Amazon.com 2005 Annual Report Download - page 48

Other Operating Expense (Income)
Other operating expense was $47 million in 2005, primarily attributable to our settlement of a patent lawsuit
for $40 million, as well as amortization of other intangibles of $5 million. Other operating income was $8 million
for 2004 and other operating expense was $3 million for 2003, which includes restructuring-related credits, net,
of $9 million in 2004 and amortization of other intangibles of $1 million and $3 million in 2004 and 2003.
During 2004, we determined that certain of the office space previously vacated as part of our 2001
restructuring, which we had been unable to sublease due to poor real estate market conditions, was necessary for
our future needs. We reduced our restructuring-related liability resulting in a gain of $13 million for 2004. Lease
payments for this office space are expensed over the lease period and classified to the corresponding operating
expense categories on the consolidated statements of operations.
In 2004, we streamlined our organizational structure in France to reduce our operating costs. These efforts
were primarily focused on eliminating French-office positions in managerial, professional, clerical, and technical
roles. The number of employees affected totaled 52 and resulted in severance costs of $4 million classified in
“Other operating expense (income)” on the consolidated statements of operations.
Income from Operations
Our income from operations was $432 million, $440 million, and $270 million during 2005, 2004, and
2003. The decrease in 2005 from 2004 is primarily a result of an increase in spending for technology and content,
an increase in stock-based compensation that is now recorded under SFAS 123(R) fair value accounting, and a
payment of $40 million to settle a patent lawsuit. These increased expenditures were partially offset by higher net
sales and gross profit. The increase in operating income in 2004 compared with 2003 was primarily attributed to
increases in net sales and gross profit growth and leveraging operating expenses relative to net sales. Income
from operations was negatively affected by year-over-year changes in exchange rates in 2005, and positively
affected in 2004 and 2003.
Net Interest Expense
The primary component of our net interest expense is the interest we incur on our long-term debt instruments,
including a $900 million principal balance of our 4.75% U.S. Convertible Subordinated Notes and a €490 million
($580 million based on the exchange rate at December 31, 2005) principal balance of our 6.875% PEACS at
December 31, 2005. Interest expense was $92 million, $107 million, and $130 million in 2005, 2004, and 2003,
with declines primarily relating to principal repayments of $265 million and $150 million in 2005 and 2004.
At December 31, 2005, our total long-term indebtedness was $1.52 billion compared to $1.86 billion at
December 31, 2004. In February 2006, we announced plans to redeem €250 million principal of our 6.875%
PEACS, which is expected to close March 7, 2006, for a cash payment of approximately $305 million (at the
Euro to U.S. dollar exchange rate on January 31, 2006), which includes $1 million of interest. See Item 8 of Part
II, “Financial Statements and Supplementary Data—Note 4—Long-Term Debt and Other.”
We generally invest our excess cash in investment grade short- to intermediate-term fixed income securities
and AAA-rated money market mutual funds. Our interest income corresponds with the average balance of
invested funds and the prevailing rates we are earning on them, which vary depending on the geographies and
currencies in which they are invested.
Other Income (Expense), Net
Other income (expense), net, was $2 million, $(5) million, and $7 million, in 2005, 2004 and 2003, and
consisted primarily of gains (losses) on sales of marketable securities, foreign-currency transaction gains (losses),
and other miscellaneous losses, net.
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