Overstock.com 2006 Annual Report Download - page 62

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 were scheduled to fully mature for $50.0 million in cash in
November 2006. The Foreign Notes did not have a stated interest rate, but were structured to return the entire principal amount and a
conditional coupon if held to maturity. The conditional coupon would provide a rate of return dependent on the performance of a
"basket" of eight Asian currencies against the U.S. dollar. At December 31, 2005, the Foreign Notes had a fair value of $48.5 million.
Under SFAS No. 133, the Foreign Notes were considered to be derivative financial instruments and were marked to market
quarterly. Any unrealized gain or loss related to the changes in value of the conditional coupon was 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 Foreign Notes was
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 was attributable to changes in the fair value of the conditional coupon
resulting in a loss of $2.6 million, which was recorded in net income, and changes in fair value of the bond instrument resulting in a
gain of $1.1 million, which was recorded as a component of other comprehensive income (loss) in the Balance Sheet. See Item 15 of
Part IV, "Financial Statements"—Note 6—"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 13—"3.75% Convertible Senior Notes".
Discontinued operations
The results of operations for fiscal 2005 for the OTravel subsidiary have been reclassified to loss from discontinued operations.
The loss from operations for the OTravel subsidiary was $2.6 million for the year ended December 31, 2005.
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.
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