On Friday, February 17, 2012 -- before the long, holiday weekend -- Overstock.com (OSTK) silently released an 8-K SEC filing, but, as usual, The Davian Letter was all over it.

OSTK 8-K filing: SECOND AMENDMENT TO FINANCING AGREEMENT AND WAIVER

http://sec.gov/Archives/edgar/data/1130713/000110465912010927/a12-5363_18k.htm

During our previous posts about OSTK, we highlighted OSTKs dependence on a very strong 4^th Quarter in order to support its cash requirements. We also covered its near default due to the Sale-Leaseback agreement default scenario.

What we didn’t know, nor did US Bank it seems, is that OSTK was already in default due to a non-timely filing after their May 4^th stockholders meeting. US Bank recently made an issue of this default and, we propose, used it as an opportunity to draw up a new amendment of the Loan Agreement in return for waiving the default.

“Pursuant to Section 12.1(d) of the Financing Agreement, an Event of Default shall occur if, among other things, Borrower fails to timely file with the Securities and Exchange Commission periodic and current reports that are in material compliance with the requirements of the Exchange Act.  Borrower has informed Bank that Borrower failed to timely file a required amendment to Borrower’s Form 8-K regarding Borrower’s annual meeting of stockholders held on May 4, 2011 (such failure being referred to herein as the “Existing Default”). “

-          SEC 8-K dated 2/16/2012 Exhibit 10.1

As a result of the negotiations with US Bank, OSTK is currently not in default, but what we find suspicious are the changes to the Financing Agreement US Bank chose to make. Below we will outline a few important changes and propose reasons and interpretations for why US Bank may have amended the agreement in this way.

Disclosure: We are not lawyers and do not claim to have legal authority. This post is simply to offer opinions.

1)    Addition of Section 2.14:

“Borrower and each of the Permitted Subsidiaries (each a “Loan Party”, and collectively the “Loan Parties”) are obligated to repay the Obligations as joint and several obligorsunder this Agreement”

This change can have a large impact in the event of default, and the legal process thereafter, because it allows the bank to hold each of the “debtors” responsible for the full amount and not just their own portion of the debt. This then puts the burden on the debtor to collect the appropriate share from the other “Loan Parties.” This prevents OSTK from having the flexibility to put assets into an affiliate or subsidiary to protect them. If you would like to know more, a good place to start would be the Investopedia article: http://www.investopedia.com/terms/j/joint-and-several-liability.asp#axzz1mxNXZLaJ

2)    Article 4 of the Security Agreement – Power of Attorney

“Without limiting any other provision of this Agreement, Debtor does hereby make, constitute and appoint Bank (or any officer or agent of Bank) as Debtor’s true and lawful attorney-in-fact, with full power of substitution, which appointment may only be exercised and enforced by Bank following the occurrence and during the continuation of an Event of Default, in the name of Debtor or in the name of Bank or otherwise, for the use and benefit of Bank, but at the cost and expense of Debtor, (i) to indorse the name of Debtor on any instruments, notes, checks, drafts, money orders, or other media of payment (including payments payable under any policy of insurance on the Collateral) or Collateral that may come into the possession of Bank or any Affiliate of Bank in full or part payment of any of the Obligations; (ii) to sign and indorse the name of Debtor on any invoice, freight or express bill, bill of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with any Collateral, and any instrument or document relating thereto or to any of Debtor’s rights therein; (iii) to file financing statements pursuant to the Uniform Commercial Code and other notices appropriate under applicable law as Bank deems necessary to perfect, preserve, and protect Bank’s rights and interests under this Agreement;….” – Page 8

The change here was subtle, but important. All references to “borrower” from the original financing agreement were changed to be “debtor.” Looking deeper, the previous wording of “borrower” would only affect Overstock.com directly, but not necessarily be binding to any of its affiliates or subsidiaries, whereas, “debtor” would also apply to the subsidiaries, since it is clear all affiliates and subsidiaries will each be bound to the security agreement now.

“B.            Concurrently herewith, Debtor is executing a Guaranty in favor of Bank (the “Guaranty”) pursuant to which Debtor guarantees the full payment and prompt performance of the Obligations (as defined in the Financing Agreement).

C.            Debtor is a Subsidiary of Borrower and has agreed to comply with the requirements of the Financing Agreement so as to remain one of the “Permitted Subsidiaries”

3)            Addition of Section 2.13 - Waiver of Subrogation

This section is the most difficult to understand and explain, but this addition is much like the others. We believe it was added to protect against lawsuits that could be pursued against US Bank by affiliates and subsidiaries of OSTK in the event that US Bank caused them harm by a default of the borrower. The details of this are not as important as the fact that US Bank chose to add the language 2½ years into this financing agreement.

There are many of pages of changes that were made to the Financing Agreement, but we chose these in particular due to the strong language and their implications. In the old agreement US Bank did not have much language in place regarding the affiliates and subsidiaries, but as you can see above they have gone to great lengths to protect themselves from any scenarios where they could be involved in to circumvent the previous agreements.

In case you were wondering what these subsidiaries are, see below:

http://sec.gov/Archives/edgar/data/1130713/000104746911001488/a2202311zex-21.htm

SUBSIDIARIES OF THE REGISTRANT