Overstock.com 2005 Annual Report Download - page 49

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our newly expanded infrastructure, including hardware and software used to enhance performance, reliability and stability.
We intend to continue investing in technology; however, we do not expect the "stair-step" increases in technology expense seen
in 2005, and we expect overall capital expenditures to decrease as a percentage of sales in the near future.
General and administrative expenses. General and administrative expenses increased 68% from $21.8 million during year ended
December 31, 2004 to $36.5 million during the year ended December 31, 2005, representing 4% and 5% of total revenue for each of
the respective periods.
The increase in general and administrative expenses in the year ended December 31, 2005 compared to the year ended
December 31, 2004 relate to the increases in primarily in payroll-related expenses, professional fees, merchandising, legal and finance
costs. Also in the third quarter of 2005, we relocated our corporate offices to larger facilities to allow for future growth. As a result we
now incur an additional rent expense of approximately $1.0 million quarterly.
On July 1, 2005, we completed our acquisition of Ski West (and renamed it OTravel.com, Inc.) and consolidated its operations
into our travel business. Ski West's operations contributed an additional $2.4 million of general and administrative expenses and an
additional $1.3 million of expense related to the amortization of intangible assets.
Amortization of stock-based compensation. Prior to the Company's initial public offering in May 2002, the Company recorded
unearned stock-based compensation related to stock options granted below the fair market value of the underlying stock. Since the
initial public offering, the Company has not granted any additional stock options below fair market value. Amortization of stock-based
compensation was approximately $360,000 and $72,000 for the years ended December 31, 2004 and 2005, respectively. The decrease
was a result of forfeitures of unvested options for which compensation expenses had been previously recorded and a decrease in
remaining number of outstanding options.
Non-operating income (expense)
Interest income, interest expense and other income (expense).
The primary component of our net interest income (expense) relates to the interest derived from the investment of our excess cash
in marketable securities offset by interest expense related to the convertible debt, letters of credit, capital leases, and other related fees.
Additionally, we incurred a large expense during the year related to the valuation of the conditional coupon of our foreign bonds.
Interest income decreased from $1.2 million in the year ended December 31, 2004 to $270,000 negative interest income in the year
ended December 31, 2005 due to the decreased valuation of our foreign bonds. During the first quarter of 2005, we purchased $49.9
million of Foreign Corporate Securities ("Foreign Notes") which fully mature for $50.0 million in cash in November 2006. The
Foreign Notes do not have a stated interest rate, but are structured to return the entire principal amount and a conditional coupon if
held to maturity. The conditional coupon will provide a rate of return dependent on the performance of a "basket" of eight Asian
currencies against the U.S. dollar. If we redeems the Foreign Notes prior to maturity, we may not realize the full amount of its initial
investment. At December 31, 2005, the Foreign Notes had a fair value of $48.5 million.
Under SFAS No. 133, the Foreign Notes are considered to be derivative financial instruments and are marked to market
quarterly. Any unrealized gain or loss related to the changes in value of the conditional coupon is recorded in the income statement as
a component of interest income or expense. Any unrealized gain or loss related to the changes in the value of the Notes is recorded as
a component of other comprehensive income (loss). For the year ended December 31, 2005, the combined overall fair value of the
Foreign Notes decreased $1.5 million. The decrease is attributable to changes in the fair value of the
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