Amazon.com 2003 Annual Report Download - page 48

At December 31, 2003, we have long-term debt of $1.95 billion primarily associated with our 6.875%
PEACS and 4.75% Convertible Subordinated Notes, which are due in 2010 and 2009. Our payment commitments
associated with these debt instruments are fixed during the corresponding terms and are comprised of periodic
interest payments and principal payments at maturity. The market value of our long-term debt will fluctuate with
movements of interest rates, increasing in periods of declining rates of interest and declining in periods of
increasing rates of interest. Based upon quoted market prices, the fair value of the 6.875% PEACS was $870
million and $531 million at December 31, 2003 and 2002, and the fair value of the 4.75% Convertible
Subordinated Notes was $1.06 billion (principal balance of $1.05 billion) and $925 million (principal balance of
$1.25 billion) at December 31, 2003 and 2002.
Foreign Exchange Risk
During 2003, net sales from our International segment (consisting of www.amazon.co.uk, www.amazon.de,
www.amazon.fr, and www.amazon.co.jp) accounted for 38% of our consolidated revenues. Net sales and related
expenses generated from these websites, as well as those relating to www.amazon.ca, are denominated in the
functional currencies of the corresponding websites, and include Euros, British Pounds, Yen, and Canadian
Dollars. The functional currency of our subsidiaries that either operate or support these websites is the same as
the corresponding local currency. The results of operations and certain of our intercompany balances associated
with our internationally-focused websites are exposed to foreign exchange rate fluctuations. Upon translation, net
sales and other operating results may differ materially from expectations, and we may record significant
transaction gains or losses on the remeasurement of intercompany balances. As a result of fluctuations in foreign
exchange rates during 2003, International segment revenues improved $226 million and our operating results
improved $15 million in comparison with the prior year.
We have foreign exchange risk related to foreign-denominated cash, cash equivalents, and marketable
securities (“foreign funds”). Based on the balance of foreign funds at December 31, 2003 of $764 million, an
assumed 5%, 10%, and 20% negative currency movement would result in fair value declines of $38 million,
$76 million, and $153 million. All investments are classified as “available for sale,” as defined by SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
We have foreign exchange risk related to our 6.875% PEACS, which have an outstanding principal balance
of 690 million Euros ($870 million, based on the exchange rate as of December 31, 2003). Based on the
outstanding 6.875% PEACS’s principal balance, an assumed 5%, 10%, and 20% weakening of the U.S. Dollar in
relation to the Euro would result in losses of approximately $43 million, $87 million, and $174 million, recorded
to “Remeasurement of 6.875% PEACS and other.” We are not hedged on interest payments under our 6.875%
PEACS. Assuming the U.S. Dollar weakens against the Euro by 5%, 10%, and 15% in 2004, we would incur
$2 million, $4 million, and $6 million additional interest expense due solely to fluctuations in foreign exchange.
Investment Risk
As of December 31, 2003, our recorded basis in equity securities was $23 million, including $9 million
classified as “Marketable securities” and $15 million classified as “Other equity investments.” 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 2003, we recorded impairment losses totaling $2 million, compared to $8 million during the year ended
December 31, 2002, to write-down several of our equity securities to fair value. The fair values of our
investments 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,
2003 of $86 million (recorded basis of $16 million), an assumed 15%, 30%, and 50% adverse change to market
prices of these securities would result in a corresponding decline in total fair value of approximately $13 million,
$26 million and $43 million.
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