<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1997
REGISTRATION 333-23795
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 5 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
AMAZON.COM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7375 91-1646860
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1516 SECOND AVENUE, 4TH FLOOR
SEATTLE, WASHINGTON 98101
(206) 622-2335
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------------
JEFFREY P. BEZOS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
AMAZON.COM, INC.
1516 SECOND AVENUE, 4TH FLOOR
SEATTLE, WASHINGTON 98101
(206) 622-2335
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
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<S> <C>
CHARLES J. KATZ, JR., ESQ. MARK A. BERTELSEN, ESQ.
L. MICHELLE WILSON, ESQ. DAVID C. DRUMMOND, ESQ.
DAVID F. MCSHEA, ESQ. ROBERT M. TARKOFF, ESQ.
PERKINS COIE WILSON SONSINI GOODRICH & ROSATI, P.C.
1201 THIRD AVENUE, 40TH FLOOR 650 PAGE MILL ROAD
SEATTLE, WASHINGTON 98101-3099 PALO ALTO, CALIFORNIA 94304-1050
(206) 583-8888 (415) 493-9300
</TABLE>
---------------------
Approximate date of commencement of proposed sale to the public: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ------------------------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ------------------------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
================================================================================================
PROPOSED PROPOSED
TITLE OF EACH CLASS AMOUNT MAXIMUM MAXIMUM AMOUNT OF
OF SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par
value per share....... 3,450,000 shares $16.00 $55,200,000 $16,727(3)
================================================================================================
</TABLE>
(1) Includes 450,000 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c).
(3) Previously paid.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 14, 1997
LOGO
- --------------------------------------------------------------------------------
3,000,000 SHARES
COMMON STOCK
- --------------------------------------------------------------------------------
All of the 3,000,000 shares of Common Stock, par value $0.01 per share ("Common
Stock"), are being sold by Amazon.com, Inc. ("Amazon.com" or the "Company").
Prior to this offering, there has been no public market for the Common Stock. It
is currently estimated that the initial public offering price will be between
$14.00 and $16.00 per share. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price. The Company has
applied to have the Common Stock approved for listing on the Nasdaq National
Market under the symbol "AMZN."
FOR INFORMATION CONCERNING CERTAIN RISK FACTORS WHICH SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS, SEE "RISK FACTORS" COMMENCING ON PAGE 5.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share $ $ $
Total(3) $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting expenses estimated at $850,000, payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
450,000 additional shares of Common Stock solely to cover over-allotments,
if any. If such option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
The shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by them, and subject to approval
of certain legal matters by counsel and certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. Delivery of the shares of Common Stock
offered hereby to the Underwriters is expected to be made in New York, New York
on or about , 1997.
DEUTSCHE MORGAN GRENFELL
ALEX. BROWN & SONS
INCORPORATED
HAMBRECHT & QUIST
The date of this Prospectus is , 1997.
<PAGE> 3
[PICTURE OF THE COMPANY'S WELCOME WEB PAGE ACCOMPANIED BY TEXT,
"Customers enter the bookstore through Amazon.com Web site and can . . .",
PICTURE OF THE COMPANY'S WEB PAGE FOR SEARCHING BY AUTHOR, TITLE, AND SUBJECT,
ACCOMPANIED BY TEXT,
". . . conduct targeted searches of over 2.5 million titles in the Amazon.com
catalog. . . ", and
PICTURE OF THE COMPANY'S AMAZON.COM JOURNAL WEB PAGE, ACCOMPANIED BY TEXT,
". . . browse from among highlighted selections and other features . . ."]
The Company has applied for federal registration of the marks "AMAZON.COM"
and "AMAZON.COM BOOKS." All other trademarks or service marks appearing in this
Prospectus are trademarks or service marks of the respective companies that
utilize them.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
Except as otherwise noted, all information in this Prospectus, including
share and per share information, (i) assumes no exercise of the Underwriters'
over-allotment option, (ii) reflects the conversion of each outstanding share of
the Company's Preferred Stock into six shares of Common Stock upon the closing
of this offering, (iii) gives effect to a four-for-one stock split of the
Company's outstanding Common Stock effective November 23, 1996 and a
three-for-two split of the Company's outstanding Common Stock effective April
18, 1997, and (iv) reflects an increase in the number of authorized shares of
Common Stock from 25,000,000 to 100,000,000 and an increase in the number of
authorized shares of Preferred Stock from 5,000,000 to 10,000,000 effective
April 18, 1997.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus.
THE COMPANY
Amazon.com is the leading online retailer of books. Since opening for
business as "Earth's Biggest Bookstore" in July 1995, the Amazon.com bookstore
has quickly become one of the most widely known, used and cited commerce sites
on the World Wide Web (the "Web"). Amazon.com strives to offer its customers
compelling value through innovative use of technology, broad selection,
high-quality content, a high level of customer service, competitive pricing and
personalized services. As an online bookseller, Amazon.com has virtually
unlimited online shelf space and can offer customers a vast selection through an
efficient search and retrieval interface. The Company offers more than 2.5
million titles, including most of the estimated 1.5 million English-language
books believed to be in print, more than one million out-of-print titles
believed likely to be in circulation and a smaller number of CDs, videotapes and
audiotapes. Beyond the benefits of selection, purchasing books from Amazon.com
is more convenient than shopping in a physical bookstore because online shopping
can be done 24 hours a day and does not require a trip to a store. Furthermore,
Amazon.com's high inventory turnover, lack of investment in expensive retail
real estate and reduced personnel requirements give it meaningful structural
economic advantages relative to traditional booksellers.
Through March 31, 1997, Amazon.com had sales of more than $32 million to
approximately 340,000 customer accounts in over 100 countries. Average daily
visits (not "hits") have grown from approximately 2,200 in December 1995 to
approximately 80,000 in March 1997, and repeat customers currently account for
over 40% of orders. Time magazine rated Amazon.com one of the 10 "Best Websites
of 1996."
THE OFFERING
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<S> <C>
Common Stock offered....................................... 3,000,000 shares
Common Stock to be outstanding after this offering......... 23,858,702 shares(1)
Use of proceeds............................................ For working capital and other general
corporate purposes.
Proposed Nasdaq National Market symbol..................... AMZN
</TABLE>
- ---------------
(1) Excludes 2,789,804 shares, 1,069,125 shares and 264,000 shares of Common
Stock issuable upon exercise of options outstanding at May 13, 1997 under
the Company's Amended and Restated 1994 Stock Option Plan (the "1994 Stock
Option Plan"), the Company's 1997 Stock Option Plan (the "1997 Stock Option
Plan", and together with the 1994 Stock Option Plan, the "Plans") and
outside the Plans, respectively, at a weighted average exercise price of
$3.62 per share. See "Management -- Employee Benefit Plans" and Note 3 of
Notes to Financial Statements.
SUMMARY FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE PERIOD QUARTER ENDED
FROM JULY 5, 1994 YEAR ENDED ----------------------------------------------------
(INCEPTION) TO DECEMBER 31, SEPT. DEC.
DECEMBER 31, ----------------- MARCH 31, JUNE 30, 30, 31, MARCH 31,
1994 1995 1996 1996 1996 1996 1996 1997
----------------- ------- ------- --------- -------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $ -- $ 511 $15,746 $ 875 $2,230 $ 4,173 $ 8,468 $16,005
Loss from operations.... (52) (304) (5,979) (336) (776) (2,472) (2,395) (3,102)
Net loss................ (52) (303) (5,777) (331) (767) (2,380) (2,299) (3,038)
Net loss per share(1)... (0.00) (0.02) (0.25) (0.02) (0.03) (0.10) (0.10) (0.13)
Shares used in
computation of net
loss per share(1)..... 17,730 18,933 22,655 22,251 22,431 22,967 22,969 23,018
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1997
--------------------------
ACTUAL AS ADJUSTED(2)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................. $ 7,162 $ 48,162
Working capital....................................................................... 79 41,079
Total assets.......................................................................... 11,722 52,722
Stockholders' equity.................................................................. 2,763 43,763
</TABLE>
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(1) See Note 1 of Notes to Financial Statements for information concerning the
determination of net loss per share.
(2) Adjusted to give effect to the sale by the Company of the shares of Common
Stock offered hereby at an assumed initial public offering price of $15.00
per share and after deducting the estimated underwriting discount and
offering expenses, and the receipt of the net proceeds therefrom. See "Use
of Proceeds" and "Capitalization."
3
<PAGE> 5
THE COMPANY
Amazon.com is the leading online retailer of books. Since opening for
business as "Earth's Biggest Bookstore" in July 1995, the Amazon.com bookstore
has quickly become one of the most widely known, used and cited commerce sites
on the Web. By offering customers an authoritative selection of more than 2.5
million titles, as well as competitive pricing and outstanding customer service,
Amazon.com believes it has achieved a preeminent position among online
retailers.
Customers enter the Amazon.com bookstore through the Company's Web site
and, in addition to ordering books, can conduct targeted searches, browse from
among highlighted selections, bestsellers and other features, read and post
reviews, register for personalized services, participate in promotions and check
order status. Customers simply click on a button to add books to their virtual
shopping baskets. Customers can add and subtract books from their shopping
baskets as they browse, prior to making a final purchase decision, just as in a
physical store. To execute orders, customers click on the buy button and are
prompted to supply shipping and credit card details. Customers are offered a
variety of delivery services, including overnight and various international
shipping options, as well as gift-wrapping.
The worldwide book industry is large, growing and relatively fragmented.
According to Euromonitor, U.S. book sales were estimated to be approximately $26
billion in 1996 and are expected to grow to approximately $30 billion in 2000,
while worldwide book sales were estimated at approximately $82 billion in 1996
and are expected to grow to approximately $90 billion in 2000.
Amazon.com was founded to capitalize on the opportunity for online book
retailing. The Company believes that the retail book industry is particularly
suited to online retailing for many compelling reasons. An online bookseller has
virtually unlimited online shelf space and can offer customers a vast selection
through an efficient search and retrieval interface. This is particularly
valuable in the book market because the extraordinary number of different items
precludes even the largest physical bookstore from economically stocking more
than a small minority of available titles. In addition, by serving a large and
global market through centralized distribution and operations, online
booksellers can realize significant structural cost advantages relative to
traditional booksellers. Furthermore, unlike with clothing or other personal
products, consumers can make educated book purchase decisions using online
information. Books can be selected and sampled effectively through online
synopses, excerpts and reviews and have consistent quality across different
retailers. In addition, the demographic overlap between frequent book buyers and
Internet users is high. Further, online bookselling has the potential to
eliminate or mitigate critical inefficiencies and problems faced by book
publishers.
Amazon.com intends to use technology to deliver an outstanding service
offering and to achieve the significant economies inherent in the online store
model. The Company's strategy is to build strong brand recognition, customer
loyalty and supplier relationships, while creating an economic model that is
superior to that of the capital and real estate intensive traditional book
retailing business. Achieving profitability given the Company's planned
investment levels depends upon the Company's ability to generate and sustain
substantially increased revenue levels. See "Risk Factors -- Limited Operating
History; Accumulated Deficit; Anticipated Losses."
The Company has grown rapidly since first opening its bookstore. Through
March 31, 1997, Amazon.com had sales of more than $32 million to approximately
340,000 customer accounts in over 100 countries. Compounded quarterly sales
growth exceeded 100% from the first quarter of 1996 through the first quarter of
1997. Average daily visits (not "hits") have grown from approximately 2,200 in
December 1995 to approximately 80,000 in March 1997, and repeat customers
currently account for over 40% of orders. Time magazine rated Amazon.com one of
the 10 "Best Websites of 1996." Growth rates experienced to date are not
sustainable. The Company incurred net losses of $5.8 million and $3.0 million in
the fiscal year ended December 31, 1996 and the quarter ended March 31, 1997,
respectively. See "Risk Factors -- Limited Operating History; Accumulated
Deficit; Anticipated Losses."
The Company was incorporated in Washington in July 1994 and reincorporated
in Delaware in June 1996. The Company's headquarters are located at 1516 Second
Avenue, 4th Floor, Seattle, Washington 98101. Its telephone number at that
location is (206) 622-2335. Information contained on the Company's Web site will
not be deemed to be a part of this Prospectus. As used herein, "titles" offered
by the Company means the number of items offered in the Company's catalog and
includes primarily books but also a small number of CDs, videotapes and
audiotapes.
4
<PAGE> 6
RISK FACTORS
In addition to the other information contained in this Prospectus,
investors should carefully consider the following risk factors before making an
investment decision concerning the Common Stock. All statements, trend analysis
and other information contained in this Prospectus relative to markets for the
Company's products and 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 are subject to business and economic risks, and the Company's actual
results of operations may differ materially from those contained in the
forward-looking statements.
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT; ANTICIPATED LOSSES. The
Company was founded in July 1994 and began selling books on its Web site in July
1995. Accordingly, the Company has a limited operating 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
March 31, 1997 had an accumulated deficit of $9.0 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 invest heavily in
marketing and promotion, site development and technology and operating
infrastructure development. The Company also intends to offer attractive pricing
programs, which will reduce 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 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 are not necessarily meaningful and should
not be relied upon as an indication of future performance. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company expects to use a portion of the net proceeds of this offering
to fund its operating losses. If such net proceeds, together with cash generated
by operations, are insufficient to fund future operating losses, the Company may
be required to raise additional funds. There can be no assurance that such
financing will be available in amounts or on terms acceptable to the Company, if
at all.
UNPREDICTABILITY OF FUTURE REVENUES; POTENTIAL FLUCTUATIONS IN QUARTERLY
OPERATING RESULTS; SEASONALITY. 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
5
<PAGE> 7
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 or
marketing decisions that could have a material adverse effect on its business,
prospects, financial condition and results of operations. See
"Business -- Competition."
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.
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.
COMPETITION. The online commerce market, particularly over the Internet, is
new, rapidly evolving and intensely competitive, which competition the Company
expects to intensify in the future. Barriers to entry are minimal, and current
and new competitors can launch new sites at a relatively low cost. In addition,
the retail book industry is intensely competitive. The Company currently or
potentially competes with a variety of other companies. These competitors
include (i) various online booksellers and vendors of other information-based
products such as CDs and videotapes, including Book Stacks Unlimited, Inc., a
subsidiary of CUC International, Inc. ("CUC"), and other small entrants,
including entrants into narrow specialty niches, that may be aided by partnering
with existing distributors, such as Ingram Book Group ("Ingram"), 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, including America Online, Inc. ("AOL")
and Microsoft Corporation, through which other bookstores may offer products,
and (iii) publishers, such as Simon & Schuster (operated by Viacom Inc., "Simon
& Schuster"), and retail vendors of books, music and videotapes, including large
specialty booksellers, with significant brand awareness, sales volume and
customer bases, such as Barnes & Noble, Inc. ("B&N") and Borders Group, Inc.
("Borders"). Both B&N and Borders have announced their intention to devote
substantial resources to online commerce in the
6
<PAGE> 8
near future. B&N, specifically, has launched a Web site to sell books online and
has a relationship with AOL through which B&N offers a broad selection of titles
at discounted prices. Simon & Schuster also has begun selling a number of books
through an online site. Competitive pressures created by any one of these
companies, 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 believes that the principal competitive factors in its market
are brand recognition, selection, personalized services, convenience, price,
accessibility, customer service, quality of search tools, quality of editorial
and other site content and reliability and speed of fulfillment. Many of the
Company's current and potential competitors have longer operating histories,
larger customer bases, greater brand recognition and significantly greater
financial, marketing and other resources than the Company. In addition, online
retailers may be acquired by, receive investments from or enter into other
commercial relationships with larger, well-established and well-financed
companies as use of the Internet and other online services increases. Certain of
the Company's competitors may be able to secure merchandise from vendors on more
favorable terms, devote greater resources to marketing and promotional
campaigns, adopt more aggressive pricing or inventory availability policies and
devote substantially more resources to Web site and systems development than the
Company. Increased competition may result in reduced operating margins, loss of
market share and a diminished brand franchise. There can be no assurance that
the Company will be able to compete successfully against current and future
competitors, and competitive pressures faced by the Company may have a material
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 or marketing decisions or acquisitions that could have a material
adverse effect on its business, prospects, financial condition and results of
operations. New technologies and the expansion of existing technologies may
increase the competitive pressures on the Company. For example, client-agent
applications that select specific titles from a variety of Web sites may channel
customers to online booksellers that compete with the Company. In addition,
companies that control access to transactions through network access or Web
browsers could promote the Company's competitors or charge the Company a
substantial fee for inclusion. See "Business -- Competition."
RISK OF CAPACITY CONSTRAINTS; RELIANCE ON INTERNALLY DEVELOPED SYSTEMS;
SYSTEM DEVELOPMENT RISKS. A key element of the Company's strategy is to generate
a high volume of traffic on, and use of, its Web site. Accordingly, the
satisfactory performance, reliability and availability of the Company's Web
site, transaction-processing systems and network infrastructure are critical to
the Company's reputation and its ability to attract and retain customers and
maintain adequate customer service levels. 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. Any substantial increase in
the volume of traffic on the Company's Web site or the number of orders placed
by customers will require the Company to expand and upgrade further its
technology, transaction-processing systems and network infrastructure. 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 timely expand and
upgrade its systems and infrastructure to accommodate such increases.
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 system is not integrated with the remainder of the Company's
accounting and financial systems. To date, development
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<PAGE> 9
efforts for the Company's transaction-processing systems have focused primarily
on support for rapid growth of order volume and customer service, and less on
traditional accounting, control and reporting aspects of system development. As
a result, the Company's current management information system, which produces
frequent operational reports, is inefficient with respect to traditional
accounting-oriented reporting and requires a significant amount of manual effort
to prepare information for financial and accounting reporting. This may make it
difficult for management to obtain accurate financial statements and reporting
information on a timely basis. On an ongoing basis, the Company upgrades and
expands its systems and, in the future, intends to further upgrade and expand
its transaction-processing systems and to integrate newly developed and/or
purchased modules with its existing systems in order to improve its accounting,
control and reporting methods and support increased transaction volume. The
Company's inability to add additional software and hardware or to develop and
upgrade further its existing technology, transaction-processing systems or
network infrastructure to accommodate increased traffic on its Web site or
increased sales volume through its transaction-processing systems may cause
unanticipated system disruptions, slower response times, degradation in levels
of customer service, impaired quality and speed of order fulfillment, and delays
in reporting accurate financial information. In addition, although the Company
works to prevent unauthorized access to Company data, it is impossible to
completely eliminate this risk. There can be no assurance that the Company will
be able 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. See "Business -- Technology."
RISK OF SYSTEM FAILURE; SINGLE SITE AND ORDER INTERFACE. The Company's
success, in particular its ability to successfully receive and fulfill orders
and provide high-quality customer service, largely depends on the efficient and
uninterrupted operation of its computer and communications hardware systems.
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 risks
could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations. See "Business -- Facilities" and
"-- Technology."
RECENT AND CONTINUING PUBLICITY. The Company has received, and may continue
to receive, a high degree of media coverage, including coverage that is not
directly attributable to statements by the Company's officers and employees. For
example, in April 1997, a newspaper article stated that the Company's President
said that the Company is not yet profitable -- although it easily could
be -- because of massive investment in advertising across the Internet and
refinement of its marketing techniques and value-added services to customers.
The Company's view, however, is that it will incur substantial losses for the
foreseeable future. See "-- Limited Operating History; Accumulated Deficit;
Anticipated Losses."
In addition, a recent advertisement by Digital Equipment Corporation states
that the Company is growing at a rate of 3,000% per year. In fact, the Company's
sales are now growing at a slower rate and the Company believes that its
historical sales growth rates are not sustainable and will decrease in the
future. In addition, this advertisement states that the Company is the world's
most prosperous online bookstore. The Company, however, has incurred significant
losses to date, expects to continue to incur substantial losses for the
foreseeable future and believes that the rate at which such losses will be
incurred will increase significantly from current levels. See "-- Limited
Operating History; Accumulated Deficit; Anticipated Losses."
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<PAGE> 10
Neither the Company nor any of the Underwriters have confirmed, endorsed or
adopted these third-party statements for utilization by, or distribution to,
prospective purchasers in this offering. To the extent any such statements are
inconsistent with, or conflict with, the information contained in this
Prospectus, or relate to information not contained in this Prospectus, they are
disclaimed by the Company and the Underwriters. Accordingly, prospective
investors should not rely on such third-party statements, or any other
information not contained in this Prospectus.
MANAGEMENT OF POTENTIAL GROWTH; NEW MANAGEMENT TEAM; LIMITED SENIOR
MANAGEMENT RESOURCES. 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. From December
31, 1995 to March 31, 1997, the Company expanded from 11 to 256 employees. The
majority of the Company's senior management joined the Company within the last
five months, and some officers have no prior senior management experience at
public companies. The Company's new employees include a number of key
managerial, technical and operations personnel who have not yet been fully
integrated into the Company, and the Company expects to add additional key
personnel in the near future. In particular, the Company intends to hire a Chief
Information Officer to manage the operation, development and enhancement of its
information system. 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 already growing employee base. The
Company also will be required to expand its finance, administrative and
operations staff. Further, the Company's management will be required to maintain
and expand its relationships with various distributors and publishers, freight
companies, other Web sites and other Web service providers, Internet and other
online service providers and other third parties necessary to the Company's
business. 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Employees."
DEPENDENCE ON CONTINUED GROWTH OF ONLINE COMMERCE. The Company's future
revenues and any future profits are substantially dependent upon the widespread
acceptance and use of the Internet and other online services as an effective
medium of commerce by consumers. Rapid growth in the use of and interest in the
Web, the Internet and other online services is a recent phenomenon, and there
can be no assurance that acceptance and use will continue to develop or that a
sufficiently broad base of consumers will adopt, and continue to use, the
Internet and other online services as a medium of commerce. Demand and market
acceptance for recently introduced services and products over the Internet are
subject to a high level of uncertainty and there exist few proven services and
products. The Company relies on consumers who have historically used traditional
means of commerce to purchase merchandise. For the Company to be successful,
these consumers must accept and utilize novel ways of conducting business and
exchanging information.
In addition, the Internet and other online services may not be accepted as
a viable commercial marketplace for a number of reasons, including potentially
inadequate development of the necessary network infrastructure or delayed
development of enabling technologies and performance improvements. To the extent
that the Internet and other online services continue to experience significant
growth in the number of users, their frequency of use or an increase in their
bandwidth requirements, there can be no assurance that the infrastructure for
the Internet and other online services will be able to support the demands
placed upon them. In addition, the Internet or other online services could lose
their viability due to delays in the development or
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<PAGE> 11
adoption of new standards and protocols required to handle increased levels of
Internet or other online service activity, or due to increased governmental
regulation. Changes in or insufficient availability of telecommunications
services to support the Internet or other online services also could result in
slower response times and adversely affect usage of the Internet and other
online services generally and Amazon.com in particular. If use of the Internet
and other online services does not continue to grow or grows more slowly than
expected, if the infrastructure for the Internet and other online services does
not effectively support growth that may occur, or if the Internet and other
online services do not become a viable commercial marketplace, the Company's
business, prospects, financial condition and results of operations would be
materially adversely affected.
RAPID TECHNOLOGICAL CHANGE. To remain competitive, the Company must
continue to enhance and improve the responsiveness, functionality and features
of the Amazon.com online store. The Internet and the online commerce industry
are characterized by rapid technological change, changes in user and customer
requirements and preferences, frequent new product and service introductions
embodying new technologies and the emergence of new industry standards and
practices that could render the Company's existing Web site and proprietary
technology and systems obsolete. The Company's success will depend, in part, on
its ability to license leading technologies useful in its business, enhance its
existing services, develop new services and technology that address the
increasingly sophisticated and varied needs of its prospective customers, and
respond to technological advances and emerging industry standards and practices
on a cost-effective and timely basis. The development of Web site and other
proprietary technology entails significant technical and business risks. There
can be no assurance that the Company will successfully use new technologies
effectively or adapt its Web site, proprietary technology and
transaction-processing systems to customer requirements or emerging industry
standards. If the Company is unable, for technical, legal, financial or other
reasons, to adapt in a timely manner in response to changing market conditions
or customer requirements, its business, prospects, financial condition and
results of operations would be materially adversely affected. See
"Business -- Technology."
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL. The Company's
performance is substantially dependent on the continued services and on the
performance of its senior management and other key personnel, particularly
Jeffrey P. Bezos, its President, Chief Executive Officer and Chairman of the
Board. The Company's performance also depends on the Company's ability to retain
and motivate its other officers and key employees. The loss of the services of
any of its executive officers or other key employees could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations. The Company does not have long-term employment agreements
with any of its key personnel and maintains no "key person" life insurance
policies. The Company's future success also depends on its ability to identify,
attract, hire, train, retain and motivate other highly skilled technical,
managerial, editorial, merchandising, marketing and customer service personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be able to successfully attract, assimilate or retain
sufficiently qualified personnel. In particular, the Company has encountered
difficulties in attracting a sufficient number of qualified software developers
for its Web site and transaction-processing systems, and there can be no
assurance that the Company will be able to retain and attract such developers.
The failure to retain and attract the necessary technical, managerial,
editorial, merchandising, marketing and customer service personnel could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. See "Business -- Employees" and
"Management."
ONLINE COMMERCE SECURITY RISKS. A significant barrier to online commerce
and communications is the secure transmission of confidential information over
public networks. The Company relies on encryption and authentication technology
licensed from third parties to provide the security and authentication necessary
to effect secure transmission of confidential information,
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<PAGE> 12
such as customer credit card numbers. There can be no assurance that advances in
computer capabilities, new discoveries in the field of cryptography, or other
events or developments will not result in a compromise or breach of the
algorithms used by the Company to protect customer transaction data. If any such
compromise of the Company's security were to occur, it could have a material
adverse effect on the Company's reputation, business, prospects, financial
condition and results of operations. A party who is able to circumvent the
Company's security measures could misappropriate proprietary information or
cause interruptions in the Company's operations. The Company may be required to
expend significant capital and other resources to protect against such security
breaches or to alleviate problems caused by such breaches. Concerns over the
security of transactions conducted on the Internet and other online services and
the privacy of users may also inhibit the growth of the Internet and other
online services generally, and the Web in particular, especially as a means of
conducting commercial transactions. To the extent that activities of the Company
or third-party contractors involve the storage and transmission of proprietary
information, such as credit card numbers, security breaches could damage the
Company's reputation and expose the Company to a risk of loss or litigation and
possible liability. There can be no assurance that the Company's security
measures will prevent security breaches or that failure to prevent such security
breaches will not have a material adverse effect on the Company's business,
prospects, financial condition and results of operations. See
"Business -- Technology."
RELIANCE ON CERTAIN SUPPLIERS. The Company purchases a substantial majority
of its products from two major vendors, Ingram and Baker & Taylor, Inc. ("B&T").
Ingram is the single largest supplier and accounted for 59% of the Company's
inventory purchases in 1996. The Company carries minimal inventory and relies to
a large extent on rapid fulfillment from these and other vendors. The Company
has no long-term contracts or arrangements with any of its vendors that
guarantee the availability of merchandise, the continuation of particular
payment terms or the extension of credit limits. There can be no assurance that
the Company's current vendors will continue to sell merchandise to the Company
on current terms or that the Company will be able to establish new or extend
current vendor relationships to ensure acquisition of merchandise in a timely
and efficient manner and on acceptable commercial terms. If the Company were
unable to develop and maintain relationships with vendors that would allow it to
obtain sufficient quantities of merchandise on acceptable commercial terms, its
business, prospects, financial condition and results of operations would be
materially adversely affected. See "Business -- Warehousing and Fulfillment."
RISKS ASSOCIATED WITH ENTRY INTO NEW BUSINESS AREAS. The Company may choose
to expand its operations by developing new Web sites, promoting new or
complementary products or sales formats, expanding the breadth and depth of
products and services offered or expanding its market presence through
relationships with third parties. In addition, the Company may pursue the
acquisition of new or complementary businesses, products or technologies,
although it has no present understandings, commitments or agreements with
respect to any material acquisitions or investments. There can be no assurance
that the Company would be able to expand its efforts and operations in a
cost-effective or timely manner or that any such efforts would increase overall
market acceptance. Furthermore, any new business or Web site launched by the
Company that is not favorably received by consumers could damage the Company's
reputation or the Amazon.com brand. Expansion of the Company's operations in
this manner would also require significant additional expenses and development,
operations and editorial resources and would strain the Company's management,
financial and operational resources. The lack of market acceptance of such
efforts or the Company's inability to generate satisfactory revenues from such
expanded services or products to offset their cost could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations.
TRADEMARKS AND PROPRIETARY RIGHTS. The Company regards its copyrights,
service marks, trademarks, trade dress, trade secrets and similar intellectual
property as critical to its success, and relies on trademark and copyright law,
trade secret protection and confidentiality and/or
11
<PAGE> 13
license agreements with its employees, customers, partners and others to protect
its proprietary rights. The Company pursues the registration of its trademarks
and service marks in the U.S. and internationally, and has applied for the
registration of certain of its trademarks and service marks. Effective
trademark, service mark, copyright and trade secret protection may not be
available in every country in which the Company's products and services are made
available online. The Company has licensed in the past, and expects that it may
license in the future, certain of its proprietary rights, such as trademarks or
copyrighted material, to third parties. While the Company attempts to ensure
that the quality of its brand is maintained by such licensees, there can be no
assurance that such licensees will not take actions that might materially
adversely affect the value of the Company's proprietary rights or reputation,
which could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations. There can be no assurance that
the steps taken by the Company to protect its proprietary rights will be
adequate or that third parties will not infringe or misappropriate the Company's
copyrights, trademarks, trade dress and similar proprietary rights. In addition,
there can be no assurance that other parties will not assert infringement claims
against the Company. The Company has been subject to claims and expects to be
subject to legal proceedings and claims from time to time in the ordinary course
of its business, including claims of alleged infringement of the trademarks and
other intellectual property rights of third parties by the Company and its
licensees. Such claims, even if not meritorious, could result in the expenditure
of significant financial and managerial resources. The Company has received
notice of alleged claims by B&N. See "Business -- Legal Proceedings."
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES. The Company is not
currently subject to direct regulation by any domestic or foreign governmental
agency, other than regulations applicable to businesses generally, and laws or
regulations directly applicable to access to online commerce. However, due to
the increasing popularity and use of the Internet and other online services, it
is possible that a number of laws and regulations may be adopted with respect to
the Internet or other online services covering issues such as user privacy,
pricing, content, copyrights, distribution and characteristics and quality of
products and services. Furthermore, the growth and development of the market for
online commerce may prompt calls for more stringent consumer protection laws
that may impose additional burdens on those companies conducting business
online. The adoption of any additional laws or regulations may decrease the
growth of the Internet or other online services, which could, in turn, decrease
the demand for the Company's products and services and increase the Company's
cost of doing business, or otherwise have an adverse effect on the Company's
business, prospects, financial condition and results of operations. Moreover,
the applicability to the Internet and other online services of existing laws in
various jurisdictions governing issues such as property ownership, sales and
other taxes, libel and personal privacy is uncertain and may take years to
resolve. Any such new legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to the
Company's business, or the application of existing laws and regulations to the
Internet and other online services could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
SALES AND OTHER TAXES. The Company does not currently collect sales or
other similar taxes in respect of shipments of goods into states other than
Washington. However, one or more states may seek to impose sales tax collection
obligations on out-of-state companies such as the Company which engage in online
commerce. In addition, any new operation in states outside Washington could
subject shipments into such states to state sales taxes under current or future
laws. A successful assertion by one or more states or any foreign country that
the Company should collect sales or other taxes on the sale of merchandise could
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations.
CONTROL OF THE COMPANY. Immediately upon completion of this offering, the
outstanding Common Stock will be beneficially owned approximately 41% by Jeffrey
P. Bezos, the Company's President, Chief Executive Officer and Chairman of the
Board, and 10% by members of Mr. Bezos'
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<PAGE> 14
family and trusts controlled by members of Mr. Bezos' family (41% and 10%,
respectively, if the over-allotment option is exercised in full). The above
persons and entities will hold an aggregate of approximately 51% of the
outstanding voting power of the Company immediately upon completion of this
offering. As a result, upon completion of this offering, the Bezos family will
be able to (i) elect, or defeat the election of, the Company's directors, (ii)
amend or prevent amendment of the Company's Restated Certificate of
Incorporation or Bylaws, or (iii) effect or prevent a merger, sale of assets or
other corporate transaction. The Company's public stockholders, for so long as
they hold less than 50% of the outstanding voting power of the Company, will not
be able to control the outcome of such transactions. The extent of ownership by
the Bezos family may have the effect of preventing a change in control of the
Company or discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of the Company, which in turn could have
an adverse effect on the market price of the Common Stock. See "Management,"
"Certain Transactions" and "Principal Stockholders."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. The trading
price of the Common Stock is likely to be highly volatile and could be subject
to wide fluctuations in response to factors such as actual or anticipated
variations in quarterly operating results, announcements of technological
innovations, new sales formats or new products or services by the Company or its
competitors, changes in financial estimates by securities analysts, conditions
or trends in the Internet and online commerce industries, changes in the market
valuations of other Internet, online service or retail companies, announcements
by the Company of significant acquisitions, strategic partnerships, joint
ventures or capital commitments, additions or departures of key personnel, sales
of Common Stock and other events or factors, many of which are beyond the
Company's control. In addition, the stock market in general, and the Nasdaq
National Market and the market for Internet-related and technology companies in
particular, has experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating performance of such
companies. The trading prices of many technology companies' stocks are at or
near historical highs and reflect price earnings ratios substantially above
historical levels. There can be no assurance that these trading prices and price
earnings ratios will be sustained. These broad market and industry factors may
materially and adversely affect the market price of the Common Stock, regardless
of the Company's operating performance. In the past, following periods of
volatility in the market price of a company's securities, securities
class-action litigation has often been instituted against such company. Such
litigation, if instituted, could result in substantial costs and a diversion of
management's attention and resources, which would have a material adverse effect
on the Company's business, prospects, financial condition and results of
operations.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of the
Company's Common Stock in the public market after this offering could adversely
affect prevailing market prices for the Common Stock. The 3,000,000 shares of
Common Stock offered hereby will be freely tradeable without restriction in the
public market. Taking into account restrictions imposed by the Securities Act of
1933, as amended (the "Securities Act"), rules promulgated by the Securities and
Exchange Commission (the "Commission") thereunder, the Company's contractual
right to repurchase shares and lock-up agreements between certain stockholders
and the Company or Deutsche Morgan Grenfell Inc., the number of additional
shares that will be available for sale in the public market, subject in some
cases to the volume and other restrictions of Rule 144 under the Securities Act,
will be as follows: approximately 31,793 additional shares will be eligible for
sale beginning 91 days after the date of this Prospectus and approximately
19,331,253 additional shares will be eligible for sale beginning 181 days after
the date of this Prospectus. Approximately 681,300 remaining shares will be
eligible for sale pursuant to Rule 144 upon the expiration of one-year holding
periods or the expiration of the Company's contractual right to repurchase the
shares between November 1997 and May 1998. Deutsche Morgan Grenfell Inc. may, in
its sole discretion and at any time without notice, release all or any portion
of the shares subject to such lock-up agreements. Upon the closing of this
offering, holders of 13,286,376 shares of Common Stock are entitled to certain
rights with respect to the registration of such shares under the Securities Act.
In
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<PAGE> 15
addition, the Company intends to file a registration statement on Form S-8 under
the Securities Act approximately 180 days after the date of this Prospectus to
register approximately 9,534,648 shares of Common Stock reserved for issuance
under the 1994 Stock Option Plan and the Company's 1997 Stock Option Plan. See
"Description of Capital Stock -- Registration Rights" and "Shares Eligible for
Future Sale."
ANTITAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS. Upon the closing of this
offering, the Company's Board of Directors will have the authority to issue up
to 10,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company without further
action by the stockholders and may adversely affect the voting and other rights
of the holders of Common Stock. The Company has no present plans to issue shares
of Preferred Stock. Further, certain provisions of the Company's Restated
Certificate of Incorporation and Bylaws and Delaware law could delay or make
more difficult a merger, tender offer or proxy contest involving the Company.
See "Description of Capital Stock."
NO SPECIFIC USE OF PROCEEDS. The Company has not designated any specific
use for the net proceeds from the sale by the Company of the Common Stock
offered hereby. The Company expects to use the net proceeds for general
corporate purposes, including working capital to fund anticipated operating
losses and capital expenditures. The Company may, when the opportunity arises,
use an unspecified portion of the net proceeds to acquire or invest in
complementary businesses, products and technologies. From time to time, in the
ordinary course of business, the Company expects to evaluate potential
acquisitions of such businesses, products or technologies. However, the Company
has no present understandings, commitments or agreements with respect to any
material acquisition or investment. Accordingly, management will have
significant flexibility in applying the net proceeds of this offering. The
failure of management to apply such funds effectively could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations. See "Use of Proceeds."
IMMEDIATE AND SUBSTANTIAL DILUTION. The initial public offering price is
substantially higher than the book value per outstanding share of Common Stock.
Accordingly, purchasers in this offering will suffer an immediate and
substantial dilution of $13.20 per share in the net tangible book value of the
Common Stock from the initial public offering price. Additional dilution will
occur upon exercise of outstanding options granted by the Company. See
"Dilution."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby, assuming an initial public offering price of $15.00
per share, are estimated to be approximately $41.0 million (approximately $47.3
million if the Underwriters' over-allotment option is exercised in full), after
deducting the estimated underwriting discount and offering expenses.
The principal purposes of this offering are to obtain additional capital,
to create a public market for the Common Stock, to facilitate future access by
the Company to public equity markets, and to provide increased visibility and
credibility in a marketplace where many of the Company's current and potential
competitors are or will be publicly held companies. The Company has no specific
plan for the net proceeds of this offering. The Company expects to use the net
proceeds for general corporate purposes, including working capital to fund
anticipated operating losses and capital expenditures. The Company may, when the
opportunity arises, use an unspecified portion of the net proceeds to acquire or
invest in complementary businesses, products and technologies. From time to
time, in the ordinary course of business, the Company expects to evaluate
potential acquisitions of such businesses, products or technologies. However,
the Company has no present understandings, commitments or agreements with
respect to any material acquisition or investment. Pending use of the net
proceeds for the above purposes, the Company intends to invest such funds in
short-term, interest-bearing, investment-grade securities. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any future earnings of its
business, and therefore does not anticipate paying any cash dividends in the
foreseeable future.
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<PAGE> 17
CAPITALIZATION
The following table sets forth at March 31, 1997 the (i) actual
capitalization of the Company, (ii) the pro forma capitalization of the Company,
giving effect to the conversion of the outstanding Preferred Stock into Common
Stock upon the closing of this offering, and (iii) the pro forma capitalization
as adjusted to reflect the receipt of the estimated net proceeds from the sale
of the 3,000,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $15.00 per share and after deducting the estimated
underwriting discount and offering expenses payable by the Company. This table
should be read in conjunction with the Company's financial statements and the
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C> <C>
Long-term obligations, net of current maturities........... $ -- $ -- $ --
Stockholders' equity:
Preferred Stock, $0.01 par value per share; 10,000,000
shares authorized: 574,396 shares issued and outstanding,
actual; no shares issued and outstanding, pro forma and
pro forma as adjusted.................................... 6 -- --
Common Stock, $0.01 par value per share; 100,000,000 shares
authorized; 17,352,406 shares issued and outstanding,
actual; 20,798,782 shares issued and outstanding, pro
forma; 23,798,782 shares issued and outstanding, pro
forma as adjusted(1)..................................... 173 208 238
Additional paid-in capital................................. 14,737 14,708 55,678
Deferred compensation...................................... (3,090) (3,090) (3,090)
Accumulated deficit........................................ (9,063) (9,063) (9,063)
------- --------- -----------
Total stockholders' equity............................... 2,763 2,763 43,763
------- --------- -----------
Total capitalization............................. $ 2,763 $ 2,763 $43,763
======= ======= =========
</TABLE>
- ---------------
(1) Excludes 2,940,774 shares, 339,075 shares and 264,000 shares of Common Stock
issuable upon exercise of options outstanding at March 31, 1997 under the
1994 Stock Option Plan, under the 1997 Stock Option Plan and outside the
Plans, respectively, at a weighted average exercise price of $1.76 per
share. See Note 3 of Notes to Financial Statements.
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<PAGE> 18
DILUTION
The pro forma net tangible book value of the Company at March 31, 1997 was
$1.9 million, or $0.09 per share. Pro forma net tangible book value per share
represents the amount of total tangible assets of the Company reduced by the
Company's total liabilities, divided by the pro forma number of shares of Common
Stock outstanding, after giving effect to the automatic conversion of all
outstanding shares of Preferred Stock into an aggregate of 3,446,376 shares of
Common Stock upon the closing of this offering. After giving effect to the sale
by the Company of the 3,000,000 shares of Common Stock offered hereby at an
assumed initial public offering price of $15.00 per share (after deducting
estimated underwriting discounts and offering expenses), the adjusted pro forma
net tangible book value of the Company at March 31, 1997 would have been $42.9
million, or $1.80 per share. This represents an immediate increase in pro forma
net tangible book value of $1.71 per share to existing stockholders and an
immediate dilution of $13.20 per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $15.00
Pro forma net tangible book value per share at March 31,
1997........................................................ $0.09
Increase per share attributable to new investors............... 1.71
-----
Adjusted pro forma net tangible book value per share after this
offering....................................................... 1.80
------
Dilution per share to new investors.............................. $13.20
======
</TABLE>
The following table sets forth on a pro forma basis at March 31, 1997,
after giving effect to the automatic conversion of all outstanding shares of
Preferred Stock into an aggregate of 3,446,376 shares of Common Stock upon the
closing of this offering, the number of shares of Common Stock purchased from
the Company, the total consideration paid to the Company and the average price
paid per share by existing stockholders and by investors purchasing Common Stock
in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 20,798,782 87.4% $11,700,567 20.6% $ 0.56
New investors............. 3,000,000 12.6 45,000,000 79.4 15.00
---------- ------- ----------- -------
Total........... 23,798,782 100.0% $56,700,567 100.0%
========== ====== =========== ======
</TABLE>
The foregoing tables assume no exercise of any outstanding stock options or
the Underwriters' over-allotment option. See "Underwriting" for information
concerning the Underwriters' over-allotment option. As of March 31, 1997, there
were outstanding options to purchase 2,940,774 shares, 339,075 shares and
264,000 shares of Common Stock under the 1994 Stock Option Plan, under the 1997
Stock Option Plan and outside the Plans, respectively, at a weighted average
exercise price of $1.76 per share. To the extent that the outstanding options,
or any options granted in the future, are exercised, there will be further
dilution to new investors.
17
<PAGE> 19
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the financial statements and the notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
herein. The statement of operations data for the period from July 5, 1994
(inception) to December 31, 1994 and for the years ended December 31, 1995 and
1996 and the balance sheet data at December 31, 1995 and 1996 are derived from
the financial statements of the Company, which have been audited by Ernst &
Young LLP, independent auditors, and are included elsewhere in this Prospectus,
and are qualified by reference to such financial statements and the notes
thereto. The balance sheet data at December 31, 1994 are derived from the
financial statements of the Company which were also audited by Ernst & Young
LLP, which are not included herein. The selected financial data as of March 31,
1997, for each of the quarters in the year ended December 31, 1996 and for the
quarter ended March 31, 1997 are derived from unaudited financial statements of
the Company, which in the opinion of management include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial information set forth therein. The historical
results are not necessarily indicative of future results.
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM QUARTER ENDED
JULY 5, 1994 YEAR ENDED ----------------------------------------------------
(INCEPTION) TO DECEMBER 31, SEPT. DEC.
DECEMBER 31, ---------------- MARCH 31, JUNE 30, 30, 31, MARCH 31,
1994 1995 1996 1996 1996 1996 1996 1997
-------------- ------ ------- --------- -------- ------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.............................. $ -- $ 511 $15,746 $ 875 $2,230 $ 4,173 $ 8,468 $16,005
Cost of sales.......................... -- 409 12,287 695 1,753 3,262 6,577 12,484
-------------- ------ ------- --------- -------- ------- ------- ---------
Gross profit........................... -- 102 3,459 180 477 911 1,891 3,521
Operating expenses:
Marketing and sales.................. -- 200 6,090 205 696 2,251 2,938 3,906
Product development.................. 38 171 2,313 263 394 755 901 1,575
General and administrative........... 14 35 1,035 48 163 377 447 1,142
-------------- ------ ------- --------- -------- ------- ------- ---------
Total operating expenses....... 52 406 9,438 516 1,253 3,383 4,286 6,623
-------------- ------ ------- --------- -------- ------- ------- ---------
Loss from operations................... (52) (304) (5,979) (336) (776) (2,472) (2,395) (3,102)
Interest income........................ -- 1 202 5 9 92 96 64
-------------- ------ ------- --------- -------- ------- ------- ---------
Net loss............................... $ (52) $ (303) $(5,777) $ (331) $ (767) $(2,380) $(2,299) $(3,038)
========== ====== ======= ======== ====== ======= ======= ========
Net loss per share(1).................. $(0.00) $(0.02) $ (0.25) $ (0.02) $(0.03) $ (0.10) $ (0.10) $ (0.13)
========== ====== ======= ======== ====== ======= ======= ========
Shares used in computation of
net loss per share(1)................ 17,730 18,933 22,655 22,251 22,431 22,967 22,969 23,018
========== ====== ======= ======== ====== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------- MARCH 31,
1994 1995 1996 1997
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................................... $ 52 $ 996 $ 6,248 $ 7,162
Working capital (deficiency)...................................... (16) 920 2,270 79
Total assets...................................................... 76 1,084 8,271 11,722
Long-term obligations, net of current maturities.................. -- -- -- --
Stockholders' equity.............................................. 8 977 3,401 2,763
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for information concerning the
determination of net loss per share.
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All statements, trend analysis and other information contained in this
Prospectus relative to markets for the Company's products and 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 are subject to business and
economic risks, and the Company's actual results of operations may differ
materially from those contained in the forward-looking statements. For a more
detailed discussion of these and other business risks, see "Risk Factors."
OVERVIEW
Amazon.com is the leading online retailer of books. The Company also sells
a smaller number of CDs, videotapes and audiotapes. All 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. For the period from inception through
July 1995, the Company had no sales and its operating activities related
primarily to the development of the necessary computer infrastructure and
initial planning and development of the Amazon.com site and operations.
Operating expenses in 1994 were minimal. For the period beginning with the
opening of the Amazon.com bookstore in July 1995 through December 31, 1995, the
Company continued the foregoing activities and also focused on building sales
momentum, establishing vendor relationships, marketing the Amazon.com brand and
establishing fulfillment and customer service operations. The Company's cost of
sales and operating expenses have increased significantly since the Company's
inception. This trend reflects the costs associated with the formation of the
Company, as well as increased efforts to promote the Amazon.com brand, build
market awareness, attract new customers, recruit personnel, build operating
infrastructure, and develop the Company's Web site and associated
transaction-processing systems.
The Company has a limited operating 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 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
March 31, 1997 had an accumulated deficit of $9.0 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 invest heavily in
marketing and promotion, site development and technology and operating
infrastructure development. The Company also intends to offer attractive pricing
programs, which will reduce 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 incur substantial operating losses for the foreseeable future, and that
the rate at which such losses will be incurred will increase significantly
19
<PAGE> 21
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 margin 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.
RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1995 AND 1996
Net Sales. 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. Net sales grew from $511,000 in 1995 to $15.7 million in
1996 as a result of the significant growth of the Company's customer base,
repeat purchases from the Company's existing customers and six additional months
of sales in 1996. International sales represented approximately 39% and 33% of
net sales in 1995 and 1996, respectively.
Cost of Sales. Cost of sales consists primarily of the costs of
merchandise sold to customers and outbound and inbound shipping costs. Cost of
sales increased substantially in absolute dollars during 1996, reflecting the
Company's increased sales volume. The Company's gross profit margin was
approximately 20% of net sales in 1995 and approximately 22% of net sales in
1996.
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. In March 1997, the Company began
discounting the Amazon.com 500 and other featured books by 40% from list price.
The Company may in the future expand or increase the discounts it offers to its
customers and may otherwise alter its pricing structures and policies. The
Company anticipates that its March 1997 pricing change and any further price
reductions will reduce gross margins below those experienced during 1995 and
1996.
Marketing and Sales Expenses. 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 from $200,000 in
1995 to $6.1 million in 1996. Marketing and sales expenses as a percentage of
net sales were 39% in each of 1995 and 1996. The increase in marketing and sales
expenses was primarily attributable to expansion of the Company's online and
print advertising, public relations and other promotional expenditures, as well
as to increased personnel and related expenses required to implement the
Company's marketing strategy and fulfill customer demand. The Company intends to
pursue an aggressive branding and marketing campaign and therefore expects
marketing and sales expenses to increase significantly in absolute dollars.
Product Development Expenses. 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. Product development expenses
increased from $171,000 in 1995 to $2.3 million in 1996. Product development
expenses as a percentage of net sales were 33% in 1995 and 15% in 1996. The
increase in product development expenses was primarily attributable to increased
staffing and associated costs related to enhancing the features, content and
functionality of the Company's Web site and transaction-processing systems, as
well as increased investments in systems and telecommunications infrastructure.
Such expenses decreased significantly as a percentage of net sales in 1996 due
to the significant increase in 1996 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 Expenses. General and administrative expenses
consist of payroll and related expenses for executive, accounting and
administrative personnel, recruiting, profes-
20
<PAGE> 22
sional fees and other general corporate expenses. General and administrative
expenses increased from $35,000 in 1995 to $1.0 million in 1996. General and
administrative expenses as a percentage of net sales were 7% in each of 1995 and
1996. The increase in general and administrative expenses was primarily due to
increased salaries and related expenses associated with the hiring of additional
personnel, 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.
Interest Income. Interest income consists of earnings on the Company's
cash and cash equivalents. Interest income increased from $1,000 in 1995 to
$202,000 in 1996. The increase was attributable to earnings on higher average
cash and cash equivalents balances during the year.
Income Taxes. The Company has had a net loss for each period since
inception. As of December 31, 1996, the Company had approximately $5.5 million
of net operating loss carryforwards for federal income tax purposes, which
expire in 2011. 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. See Note 4 of Notes to
Financial Statements.
RESULTS OF OPERATIONS -- QUARTERS ENDED MARCH 31, 1996 AND 1997
Net Sales. Net sales grew from $875,000 for the quarter ended March 31,
1996 to $16.0 million for the quarter ended March 31, 1997 as a result of the
significant growth of the Company's customer base and repeat purchases from the
Company's existing customers. International sales represented approximately 40%
and 28% of net sales for the quarters ended March 31, 1996 and March 31, 1997,
respectively.
Cost of Sales. Cost of sales increased substantially in absolute dollars in
the quarter ended March 31, 1997 as compared to the quarter ended March 31,
1996, reflecting the Company's increased sales volume. The Company's gross
profit margin was approximately 22% of net sales in the quarter ended March 31,
1997. The Company anticipates that its March 1997 pricing change and any further
price reductions will reduce gross margins below those experienced during the
first quarter of 1997.
Marketing and Sales Expenses. Marketing and sales expenses increased from
$205,000 in the quarter ended March 31, 1996 to $3.9 million in the quarter
ended March 31, 1997. Marketing and sales expenses as a percentage of net sales
were 24% in the quarter ended March 31, 1997. The increase in marketing and
sales expenses was primarily attributable to expansion of the Company's online
and print advertising, public relations and other promotional expenditures, as
well as to increased personnel and related expenses required to implement the
Company's marketing strategy and fulfill customer demand.
Product Development Expenses. Product development expenses increased from
$263,000 in the quarter ended March 31, 1996 to $1.6 million in the quarter
ended March 31, 1997. Product development expenses as a percentage of net sales
were 10% in the quarter ended March 31, 1997. The increase in product
development expenses was 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 in the quarter
ended March 31, 1997 due to the significant increase in net sales.
General and Administrative Expenses. General and administrative expenses
increased from $48,000 in the quarter ended March 31, 1996 to $1.1 million in
the quarter ended March 31, 1997. General and administrative expenses as a
percentage of net sales were 7% in the quarter ended March 31, 1997. The
increase in general and administrative expenses was primarily due to
21
<PAGE> 23
increased salaries and related expenses associated with the hiring of additional
personnel, and increases in professional fees and travel.
Interest Income. Interest income increased from $5,000 in the quarter ended
March 31, 1996 to $64,000 in the quarter ended March 31, 1997. The increase was
attributable to earnings on higher average cash and cash equivalents balances.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statement of
operations data for the five quarters ended March 31, 1997. In the opinion of
management, this information has been prepared substantially on the same basis
as the audited financial statements appearing elsewhere in this Prospectus, and
all necessary adjustments, consisting only of normal recurring adjustments, have
been included in the amounts stated below to present fairly the unaudited
quarterly results. The quarterly data should be read in conjunction with the
audited financial statements of the Company and the notes thereto appearing
elsewhere in this Prospectus. The operating results for any quarter are not
necessarily indicative of the operating results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------
MARCH JUNE SEPT. DEC. MARCH
31, 30, 30, 31, 31,
1996 1996 1996 1996 1997
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales......................... $ 875 $ 2,230 $ 4,173 $ 8,468 $ 16,005
Cost of sales..................... 695 1,753 3,262 6,577 12,484
------- ------- ------- ------- --------
Gross profit...................... 180 477 911 1,891 3,521
Operating expenses:
Marketing and sales............. 205 696 2,251 2,938 3,906
Product development............. 263 394 755 901 1,575
General and administrative...... 48 163 377 447 1,142
------- ------- ------- ------- --------
Total operating
expenses.............. 516 1,253 3,383 4,286 6,623
------- ------- ------- ------- --------
Loss from operations.............. (336) (776) (2,472) (2,395) (3,102)
Interest income................... 5 9 92 96 64
------- ------- ------- ------- --------
Net loss.......................... $ (331) $ (767) $(2,380) $(2,299) $ (3,038)
======= ======= ======= ======= ========
Net loss per share................ $ (0.02) $ (0.03) $ (0.10) $ (0.10) $ (0.13)
======= ======= ======= ======= ========
Shares used in computation of net
loss per share.................. 22,251 22,431 22,967 22,969 23,018
======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET SALES
-----------------------------------------------------
MARCH JUNE SEPT. DEC. MARCH
31, 30, 30, 31, 31,
1996 1996 1996 1996 1997
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net sales......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales..................... 79.4 78.6 78.2 77.7 78.0
------- ------- ------- ------- --------
Gross profit...................... 20.6 21.4 21.8 22.3 22.0
Operating expenses:
Marketing and sales............. 23.4 31.2 53.9 34.7 24.4
Product development............. 30.1 17.7 18.1 10.6 9.9
General and administrative...... 5.5 7.3 9.0 5.3 7.1
------- ------- ------- ------- --------
Total operating
expenses.............. 59.0 56.2 81.0 50.6 41.4
------- ------- ------- ------- --------
Loss from operations.............. (38.4) (34.8) (59.2) (28.3) (19.4)
Interest income................... 0.6 0.4 2.2 1.1 0.4
------- ------- ------- ------- --------
Net loss.......................... (37.8)% (34.4)% (57.0)% (27.2)% (19.0)%
======= ======= ======= ======= ========
</TABLE>
The Company's net sales have increased significantly in all quarters
presented due to the expansion of the Company's customer base and repeat
purchases by existing customers. Interna-
22
<PAGE> 24
tional sales have grown less rapidly than domestic sales and have decreased as a
percentage of net sales during each of the five quarters in the period ended
March 31, 1997. All operating expense categories increased in absolute dollars
in each quarter, reflecting increased spending on developing, delivering,
supporting and marketing the Company's business and products, and building the
Company's market presence. This trend accelerated in the third quarter of 1996,
particularly with respect to marketing and sales expenses, following the
Preferred Stock financing in June 1996. The Company recorded aggregate deferred
compensation of $612,000 during the fourth quarter of 1996 and an additional
$2.7 million of deferred compensation during the first quarter of 1997. The
amounts recorded represent the difference between the exercise price and the
deemed fair value of the Common Stock for shares subject to options granted in
1996 and 1997. The amortization of deferred compensation will be charged to
operations over the vesting period of the options, which is typically five
years. No amount was amortized in 1996 and $263,000 was amortized in the first
quarter of 1997.
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 or marketing decisions that could have a material adverse
effect on its business, prospects, financial condition and results of
operations. See "Business -- Competition."
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.
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.
23
<PAGE> 25
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private sales of Common Stock and Preferred Stock which, through March 31, 1997,
totaled $2.0 million and $8.2 million, respectively.
Net cash used in operating activities was $232,000 in 1995 and $1.7 million
in 1996. Cash used in operating activities in 1995 was attributable to a net
loss of $303,000 and increases in inventories and prepaid expenses, partially
offset by an increase in accounts payable and accrued expenses, as well as
depreciation and amortization. For 1996, cash used in operating activities
resulted from a net loss of $5.8 million and increases of $554,000 in
inventories, $307,000 in prepaid expenses and $146,000 in deposits, largely
offset by increases of $4.8 million in accounts payable and accrued expenses and
$286,000 in depreciation and amortization. Net cash used in operating activities
was $104,000 in the quarter ended March 31, 1996 while net cash provided by
operating activities was $1.2 million in the quarter ended March 31, 1997. Cash
used in operating activities in the first quarter of 1996 was attributable to a
net loss of $331,000, partially offset by an increase in accounts payable and
accrued expenses of $250,000. For the first quarter of 1997, cash provided by
operating activities resulted from an increase of $4.6 million in accounts
payable and accrued expenses and $683,000 of depreciation and amortization,
partially offset by a net loss of $3.0 million and increases of $368,000 in
inventories and $616,000 in prepaid expenses and other assets. Net cash used in
investing activities of $52,000, $1.2 million, $91,000 and $926,000 for the
years ended December 31, 1995 and 1996 and for the quarters ended March 31, 1996
and 1997, respectively, was primarily 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 $1.2 million in 1995
consisted primarily of proceeds from the issuance of Common Stock and the
exercise of stock options. Cash flow of $8.2 million attributable to financing
activities in 1996 consisted of net proceeds of $8.0 million from the issuance
of Preferred Stock and $231,000 from the sale of Common Stock and the exercise
of Common Stock options. Cash flows provided by financing activities of $36,000
in the first quarter of 1996 consisted primarily of net proceeds from the sale
of Common Stock and the exercise of Common Stock options. Cash flows of $637,000
attributable to financing activities in the first quarter of 1997 consisted of
net proceeds of $200,000 from the issuance of Preferred Stock and $437,000 from
the exercise of Common Stock options.
As of March 31, 1997, the Company had $7.2 million of cash and cash
equivalents. As of that date, the Company's principal commitments consisted of
obligations outstanding under operating leases. 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 may
establish additional warehouse locations, 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 purchases a substantial majority of its products from two major
vendors, Ingram and B&T. Ingram is the single largest supplier and accounted for
59% of the Company's inventory purchases in 1996. The Company carries minimal
inventory and relies to a large extent on rapid fulfillment from these and other
vendors. The Company has no long-term contracts or arrangements with any of its
vendors that guarantee the availability of merchandise, the continuation of
particular payment terms or the extension of credit limits. There can be no
assurance that
24
<PAGE> 26
the Company's current vendors will continue to sell merchandise to the Company
on current terms or that the Company will be able to establish new or extend
current vendor relationships to ensure acquisition of merchandise in a timely
and efficient manner and on acceptable commercial terms. If the Company were
unable to develop and maintain relationships with vendors that would allow it to
obtain sufficient quantities of merchandise on acceptable commercial terms, its
business, prospects, financial condition and results of operations would be
materially adversely affected. See "Business -- Warehousing and Fulfillment."
The Company believes that the net proceeds from this offering, together
with its current cash and cash equivalents, will be sufficient to meet its
anticipated cash needs for working capital and capital expenditures for at least
12 months. 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 February 1997, the Financial Accounting Standards Board adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per Share." The
Company, which is required to adopt the provisions of this standard in 1997,
does not expect the effect on earnings per share to be material.
25
<PAGE> 27
BUSINESS
Amazon.com is the leading online retailer of books. Since opening for
business as "Earth's Biggest Bookstore" in July 1995, the Amazon.com bookstore
has quickly become one of the most widely known, used and cited commerce sites
on the Web. Amazon.com strives to offer its customers compelling value through
innovative use of technology, broad selection, high-quality content, a high
level of customer service, competitive pricing and personalized services. As an
online bookseller, Amazon.com has virtually unlimited online shelf space and can
offer a vast selection through an efficient search and retrieval interface. The
Company offers more than 2.5 million titles, including most of the estimated 1.5
million English-language books believed to be in print, more than one million
out-of-print titles believed likely to be in circulation and a smaller number of
CDs, videotapes and audiotapes. Beyond the benefits of selection, purchasing
books from Amazon.com is more convenient than shopping in a physical bookstore
because online shopping can be done 24 hours a day and does not require a trip
to a store. Furthermore, once the Company achieves sufficient sales volume to
realize economies of scale, the Company believes that its high inventory
turnover, lack of investment in expensive retail real estate and reduced
personnel requirements will give it meaningful structural economic advantages
relative to traditional booksellers.
The Company has grown rapidly since first opening its bookstore. Through
March 1997, Amazon.com had sales of more than $32 million to approximately
340,000 customer accounts in over 100 countries. Compounded quarterly sales
growth exceeded 100% from the first quarter of 1996 through the first quarter of
1997. Average daily visits (not "hits") have grown from approximately 2,200 in
December 1995 to approximately 80,000 in March 1997, and repeat customers
currently account for over 40% of orders. Time magazine rated Amazon.com one of
the 10 "Best Websites of 1996." Growth rates experienced to date are not
sustainable. The Company incurred net losses of $5.8 million and $3.0 million in
the fiscal year ended December 31, 1996 and the quarter ended March 31, 1997,
respectively. See "Risk Factors -- Limited Operating History; Accumulated
Deficit; Anticipated Losses."
INDUSTRY BACKGROUND
Growth of the Internet and Online Commerce
The Internet is an increasingly significant global medium for
communications, content and online commerce. International Data Corporation
("IDC") estimates that the number of Web users grew to approximately 35 million
by the end of 1996 and will grow to approximately 163 million by 2000. Growth in
Internet usage has been fueled by a number of factors, including the large and
growing installed base of personal computers in the workplace and home, advances
in the performance and speed of personal computers and modems, improvements in
network infrastructure, easier and cheaper access to the Internet and increased
awareness of the Internet among businesses and consumers.
The increasing functionality, accessibility and overall usage of the
Internet and online services have made them an attractive commercial medium. The
Internet and other online services are evolving into a unique sales and
marketing channel, just as retail stores, mail-order catalogs and television
shopping have done. Online retailers can interact directly with customers by
frequently adjusting their featured selections, editorial insights, shopping
interfaces, pricing and visual presentations. The minimal cost to publish on the
Web, the ability to reach and serve a large and global group of customers
electronically from a central location, and the potential for personalized
low-cost customer interaction provide additional economic benefits for online
retailers. Unlike traditional retail channels, online retailers do not have the
burdensome costs of managing and maintaining a significant retail store
infrastructure or the continuous printing and mailing costs of catalog
marketing. Because of these advantages over traditional retailers, online
retailers have the potential to build large, global customer bases quickly and
to achieve superior economic returns over the long term. An increasingly broad
base of products is being sold successfully online, including computers, travel
services, brokerage services, automobiles and music, as well as
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books. IDC estimates that the total value of goods and services purchased over
the Web grew from $318 million in 1995, to an annualized run rate of $5.4
billion in December 1996, and will increase to $95 billion in 2000.
Traditional Book Industry
The worldwide book industry is large, growing and relatively fragmented.
According to Euromonitor, U.S. book sales were estimated to be approximately $26
billion in 1996 and are expected to grow to approximately $30 billion in 2000,
while worldwide book sales were estimated at approximately $82 billion in 1996
and are expected to grow to approximately $90 billion in 2000. Books In Print
lists approximately 50,000 publishers. Publishers sell books both directly to
retailers and to a network of distributors. Distributors serve as the primary
vendors for many retailers and carry up to 350,000 of the best-selling titles.
The two largest U.S. retailers, which together are estimated to account for less
than 25% of total U.S. book sales, have focused aggressively on superstore
growth and have closed many of their smaller mall stores. Based on publicly
available data, the Company estimates that such superstores carry an average of
approximately 130,000 titles, with the largest stores carrying up to 175,000
titles on site. There are thousands of independent bookstores in the U.S., which
typically carry a more limited selection of titles in a small selling space and
have recently come under intense competitive pressure from the superstore
format.
Several characteristics of the traditional book industry have created
inefficiencies for all participants. Physical store-based book retailers must
make significant investments in inventory, real estate and personnel for each
retail location. This capital and real estate intensive business model, among
other things, limits the amount of inventory that can be economically carried in
any location. The average superstore stocks less than 10% of the estimated 1.5
million English-language books believed to be in print, which limits customer
selection and available retail shelf space for the majority of published titles.
In addition, publishers typically offer generous rights of return to their
customers and, as a result, effectively bear the risk of their customers' demand
forecasting, which encourages overordering. As a result, returns in the book
industry are high, creating substantial additional costs. Finally, publishers
and traditional book retailers cannot easily obtain demographic and behavioral
data about customers, limiting opportunities for direct marketing and
personalized services.
THE AMAZON.COM SOLUTION
Amazon.com was founded to capitalize on the opportunity for online book
retailing. The Company believes that the retail book industry is particularly
suited to online retailing for many compelling reasons. An online bookseller has
virtually unlimited online shelf space and can offer customers a vast selection
through an efficient search and retrieval interface. This is particularly
valuable in the book market because the extraordinary number of different items
precludes even the largest physical bookstore from economically stocking more
than a small minority of available titles. In addition, by serving a large and
global market through centralized distribution and operations, online
booksellers can realize significant structural cost advantages relative to
traditional booksellers. Furthermore, unlike with clothing or other personal
products, consumers can make educated book purchase decisions using online
information. Books can be selected and sampled effectively through online
synopses, excerpts and reviews and have consistent quality across different
retailers. In addition, the demographic overlap between frequent book buyers and
Internet users is high. Further, online bookselling promises significant
benefits for publishers because centralized distribution is believed to greatly
reduce product returns and because consumer preference information can be
efficiently captured and utilized.
Since opening for business as "Earth's Biggest Bookstore" in July 1995, the
Amazon.com bookstore has quickly become one of the most widely known, used and
cited commerce sites on the Web. By offering customers an authoritative
selection of more than 2.5 million titles, as well as
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competitive pricing and outstanding customer service, Amazon.com believes it has
achieved a preeminent position among online retailers. Key components of the
Amazon.com solution include:
Authoritative Selection. Amazon.com offers a breadth of selection that
would be economically impractical to stock in a physical bookstore or to include
in a mail-order catalog. Amazon.com offers more than 2.5 million titles through
a consistent search and retrieval interface, including most of the estimated 1.5
million English-language books believed to be in print, more than one million
out-of-print titles believed likely to be in circulation and a smaller number of
CDs, videotapes and audiotapes. In contrast, the average retail superstore
stocks only 130,000 titles, fewer than 10% of titles in print.
Online Store Economics. As an online bookseller, Amazon.com enjoys
meaningful structural economic advantages relative to traditional retailers. As
a result of its online business model and centralized distribution, Amazon.com
offers significantly improved inventory turnover, eliminates investment in
expensive retail real estate and reduces personnel requirements. Further,
Amazon.com serves a global market through centralized operations, allowing its
investments in Web sites, content, marketing and technology to be leveraged over
a relatively large sales base.
Customer Convenience. Beyond the benefits of selection, purchasing books
from Amazon.com is more convenient than shopping in a physical bookstore because
the Amazon.com bookstore is open 24 hours a day and shopping does not require a
trip to a store. Books can be shipped directly to the customer's home or office.
The Company believes that customers may buy more books because they have more
hours to shop, can act immediately on a purchase impulse and can locate books
that are hard to find. Because the Amazon.com bookstore has a global reach, it
can deliver an extremely broad selection to customers in rural, international or
other locations that cannot support large-scale physical bookstores.
Compelling Content. Amazon.com has attracted a high-quality editorial
staff and delivers relevant, informative and entertaining editorial and other
content, including synopses, reviews and excerpts. In addition, reviews by
authors, other users, publishers and third-party reviewers provide diverse and
often stimulating points of view to inform and entertain customers while
shopping.
Personalized Service. Amazon.com currently offers the Eyes and Editors
notification services and intends to add a collaborative filtering service in
the future. Over time, the Company can accumulate substantial preference and
behavioral information that will allow it to provide increasingly rich
value-added services to its customers.
Benefits to Vendors. Amazon.com's methods of online bookselling offer
substantial benefits to publishers. Because Amazon.com centralizes distribution
and orders most products based on actual customer demand, it believes that its
returns of books to publishers and wholesalers are significantly below industry
norms. The Company believes its market approach may increase sales of many
second- and third-tier titles that are not typically stocked in physical
bookstores. In addition, the Company believes it will be able to help publishers
target customers for particular product offerings.
STRATEGY
Amazon.com's objective is to be the leading online retailer of
information-based products and services, with an initial focus on books. The
Company plans to attain this goal through the following key strategies:
Create Customer Loyalty by Delivering a Compelling Value Proposition. The
Company's goal is to be the authoritative source for books and information-based
products by delivering to its customers the benefits of online commerce and by
maintaining relentless customer focus. Amazon.com strives to offer its customers
compelling value through innovative use of technology, broad selection,
high-quality content, a high level of customer service, competitive pricing and
personalized services. In addition, the Company seeks to offer its customers a
high-quality
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shopping experience through informative and entertaining editorial content, as
well as simple and efficient navigation and search capabilities.
Build Strong Brand Recognition. Amazon.com is a leading brand name in
online commerce and believes that it is benefiting from first mover advantages
and momentum. The Company's strategy is to promote, advertise and increase its
brand equity and visibility through excellent service and a variety of marketing
and promotional techniques, including advertising on leading Web sites and other
media, conducting an ongoing public relations campaign and developing business
alliances and partnerships.
Create a Superior Economic Model. Because it is not burdened by the costs
or legacy of a physical store network and related personnel, the Company
believes it has an inherent economic advantage relative to traditional
retailers. The Company's goal is to capitalize on this advantage by aggressively
driving revenue growth to achieve economies of scale and by incorporating
technological advances throughout its business.
Maintain Technology Focus and Expertise. A state-of-the-art interactive
commerce platform is necessary to enhance the Amazon.com service offering,
leverage the unique characteristics of online retailing, and enable a superior
economic model. Amazon.com's internal development group has expended and will
continue to expend substantial efforts developing, acquiring and implementing
technology-driven enhancements to its Web site and transaction-processing
systems. Among other technology objectives, the Company intends to provide
increasingly valuable personalized service programs, make the user interface as
intuitive, engaging and fast as possible and continuously improve the efficiency
of its fulfillment activities.
Build Strong Publisher and Distributor Relationships. The Company views
its publishers and distributors as customers and seeks to utilize the
substantial structural advantages inherent in its business model to build strong
relationships with them. Amazon.com's current inventory management practices
result in many fewer returns than are traditional in the industry. In addition,
the demographic and purchasing data accumulated by the Company will enable it to
help publishers target customers for particular product offerings. Through
targeted marketing and virtually unlimited online shelf space, the Company can
offer publishers enhanced promotional opportunities for new authors, new titles
and second- and third-tier titles.
Attract and Retain Exceptional Employees. The Company believes that
versatile and experienced employees, management and directors provide
significant advantages in the rapidly evolving market in which it competes.
Since inception, the Company has devoted and will continue to devote substantial
efforts to building a talented employee base and to attracting an experienced
management team with a track record in large and fast-growing organizations.
Pursue Incremental Revenue Opportunities. The Company intends to leverage
its brand, online commerce experience, operating infrastructure and customer
base to broaden its presence and develop additional revenue opportunities. For
example, the Company's Associates Program allows the Company to work
collaboratively with owners of other Web sites, and the Company believes that it
can further expand its reach through alliances with other Web sites, online
service providers and other relationships. In addition, the Company will
consider developing incremental revenue opportunities through affiliated or
related sites, related product areas, geographic expansion or acquisition of
complementary businesses, products or technologies. Finally, the Company's
customer demographic and substantial site traffic create a meaningful
opportunity for advertising sales.
THE AMAZON.COM BOOKSTORE
Customers enter the Amazon.com bookstore through the Company's Web site
and, in addition to ordering books, can conduct targeted searches, browse from
among highlighted
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selections, bestsellers and other features, read and post reviews, register for
personalized services, participate in promotions and check order status.
Browsing. The Amazon.com site offers visitors a variety of highlighted
subject areas and special features. Popular features include Editors' Favorites
organized by subject matter, as well as Amazon.com and national bestsellers
lists. The Amazon.com 500 and various focus lists such as the Computer 50 and
the Science Fiction 50 feature current bestsellers and titles that Amazon.com
predicts will be future bestsellers at 40% discounts from list price. Books of
the Day focuses on particular highlighted books chosen to provide readers a mix
of popular, unusual, entertaining and topical selections. A selection of
noteworthy titles is highlighted directly on the home page, as is Titles in the
News, which lists titles recently featured in sources such as The New York Times
Book Review, National Public Radio, The Atlantic Monthly, Entertainment Weekly,
The Oprah Winfrey Show, Wired and others. In addition, the Amazon.com home page
presents a variety of other features of topical or current-event interest, such
as a Women's History Month reading list and a guide to books written by
participants and speakers at notable industry conferences. The site also
periodically offers advance glimpses into new or upcoming releases, such as the
recently featured first two chapters of John Grisham's new novel, The Partner.
Other features include the New on Our Shelves section of best-selling new or
released titles and Award Winners, a list of nominees and winners of over 20
different literary prizes, including the Nobel Prize for Literature and the
Pulitzer Prize. To enhance the shopping experience and increase sales, the
Company features various books on a rotating basis throughout the store. As a
customer proceeds through the catalog, he or she encounters cover art of
featured books. Clicking with the mouse on any of these images pulls up more
information about the featured book, as well as a button which, if clicked on,
adds the book to the customer's order. These images of featured books appear,
one or two at a time, in addition to whatever material the customer specifically
requested.
Searching. A primary feature of the Amazon.com bookstore is its
interactive, searchable catalog of more than 2.5 million titles. The Company
provides a selection of search tools to find books based on title, subject,
author, keyword, publication date or ISBN. Customers can also use more complex
and precise search tools such as Boolean search queries. The Company licenses
some of its catalog and other information from third parties.
Reviews and Content. The Amazon.com store offers numerous forms of content
to entertain and engage readers, enhance the customer's shopping experience and
encourage purchases. The Amazon.com Journal section contains exclusive author
interviews, feature articles and columns. Numerous author interviews are
presented on the site, along with reviews from professional sources and other
consumers. Various types of content are available for particular titles,
including cover art, synopses, annotations, interviews by authors or reviews by
other readers. Customers are encouraged to write and post their own reviews, and
authors are invited to "self-administer" interviews by answering pre-defined
questions.
Online Community. By creating an online community, the Company hopes to
provide customers with an inviting and familiar experience that will encourage
them to return frequently to the site and to interact with other users, and that
will promote loyalty and repeat purchase. Amazon.com invites readers, authors
and publishers to post reviews, sponsors review competitions and provides a
forum for author interviews. Reviewers and authors are encouraged to provide
their e-mail addresses to facilitate interaction with other readers.
Personalized Services. Amazon.com currently offers two free e-mail
notification services. The Company's Eyes service allows customers to specify an
author, title or subject area and receive notice automatically when a new book
is published that matches their criteria. Typically, a few weeks prior to the
release date of a matching new book, the Company's Eyes book notification
service software sends the customer an e-mail message containing prerelease
information. The Company's Editors service draws on experts in more than 50
subjects and genres to send e-mail notices highlighting interesting information
on the chosen subject or genre. The editors study
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advance reviews and preview galleys to find titles of interest to subscribers.
Subscribers receive e-mail messages periodically in selected subject areas.
Collaborative Filtering. Amazon.com intends to add a collaborative
filtering service to its personalized service offerings in the future. The
collaborative filtering service will function as an expert reviewer that
develops a relationship with customers, helping them to find books they may like
based on their preferences. It will match the preferences of people to one
another, drawing from a pool of titles chosen by other Amazon.com customers who
share similar interests and tastes.
Ordering. To purchase books, customers simply click on a button to add
books to their virtual shopping baskets. Customers can add and subtract books
from their shopping baskets as they browse, prior to making a final purchase
decision, just as in a physical store. To execute orders, customers click on the
buy button and are prompted to supply shipping and credit card details, either
by e-mail or by telephone. This information is stored on the Company's secure
server and need not be provided again by repeat customers. The personal password
allows repeat customers to automatically access their previously provided
shipping and credit card information, as well as their book notification
profiles. The Company's system automatically confirms each order by e-mail to
the customer within minutes after the order is placed and advises customers by
e-mail shortly after orders are shipped.
Availability and Fulfillment. Some of the Company's titles are available
for immediate shipment, others are available for shipment within 48 to 72 hours
and the remainder of in-print titles are generally available within four to six
weeks, although some titles may not be available at all. Out-of-print titles
generally are available in two to six months, although some titles may not be
available at all. Customers select from a variety of delivery options, including
overnight and various international shipping options, as well as gift-wrapping
services. The Company uses e-mail to notify customers of order status under
various conditions. If a hard-to-find book is discovered to have a price higher
than an estimate previously provided to the customer, the Company notifies the
customer and seeks approval for sale at the higher price. The Company seeks to
provide rapid and reliable fulfillment of customer orders, and intends to
continue to improve its availability and fulfillment in the future.
Out-of-Print. Amazon.com began offering an out-of-print book service in
March 1997. More than one million out-of-print titles are listed in the
Company's catalog. Because of the difficulty of sourcing out-of-print titles,
customers are advised to expect two- to six-month delivery times and that the
books may not be available at all.
MARKETING AND PROMOTION
The Company's goal is to be the worldwide authoritative source for books.
Amazon.com's marketing strategy is designed to strengthen the Amazon.com brand
name, increase customer traffic to the Amazon.com bookstore, build strong
customer loyalty, maximize repeat purchases and develop incremental revenue
opportunities.
Amazon.com intends to build customer loyalty by creatively applying
technology to deliver personalized programs and service, as well as creative and
flexible merchandising. The Company will be able to provide increasingly
targeted and customized services by using the extensive customer preference and
behavioral data obtained as a result of its online experience and market share.
The Internet allows rapid and effective experimentation and analysis, instant
user feedback and efficient "redecorating of the store for each and every
customer," all of which the Company intends to incorporate in its merchandising.
In contrast to traditional direct-marketing efforts, the Company's personalized
notification services send customers highly customized notices at their request.
By offering customers a compelling and personalized value proposition, the
Company seeks to increase the number of visitors that make a purchase, to
encourage repeat visits and purchases and to extend customer retention. Loyal,
satisfied customers also generate word-of-
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mouth advertising and awareness, and are able to reach thousands of other
customers and potential customers because of the reach of online communication.
The Company employs a variety of media, program and product development,
business development and promotional activities to achieve these goals.
Online Service and Internet Advertising. The Company places advertisements
on various high-profile and high-traffic conduit Web sites, including CNET,
Yahoo!, Pointcast, Excite, Lycos, Quote.com and CNN. These advertisements
usually take the form of banners that encourage readers to click through
directly to the Amazon.com bookstore.
Advertising and Public Relations. The Company engages in a coordinated
program of print advertising in specialized and general circulation newspapers
and magazines, such as The New York Times Book Review and Wired. In the future
it may begin advertising in other media. As a result of its public relations
activities as well as unsolicited invitations, the Company has been featured in
a wide variety of television shows, articles and radio programs and as part of
the "What's New" and "What's Cool" sections of Netscape and Yahoo!,
respectively.
Associates Program. The Company extends its market presence through its
Associates Program, which includes several thousand enrolled members. The
program enables Associate Web sites to offer books to their audiences for
fulfillment by Amazon.com. The Associate embeds a hyperlink to Amazon.com's
site, together with books recommended for that Associate's targeted customer
base. The customer is automatically connected to Amazon.com's site and may place
his or her order. The Associate is able to offer enhanced services and
recommendations, avoiding the expenses associated with ordering and fulfillment,
and receives a commission for certain orders. Prominent Associate sites include
Netscape Developer's Bookstore, The Village Voice and Upside.com.
Personalized Shopping Services. The Company offers personalized
notification and shopping services through its Eyes and Editors services and
intends to add a collaborative filtering service to its personalized service
offerings in the future.
Customer Gifts. The Company has in the past sent, and may in the future
send, gifts to its customer base. These activities are designed to increase
customer loyalty and provide customers with a continuing reminder of the
Amazon.com brand and Web site.
CUSTOMER SERVICE
The Company believes that its ability to establish and maintain long-term
relationships with its customers and encourage repeat visits and purchases
depends, in part, on the strength of its customer support and service operations
and staff. Furthermore, the Company values frequent communication with and
feedback from its customers in order to continually improve the store and its
services. Amazon.com offers nine e-mail addresses to enable customers to request
information and to encourage feedback and suggestions. The Company's team of
customer support and service personnel are responsible for handling general
customer inquiries, answering customer questions about the ordering process, and
investigating the status of orders, shipments and payments. Amazon.com also
offers a toll-free line for customers who are reluctant to enter their credit
card numbers through the Web site. The Company has automated certain of the
tools used by its customer support and service staff and intends to actively
pursue enhancements to and further automation of its customer support and
service systems and operations.
WAREHOUSING AND FULFILLMENT
The Company sources product from a network of book distributors and
publishers. The Company carries minimal inventory and relies to a large extent
on rapid fulfillment from major distributors and wholesalers which carry a broad
selection of titles. The Company purchases a substantial majority of its
products from Ingram and B&T. Ingram is the single largest supplier and
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accounted for 59% of the Company's inventory purchases in 1996. Of the more than
2.5 million titles offered by the Company, up to 400,000 are currently supplied
by book distributors and wholesalers, including Ingram and B&T. See "Risk
Factors -- Reliance on Certain Suppliers."
The Company utilizes automated interfaces for sorting and organizing its
orders to enable it to achieve the most rapid and economic purchase and delivery
terms possible. The Company's proprietary software selects the orders that can
be filled quickly via electronic interfaces with vendors, and forwards remaining
orders to its special order group. Under the Company's arrangements with its
distributors, electronically ordered books often are shipped by the distributor
within hours of receipt of an order from Amazon.com. The Company has developed
customized information systems and dedicated ordering personnel that specialize
in sourcing hard-to-find books. The Company currently processes all sales
through its warehouse in Seattle.
TECHNOLOGY
The Company has implemented a broad array of site management, search,
customer interaction, transaction-processing and fulfillment services and
systems using a combination of its own proprietary technologies and commercially
available, licensed technologies. The Company's current strategy is to license
commercially available technology whenever possible rather than seek internally
developed solutions. Amazon.com focuses its development efforts on creating and
enhancing the specialized, proprietary software that is unique to its business.
The Company uses a set of applications for accepting and validating
customer orders, organizing, placing and managing orders with suppliers,
receiving product and assigning it to customer orders, and managing shipment of
books to customers based on various ordering criteria. The Company's
transaction-processing systems handle millions of items, six different
availability statuses, gift-wrapping requests and multiple shipment methods, and
allow the customer to choose whether to receive single or several shipments
based on availability. These applications also manage the process of accepting,
authorizing and charging customer credit cards. In addition, the Company's
systems allow it to maintain ongoing automated e-mail communications with
customers throughout the ordering process at a negligible incremental cost.
These systems automate many routine communications entirely, facilitate
management of customer e-mail inquiries and allow customers to, on a
self-service basis, check order status, change their e-mail address or password,
and check subscriptions to personal notification services. The Amazon.com
bookstore also incorporates a variety of search and database tools.
A group of systems administrators and network managers monitor and operate
the Company's Web site, network operations and transaction-processing systems.
The continued uninterrupted operation of the Company's Web site and
transaction-processing systems is essential to its business, and it is the job
of the site operations staff to ensure, to the greatest extent possible, the
reliability of the Company's Web site and transaction-processing systems. The
Company uses the services of two Internet service providers, UUNet Technologies,
Inc. and Interconnected Associates, Inc., to obtain connectivity to the Internet
over multiple dedicated T1 lines.
The Company's transaction-processing systems are not integrated with the
remainder of the Company's accounting and financial systems. As a result, the
Company's current management information system, which produces frequent
operational reports, is inefficient with respect to traditional
accounting-oriented reporting and requires a significant amount of manual effort
to prepare information for financial and accounting reporting. See "Risk
Factors -- Risk of Capacity Constraints; Reliance on Internally Developed
Systems; System Development Risks," "-- Risk of System Failure; Single Site and
Order Interface" and "-- Online Commerce Security Risks."
COMPETITION
The online commerce market, particularly over the Internet, is new, rapidly
evolving and intensely competitive, which competition the Company expects to
intensify in the future. Barriers
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to entry are minimal, and current and new competitors can launch new sites at a
relatively low cost. In addition, the retail book industry is intensely
competitive. The Company currently or potentially competes with a variety of
other companies. These competitors include (i) various online booksellers and
vendors of other information-based products such as CDs and videotapes,
including Book Stacks Unlimited, Inc., a subsidiary of CUC, and other small
entrants, including entrants into narrow specialty niches, that may be aided by
partnering with existing distributors, such as Ingram, 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, including AOL and Microsoft Corporation, through which
other bookstores may offer products, and (iii) publishers, such as Simon &
Schuster, and retail vendors of books, music and videotapes, including large
specialty booksellers, with significant brand awareness, sales volume and
customer bases, such as B&N and Borders. Both B&N and Borders have announced
their intention to devote substantial resources to online commerce in the near
future. B&N, specifically, has launched a Web site to sell books online and has
a relationship with AOL through which B&N offers a broad selection of titles at
discounted prices. Simon & Schuster also has begun selling a number of books
through an online site. Competitive pressures created by any one of these
companies, 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 believes that the principal competitive factors in its market
are brand recognition, selection, personalized services, convenience, price,
accessibility, customer service, quality of search tools, quality of editorial
and other site content and reliability and speed of fulfillment. Many of the
Company's current and potential competitors have longer operating histories,
larger customer bases, greater brand recognition and significantly greater
financial, marketing and other resources than the Company. In addition, online
retailers may be acquired by, receive investments from or enter into other
commercial relationships with larger, well-established and well-financed
companies as use of the Internet and other online services increases. Certain of
the Company's competitors may be able to secure merchandise from vendors on more
favorable terms, devote greater resources to marketing and promotional
campaigns, adopt more aggressive pricing or inventory availability policies and
devote substantially more resources to Web site and systems development than the
Company. Increased competition may result in reduced operating margins, loss of
market share and a diminished brand franchise. There can be no assurance that
the Company will be able to compete successfully against current and future
competitors, and competitive pressures faced by the Company may have a material
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 or marketing decisions or acquisitions that could have a material
adverse effect on its business, prospects, financial condition and results of
operations. New technologies and the expansion of existing technologies may
increase the competitive pressures on the Company. For example, client-agent
applications that select specific titles from a variety of Web sites may channel
customers to online booksellers that compete with the Company. In addition,
companies that control access to transactions through network access or Web
browsers could promote the Company's competitors or charge the Company a
substantial fee for inclusion. See "Risk Factors -- Competition."
LEGAL PROCEEDINGS
The Company has been subject to claims and expects to be subject to legal
proceedings and claims from time to time in the ordinary course of its business,
including claims of alleged infringement by the Company of trademarks and other
intellectual property rights of third parties. In January 1997, the Company
received a letter from legal counsel for B&N which claims in part that the
Company has infringed B&N's alleged common-law trademark rights. On May 12,
1997, B&N filed suit against the Company in the United States District Court for
the Southern District of New
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York alleging that the Company has made false advertising claims because it is
not a "bookstore" and does not physically warehouse most of the titles it
offers. The complaint seeks compensatory and punitive damages, and injunctive
and other equitable relief. A Dow Jones News Service release on May 13, 1997
reported that a "syndicate source characterized the lawsuit as petty and
spiteful, and said it would probably put a 'little bit of a damper' on
Amazon.com's IPO. The source said investors will view this suit as somewhat
benign because it isn't in response to Amazon's handling of its finances or some
other hard-core business practice." These statements were not authorized by and
have not been endorsed by the Company. The Company is still in the process of
evaluating B&N's claims, and therefore is not in a position at this time to
determine that the suit is not without merit. The Company intends to defend
against the lawsuit vigorously. The Company is not currently aware of any other
legal proceedings pending against it.
INTELLECTUAL PROPERTY
The Company regards its copyrights, service marks, trademarks, trade dress,
trade secrets and similar intellectual property as critical to its success, and
relies on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
partners and others to protect its proprietary rights. The Company pursues the
registration of its trademarks and service marks in the U.S. and
internationally, and has applied for the registration of certain of its
trademarks and service marks. Effective trademark, service mark, copyright and
trade secret protection may not be available in every country in which the
Company's products and services are made available online. The Company has
licensed in the past, and expects that it may license in the future, certain of
its proprietary rights, such as trademarks or copyrighted material, to third
parties. While the Company attempts to ensure that the quality of its brand is
maintained by such licensees, there can be no assurance that such licensees will
not take actions that might materially adversely affect the value of the
Company's proprietary rights or reputation, which could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations. There can be no assurance that the steps taken by the Company to
protect its proprietary rights will be adequate or that third parties will not
infringe or misappropriate the Company's copyrights, trademarks, trade dress and
similar proprietary rights. In addition, there can be no assurance that other
parties will not assert infringement claims against the Company. The Company has
been subject to claims and expects to be subject to legal proceedings and claims
from time to time in the ordinary course of its business, including claims of
alleged infringement of the trademarks and other intellectual property rights of
third parties by the Company and its licensees. Such claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources. The Company has received notice of alleged claims by B&N.
See "-- Legal Proceedings."
EMPLOYEES
As of March 31, 1997, the Company employed 256 employees. The Company also
employs independent contractors and other temporary employees in its editorial,
operations and finance and administration departments. None of the Company's
employees is represented by a labor union, and the Company considers its
employee relations to be good. Competition for qualified personnel in the
Company's industry is intense, particularly among software development and other
technical staff. The Company believes that its future success will depend in
part on its continued ability to attract, hire and retain qualified personnel.
See "Risk Factors -- Management of Potential Growth; New Management Team;
Limited Senior Management Resources" and "-- Dependence on Key Personnel; Need
for Additional Personnel."
FACILITIES
The Company's principal administrative, engineering, marketing and customer
service facilities total approximately 42,400 square feet and are located in
Seattle, Washington under a lease that
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<PAGE> 37
expires on July 31, 1999. The Company's warehousing and merchandising operations
are housed in an approximately 50,000-square-foot facility in Seattle,
Washington under a lease that expires on October 31, 1999. The Company
anticipates that it will require additional administrative, customer service,
warehouse and fulfillment space within the next 12 months, but that suitable
additional space will be available on commercially reasonable terms, although
there can be no assurance in this regard. The Company does not own any real
estate.
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<PAGE> 38
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company as of March 31, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------------------------- --- --------------------------------------
<S> <C> <C>
Jeffrey P. Bezos...................... 33 President, Chief Executive Officer and
Chairman of the Board
Rick R. Ayre.......................... 47 Vice President and Executive Editor
Mark L. Breier........................ 37 Vice President of Marketing
Joy D. Covey.......................... 33 Chief Financial Officer, Vice
President of Finance and
Administration, Treasurer and
Secretary
Oswaldo F. Duenas..................... 50 Vice President of Operations
Mary E. Engstrom...................... 34 Vice President of Publisher Affairs
Sheldon J. Kaphan..................... 44 Vice President and Chief Technology
Officer
Scott E. Lipsky....................... 32 Vice President of Business Expansion
John D. Risher........................ 31 Vice President of Product Development
Joel R. Spiegel....................... 41 Vice President of Engineering
Tom A. Alberg(1)...................... 57 Director
Scott D. Cook......................... 44 Director
L. John Doerr(2)...................... 45 Director
Patricia Q. Stonesifer(1)(2).......... 40 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
JEFFREY P. BEZOS. Mr. Bezos has been President and Chairman of the Board
of the Company since founding it in 1994, and Chief Executive Officer since May
1996, and served as Treasurer and Secretary from May 1996 to March 1997. From
December 1990 to June 1994, Mr. Bezos was employed by D.E. Shaw & Co., a Wall
Street investment firm, becoming Senior Vice President in 1992. From April 1988
to December 1990, Mr. Bezos was employed by Bankers Trust Company, becoming Vice
President in February 1990. Mr. Bezos received his B.S. in Electrical
Engineering and Computer Science, Summa Cum Laude, from Princeton University.
RICK R. AYRE. Mr. Ayre joined the Company in September 1996 as Vice
President and Executive Editor. From September 1991 to September 1996, Mr. Ayre
served in a number of positions at PC Magazine, most recently as Executive
Editor for Technology. From September 1988 to September 1991, Mr. Ayre served as
Chief of Information Resources Management of Highland Drive VAMC, a hospital.
Mr. Ayre received his B.A. in Sociology from Drury College.
MARK L. BREIER. Mr. Breier joined the Company in January 1997 as Vice
President of Marketing. From March 1994 to September 1996, Mr. Breier served as
Vice President of Marketing of Cinnabon World Famous Cinnamon Rolls. Mr. Breier
was involved in product management and introduction at Dreyer's Grand Ice Cream
from October 1988 to March 1994, at Kraft Foods, Inc., a multinational consumer
products company, from April 1986 to October 1988 and at Parker Brothers, a
worldwide manufacturer of toys and games, from August 1985 to March 1986. Mr.
Breier received his B.A. in Economics from Stanford University and his M.B.A.
from the Stanford University Graduate School of Business.
JOY D. COVEY. Ms. Covey joined the Company in December 1996 as Chief
Financial Officer and Vice President of Finance and Administration, and became
Secretary and Treasurer in March 1997. From June 1995 to February 1996, Ms.
Covey served as Vice President, Operations of the
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<PAGE> 39
Broadcast Division of Avid Technology, Inc. ("Avid"), a developer of digital
media systems, and from January 1995 to June 1995, Ms. Covey served as Vice
President of Business Development for Avid. From July 1991 to January 1995, Ms.
Covey served as Chief Financial Officer of Digidesign, Inc., a developer of
random access digital audio systems and software. Prior to that, she was an
associate at Wasserstein Perella & Co., and a certified public accountant at
Arthur Young & Company (now Ernst & Young LLP). Ms. Covey received her B.S. in
Business Administration, Summa Cum Laude, from California State University,
Fresno, her M.B.A., With High Distinction, from Harvard Business School and her
J.D., Magna Cum Laude, from Harvard Law School. She is a Certified Public
Accountant and a member of the California State Bar.
OSWALDO F. DUENAS. Mr. Duenas joined the Company in January 1997 as Vice
President of Operations. From February 1994 to December 1996, Mr. Duenas served
as Vice President of the Latin American division of International Service
System, Inc., Latin America's largest integrated service company, where he
oversaw sales, marketing, operations and customer relations for the division and
managed several thousand employees. From September 1993 to January 1994, Mr.
Duenas served as President and Director General of National Vision Associates, a
Mexican vision retail business. From 1973 to 1993, Mr. Duenas held various
management positions with Federal Express, a worldwide express transportation
company.
MARY E. ENGSTROM. Ms. Engstrom joined the Company in February 1997 as Vice
President of Publisher Affairs. From December 1996 to February 1997, Ms.
Engstrom served as Vice President of Marketing of Symantec Corporation
("Symantec"), a developer of information management and productivity enhancement
software, and from February 1996 to February 1997, Ms. Engstrom served as
General Manager of the Security Business Unit of Symantec. From July 1989 to
September 1994, Ms. Engstrom held several management positions at Microsoft
Corporation, including Group Product Manager for Microsoft Access, Group Product
Manager for Microsoft Project and Director of Marketing, Strategic Relations.
Ms. Engstrom received her B.A. in Economics from the University of California,
Berkeley, and her M.B.A. from the Anderson Graduate School of Management at the
University of California, Los Angeles.
SHELDON J. KAPHAN. Mr. Kaphan has served as the Company's Vice President
and Chief Technology Officer since March 1997. From October 1994 to March 1997,
Mr. Kaphan served as Vice President of Research and Development of the Company.
From October 1992 to July 1994, Mr. Kaphan served as senior engineer at Kaleida
Labs Inc., a multimedia joint venture between Apple Computer Inc. and
International Business Machines Corporation. Mr. Kaphan received his B.A. in
Mathematics from the University of California, Santa Cruz.
SCOTT E. LIPSKY. Mr. Lipsky joined the Company in July 1996 as Vice
President of Business Expansion. From March 1994 to July 1996, Mr. Lipsky served
as Chief Information Officer of Barnes & Noble, Inc., a national trade bookstore
chain, and Chief Technology Officer of Barnes & Noble College Bookstores, Inc.,
a national college bookstore chain. From September 1991 to January 1994, Mr.
Lipsky served as founder and President of Omni Information Group, a consulting,
software development and systems integration company serving the retail-chain
market. From February 1987 to September 1991, Mr. Lipsky was Vice President of
Information Systems at Babbage's, a consumer software retail chain.
JOHN D. RISHER. Mr. Risher joined the Company in February 1997 as Vice
President of Product Development. From July 1991 to February 1997, Mr. Risher
held a variety of marketing and project management positions at Microsoft
Corporation, including Team Manager for Microsoft Access and Founder and Product
Unit Manager for MS Investor, Microsoft's Web site for personal investment. Mr.
Risher received his B.A. in Comparative Literature, Magna Cum Laude, from
Princeton University and his M.B.A. from Harvard Business School.
JOEL R. SPIEGEL. Mr. Spiegel joined the Company in March 1997 as Vice
President of Engineering. From March 1995 to March 1997, Mr. Spiegel held
several positions with Microsoft Corporation, including Windows 95 Multimedia
Development Manager, Windows Multimedia Group Manager and Product Unit Manager,
Information Retrieval. From June 1986 to March 1995, he held a variety of
positions at Apple Computer Inc., most recently as Senior Manager responsible
for new product development in the Apple Business Systems Division. Prior to
that, Mr. Spiegel
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<PAGE> 40
held software product development positions at a number of companies, including
Hewlett-Packard and VisiCorp. Mr. Spiegel received his B.A. in Biology with
Honors from Grinnell College.
TOM A. ALBERG. Mr. Alberg has been a director of the Company since June
1996. Mr. Alberg has been a principal in Madrona Investment Group, L.L.C., a
private merchant banking firm, since January 1996. From April 1991 to October
1995, he was the President and a director of LIN Broadcasting Corporation, and
from July 1990 to October 1995, he was Executive Vice President of McCaw
Cellular Communications, Inc.; both companies were providers of cellular
telephone services and are now part of AT&T Corp. Prior to 1990, Mr. Alberg was
a partner of the law firm Perkins Coie, where he also served as Chairman of the
firm's Executive Committee. Mr. Alberg is also a director of Active Voice
Corporation, Emeritus Corporation, Mosaix, Inc., Teledesic Corporation and Visio
Corporation. Mr. Alberg received his B.A. from Harvard University and his J.D.
from Columbia Law School.
SCOTT D. COOK. Mr. Cook has been a director of the Company since January
1997. Mr. Cook co-founded Intuit, Inc., a leading personal finance, tax and
accounting software company, in 1983, has served as President of Intuit since
that time and has served as its Chairman of the Board since April 1994. Prior to
co-founding Intuit, Mr. Cook was a consultant for Bain & Company, a strategy
consulting firm, and a brand manager for Procter & Gamble. Mr. Cook is also a
director of Broderbund Software, Inc. and Intuit, Inc. Mr. Cook received his
B.A. in Mathematics and Economics from the University of Southern California and
his M.B.A. from Harvard Business School.
L. JOHN DOERR. Mr. Doerr has been a director of the Company since June
1996. Mr. Doerr has been a general partner of Kleiner Perkins Caufield & Byers,
a venture capital firm, since September 1980. Prior to joining Kleiner Perkins
Caufield & Byers, Mr. Doerr was employed by Intel Corporation for five years.
Mr. Doerr is also a director of Netscape Communications Corporation, Intuit,
Inc., Macromedia, Inc., Platinum Software, Inc., Shiva Corporation and Sun
Microsystems, as well as several private companies. Mr. Doerr received his
M.E.E. and B.S.E.E. from Rice University and his M.B.A. from Harvard Business
School.
PATRICIA Q. STONESIFER. Ms. Stonesifer has been a director of the Company
since February 1997. Ms. Stonesifer is an independent management consultant
whose clients include DreamWorks SKG. Ms. Stonesifer served as Senior Vice
President of the Interactive Media Division of Microsoft Corporation from
February 1996 to December 1996, was head of Microsoft's Consumer Division from
August 1993 to February 1996 and held a range of positions at Microsoft from
1988 to 1993. While at Microsoft, Ms. Stonesifer managed its investments in new
online content and service products, including MSN, the Microsoft Network
(msn.com); MSNBC, Microsoft's joint venture with NBC; Slate (slate.com); and
Expedia (expedia.com), as well as other Internet-based products. Prior to
joining Microsoft, Ms. Stonesifer held a number of positions at Que Corporation.
Ms. Stonesifer is also a director of Kinko's, Inc. and a member of the Executive
Board of the Academy of Interactive Arts and Sciences. Ms. Stonesifer received
her B.A. in General Studies from Indiana University.
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee consists of Mr. Alberg and Ms. Stonesifer. Among other
functions, the Audit Committee makes recommendations to the Board of Directors
regarding the selection of independent auditors, reviews the results and scope
of the audit and other services provided by the Company's independent auditors,
reviews the Company's balance sheet, statement of operations and cash flows and
reviews and evaluates the Company's internal control functions.
The Compensation Committee consists of Mr. Doerr and Ms. Stonesifer. The
Compensation Committee reviews and approves the compensation and benefits for
the Company's executive officers, administer the Company's stock option plans
and make recommendations to the Board of Directors regarding such matters.
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<PAGE> 41
DIRECTOR COMPENSATION
Directors of the Company do not receive cash compensation for their
services as directors or members of committees of the Board of Directors, but
are reimbursed for their reasonable expenses incurred in attending meetings of
the Board of Directors. In December 1995, the Company granted to Mr. Alberg a
nonqualified stock option to purchase 60,000 shares of Common Stock at an
exercise price of $0.3333 per share and a nonqualified stock option to purchase
60,000 shares of Common Stock at an exercise price of $0.6666 per share. In
January 1997, the Company granted Mr. Cook, a director of the Company, an option
to purchase 60,000 shares of Common Stock at an exercise price of $1.3333 per
share. In February 1997, the Company granted Ms. Stonesifer, a director of the
Company, an option to purchase 60,000 shares of Common Stock at an exercise
price of $2.6666 per share. The Company currently intends to make comparable
option grants to future outside directors. See "Certain Transactions."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Mr. Doerr and Ms.
Stonesifer. No member of the Board of Directors or of the Compensation Committee
serves as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee. In February 1997, Ms.
Stonesifer, a member of the Compensation Committee, purchased 2,500 shares of
the Company's Series A Preferred Stock at $40.00 per share.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Restated Certificate of Incorporation limits the liability of
directors to the full extent permitted by Delaware law. Delaware law provides
that a corporation's certificate of incorporation may contain a provision
eliminating or limiting the personal liability of directors for monetary damages
for breach of their fiduciary duties as directors, except for liability (i) for
any breach of their duty of loyalty to the corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) for unlawful payments of dividends or
unlawful stock repurchases or redemptions as provided in Section 174 of the
Delaware General Corporation Law (the "DGCL"), or (iv) for any transaction from
which the director derived an improper personal benefit. The Company's Bylaws
provide that the Company shall indemnify its directors and officers and may
indemnify its employees and agents to the fullest extent permitted by law. The
Company believes that indemnification under its Bylaws covers at least
negligence and gross negligence on the part of indemnified parties.
The Company has entered into agreements to indemnify its directors and
executive officers. These agreements, among other things, indemnify the
Company's directors and officers for certain expenses (including attorneys'
fees), judgments, fines and settlement amounts incurred by such persons in any
action or proceeding, including any action by or in the right of the Company,
arising out of such person's services as a director or officer of the Company,
any subsidiary of the Company or any other company or enterprise to which the
person provides services at the request of the Company. The Company believes
that these provisions and agreements are necessary to attract and retain
qualified directors and officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding that might result in a claim for such indemnification.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
received for services rendered to the Company in all capacities during the year
ended December 31, 1996 by the Company's President and Chief Executive Officer.
No other executive officer of the Company who held office at December 31, 1996
met the definition of "highly compensated" within the meaning of the
Commission's executive compensation disclosure rules.
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<PAGE> 42
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------
NAME AND PRINCIPAL OTHER ANNUAL ALL OTHER
POSITION SALARY($) BONUS($) COMPENSATION($) COMPENSATION($)
- -------------------------------------- --------- -------- --------------- ---------------
<S> <C> <C> <C> <C>
Jeffrey P. Bezos...................... $ 64,333 $ -0- $ -0- $ -0-
President and Chief Executive
Officer
</TABLE>
Mr. Bezos does not currently hold options to purchase capital stock of the
Company.
EMPLOYEE BENEFIT PLANS
1994 Stock Option Plan. The Company's Board of Directors has adopted the
Company's 1994 Stock Option Plan and reserved an aggregate of 4,800,000 shares
of Common Stock for grants of stock options under the plan. The 1994 Stock
Option Plan provides for the grant of options for Common Stock to employees,
directors, officers, consultants, advisors and independent contractors of the
Company or an affiliate of the Company. As of May 13, 1997, options to purchase
2,789,804 shares of Common Stock were outstanding under the 1994 Stock Option
Plan with exercise prices ranging from $0.1717 to $4.00 per share, options to
purchase 212,190 shares were available for grant and options for 1,798,006
shares had been exercised.
The 1994 Stock Option Plan is administered by the Compensation Committee.
The Compensation Committee has the authority to select individuals who are to
receive options under the 1994 Stock Option Plan and to specify the terms and
conditions of each option so granted (incentive or nonqualified), the vesting
provisions, the option term and the exercise price. Options granted under the
1994 Stock Option Plan must be exercised within three months of the optionee's
termination of service (as defined in the 1994 Stock Option Plan) to or
employment by the Company (subject to extension to one year from the date of
termination if the optionee dies within such three-month exercise period), or
within one year after the optionee's termination by death or disability (subject
to extension to one year from the date of death if the optionee dies during the
one-year exercise period after termination by disability), but in no event later
than the expiration of the option term. Options granted under the 1994 Stock
Option Plan are not transferable by the optionee except by will or the laws of
descent and distribution and generally are exercisable during the lifetime of
the optionee only by such optionee.
In the event of a sale of all or substantially all of the Company's assets,
a merger or reorganization in which the Company is not the surviving
corporation, or the sale or other transfer of more than 50% of the outstanding
shares of Common Stock (each, a "Terminating Event"), the Compensation Committee
may determine whether provision will be made for assumption of or substitution
for the stock options granted under the 1994 Stock Option Plan by the successor
corporation. If the Compensation Committee determines that no such assumption or
substitution will be made, all options will become fully vested and each
optionee will have the right to exercise any unexercised and unexpired options
within 30 days from the date of notice of such determination. With respect to
options granted prior to December 20, 1996, Terminating Events also include the
sale of a material division of the Company, an acquisition by the Company
resulting in an extraordinary expansion of the Company and a material change in
the capital structure of the Company (excluding the issuance of securities of
the Company for adequate consideration and the conversion into Common Stock of
convertible securities of the Company).
1997 Stock Option Plan. The Company's Board of Directors has adopted the
1997 Stock Option Plan and reserved an aggregate of 6,000,000 shares of Common
Stock for grants of stock options under the plan. The purpose of the 1997 Stock
Option Plan is to enhance the long-term stockholder value of the Company by
offering opportunities to employees, directors, officers, consultants, agents,
advisors and independent contractors of the Company to participate in the
Company's growth and success, and to encourage them to remain in the service of
the Company and acquire and maintain stock ownership in the Company.
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<PAGE> 43
As of May 13, 1997, options to purchase 1,069,125 shares of Common Stock
were outstanding under the 1997 Stock Option Plan with exercise prices ranging
from $4.6667 to $12.00 per share, options to purchase 4,913,325 shares were
available for grant and options for 17,550 shares had been exercised. In
addition, any shares of Common Stock available for issuance under the 1994 Stock
Option Plan that are not issued under that plan shall be added to the aggregate
number of shares available for issuance under the 1997 Stock Option Plan.
Options for a maximum of 375,000 shares may be granted under the 1997 Stock
Option Plan to any individual in any one fiscal year, except that the Company
may make additional one-time grants of up to 1,500,000 shares to newly hired
individuals.
The 1997 Stock Option Plan is administered by the Compensation Committee,
which has the authority to select individuals who are to receive options under
the 1997 Stock Option Plan and to specify the terms and conditions of each
option so granted (incentive or nonqualified), the vesting provisions, the
option term and the exercise price. Unless otherwise provided by the
Compensation Committee, an option granted under the 1997 Stock Option Plan
expires 10 years from the date of grant (five years in the case of an incentive
stock option granted to a holder of 10% or more of the Company's outstanding
capital stock) or, if earlier, three months after the optionee's termination of
employment or service other than termination for cause, one year after the
optionee's retirement, early retirement at the Company's request, death or
disability, or immediately upon notification to an optionee of termination for
cause. Options granted under the 1997 Stock Option Plan are not generally
transferable by the optionee except by will or the laws of descent and
distribution and generally are exercisable during the lifetime of the optionee
only by such optionee. In addition, the Option Committee of the Board of
Directors has authority to grant options under the 1997 Stock Option Plan for up
to an aggregate of 50,000 shares of Common Stock per individual to nonofficer
employees of the Company and consultants to the Company at an exercise price not
greater than the fair market value of the Common Stock on the date of grant.
Jeffrey P. Bezos is currently the sole member of the Option Committee.
In the event of (i) the merger or consolidation of the Company in which it
is not the surviving corporation, or pursuant to which shares of Common Stock
are converted into cash, securities or other property (other than a merger in
which holders of Common Stock immediately before the merger have the same
proportionate ownership of the capital stock of the surviving corporation
immediately after the merger), (ii) the sale, lease, exchange or other transfer
of all or substantially all of the Company's assets (other than a transfer to a
majority-owned subsidiary), or (iii) the approval by the holders of Common Stock
of any plan or proposal for the Company's liquidation or dissolution (each, a
"Corporate Transaction"), the Compensation Committee will determine whether
provision will be made in connection with the Corporate Transactions for
assumption of the options under the 1997 Stock Option Plan or substitution of
appropriate new options covering the stock of the successor corporation, or an
affiliate of the successor corporation. If the Compensation Committee determines
that no such assumption or substitution will be made, each outstanding option
under the 1997 Stock Option Plan shall automatically accelerate so that it will
become 100% vested and exercisable immediately before the Corporate Transaction,
except that acceleration will not occur if, in the opinion of the Company's
accountants, it would render unavailable "pooling of interest" accounting for
the Corporate Transaction.
Repurchase Right Under Option Plans. With respect to each of the 1994
Stock Option Plan and the 1997 Stock Option Plan (collectively, the "Plans"),
the Compensation Committee has the discretion to authorize the issuance of
unvested shares of Common Stock pursuant to the exercise of a stock option under
the applicable Plan. If the optionee ceases to be employed by or provide
services to the Company, all shares of Common Stock issued on exercise of a
stock option which are unvested at the time of cessation shall be subject to
repurchase by the Company at the exercise price paid for such shares. The terms
and conditions upon which the repurchase rights are exercisable by the Company
are determined by the Compensation Committee and set forth in the agreement
evidencing such right. The Compensation Committee has discretionary authority to
cancel the Company's outstanding repurchase rights with respect to one or more
shares pur-
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<PAGE> 44
chased or purchasable under an option granted pursuant to that Plan. In the
event of a Terminating Event or a Corporate Transaction under the 1994 Stock
Option Plan or the 1997 Stock Option Plan, respectively, if vesting of the
options accelerates, the repurchase rights of the Company with respect to shares
previously acquired on exercise of options granted under the 1994 Stock Option
Plan or the 1997 Stock Option Plan, respectively, shall terminate.
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<PAGE> 45
CERTAIN TRANSACTIONS
Since the inception of the Company in July 1994, the Company has issued
shares of Preferred Stock in private placement transactions as follows: 555,161
and 14,235 shares of Series A Preferred Stock at $14.05 per share to Kleiner
Perkins Caufield & Byers VIII and KPCB Information Sciences Zaibatsu Fund II,
respectively, and 2,500 and 2,500 shares of Series A Preferred Stock at $40.00
per share to Scott D. Cook and Patricia Q. Stonesifer, respectively. L. John
Doerr, a director of the Company, is a general partner of KPCB VIII Associates,
which is a general partner of Kleiner Perkins Caufield & Byers VIII and KPCB
Information Sciences Zaibatsu Fund II. Mr. Doerr disclaims beneficial ownership
of the shares of Series A Preferred Stock issued to such entities, except for
his proportional interest therein. Mr. Cook and Ms. Stonesifer are directors of
the Company. All outstanding shares of Series A Preferred Stock will convert
into an aggregate of 3,446,376 shares of Common Stock upon the closing of this
offering. The holders of certain of such shares of Series A Preferred Stock are
entitled to certain registration rights with respect to the Common Stock
issuable upon conversion thereof. See "Description of Capital
Stock--Registration Rights."
In July 1994, Jeffrey P. Bezos, the President, Chief Executive Officer and
Chairman of the Board of the Company, purchased 10,200,000 shares of Common
Stock for an aggregate price of $10,000. Mr. Bezos made interest-free loans to
the Company in the principal amounts of $15,000, $29,000 and $40,000 in July
1994, November 1994 and November 1995, respectively, which were fully repaid in
August 1995, April 1995 and November 1995, respectively. From November 1994 to
December 1996, Mr. Bezos personally guaranteed the obligations of the Company
under a merchant account with Seafirst Bank. Since July 1995, Mr. Bezos has
personally guaranteed the obligations of the Company under a bankcard merchant
account with Wells Fargo Bank. Since April 1995, Mr. Bezos has personally
guaranteed company credit cards. The Company intends to secure releases of all
of Mr. Bezos' guarantees as soon as possible following the closing of this
offering. The Company has granted to Mr. Bezos certain rights with respect to
the registration of 9,885,000 shares of Common Stock. See "Description of
Capital Stock -- Registration Rights."
In February 1995, the Company sold 582,528 shares of Common Stock to Miguel
A. Bezos at a price per share of $0.1717. In July 1995, the Company sold 847,716
shares of Common Stock to the Gise Family Trust at a price per share of $0.1717.
Jacklyn Gise Bezos is the trustee and beneficiary of the Gise Family Trust.
Miguel A. Bezos and Jacklyn Gise Bezos are the parents of Jeffrey P. Bezos. In
May 1996, the Company sold 30,000 shares of Common Stock to each of Mark S.
Bezos and Christina Bezos Poore, siblings of Jeffrey P. Bezos, at a price per
share of $0.3333.
In December 1995, the Company sold 150,000 shares of Common Stock to Tom A.
Alberg, a director of the Company, at a price per share of $0.3333.
In June 1996, in connection with the Company's Series A Preferred Stock
financing, Mr. Bezos granted the Company a right to repurchase 612,000 shares of
Common Stock held by him at $0.0010 per share if his employment terminates under
certain circumstances. The Company's right of repurchase lapses ratably over the
36-month period ending June 21, 1999.
The Company believes that all the transactions set forth above were made on
terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. Any future transactions, including loans, between
the Company and its officers, directors and principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested directors, and will be on terms no
less favorable to the Company than could be obtained from unaffiliated third
parties.
The Company has entered into indemnification agreements with each of its
executive officers and directors. See "Management -- Limitation of Liability and
Indemnification Matters."
44
<PAGE> 46
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Common Stock as of May 13, 1997 and as
adjusted to reflect the sale of the Common Stock offered hereby for (i) each
person or entity known by the Company to beneficially own more than 5% of the
Common Stock, (ii) each director of the Company, (iii) the Company's Chief
Executive Officer, and (iv) all of the Company's directors and executive
officers as a group. Except as otherwise indicated, the Company believes that
the beneficial owners of the Common Stock listed below, based on information
furnished by such owners, have sole voting and investment power with respect to
such shares.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OUTSTANDING
-------------------
NUMBER OF SHARES PRIOR TO AFTER
NAME AND ADDRESS BENEFICIALLY OWNED OFFERING OFFERING
- --------------------------------------------------------- ------------------ -------- --------
<S> <C> <C> <C>
Jeffrey P. Bezos......................................... 9,885,000 47.4% 41.4%
c/o Amazon.com, Inc.
1516 Second Avenue, 4th Floor
Seattle, WA 98101
L. John Doerr(1)......................................... 3,401,376 16.3 14.3
Kleiner Perkins Caufield & Byers
4 Embarcadero Center, Suite 3520
San Francisco, CA 94111
Tom A. Alberg(2)......................................... 195,000 * *
Scott D. Cook(3)......................................... 75,000 * *
Patricia Q. Stonesifer(4)................................ 75,000 * *
All directors and executive officers as a group (14
persons)(5)............................................ 15,688,925 72.3 63.5
</TABLE>
- ---------------
* Less than 1%
(1) Represents 3,315,966 shares and 85,410 shares of Common Stock issuable upon
conversion of Series A Preferred Stock held by Kleiner Perkins Caufield &
Byers VIII and KPCB Information Sciences Zaibatsu Fund II, respectively. Mr.
Doerr is a general partner of KPCB VIII Associates, which is a general
partner of Kleiner Perkins Caufield & Byers VIII and KPCB Information
Sciences Zaibatsu Fund II. Mr. Doerr disclaims beneficial ownership of such
shares, except for his proportional interest therein.
(2) Includes 48,000 shares subject to options exercisable within 60 days of May
13, 1997.
(3) Represents 60,000 shares subject to options exercisable within 60 days of
May 13, 1997, certain of which shares may be subject to a right of
repurchase by the Company, and 15,000 shares of Common Stock issuable upon
conversion of Series A Preferred Stock.
(4) Represents 60,000 shares subject to options exercisable within 60 days of
May 13, 1997, certain of which shares may be subject to a right of
repurchase by the Company, and 15,000 shares of Common Stock issuable upon
conversion of Series A Preferred Stock.
(5) Includes 856,998 shares subject to options exercisable within 60 days of May
13, 1997, certain of which may be subject to a right of repurchase by the
Company.
45
<PAGE> 47
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, $0.01 par value per share, and 10,000,000 shares of Preferred
Stock, $0.01 par value per share. The following summary of certain provisions of
the Common Stock and Preferred Stock does not purport to be complete and is
subject to, and qualified in its entirety by, the provisions of the Company's
Restated Certificate of Incorporation, which is included as an exhibit to the
Registration Statement of which this Prospectus is a part, and by the provisions
of applicable law.
COMMON STOCK
As of May 13, 1997, there were 17,412,326 shares of Common Stock
outstanding held of record by 76 stockholders. There will be 23,858,702 shares
of Common Stock outstanding (assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options) after giving
effect to the sale of Common Stock offered to the public hereby. The holders of
Common Stock are entitled to one vote for each share held of record on all
matters submitted to a vote of stockholders. See "Risk Factors -- Control of the
Company." Subject to preferences that may be applicable to any outstanding
shares of Preferred Stock, the holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared by the Board of Directors out
of funds legally available for the payment of dividends. See "Dividend Policy."
In the event of a liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities and liquidation preferences of any outstanding
shares of Preferred Stock. Holders of Common Stock have no preemptive rights or
rights to convert their Common Stock into any other securities. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable, and the
shares of Common Stock to be issued upon completion of this offering will be
fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of Preferred
Stock will be converted into 3,446,376 shares of Common Stock. Thereafter,
pursuant to the Company's Restated Certificate of Incorporation, the Board of
Directors will have the authority, without further action by the stockholders,
to issue up to 10,000,000 shares of Preferred Stock in one or more series and to
fix the designations, powers, preferences, privileges and relative,
participating, optional or special rights and the qualifications, limitations or
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption and liquidation preferences, any or all of which may
be greater than the rights of the Common Stock. The Board of Directors, without
stockholder approval, can issue Preferred Stock with voting, conversion or other
rights that could adversely affect the voting power and other rights of the
holders of Common Stock. Preferred Stock could thus be issued quickly with terms
calculated to delay or prevent a change in control of the Company or make
removal of management more difficult. Additionally, the issuance of Preferred
Stock may have the effect of decreasing the market price of the Common Stock,
and may adversely affect the voting and other rights of the holders of Common
Stock. The Company has no plans to issue any Preferred Stock.
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF RESTATED CERTIFICATE OF
INCORPORATION AND WASHINGTON LAW
As noted above, the Company's Board of Directors, without stockholder
approval, has the authority under the Company's Restated Certificate of
Incorporation to issue Preferred Stock with rights superior to the rights of the
holders of Common Stock. As a result, Preferred Stock could be issued quickly
and easily, could adversely affect the rights of holders of Common Stock and
could be issued with terms calculated to delay or prevent a change in control of
the Company or make removal of management more difficult.
The laws of the State of Washington, where the Company's principal
executive offices are located, impose restrictions on certain transactions
between certain foreign corporations and significant stockholders. Chapter
23B.19 of the Washington Business Corporation Act (the "WBCA") prohibits a
"Target Corporation," with certain exceptions, from engaging in certain
"Significant Business Transactions" with a person or group of persons which
beneficially owns
46
<PAGE> 48
10% or more of the voting securities of the Target Corporation (an "Acquiring
Person") for a period of five years after such acquisition, unless the
transaction or acquisition of shares is approved by a majority of the members of
the Target Corporation's board of directors prior to the time of acquisition.
Such prohibited transactions include, among other things, a merger or
consolidation with, disposition of assets to, or issuance or redemption of stock
to or from, the Acquiring Person, termination of 5% or more of the employees of
the Target Corporation as a result of the Acquiring Person's acquisition of 10%
or more of the shares or allowing the Acquiring Person to receive any
disproportionate benefit as a stockholder. After the five-year period, a
Significant Business Transaction may take place as long as it complies with
certain fair price provisions of the statute. A Target Corporation includes a
foreign corporation if (i) the corporation has a class of voting stock
registered pursuant to Section 12 or 15 of the Securities Exchange Act of 1934,
as amended, (ii) the corporation's principal executive office is located in
Washington State, (iii) any of (a) more than 10% of the corporation's
stockholders of record are Washington residents, (b) more than 10% of its shares
of record are owned by Washington residents, or (c) 1,000 or more of its
stockholders of record are Washington residents, (iv) a majority of the
corporation's employees are Washington residents or more than 1,000 Washington
residents are employees of the corporation, and (v) a majority of the
corporation's tangible assets are located in Washington State or the corporation
has more than $50 million of tangible assets located in Washington State. A
corporation may not "opt out" of this statute. Depending upon whether the
Company meets the definition of a Target Corporation, Chapter 23B.19 of the WBCA
may have the effect of delaying, deferring or preventing a change in control of
the Company.
Although Section 203 of the DGCL generally prohibits Delaware corporations
from engaging in certain "Business Combinations" (as defined therein) with
certain "Interested Stockholders" (as defined therein) for a period of three
years unless certain criteria are met, the Company has expressly elected in its
Restated Certificate of Incorporation not to be governed by Section 203 of the
DGCL.
REGISTRATION RIGHTS
Pursuant to an agreement among the Company, Mr. Bezos, who is the holder of
9,885,000 shares of Common Stock (the "Common Holder"), and two holders of
566,896 shares of Series A Preferred Stock in the aggregate which are
convertible into 3,401,376 shares of Common Stock (the "Preferred Holders"), the
Common Holder and the Preferred Holders are entitled to certain rights with
respect to the registration of such shares under the Securities Act. If the
Company proposes to register any of its securities under the Securities Act,
either for its own account or for the account of other security holders, the
Common Holder and the Preferred Holders are entitled to notice of such
registration and to include shares of Common Stock in such registration at the
Company's expense. Additionally, the Preferred Holders are entitled to certain
demand registration rights pursuant to which they may require the Company to
file a registration statement under the Securities Act at the Company's expense
with respect to their shares of Common Stock, and the Company is required to use
its commercially reasonable efforts to effect such registration (a "Requested
Registration"). Further, the Preferred Holders may require the Company to file
additional registration statements on Form S-3 at the expense of the Preferred
Holders. All of these registration rights are subject to certain conditions and
limitations, among them the right of the underwriters of an offering to limit
the number of shares included in such registration and the right of the Company
not to effect a Requested Registration before the earlier of (a) one year after
the offering made hereby and (b) June 21, 1999.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, Ridgefield Park, New Jersey.
NASDAQ NATIONAL MARKET LISTING
Application has been made to have the Common Stock listed for quotation on
the Nasdaq National Market under the symbol "AMZN."
47
<PAGE> 49
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common
Stock and there can be no assurance that a significant public market for the
Common Stock will be developed or be sustained after this offering. Sales of
substantial amounts of Common Stock in the public market after this offering, or
the possibility of such sales occurring, could adversely affect prevailing
market prices for the Common Stock or the future ability of the Company to raise
capital through an offering of equity securities.
After this offering, the Company will have outstanding 23,858,702 shares of
Common Stock. Of these shares, the 3,000,000 shares offered hereby will be
freely tradeable in the public market without restriction under the Securities
Act, unless such shares are held by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act.
The remaining 20,858,702 shares of Common Stock outstanding upon completion
of this offering will be "restricted securities," as that term is defined in
Rule 144 ("Restricted Shares"). The Restricted Shares were issued and sold by
the Company in private transactions in reliance upon exemptions from
registration under the Securities Act. Restricted Shares may be sold in the
public market only if they are registered or if they qualify for an exemption
from registration under Rule 144 or 701 under the Securities Act, which are
summarized below.
Pursuant to certain "lock-up" agreements, all the executive officers,
directors and certain stockholders and employees of the Company, who
collectively hold an aggregate of approximately 20,826,909 Restricted Shares,
have agreed not to offer, sell, contract to sell, grant any option to purchase
or otherwise dispose of any such shares for a period of 180 days from the date
of this Prospectus. The Company has also entered into an agreement with Deutsche
Morgan Grenfell Inc. that it will not offer, sell or otherwise dispose of Common
Stock for a period of 180 days from the date of this Prospectus.
Ninety days after the date of this Prospectus, approximately 31,793
Restricted Shares that are not subject to the lock-up agreements described below
will be eligible for sale in the public market in accordance with Rules 144 and
701. On the date of the expiration of the lock-up agreements, an additional
19,331,253 of the Restricted Shares will be eligible for immediate sale (of
which 17,246,669 shares will be subject to certain volume, manner of sale and
other limitations under Rule 144). Approximately 681,300 remaining shares will
be eligible for sale pursuant to Rule 144 on the expiration of one-year holding
periods or the expiration of the Company's contractual right to repurchase the
shares over the six months following expiration of the lock-up period.
Following the expiration of such lock-up periods, certain shares issued
upon exercise of options granted by the Company prior to the date of this
Prospectus will also be available for sale in the public market pursuant to Rule
701 under the Securities Act. Rule 701 permits resales of such shares in
reliance upon Rule 144 but without compliance with certain restrictions,
including the holding period requirement, imposed under Rule 144. In general,
under Rule 144 as in effect at the closing of this offering, beginning 90 days
after the date of this Prospectus, a person (or persons whose shares of the
Company are aggregated) who has beneficially owned Restricted Shares for at
least one year (including the holding period of any prior owner who is not an
affiliate of the Company) would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of (i) one percent of
the then outstanding shares of Common Stock (approximately 238,587 shares
immediately after this offering) or (ii) the average weekly trading volume of
the Common Stock during the four calendar weeks preceding the filing of a Form
144 with respect to such sale. Sales under Rule 144 are also subject to certain
manner of sale and notice requirements and to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed to
have been an affiliate of the Company at any time during the 90 days preceding a
sale and who has beneficially owned the shares proposed to be sold for at least
two years (including the holding period of any prior owner who is not an
affiliate of
48
<PAGE> 50
the Company) is entitled to sell such shares without complying with the manner
of sale, public information, volume limitation or notice provisions of Rule 144.
The Company intends to file after the effective date of this offering a
Registration Statement on Form S-8 to register approximately 9,534,648 shares of
Common Stock reserved for issuance under the 1994 Stock Option Plan and the 1997
Stock Option Plan. Such Registration Statement will become effective
automatically upon filing. Shares issued under the foregoing plans, after the
filing of a Registration Statement on Form S-8, may be sold in the open market,
subject, in the case of certain holders, to the Rule 144 limitations applicable
to affiliates, the above-referenced lock-up agreements and vesting restrictions
imposed by the Company.
In addition, following this offering, the holders of 13,286,376 shares of
outstanding Common Stock will, under certain circumstances, have rights to
require the Company to register their shares for future sale. See "Description
of Capital Stock -- Registration Rights."
49
<PAGE> 51
UNDERWRITING
The Underwriters named below, for whom Deutsche Morgan Grenfell Inc., Alex.
Brown & Sons Incorporated, and Hambrecht & Quist LLC are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions contained in the Underwriting Agreement (the form of which
will be filed as an exhibit to the Company's Registration Statement, of which
this Prospectus is a part), to purchase from the Company the respective number
of shares of Common Stock indicated below opposite their respective names. The
Underwriters are committed to purchase all of the shares, if they purchase any.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------------------------- ---------
<S> <C>
Deutsche Morgan Grenfell Inc...................................................
Alex. Brown & Sons Incorporated................................................
Hambrecht & Quist LLC..........................................................
---------
Total................................................................ 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions.
The Representatives have advised the Company that the Underwriters propose
initially to offer the Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow to selected dealers
(who may include the Underwriters) a concession of not more than $ per
share. The selected dealers may reallow a concession of not more than
$ per share to certain other dealers. After the initial public
offering, the price and concessions and re-allowances to dealers and other
selling terms may be changed by the Representatives. The Common Stock is offered
subject to receipt and acceptance by the Underwriters, and to certain other
conditions, including the right to reject orders in whole or in part. The
Underwriters do not intend to sell any of the shares of Common Stock offered
hereby to accounts for which they exercise discretionary authority.
The Company has granted an option to the Underwriters to purchase up to a
maximum of 450,000 additional shares of Common Stock to cover over-allotments,
if any, at the public offering price, less the underwriting discount set forth
on the cover page of this Prospectus. Such option may be exercised at any time
until 30 days after the date of the Underwriting Agreement. To the extent the
Underwriters exercise this option, each of the Underwriters will be committed,
subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with this offering.
In connection with this offering, the Company and the directors, executive
officers and certain stockholders have agreed not to offer or sell any Common
Stock until the expiration of 180 days following the date of the final
Prospectus without the prior written consent of Deutsche Morgan Grenfell Inc.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including civil liabilities
under the Securities Act, as amended, or will contribute to payments the
Underwriters may be required to make in respect thereof.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price will be determined by negotiation
between the Company and the Representatives. The principal factors to be
considered in determining the public offering price include the information set
forth in this Prospectus and otherwise available to the Representatives; the
history and the prospects for the industry in which the Company will compete;
the ability of the Company's management; the prospects for future earnings of
the Company; the present state of
50
<PAGE> 52
the Company's development and its current financial condition; the general
condition of the securities markets at the time of this offering; and the recent
market prices of, and the demand for, publicly traded common stock of generally
comparable companies. Each of the Representatives has informed the Company that
it currently intends to make a market in the shares subsequent to the
effectiveness of this offering, but there can be no assurance that the
Representatives will take any action to make a market in any securities of the
Company.
Certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
this offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with this
offering when shares of Common Stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on the
Nasdaq Stock Market, in the over-the-counter market, or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
LEGAL MATTERS
Certain legal matters will be passed on for the Company by Perkins Coie,
Seattle, Washington. Certain legal matters will be passed on for the
Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California.
EXPERTS
The financial statements of Amazon.com, Inc. at December 31, 1995 and 1996,
and for the period July 5, 1994 (date of inception) to December 31, 1994 and the
years ended December 31, 1995 and 1996, appearing in this Prospectus and the
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement, of
which this Prospectus constitutes a part, under the Securities Act with respect
to the shares of Common Stock offered hereby. This Prospectus omits certain
information contained in the Registration Statement, and reference is made to
the Registration Statement and the exhibits thereto for further information with
respect to the Company and the Common Stock offered hereby. Statements contained
herein concerning the provisions of any documents are not necessarily complete,
and in each instance reference is made to the copy of such document filed as an
exhibit to the Registration Statement. Each such statement is qualified in its
entirety by such reference. The Registration Statement, including exhibits filed
therewith, may be inspected without charge at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials may be obtained from the Public Reference Section of
the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates. The Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants, such as the Company, that file
electronically with the Commission. Information concerning the Company is also
available for inspection at the offices of the Nasdaq National Market, Reports
Section, 1735 K Street, N.W., Washington, D.C. 20006.
51
<PAGE> 53
(This page intentionally left blank)
<PAGE> 54
AMAZON.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors................................... F-2
Balance Sheets...................................................................... F-3
Statements of Operations............................................................ F-4
Statements of Stockholders' Equity.................................................. F-5
Statements of Cash Flows............................................................ F-6
Notes to Financial Statements....................................................... F-7
</TABLE>
F-1
<PAGE> 55
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Amazon.com, Inc.
We have audited the accompanying balance sheets of Amazon.com, Inc. as of
December 31, 1995 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for the period from July 5, 1994 (date of
inception) to December 31, 1994 and the years ended December 31, 1995 and 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Amazon.com, Inc. at December
31, 1995 and 1996, and the results of its operations and its cash flows for the
period from July 5, 1994 (date of inception) to December 31, 1994 and the years
ended December 31, 1995 and 1996, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Seattle, Washington
February 28, 1997, except for Note 6, as
to which the date is April 18, 1997
F-2
<PAGE> 56
AMAZON.COM, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY AT
DECEMBER 31, MARCH 31,
------------------ MARCH 31 1997
1995 1996 1997 (NOTE 6)
------ ------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............... $ 996 $ 6,248 $ 7,162
Inventories............................. 17 571 939
Prepaid expenses and other.............. 14 321 937
------ ------- -----------
Total current assets............ 1,027 7,140 9,038
Equipment, net............................ 57 985 2,491
Deposits.................................. -- 146 193
------ ------- -----------
Total assets.................... $1,084 $ 8,271 $11,722
====== ======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................ $ 99 $ 2,852 $ 5,650
Accrued advertising..................... -- 598 1,254
Accrued product development............. -- 500 --
Other liabilities and accrued
expenses............................. 8 920 2,055
------ ------- -----------
Total current liabilities....... 107 4,870 8,959
Commitments
Stockholders' equity:
Preferred stock, $0.01 par value:
Authorized shares -- 10,000,000
Issued and outstanding shares --
569,396 at December 31, 1996 and
574,396 at March 31, 1997 (none pro
forma), aggregate liquidation
preference -- $8,200............... -- 6 6 $ --
Common stock, $0.01 par value:
Authorized shares -- 100,000,000
Issued and outstanding shares --
14,555,244, 15,900,229 and
17,352,406 at December 31, 1995 and
1996 and March 31, 1997,
respectively (20,798,782 pro
forma)............................. 1,075 159 173 208
Advances received for common stock...... 150 -- -- --
Additional paid-in capital.............. -- 9,873 14,737 14,708
Deferred compensation................... -- (612) (3,090) (3,090)
Accumulated deficit..................... (248) (6,025) (9,063) (9,063)
------ ------- ----------- ------------
Total stockholders' equity...... 977 3,401 2,763 $ 2,763
==========
------ ------- -----------
Total liabilities and
stockholders' equity.......... $1,084 $ 8,271 $11,722
====== ======= =========
</TABLE>
See accompanying notes.
F-3
<PAGE> 57
AMAZON.COM, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JULY 5, 1994 (DATE YEAR ENDED QUARTER ENDED
OF INCEPTION) DECEMBER 31, MARCH 31,
TO DECEMBER 31, ------------------ ------------------
1994 1995 1996 1996 1997
------------------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................... $ -- $ 511 $15,746 $ 875 $16,005
Cost of sales............... -- 409 12,287 695 12,484
------- ------- ------- ------- -------
Gross profit................ -- 102 3,459 180 3,521
Operating expenses:
Marketing and sales....... -- 200 6,090 205 3,906
Product development....... 38 171 2,313 263 1,575
General and
administrative......... 14 35 1,035 48 1,142
------- ------- ------- ------- -------
Total operating
expenses........ 52 406 9,438 516 6,623
------- ------- ------- ------- -------
Loss from operations........ (52) (304) (5,979) (336) (3,102)
Interest income............. -- 1 202 5 64
------- ------- ------- ------- -------
Net loss.................... $ (52) $ (303) $(5,777) $ (331) $(3,038)
======= ======= ======= ======= =======
Net loss per share.......... $ (0.00) $ (0.02) $ (0.25) $ (0.02) $ (0.13)
======= ======= ======= ======= =======
Shares used in computation
of net loss per share..... 17,730 18,933 22,655 22,251 23,018
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 58
AMAZON.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADVANCES ADDITIONAL TOTAL
---------------- ------------------- RECEIVED FOR PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT COMMON STOCK CAPITAL COMPENSATION DEFICIT EQUITY
------- ------ ---------- ------ ------------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sale of common
stock to
founder...... -- $ -- 10,200,000 $ 10 $ -- $ -- $ -- $ -- $ 10
Advances
received for
common
stock........ -- -- -- -- 50 -- -- -- 50
Net loss for
the period
ended
December 31,
1994......... -- -- -- -- -- -- -- (52) (52)
------- ------ ---------- ------ ----- ------- ------- ------- -------
Balance at
December 31,
1994........... -- -- 10,200,000 10 50 -- -- (52) 8
Sale of common
stock........ -- -- 4,235,244 1,172 (50) -- -- -- 1,122
Reclassification
of
accumulated
deficit due
to
termination
of S
Corporation
status....... -- -- -- (107) -- -- -- 107 --
Advances
received for
common
stock........ -- -- -- -- 150 -- -- -- 150
Exercise of
common stock
options...... -- -- 120,000 -- -- -- -- -- --
Net loss for
the year
ended
December 31,
1995......... -- -- -- -- -- -- -- (303) (303)
------- ------ ---------- ------ ----- ------- ------- ------- -------
Balance at
December 31,
1995........... -- -- 14,555,244 1,075 150 -- -- (248) 977
Reincorporation
in
Delaware..... -- -- -- (929) -- 929 -- -- --
Sale of
preferred
stock, net of
issuance
costs of
$30.......... 569,396 6 -- -- -- 7,964 -- -- 7,970
Sale of common
stock........ -- -- 840,528 8 (150) 178 -- -- 36
Exercise of
common stock
options...... -- -- 504,457 5 -- 190 -- -- 195
Unearned
compensation
related to
stock
options...... -- -- -- -- -- 612 (612) -- --
Net loss for
the year
ended
December 31,
1996......... -- -- -- -- -- -- -- (5,777) (5,777)
------- ------ ---------- ------ ----- ------- ------- ------- -------
Balance at
December 31,
1996........... 569,396 6 15,900,229 159 -- 9,873 (612) (6,025) 3,401
Sale of
preferred
stock
(unaudited).. 5,000 -- -- -- -- 200 -- -- 200
Exercise of
common stock
options
(unaudited)... -- -- 1,227,177 12 -- 425 -- -- 437
Issuance of
common stock
for software
and accrued
product
development
(unaudited)... -- -- 225,000 2 -- 1,498 -- -- 1,500
Unearned
compensation
related to
stock options
(unaudited)... -- -- -- -- -- 2,741 (2,741) -- --
Amortization of
unearned
compensation
related to
stock options
(unaudited)... -- -- -- -- -- -- 263 -- 263
Net loss for
quarter ended
March 31,
1997
(unaudited)... -- -- -- -- -- -- -- (3,038) (3,038)
------- ------ ---------- ------ ----- ------- ------- ------- -------
Balance at March
31, 1997
(unaudited).... 574,396 $ 6 17,352,406 $ 173 $ -- $ 14,737 $ (3,090) $(9,063) $ 2,763
======= ====== ========== ====== ===== ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 59
AMAZON.COM, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM JULY 5,
1994 (DATE OF YEAR ENDED QUARTER ENDED
INCEPTION) TO DECEMBER 31, MARCH 31,
DECEMBER 31, ----------------- ----------------
1994 1995 1996 1996 1997
------------- ------ ------- ----- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................. $ (52) $ (303) $(5,777) $(331) $(3,038)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization...... 5 19 286 17 420
Amortization of unearned
compensation related to stock
options......................... -- -- -- -- 263
Changes in operating assets and
liabilities:
Increase in inventories......... -- (17) (554) (21) (368)
(Increase) decrease in prepaid
expenses and other............ -- (14) (307) 11 (616)
Increase in deposits............ -- -- (146) (30) (47)
Increase in accounts payable and
accrued expenses.............. 23 83 4,763 250 4,589
---- ------ ------- ----- -------
Net cash provided by (used in)
operating activities....... (24) (232) (1,735) (104) 1,203
INVESTING ACTIVITIES
Purchases of equipment............... (28) (52) (1,214) (91) (926)
---- ------ ------- ----- -------
Net cash used in investing
activities................. (28) (52) (1,214) (91) (926)
FINANCING ACTIVITIES
Proceeds from exercise of stock
options, sale of stock, and
advances received for common
stock.............................. 60 1,272 231 36 437
Proceeds from sale of preferred
stock.............................. -- -- 7,970 -- 200
Proceeds from (repayment of) notes
payable............................ 44 (44) -- -- --
---- ------ ------- ----- -------
Net cash provided by financing
activities................. 104 1,228 8,201 36 637
---- ------ ------- ----- -------
Net increase (decrease) in cash...... 52 944 5,252 (159) 914
Cash and cash equivalents at
beginning of period................ -- 52 996 996 6,248
---- ------ ------- ----- -------
Cash and cash equivalents at end of
period............................. $ 52 $ 996 $ 6,248 $ 837 $ 7,162
==== ====== ======= ===== =======
SUPPLEMENTAL CASH FLOW INFORMATION
Common stock issued for software
and accrued product
development..................... $ -- $ -- $ -- $ -- $ 1,500
==== ====== ======= ===== =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 60
AMAZON.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1997
AND FOR THE QUARTERS ENDED
MARCH 31, 1996 AND 1997 IS UNAUDITED)
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 information as of March 31, 1997 and for the quarters ended
March 31, 1996 and 1997 is unaudited, but includes all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary for a
fair presentation of the financial position at such dates and the operations and
cash flows for the periods then ended. Operating results for the quarter ended
March 31, 1997 are not necessarily indicative of results that may be expected
for the entire year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents represent short-term investments consisting of
commercial paper and money market funds carried at cost, which approximates
market. The Company considers all short-term investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
Inventories
Inventories are valued at the lower of average cost or market.
The Company's largest vendor accounted for 59% of the Company's book
purchases in 1996. The vendor's inability to supply books in a timely manner or
on terms acceptable to the Company could severely affect the Company's ability
to meet customers' demands.
Equipment
Equipment is recorded at cost less accumulated depreciation. Depreciation
of equipment and amortization of software are provided using primarily the
straight-line method over the estimated useful lives of two to four years.
Income Taxes
The Company was initially organized under the provisions of Subchapter S of
the Internal Revenue Code of 1986, as amended (the Code). In lieu of corporate
income taxes, the stockholders of a Subchapter S corporation are taxed on their
proportionate shares of the
F-7
<PAGE> 61
AMAZON.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
company's taxable income. Effective March 31, 1995, the Company, with the
consent of its stockholders, elected to be taxed under the provisions of
Subchapter C of the Code. Accordingly, cumulative net losses of $107,000
incurred by the Company as of that date have been reclassified to common stock.
Revenue Recognition
The Company recognizes revenue from product sales, net of any discounts,
when the products are shipped to customers. Outbound shipping and handling
charges are included in net sales. The Company provides an allowance for sales
returns, which have been insignificant, based on historical experience.
International sales were $198,000 and $5.1 million for the years ended December
31, 1995 and 1996, respectively, and $348,000 and $4.5 million for the first
quarter of 1996 and 1997, respectively. No foreign country or geographical area
accounted for more than 10% of revenue in any of the periods presented.
Advertising Costs
The cost of advertising is expensed as incurred. For the years ended
December 31, 1995 and 1996, the Company incurred advertising expense of $30,000
and $3.4 million, respectively, and $53,000 and $1.8 million for the first
quarter of 1996 and 1997, respectively.
Product Development
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. All product development costs have been expensed as incurred.
Stock Compensation
The Company has elected to apply the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, the Company accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Compensation cost for stock options is measured as the excess,
if any, of the fair value of the Company's common stock at the date of grant
over the stock option exercise price.
Concentrations of Credit Risk
The Company is subject to concentrations of credit risk from its cash
investments. The Company's credit risk is managed by investing its excess cash
in high-quality money market instruments and securities of the U.S. government.
Net Loss Per Share
Net loss per share is computed based on the weighted average number of
common shares outstanding. In accordance with the Securities and Exchange
Commission requirements, common and common equivalent shares issued during the
12-month period prior to the filing of the Company's initial public offering
have been included in the calculation as if they were outstanding for all
periods presented using the treasury stock method and the assumed initial public
offering price. Common equivalent shares consist of the common shares issuable
upon the conversion of the convertible preferred stock and shares issuable upon
the exercise of stock options.
F-8
<PAGE> 62
AMAZON.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Reclassifications
Certain prior-year balances have been reclassified to conform to the
current-year presentation.
2. EQUIPMENT
Equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1995 1996 1997
---- ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Computers and equipment....................... $73 $1,031 $ 1,812
Purchased software............................ 8 134 1,154
Leasehold improvements........................ -- 130 255
--- ------ ------
81 1,295 3,221
Less accumulated depreciation and
amortization................................ 24 310 730
--- ------ ------
$57 $ 985 $ 2,491
=== ====== ======
</TABLE>
3. STOCKHOLDERS' EQUITY
Reincorporation
On May 28, 1996, the Company reincorporated in the state of Delaware with
authorized capital of 5,000,000 shares of $0.01 par value preferred stock and
25,000,000 shares of $0.01 par value common stock. The accompanying financial
statements have been restated to reflect this reincorporation.
Preferred Stock
Preferred stock is convertible into common stock at the option of the
holder, at any time, at a rate of four shares of common stock for one share of
preferred stock. The conversion rate may be adjusted depending on future events.
(See Note 6). The preferred stock also has certain mandatory conversion
requirements, including in the event of an initial public offering of the
Company's common stock, subject to certain minimum requirements.
Each share of preferred stock has voting rights equivalent to the number of
common shares issuable, if converted. The preferred stock also has preferential
rights in the event of any distribution of assets upon liquidation of the
Company, which are determined as fixed amounts per share, plus any declared but
unpaid dividends. Noncumulative dividends accrue at $1 per share, per annum,
when and if declared.
In June 1996, the Company issued 569,396 shares of Series A convertible
preferred stock at a price of $14.05 per share.
In January and February 1997, the Company sold 2,500 shares of Series A
preferred stock at $40 per share to each of two new directors of the Company,
aggregating 5,000 shares, and increased the total number of designated Series A
preferred stock to 579,396 shares.
Common Stock
At December 31, 1994 and 1995, the Company received advances for common
stock. The common stock was subsequently issued at $0.172 and $0.333 per share,
respectively.
F-9
<PAGE> 63
AMAZON.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
On November 23, 1996, the Company effected a four-for-one common stock
split. The accompanying financial statements have been restated to reflect this
stock split. (See Note 6).
In conjunction with the sale of Series A preferred stock in June 1996, the
Company's founder granted the Company a right to repurchase 612,000 shares of
common stock held by him at the original purchase price of $0.001 per share if
his employment terminates under certain circumstances. The Company's right of
repurchase lapses ratably over the 36-month period ending June 21, 1999. At
December 31, 1996, 510,000 shares held by the founder were subject to repurchase
under this agreement.
STOCK OPTIONS
The Company adopted the 1994 Stock Option Plan (the 1994 Plan), which
provides for the issuance of incentive and nonqualified stock options to
employees and officers. There are 4,800,000 shares of common stock reserved
under the 1994 Plan. Generally, options are granted by the Company's Board of
Directors at an exercise price of not less than the fair market value of the
Company's common stock at the date of grant. Each outstanding option granted
prior to December 20, 1996 has a term of five years from the date of vesting.
Each outstanding option granted subsequent to December 20, 1996 has a term of
ten years from the date of grant. Generally, options granted under the 1994 Plan
become exercisable immediately and vest at the rate of 20% after year one, 20%
after year two, and 5% at the end of each quarter for years three through five.
Shares issued upon exercise of options that are unvested are subject to
repurchase by the Company upon termination of employment or services.
During 1995, the Company granted a total of 360,000 nonqualified stock
options outside of the 1994 Plan under separate agreements with three
individuals. Under the terms of these agreements, the option prices range from
$0.333 to $0.667 and vest at the rate of 40% on the date of grant, 30% after two
years, and 30% after four years. Unexercised options expire five years after the
date of grant. At December 31, 1996, options for 96,000 shares of common stock
were exercisable and options for 48,000 shares had been exercised.
F-10
<PAGE> 64
AMAZON.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the Company's stock option activity:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- --------
<S> <C> <C>
Options granted in 1994......................... 1,176,816 $ 0.001
---------
Balance, December 31, 1994........................ 1,176,816 0.001
Options granted................................. 742,464 0.344
Options canceled................................ (30,000) 0.172
Options exercised............................... (120,000) 0.001
---------
Balance December 31, 1995......................... 1,769,280 0.142
Options granted:
At fair market value......................... 1,038,600 0.333
At less than fair market value............... 1,554,150 0.796
Options canceled................................ (528,722) 0.278
Options exercised............................... (504,457) 0.387
---------
Balance December 31, 1996......................... 3,328,851 0.448
Options granted (unaudited):
At fair market value......................... 120,375 11.000
At less than fair market value............... 1,378,350 2.840
Options canceled (unaudited).................... (56,550) 0.924
Options exercised (unaudited)................... (1,227,177) 0.356
---------
Balance March 31, 1997 (unaudited)................ 3,543,849 1.761
=========
</TABLE>
At December 31, 1996, 1,206,690 shares of common stock were available for
future issuance under the 1994 Plan.
The following table summarizes information about options outstanding and
exercisable at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------
WEIGHTED- OPTIONS EXERCISABLE
AVERAGE -----------------------------
REMAINING WEIGHTED- WEIGHTED-
RANGE OF OPTIONS CONTRACTUAL AVERAGE OPTIONS AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.001 - $0.334.... 1,770,450 6.5 years $0.168 1,662,450 $0.158
0.335 - 1.00 .... 1,558,401 8.1 years 0.766 1,450,401 0.773
--------- ---------
0.001 - 1.00 .... 3,328,851 7.3 years 0.448 3,112,851 0.445
</TABLE>
At December 31, 1996, common stock reserved for future issuance was as
follows:
<TABLE>
<CAPTION>
<S> <C>
Preferred stock conversion.................... 3,416,376
Stock options:
1994 Plan................................... 4,223,541
Outside 1994 Plan........................... 312,000
----------
7,951,917
==========
</TABLE>
F-11
<PAGE> 65
AMAZON.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company follows the intrinsic value method in accounting for its stock
options. Had compensation cost been recognized based on the fair value at the
date of grant for options granted in 1995 and 1996 that were awarded under the
1994 Plan, the pro forma amounts of the Company's net loss and net loss per
share for the years ended December 31, 1995 and 1996 would have been as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
------ ------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Net loss -- as reported................................. $ 303 $5,777
Net loss -- pro forma................................... 304 5,808
Net loss per common share -- as reported................ (0.02) (0.25)
Net loss per common share -- pro forma.................. (0.02) (0.26)
</TABLE>
The fair value of each option grant was estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions: risk-free
interest rates of 5.16% to 7.60%; expected option life of three years; and no
expected dividends. As the Company is privately held, expected volatility is not
applicable. The weighted-average fair value of options granted during the years
1995 and 1996 was $0.06 and $0.08, respectively, for options granted at fair
market value. The weighted-average fair value of options granted at less than
fair market value during 1996 was $0.53.
Deferred Compensation
The Company recorded aggregate deferred compensation of $612,000 during the
fourth quarter of 1996 and an additional $2.7 million of deferred compensation
during the first quarter of 1997. The amounts recorded represent 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. The amortization of
deferred compensation will be charged to operations over the vesting period of
the options, which is typically five years. No amount was amortized in 1996 and
$263,000 was amortized in the first quarter of 1997.
4. INCOME TAXES
The Company did not provide an income tax benefit for any of the periods
presented because it has experienced operating losses since inception. At
December 31, 1996, the Company had net operating loss carryforwards of
approximately $5.5 million. Utilization of net operating loss carryforwards may
be subject to certain limitations under Section 382 of the Code. The
carryforwards expire in 2011.
F-12
<PAGE> 66
AMAZON.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
---- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $ 84 $ 1,855
Book-over-tax depreciation........................... 2 --
---- -------
86 1,855
Valuation allowance for deferred tax assets............ (86) (1,855)
---- -------
Net deferred tax assets................................ $ -- $ --
==== =======
</TABLE>
5. COMMITMENTS AND CONTINGENCY
Lease Commitments
The Company currently leases office and warehouse space and equipment under
noncancelable operating leases. Rental expense under operating lease agreements
for 1994, 1995, and 1996 was $2,000, $12,000, and $257,000, respectively, and
$18,000 and $242,000 for the first quarter of 1996 and 1997, respectively.
In February 1997, the Company entered into several additional lease
commitments for equipment and facilities. Future minimum lease commitments under
noncancelable leases and service agreements as of December 31, 1996, including
the lease commitments entered into in February 1997, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1997......................... $1,540
1998......................... 1,534
1999......................... 1,133
2000......................... 107
2001......................... 9
------
$4,323
======
</TABLE>
Contingency (Unaudited)
On May 12, 1997, Barnes & Noble, Inc. filed suit against the Company in the
United States District Court for the Southern District of New York alleging that
the Company has made false advertising claims because it is not a "bookstore"
and does not physically warehouse most of the titles it offers. The complaint
seeks compensatory and punitive damages, and injunctive and other equitable
relief. The Company is evaluating Barnes & Noble, Inc.'s claims and intends to
defend against them vigorously.
6. SUBSEQUENT EVENTS
In February 1997, the Company adopted the 1997 Stock Option Plan (the 1997
Plan). Under the 1997 Plan, 6,000,000 shares of common stock have been reserved
for future issuance.
In March 1997, the Company's Board of Directors authorized management to
file a registration statement with the Securities and Exchange Commission to
permit the Company to sell shares of
F-13
<PAGE> 67
AMAZON.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
its common stock to the public. Upon completion of the Company's initial public
offering, each outstanding share of preferred stock will convert into six shares
of common stock. Unaudited pro forma stockholders' equity reflects the assumed
conversion of the preferred stock into common stock as of March 31, 1997.
On April 18, 1997, the Company effected a three-for-two common stock split,
increased its authorized common stock to 100,000,000 shares and increased its
authorized preferred stock to 10,000,000 shares. The accompanying financial
statements have been restated to reflect the three-for-two common stock split.
F-14
<PAGE> 68
(This page intentionally left blank)
<PAGE> 69
[PICTURE OF THE COMPANY'S WEB PAGE FOR THE AMAZON.COM 500, ACCOMPANIED BY TEXT,
"...browse the 500 current bestsellers and titles Amazon.com believes will be
future best-sellers -- all at a 40% discount to list price..."; PICTURE OF THE
COMPANY'S WEB PAGE FOR EDITORS MAILING LIST SIGN UP, ACCOMPANIED BY TEXT,
"...register for personalized services..."; PICTURE OF THE COMPANY'S WEB PAGE
FOR FINALIZING ORDERS, ACCOMPANIED BY TEXT, "...and order books 24 hours a day,
7 days a week, worldwide without having to go to the store..."; PICTURES OF THE
COMPANY'S WAREHOUSE, THE SCANNING OF A BARCODE ON A BOOK, AND PEOPLE FULFILLING
BOOK ORDERS; and PICTURE OF A FORM OF THE COMPANY'S E-MAIL CONFIRMATION OF AN
ORDER.]
<PAGE> 70
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
The Company........................... 4
Risk Factors.......................... 5
Use of Proceeds....................... 15
Dividend Policy....................... 15
Capitalization........................ 16
Dilution.............................. 17
Selected Financial Data............... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 26
Management............................ 37
Certain Transactions.................. 44
Principal Stockholders................ 45
Description of Capital Stock.......... 46
Shares Eligible for Future Sale....... 48
Underwriting.......................... 50
Legal Matters......................... 51
Experts............................... 51
Additional Information................ 51
Index to Financial Statements......... F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ---------------------------------------------------------
LOGO
3,000,000 SHARES
COMMON STOCK
DEUTSCHE MORGAN GRENFELL
ALEX. BROWN & SONS
INCORPORATED
HAMBRECHT & QUIST
Prospectus
, 1997
<PAGE> 71
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the registrant in connection with the sale of
the Common Stock being registered hereby. All amounts shown are estimates,
except the Securities and Exchange Commission registration fee, the NASD filing
fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............................. $ 16,727
NASD filing fee................................................................. 6,020
Nasdaq National Market listing fee.............................................. 50,000
Blue Sky fees and expenses...................................................... 5,000
Printing and engraving expenses................................................. 150,000
Legal fees and expenses......................................................... 275,000
Accounting fees and expenses.................................................... 150,000
Directors and officers insurance................................................ 150,000
Transfer Agent and Registrar fees............................................... 10,000
Miscellaneous expenses.......................................................... 37,253
--------
Total................................................................. $850,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers, as well as other
employees and individuals, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation -- a
"derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such actions, and the statute requires court approval
before there can be any indemnification where the person seeking indemnification
has been found liable to the corporation. The statute provides that it is not
exclusive of other indemnification that may be granted by a corporation's
charter, bylaws, disinterested director vote, stockholder vote, agreement or
otherwise.
Section 10 of the registrant's Bylaws (Exhibit 3.2 hereto) requires
indemnification to the full extent permitted under Delaware law as it now exists
or may hereafter be amended. Subject to any restrictions imposed by Delaware
law, the Bylaws provide an unconditional right to indemnification for all
expense, liability and loss (including attorneys' fees, judgment, fines, ERISA
excise taxes or penalties and amounts paid in settlement) actually and
reasonably incurred or suffered by any person in connection with any actual or
threatened action, suit or proceeding, whether civil, criminal, administrative
or investigative (including, to the extent permitted by law, any derivative
action) by reason of the fact that such person is or was serving as a director
or officer of the registrant or that, being or having been a director or officer
of the registrant, such person is or was serving at the request of the
registrant as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan. The Bylaws also provide that the registrant
may, by action of its Board of Directors, provide indemnification to its
employees and agents with the same scope and effect as the foregoing
indemnification of directors and officers.
II-1
<PAGE> 72
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability for (i) any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) payments of unlawful dividends or unlawful
stock repurchases or redemptions, or (iv) any transaction from which the
director derived an improper personal benefit.
Article 10 of the registrant's Restated Certificate of Incorporation
(Exhibit 3.1 hereto) provides that to the full extent that the DGCL, as it now
exists or may hereafter be amended, permits the limitation or elimination of the
liability of directors, a director of the registrant shall not be liable to the
registrant or its stockholders for monetary damages for breach of fiduciary duty
as a director. Any amendment to or repeal of such Article 10 shall not adversely
affect any right or protection of a director of the registrant for or with
respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
The registrant has entered into certain indemnification agreements with its
officers and directors, the form of which is attached as Exhibit 10.1 to this
Registration Statement and incorporated herein by reference. The indemnification
agreements provide the registrant's officers and directors with further
indemnification to the maximum extent permitted by the DGCL. Reference is made
to the Underwriting Agreement (Exhibit 1.1 hereto), in which the Underwriters
have agreed to indemnify the officers and directors of the registrant against
certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since its inception in July 1994, the registrant has issued and sold
unregistered securities as follows (which information has been adjusted to give
effect to a four-for-one stock split of the registrant's outstanding Common
Stock effective November 23, 1996 and a three-for-two stock split of the
registrant's outstanding Common Stock effective April 18, 1997):
1. On July 5, 1994, the registrant issued an aggregate of 10,200,000 shares
of Common Stock to its founder for a consideration of approximately $.0010 per
share, or an aggregate of $10,000. The foregoing purchase and sale were exempt
from registration under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to Section 4(2) thereof on the basis that the transaction did
not involve a public offering.
2. On February 9, 1995, July 24, 1995 and May 3, 1996, the registrant
issued an aggregate of 2,012,772 shares of Common Stock to three investors who
are related to the founder for a consideration of approximately $.1717 per
share, or an aggregate of $345,525. The foregoing purchases and sales were
exempt from registration under the Securities Act pursuant to Section 4(2)
thereof on the basis that the transactions did not involve a public offering.
3. On August 7, 1995, the registrant issued 42,000 shares of Common Stock
to one investor who is an employee for a consideration of approximately $.1287
per share, or an aggregate of $5,408. The foregoing purchase and sale were
exempt from registration under the Securities Act pursuant to Section 4(2)
thereof on the basis that the transaction did not involve a public offering.
4. Between December 6, 1995 and May 16, 1996, the registrant issued an
aggregate of 3,021,000 shares of Common Stock to 23 purchasers for a
consideration of approximately $.3333 per share, or an aggregate of $1,007,000.
The purchasers consisted of one director of the registrant, Tom A. Alberg, who
purchased 150,000 shares of Common Stock, two investors who are related to the
founder and purchased 60,000 shares of Common Stock and 20 unaffiliated
investors who purchased 2,811,000 shares of Common Stock. The foregoing
purchases and sales were exempt from registration under the Securities Act
pursuant to Section 4(2) thereof on the basis that the transactions did not
involve a public offering.
5. On June 18, 1996, the registrant effected a reincorporation from the
state of Washington to the state of Delaware. The registrant, as a Washington
corporation, merged with and into a new corporation incorporated in Delaware,
with the new corporation surviving the merger (the
II-2
<PAGE> 73
"Surviving Entity"). As a result, each share of Common Stock of the registrant,
as a Washington corporation, converted into one fully paid and nonassessable
share of Common Stock of the Surviving Entity. Such issuances were exempt from
registration under the Securities Act under Section 2(3) thereof on the basis
that the transaction did not involve a sale of securities.
6. On June 21, 1996, the registrant issued 569,396 shares of Series A
Preferred Stock, which are convertible into 3,416,376 shares of Common Stock, to
two investors, Kleiner Perkins Caufield & Byers VIII and KPCB Information
Sciences Zaibatsu Fund II, for a consideration of approximately $14.05 per share
of Series A Preferred Stock, or an aggregate of $8,000,014. The foregoing
purchases and sales were exempt from registration under the Securities Act
pursuant to Section 4(2) thereof on the basis that the transactions did not
involve a public offering.
7. In January and February 1997, the registrant issued an aggregate of
5,000 shares of Series A Preferred Stock, which are convertible into 30,000
shares of Common Stock, to two directors of the registrant, Patricia Q.
Stonesifer and Scott D. Cook, for a consideration of $40.00 per share of Series
A Preferred Stock, or an aggregate of $200,000. The foregoing purchases and
sales were exempt from registration under the Securities Act pursuant to Section
4(2) thereof on the basis that the transactions did not involve a public
offering.
8. In March 1997, the registrant issued 225,000 shares of Common Stock to a
licensor in consideration of a software license and accrued product development.
9. From October 24, 1994 through May 13, 1997, the registrant granted stock
options to purchase 5,296,080 shares of the Common Stock, with exercise prices
ranging from $.1717 to $4.00 per share, to employees, consultants and directors
pursuant to its 1994 Stock Option Plan. Of these options, options for 708,270
shares have been canceled without being exercised, options for 1,798,006 shares
have been exercised and options for 2,789,804 shares remain outstanding. From
December 6, 1995 through May 13, 1997, the registrant also granted stock options
outside of any plan to purchase 360,000 shares of the registrant's Common Stock,
with exercise prices ranging from $.3333 to $.6667 per share, to consultants and
directors. Of these options, none have been canceled, options for 96,000 shares
have been exercised and options for 264,000 shares remain outstanding. From
February 25, 1997 through May 13, 1997, the Company has granted stock options to
purchase 1,087,275 shares of the Company's Common Stock, with exercise prices
ranging from $4.6667 to $12.00 per share, to employees and consultants pursuant
to its 1997 Stock Option Plan. Of these options, options for 600 shares have
been canceled without being exercised, options for 17,550 shares have been
exercised and options for 1,069,125 shares remain outstanding.
The sales and issuances of these securities were exempt from registration
under the Securities Act pursuant to Rule 701 promulgated thereunder on the
basis that these options were offered and sold either pursuant to a written
compensatory benefit plan or pursuant to written contracts relating to
consideration, as provided by Rule 701, or pursuant to Section 4(2) thereof on
the basis that the transactions did not involve a public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<C> <C> <S>
1.1* -- Form of Underwriting Agreement.
2.1* -- Agreement and Plan of Merger between the Registrant, a Washington corporation,
and Amazon.com, Inc., a Delaware corporation, dated May 28, 1996.
3.1* -- Restated Certificate of Incorporation of the Registrant.
3.2* -- Bylaws of the Registrant.
5.1* -- Opinion of Perkins Coie as to the legality of the shares.
</TABLE>
II-3
<PAGE> 74
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<C> <C> <S>
10.1* -- Form of Indemnification Agreement between the Registrant and each of its
Directors and Executive Officers.
10.2* -- Series A Preferred Stock Purchase Agreement, dated June 21, 1996, by and among
the Registrant and Kleiner Perkins Caufield & Byers VIII and KPCB Information
Sciences Zaibatsu Fund II.
10.3* -- Co-Sale Agreement, dated June 21, 1996, by and among the Registrant and Kleiner
Perkins Caufield & Buyers VIII, KPCB Information Sciences Zaibatsu Fund II and
Jeffrey P. Bezos.
10.4* -- Right of First Refusal Agreement, dated June 21, 1996, by and between the
Registrant and Kleiner Perkins Caufield & Byers VIII, KPCB Information Sciences
Zaibatsu Fund II and Jeffrey P. Bezos.
10.5* -- Repurchase Agreement, dated June 21, 1996, by and between the Registrant and
Jeffrey P. Bezos.
10.6* -- Voting Agreement, dated June 21, 1996, by and among the Registrant and Kleiner
Perkins Caufield & Byers VIII, KPCB Information Sciences Zaibatsu Fund II and
Jeffrey P. Bezos.
10.7* -- Investor Rights Agreement, dated as of June 21, 1996, by and among the
Registrant, Kleiner Perkins Caufield & Byers VIII, KPCB Information Sciences
Zaibatsu Fund II and Jeffrey P. Bezos.
10.8* -- Investment Letter Agreement regarding Purchase of Series A Stock, dated January
31, 1997, between the Registrant and Scott D. Cook.
10.9* -- Right of First Refusal Agreement, dated January 31, 1997, between the Registrant
and Scott D. Cook.
10.10 * -- Investment Letter Agreement regarding Purchase of Series A Stock, dated February
20, 1997, between the Registrant and Patricia Q. Stonesifer.
10.11 * -- Right of First Refusal Agreement, dated February 20, 1997, between the Registrant
and Patricia Q. Stonesifer.
10.12 * -- Subscription, dated July 5, 1994, by Jeffrey P. Bezos.
10.13 * -- Shareholder's Agreement, dated February 9, 1995, by and between the Registrant
and Miguel A. Bezos.
10.14 * -- Shareholder's Agreement, dated July 24, 1995, by and between the Registrant and
the Gise Family Trust.
10.15 * -- Shareholder's Agreement, dated August 8, 1995, by and between the Registrant and
Sheldon J. Kaphan.
10.16 * -- Shareholder's Agreement, dated November 26, 1995, by and between the Registrant
and Tom A. Alberg.
10.17 -- [Reserved]
10.18 * -- Shareholder's Agreement, dated July 10, 1996, by and between the Registrant and
Scott E. Lipsky.
10.19 * -- Shareholder's Agreement, dated December 31, 1996, by and between the Registrant
and Joy D. Covey.
10.20 * -- Amended and Restated 1994 Stock Option Plan (version as of December 20, 1996 for
Amended and Restated Grants and version as of December 20, 1996 for New Grants).
10.21 * -- 1997 Stock Option Plan.
</TABLE>
II-4
<PAGE> 75
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<C> <C> <S>
10.22* -- Amended and Restated Incentive Stock Option Letter Agreement, effective October
24, 1994, from the Registrant to Sheldon J. Kaphan.
10.23* -- Non-Qualified Stock Option Letter Agreement, effective December 6, 1995, from the
Registrant to Tom A. Alberg.
10.24* -- Non-Qualified Stock Option Letter Agreement, effective December 6, 1995, from the
Registrant to Tom A. Alberg.
10.25* -- Non-Qualified Stock Option Letter Agreement, effective December 20, 1996, from
the Registrant to Joy D. Covey.
10.26* -- Incentive Stock Option Letter Agreement, effective December 20, 1996, from the
Registrant to Joy D. Covey.
10.27* -- Subrogation Agreement, dated June 19, 1996, by and between the Registrant and
Jeffrey P. Bezos.
10.28* -- Lease Agreement, dated July 1, 1996, as amended on December 21, 1996, January 9,
1997 and February 27, 1997, by and between the Registrant and Trident
Investments, Inc.
10.29* -- Lease Agreement, dated September 30, 1996, by and between the Registrant and
Pacific Northwest Group A.
10.30* -- Sublease Agreement, dated February 19, 1997, by and between C.C. Filson Company
and the Registrant.
10.31* -- Sublease Agreement, dated January 19, 1996, by and between the Registrant and
Coast Wide Supply Co.
10.32* -- Master Lease Agreement No. 6672336, dated February 12, 1997, between the
Registrant and Digital Financial Services, a division of General Electric Capital
Corporation.
10.33* -- Shareholder's Agreement, dated March 18, 1997, by and between the Registrant and
Rick R. Ayre.
10.34* -- Shareholder's Agreement, dated March 15, 1997, by and between the Registrant and
John D. Risher.
10.35* -- Shareholder's Agreement, dated March 13, 1997, by and between the Registrant and
Joel R. Spiegel.
11.1* -- Statement regarding computation of net loss per share.
23.1 -- Consent of Ernst & Young LLP.
23.2* -- Consent of Perkins Coie (contained in the opinion filed as Exhibit 5.1 hereto).
24.1* -- Power of Attorney.
27.1* -- Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
(b) Financial Statement Schedules
All schedules are omitted because they are inapplicable or the requested
information is shown in the financial statements of the registrant or related
notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and
II-5
<PAGE> 76
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 77
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 5 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Seattle, State of Washington, on the 14th day of May, 1997.
AMAZON.COM, INC.
By: /s/ JEFFREY P. BEZOS
-----------------------------------
Jeffrey P. Bezos, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 5 to Registration Statement has been signed by the following
persons in the capacities indicated below on the 14th day of May, 1997.
<TABLE>
<C> <S>
/s/ JEFFREY P. BEZOS President, Chief Executive Officer and
- --------------------------------------------- Chairman of the Board (Principal Executive
Jeffrey P. Bezos Officer)
/s/ JOY D. COVEY Chief Financial Officer, Vice President of
- --------------------------------------------- Finance and Administration (Principal
Joy D. Covey Financial and Accounting Officer)
* TOM A. ALBERG Director
- ---------------------------------------------
Tom A. Alberg
* SCOTT D. COOK Director
- ---------------------------------------------
Scott D. Cook
* L. JOHN DOERR Director
- ---------------------------------------------
L. John Doerr
* PATRICIA Q. STONESIFER Director
- ---------------------------------------------
Patricia Q. Stonesifer
* By/s/ JEFFREY P. BEZOS
- ---------------------------------------------
Jeffrey P. Bezos
Attorney-in-fact
</TABLE>
II-7
<PAGE> 78
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------ --------------------------------------------------------------------------
<C> <C> <S> <C>
1.1* -- Form of Underwriting Agreement.
2.1* -- Agreement and Plan of Merger between the Registrant, a Washington
corporation, and Amazon.com, Inc., a Delaware corporation, dated May 28,
1996.
3.1* -- Restated Certificate of Incorporation of the Registrant.
3.2* -- Bylaws of the Registrant.
5.1* -- Opinion of Perkins Coie as to the legality of the shares.
10.1* -- Form of Indemnification Agreement between the Registrant and each of its
Directors and Executive Officers.
10.2* -- Series A Preferred Stock Purchase Agreement, dated June 21, 1996, by and
among the Registrant and Kleiner Perkins Caufield & Byers VIII and KPCB
Information Sciences Zaibatsu Fund II.
10.3* -- Co-Sale Agreement, dated June 21, 1996, by and among the Registrant and
Kleiner Perkins Caufield & Buyers VIII, KPCB Information Sciences Zaibatsu
Fund II and Jeffrey P. Bezos.
10.4* -- Right of First Refusal Agreement, dated June 21, 1996, by and between the
Registrant and Kleiner Perkins Caufield & Byers VIII, KPCB Information
Sciences Zaibatsu Fund II and Jeffrey P. Bezos.
10.5* -- Repurchase Agreement, dated June 21, 1996, by and between the Registrant
and Jeffrey P. Bezos.
10.6* -- Voting Agreement, dated June 21, 1996, by and among the Registrant and
Kleiner Perkins Caufield & Byers VIII, KPCB Information Sciences Zaibatsu
Fund II and Jeffrey P. Bezos.
10.7* -- Investor Rights Agreement, dated as of June 21, 1996, by and among the
Registrant, Kleiner Perkins Caufield & Byers VIII, KPCB Information
Sciences Zaibatsu Fund II and Jeffrey P. Bezos.
10.8* -- Investment Letter Agreement regarding Purchase of Series A Stock, dated
January 31, 1997, between the Registrant and Scott D. Cook.
10.9* -- Right of First Refusal Agreement, dated January 31, 1997, between the
Registrant and Scott D. Cook.
10.10* -- Investment Letter Agreement regarding Purchase of Series A Stock, dated
February 20, 1997, between the Registrant and Patricia Q. Stonesifer.
10.11* -- Right of First Refusal Agreement, dated February 20, 1997, between the
Registrant and Patricia Q. Stonesifer.
10.12* -- Subscription, dated July 5, 1994, by Jeffrey P. Bezos.
10.13* -- Shareholder's Agreement, dated February 9, 1995, by and between the
Registrant and Miguel A. Bezos.
10.14* -- Shareholder's Agreement, dated July 24, 1995, by and between the
Registrant and the Gise Family Trust.
10.15* -- Shareholder's Agreement, dated August 8, 1995, by and between the
Registrant and Sheldon J. Kaphan.
10.16* -- Shareholder's Agreement, dated November 26, 1995, by and between the
Registrant and Tom A. Alberg.
10.17 -- [Reserved]
</TABLE>
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------ --------------------------------------------------------------------------
<C> <C> <S> <C>
10.18* -- Shareholder's Agreement, dated July 10, 1996, by and between the
Registrant and Scott E. Lipsky.
10.19* -- Shareholder's Agreement, dated December 31, 1996, by and between the
Registrant and Joy D. Covey.
10.20* -- Amended and Restated 1994 Stock Option Plan (version as of December 20,
1996 for Amended and Restated Grants and version as of December 20, 1996
for New Grants).
10.21* -- 1997 Stock Option Plan.
10.22* -- Amended and Restated Incentive Stock Option Letter Agreement, effective
October 24, 1994, from the Registrant to Sheldon J. Kaphan.
10.23* -- Non-Qualified Stock Option Letter Agreement, effective December 6, 1995,
from the Registrant to Tom A. Alberg.
10.24* -- Non-Qualified Stock Option Letter Agreement, effective December 6, 1995,
from the Registrant to Tom A. Alberg.
10.25* -- Non-Qualified Stock Option Letter Agreement, effective December 20, 1996,
from the Registrant to Joy D. Covey.
10.26* -- Incentive Stock Option Letter Agreement, effective December 20, 1996, from
the Registrant to Joy D. Covey.
10.27* -- Subrogation Agreement, dated June 19, 1996, by and between the Registrant
and Jeffrey P. Bezos.
10.28* -- Lease Agreement, dated July 1, 1996, as amended on December 21, 1996,
January 9, 1997 and February 27, 1997, by and between the Registrant and
Trident Investments, Inc.
10.29* -- Lease Agreement, dated September 30, 1996, by and between the Registrant
and Pacific Northwest Group A.
10.30* -- Sublease Agreement, dated February 19, 1997, by and between C.C. Filson
Company and the Registrant.
10.31* -- Sublease Agreement, dated January 19, 1996, by and between the Registrant
and Coast Wide Supply Co.
10.32* -- Master Lease Agreement No. 6672336, dated February 12, 1997, between the
Registrant and Digital Financial Services, a division of General Electric
Capital Corporation.
10.33* -- Shareholder's Agreement, dated March 18, 1997, by and between the
Registrant and Rick R. Ayre.
10.34* -- Shareholder's Agreement, dated March 15, 1997, by and between the
Registrant and John D. Risher.
10.35* -- Shareholder's Agreement, dated March 13, 1997, by and between the
Registrant and Joel R. Spiegel.
11.1* -- Statement regarding computation of net loss per share.
</TABLE>
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------ --------------------------------------------------------------------------
<C> <C> <S> <C>
23.1 -- Consent of Ernst & Young LLP.
23.2* -- Consent of Perkins Coie (contained in the opinion filed as Exhibit 5.1
hereto).
24.1* -- Power of Attorney.
27.1* -- Financial Data Schedule.
</TABLE>
- ------------------------
* Previously filed.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated February 28,
1997 (except for Note 6, as to which the date is April 18, 1997), in Amendment
No. 5 to the Registration Statement (Form S-1 No. 333-23795) and related
Prospectus of Amazon.com, Inc. for the registration of 3,450,000 shares of its
common stock.
ERNST & YOUNG LLP
Seattle, Washington
May 14, 1997
