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Dr. Byrne's exchange with Business Week

Sanity Check has long maintained that the mainstream financial press has been compromised by Wall Street. See below this shocking set of questions from Timothy Mullaney, which are posted to give the layman an opportunity to appreciate the tone some reporters take with some CEOs of publicly traded companies. Immediately following you will find Dr. Byrne's responses. (Note that Tim's questions and comments are blue to make the dialog easier to follow in the Tim/Byrne response).

Bob O'Brien's comments can be found on his Sanity Check Blog.

Email from Tim to Patrick
OK, here goes…

First topic: What went wrong in 2005?

Let's walk through each of the four quarters. In the first quarter, there was a miss attributed in part to errors in buying offline media. What happened? Who made the buy? Which purchases didn't deliver? How do you measure that: i.e. how do you know which buys to blame? What corrective actions did you take.
In the second quarter, what was the problem? What did you do about it? Did it work?
For the third quarter, IT was the problem. How long did that fester before it was recognized? Why did it take so long to be recognized, and then to be disclosed? (Orbitz.com, by contrast, reported a big problem with its Oracle databases in I believe 2003 within a day or two of the snafu). Why did it take so long to correct? Where was Shawn Schwegman during this period? During the extended leave Patrick has described on The Motley Fool, who was standing in for the CIO? With regard to the account of Shawn having sold stock to buy a home immediately upon his return, some questions. A. Who was the woman? B. Did they get married? C. Are they still together? D. Can we review the timing of exactly when he sold the shares, and from where he contacted his broker? E. What background in running large technology systems did Shawn have before joining Overstock? Before becoming CIO? When exactly did he go on leave, does he remain on leave, and who is fulfilling the CIO function? (I see you have an SVP for technology, but that is not quite the same title and the date of his assuming that role is not given in his bio).
In the fourth quarter, what was the source of the disappointing sales growth PMB mentioned on Bloomberg? How bad was it? Is the Street on target in putting full-year sales for 05 around $840M and a 15 cents per share loss? What will be the operating cash flow for the fourth quarter and cash position (exclusive of short-term securities) at 12.31?
Everyone knows online retailers are strongly cash-flow positive in 4Q, and then pay bills in January. This is not exclusive at all to OSTK. What will be the cash position at 3/31/06, when the short-term exaggeration of cash flow has been flushed out?
How is your liquidity? Can you describe the Asian-currency instrument that is tying up the $70 million-plus, or direct me to the correct pages in your SEC filings that describe this instrument and when it matures? Preferably, do both. There have also been some fluctuations in the interest rate and terms of your Wells Fargo facility. Please explain, and do they indicate, taken together, that Overstock has become a stronger or a weaker credit?
Seems as if marketing issues were a pretty consistent 2005 problem. Why? Some on the short side contend that the issue can be traced to having an underqualified executive running offline marketing. Without any reference to this person's non-existent illicit past, why is someone whom Howard Lemcke describes as a former office manager for a small local business running such a critical function for a public company closing in on $1 billion in sales?
Why did gross margins stall? Why did you take marketing spend to 10% or more of revenues? Was this planned, or a function of revenue shortfalls relative to internal budgets?
Why did operating expense spike so? Technology spending? Several analysts told me they did not know tech spending was going to rise so sharply in 05, though none accuses you of lying about it. Did you change your mind? When? When was 2005's tech spend approved, and why didn't sell-side analysts, several of whom work for firms that had banked for Overstock, know about it? And was it a tactical mistake, or anything worse, not to communicate that change in strategy or tactics once you decided on it?
The cash consumption of the business multiplied during the first nine months of 2005, even relative to the size of the business. Why? Was that planned?
Several analysts blame 2005 on management's inability to properly vet and manage up to a dozen or more major projects. Jewelry, travel, auctions, Club O, the software upgrade – it's a longish list. How fair is this critique? Why did you take on so much? Did any of it succeed? An industry source says that tracking the serial numbers of diamonds convinces him that you are selling as few as 2 to 4 diamond rings a month, with at least $7 million in inventory on your balance sheet, representing approximately 2,700 to 2,800 stones. True?
Walk me through the metrics for emerging markets: How much travel are you selling (use GTS please; I am recognized as an online travel expert and have spoken at several PhoCusWright and Travelcom conferences)? Revenue from auctions? How many diamonds? And whither Club O and b2b? How much of your inventory bloat do the diamonds represent? Are you going to have to write them down? When?
Also, who runs each of these efforts? What domain expertise did they have, if any? Was a jewelry expert running jewelry? Did Ms. MacDonald Korth have any material background in online auctions? Who ran travel? And so on. Do they add up to a pattern, as sell side analysts contend, of having weak executives running key growth initiatives. What does that say about the executives who appointed them if this is, in fact, a consistent pattern? How exactly did Ms. Simon and Ms. MacDonald Korth get hired? Why was MacDonald Korth retained after a brush with the law reported in the Salt Lake City papers in 2002? (I am confirming the disposition of this case with the SLCPD, but I understand it was dismissed).
Scott Devitt, perhaps the most sympathetic buy-side analyst extant, says you missed all four quarters of 2005 relative to his forecasts (Yahoo Finance says you met the second quarter; Devitt says that was due to a non-recurring item). What does that say about management and control? Are you aware of any public company that has done that in recent years without management getting fired? Why shouldn't you be fired, other than your ownership position in OSTK? Why has the board not insisted on better performance?
What was the purpose or meaning of the board changes? How much time is Jack Byrne spending at OSTK? Who reports to him? What are his functions as non-executive chairman of the board? Competitors suggest Jack is running the company's day to day operations in tandem with Jason Lindsey. Please sort out who is doing what, and how much time Patrick is devoting to the Rocker litigation, the NCANS and related matters. Was Patrick, in essence, relieved of his CEO duties as some believe?

Section II. What is the strategy going forward?

What is the prospect for getting gross margins higher, especially in the part of the business where you take inventory risk? What do you say to sell-side critiques – and please note that this is a sell-side critique – that the prominent role of shopping bots in consumer electronics will constrict your ability to rebuild margins? Given the very tight competition in consumer electronics, how much margin wiggle room do you have in this sector? What percentage of your sales come from consumer electronics, which tend to be among your most expensive SKUs?
Explain the strategy for maintaining or expanding gross margins in the consignment part of the business. We may want to have me discuss this business offline with a more junior executive to prepare me for speaking with PMB, so I understand it better. To what extent does your fulfillment business compete directly with Amazon, and to what degree are you working distinct markets ( i.e. are yours closeouts and theirs not?). What is the difference between your margins and share in this business and theirs? How do you answer a critique that Amazon will be able to keep you from raising margins by setting the pricing standards for this market?
Aaron Kessler and Derek Brown – and to a degree Scott Devitt – all say you have to slow the rate of growth, cut marketing spending to 8% or 9% of sales, and try to achieve profits beginning in 2006. How, in fact, could you do that? To get opex under control, for example, will you have to lay off employees who fall under SG&A? How many? How, especially, do you do that when the consensus is that online advertising rates are rising strongly? What are your options, and your plans?
What margins can you achieve if you successfully do these things? What about in 07?
Posters to various blogs, including one claiming to be an insider, have raised the notion that management and Jack Byrne would like to take Overstock private, tune out the public market noise, and get the company fine-tuned in a more manageable atmosphere. Is management considering this? Has the board discussed it, in even a preliminary fashion? If you are not interested in such an option, why not?
Several people have expressed skepticism that such a buyout would be credit-worthy. Have you had any discussions with lenders? On the other hand, given the large management stake and close association with Scion and Fairholme, how much stock would you need to buy to buy the company, assuming investors recruited by management and the board participated?
Related question: Who runs Odyssey America Reinsurance, which bought 475,000 shares in the third quarter? Do its officers, directors or portfolio managers/analysts have any past or present ties to Messr. Byrnes, Macklin, Fisher or Lindsey? Can you describe any meeting with management Odyssey had before buying the position, or any outreach that Overstock, its directors, its bankers or other representatives conducted with Odyssey before or during Odyssey's efforts to amass its position?
Describe your strategy for rebuilding trust and confidence among sell-side analysts.
As an out-year scenario, one can envision OSTK as a 1.5 billion to $2 billion company with perhaps 4% EBITDA margins. How do you get there? Can you get margins beyond that on 15% Gross margins? How? (Even assuming you can hit those revenue figures, which seems likely). Can you grow that much while trimming marketing? How long would it likely take?

Section III. The Disputes…

1. Let's review numbers. Overstock has 19 million shares outstanding. The float appears to be 10 million shares. According to Nasdaq, the short position is 7.1 million shares. Why does Overstock believe that it is necessary to violate securities laws to short the shares. Why is a short seller who says "19 million shares, 10 million float, 7 million short, what's the problem?" incorrect? Are these numbers incorrect? I believe I recall reading an assertion by PMB, though offhand I do not recall where, that the company knew in detail who owned its shares, who was allowing their shares to be borrowed and who was not, and that the then-existing position was impossible. Please review what you know and whether I correctly remember this statement, and what basis you might have for making such an assertion.

2. I'll ask an open-ended question more generally…Why do you think shorts—and which ones – have violated Regulation SHO? Take all the time you need with this one; I want to understand your basis for this in detail, whether I end up devoting much space to it or just a little.

3. When during the Bloomberg interview were you cut off? I have a transcript that does not note any interruption (am checking with Bloomberg). Why do you believe this occurred?

4. I note with interest Bob O'Brien's post about members of the Byrne family being unable to buy shares. Can you explain, and can you put me in touch with brokers and other third parties who can confirm this?

5. Who is Bob O'Brien? Is he really a penny-stock artist affiliated with Richard Mellon Scaife? Are you at all concerned that this association hurts Overstock's reputation or credibility? Can you supply his contact information?

6. What is your basis for:

a. Asserting on Bloomberg that "some of these officials are mobsters"? Please explain also the remark about a body being found on you.

b. Asserting that 10 to 15 million shares of Overstock have been counterfeited? By whom? How do you know? Have you seen any forged certificates?

c. Asserting that journalists accept assignments from short sellers?
d. Asserting that Jim Cramer is an undisclosed investor in Rocker Partners?
e. Asserting that "a master criminal from the 1980s" is coordinating an attack on Overstock? Is this Michael Milken? Why does Bob O'Brien appear to think so, judging from his postings?

f. Saying that you are afraid of the Israeli mafia? Have you received any threats? If so, describe. (Note: I have seen an excerpt of PMB's remarks, but have not yet listened to the CFR webcast.) Or is this a more general observation that society should fear crime? If so, how is it even remotely related to securities violations surrounding OSTK shares? Do you have any expectation that

g. Asserting that Overstock would dominate the mid-priced diamond market?

7. Please explain the Bethany McLean e-mail. I've read Bethany's story; I want to hear it straight from PMB.
8. How much time does PMB devote to NCANS, the litigation and related matters, including media appearances. He has acknowledged financially supporting NCANS; how much has he spent? Is it a distraction from work?

9. May I have a phone number or e-mail address for Mr. O'Brien and for Mary, whose last name escapes me, from NCANS.
10. There are not more questions about Gradient in part because I've read the filings posted on your site and understand your basis for those specific allegations.

11. It appears from Bloomberg's summaries of SEC filings that the top 35 holders own 99%+ of OSTK shares. If Bob O'Brien and NCANS believe so strongly that you have been wronged by the short side, have they bought any?

Section IV. Just for the Record…

1. How is PMB's health? In comparing old pictures of PMB to more recent ones, a senior BW editor – i.e. not me – noted what appeared to be a significant weight gain that occurred within the last two years. Is this correct? If so, is it a function of stress?

2. Is PMB manic depressive? Has he ever sought care or diagnosis for any mental incapacity? Is he on any psychoactive medications of any kind? (I mean no offense, and this is no more intrusive than Pat's own public discussion of whether he uses illegal drugs).

3. Why is Jim Cramer referring e-mails from NCANS supporters to his lawyers? Has any counsel for Cramer contacted OSTK or PMB about pending or threatened defamation claims? E-mail trails I have read include Cramer asserting he may have a claim against OSTK or OSTK defenders at NCANS. Are these e-mails genuine? (I'm calling JJC as well).

4. Mark Cuban, asked in jest if he would trade PMB for Ron Artest, even up, responded in part: "No. Ron Artest knows what his issues are and takes medication." Please comment. We know about Mr. Cuban's short position in OSTK, which he puts at 20,000 shares.

Scott, let's get it started. I don't have enough space, most likely, for all this material. But I have to understand it deeply to write the strongest possible 1200-1500 words I can.

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Dr. Byrne's Response

Dear Tim,
I appreciate your taking the time to write such an exhaustive list of questions. Since you did nothing to indicate the interview was off-the-record I am treating it as on-the-record (that is the journalistic convention, I believe), and so have reprinted your letter below. I trust also that you do not mind me responding in this public forum, as you also failed to stipulate otherwise (as some reporters have when they interview me by email).

My normal practice is to respond in CAPS interspersed among questions posed. As some, however, some have misconstrued that to mean, "shouting," I will switch to italics to reduce any possibility of misunderstanding.

From: Mullaney, Tim [ mailto:Tim_Mullaney@businessweek.com]
Sent: Tuesday, January 10, 2006 6:55 PM
To: Scott Blevins
Subject: Some questions to get started
Hi Scott:

As we discussed, here are some questions for Patrick and others at Overstock. This is most of my line of questioning, but not necessarily all the questions that may arise......(edited for privacy reasons, nothing of interest in this copy)

OK, here goes…

First topic: What went wrong in 2005?

Let's walk through each of the four quarters. In the first quarter, there was a miss attributed in part to errors in buying offline media. What happened? Who made the buy? Which purchases didn't deliver? How do you measure that: i.e. how do you know which buys to blame? What corrective actions did you take.
In the second quarter, what was the problem? What did you do about it? Did it work?
For the third quarter, IT was the problem. How long did that fester before it was recognized? Why did it take so long to be recognized, and then to be disclosed? ( Orbitz.com , by contrast, reported a big problem with its Oracle databases in I believe 2003 within a day or two of the snafu). Why did it take so long to correct? Where was Shawn Schwegman during this period? During the extended leave Patrick has described on The Motley Fool, who was standing in for the CIO? With regard to the account of Shawn having sold stock to buy a home immediately upon his return, some questions. A. Who was the woman? B. Did they get married? C. Are they still together? D. Can we review the timing of exactly when he sold the shares, and from where he contacted his broker? E. What background in running large technology systems did Shawn have before joining Overstock? Before becoming CIO? When exactly did he go on leave, does he remain on leave, and who is fulfilling the CIO function? (I see you have an SVP for technology, but that is not quite the same title and the date of his assuming that role is not given in his bio).
In the fourth quarter, what was the source of the disappointing sales growth PMB mentioned on Bloomberg? How bad was it? Is the Street on target in putting full-year sales for 05 around $840M and a 15 cents per share loss? What will be the operating cash flow for the fourth quarter and cash position (exclusive of short-term securities) at 12.31?

5. Everyone knows online retailers are strongly cash-flow positive in 4Q, and then pay bills in January.

Actually, Tim, I was so surprised to discover how much of Wall Street overlooked that dynamic (at least while observing a competitor) that in the interests of conservatism I drew attention to the fact in my January, 2004 shareholders' letter:

"Consider a business that makes bricks, is running at break-even, and is growing. As it grows it will absorb cash to fund increased working capital needs. If it begins to shrink, however, it will release cash as working capital declines (ceteris paribus).

Overstock is different: …. If we were at break-even but growing, our growth would generate float-cash. If we shrank, we would lose float-cash (again, ceteris paribus). This dynamic is the reverse of that displayed by the brick factory imagined above.

It is not clear to me that Wall Street understands this odd dynamic of Overstock (or other Internet businesses whose 'operating cash flow' they model). That $40.3 million cash isn't really 'ours': much of it is money we are just holding for other people."

This is not exclusive at all to OSTK. What will be the cash position at 3/31/06, when the short-term exaggeration of cash flow has been flushed out?

Sorry, I don't give out detailed projections, nor quarterly projections, and hence, by extension, detailed quarterly projections.

6. How is your liquidity? Can you describe the Asian-currency instrument that is tying up the $70 million-plus, or direct me to the correct pages in your SEC filings that describe this instrument and when it matures? Preferably, do both. There have also been some fluctuations in the interest rate and terms of your Wells Fargo facility. Please explain, and do they indicate, taken together, that Overstock has become a stronger or a weaker credit?

We do not have an Asian-currency instrument "tying up $70 million plus." We have one that is tying up a lesser amount. I think our liquidity is fine.

7. Seems as if marketing issues were a pretty consistent 2005 problem. Why? Some on the short side contend that the issue can be traced to having an underqualified executive running offline marketing. Without any reference to this person's non-existent illicit past, why is someone whom Howard Lemcke describes as a former office manager for a small local business running such a critical function for a public company closing in on $1 billion in sales?

Yes, when our annual growth is only 4X the industry's instead of our customary 5X or 6X I consider that a "problem" too. Offline marketing was outstanding in 2005 by all measures (your assumption that this was a problem is false).

By saying, "Without any reference to this person's non-existent illicit past" you have referred to this person's non-existent illicit past, so I will address your point. Several years ago my friend and colleague, Stormy Simon, put a killer (David Meade) behind bars. For four years the police searched for a witness of whom they knew only a name, "Stormy" (which they mistakenly assumed to be a stripper's nom du stage: they thus confined their searches to Intermountain strip joints). They never found Stormy, and while Stormy knew some key facts about the murder, she did not know that a murder had taken place. Stormy learned only when Meade found her to tell her that if she testified she "would end up face down in a field with a bullet in her head." At the end of Meade's trial it seemed certain he would walk out of court a free man, but in a John Grisham-like twist, Stormy surprised everyone by showing up in the courtroom. Her testimony put Meade away for life. She is a hero to the Salt Lake City homicide detectives and prosecutors, one of whom just wrote a book, "Death in a Fish Pond," the climax of which is Story's out-of-the-blue heroism (the only other witness, incidentally, has since ended up face down in a field).

The shorts have made legend out of this "ex-stripper executive" story, even though the crux of the story is that it was the police's mistaken assumption about her name that caused them to miss her in the first place. They know it to be false, yet slimily, they continuously feed it to compliant reporters who dutifully bring it up, often in these "Without any reference to this person's non-existent illicit past" ways. (For the record, I count several wrigglers and escorts among my friends, consider these women finer human beings than the average denizen of Wall Street, and would have no objection to hiring any of them. Unfortunately, they are all holding out for C-level titles.)

Lastly, I fail to see the relevance of the fact that in 1995 Stormy Simon was an office manager. Her "credentials" are that she has taken our unprompted brand awareness from low single digits to 29% in two years: judging from other of your correspondence, you seem a little hung-up on credentials (however, if you're ever looking for a job just call: Stormy might be hiring).

8. Why did gross margins stall? Why did you take marketing spend to 10% or more of revenues? Was this planned, or a function of revenue shortfalls relative to internal budgets?

Gross margins went up 270 basis points in 2004, but "only" 170 basis points in 2005. I'll put this in the bucket holding the "annual growth only 4X the industry" failure.

9. Why did operating expense spike so? Technology spending? Several analysts told me they did not know tech spending was going to rise so sharply in 05, though none accuses you of lying about it. Did you change your mind? When? When was 2005's tech spend approved, and why didn't sell-side analysts, several of whom work for firms that had banked for Overstock, know about it? And was it a tactical mistake, or anything worse, not to communicate that change in strategy or tactics once you decided on it?

Yes, technology spending was the reason. While some of it was unexpected, the primary reason that analysts did not know was that I did not tell them privately, because it is illegal to do so (that whole "Reg FD" thing, remember?) And no, I do not consider "not breaking the law" a tactical mistake.

10. The cash consumption of the business multiplied during the first nine months of 2005, even relative to the size of the business. Why? Was that planned?

Because we decided to beef up our technology tremendously. "Was that planned?" Yes, we never bought anything by accident. Was it anticipated? We did do more than we expected to do at the start of the year.

11. Several analysts blame 2005 on management's inability to properly vet and manage up to a dozen or more major projects. Jewelry, travel, auctions, Club O, the software upgrade – it's a longish list. How fair is this critique? Why did you take on so much? Did any of it succeed? An industry source says that tracking the serial numbers of diamonds convinces him that you are selling as few as 2 to 4 diamond rings a month, with at least $7 million in inventory on your balance sheet, representing approximately 2,700 to 2,800 stones. True?

The critique has some merit: many of the projects came off well, but I did bite off too much technology to chew in one year.

The diamond sales prediction is low. Yes, it is true that we have $7 million of diamonds on our balance sheet, though I am fine with this: they are not going anywhere, and they are holding value nicely (I just had a nice offer yesterday for the lot, actually).

12. Walk me through the metrics for emerging markets: How much travel are you selling (use GTS please; I am recognized as an online travel expert and have spoken at several PhoCusWright and Travelcom conferences)? Revenue from auctions? How many diamonds? And whither Club O and b2b? How much of your inventory bloat do the diamonds represent? Are you going to have to write them down? When?

Oh my, I had no idea I was addressing a "recognized … online travel expert" who had "spoken at several PhoCusWright and Travelcom conferences." I'll try to keep up.

"GTS"? Not sure what it is, but I will assume the "G" means, "Gross": the business we bought had "GTS" of about $30 million (gross) in the year before we bought it. Beyond saying that I expect it will grow at the rate of the rest of the company or faster, I try to avoid making segment reports or predictions.

Auctions had GMV of about $30 million in 2005: again, I will not be reporting by segment going forward.
"Whither Club O and b2b?" Club O is great, b2b has morphed into a new tab ("Bulk Buys & Business Supplies") last autumn.

Diamonds are $7 million, and no, I do not plan on writing down diamonds (nor any gold I find laying around, either).
13. Also, who runs each of these efforts? What domain expertise did they have, if any? In some cases, huge amounts, in some cases, little. Was a jewelry expert running jewelry? Yes, if 20 years makes one an "expert." Did Ms. MacDonald Korth have any material background in online auctions? Yes. Who ran travel? The two guys who built the $30 million travel business from scratch: I don't know if they ever spoke at any conferences so I am not sure that they would qualify as "recognized online travel experts."

And so on. Do they add up to a pattern, as sell side analysts contend, of having weak executives running key growth initiatives. What does that say about the executives who appointed them if this is, in fact, a consistent pattern?

You know, I have been thinking of replacing the whole lot of us, but it's just so hard to find a team that grew an e-tailer that is a "public company closing in on $1 billion in sales" (your words above) in six years on $90 million of burned capital. There's Amazon, of course: oh wait, they'd burned $2.5 billion or so by this point, and were losing hundreds of millions per year from operations. There's Buy.com – oh, their S-1 shows they've lost $420 million, and they are about 40% of our size. uBid? Over half a billion, right? Etc. etc.

How exactly did Ms. Simon and Ms. MacDonald Korth get hired?
Ms. Simon came in for a temp job. I hired Ms. MacDonald-Korth from an analyst's position at the Federal Reserve.

14. Scott Devitt, perhaps the most sympathetic buy-side analyst extant, says you missed all four quarters of 2005 relative to his forecasts (Yahoo Finance says you met the second quarter; Devitt says that was due to a non-recurring item).

Could be. I agree he is nice (and the most knowledgeable analyst I have met when it comes to the liquidation industry). In fact, I would add, the good analysts provide me a service. They come, we talk, I like hearing them and their thoughts. The better of them are like getting access to good consultants, without the ego problems: Devitt, Kessler, Doug from Lehman. Bill and Craig from Hambrecht. A couple more here and there. They know what is going on in the industry, and often either alert us to some technology that we missed, or have even pointed out a metric within our own business that bears study.

But that said, I cannot comment on their forecasts, as I don't read them (and I doubt they read mine).
15. What does that say about management and control? Are you aware of any public company that has done that in recent years without management getting fired? Why shouldn't you be fired, other than your ownership position in OSTK? Why has the board not insisted on better performance?

Ha ha ha ha. I've been trying to get fired for six years. Regarding the "done that," stuff, I strongly doubt the board has read any analysts reports either. As far as the rest, see the second part of my answer to #13 above.

But as I have mentioned elsewhere, last summer I was actually planning on leaving this January for a much more interesting job. That is one of the reasons I began responding to the miscreants when I did: I wanted to flush the bowl before I left. Because the plumbing was not working as smoothly as I hoped, and because some operational issues sprung up, I have decided to stay, and that job opportunity has passed. I do notice this new element of the Party Line, and thank them for it. I truly have been trying to get out of here for six years. But now it looks like we are stuck with each other.

16. What was the purpose or meaning of the board changes? How much time is Jack Byrne spending at OSTK? Who reports to him? What are his functions as non-executive chairman of the board? Competitors suggest Jack is running the company's day to day operations in tandem with Jason Lindsey. Please sort out who is doing what, and how much time Patrick is devoting to the Rocker litigation, the NCANS and related matters. Was Patrick, in essence, relieved of his CEO duties as some believe?

If Patrick was, he was prescient enough to announce it to the world months in advance, and for years, all the times he has explained why he thinks the roles of chairman and CEO should be split, and also, for the first three years of the business, when he asked his father to be chairman. The better question would be, "Why in its six year history were there three years when Jack Byrne was not chairman?" The answer to that is, "SOX."

Section II. What is the strategy going forward? –

As a prefatory comment, please understand that as detailed as I am about the past, I tend not to be too forthcoming on future strategy.

What is the prospect for getting gross margins higher, especially in the part of the business where you take inventory risk? What do you say to sell-side critiques – and please note that this is a sell-side critique – that the prominent role of shopping bots in consumer electronics will constrict your ability to rebuild margins? Given the very tight competition in consumer electronics, how much margin wiggle room do you have in this sector? What percentage of your sales come from consumer electronics, which tend to be among your most expensive SKUs?
2. Explain the strategy for maintaining or expanding gross margins in the consignment part of the business. We may want to have me discuss this business offline with a more junior executive to prepare me for speaking with PMB, so I understand it better. To what extent does your fulfillment business compete directly with Amazon, and to what degree are you working distinct markets ( i.e. are yours closeouts and theirs not?). What is the difference between your margins and share in this business and theirs? How do you answer a critique that Amazon will be able to keep you from raising margins by setting the pricing standards for this market?

Hmm. Could be. Sounds like business.
3. Aaron Kessler and Derek Brown – and to a degree Scott Devitt – all say you have to slow the rate of growth, cut marketing spending to 8% or 9% of sales, and try to achieve profits beginning in 2006. How, in fact, could you do that? To get opex under control, for example, will you have to lay off employees who fall under SG&A? How many? How, especially, do you do that when the consensus is that online advertising rates are rising strongly? What are your options, and your plans?

Kessler and Devitt are as good as the game, and their instincts about marketing are probably right. Opex is already under control. Derek Brown cannot build a simple spreadsheet on his own (no kidding, that's not hyperbole, I've worked with him, he needs staffers to do it) so I will not comment on his opinions.

4. What margins can you achieve if you successfully do these things? What about in 07?

See above.

5. Posters to various blogs, including one claiming to be an insider, have raised the notion that management and Jack Byrne would like to take Overstock private, tune out the public market noise, and get the company fine-tuned in a more manageable atmosphere. Is management considering this? Has the board discussed it, in even a preliminary fashion? If you are not interested in such an option, why not?

Board deliberations are private, but I can tell you that I have considered it, but only from an economics perspective: the "public market noise" means nothing to me, as I would have imagined you guys would have figured out by now. (Actually, that is not completely true: all things being equal, I have a slight preference for the amount of consternation I am causing you fellows, and if nothing else, many, many people tell me that the homogeneity of the coverage by Wall Street is what has convinced them I am right about things.)

6. Several people have expressed skepticism that such a buyout would be credit-worthy. Have you had any discussions with lenders? On the other hand, given the large management stake and close association with Scion and Fairholme, how much stock would you need to buy to buy the company, assuming investors recruited by management and the board participated?

There's no "close association" with Scion or Fairholme. How much would we have to buy? I don't know. But personally, I think it would be so much more fun to leave a little stub in the public's hands, for lots of reasons.

7. Related question: Who runs Odyssey America Reinsurance, which bought 475,000 shares in the third quarter? Do its officers, directors or portfolio managers/analysts have any past or present ties to Messr. Byrnes, Macklin, Fisher or Lindsey? Can you describe any meeting with management Odyssey had before buying the position, or any outreach that Overstock, its directors, its bankers or other representatives conducted with Odyssey before or during Odyssey's efforts to amass its position?

I don't recall ever hearing of Odyssey. Beyond looking at the page on Yahoo about once/year, I cannot ever recall looking at a list of who owns our stock in the 3.5 years we have been public.

8. Describe your strategy for rebuilding trust and confidence among sell-side analysts.
Continue focusing on building a real company that dominates the Internet and let the smart ones filter themselves out?
9. As an out-year scenario, one can envision OSTK as a 1.5 billion to $2 billion company with perhaps 4% EBITDA margins. How do you get there? Can you get margins beyond that on 15% Gross margins? How? (Even assuming you can hit those revenue figures, which seems likely). Can you grow that much while trimming marketing? How long would it likely take?

Since I think "EBITDA" is the stupidest thing I ever heard emanate from Wall Street (no small feat), I … don't begin to know how to answer. I suppose I could go and recast all my numbers into EBITDA (or for that matter, "pro forma") but I think I'll do something more valuable with my time, like alphabetize my CD's by, "Name of drummer."

Section III. The Disputes…

Your recollection is false: I have no idea who is allowing their shares to be borrowed.
I believe someone is violating securities laws because: the SEC mandates that the SRO's ( e.g., NASD) publish nightly "Reg SHO Threshold Lists" of companies that are seeing excessive failures to deliver; excessively failing to deliver violates securities laws; and Overstock has been on NASDAQ's list for 47 of the last 50 weeks. See?

I also think it because I conduct little experiments like buying 50,000 shares, and I don't get them for weeks or months on end, and when I ask around the BD the staff says things like, "Our trader says this is a hot stock and it is very hard to get delivery, and we could try to buy it in but if we did the stock we'd get would also be phony." (See O'Brien's blogs about this).

I'm not sure, but that doesn't sound right to me. My recollection of markets re that they are places where people buy and sell things, not places where people buy and are promised things that don't arrive. Call me madcap.