Amazon.com 2004 Annual Report Download - page 77

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
6.875% PEACS
In February 2000, we completed an offering of 690 million Euros of 6.875% PEACS due 2010. The 6.875%
PEACS are convertible, at the holder’s option, into our common stock at a conversion price of 84.883 Euros per
share. The U.S. Dollar equivalent principal, interest, and conversion price fluctuate based on the Euro/U.S.
Dollar exchange ratio. Interest on the 6.875% PEACS is payable annually in arrears in February of each year.
The 6.875% PEACS are unsecured and are subordinated to any existing and future senior indebtedness. The
6.875% PEACS rank equally with our outstanding 4.75% Convertible Subordinated Notes. We have the right to
redeem the 6.875% PEACS, in whole or in part, by paying the principal, plus any accrued and unpaid interest.
No premium payment is required for early redemption.
Upon the occurrence of a “fundamental change” prior to the maturity of the 6.875% PEACS, each holder
thereof has the right to require us to redeem all or any part of such holder’s 6.875% PEACS at a price equal to
100% of the principal amount of the notes being redeemed, together with accrued interest. As defined in the
indenture, a “fundamental change” is the occurrence of certain types of transactions in which our stockholders do
not receive publicly-traded securities.
The indenture governing the 6.875% PEACS contains certain affirmative covenants for us, including
making principal and interest payments when due, maintaining our corporate existence and properties, and
paying taxes and other claims in a timely manner. We were in compliance with these covenants through
December 31, 2004.
During the second quarter of 2003, we terminated our Euro Currency Swap that previously was designated
as a cash flow hedge of a portion of the 6.875% PEACS’ principal and interest. Although neither party made cash
payments to terminate the agreement, we recorded a non-cash loss of $6 million to “Remeasurements and other”
representing the remaining basis in our swap asset. At December 31, 2004, the remaining cumulative unrealized
loss associated with our Euro Currency Swap, recorded to “Accumulated other comprehensive income,” was $7
million, net of tax effects. In accordance with SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities,this accumulated loss will be amortized to “Remeasurements and other” over the life of the
6.875% PEACS. No net gains or losses resulting from hedge ineffectiveness were recognized in our results of
operations during the year ended December 31, 2002. If we redeem or otherwise restructure our 6.875% PEACS
prior to maturity in 2010, any remaining cumulative unrealized loss associated with the Euro Currency Swap will
be recorded as a charge to “Remeasurements and other.”
Based upon quoted market prices, the fair value of the 6.875% PEACS was $936 million and $870 million
as of December 31, 2004 and 2003.
4.75% Convertible Subordinated Notes
On February 3, 1999, we completed an offering of $1.25 billion of 4.75% Convertible Subordinated Notes
due February 2009. The 4.75% Convertible Subordinated Notes are convertible into our common stock at the
holders’ option at a conversion price of $78.0275 per share. Interest on the 4.75% Convertible Subordinated
Notes is payable semi-annually in arrears in February and August of each year. The 4.75% Convertible
Subordinated Notes are unsecured and are subordinated to any existing and future senior indebtedness as defined
in the indenture governing the 4.75% Convertible Subordinated Notes. The 4.75% Convertible Subordinated
Notes rank equally with our outstanding 6.875% PEACS. We have the right to redeem the 4.75% Convertible
Subordinated Notes, in whole or in part, by paying the principal plus a redemption premium, plus any accrued
and unpaid interest. At December 31, 2004, the redemption premium was 2.375% of the principal, and decreased
to 1.900% on February 1, 2005 and will decrease by an additional 47.5 basis points annually until maturity.
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