Amazon.com 2005 Annual Report Download - page 54

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Based upon quoted market prices at prevailing exchange rates, the fair value of the 6.875% PEACS was
€495 million or $586 million (outstanding principal of €490 million) and €691 million or $936 million
(outstanding principal of €690 million) at December 31, 2005 and 2004, and the fair value of the 4.75%
Convertible Subordinated Notes was $868 million and $907 million at December 31, 2005 and 2004.
Foreign Exchange Risk
During 2005, net sales from our International segment (consisting of www.amazon.co.uk,www.amazon.de,
www.amazon.fr,www.amazon.co.jp, and www.joyo.com) accounted for 45% of our consolidated revenues. Net
sales and related expenses generated from these websites, as well as those relating to www.amazon.ca (which is
included in our North America segment), are denominated in the functional currencies of the corresponding
websites and primarily include Euros, British Pounds, and Yen. 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
of, and certain of our intercompany balances associated with, our internationally-focused websites are exposed to
foreign exchange rate fluctuations. Upon consolidation, as exchange rates vary, net sales and other operating
results may differ materially from expectations, and we may record significant gains or losses on the
remeasurement of intercompany balances. For example, as a result of fluctuations in foreign exchange rates
during 2005, International segment revenues declined $78 million and our operating results declined $7 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, 2005 of $905 million, an
assumed 5%, 10%, and 20% negative currency movement would result in fair value declines of $45 million, $91
million, and $181 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
at December 31, 2005 of €490 million ($580 million, based on the exchange rate as of December 31, 2005). Due
to fluctuations in the Euro/U.S. Dollar exchange ratio, which we cannot predict, our remaining principal debt
obligation under the 6.875% PEACS since issuance in February 2000 has increased by $97 million as of
December 31, 2005. Based on the outstanding 6.875% PEACS’ principal balance, an assumed 5%, 10%, and
20% weakening of the U.S. Dollar in relation to the Euro would result in additional losses of approximately $29
million, $58 million, and $116 million, recorded to “Remeasurements and other.” Additionally, we have not
hedged our interest payments under our 6.875% PEACS to protect against exchange rate fluctuations. Assuming
the U.S. Dollar weakens against the Euro by 5%, 10%, and 20% in 2006, we would incur $2 million, $4 million,
and $8 million additional annual interest expense due solely to fluctuations in foreign exchange.
See “Effect of Exchange Rates” for additional information on the effect on reported results of changes in
exchange rates.
Investment Risk
As of December 31, 2005, our recorded basis in equity securities (including both publicly-traded and private
companies) was $14 million, including $6 million classified as “Marketable securities,” and $8 million classified
as “Other assets.” We regularly review the carrying value of our investments and identify and record losses when
events and circumstances indicate that declines in the fair value of such assets below our accounting basis are
other-than-temporary. The fair values of our investments are subject to significant fluctuations due to volatility of
the stock market in general, company-specific circumstances, and changes in general economic conditions. Based
on the fair value of the publicly-traded equity securities we held at December 31, 2005 of $44 million (recorded
basis of $7 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 $7 million, $13 million, and $22 million.
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