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OSTK the Saga Continued

OSTK the Saga Continued

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Published by Anthony Davian
OSTK filed an 8K last night, which severed their mater lease agreement with US Bank. This tells us that their 4th quarter will be awful and the shelf registration will be used.
OSTK filed an 8K last night, which severed their mater lease agreement with US Bank. This tells us that their 4th quarter will be awful and the shelf registration will be used.

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Published by: Anthony Davian on Dec 29, 2011
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12/29/2011

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Overstock.comContinuedP a g e |
1
DL |
davianletter.com
Thursday,December29,2011
Overstock Follow-up
New Information
ThoseofyoufollowingthestoryofOSTKorwhohavereadourlatestarticleaboutitmighthavenoticedthe8-KfiledtodaywiththeSEC.Ifnot,hereistheoverview:“TheCompanypaidapproximately$20.1milliontoLessorinconnectionwiththeamendmentandagreementtoterminatetheMasterLeaseAgreement,includingapproximately$1.2millioninprepaymentpremiums.”….“TheCompanyamendedtheMasterLeaseAgreementinordertoeliminatethetotalfixedchargecoverageratiocovenantundertheMasterLeaseAgreement.AsdisclosedintheCompany’sForm10-QforthequarterendedSeptember30,2011,basedontheCompany’sresultsforthefirstthreequartersof2011,managementconsidereditlikelyatthattimethattheCompanywouldbeoutofcompliancewiththeMasterLeaseAgreement’stotalfixedchargecoverageratiocovenantatDecember31,2011.Inordertoavoidacovenantviolation,theCompanyamendedtheMasterLeaseAgreementtoeliminatethefinancialcovenants.”
http://sec.gov/Archives/edgar/data/1130713/000110465911071476/a11-32343_18k.htm
Thefilinghasconfirmedourpriorthesis,andhasafewimplicationsforthefuturewewouldliketoaddress,lestyouthinkitwasgoodnewsthattheyavoidedtheDecember31
st
deadline.
 What it did
EssentiallywhattheyhavedoneisboughtbacktheITequipmentthathadbeensoldandre-leasedbacktothemin2010andadditionalamountsin2011.The“MasterLeaseAgreement”hadtwoclausesinit,whichwerebecomingtroublesome,andtheyhadadmittedwouldhavecausedthemtodefaultonDecember31
st
ifnotnegotiatedaway.ThelargestproblemwasthattheagreementcontainedalimitationoftheirFixedChargeCoverageRatio,whichtheywereviolating,anditwastiedtothemainFinanceAgreementandwouldhavecausedbothtodefault.Italsoforcedthemtomaintainabalanceof$30millionofCashEquivalents(includingtheirMarketableSecurities).ByessentiallybuyingtheMasterLeaseouttheynolongerhavetoabidebythefixedchargeratio,andnowtheircollateralbalancerequirementisdownto$20milliontosecuretheFinancingAgreement.Thisseemslikegoodnewsonthesurface,butdeepernotsomuch.
 
In Focus:
NewinformationWhatitdidImmediateimpactandquestionsFutureimplicationsBy:BClark,LoneWolf,andADavianinfo@davianletter.com
 
Overstock.comContinuedP a g e |
2
DL |
davianletter.com
Thursday,December29,2011
Immediate impact and questions
Theimmediateimpactisthattheywillnotdefaultonthe31
st
,butatacost.Theyhadtopay$1.2millioninfeesforearlyredemption.Alongwiththeincometaxestheywouldhavepaidinitially,lostdepreciation,andtheinterest(6.3%),thisMasterLeasehasturnedouttobeaverybaddealforthem.Worseyettheyhadtouse$20millionincashofsomesorttobuyitback,andthatbegsthequestionofwheredidthatcomefrom?ItcouldhavecomefromagreatQ4,butthathasbeenaddressedinthepriorarticle,andwillbefurtheraddressedbelow.TheotheroptionsarethattheSEChasgiventhemearlynoticethattheirshelfofferinghasbeenapproved.Itisalsopossiblethattheycouldusesomeofthemoney/securitiesthatwouldhavebeenavailableduetothedropincollateralrequirements.Asnotedinthepreviousarticle,Mr.Chouhasbeendeftlysupportingthestockpriceat$7.75;youcanseethisinthepriceaction,theSECfilings,andthisVolumebyPricechartbelow.
Weproposehewasdoingthisinordertomakesurethe“MarketableSecurities”heldatUSBanktokeeptheirbalanceabovethe$30millionrequirement,nowthattherequirementisreduceddownto$20millionhenolongerwillneedtoofferthissupport,andtherecentfloorinthestockpricewillbebroken.
Future Implications
“We have held initial and collegial discussions with U.S. Bank regarding this potential non-compliance.”  – Q3 2011 p. 17 
ThelargestimplicationisfromthefactthatUSBankchosenottonegotiate,ortheyatleastofferedtermsthatwereworsethanOSTKwould/couldtake.USBanklikelyhasoneofthebestpicturesofhowhealthyOSTKreallyis,theyhavebeentheirmainbankandcreditorforyears,andhaveinsideinformationprobablybeyondanyonebuttheboard.ByUSBankmakingsurethisdidn’tgetnegotiatedtobettertermsispossiblythebiggestvoteofnoconfidenceimaginable.Thefactthatthiswasdonewith3daystogoinnegotiationsalsoshowsthattherewasnochanceofgettingthisdone.

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