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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended JUNE 30, 1997 Commission File No. 000-22513
AMAZON.COM, INC.
(Exact name of registrant as specified in its charter)
Delaware 91-1646860
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1516 Second Avenue, Seattle, Washington, 98101
(address of principal executive offices, Zip Code)
Registrant's telephone number, including area code (206) 622-2335
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
23,858,702 shares of $0.01 par value common stock outstanding
as of July 31, 1997
Page 1 of 16
Exhibit Index on Page 15
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AMAZON.COM, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Exhibit Index 15
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMAZON.COM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
June 30, Dec. 31,
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share data) (unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 47,700 $ 6,248
Short-term investments 8,692 -
Inventories 1,652 571
Prepaid expenses and other 1,162 321
---------------- -----------------
TOTAL CURRENT ASSETS 59,206 7,140
Equipment, net 3,564 985
Deposits 328 146
---------------- -----------------
TOTAL ASSETS $ 63,098 $ 8,271
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 10,327 $ 2,852
Accrued advertising 3,172 598
Accrued product development - 500
Other liabilities and accrued expenses 3,858 920
---------------- -----------------
TOTAL CURRENT LIABILITIES 17,357 4,870
LONG-TERM LEASE OBLIGATIONS 181 -
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value -
Authorized, 10,000,000 shares
Issued and outstanding, none
and 569,396 shares, respectively - 6
Common stock, $0.01 par value -
Authorized, 100,000,000 shares
Issued and outstanding, 23,858,702
and 15,900,229 shares, respectively 238 159
Additional paid-in capital 63,749 9,873
Deferred compensation (2,659) (612)
Accumulated deficit (15,768) (6,025)
---------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 45,560 3,401
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 63,098 $ 8,271
================ =================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
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AMAZON.COM, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
Quarter Ended Six Months Ended
----------------------------------- ---------------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
----------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales $ 27,855 $ 2,230 $ 43,860 $ 3,105
Cost of sales 22,633 1,753 35,117 2,448
----------------------------------- ---------------------------------
Gross profit 5,222 477 8,743 657
Operating expenses:
Marketing and sales 7,773 696 11,679 901
Product development 2,808 394 4,383 657
General and administrative 1,708 163 2,850 211
----------------------------------- ---------------------------------
Total operating expenses 12,289 1,253 18,912 1,769
Loss from operations (7,067) (776) (10,169) (1,112)
Interest income 362 9 426 14
----------------------------------- ---------------------------------
Net loss $ (6,705) $ (767) $ (9,743) $ (1,098)
=================================== =================================
Net loss per share $ (0.28) $ (0.03) $ (0.42) $ (0.05)
=================================== =================================
Shares used in computation of net loss per share 23,646 22,431 23,332 22,341
=================================== =================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
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AMAZON.COM, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------- ---------------- -------- ----------------
June 30, June 30,
FOR THE SIX MONTHS ENDED 1997 1996
- --------------------------------------------------------------------------------- ---------------- -------- ----------------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (9,743) $ (1,098)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization 1,022 45
Amortization of unearned compensation - stock options 625 -
Changes in operating assets and liabilities:
Inventories (1,081) (87)
Prepaid expenses and other assets (841) 9
Deposits (182) (30)
Accounts payable 7,475 219
Accrued advertising and other accrued expenses 5,331 685
---------------- ----------------
Net cash provided by (used in) operating activities 2,606 (257)
INVESTING ACTIVITIES:
Purchases of marketable securities (8,692) -
Additions to equipment (2,239) (235)
---------------- ----------------
Net cash used for investing activities (10,931) (235)
FINANCING ACTIVITIES:
Proceeds from initial public offering 49,103 -
Proceeds from exercise of stock options and sale of stock 474 36
Proceeds from sale of preferred stock 200 7,970
---------------- ----------------
Net cash provided by financing activities 49,777 8,006
---------------- ----------------
Net increase in cash and cash equivalents 41,452 7,514
Cash and cash equivalents at beginning of period 6,248 996
---------------- ----------------
Cash and cash equivalents at end of period $ 47,700 $ 8,510
================ ================
SUPPLEMENTAL CASH FLOW INFORMATION
Common stock issued for software and
accrued product development $ 1,500 $ -
Equipment acquired under capital lease 362 -
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
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AMAZON.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ACCOUNTING POLICIES
Description of Business
Amazon.com, Inc. (the Company) was incorporated on July 5, 1994. The Company is
an online retailer of books and other information-based products on the
Company's Internet site, and offers more than 2.5 million titles.
Unaudited Interim Financial Information
The financial statements as of June 30, 1997 and 1996 have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). These statements are unaudited and, in the opinion of
management, include all adjustments (consisting of normal recurring adjustments
and accruals) necessary to present fairly the results for the periods presented.
The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
SEC rules and regulations. Operating results for the quarter ended June 30, 1997
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. These financial statements should be read in
conjunction with the financial statements and the accompanying notes included in
the Company's Registration Statement on Form S-1 (No. 333-23795), including the
related Prospectus dated May 15, 1997 as filed with the SEC (the "Registration
Statement"). Certain prior period balances have been reclassified to conform to
current period presentation.
Net Loss per Share
Net loss per share is computed using the weighted average number of common and
common equivalent shares outstanding during the period. Common equivalent shares
consist of the incremental common shares issuable upon conversion of the
convertible preferred stock and shares issuable upon the exercise of stock
options using the treasury stock method. Common equivalent shares are excluded
from the computation if their effect is antidilutive, except that, pursuant to
the SEC Staff Accounting Bulletins, the convertible preferred stock and common
equivalent shares (using the treasury stock method and the public offering
price) issued during the 12 months previous to the initial public offering have
been included in the computation through May 15, 1997, regardless of
antidilutive effect, as if they were outstanding for all periods presented.
The Financial Accounting Standards Board recently issued Statement No. 128,
Earnings per Share, which requires the presentation of basic earnings per share
(EPS) and, for companies with complex capital structures, diluted EPS. Statement
No. 128 is effective for annual and interim periods ending after December 15,
1997. The Company expects that for profitable periods, basic EPS will be higher
than primary earnings per share as presented in the accompanying financial
statements and diluted EPS will not differ materially from earnings per share as
presented in the accompanying financial statements. Computations for loss
periods should not change significantly.
NOTE 2 - INVESTMENTS
The Company invests certain of its excess cash in debt instruments of the U.S.
government and its agencies, and of high quality corporate issuers. All highly
liquid instruments with an original maturity of three months or less are
considered cash equivalents; those with original maturities greater than three
months are considered short-term investments and those with maturities greater
than twelve months from the balance sheet date are considered long-term
investments. The Company classifies investment securities in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
At June 30, 1997, short-term investments consist primarily of U.S. Treasury
Securities and Foreign Government Securities and were classified as
held-to-maturity. At December 31, 1996, the Company did not hold any short-term
investments. Unrealized holding gains and losses at June 30, 1997 were not
significant.
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NOTE 3 - EQUIPMENT
Equipment, at cost, consisted of the following components (in thousands):
<TABLE>
<CAPTION>
June 30, Dec. 31,
1997 1996
---------------- ----------------
<S> <C> <C>
Computers and equipment $ 2,813 $ 1,031
Purchased software 1,221 134
Leasehold improvements 500 130
Leased equipment 362 -
---------------- ----------------
4,896 1,295
Less accumulated depreciation and
amortization 1,332 310
---------------- ----------------
$ 3,564 $ 985
================ ================
</TABLE>
NOTE 4 - STOCKHOLDERS' EQUITY
On May 15, 1997, the Company completed its initial public offering of 3,000,000
shares of its common stock. Net proceeds to the Company aggregated $49,103,000.
As of the closing date of the offering, all of the convertible preferred stock
outstanding was converted into an aggregate of 3,446,376 shares of common stock.
NOTE 5 - CONTINGENCY
On May 12, 1997, Barnes & Noble, Inc. ("B&N") filed suit against the Company in
the United States District Court for the Southern District of New York. The suit
alleges one count of false and misleading advertising in violation of the Lanham
Act. Specifically, B&N alleges that: (1) the Company's use of the phrase
"Earth's Biggest Bookstore" is false and misleading; (2) the Company's claim to
provide access to 2.5 million titles is false and misleading; and (3) the
Company's claim to provide access to more titles than B&N is false and
misleading. The complaint seeks compensatory and punitive damages, as well as
injunctive and other equitable relief. The Company filed its answer on July 11,
1997, in which it denies B&N's claims. The Company believes that B&N's claims
are without merit and intends to defend against the lawsuit vigorously.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements based on management's
current expectations, estimates and projections about the Company's industry,
management's beliefs and certain assumptions made by management. All statements,
trends, analyses and other information contained in this report relative to
trends in net sales, gross margin and anticipated expense levels, as well as
other statements, including words such as "anticipate," "believe," "plan,"
"estimate," "expect" and "intend" and other similar expressions, constitute
forward-looking statements. These forward-looking statements involve risks and
uncertainties, and actual results may differ materially from those anticipated
or expressed in such statements. Potential risks and uncertainties include,
among others, those set forth under "Overview" and "Additional Factors That May
Affect Future Results" included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and in the "Risk Factors" section
of the Company's final prospectus dated May 15, 1997, as filed with the SEC.
Particular attention should be paid to the cautionary statements involving the
Company's limited operating history, the unpredictability of its future
revenues, the unpredictable and evolving nature of its business model, the
increasingly competitive online commerce environment and the risks associated
with capacity constraints, systems development and management of growth. Except
as required by law, the Company undertakes no obligation to update any
forward-looking statement, whether as a result of new information, future events
or otherwise. Readers, however, should carefully review the factors set forth in
other reports or documents that the Company files from time to time with the
SEC.
OVERVIEW
Amazon.com is the leading online retailer of books. The Company also sells a
smaller number of CDs, videotapes and audiotapes. All of these products are sold
through the Company's Web site. The Company was incorporated in July 1994 and
commenced offering products for sale on its Web site in July 1995. Accordingly,
the Company has a limited operating
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history on which to base an evaluation of its business and prospects. The
Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets such as
online commerce. Such risks for the Company include, but are not limited to, an
evolving and unpredictable business model and the management of growth. To
address these risks, the Company must, among other things, maintain and increase
its customer base, implement and successfully execute its business and marketing
strategy, continue to develop and upgrade its technology and
transaction-processing systems, improve its Web site, provide superior customer
service and order fulfillment, respond to competitive developments, and attract,
retain and motivate qualified personnel. There can be no assurance that the
Company will be successful in addressing such risks, and the failure to do so
could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.
Since inception, the Company has incurred significant losses, and as of June 30,
1997 had an accumulated deficit of $15.8 million. The Company believes that its
success will depend in large part on its ability to (i) extend its brand
position, (ii) provide its customers with outstanding value and a superior
shopping experience, and (iii) achieve sufficient sales volume to realize
economies of scale. Accordingly, the Company intends to continue to invest
heavily in marketing and promotion (including its recent relationships with
Yahoo! Inc. ("Yahoo!"), Excite, Inc. ("Excite") and America Online, Inc. ("AOL")
as discussed below), site development and technology and operating
infrastructure development. The Company also offers attractive pricing programs,
which have reduced its gross margins. Because the Company has relatively low
product gross margins, achieving profitability given planned investment levels
depends upon the Company's ability to generate and sustain substantially
increased revenue levels. As a result, the Company believes that it will
continue to incur substantial operating losses for the foreseeable future, and
that the rate at which such losses will be incurred will increase significantly
from current levels. Although the Company has experienced significant revenue
growth in recent periods, such growth rates are not sustainable and will
decrease in the future. In view of the rapidly evolving nature of the Company's
business and its limited operating history, the Company believes that
period-to-period comparisons of its operating results, including the Company's
gross profit and operating expenses as a percentage of net sales, are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
As a result of the Company's limited operating history and the emerging nature
of the markets in which it competes, the Company is unable to accurately
forecast its revenues. The Company's current and future expense levels are based
largely on its investment plans and estimates of future revenues and are to a
large extent fixed. Sales and operating results generally depend on the volume
of, timing of and ability to fulfill orders received, which are difficult to
forecast. The Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall in revenues in relation to the Company's planned expenditures would
have an immediate adverse effect on the Company's business, prospects, financial
condition and results of operations. Further, as a strategic response to changes
in the competitive environment, the Company may from time to time make certain
pricing, service, marketing or acquisition decisions that could have a material
adverse effect on its business, prospects, financial condition and results of
operations. For example, the Company has agreed in each of its arrangements with
Yahoo!, Excite and AOL to make significant fixed payments. There can be no
assurance that these arrangements will generate adequate revenues to cover the
associated expenditures, and any significant shortfall would have a material
adverse effect on the Company's financial condition and results of operations.
The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside the Company's control. Factors that may adversely affect the Company's
quarterly operating results include (i) the Company's ability to retain existing
customers, attract new customers at a steady rate and maintain customer
satisfaction, (ii) the Company's ability to manage inventory and fulfillment
operations and maintain gross margins, (iii) the announcement or introduction of
new sites, services and products by the Company and its competitors, (iv) price
competition or higher wholesale prices in the industry, (v) the level of use of
the Internet and online services and increasing consumer acceptance of the
Internet and other online services for the purchase of consumer products such as
those offered by the Company, (vi) the Company's ability to upgrade and develop
its systems and infrastructure and attract new personnel in a timely and
effective manner, (vii) the level of traffic on the Company's Web site, (viii)
technical difficulties, system downtime or Internet brownouts, (ix) the amount
and timing of operating costs and capital expenditures relating to expansion of
the Company's business, operations and infrastructure, (x) the number of popular
books introduced during the period, (xi) the level of merchandise returns
experienced by the Company, (xii) governmental regulation, and (xiii) general
economic conditions and economic conditions specific to the Internet, online
commerce and the book industry.
The Company expects that it will experience seasonality in its business,
reflecting a combination of seasonal fluctuations in Internet usage and
traditional retail seasonality patterns. Internet usage and the rate of Internet
growth may be expected to decline during the summer. Further, sales in the
traditional retail book industry are significantly higher in the fourth calendar
quarter of each year than in the preceding three quarters.
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Due to the foregoing factors, in one or more future quarters the Company's
operating results may fall below the expectations of securities analysts and
investors. In such event, the trading price of the common stock would likely be
materially adversely affected.
The Company has recorded aggregate deferred compensation of approximately $3.3
million. The amount recorded represents the difference between the grant price
and the deemed fair value of the Company's common stock for shares subject to
options granted in 1996 and 1997. Deferred compensation is amortized over the
vesting period of the options, which is typically five years. Amortization for
the quarter and six months ended June 30, 1997 was $362,000 and $625,000,
respectively.
RECENT EVENTS
In June 1997, the Company entered into multiyear, multimillion dollar
advertising agreements with three Internet aggregators, Yahoo!, Excite and AOL.
These agreements provide the Company with a broad bookselling promotional
presence on each aggregator's Internet service. Each of the agreements provides
for fixed payments as well as performance incentive payments. The Company
anticipates that it will not recognize sales revenues from these agreements
until the fourth quarter of 1997, but expects to recognize marketing and sales
expenses in earlier quarters, including $1.8 million in the quarter ended June
30, 1997. Although the Company anticipates that the promotional placements
resulting from these arrangements will increase its brand awareness, its
customer base and accordingly its sales levels, the Company has agreed, in each
case, to make significant fixed payments over the course of the contracts. There
can be no assurance that these arrangements will generate adequate revenues to
cover the associated expenditures, and any significant shortfall would have a
material adverse effect on the Company's financial condition and results of
operations.
RESULTS OF OPERATIONS
NET SALES
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
(in thousands) June 30, June 30, June 30, June 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 27,855 $ 2,230 $ 43,860 $ 3,105
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Net sales are comprised of the selling price of books and other merchandise sold
by the Company, net of returns, as well as outbound shipping and handling
charges. Growth in net sales reflects a significant increase in units sold due
to the significant growth of the Company's customer base and repeat purchases
from the Company's existing customers. International sales represented 28% and
37% of net sales for the quarters ended June 30, 1997 and 1996, respectively,
and 28% and 38% of net sales for the six months ended June 30, 1997 and 1996,
respectively.
GROSS PROFIT
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
(in thousands) June 30, June 30, June 30, June 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross profit $ 5,222 $ 477 $ 8,743 $ 657
Gross margin 18.7% 21.4% 19.9% 21.2%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Gross profit equals sales less cost of sales, which consists of the cost of
merchandise sold to customers and outbound and inbound shipping costs. Gross
profit increased in absolute dollars reflecting the Company's increased sales
volume. The Company's gross margin decreased due to a combination of lower
prices and lower overall shipping margins, partially offset by improvements in
purchasing.
The Company believes that offering its customers attractive prices is an
essential component of its business strategy. Accordingly, the Company offers
discounts on a broad selection of books. During April and May 1997, the Company
offered discounts of 40% on titles on the Amazon.com 500 and other focus lists.
In June 1997, the Company extended its discounts to include 20% and 30%
discounts on over 400,000 titles, with fewer titles discounted at 40%. The
Company may in the future expand or increase the discounts it offers to its
customers and may otherwise alter its pricing structure and policies. The
Company anticipates that its June pricing change will reduce gross margins in
upcoming quarters below those experienced in the quarter ended June 30, 1997.
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MARKETING AND SALES
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
(in thousands) June 30, June 30, June 30, June 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Marketing and sales $ 7,773 $ 696 $11,679 $ 901
Percentage of net sales 27.9% 31.2% 26.6% 29.0%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Marketing and sales expenses consist primarily of advertising, public relations
and promotional expenditures, as well as payroll and related expenses for
personnel engaged in marketing, selling and fulfillment activities. Marketing
and sales expenses increased primarily due to increases in the Company's
promotional expenditures, including $1.8 million associated with the Yahoo!,
Excite and AOL relationships (see "Recent Events"), and increased personnel and
related expenses required to implement the Company's marketing strategy and
fulfill customer demand. The Company intends to continue to pursue its
aggressive branding and marketing campaign and expects its costs of fulfillment
to increase based on anticipated sales growth. Therefore, the Company expects
marketing and sales expenses to increase significantly in absolute dollars.
PRODUCT DEVELOPMENT
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
(in thousands) June 30, June 30, June 30, June 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Product development $ 2,808 $ 394 $ 4,383 $ 657
Percentage of net sales 10.1% 17.7% 10.0% 21.2%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Product development expenses consist principally of payroll and related expenses
for development, editorial and network operations personnel and consultants,
systems and telecommunications infrastructure and costs of acquired content. The
increases in product development expenses were primarily attributable to
increased staffing and associated costs relating to enhancing the features,
content and functionality of the Company's Web site and transaction-processing
systems, as well as increased investment in systems and telecommunications
infrastructure. Such expenses decreased significantly as a percentage of net
sales due to the significant increase in net sales. To date, all product
development costs have been expensed as incurred. The Company believes that
continued investment in product development is critical to attaining its
strategic objectives and, as a result, expects product development expenses to
increase significantly in absolute dollars.
GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
(in thousands) June 30, June 30, June 30, June 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
General and administrative $ 1,708 $ 163 $ 2,850 $ 211
Percentage of net sales 6.1% 7.3% 6.5% 6.8%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
General and administrative expenses consist of payroll and related expenses for
executive, accounting and administrative personnel, recruiting, professional
fees and other general corporate expenses. The increase in general and
administrative expenses was primarily due to increased salaries and related
expenses associated with the hiring of additional personnel, costs attributable
to being a public company, and increases in professional fees and travel. The
Company expects general and administrative expenses to increase in absolute
dollars as the Company expands its staff and incurs additional costs related to
the growth of its business and being a public company.
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INTEREST INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
(in thousands) June 30, June 30, June 30, June 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 362 $ 9 $ 426 $ 14
Percentage of net sales 1.3% 0.4% 1.0% 0.5%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest income on cash, cash equivalents and short-term investments increased
due to higher cash, cash equivalents and short-term investment balances
resulting from the Company's financing activities, including the issuance of
preferred stock in June 1996 and the completion of the Company's initial public
offering of common stock in May 1997.
INCOME TAXES
The Company has not generated any net income to date and therefore has not paid
any federal income taxes since inception. Utilization of the Company's net
operating loss carryforwards may be subject to certain limitations under Section
382 of the Internal Revenue Code. The Company has provided a full valuation
allowance on the deferred tax asset, consisting primarily of net operating loss
carryforwards, because of uncertainty regarding its realizability.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997 the Company's cash and cash equivalents were $47.7 million,
compared to $6.2 million at December 31, 1996. On May 15, 1997, the Company
completed an initial public offering of 3,000,000 shares of common stock at a
price of $18.00 per share. The net proceeds to the Company from the offering
were approximately $49.1 million.
Net cash provided by operating activities of $2.6 million for the six months
ended June 30, 1997 was attributable to increases of $7.5 million in accounts
payable and $5.3 million in accrued advertising and other accrued expenses plus
$1.6 million in depreciation and amortization, largely offset by a net loss of
$9.7 million and increases of $1.1 million in inventories, $841,000 in prepaid
expenses and $182,000 in deposits. For the six months ended June 30, 1996, cash
used in operating activities of $257,000 resulted from a net loss of $1.1
million and increases in inventories and deposits, largely offset by increases
in accounts payable and accrued advertising and other accrued expenses, as well
as depreciation and amortization. Net cash used in investing activities was
$10.9 million for the six months ended June 30, 1997, and consisted of purchases
of short-term investments of $8.7 million and purchases of equipment of $2.2
million. Cash used in investing activities of $235,000 for the six months ended
June 30, 1996 was attributable to purchases of equipment. The large increases in
the components of working capital on a period-to-period basis are a direct
result of the rapid growth of the Company's revenues and related activities.
Such growth has required the Company to purchase additional equipment and
software and increase purchases of products, which resulted in corresponding
increases in inventories and accounts payable.
Cash flows provided by financing activities of $49.8 million for the six months
ended June 30, 1997 consisted of net proceeds of approximately $49.1 million
from the initial public offering, $474,000 from the exercise of common stock
options and $200,000 from the issuance of preferred stock. Cash flows of $8.0
million attributable to financing activities for the six months ended June 30,
1996 consisted primarily of net proceeds from the issuance of preferred stock.
As of June 30, 1997 the Company's principal sources of liquidity consisted of
$47.7 million of cash and cash equivalents and $8.7 million of short-term
investments. As of that date, the Company's principal commitments consisted of
obligations outstanding under operating leases and commitments for advertising
arrangements. Although the Company has no material commitments for capital
expenditures, it anticipates a substantial increase in its capital expenditures
and lease commitments consistent with anticipated growth in operations,
infrastructure and personnel. The Company expects to establish one or more
additional warehouse locations within the next six months, which will require it
to commit to additional lease obligations and stock inventories, and to purchase
equipment and install leasehold improvements. In the future, the Company may
support a larger merchandise inventory in order to provide better availability
to customers and achieve purchasing efficiencies.
The Company believes that current cash and cash equivalent balances and
short-term investments will be sufficient to meet its anticipated cash needs for
at least 12 months. However, any projection of future cash needs and cash flows
is subject to substantial uncertainty. If cash generated from operations is
insufficient to satisfy the Company's liquidity requirements, the Company may
seek to sell additional equity or debt securities or to obtain a credit
facility. The sale of additional equity or convertible debt securities could
result in additional dilution to the Company's stockholders. There can be no
assurance that financing will be available in amounts or on terms acceptable to
the Company, if at all. In
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<PAGE> 12
addition, the Company will, from time to time, consider the acquisition of or
investment in complementary businesses, products and technologies, which might
increase the Company's liquidity requirements or cause the Company to issue
additional equity or debt securities.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the factors discussed in the "Overview" section of this
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Company's final prospectus dated May 15, 1997, as filed with
the SEC, including, among others, the Company's limited operating history, the
unpredictability of its future revenues and the unpredictable and evolving
nature of its business model, the following additional factors may affect the
Company's future results.
The online commerce market, particularly over the Internet, is new, rapidly
evolving and intensely competitive, which competition the Company expects will
intensify in the future. In addition, the retail book industry is intensely
competitive. The Company's current or potential competitors include (i) various
online booksellers and vendors of other information-based products such as CDs
and videotapes, including entrants into narrow specialty niches that may be
aided by partnering with existing distributors that help establish and operate
online sites for booksellers, (ii) a number of indirect competitors that
specialize in online commerce or derive a substantial portion of their revenues
from online commerce, through which bookstores other than the Company may offer
products, and (iii) publishers and retail vendors of books, music and
videotapes, including large specialty booksellers, with significant brand
awareness, sales volume and customer bases. Many of these competitors have
longer operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than the Company.
In addition, new technologies and the expansion of existing technologies may
increase the competitive pressures on the Company. Competitive pressures created
by any one of the Company's competitors, or by the Company's competitors
collectively, could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
The Company's revenues depend on the number of visitors who shop on its Web site
and the volume of orders it fulfills. Any system interruptions that result in
the unavailability of the Company's Web site or reduced order fulfillment
performance would reduce the volume of goods sold and the attractiveness of the
Company's product and service offerings. The Company has experienced periodic
system interruptions, which it believes will continue to occur from time to
time. The Company uses an internally developed system for its Web site, search
engine and substantially all aspects of transaction processing, including order
management, cash and credit card processing, purchasing, inventory management
and shipping. The Company will be required to add additional software and
hardware and further develop and upgrade its existing technology,
transaction-processing systems and network infrastructure to accommodate
increased traffic on its Web site and increased sales volume through its
transaction-processing systems. Any inability to do so may cause unanticipated
system disruptions, slower response times, degradation in levels of customer
service, impaired quality and speed of order fulfillment, or delays in reporting
accurate financial information. There can be no assurance that the Company will
be able to accurately project the rate or timing of increases, if any, in the
use of its Web site or in a timely manner to effectively upgrade and expand its
transaction-processing systems or to integrate smoothly any newly developed or
purchased modules with its existing systems. Any inability to do so would have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. Substantially all of the Company's computer
and communications hardware is located at a single leased facility in Seattle,
Washington. The Company's systems and operations are vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure,
break-ins, earthquake and similar events. The Company does not presently have
redundant systems or a formal disaster recovery plan and does not carry
sufficient business interruption insurance to compensate it for losses that may
occur. Despite the implementation of network security measures by the Company,
its servers are vulnerable to computer viruses, physical or electronic break-ins
and similar disruptions, which could lead to interruptions, delays, loss of data
or the inability to accept and fulfill customer orders. The occurrence of any of
the foregoing events could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
The Company has rapidly and significantly expanded its operations, and
anticipates that further significant expansion will be required to address
potential growth in its customer base and market opportunities. This expansion
has placed, and is expected to continue to place, a significant strain on the
Company's management, operational and financial resources. To manage the
expected growth of its operations and personnel, the Company will be required to
improve existing and implement new transaction-processing, operational and
financial systems, procedures and controls, and to expand, train and manage its
growing employee base. There can be no assurance that the Company's current and
planned personnel, systems, procedures and controls will be adequate to support
the Company's future operations, that management will be able to hire, train,
retain, motivate and manage required personnel or that Company management will
be able to successfully identify, manage and exploit existing and potential
market opportunities. If the Company is unable to manage growth effectively, its
business, prospects, financial condition and results of operations will be
materially adversely affected.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 12, 1997, B&N filed suit against the Company in the
United States District Court for the Southern District of New
York. The suit alleges one count of false and misleading
advertising in violation of the Lanham Act. Specifically, B&N
alleges that: (1) the Company's use of the phrase "Earth's
Biggest Bookstore" is false and misleading; (2) the Company's
claim to provide access to 2.5 million titles is false and
misleading; and (3) the Company's claim to provide access to
more titles than B&N is false and misleading. The complaint
seeks compensatory and punitive damages, as well as injunctive
and other equitable relief. The Company filed its answer on
July 11, 1997, in which it denies B&N's claims. The Company
believes that B&N's claims are without merit and intends to
defend against the lawsuit vigorously.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Statement Regarding Computation of Loss Per Share
27. Financial Data Schedule
(b) Reports on Form 8-K
None
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<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMAZON.COM, INC.
(REGISTRANT)
DATED: August 14, 1997
By://S//Joy D. Covey
Joy D. Covey
Chief Financial Officer
Vice President
Finance and Administration
Treasurer and Secretary
Page 14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Title
- -------------- ---------------------------------------------------
<S> <C>
11 Statement Regarding Computation of Loss per Share
27 Financial Data Schedule
</TABLE>
Page 15
<PAGE> 1
EXHIBIT 11
AMAZON.COM, INC.
COMPUTATION OF LOSS PER SHARE
Loss per share reported in Form 10-Q for the quarters ended June 30, 1997 and
1996 are based on the following (in thousands, except per share data):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Quarter Ended Six Months Ended
----------------------------------- ---------------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Loss $ (6,705) $ (767) $ (9,743) $ (1,098)
=================================== =================================
Weighted average number of common shares used
in computation 20,719 15,348 18,774 15,035
Net effect of stock options exercised and granted,
and preferred stock issued during the 12-month
period prior to the Company's filing of its
initial public offering at less than the
offering price, calculated using the treasury
stock method at the offering price of $18 per
share, and treated as outstanding for all
periods presented prior to and through May 15,
1997 2,927 7,083 4,558 7,306
----------------------------------- ---------------------------------
Total Shares 23,646 22,431 23,332 22,341
=================================== =================================
Net Loss per Share $ (0.28) $ (0.03) $ (0.42) $ (0.05)
=================================== =================================
</TABLE>
Page 16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AMAZON.COM INC. FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 47,700
<SECURITIES> 8,692
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 1,652
<CURRENT-ASSETS> 59,206
<PP&E> 4,896
<DEPRECIATION> 1,332
<TOTAL-ASSETS> 63,098
<CURRENT-LIABILITIES> 17,357
<BONDS> 0
0
0
<COMMON> 238
<OTHER-SE> 61,090
<TOTAL-LIABILITY-AND-EQUITY> 63,098
<SALES> 43,860
<TOTAL-REVENUES> 43,860
<CGS> 35,117
<TOTAL-COSTS> 35,117
<OTHER-EXPENSES> 18,912
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,743)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,743)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,743)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
