Overstock.com 2006 Annual Report Download - page 97

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6. MARKETABLE SECURITIES
The Company's marketable securities consist of funds deposited into capital management accounts managed by two financial
institutions. The financial institutions have invested these funds in municipal, government, and corporate bonds at December 31, 2005,
as follows (in thousands):
Cost
Basis
Recognized
Loss on
Derivative
Security
Unrealized
Gains
(Losses)
Estimated
Market Value
U.S. government and government agency securities $ 3,299 $ — $ (15) $ 3,284
Money market securities 2,000 — — 2,000
Mortgage based securities 2,091 — (39) 2,052
Foreign corporate securities 49,949 (2,611) 1,125 48,463
$57,339 $ (2,611) $1,071 $ 55,799
The Company had no marketable securities at December 31, 2006.
The components of realized gains and losses on sales of marketable securities for the years ended December 31, 2004, 2005 and
2006 were (in thousands):
Year ended
December 31,
2004 2005 2006
Gross gains $ 2 $ — $ 56
Gross losses — (3,351)(2,141)
Net realized gain (loss) on sales of marketable securities $ 2 $ (3,351)$ (2,085)
Derivative instruments
During the first quarter of 2005, the Company purchased $49.9 million of Foreign Corporate Securities ("Foreign Notes") which
were scheduled to 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. If the Company redeemed
the Foreign Notes prior to maturity, the Company would not realize the full amount of its initial investment.
The Company purchased the Foreign Notes to manage its foreign currency risks related to the strengthening of Asian currencies
compared to the U.S. dollar, which would reduce the inventory purchasing power of the Company in Asia. However, the Company
determined that the Foreign Notes did not qualify as hedging derivative instruments.
Under SFAS No. 133, the Foreign Notes are 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 accumulated 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 accumulated other comprehensive income (loss) in the Balance Sheet. At December 31, 2005, the Foreign Notes had a fair value of
$48.5 million.
F-19