Amazon.com 2002 Annual Report Download - page 75

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AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
stock price (converted into Euros) is greater than or equal to the minimum conversion price of the 6.875%
PEACS. The Company has designated the swap agreement as a cash Öow hedge of the foreign exchange
rate risk on a portion of the 6.875% PEACS principal and interest in accordance with the provisions of
SFAS No. 133. Each period, gains or losses resulting from changes in the fair value of the swap contract
are recorded to ""Accumulated other comprehensive income (loss)'' and a portion of such gain or loss is
immediately reclassiÑed to the statement of operations, ""Other gains (losses), net,'' to oÅset the foreign
currency loss or gain attributable to remeasurement of the hedged portion of the 6.875% PEACS. For the
year ended December 31, 2002, a currency swap gain of $13 million was reclassiÑed to oÅset a $13 million
currency loss on the 6.875% PEACS. The terms of the swap contract have been structured to match the
terms of the hedged portion of the 6.875% PEACS. No net gains or losses, resulting from hedge
ineÅectiveness, were recognized in results of operations during the year ended December 31, 2002 and
2001.
EÅective January 1, 2001, currency gains and losses arising from the remeasurement of the 6.875%
PEACS's principal from Euros to U.S. Dollars each period are recorded to ""Other gains (losses), net.''
Prior to January 1, 2001, 6.875% PEACS's principal of 615 million Euros was designated as a hedge of an
equivalent amount of Euro-denominated investments classiÑed as available-for-sale; accordingly, currency
gains and losses on the 6.875% PEACS were recorded to ""Accumulated other comprehensive income
(loss)'' on the consolidated balance sheets as hedging oÅsets to currency gains and losses on the Euro-
denominated investments. As the hedge does not qualify for hedge accounting under the provisions of
SFAS No. 133, commencing January 1, 2001, the foreign currency change resulting from the portion of
the 6.875% PEACS previously hedging the available-for-sale securities is now being recorded to ""Other
gains (losses), net'' on the consolidated statements of operations. The change resulted in a gain of
$47 million for the year ended December 31, 2001, consisting of a $10 million gain reclassiÑed from
""Accumulated other comprehensive income (loss)'' and a $37 million gain attributable to remeasurement
of the 6.875% PEACS during the period.
The fair value of the swap is determined as the present value of net future cash payments and
receipts, adjusted for the Company's ability to cancel the agreement and the likelihood of such
cancellation. The fair value takes into consideration current foreign exchange rates, market interest rates,
the current market price of the Company's common stock and other variables. The fair value of the swap
obligation was $12 million and $33 million at December 31, 2002 and December 31, 2001, respectively.
Based upon quoted market prices, the fair value of the 6.875% PEACS was $531 million and $310 million,
as of December 31, 2002 and December 31, 2001, respectively.
4.75% Convertible Subordinated Notes
On February 3, 1999, the Company completed an oÅering of $1.25 billion of 4.75% Convertible
Subordinated Notes due 2009. The 4.75% Convertible Subordinated Notes are convertible into the
Company's common stock at the holders' option at a conversion price of $78.0275 per share, subject to
adjustment in certain events. Interest on the 4.75% Convertible Subordinated Notes is payable semi-
annually in arrears on February 1 and August 1 of each year, and commenced August 1, 1999. The 4.75%
Convertible Subordinated Notes are unsecured and are subordinated to all existing and future Senior
Indebtedness as deÑned in the indenture governing the 4.75% Convertible Subordinated Notes. At any
time on or after February 6, 2002, on at least 30 days' notice the Company may redeem the notes, in
whole or in part, at a premium of 3.325% over its principal balance, together with accrued interest. The
redemption premium is thereafter reduced by 0.475% on each February 1 between 2003 and 2009.
Upon the occurrence of a ""fundamental change'' prior to the maturity of the 4.75% Convertible
Subordinated Notes, each holder thereof has the right to require the Company to redeem all or any part of
such holder's 4.75% Convertible Subordinated Notes at a price equal to 100% of the principal amount of
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