Amazon.com 2001 Annual Report Download - page 49

of the United Kingdom, Germany, France and Japan, respectively. Results of operations from our foreign
subsidiaries and our subsidiaries that operate our internationally-focused Web sites are exposed to foreign
currency exchange rate fluctuations as the financial results of these subsidiaries are translated into U.S. dollars
upon consolidation. As exchange rates vary, net sales and other operating results, when translated, may differ
materially from expectations. The effect of foreign currency exchange rate fluctuations on the results of
operations of our internationally-focused Web sites for 2001 was not material.
At December 31, 2001, we were also exposed to foreign currency risk related to our 6.875% PEACS and
Euro-denominated cash equivalents and marketable securities (“Euro Investments”). The 6.875% PEACS have
an outstanding principal balance of 690 million Euros ($609 million, based on the exchange rate as of
December 31, 2001), and our Euro Investments, classified as available-for-sale, had a balance of 179 million
Euros ($158 million, based on the exchange rate as of December 31, 2001). As the Euro/U.S. dollar exchange
ratio varies, the value of our Euro Investments, when translated, will fluctuate. Debt principal of 615 million
Euros is remeasured each period, which results in currency gains or losses that are recorded in “Other gains
(losses), net” on our statements of operations. We hedge the exchange rate risk on debt principal of 75 million
Euros and a portion of the interest payments using a cross-currency swap agreement. Under the swap agreement,
we agreed to pay at inception and receive upon maturity 75 million Euros in exchange for receiving at inception
and paying at maturity $67 million. In addition, we agreed to receive in February of each year 27 million Euros
corresponding with interest payments on 390 million Euros of the 6.875% PEACS and, simultaneously, to pay
$32 million. This agreement is cancelable, in whole or in part, at our option at no cost on or after February 20,
2003 if our common stock price (converted into Euros) is greater than or equal to 84.883 Euros, the minimum
conversion price of the 6.875% PEACS. We account for the swap agreement as a cash flow hedge of the risk of
exchange rate fluctuations on the debt principal and interest. Gains and losses on the swap agreement are initially
recorded in “Accumulated other comprehensive loss” on our balance sheets and recognized in “Other gains
(losses), net” on our statements of operations upon the recognition of the corresponding currency losses and
gains on the remeasurement of the 6.875% PEACS.
Investment Risk
As of December 31, 2001, our recorded basis in equity securities was $41 million, including $13 million
classified as “Marketable securities,” $10 million classified as “Investments in equity-method investees,” and
$18 million classified as “Other equity investments.” We invest in the stock and/or warrants of both private and
public companies, including companies with which we have formed strategic alliances, primarily for strategic
purposes. At December 31, 2001, our investments in securities of publicly-held companies was $16 million, and
our investments in securities of privately-held companies was $25 million. We have also received securities,
including warrant investments, from some of the companies with which we have formed strategic alliances in
exchange for services provided by us to those companies. Our investments are accounted for under the equity
method if we have the ability to exercise significant influence, but not control, over an investee. Some of our
cost-method investments are in private companies and are accounted for at cost and others are in public
companies and are accounted for as available-for-sale securities and recorded at fair value. Warrant investments
are generally carried at fair value. We regularly review the carrying value of our investments and identify and
record losses when events and circumstances indicate that such declines in the fair value of such assets below our
accounting basis are other-than-temporary. During 2001, we recorded impairment losses totaling $44 million to
write-down several of our equity securities to fair value. All of these investments are in companies involved in
the Internet and e-commerce industries and their fair values are subject to significant fluctuations due to volatility
of the stock market and changes in general economic conditions. Based on the fair value of the publicly-traded
equity securities we held at December 31, 2001, an assumed 15%, 30% or 50% adverse change to market prices
of these securities would result in a corresponding decline in total fair value of approximately $6 million,
$12 million or $21 million, respectively.
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