Amazon.com 2006 Annual Report Download - page 51

The fair value of the 6.875% PEACS was $320 million at December 31, 2006 (outstanding principal of €240
million), and $586 million at December 31, 2005 (outstanding principal of €490 million).
Foreign Exchange Risk
During 2006, 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 Japanese 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 2006, International segment revenues increased $18 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, 2006 of $623 million, an
assumed 5%, 10%, and 20% negative currency movement would result in fair value declines of $30 million, $60
million, and $125 million. All investments are classified as “available for sale,” as defined by SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Fluctuations in fair value are recorded in
“Accumulated other comprehensive income (loss),” a separate component of stockholders’ equity.
We have foreign exchange risk related to our intercompany balances denominated in foreign currency.
Based on the net intercompany balances at December 31, 2006 of $386 million, an assumed 5%, 10%, and 20%
strengthening of the U.S. Dollar in relation to these foreign currencies would result in losses of $20 million, $40
million, and $80 million, recorded to “Remeasurements and other.”
We have foreign exchange risk related to our 6.875% PEACS, which have an outstanding principal balance
at December 31, 2006 of €240 million ($317 million, based on the exchange rate as of December 31, 2006). 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 $80 million as of
December 31, 2006. 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 $15
million, $30 million, and $65 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 $1 million, $2 million,
and $4 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, 2006, our recorded basis in equity securities (including both publicly-traded and private
companies) was $27 million, including $7 million classified as “Marketable securities,” and $19 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, 2006 of $59
million (recorded basis of $11 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 $10 million, $20
million, and $30 million.
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