Overstock.com 2007 Annual Report Download - page 68

Interest expense is largely related to our convertible notes, capital leases and our credit lines. Interest expense decreased slightly from $5.6 million during
the year ended December 31, 2005 to $4.8 million during the same period in 2006. The decrease in interest expense was related to the reduction of convertible
notes outstanding related to the retirement of $43.0 million of Senior Notes in June and November of 2005 (see Item 15 of Part IV, "Financial Statements"—
Note 11—"3.75% Convertible Senior Notes").
Under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, 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 Notes was recorded as a
component of other comprehensive income (loss). On April 26, 2006, we sold the Foreign Notes for $49.5 million, resulting in the gain on the bond
instrument of $1.9 million (see Item 15 of Part IV, "Financial Statements"—Note 5—"Marketable Securities").
Other income for the year ended December 31, 2005 related primarily to the retirement of $43.0 million of Senior Notes for $35.7 million, which
resulted in a recognized gain of $6.2 million.
Discontinued operations
As part of the program to reduce our expense structure and sell non-core businesses, we decided during the fourth quarter of 2006 to sell our travel
subsidiary ("OTravel"). As a result, OTravel's operations have been classified as a discontinued operation and therefore were not included in the results of
continuing operations. The loss from discontinued operations for OTravel was $6.9 million for the year ended December 31, 2006, including a goodwill
impairment charge of $4.5 million.
Income taxes
Income taxes. For the year ended December 31, 2005 and 2006, we incurred net operating losses, and consequently paid insignificant amounts of
federal, state and foreign income taxes. As of December 31, 2005 and 2006, we had net operating loss carryforwards of approximately $58.0 million and
$145.2 million, respectively, which may be used to offset future taxable income. An additional $21.9 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 2018.
Supplemental Information about Stock-Based Compensation
Periods prior to the adoption of SFAS 123(R)
Prior to January 1, 2006, the Company accounted for stock-based awards under the intrinsic value method, which followed the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employee, and related interpretations. The intrinsic value method of
accounting resulted in compensation expense for stock options to the extent option exercise prices were set below market prices on the date of grant. Also, to
the extent stock awards were forfeited prior to vesting, any previously recognized expense was reversed as an offset to operating expenses in the period of
forfeiture.
The following table (in thousands, except per share data) illustrates the effects on net loss and net loss per share as if the Company had applied the fair
value recognition provisions of SFAS 123, Accounting for Stock Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation—Transition and Disclosure to options granted under the Company's stock-based compensation plans prior to the adoption. For purposes of this
pro forma disclosure, the value of the options was estimated using the Black-Scholes-Merton ("BSM") option-pricing formula and amortized
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