Amazon.com 2003 Annual Report Download - page 42

Remeasurement of 6.875% PEACS and Other
The majority of “Remeasurement of 6.875% PEACS and other” consists of gains or charges due to our
quarterly remeasurement of the principal of our 6.875% PEACS from Euros to U.S. Dollars. We exclude the effect
of these periodic remeasurements from our pro forma net income (loss) because the ultimate cash effect resulting
from changes in exchange rates is inherently uncertain. These gains or charges would only affect near-term cash
flows if we redeem or, in certain cases, restructure, our 6.875% PEACS in the next several years, rather than over a
longer term or at maturity in 2010. Because these charges and gains vary based on exchange rates between the U.S.
Dollar and Euro, these amounts are beyond our immediate control and are difficult to predict for future periods.
Additionally, we exclude gains or charges associated with remeasurements of foreign-currency denominated
intercompany balances. We exclude these amounts because they are beyond our immediate control and are
difficult to predict for future periods.
This line item also includes $24 million of losses associated with the redemption of our 10% Senior
Discount Notes and a portion of our 4.75% Convertible Subordinated Notes and $6 million of losses associated
with the termination of our Euro Currency Swap.
Equity in Losses of Equity-Method Investees, Net
We exclude equity in losses of equity-method investees, net, because it generates potential non-cash gains
or losses, which are based on the financial results of other companies that we do not manage or control and are
difficult to predict. In addition, we believe these non-cash gains and losses are not indicative of our financial or
operating performance. Finally, in recent quarters, these amounts represented insignificant charges and, absent
future investments, we expect this trend to continue.
Cumulative Effect of Change in Accounting Principle
We exclude cumulative effect of change in accounting principle because it generates non-cash charges,
which we believe are not indicative of our financial or operating performance.
Limitations of Pro Forma Net Income (Loss)
Pro forma net income (loss) has the same limitations as consolidated segment operating income. See
“Consolidated Segment Operating Income (Loss)—Limitations of Consolidated Segment Operating Income
(Loss)” above. In addition, when the 6.875% PEACS are retired, whether by early redemption or restructuring, or
at maturity in 2010, the foreign currency effect of changes in the exchange ratio between the U.S. Dollar and the
Euro will result in a cash effect. We compensate for this limitation by disclosing the effect of currency
movements on our 6.875% PEACS on our consolidated statements of operations and presenting the fair value of
our 6.875% PEACS in the notes to our financial statements. See Item 8 of Part II, “Financial Statements and
Supplementary Data—Note 6—Long-Term Debt and Other.”
Free Cash Flow
Free cash flow, which we reconcile to “Net cash provided by (used in) operating activities,” is cash flow
from operations reduced by “Purchases of fixed assets, including internal-use software and website
development.” We use free cash flow, and ratios based on it, to conduct and evaluate our business because,
although it is similar to cash flow from operations, we believe it is a more conservative measure of cash flows
since purchases of fixed assets are a necessary component of ongoing operations. In limited circumstances where
proceeds from sales of fixed assets exceed purchases, free cash flow would exceed cash flow from operations.
However, since we do not anticipate being a net seller of fixed assets, we expect free cash flow to be less than
operating cash flows.
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