet advertising expenses are recognized as incurred based on the terms of the individualagreements, which are generally: 1) a commission for traffic driven to the Website that generates a sale or 2) a referral fee based on the number of clicks onkeywords or links to our Website generated during a given period. Advertising expense is included in sales and marketing expenses and totaled $82.1 million,$55.6 million and $52.5 million during the years ended December 31, 2013, 2012 and 2011, respectively. Prepaid advertising (included in Prepaids andother assets in the accompanying consolidated balance sheets) was $1.4 million and $1.2 million at December 31, 2013 and 2012, respectively. Stock-based compensation We measure compensation expense for all outstanding unvested share-based awards at fair value on the date of grant and recognize compensationexpense over the service period for awards expected to vest at the greater of a straight line basis or on an accelerated schedule when vesting of restricted stockawards exceeds a straight line basis. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ fromestimates, such amounts will be recorded as an adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures,including types of awards, and historical experience. Actual results may differ substantially from these estimates (see Note 17—Stock-Based Awards). Loss contingencies In the normal course of business, we are involved in legal proceedings and other potential loss contingencies. We accrue a liability for such matterswhen it is probable that a loss has been incurred and the amount can be reasonably estimated. When only a range of probable loss can be estimated, the mostprobable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount inthe range is accrued. We expense legal fees as incurred (see Note 13—Commitments and Contingencies). 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, the terminationcosts should be recognized and measured at fair value when the entity ceases using the facility. Key assumptions in determining the restructuring expensesinclude 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 which theyarise, we consider all available positive and negative evidence, including projected future taxable income, scheduled reversals of our deferred tax liabilities, taxplanning strategies and results of recent operations.At December 31, 2013 based on our evaluation of the positive and negative evidence described in Note 20—Income Taxes, we concluded that thepositive evidence outweighed the negative evidence and that it was more likely than not that we will realize all of our deferred tax assets. Consequently, atDecember 31, 2013 we reduced our deferred tax asset valuation allowance to zero. At December 31, 2012, we had a full valuation allowance against ourdeferred tax asset, net of expected reversals of existing deferred tax liabilities. We have tax deductions from stock-based compensation that exceed the stock-based compensation recorded for such instruments. To the extent suchexcess tax benefits are ultimately realized, they will increase shareholders’ equity. We utilize the with-and-without approach in determining if and when suchexcess tax benefits are realized, and under this approach excess tax benefits related to stock based compensation are the last to be realized. 79Table of ContentsEarnings (loss) per share Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common shares by the weighted average number of commonshares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) attributable to common shares for the periodby the weighted average number of common and potential common shares outstanding during the period. Potential common shares, comprising incrementalcommon shares issuable upon the exercise of stock options and restricted stock awards are included in the calculation of diluted earnings (loss) per commonshare 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):Year ended December 31,2013 2012 2011Net income (loss)$88,509 $14,669 $(19,438) Deemed dividend related to redeemable common stock— — (12)Net income (loss) attributable to common shares$88,509 $14,669 $(19,450)Net income (loss) per common share—basic: Net income (loss) attributable to common shares—basic$3.73 $0.63 $(0.84)Weighted average common shares outstanding—basic23,714 23,387 23,259Effect of dilutive securities: Stock options and restricted stock awards580 285 —Weighted average common shares outstanding—diluted24,294 23,672 23,259Net income (loss) attributable to common shares—diluted$3.64 $0.62 $(0.84) The following shares were excluded from the calculation of diluted shares outstanding as their effect would have been anti-dilutive (in thousands):Year ended December 31,2013 2012 2011Stock options and restricted stock units154 537 927Accounting pronouncements adoptedWe adopted ASU 2013-11, which clarifies current guidance by eliminating diversity in practice on the financial statement presentation of anunrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments generally clarifyFASB ASC Topic 740 by specifying that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financialstatements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, subject to certainexceptions. The adoption of ASU 2013-11 did not 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 in aneffort to improve future operating performance. The facilities consolidation and restructuring program was substantially completed by the end of the secondquarter of 2007. 80Table of ContentsRestructuring liabilities along with charges (credits) to expense and payments associated with the facilities consolidation and restructuring programare as follows (in thousands): Balance atBeginning of Year AccretionExpense Net CashPayments Adjustments Balance at End ofYearYear ended December 31, 2013$1,197 $71 $(352) $(471) $445Year ended December 31, 2012$1,491 $143 $(513) $76 $1,197 During the year ended December 31, 2013 we reversed approximately $471,000 of lease termination costs primarily due to changes in ourrestructuring accrual as a result of our reoccupation of a portion of formerly restructured office space. We incurred $76,000 of restructuring charges during theyear ended December 31, 2012 due to changes in the estimate of sublease income as a result of our entering into a new sublease agreement and ceasing the useof some of our office facilities.4. COMPREHENSIVE INCOME (LOSS)Our comprehensive income (loss) is as follows (in thousands): Year ended December 31, 2013 2012 2011Net income (loss) $88,509 $14,669 $(19,438)Components of other comprehensive income, net of tax — — —Comprehensive income (loss) $88,509 $14,669 $(19,438)5. ACCOUNTS RECEIVABLEAccounts receivable consist of the following (in thousands): December 31, 2013 2012Accounts receivable, other $10,098 $10,888Credit card receivables 6,101 9,182 16,199 20,070Less: allowance for doubtful accounts (152) (797)Accounts receivable, net $16,047 $19,2736. INVENTORIESInventories consist of the following (in thousands): December 31, 2013 2012Product inventory $18,841 $18,044Inventory in-transit 8,202 8,420Total inventories, net $27,043 $26,46481Table of Contents7. PREPAIDS AND OTHER ASSETSPrepaids and other assets consist of the following (in thousands): December 31, 2013 2012Prepaid maintenance $6,949 $6,494Prepaid other 1,993 2,148Prepaid advertising 1,356 1,200Investment in precious metals — 3,055Total prepaids and other assets $10,298 $12,8978. FIXED ASSETSFixed assets consist of the following (in thousands): December 31, 2013 2012Computer hardware and software, including internal-use software and website development $170,702 $151,155Furniture and equipment 14,457 14,283Leasehold improvements 6,539 6,339 191,698 171,777Less: accumulated depreciation and amortization (164,504) (150,740)Total fixed assets, net $27,194 $21,037Depreciation and amortization of property and equipment totaled $14.5 million, $16.0 million, and $16.4 million for the years ended December 31,2013, 2012 and 2011, respectively. Fixed assets included assets under capital leases of $4.2 million and $1.7 million, and accumulated amortization related toassets under capital leases of $2.1 million and $1.7 million at December 31, 2013 and 2012, respectively.9. OTHER LONG-TERM ASSETSOther long-term assets consist of the following (in thousands): December 31, 2013 2012Prepaid expenses, long-term portion $1,585 $1,816Prepaid other 438 350Total other long-term assets, net $2,023 $2,16682Table of Contents10. ACCRUED LIABILITIESAccrued liabilities consist of the following (in thousands): December 31, 2013 2012Accrued marketing expenses $13,715 $6,172Allowance for returns 13,232 10,618Accounts payable accrual 10,870 8,416Other accrued expenses 9,934 4,034Accrued compensation and other related costs 8,558 9,135Accrued freight 4,276 2,761Accrued taxes 1,833 2,349Facility lease accruals 567 1,653Inventory received but not invoiced 864 700Accrued professional expenses 824 760Credit card processing fee accrual 700 584Short term portion of restructuring accrual (Note 3) 306 492Total accrued liabilities $65,679 $47,67411. DEFERRED REVENUEDeferred revenue consists of the following (in thousands): December 31, 2013 2012Payments owed or received prior to product delivery $24,402 $29,280Club O membership fees and reward points 5,697 3,579Unredeemed gift cards 3,061 2,973In store credits 2,400 1,030Other 1,761 1,549Total deferred revenue $37,321 $38,41112. BORROWINGS U.S. Bank Financing Agreements On December 26, 2012, we entered into a $3.0 million cash-collateralized line of credit agreement (the “Credit Agreement”) with U.S. Bank NationalAssociation (“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 CreditAgreement matures on December 31, 2014. Amounts outstanding under the Credit Agreement were zero at December 31, 2013 and 2012. Until December 31, 2012, we were party to a Financing Agreement with U.S. Bank (the “Financing Agreement”). In November 2012, we repaid allamounts outstanding under the Financing Agreement. The Financing Agreement expired in accordance with its terms on December 31, 2012. The maximumcredit potentially available under the revolving facility was $20 million. Our obligations under the Financing Agreement and all related agreements were securedby all or substantially all of our assets, excluding our interest in certain litigation.83Table of ContentsAt December 31, 2013 and 2012, letters of credit totaling $1.6 million and $1.8 million, respectively, were issued on our behalf collateralized bycompensating cash balances held at U.S. Bank, which are included in Restricted cash in the accompanying consolidated balance sheets. U.S. Bank Commercial Purchasing Card Agreement We have a commercial purchasing card (the “Purchasing Card”) agreement with U.S. Bank. We use the Purchasing Card for business purposepurchasing and must pay it in full each month. At December 31, 2013, $517,000 was outstanding and $4.5 million was available under the PurchasingCard. At December 31, 2012, $3.9 million was outstanding and $1.1 million was available under the Purchasing Card.Capital leasesIn March 2013, we entered into a capital lease arrangement for $2.6 million of computer equipment that will expire in 2017. We prepaid the entire$2.6 million shortly after entering into the agreement in order to obtain discounted pricing. As such, we have no future payment obligations under capitalleases at December 31, 2013. Fixed assets included assets under capital leases of $4.2 million and $1.7 million and accumulated depreciation related to assets under capital leasesof $2.1 million and $1.7 million, at December 31, 2013 and 2012, respectively. Depreciation expense of assets recorded under capital leases was $429,000and $221,000, for the years ended December 31, 2013 and 2012, respectively.13. COMMITMENTS AND CONTINGENCIESSummary of future minimum lease payments for all operating leasesMinimum future payments under all operating leases as of December 31, 2013, are as follows (in thousands): Payments due by period: 2014$11,00420158,75120164,85920173,92220183,826Thereafter32,437 $64,799Rental expense for operating leases totaled $10 million, $8.5 million and $8.9 million for the years ended December 31, 2013, 2012 and 2011,respectively. There is no estimated sublease income expected over the next five years.On May 13, 2013 we entered into a new operating lease for a warehouse facility that we have leased since September 2008. This lease extends the termof occupancy to August 31, 2026. The minimum future payments due under this new operating lease are included in the summary of future minimum leasepayments for all operating leases in the table above.Naming rightsDuring 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 to terminate thisagreement at our sole option, subject to payment of a termination fee.84Table of ContentsMinimum future payments under naming rights agreement as of December 31, 2013, are as follows (in thousands): Payments due by period 2014$1,31120151,35120161,391Thereafter— $4,053Legal 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 may proveunenforceable or non-collectible, and in the event we cannot enforce or collect on indemnification obligations, we may bear the full responsibility for damages,fees and costs resulting from such litigation. We may also be subject to penalties and equitable remedies that could force us to alter important businesspractices. Such litigation could be costly and time consuming and could divert or distract our management and key personnel from our business operations.Due to the uncertainty of litigation and depending on the amount and the timing, an unfavorable resolution of some or all of these matters could materiallyaffect 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 Francisco againstMorgan 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 later amended the complaint to add Lehman Brothers Holdings Inc. as a defendant. The suit alleged that the defendants, who controlled over 80% of theprime brokerage market, participated in an illegal stock market manipulation scheme and that the defendants had no intention of covering short sell orderswith 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 tocause dramatic declines in the share price of our stock and that the amount of “fails to deliver” often exceeded our entire supply of outstanding shares. The suitaccused the defendants of violations of California securities laws and common law and violations of California’s Unfair Business Practices Act. After it filedfor bankruptcy on September 2008, we elected not to pursue our claims against Lehman Brothers Holdings. On July 23, 2009, the court sustaineddefendants’ demurrer to our amended causes of action for conversion and trespass to chattels. On December 15, 2010, we and the other plaintiffs in the caseentered into a settlement agreement with certain of the defendants requiring these defendants to pay in the aggregate $4.5 million to plaintiffs. Other terms ofsettlement are confidential. At that time, remaining defendants in the suit were Goldman Sachs Group, Inc., Goldman Sachs & Co., Goldman SachsExecution & Clearing L.P., (“Goldman Defendants”) Merrill Lynch, Pierce, Fenner & Smith, Inc., Merrill Lynch Professional Clearing Corporation (“MerrillLynch Defendants), and Bank of America Securities LLC. On December 15, 2010, we filed a motion to amend our complaint against the Goldman andMerrill Lynch Defendants to add a cause of action based on the New Jersey Racketeer Influenced and Corrupt Organization (RICO) Act. Defendants challengedthe RICO claim by demurrer and eventually the court sustained the demurrer. We thereafter entered a settlement agreement with Bank of AmericaSecurities LLC, the terms of which are confidential, and have dismissed the action as to that defendant. On August 19, 2011, the remaining defendants fileda motion for summary judgment. On January 10, 2012, the court granted the motion for summary judgment as to all remaining defendants and the judgmenthas been entered. We have appealed that decision and each side has appealed the trial court’s decisions regarding sealing of certain records in the case. Thedefendants applied to the court for reimbursement from us of their allowable court costs in the collective amount of $2.4 million. We challenged theapplication, and the court reduced the amount to $689,471, which will be payable only if we do not succeed on our appeal of the summary judgment. Thebriefing of the appeals on both the records sealing and summary judgment is complete. The Court of Appeal has not set a date for oral argument. The nature ofthe 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, its Commissioner,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 to require Internet sellersto collect and remit New York sales taxes on their New York sales even if the seller has no New York tax “nexus” other than with New York based independentcontractors who are Internet advertising affiliates. The complaint asked for the court to declare the law unconstitutional and enjoin its85Table of Contentsapplication to us. New York filed a motion to dismiss. We responded to the motion and filed a motion for summary judgment, and both motions were heardsimultaneously. On January 12, 2009, the court granted New York’s motion to dismiss and denied our motion for summary judgment. We appealed thedecision, and the New York Appellate Division upheld part of the lower court’s ruling rejecting our claims that the law is unconstitutional on its face, butremanded to the trial court our claims that the law is unconstitutional as applied. We filed with the New York State Court of Appeals a motion for leave toappeal the portions of the decision upholding the lower court’s ruling. On March 15, 2011, the Appellate Division of the New York State Court of Appealsdenied our motion. We then determined not to pursue in the trial our claims that the law is unconstitutional as applied and proceeded with an appeal to the NewYork State Court of Appeals of the Appellate Division’s ruling on our claim that the statute is unconstitutional on its face. On March 28, 2013, New YorkState Court of Appeals denied the appeal. We petitioned the Supreme Court of the United States for a writ of certiorari which was denied on December 2, 2013,concluding the appeal and the case. On August 12, 2008, we along with seven other defendants, were sued in the United States District Court for the Northern District of California, bySean 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 and ComputerCrime Law. The complaint relates to our use of a product known as Facebook Beacon. The Plaintiff and Facebook proposed a stipulated settlement to theCourt for approval, which would resolve the case without requirement of financial contribution from us. On March 17, 2010, over objections lodged by someparties, the Court entered an order accepting settlement. Various parties appealed and the Federal Appeals Court for the 9th Circuit upheld the settlement.Appealing parties petitioned for a rehearing which the Court denied. The appealing parties petitioned the Supreme Court of the United States for a writ ofcertiorari, which was denied November 4, 2013, concluding the case. On November 14, 2008, we filed suit in Ohio state court against the Ohio Tax Commissioner, the Ohio Attorney General and the Governor of Ohio,alleging the Ohio Commercial Activity Tax is unconstitutional. Enacted in 2005, Ohio’s Commercial Activity Tax is based on activities in Ohio that contributeto production or gross income for a company whether or not the company has a physical presence, or “nexus,” within the state. Our complaint asked for ajudgment declaring the tax unconstitutional and for an injunction preventing enforcement of the tax. The defendants moved to dismiss. On July 28, 2009, thetrial court granted the defendants’ motions to dismiss. In September 2009, we received a letter of determination from the Ohio Department of Taxation notingthe Department’s determination that we were required to register for remitting of the Commercial Activity Tax, and owed $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$170,322 as of September 30, 2013. We filed protests to challenge the Department’s Assessments on constitutional grounds. A hearing on these matters washeld November 18, 2011. Before a ruling issued, we reached an agreement in principle with the Ohio Department which required our payment of a diminishedamount of the estimated assessments, a reduction in interest and waiver of penalties, and the case is now concluded. On September 23, 2009, SpeedTrack, Inc. sued us along with 27 other defendants in the United States District Court in the Northern District ofCalifornia. We are alleged to have infringed a patent covering search and categorization software. We believe that certain third party vendors of products andservices sold to us are contractually obligated to indemnify us in this action. On November 11, 2009, the parties stipulated to stay all proceedings in the caseuntil resolution of a reexamination of the patent in question, and also until a previously filed infringement action against Wal-Mart Stores, Inc. and otherretailers resulted either in judgment or dismissal. Subsequently, the parties agreed to extend the time for defendants’ complaint answer until 21 days followinga court order to lift the stay to which the parties stipulated. The United States Patent and Trademark Office resolved the reexamination of the patent in questionin favor of SpeedTrack, Inc. The case remains stayed, pending the outcome and appeal of the infringement action against Wal-Mart Stores, Inc. and otherretailers. On February 22, 2012, the court in the Wal-Mart Stores case granted Wal-Mart Stores’ motion for summary judgment of non-infringement. Thecourt also 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 nature of theloss 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. Weintend to vigorously defend this action and pursue our indemnification rights with our vendors.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 Bankruptcy Codesections and the Minnesota Fraudulent Transfer Act, to recover damages for alleged transfers of property from the Petters Company occurring prior to thefiling of the case initially as a civil receivership in October 2008. The trustee’s complaint alleges such transfers occurred in at least one note transactionwhereby86Table of Contentswe transferred at least $2.3 million and received in return transfers totaling at least $2.5 million. The trustee does not specify a date for the transactions;however we believe that any alleged transaction with the Petters Company would have taken place in excess of seven years from the date of the filing of theadversary proceeding. The case is in its discovery stages. We filed a motion to dismiss on statute of limitations and other grounds. The court consolidated theissues in our motion with issues raised by motion in similar trustee-filed cases. The court issued legal rulings on these consolidated legal issues, and hasallowed portions of the case to proceed to the discovery stage. 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 Counties ofAlameda, Marin, Monterey, Napa, Santa Clara, Shasta and Sonoma County, and the County of Santa Cruz later joined the suit. These district attorneyssought damages and an injunction under claims for violations of California consumer protection laws, alleging we made untrue or misleading statementsconcerning our pricing, price reductions, sources of products and shipping charges. The complaint asked for damages in the amount of not less than $15million. We tried the case in September 2013 before the judge of the court and made final arguments in December 2013. On January 3, 2014, the court issued atentative ruling in favor of the District Attorneys, which became a final Statement of Decision on February 5, 2014. The decision provides for an injunctionthat prescribes disclosures necessary for certain types of price advertising and price reductions and imposes civil penalties of $3,500 per day for practicesfrom March 2006 through September 2008, and $2,000 per day for September 2008 through September 2013, totaling $6.8 million. The court issued a FinalJudgment February 19, 2014 reflecting the Court’s Statement of Decision. Plaintiff may apply to the court for a reimbursement of costs. It is unknownwhether the plaintiff will request or have entitlement to an award of attorneys fees, or whether the court would grant any such request. While we intend tocomply with the judgment, we will appeal. We will likely have to post an appeal bond under California rules or alternatively, by agreement, provide some formof surety in the amount of the ordered penalty. The nature of the loss contingencies relating to claims that have been asserted against us are described above. Weintend to continue 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 the complaint. Thecase is in its discovery stages and has been scheduled for trial in January 2015. The nature of the loss contingencies relating to claims that have been assertedagainst 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 ourindemnification rights with our 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 was denied. Thecase is in its discovery stages. The nature of the loss contingencies relating to claims that have been asserted against us are described above. However, noestimate of the loss or range of loss can be made. We intend to vigorously defend this action and pursue our indemnification rights, if any, 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 for infringementof two patents covering a system for coordinating data and voice communications via customer contact channel changing system using voice over IP andinfringement of one patent for coordinating data and voice communications via customer contact channel changing system. We answered the complaint. Wetendered the defense of the case to an indemnitor. The case against us was stayed July 10, 2012, pending resolution of a declaratory judgment action filed byour indemnitor against Pragmatus. Our indemnitor reached a settlement agreement with Pragmatus, requiring no payment from us, and on February 7, 2014the case was dismissed. 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 for infringementof a patent entitled “Internet Protocol (IP) Phone with Search and Advertising Capability.” We answered the complaint. On January 28, 2013, we filed a motionfor summary judgment for invalidity on two claims of the patent. On September 23, 2013, the court granted the motion. H-W Technology has appealed. Wehave applied to the court for court-ordered reimbursement of our legal fees and costs expended in our defense. 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 the complaint.The case is in its discovery stages. The nature of the loss87Table of Contentscontingencies 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. Weintend to vigorously defend this action and pursue our indemnification rights with our vendors. On July 16, 2012, Digitech Image Technologies, LLC filed against us and 45 other defendants in the United States District Court for the CentralDistrict of California for infringement of a patent covering the imaging technology that facilitates prediction of color and location within digital cameras. Theinitial case was dismissed, but in September 2012, Digitech filed a new complaint on the same infringement claims. Subsequently, the court granted a motionfor summary judgment on invalidity of the patent and entered judgment for us. Digitech has appealed. The appeal is in the briefing stages. The nature of theloss 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. Weintend 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. We haveanswered the complaint. The case is in its discovery 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 our indemnificationrights with our vendors. On February 11, 2013, RPost Holdings, Inc., RPost Communications Limited, and RMail Limited, filed suit against us in the United States DistrictCourt in Eastern District of Texas for infringement of patents covering products and services that verify the delivery and integrity of email messages. Wetendered defense of the case to an indemnitor which accepted the defense. We have answered the complaint. The case is in its early stages. The nature of theloss 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. Weintend to vigorously defend this action and pursue our indemnification rights with our vendors. On April 23, 2013, Eclipse IP, LLC filed suit against us in the United States District Court in Eastern District of Texas for infringement of patentscovering “secure notification messaging systems and methods using authentication indicia.” We were served with the complaint on May 10, 2013, andanswered the complaint. Eclipse IP recently advised us that it intended not to pursue its alleged claims against us, and it dismissed its case against us withprejudice on February 21, 2014.On August 16, 2013, Online News Link LLC, LLC filed suit against us in the United States District Court in District of Delaware for infringementof patents covering data distribution systems that can make downloading data fast and efficient. We are examining whether we are indemnified by any vendor.We were served with the complaint on August 19, 2013. The case is in its early stages. The nature of the loss contingencies relating to claims that have beenasserted against us are described above. However, no estimate of the loss or range of loss can be made. We intend to vigorously defend this action and pursueany indemnification rights with our vendors.On January 3, 2014, Guardian Media Technologies LTD filed suit against us in the United States District Court in the Eastern District of Texas forinfringement of patents covering parental control features in DVD players and televisions. The suit relates to two prior lawsuits with Guardian filed in 2008,and in 2013, which were previously dismissed. We are examining whether we are indemnified by any vendor in this subsequent suit. 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 loss or rangeof loss can be made. We intend to vigorously defend this action and pursue any indemnification rights with our vendors. On September 30, 2013, Altaf Nazerali filed suit against us in the Supreme Court of British Columbia for vicarious liability for defamation, liableand slander. The suit relates to alleged representations about Nazerali found on the website www.deepcapture.com. The suit alleges that the representations weremade by our Chief Executive Officer, Patrick Byrne, and two other employees. The case is in its early stages. The nature of the loss contingencies relating toclaims that have been asserted against us are described above. However, no estimate of the loss or range of loss can be made.We establish liabilities when a particular contingency is probable and estimable. At December 31, 2013, we have accrued $8.5 million in light ofthese probable and estimable liabilities. It is reasonably possible that the actual losses may exceed our accrued liabilities. We have other contingencies which arereasonably possible; however, the reasonably possible exposure to losses cannot currently be estimated.88Table of Contents14. 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 facility leasesfor certain claims arising from such facility or lease, and indemnities to our directors and officers to the maximum extent permitted under the laws of the Stateof Delaware. The duration of these indemnities, commitments, and guarantees varies, and in certain cases, is indefinite. In addition, the majority of theseindemnities, commitments, and guarantees do not provide for any limitation of the maximum potential future payments we could be obligated to make. Assuch, we are unable to estimate with any reasonableness our potential exposure under these items. We have not recorded any liability for these indemnities,commitments, and guarantees in the accompanying consolidated balance sheets. We do, however, accrue for losses for any known contingent liability,including those that may arise from indemnification provisions, when future payment is both probable and reasonably estimable.15. STOCKHOLDERS' EQUITYCommon StockEach share of common stock has the right to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legallyavailable and when declared by the board of directors, subject to prior rights of holders of all classes of stock outstanding having priority rights as todividends. No dividends have been declared or paid on our common stock through December 31, 2013.16. STOCK AND DEBT REPURCHASE PROGRAMWe 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 in aloss of $54,000 on early extinguishment of debt, net of $77,000 of associated unamortized discount. Of the $34.6 million in Senior Notes retired during theyear 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 heldby Fairfax Financial Holdings Limited or an affiliate of Fairfax ("Fairfax"). Chou and Fairfax are beneficial owners of more than 5% of our common stock.17. STOCK-BASED AWARDSStock Option AwardsOur 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 and directorsof the Company and non-qualified stock options to consultants, as well as restricted stock units and other types of equity awards of the Company. Optionsgranted under this Plan generally expire at the end of ten years and vest on a straight line basis in accordance with a vesting schedule determined by our boardof directors, usually over four years from the grant date. We did not grant any options during the years ended December 31, 2013, 2012 and 2011. AtDecember 31, 2013, 2.8 million shares of stock remained available for future grants under the Plan. We settle stock option exercises with newly issuedcommon shares.89Table of ContentsThe following is a summary of stock option activity (in thousands, except per share data): 2013 2012 2011 Shares WeightedAverageExercisePrice Shares WeightedAverageExercisePrice Shares WeightedAverageExercise PriceOutstanding—beginning of year 364 $17.34 405 $17.58 496 $18.09Exercised (89) 17.45 — — — —Expired/Forfeited (2) 17.08 (41) 20.06 (91) 20.55Outstanding—end of year 273 $17.30 364 $17.34 405 $17.58Options exercisable at year-end 273 $17.30 364 $17.34 404 $17.59The following table summarizes information about stock options as of December 31, 2013 (in thousands, except per share data):Options Outstanding Options ExercisableShares WeightedAverageExercisePrice WeightedAverageRemainingContract Life AggregateIntrinsicValue Shares WeightedAverageExercisePrice WeightedAverageRemainingContract Life AggregateIntrinsicValue273 $17.30 3.11 $3,695 273 $17.30 3.11 $3,695Stock 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, 2013, 2012and 2011, we recorded stock based compensation related to stock options of $0, $3,000 and $200,000, respectively.Total unrecognized compensation costs related to nonvested stock option awards was approximately $0, $0 and $3,000 as of December 31, 2012,2012 and 2011, respectively.The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our stock price of $30.79 as of December 31,2013, 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, 2013, 2012 and 2011 was $728,000, $0, and $0, respectively.The total cash received from employees as a result of employee stock option exercises during the years ended December 31, 2013, 2012 and 2011 wereapproximately $1.6 million, $0, and $0, respectively. In connection with these exercises, there was no tax benefit realized due to our net operating lossposition.Restricted Stock AwardsFor the years ended December 31, 2013, 2012 and 2011, we granted 275,000, 795,000 and 268,000 restricted stock units, respectively. The cost ofrestricted stock units is determined using the fair value of our common stock on the date of the grant and we recognize compensation expense over the threeyear vesting schedule on a straight line basis or on an accelerated schedule when vesting of restricted stock awards exceeds a straight line basis. The weightedaverage grant date fair value of restricted stock units granted during the years ended December 31, 2013, 2012 and 2011 was $16.12, $6.75 and $15.47,respectively.90Table of ContentsThe following table summarizes restricted stock award activity (in thousands): 2013 2012 2011 Units WeightedAverageGrant DateFair Value Units WeightedAverageGrant DateFair Value Units WeightedAverageGrant DateFair ValueOutstanding—beginning of year1,003 $8.81 522 $13.40 685 $12.08Granted at fair value275 16.12 795 6.75 268 15.47Vested(339) 10.23 (240) 12.11 (318) 12.20Forfeited(235) 9.38 (74) 8.25 (113) 13.88Outstanding—end of year704 $10.79 1,003 $8.81 522 $13.40Restricted stock units granted in 2013 vest over three years at 40% at the end of the first year, 30% at the end of the second year and 30% at the end ofthe third year. 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, 2013, 2012 and 2011, we recorded stock based compensation related to restricted stock units of $3.3 million, $3.5 million and $2.8 million,respectively. Changes to the estimated forfeiture rate are accounted for as a cumulative effect of change in the period of such change.Subsequent to 2013, we granted 232,000 additional restricted stock units. These restricted stock units vest over three years at 33.3% at the end ofeach of the first, second and third years.18. EMPLOYEE RETIREMENT PLANWe 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. During the years ended December 31, 2013, 2012 and 2011, employees who have completed a half-year of serviceand are 21 years of age or older are qualified to participate in the plan which provided matches of 50% of the first 6% of each participant's contributions to theplan subject to IRS limits. Our contributions will vest based on the participant's years of service at 20% per year over five years. Participant contributions areimmediately vested. Our matching contribution totaled $1.0 million, $653,000 and $991,000 for the years ended December 31, 2013, 2012 and 2011,respectively. No discretionary contributions were made to eligible participants for the years ended December 31, 2013, 2012 and 2011, respectively. During2013, we announced a change to our 401(k) plan that we expect to be effective in 2014 whereby we will match 100% of the first 6% of each participant'scontributions to the plan subject to IRS limits, and that our matching contributions will vest immediately.We have a Non-Qualified Deferred Compensation Plan for senior management. The plan allows eligible members of senior management to defer theirreceipt of compensation from us, subject to the restrictions contained in the plan. Participants are 100% vested in their deferred compensation amounts and theassociated gains or losses. For our contributions, if any, and the associated gains or losses, the participants shall vest in those deferred compensation amountsaccording to a vesting schedule that we shall determine at the time our contribution is made. As of December 31, 2013, we have not made any contributionsinto the NQDC Plan. Participants are generally eligible to receive distributions from the plan two plan years subsequent to the plan year their initial deferralcontribution is made. Deferred compensation amounts are held in a "rabbi trust," which invests primarily in mutual funds. The trust assets, which consistprimarily of mutual funds, are recorded in our consolidated balance sheets because they are subject to the claims of our creditors. The corresponding deferredcompensation liability represents the amounts deferred by the plan participants plus or minus any earnings or losses on the trust assets. The trust's assetstotaled $138,000 and $264,000 at December 31, 2013 and December 31, 2012, respectively, and are included in Other current and long-term assets in theconsolidated balance sheets. Gains and losses on these investments were immaterial for the years ended December 31, 2013, 2012 and 2011.91Table of Contents19. OTHER INCOME (EXPENSE), NETOther income (expense), net consisted of the following (in thousands): Years ended December 31, 2013 2012 2011Gift card and Club-O rewards breakage $1,187 $3,308 $971Other 35 23 (13)Loss on precious metals (1,457) — —Sublease income — 355 573Gain (loss) from early retirement of convertible senior notes — — (54)Loss from early retirement of finance obligations — — (1,199)Total other income (expense), net $(235) $3,686 $27820. INCOME TAXES The provision (benefit) for income taxes consists of the following (in thousands): Years ended December 31, 2013 2012 2011Current: Federal $196 $416 $(254)State 239 39 69Foreign 51 30 43Total current 486 485 (142)Deferred: Federal (63,012) — —State (9,639) — —Total deferred (72,651) — —Total provision (benefit) for income taxes $(72,165) $485 $(142)The income tax provision differs from the amount computed by applying the U.S. federal income tax rate of 35% to income (loss) before incometaxes for the following reasons (in thousands): Year ended December 31, 2013 2012 2011U.S. federal income tax provision (benefit) at statutory rate $5,720 $5,303 $(6,853)Adjustment to reserves in prior years (1) 4,418 — —Non-deductible fines and penalties 2,387 — —Other 242 (1,764) 30Lobbying expenses 209 — —Stock based compensation expense (176) 1 70Research and development credit (6,069) — —State income tax expense, net of federal benefit (8,097) 44 45Change in valuation allowance (70,799) (3,099) 6,566Income tax provision (benefit) $(72,165) $485 $(142) ___________________________________________(1) Adjustments to reserves in prior years includes (1) the effects of reconciling income tax amounts recorded in our Consolidated Statements ofOperations and Consolidated Income (Loss) to amounts reflected on our tax returns, including any adjustments to the Consolidated BalanceSheets; and (2) reductions to the NOLs from previous acquisitions.92Table of ContentsWe account for income taxes in accordance with ASC Topic 740, Income Taxes (“ASC 740”). ASC 740 requires an asset and liability approach formeasuring deferred taxes based on temporary differences between the financial statement and tax bases of assets and liabilities existing at each balance sheetdate using enacted tax rates for years in which taxes are expected to be paid or recovered.The components of our deferred tax assets and liabilities as of December 31, 2013 and 2012 are as follows (in thousands): December 31, 2013 2012Deferred tax assets: Net operating loss carryforwards $60,311 $68,659R&D tax credits 6,069 —AMT and other tax credits 664 499Accrued expenses 5,690 4,469Reserves and other 4,565 7,464Gross deferred tax assets 77,299 81,091Valuation allowance — (79,693)Total deferred tax assets 77,299 1,398Deferred tax liabilities: Fixed assets (3,291) (1,398)Prepaid expenses (1,357) —Total deferred tax liabilities (4,648) (1,398)Total deferred tax assets, net $72,651 $—At December 31, 2013 and 2012, we had federal net operating loss carryforwards of approximately $152.2 million and $174.1 million and state netoperating loss carryforwards of approximately $141.2 million and $151.6 million, respectively, which may be used to offset future taxable income. Therewas an Internal Revenue Code section 382 study completed during 2013 and the amounts above reflect the NOLs that can be realized. Of the total federal andstate NOLs, $13.5 million was generated from stock option deductions and are not reflected in our deferred tax assets. The net benefit of $5.2 million will becredited to additional paid-in capital in our consolidated balance sheets under the "with-and-without" method of utilization for tax attributes. We utilize thewith-and-without approach in determining if and when such excess tax benefits are realized, and under this approach excess tax benefits related to stock basedcompensation are the last to be realized. Our NOLs begin to expire in 2020 to 2031 if unused.In 2013, we performed a research and development (R&D) tax credit study for the periods 2007 to 2013. The study resulted in federal and stateincome tax credits of $4.0 million and $2.1 million, respectively. These tax credits expire at various dates between 2021 and 2033. We do not have anyindefinite lived intangibles and the remaining deferred tax assets have no expiration date.Each quarter we assess the recoverability of our deferred tax assets under ASC 740. We are required to establish a valuation allowance for any portionof the assets that we conclude is not more likely than not realizable. Our assessment considers, among other things, the three year cumulative net income,positive pretax net income and taxable income, forecasts of our future taxable income, carryforward periods, our utilization experience with operating loss andtax credit carryforwards and tax planning strategies.As of December 31, 2013, we had a $72.7 million of deferred tax assets (net of deferred tax liabilities). During the years ended December 31, 2013and 2012, we had taxable income of $9.9 million and $18.9 million, respectively, and our valuation allowance changed by $79.7 million and $3.9 million,respectively. At December 31, 2013, we determined that we need to generate approximately $163.5 million of pre-tax income in future periods to realize ourdeferred tax assets. The annual minimum amount of taxable income required to utilize our expiring deferred tax assets is $10.9 million. Historically, our pre-tax income and our taxable income have not varied by much other than one time tax accounting method changes and the anomaly of the 2013 civil penalty of$6.8 million assessed in a legal matter. Except as otherwise disclosed, there are no known trends, events or transactions that are expected to negatively impactthe future levels of taxable income.93Table of ContentsWe concluded that this reversal was appropriate after determining that it was more likely than not that we will realize the full amount of this incometax benefit within allowable net loss carryforward periods. In reaching this conclusion we considered, among other things, our recent financial and operatingresults (three years of cumulative income, eight consecutive quarters of profitability and expectation to realize all deferred tax assets prior to expiration). Due tostrong results for the last two years and increased confidence that we will continue to generate taxable income into the foreseeable future, our assessmentregarding the potential to realize our deferred tax assets changed. This assessment required us to exercise significant judgment and make estimates about ourability to generate revenue, gross profit, operating income and taxable income in future periods.Changes in state, federal, and foreign tax laws may increase our tax contingencies. The timing of the resolution of income tax examination is highlyuncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued. It isreasonably possible that within the next 12 months we will receive additional assessments by various tax authorities or possibly reach resolution of income taxexaminations in one or more jurisdictions. Our policy is to recognize interest and penalties accrued on any unrecognized tax positions as a component ofincome tax expense.A reconciliation of the beginning and ending tax contingencies, excluding interest and penalties, as of December 31, 2013 and 2012 is as follows (inthousands): Year ended December 31, 2013 2012 2011Beginning balance $231 $231 $191Additions for tax positions related to the current year 2,737 — —Additions for tax positions taken in prior years — — 40Ending balance $2,968 $231 $231The interest and penalties accrued on tax contingencies as of December 31, 2013 and 2012 were $127,000 and $97,000, respectively. Tax yearsbeginning in 2010 are subject to examination by taxing authorities, although net operating loss and credit carryforwards from all years are subject toexaminations and adjustments for at least three years following the year in which the attributes are used.21. RELATED PARTY TRANSACTIONSOn occasion, Haverford-Valley, L.C. (an entity owned by our Chairman of the Board) and certain affiliated entities make travel arrangements for ourexecutives and pay the travel related expenses incurred by our executives on company business. During the years ended December 31, 2013, 2012 and 2011we reimbursed Haverford-Valley L.C. $170,000, $93,000, and $122,000, 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 in aloss of $54,000 on early extinguishment of debt, net of $77,000 of associated unamortized discount. Of the $34.6 million in Senior Notes retired during theyear 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 heldby Fairfax Financial Holdings Limited or an affiliate of Fairfax ("Fairfax"). Chou and Fairfax are beneficial owners of more than 5% of our common stock.22. BUSINESS SEGMENTS Segment information has been prepared in accordance with ASC Topic 280 Segment Reporting. Segments were determined based on how we managethe business. There were no inter-segment sales or transfers during the years ended December 31, 2013 and 2012. We evaluate the performance of our segmentsand allocate resources to them based primarily on gross profit. The table below summarizes information about reportable segments for the years endedDecember 31, 2013, 2012 and 2011 (in thousands):94Table of ContentsYear ended December 31, Fulfillment Direct partner Total2013 Revenue, net$156,032 $1,148,185 $1,304,217Cost of goods sold136,282 920,275 1,056,557Gross profit$19,750 $227,910 $247,660Operating expenses (231,095)Other income (expense), net (221)Provision (benefit) for income taxes (72,165)Net income $88,509 2012 Revenue, net$155,516 $943,773 $1,099,289Cost of goods sold140,536 760,323 900,859Gross profit$14,980 $183,450 $198,430Operating expenses (186,269)Other income, net 2,993Provision for income taxes 485Net income $14,669 2011 Revenue, net$163,609 $890,668 $1,054,277Cost of goods sold149,660 725,529 875,189Gross profit$13,949 $165,139 $179,088Operating expenses (196,622)Other income (expense), net (2,046)Provision (benefit) for income taxes (142)Net loss $(19,438) 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.For the years ended December 31, 2013, 2012 and 2011, substantially all of our sales revenues were attributable to customers in the United States.At December 31, 2013 and December 31, 2012, substantially all of our fixed assets were located in the United States.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 ended December 31,2013. We have prepared this information on the same basis as the consolidated statements of operations and the information includes all adjustments that weconsider necessary for a fair statement of its financial position and operating results for the quarters presented.95Table of Contents Three Months Ended March 31,2013 June 30,2013 September 30,2013 December 31,2013 (in thousands, except per share data)Consolidated Statement of Operations Data: Revenue, net Direct $41,942 $36,250 $35,681 $42,159Fulfillment partner 270,052 256,954 265,745 355,434Total net revenue 311,994 293,204 301,426 397,593Cost of goods sold Direct 37,149 31,842 30,777 36,514Fulfillment partner 215,909 203,523 211,499 289,344Total cost of goods sold 253,058 235,365 242,276 325,858Gross profit 58,936 57,839 59,150 71,735Operating expenses: Sales and marketing 18,705 19,208 22,463 31,233Technology 18,160 17,920 17,259 18,449General and administrative 15,088 16,585 15,970 20,526Restructuring (432) (39) — —Total operating expenses 51,521 53,674 55,692 70,208Operating income 7,415 4,165 3,458 1,527Interest income 34 32 34 27Interest expense (51) (37) (33) 8Other income (expense), net 345 (150) 165 (595)Net income before income taxes 7,743 4,010 3,624 967Provision (benefit) for income taxes 46 312 91 (72,614)Net income 7,697 3,698 3,533 73,581Net income attributable to common shares $7,697 $3,698 $3,533 $73,581Net income per common share—basic: Net income per share—basic $0.33 $0.16 $0.15 $3.09Weighted average common shares outstanding—basic 23,594 23,714 23,766 23,780Net income per common share—diluted: Net income per share—diluted $0.32 $0.15 $0.14 $3.01Weighted average common shares outstanding—diluted 24,016 24,283 24,446 24,430Comprehensive income $7,697 $3,698 $3,533 $73,58196Table of Contents 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 $46,468Fulfillment partner 221,470 205,600 221,137 295,566Total net revenue 262,367 239,536 255,352 342,034Cost of goods sold Direct 37,630 31,108 30,684 41,114Fulfillment partner 177,229 165,259 178,126 239,709Total cost of goods sold 214,859 196,367 208,810 280,823Gross profit 47,508 43,169 46,542 61,211Operating expenses: Sales and marketing 14,475 13,512 14,899 20,581Technology 15,638 15,122 16,085 18,622General and administrative 14,822 14,516 13,828 14,093Restructuring 98 — (45) 23Total operating expenses 45,033 43,150 44,767 53,319Operating income 2,475 19 1,775 7,892Interest income 29 27 30 30Interest expense (208) (253) (194) (154)Other income, net 432 719 1,213 1,322Net income before income taxes 2,728 512 2,824 9,090Provision for income taxes 9 42 131 303Net income 2,719 470 2,693 8,787Net income attributable to common shares $2,719 $470 $2,693 $8,787Net income per common share—basic: Net income per share—basic $0.12 $0.02 $0.11 $0.37Weighted average common shares outstanding—basic 23,392 23,437 23,447 23,450Net income per common share—diluted: Net income per share—diluted $0.12 $0.02 $0.11 $0.37Weighted average common shares outstanding—diluted 23,414 23,464 23,754 24,064Comprehensive income $2,719 $470 $2,693 $8,78797Table of ContentsSchedule IIValuation and Qualifying Accounts(dollars in thousands) Balance atBeginning ofYear Charged toExpense Deductions Balance atEnd of YearYear ended December 31, 2013 Deferred tax valuation allowance $79,693 $— $79,693 $—Allowance for sales returns 10,618 95,807 93,193 13,232Allowance for doubtful accounts 797 161 806 152Year ended December 31, 2012 Deferred tax valuation allowance $83,617 $— $3,924 $79,693Allowance for sales returns 10,899 79,785 80,066 10,618Allowance for doubtful accounts 574 249 26 797Year ended December 31, 2011 Deferred tax valuation allowance $77,051 $6,566 $— $83,617Allowance for sales returns 11,525 83,129 83,755 10,899Allowance for doubtful accounts 2,048 268 1,742 57498Exhibit 10.16 Summary of Unwritten Compensation ArrangementsApplicable to Non-Employee Directors of Overstock.com, Inc.During 2013 the Company paid its non-employee directors $57,000. During 2014 the Company intends to pay 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 joinsthe Board, and periodically thereafter. In 2013, the Company granted restricted stock units to non-employee directors as follows:NameGrant Date Number of Restricted Stock UnitsGrantedAllison H. AbrahamMay 8, 2013 7,500Barclay F. CorbusMay 8, 2013 7,500Joseph J. Tabacco, Jr.May 8, 2013 7,500Samuel A. MitchellMay 8, 2013 7,500(1) Each restricted stock unit represents a contingent right to receive one share of Overstock.com, Inc. common stock. The restricted stock units vestas to 40% at the close of business on the first anniversary of the date of grant, 30% at the second anniversary of the date of grant, and the remaining30% at the third anniversary of the date of grant. Vested shares are delivered promptly after the restricted stock units vest.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, also occasionally make travelarrangements for directors to attend Board meetings, for which the Company reimburses Haverford Valley at rates not in excess of commercially availableairline rates.Exhibit 21NameJurisdiction of Formation Trade NamesOverstock.com Services, IncUtah 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 CurrentSupplier Oasis Fulfillment Services, Inc.Utah SOFSOverstock Ireland LimitedIreland O.co Ireland.ieO Agency Group, Inc.Utah Overstock.com InsuranceExhibit 23Consent of Independent Registered Public Accounting FirmThe 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 27, 2014, with respect to the consolidated balancesheets of Overstock.com, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive income (loss),changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2013, and the related financial statementschedule, and the effectiveness of internal control over financial reporting as of December 31, 2013, which reports appear in the December 31, 2013 annualreport on Form 10-K of Overstock.com, Inc./s/ KPMG LLPSalt Lake City, UtahFebruary 27, 2014Exhibit 31.1 CERTIFICATION I, Patrick M. Byrne, certify that: 1. I have reviewed this Annual Report on Form 10-K of Overstock.com, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-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 our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, 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 most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially 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 theregistrant’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 are reasonablylikely 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 internal controlover financial reporting. Date:February 27, 2014/s/ PATRICK M. BYRNE Patrick M. Byrne Chief Executive Officer (principal executive officer)Exhibit 31.2 CERTIFICATION I, Robert P. Hughes, 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 defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-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 our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, 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 most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially 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 theregistrant’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 are reasonablylikely 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 internal controlover financial reporting. Date:February 27, 2014/s/ ROBERT P. HUGHES Robert P. Hughes Senior Vice President, Finance and Risk Management (principal financial officer)Exhibit 32.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Patrick M. Byrne, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the AnnualReport of Overstock.com, Inc. on Form 10-K for the year ended December 31, 2013 fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934, as applicable, and that information contained in such Report fairly presents in all material respects the financial conditionand results of operations of Overstock.com, Inc. Date:February 27, 2014/s/ PATRICK M. BYRNE Patrick M. Byrne Chief Executive Officer (principal executive officer)Exhibit 32.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Robert P. Hughes, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the AnnualReport of Overstock.com, Inc. on Form 10-K for the year ended December 31, 2013 fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934, as applicable, and that information contained in such Report fairly presents in all material respects the financial conditionand results of operations of Overstock.com, Inc. Date:February 27, 2014/s/ ROBERT P. HUGHES Robert P. Hughes Senior Vice President, Finance and Risk Management (principal financial officer)

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