Overstock.com 2005 Annual Report Download - page 50

conditional coupon resulting in a loss of $2.6 million, which is recorded in net income, and changes in fair value of the bond
instrument resulting in a gain of $1.1 million, which is recorded as a component of other comprehensive income (loss) in the Balance
Sheet. See Item 15 of Part IV, "Financial Statements—Note 4—Marketable Securities".
Interest expense is comprised largely of interest expense related to our convertible notes, capital leases and our line of credit.
Interest expense increased from $775,000 during the year ended December 31, 2004 to $5.6 million during the year ended
December 31, 2005, primarily as a result of the interest expense related to our convertible senior notes issued in November 2004.
We recorded other expense, net of $49,000 and other income, net of $4.7 million for the years ended December 31, 2004 and
2005, respectively. The gain realized during the year ended December 31, 2005 resulted from the retirement of $43.0 million of the
3.75% Convertible Senior Notes which occurred during the second and fourth quarters of 2005, resulting in a combined net gain of
$6.2 million. See Item 15 of Part IV, "Financial Statements—Note 11—3.75% Convertible Senior Notes".
Income taxes
Income taxes. For the years ended December 31, 2004 and 2005, we incurred net operating losses, and consequently paid
insignificant amounts of federal, state and foreign income taxes. As of December 31, 2004 and 2005, we had net operating loss
carryforwards of approximately $50.5 million and $58.0 million, respectively, which may be used to offset future taxable income. An
additional $14.4 million of net operating losses are limited under Internal Revenue Code Section 382 to $799,000 a year. These net
operating loss carryforwards will begin to expire in 2019.
Comparison of Years Ended December 31, 2003 and 2004
Revenue
Beginning July 1, 2003, customer returns from sales shipped by our fulfillment partners are returned directly to us and processed
through our Salt Lake City warehouse, rather than returned to our fulfillment partners, as they previously were. We made the decision
to change this policy to have more control over the Overstock customer shopping experience, as we believe that a seamless customer
experience is key to creating loyal, long-term customers. By accepting returns at our warehouse, we can verify that fulfillment partner
products are being packaged and shipped to our standards. Additionally, as customer returns are now all shipped to one location, the
process is simpler and more convenient for our customers.
As a result of this change in business practices, we now record the majority of these sales transactions shipped by our fulfillment
partners on a gross basis instead of a net basis as we have historically done. Therefore, from the third quarter 2003 forward, revenue
recorded in accordance with accounting principles generally accepted in the United States ("GAAP") will increase significantly from
our results as reported in SEC filings prior to the third quarter of 2003. Additionally, direct revenue, as a percentage of total revenue
will decrease significantly while fulfillment partner revenue, as a percentage of total revenue, will increase significantly. As a result,
for each of the years presented, we believe that for year-over-year comparison purposes, gross bookings comparisons may be more
informative than revenue comparisons, as the gross bookings were not affected by the change in business practices. Gross bookings
represents the gross selling price of all transactions before returns, sales discounts, and before payments to fulfillment partners prior to
July 1, 2003. Since it has been over 12 months since we implemented the change described above, year-over-year revenue, in addition
to gross bookings, is comparable in 2005.
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