<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
----------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NO. 000-22513
AMAZON.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 91-1646860
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1200 12TH AVENUE SOUTH, SUITE 1200, SEATTLE, WASHINGTON 98144-2734
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)
(206) 266-1000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
351,774,236 shares of $0.01 par value common stock outstanding as of
April 30, 2000
================================================================================
<PAGE> 2
AMAZON.COM, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance sheets--March 31, 2000 and December 31, 1999...................... 4
Statements of operations--Three months ended March 31, 2000 and 1999...... 5
Statements of cash flows--Three months ended March 31, 2000 and 1999...... 6
Notes to financial statements--March 31, 2000............................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 11
Item 3. Quantitative and Qualitative Disclosure Of Market Risk.................... 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 26
Item 2. Changes in Securities and Use of Proceeds................................. 26
Item 3. Defaults Upon Senior Securities........................................... 26
Item 4. Submission of Matters to a Vote of Security Holders....................... 26
Item 5. Other Information......................................................... 26
Item 6. Exhibits and Reports on Form 8-K.......................................... 26
Signature............................................................................. 28
Exhibit Index......................................................................... 29
</TABLE>
3
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMAZON.COM, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
ASSETS
<S> <C> <C>
Current assets: (unaudited)
Cash ................................................... $ 84,087 $ 116,962
Marketable securities .................................. 924,794 589,226
Inventories ............................................ 172,257 220,646
Prepaid expenses and other current assets .............. 89,811 85,344
----------- -----------
Total current assets ........................... 1,270,949 1,012,178
Fixed assets, net ........................................ 334,396 317,613
Goodwill, net ............................................ 471,748 534,699
Other intangibles, net ................................... 175,444 195,445
Investments in equity-method investees ................... 271,542 226,727
Other investments ........................................ 150,782 144,735
Other assets ............................................. 54,882 40,154
----------- -----------
Total assets ................................... $ 2,729,743 $ 2,471,551
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................... $ 255,797 $ 463,026
Accrued expenses and other current liabilities ......... 144,815 181,909
Unearned revenue ....................................... 134,758 54,790
Interest payable ....................................... 15,812 24,888
Current portion of long-term debt and other ............ 15,983 14,322
----------- -----------
Total current liabilities ...................... 567,165 738,935
Long-term debt ........................................... 2,136,961 1,466,338
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value:
Authorized shares -- 150,000
Issued and outstanding shares -- none ............... -- --
Common stock, $0.01 par value:
Authorized shares -- 1,500,000
Issued and outstanding shares -- 349,959 and 345,155
shares at March 31, 2000 and December 31, 1999,
respectively ....................................... 3,500 3,452
Additional paid-in capital ............................. 1,293,761 1,194,369
Stock-based compensation ............................... (34,889) (47,806)
Accumulated other comprehensive loss ................... (46,302) (1,709)
Accumulated deficit .................................... (1,190,453) (882,028)
----------- -----------
Total stockholders' equity ..................... 25,617 266,278
----------- -----------
Total liabilities and stockholders' equity ..... $ 2,729,743 $ 2,471,551
=========== ===========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 4
AMAZON.COM, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net sales ........................................ $ 573,889 $ 293,643
Cost of sales .................................... 445,755 228,852
--------- ---------
Gross profit ..................................... 128,134 64,791
Operating expenses:
Marketing, sales and fulfillment ............... 140,111 60,717
Technology and content ......................... 61,244 23,402
General and administrative ..................... 26,045 11,243
Stock-based compensation ....................... 13,652 111
Amortization of goodwill and other intangibles . 82,955 20,900
Merger, acquisition and investment-related costs 2,019 399
--------- ---------
Total operating expenses ............... 326,026 116,772
--------- ---------
Loss from operations ............................. (197,892) (51,981)
Interest income .................................. 10,126 10,920
Interest expense ................................. (27,621) (16,634)
Other expense, net ............................... (4,774) (49)
--------- ---------
Net interest expense and other .............. (22,269) (5,763)
--------- ---------
Loss before equity in losses of equity-method
investees ...................................... (220,161) (57,744)
Equity in losses of equity-method investees ...... (88,264) (3,923)
--------- ---------
Net loss ......................................... $(308,425) $ (61,667)
========= =========
Basic and diluted loss per share ................. $ (0.90) $ (0.20)
========= =========
Shares used in computation of basic and
diluted loss per share ......................... 343,884 313,794
========= =========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 5
AMAZON.COM, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH AT BEGINNING OF PERIOD .............................. $ 116,962 $ 25,561
OPERATING ACTIVITIES:
Net loss ................................................. (308,425) (61,667)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of fixed assets .......... 18,180 5,223
Amortization of deferred stock-based compensation ...... 13,652 111
Equity in losses of equity-method investees ............ 88,264 3,923
Amortization of goodwill and other intangibles ......... 82,955 20,900
Non-cash merger, acquisition, and
investment-related costs............................... 2,019 399
Amortization of previously unearned revenue ............ (18,485) --
(Gain) loss on sale of marketable securities ........... (2,600) 4,190
Non-cash interest expense and other .................... 5,745 7,468
Changes in operating assets and liabilities:
Inventories ......................................... 48,389 (15,735)
Prepaid expenses and other current assets ........... 2,634 (15,584)
Accounts payable .................................... (207,229) 19,745
Accrued expenses and other current liabilities ...... (37,239) 4,736
Unearned revenue .................................... 614 --
Interest payable .................................... (8,988) 9,097
----------- -----------
Net cash used in operating activities .......... (320,514) (17,194)
INVESTING ACTIVITIES:
Sales and maturities of marketable securities ............ 1,013,947 1,217,942
Purchases of marketable securities ....................... (1,333,393) (2,342,230)
Purchases of fixed assets ................................ (26,601) (19,062)
Investments in equity-method investees and other
investments ............................................ (47,487) --
----------- -----------
Net cash used in investing activities .......... (393,534) (1,143,350)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options .................. 21,359 6,540
Proceeds from long-term debt ............................. 679,374 1,250,000
Repayment of long-term debt .............................. (4,023) (81,249)
Financing costs .......................................... (15,895) (34,900)
----------- -----------
Net cash provided by financing activities ...... 680,815 1,140,391
Effect of exchange rate changes .......................... 358 (160)
----------- -----------
Net decrease in cash ..................................... (32,875) (20,313)
----------- -----------
CASH AT END OF PERIOD .................................... $ 84,087 $ 5,248
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Fixed assets acquired under capital leases ............... $ 3,502 $ 14,594
Fixed assets acquired under financing agreements ......... 4,551 4,421
Equity securities for unearned Amazon Commerce
Network services ......................................... 97,839 --
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 6
AMAZON.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- ACCOUNTING POLICIES
Unaudited Interim Financial Information
The accompanying financial statements have been prepared by Amazon.com, Inc.
("Amazon.com" or the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC") for interim financial reporting.
These financial statements are unaudited and, in the opinion of management,
include all adjustments (consisting of normal recurring adjustments and
accruals) necessary for a fair presentation of the balance sheets, operating
results, and cash flows for the periods presented. Operating results for the
three-month period ended March 31, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted in accordance with the rules and regulations of the SEC. These financial
statements should be read in conjunction with the audited financial statements,
and accompanying notes, included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999. Certain prior period amounts have been
reclassified to conform to the current period presentation.
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 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.
Comprehensive Loss
Comprehensive loss is comprised of net loss, unrealized gains and losses on
marketable securities and other available-for-sale investments, and foreign
currency translation adjustments. Comprehensive loss was $353.0 million and
$67.9 million for the three-month periods ended March 31, 2000 and 1999,
respectively.
Loss per Share
The number of shares used in calculating loss per share for the three-month
periods ended March 31, 2000 and 1999 was reduced by 3.8 million and 6.9 million
shares, respectively, representing the weighted average number of outstanding
shares subject to repurchase. Stock options are antidilutive and accordingly
excluded from diluted loss per share.
Recent Accounting Pronouncement
In March 2000, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board reached a consensus on EITF Issue 00-2, "Accounting
for Web Site Development Costs." This consensus provides guidance on what types
of costs incurred to develop Web sites should be capitalized or expensed. The
consensus is effective for Web site development costs incurred for fiscal
quarters beginning after June 30, 2000. The Company does not expect the adoption
of this consensus to have a material impact on its financial position or results
of operations.
NOTE 2 -- MARKETABLE SECURITIES
Marketable securities available for sale, at fair value, consist of the
following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Asset-backed and agency securities .... $114,935 $247,667
Commercial paper and short-term
obligations ........................... 690,340 73,557
</TABLE>
7
<PAGE> 7
<TABLE>
<S> <C> <C>
Treasury notes and bonds .............. 84,536 164,158
Corporate notes and bonds ............. -- 103,844
Equity securities ..................... 34,983 --
-------- --------
Total marketable securities . $924,794 $589,226
======== ========
</TABLE>
The Company's marketable securities consist primarily of high quality short-
to intermediate-term fixed income securities and money market mutual funds. The
Company classifies all investments of cash as marketable securities, including
highly liquid investments with maturities of three months or less and reflects
the related cash flows as investing activities in the Statements of Cash Flows.
As a result of the classification of highly liquid investments within marketable
securities, a significant portion of the Company's gross marketable securities
purchases and maturities disclosed as investing cash flows is related to highly
liquid investments with short maturities.
At March 31, 2000 and December 31, 1999, the amortized cost of the Company's
marketable securities was $902.8 million and $601.4 million, respectively. At
March 31, 2000, $665.1 million of the Company's marketable securities were
comprised of money market funds denominated in euros.
NOTE 3 --INVESTMENTS IN EQUITY-METHOD INVESTEES
The Company holds certain investments accounted for under the equity method.
The Company accounts for an investment under the equity method if the investment
gives the Company the ability to exercise significant influence, but not
control, over an investee. Significant influence is generally deemed to exist if
the Company has an ownership interest in the voting stock of the investee of
between 20% and 50%, although other factors, such as representation on the
investee's Board of Directors, are considered in determining whether the equity
method of accounting is appropriate. The Company records its equity in the
income or losses of these investees one month in arrears for private companies
and one quarter in arrears for public companies.
NOTE 4 -- OTHER INVESTMENTS
At March 31, 2000, Other Investments included $68.7 million of investments
accounted for under the cost method and $82.1 million of investments in equity
securities with ready markets that are recorded at fair value and classified as
available-for-sale securities pursuant to Statement of Financial Accounting
Standards (SFAS) No. 115. The cost of such noncurrent available-for-sale equity
securities at March 31, 2000 was $151.3 million. Gross unrealized gains were
$0.7 million and gross unrealized losses were $69.9 million at March 31, 2000.
NOTE 5 -- UNEARNED REVENUE AND RELATED PARTY TRANSACTIONS
Unearned revenue is recorded for the fair value of services to be performed
in future periods for Amazon Commerce Network (ACN) partners. ACN partners are
companies with which the Company has entered into strategic relationships that
have generally consisted of the Company making a minority investment in the
companies and entering into commercial agreements that involve the sale of
products and services by these companies on co-branded sections of the Amazon
Web site. The fair value of services is measured by the consideration received
from ACN partners, which includes cash and the equity securities of ACN
partners. The Company holds equity securities of ACN partners, some of which are
accounted for under the equity method. Fair value of securities is determined
based upon the market value, subject to adjustments for any restrictions on
marketability, at the date the agreement is consummated for ACN partners that
are public companies and by an estimate of fair value including the use of
independent third-party appraisals for ACN partners that are private companies.
In March 2000, the EITF reached a consensus on EITF Issue 00-8, "Accounting
by a Grantee for an Equity Instrument to be Received in Conjunction with
Providing Goods or Services." This consensus indicates that the grantee should
measure the fair value of equity instruments received in conjunction with
providing goods or services using the stock price and other measurement
assumptions as of the earlier of either (a) the date the parties come to a
mutual understanding of the terms of the equity-based compensation arrangement
and commitment for performance by the grantee to earn the equity instruments is
reached, or (b) the date at which the grantee's performance necessary to earn
the equity instruments is complete. The consensus applies to new grants or
modifications of existing grants that occur after March 16, 2000. The consensus
does not affect the Company's accounting for any of the transactions in which
the Company received an equity instrument in conjunction with providing
services, but may affect future transactions.
8
<PAGE> 8
Unearned revenue is recognized over the period in which the service for
which consideration has been received is performed (generally one to 2.5 years).
During the three months ended March 31, 2000, the Company recorded $19.9 million
of revenue from ACN partners.
NOTE 6 -- LONG-TERM DEBT
On February 16, 2000, the Company completed an offering of E690,000,000
($680,685,000 as of February 11, 2000) of 6.875% Convertible Subordinated Notes
due 2010, also known as PEACS. The PEACS are convertible into the Company's
common stock at an initial conversion price of E104.947 per share. Interest on
the PEACS is payable annually in arrears in February of each year, commencing in
February 2001. The PEACS are unsecured and are subordinated to all of the
Company's existing and future senior indebtedness. The PEACS rank equally with
the Company's outstanding 4 3/4% Convertible Subordinated Notes due 2009 (the
"Convertible Notes"). The conversion price for the PEACS will be reset on
February 16, 2001 and February 16, 2002, but in no event will the conversion
price be reset lower that E84.883 per share. Subject to certain conditions, the
PEACS may be redeemed at the Company's option prior to February 20, 2003, in
whole or in part, at the redemption price of E1,000 per note, plus accrued and
unpaid interest.
NOTE 7 -- STOCK-BASED COMPENSATION
The following table shows the amounts of stock-based compensation, arising
primarily from acquisitions accounted for under the purchase method, that would
have been recorded under the following income statement categories had
stock-based compensation not been separately stated in the Statements of
Operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
------- ----
(IN THOUSANDS)
<S> <C> <C>
Marketing, sales and fulfillment .... $ 331 $ 37
Technology and content .............. 12,829 74
General and administrative .......... 492 --
------- -------
$13,652 $ 111
======= =======
</TABLE>
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
Legal Proceedings
During the first quarter of 2000, Supnick v. Amazon.com and Alexa Internet
and four similar class action complaints were filed against the Company and its
wholly owned subsidiary, Alexa Internet. The complaints, which are currently
being consolidated in the United States District Court for the Western District
of Washington, allege that Alexa Internet's tracking and storage of Internet Web
usage paths violates federal and state statutes prohibiting computer fraud,
unfair competition, and unauthorized interception of private electronic
communications, as well as common law proscriptions against trespass and
invasion of privacy. The complaints seek actual, statutory and punitive damages,
as well as restitution, on behalf of all users of Alexa Internet's Web
navigation service, as well as injunctive relief prohibiting Alexa Internet from
tracking and storing such information or disclosing it to third parties.
Although the Company disputes the allegations of wrongdoing in these complaints,
there can be no assurance that the Company will prevail in these lawsuits.
In addition, the Federal Trade Commission has requested information and
documents regarding Alexa Internet's practices and has opened a formal
investigative file in connection with its inquiry. The Commission is seeking to
determine whether the Company has engaged in unfair or deceptive acts in
connection with the advertisement and operation of certain services provided by
Alexa. The Company is cooperating voluntarily with the Commission's
investigation.
Depending on the amount and the timing, an unfavorable resolution of some or
all of these matters could materially affect the Company's business, future
results of operations or cash flows in a particular period.
From time to time, the Company is subject to other legal proceedings and
claims in the ordinary course of business, including claims of alleged
infringement of trademarks, copyrights, patents and other intellectual property
rights. The Company currently is not aware of any such legal proceedings or
claims that it believes will have, individually or in the aggregate, a material
adverse effect on its business, prospects, financial condition or operating
results.
NOTE 9 -- SEGMENT INFORMATION
9
<PAGE> 9
Information on reportable segments and a reconciliation to net income is as
follows:
<TABLE>
<CAPTION>
US BOOKS, EARLY-STAGE
MUSIC AND BUSINESSES
DVD/VIDEO INTERNATIONAL AND OTHER CONSOLIDATED
--------- ------------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 2000:
Revenues.............................. $401,415 $ 75,132 $ 97,342 $ 573,889
Gross profit.......................... 82,855 16,036 29,243 128,134
Segment loss.......................... (2,425) (27,448) (69,393) (99,266)
Other operating expenses.............. -- -- -- (98,626)
Net interest expense and other........ -- -- -- (22,269)
Equity in losses of equity-method
investees.......................... -- -- -- (88,264)
----------
Net loss.............................. -- -- -- (308,425)
==========
THREE MONTHS ENDED MARCH 31, 1999:
Revenues.............................. 267,522 25,719 402 293,643
Gross profit.......................... 59,266 5,157 368 64,791
Segment loss.......................... (3,117) (14,253) (13,201) (30,571)
Other operating expenses.............. -- -- -- (21,410)
Net interest expense and other........ -- -- -- (5,763)
Equity in losses of equity-method
investees.......................... -- -- -- (3,923)
----------
Net loss.............................. -- -- -- $ (61,667)
=========
</TABLE>
Revenue and gross profit generated on ACN services, which are included
within the Early-Stage Businesses and Other segment, was $19.9 million and $19.5
million for the three months ended March 31, 2000. There was no revenue or gross
profit on ACN services during the three months ended March 31, 1999.
The measure of profit or loss used for each reportable segment is income (loss)
from operations before other operating expenses, including stock-based
compensation, amortization of goodwill and other intangibles, and merger,
acquisition and investment-related costs.
10
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition
and Results of Operations" includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, such as
forward-looking statements regarding expectations of future profitability of the
US Books, Music and DVD/video segment, positive cash flow from operations and
improvement in operating loss and sales, all of which are inherently difficult
to predict. All statements other than statements of historical fact made in
this Quarterly Report on Form 10-Q are forward looking. We generally use words
such as "anticipates," "believes," "expects," "future" and "intends" and similar
expressions to identify forward-looking statements. Forward-looking statements
reflect management's current expectations and are inherently uncertain. The
Company's actual results may differ significantly from management's expectations
for a variety of reasons, including the rate of growth of the Internet and
online commerce, the amount that the Company invests in new business
opportunities and the timing of those investments, customer spending patterns,
the mix of products sold to customers, the mix of revenues derived from product
sales as compared to services, fluctuations in the value of securities held by
the Company (some of which consist of securities issued to the Company as
consideration for services to be performed by the Company for the issuers),
risks of inventory management, and risks of distribution and fulfillment
throughput and productivity. These risks and uncertainties, as well as other
risks and uncertainties that could cause the Company's actual results to differ
significantly from management's expectations, are described in greater detail in
the section entitled "Business -- Additional Factors That May Affect Future
Results," which, along with the following discussion, describes some, but not
all, of the factors that could cause actual results to differ significantly from
management's expectations.
OVERVIEW
Amazon.com, Inc. is the world's leading online retailer. We have served over
20 million customer accounts in over 150 countries. We directly offer for sale
millions of distinct items in categories such as books, music, DVDs, videos,
toys, electronics, software, video games, tools and hardware, lawn and patio
products and kitchen products. Through our marketplace services such as Amazon
Auctions, zShops and sothebys.amazon.com, we have created Web-based marketplaces
where buyers and sellers can enter into transactions with respect to a wide
range of products. In addition to our US Web site, we currently have two
internationally focused Web sites located at www.amazon.co.uk and www.amazon.de.
We offer our customers a superior shopping experience by providing high value
through selection, convenience, ease of use, low prices, product information and
an intense focus on customer service. We are a proven technology leader, having
developed electronic commerce innovations such as 1-Click technology,
personalized shopping services, easy-to-use search and browse features, secure
payment protections and wireless access to our stores. We now operate ten
distribution centers worldwide comprising approximately five million square feet
of warehouse and distribution space, which allows us control over the
distribution process and facilitates our ability to deliver merchandise to
customers on a reliable and timely basis.
Amazon.com was incorporated in 1994 in the state of Washington and
reincorporated in 1996 in Delaware. The Company's principal corporate offices
are located in Seattle, Washington. Amazon.com completed its initial public
offering in May 1997, and its common stock is listed on the Nasdaq National
Market under the symbol "AMZN."
As used herein, "Amazon.com," "Amazon," "we," "our," "us" and "the Company"
includes Amazon.com, Inc. and its consolidated subsidiaries, unless the context
requires otherwise.
During the three months ended March 31, 2000, through our Amazon Commerce
Network (ACN), we entered into a number of strategic relationships with selected
e-commerce companies. These relationships have generally consisted of our making
a minority investment in the companies and the entry into commercial agreements
that involve the sale of products and services by these companies on co-branded
sections of the Amazon Web site. We received cash and equity securities in these
companies with a fair value (as determined at the time these commercial
agreements were entered into by quoted market prices of public companies,
considering any restrictions on marketability, or by the use of independent,
third-party valuations of private companies) of $97.8 million during the three
months ended March 31, 2000 and recorded such amounts as unearned revenue.
Revenue will be earned based on the original recorded value as we provide the
related services in the future (generally over the next one to 2.5 years,
depending on the terms of each arrangement). Our first co-branded section of the
Amazon Web site, the Health and Beauty store created in conjunction with
drugstore.com, was launched on April 17, 2000.
We believe that these investments and commercial arrangements are attractive to
us for a variety of reasons. First, our customers receive access to a wider
range of products and services. Second, we are able to generate revenue from the
strategic partners because we help them sell to our customer base. Third, we
have the opportunity to participate in the future success of our strategic
partners as a
11
<PAGE> 11
result of our ownership interest in such companies. We believe that our
strategic partners are also well served as a result of the opportunity to grow
their customer base quickly and build brand recognition.
On February 16, 2000, we completed an offering of E690,000,000 ($680,685,000
as of February 11, 2000) of 6.875% Convertible Subordinated Notes due 2010, also
known as PEACS. The PEACS are convertible into our common stock at an initial
conversion price of E104.947 per share. Interest on the PEACS is payable
annually in arrears in February of each year, commencing in February 2001. The
PEACS are unsecured and are subordinated to all of our existing and future
senior indebtedness. The PEACS rank equally with our outstanding $1.25 billion
of 4 3/4% Convertible Subordinated Notes due 2009 (the "Convertible Notes"). The
conversion price for the PEACS will be reset on February 16, 2001 and February
16, 2002, but in no event will the conversion price be reset lower that
E84.883 per share. Subject to certain conditions, the PEACS may be redeemed
at our option prior to February 20, 2003, in whole or in part, at the redemption
price of E1,000 per note, plus accrued and unpaid interest.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
2000 1999 % CHANGE
---- ---- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales ............................ $573,889 $293,643 95%
Gross profit ......................... 128,134 64,791 98%
Gross margin ......................... 22.3% 22.1% 1%
Marketing, sales and fulfillment ..... 140,111 60,717 131%
Technology and content ............... 61,244 23,402 162%
General and administrative ........... 26,045 11,243 132%
Stock-based compensation ............. 13,652 111 12,199%
Amortization of goodwill and
other intangibles ................. 82,955 20,900 297%
Loss from operations ................. 197,892 51,981 281%
Interest income ...................... 10,126 10,920 (7)%
Interest expense ..................... 27,621 16,634 66%
Other expense, net ................... 4,774 49 9,643%
Equity in losses of equity-method
investees ......................... 88,264 3,923 2,150%
</TABLE>
Net Sales
Net sales includes the selling price of products sold by us, less returns
and promotional gift certificates, and also includes outbound shipping charges
charged to our customers. Shipping revenue was $74.6 million and $44.2 million
for the three-month periods ended March 31, 2000 and 1999, respectively. Net
sales also includes revenues earned from activities of ACN of $19.9 million for
the three months ended March 31, 2000, as well as commissions from auctions and
zShops transactions. Growth in net sales is primarily related to an increase in
units sold due to the growth of the Company's customer base, repeat purchases
from existing customers, and the introduction of new product lines. Subsequent
to March 31, 1999, the Company has added several new product lines.
At March 31, 2000, the number of customer accounts, which includes customer
accounts for marketplace services but excludes customer accounts for ACN,
reached 20 million, compared with 8.4 million at March 31, 1999.
Sales to customers outside of the US, including export sales from the US and
sales by our international subsidiaries, represented approximately 24% and 22%
of net sales for the three months ended March 31, 2000 and 1999, respectively.
Gross Profit
Gross profit consists of net sales less the cost of sales, which consists of the
cost of merchandise sold to customers, as well as inbound and outbound shipping
costs and the cost of tangible supplies used to package product for shipment to
customers. Gross profit increased in absolute dollars, reflecting our increased
sales volume. Gross margin increased slightly, from 22.1% to 22.3%, primarily
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due to the generation of revenue from the higher-margin service activities of
ACN. Gross profit from ACN activities was $19.5 million for the three months
ended March 31, 2000. Excluding the effect of ACN, gross margin would have been
19.6% during the three months ended March 31, 2000, a decrease of 2.5% compared
to the three months ended March 31, 1999, but an increase of 6.6% compared to
the three months ended December 31, 1999. The decrease from the three months
ended March 31, 1999 to March 31, 2000 is primarily due to the reduction in
gross profit (loss) from shipping. Gross profit (loss) from shipping, which
represents shipping revenues less outbound shipping costs, was $(3.4) million
and $6.9 million for the three-month periods ended March 31, 2000 and 1999,
respectively. The change in gross profit (loss) from shipping is primarily a
function of the addition of the toys, electronics and tools and hardware product
lines since March 31, 1999, which have had lower shipping margins than books,
music and DVD/video products. It is also a result of our distribution center
expansion during 1999, which has led to increased split-shipments.
We intend to continue to expand our operations by promoting new or
complementary products or sales formats and by expanding the breadth and depth
of our product and service offerings. Gross margins attributable to new business
areas may be different from those associated with our existing business
activities. To the extent such business areas become larger components of our
sales, we would expect a corresponding impact on overall gross margin.
Organizations responsible for promulgating accounting standards are
currently reviewing the financial statement classification of, and accounting
for, fulfillment and order processing costs and other items by a number of
retailers, online and offline, including Amazon.com. This review may lead to new
accounting standards that could require some or all fulfillment and order
processing costs to be classified as costs of sales and/or require some or all
of such costs to be capitalized in inventory. We currently include these costs
in marketing, sales and fulfillment.
Marketing, Sales and Fulfillment
Marketing, sales and fulfillment expenses consist of advertising,
promotional and public relations expenditures, credit card fees and payroll and
related expenses for personnel engaged in marketing, selling and fulfillment
activities. Fulfillment costs included in marketing, sales and fulfillment
expenses represent those costs incurred in operating and staffing distribution
and customer service centers, including costs attributable to receiving,
inspecting and warehousing inventories; picking, packaging and preparing
customers' orders for shipment; responding to inquiries from customers; and
credit card fees. Fulfillment costs amounted to $99.5 million and $34.2 million
for the three-month periods ended March 31, 2000 and 1999, respectively.
Advertising, promotional and public relations costs totaled $40.6 million and
$26.5 million for the three-month periods ended March 31, 2000 and 1999,
respectively. Marketing, sales and fulfillment expenses increased primarily due
to increased payroll and related costs associated with fulfilling customer
demand and increased credit card fees resulting from higher sales. Marketing,
sales and fulfillment expenses increased as a percentage of net sales, from
20.7% for the three months ended March 31, 1999 to 24.4% for the three months
ended March 31, 2000, primarily due to increases in fulfillment expenses
associated with the expansion of our distribution center network and customer
service staff, most of which occurred subsequent to March 31, 1999. We intend to
continue our advertising and marketing activities in the future and expect that
such expenditures will continue to increase in absolute dollars, but, as a
percentage of sales, will likely decline in the future. We also expect that
fulfillment costs will decline as a percentage of sales in the future as
additional capacity of our existing distribution center network is more fully
utilized. However, due to risks related to market share, seasonality, inventory
management and other factors, advertising and marketing expenditures and
fulfillment costs may not decline as a percentage of sales. See "Additional
Factors That May Affect Future Results."
Technology and content
Technology and content expenses consist principally of payroll and related
expenses for development, editorial, systems and telecommunications operations
personnel and consultants; systems and telecommunications infrastructure; and
costs of acquired content, including freelance reviews. The increase in
technology and content expenses was primarily attributable to increased staffing
and associated costs related to continual enhancements to the features, content
and functionality of our Web sites and transaction-processing systems, as well
as increased investment in systems and telecommunications infrastructure.
Technology and content costs are generally expensed as incurred, except for
costs incurred during the application development stage of internal-use
software, including those related to the Company's Web sites, that are
capitalized and depreciated over estimated useful lives (generally two years).
We believe that continued investment in technology and content is critical to
attaining our strategic objectives. In addition to ongoing investments in our
Web stores and infrastructure, we intend to increase investments in products,
services and international expansion. As a result, we expect technology and
content expenses to continue to increase in absolute dollars.
General and Administrative
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General and administrative expenses consist of payroll and related expenses
for executive, finance and administrative personnel, recruiting, professional
fees and other general corporate expenses. The increase in general and
administrative expenses was primarily a result of increased salaries and related
expenses associated with the hiring of additional personnel and legal and other
professional fees.
Stock-Based Compensation
Stock-based compensation is comprised of the portion of acquisition-related
consideration that is conditioned on the continued tenure of key employees of
acquired businesses, which must be classified as compensation expense rather
than as a component of purchase price under generally accepted accounting
principles. Stock-based compensation also includes stock-based charges for
certain other compensation and severance arrangements. The increase in
stock-based compensation resulted primarily from acquisitions consummated in
1999.
Amortization of Goodwill and Other Intangibles
Increases in amortization of goodwill and other intangibles primarily
resulted from our 1999 acquisitions of e-Niche Incorporated (Exchange.com),
Alexa Internet, Accept.com Financial Services Corporation, LiveBid.com, Inc.,
the catalog and online commerce assets of Acme Electric Motor Co. (Tool Crib of
the North), Back to Basics Toys, Inc. and other acquisitions. We may continue to
expand our business through acquisitions, which would cause amortization of
goodwill and other intangibles to increase.
Loss from Operations
Our loss from operations increased due to increases as a percentage of sales
in marketing, sales and fulfillment, technology and content, stock-based
compensation and amortization of goodwill and other intangibles.
Interest Income and Expense
Interest income on cash and marketable securities remained relatively
constant due to a comparable average balance of marketable securities being
invested for the three-month periods ended March 31, 2000 and 1999. During both
periods, the Company completed significant debt offerings and invested the
proceeds in interest-bearing marketable securities. Interest expense increased
due to a full quarter of interest expense in 2000 for the February 1999 issuance
of the Convertible Notes and interest on the February 2000 issuance of
E690,000,000 ($680,685,000 as of February 11, 2000) of 6.875% Convertible
Subordinated Notes due 2010, also known as "PEACS".
Other expense, net
Other expense primarily consists of net realized gains and losses on sales
of marketable securities and net foreign exchange transaction gains and losses.
The increase in other expense, net is primarily due to higher net foreign
exchange transaction losses during the three months ended March 31, 2000. The
increase in net foreign exchange transaction losses is commensurate with an
increase in foreign exchange transactions, primarily related to the issuance of
the PEACS.
Equity in Losses of Equity-Method Investees
Equity in losses of equity-method investees represents our share of losses
of companies in which we have investments that give us the ability to exercise
significant influence, but not control, over an investee. We made several
investments in 1999 that are accounted for under the equity method of accounting
and increased our investment in certain equity-method investees during the
three-month period ended March 31, 2000. We expect to make additional
investments in the future that will be accounted for under the equity method of
accounting. Most of the companies in which we have invested to date are in the
early stage of their operations and are incurring net losses. Therefore, we
expect to continue to record losses on our equity-method investments.
Two of our equity-method investees, HomeGrocer.com, Inc. and Pets.com, Inc.,
completed the initial public offerings of their common stock during the three
months ended March 31, 2000. Additionally, another of our equity-method
investees, drugstore.com, inc., completed a secondary offering of its common
stock during the three months ended March 31, 2000. In connection with these
sales of common stock by our investees, we recorded the related unrealized gains
as contributions to additional paid-in capital of a total of $77.8 million
during the three months ended March 31, 2000, representing the difference
between the carrying value and the fair value of the portion of our investments
that have been deemed to have been sold by the investees.
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<PAGE> 14
Pro Forma Results of Operations
Pro forma information regarding our results, which excludes amortization of
goodwill and other intangibles, stock-based compensation, equity in losses of
equity-method investees and merger, acquisition and investment-related costs, is
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
---- ----
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Pro forma loss from operations ........... $ (99,266) $ (30,571)
Pro forma net loss ....................... $(121,535) $ (36,334)
Pro forma basic and diluted loss per share $ (0.35) $ (0.12)
Shares used in computation of pro forma
basic and diluted loss per share ......... 343,884 313,794
</TABLE>
Presentation of pro forma results from operations on the face of the
financial statements is not in conformity with generally accepted accounting
principles. However, we are providing pro forma results of operations for
informational purposes. The pro forma results are derived from information
recorded in our financial statements.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000 the Company's total cash and marketable securities balance
was $1.01 billion compared to $706.2 million at December 31, 1999.
Net cash used in operating activities was $320.5 million and $17.2 million
for the three-month periods ended March 31, 2000 and 1999. Our net operating
cash flow for the three months ended March 31, 2000 was primarily a result of
our operating loss and the payment of accounts payable related to product sold
during the fourth quarter of 1999. For further information regarding our
operating cash flows, see the Statements of Cash Flows included in our unaudited
interim financial statements.
Net cash used in investing activities was $393.5 million and $1.1 billion
for the three-month periods ended March 31, 2000 and 1999, and consisted of net
purchases of marketable securities, purchases of fixed assets, and, in 2000,
cash paid for equity investments. Cash available for investment purposes
increased substantially in both 2000 and 1999 as a result of the issuance of the
PEACS and Convertible Notes.
Net cash provided by financing activities of $681 million and $1.1 billion
for the three-month periods ended March 31, 2000 and 1999, was primarily a
result of the issuance of the PEACS and Convertible Notes in 2000 and 1999.
Proceeds from these sales of debt were offset in both periods by financing costs
incurred in connection with the issuance of this debt.
As of March 31, 2000, the Company's principal commitments consisted of
obligations outstanding under the PEACS, Convertible Notes, 10% Senior Discount
Notes due May 2008 (the "Senior Discount Notes") and leases of property and
equipment. The Company believes that current cash and marketable securities
balances will be sufficient to meet its anticipated cash needs for at least the
next 12 months and that it will generate positive cash flow from operations over
the final three quarters of fiscal 2000 combined. However, any projections of
future cash flows are subject to substantial uncertainty. See "Additional
Factors That May Affect Future Results." If current cash, marketable securities
and cash that may be generated from operations are insufficient to satisfy the
Company's liquidity requirements, the Company may seek to sell additional equity
or debt securities or to obtain a line of credit. The sale of additional equity
or convertible debt securities could result in additional dilution to the
Company's stockholders. In addition, the company will, from time to time,
consider the acquisition of or investment in complementary businesses, products,
services and technologies, and the repurchase and retirement of debt, which
might impact the Company's liquidity requirements or cause the Company to issue
additional equity or debt securities. There can be no assurance that financing
will be available in amounts or on terms acceptable to the Company, if at all.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the factors discussed in the "Overview" and "Liquidity and
Capital Resources" sections of this "Management's Discussion and Analysis of
Financial Condition and Results of Operations", the following additional factors
may affect the Company's future results:
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WE HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU CAN EVALUATE OUR BUSINESS AND
PROSPECTS
We have a relatively short operating history upon which you can evaluate our
business and prospects. You should consider our prospects in light of the risks,
expenses and difficulties frequently encountered by online commerce companies.
As an online commerce company, we have a rapidly evolving and unpredictable
business model, we face intense competition, we must effectively manage our
growth, and we must respond quickly to rapid changes in customer demands and
industry standards. We may not succeed in addressing these challenges and risks.
WE HAVE AN ACCUMULATED DEFICIT AND ANTICIPATE FURTHER LOSSES
We have incurred significant losses since we began doing business. As of
March 31, 2000, we had an accumulated deficit of $1.19 billion. We anticipate at
June 30, 2000 that total shareholders' equity will be a deficit. While we expect
to generate income on a pro forma operating basis in our US Books, Music and
DVD/video segment for the full year in 2000, we are incurring substantial
operating losses and will continue to incur such losses for the foreseeable
future. These losses may be significantly higher than our current losses. To
succeed, we must invest heavily in marketing and promotion and in developing our
product offerings and technology and operating infrastructure. In today's tight
labor market we could be forced to increase our cash compensation to employees
which could hurt our operating results. In addition, the expenses associated
with our recent and future acquisitions and investments and interest expense
related to our outstanding debt securities will adversely affect our operating
results. Our aggressive pricing programs have resulted in relatively low gross
margins. Our historical revenue growth rates are not sustainable and our
percentage growth rate will decrease in the future.
OUR SIGNIFICANT AMOUNT OF INDEBTEDNESS COULD AFFECT OUR BUSINESS
We have significant indebtedness. As of March 31, 2000, we had indebtedness
under senior discount notes, convertible notes, capitalized lease obligations
and other asset financing totaling approximately $2.15 billion. We may incur
substantial additional debt in the future. Our indebtedness could:
o make it difficult to make principal and interest payments on our
debt,
o make it difficult to obtain necessary additional financing for
working capital, capital expenditures, debt service requirements
or other purposes in the future,
o limit our flexibility in planning for, or reacting to, changes in
our business and competition, and
o make it more difficult for us to react in the event of an economic
downturn.
We may not be able to meet our debt service obligations. If our cash flow is
inadequate to meet our obligations, we may face substantial liquidity problems.
If we are unable to generate sufficient cash flow or obtain funds for required
payments, or if we fail to comply with other covenants in our indebtedness, we
will be in default. This would permit our creditors to accelerate the maturity
of our indebtedness. In addition, our PEACS are denominated in euros, not
dollars, and the exchange ratio between the euro and the dollar is not fixed by
the indenture governing the PEACS. Therefore, fluctuations in the euro/dollar
exchange ratio may adversely affect us, including by potentially triggering
certain reset provisions in the PEACS that would lower the conversion price.
WE CANNOT ACCURATELY FORECAST REVENUES OF OUR BUSINESS. WE MAY EXPERIENCE
SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS. OUR BUSINESS IS
SUBJECT TO SEASONAL FLUCTUATION. FUTURE FLUCTUATIONS IN OPERATING RESULTS OR
REVENUE SHORTFALLS COULD ADVERSELY AFFECT OUR SUCCESS
Due to our limited operating history and the unpredictability of our
industry, we cannot accurately forecast our revenues. We base our current and
future expense levels on our investment plans and estimates of future revenues.
Our expenses are to a large extent fixed. We may not be able to adjust our
spending quickly if our revenues fall short of our expectations. Further, we may
make pricing, purchasing, service, marketing, acquisition, investment or
financing decisions that could adversely affect our business results.
Our quarterly operating results will fluctuate for many reasons, including:
o our ability to retain existing customers, attract new customers
and satisfy our customers' demands,
o our ability to acquire merchandise, manage our inventory and
fulfill orders,
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o changes in gross margins of our current and future products,
services and markets,
o our ability to introduce, and the timing of introductions by us
and our competitors of products or services, and our ability to
properly anticipate demand,
o purchases of large quantities of products, particularly in advance
of the holidays, for which demand may not materialize,
o introduction of our new Web sites, services and products or those
of competitors,
o termination of Web sites, service offerings and/or product sales
that we determine are not viable,
o changes in usage of the Internet and online services and consumer
acceptance of the Internet and online commerce,
o timing of upgrades and developments in our systems and
infrastructure,
o the level of traffic on our Web sites,
o the effects of acquisitions and other business combinations, and
our ability to successfully integrate those acquisitions and
business combinations,
o technical difficulties, system downtime or Internet brownouts,
o the mix of products we sell,
o the mix of revenues derived from products as compared to services,
o our inability to prevent fraud perpetrated by third parties
through credit card transactions, Amazon Payments transactions,
and auction and zShops transactions,
o our level of merchandise and vendor returns, and
o disruptions in service by common shipping carriers due to strikes
or otherwise.
Both seasonal fluctuations in Internet usage and traditional retail
seasonality are likely to affect our business. Internet usage generally declines
during the summer. Sales in the traditional retail book, music, DVD/video, toy,
electronics and tools and hardware industries usually increase significantly in
the fourth calendar quarter of each year. The fourth quarter seasonal impact may
be even more pronounced in our toys, electronics and video games businesses.
For these reasons, you should not rely on period-to-period comparisons of
our financial results to forecast our future performance. Our future operating
results may fall below the expectations of securities analysts or investors,
which would likely cause the trading price of our common stock to decline.
WE COULD LOSE SUBSTANTIAL MARKET SHARE IF WE DO NOT KEEP UP WITH THE INTENSE
COMPETITION IN THE ONLINE COMMERCE MARKET
The online commerce market is new, rapidly evolving and intensely
competitive. In addition, the retail book, music, DVD/video, toy, electronics,
software, video game, tools and hardware, lawn and patio and kitchen industries
are intensely competitive. Our current or potential competitors include:
o online vendors of books, music, DVDs, videos, toys, electronics,
software, video games, tools and hardware, lawn and patio
products, kitchen products and other products,
o a number of indirect competitors, including Web portals and Web
search engines, that are involved in online commerce, either
directly or in collaboration with other retailers,
o online auction services,
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o Web-based retailers using alternative distribution capabilities,
and
o publishers, distributors, manufacturers and physical-world
retailers of our products, many of which possess significant brand
awareness, sales volume and customer bases, and some of which
currently sell, or may sell, products or services through the
Internet, mail order or direct marketing.
We believe that the principal competitive factors in our market include
brand recognition, selection, personalized services, convenience, price,
accessibility, customer service, quality of search tools, quality of editorial
and other Web site content, reliability, speed of fulfillment, ease of use and
our ability to adapt to changing conditions.
Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than we have. They may be able
to secure merchandise from vendors on more favorable terms and may be able to
adopt more aggressive pricing or inventory policies. They also can devote more
resources to technology development and marketing than we can.
As the online commerce market continues to grow, other companies may enter
into business combinations or alliances that strengthen their competitive
positions. Competition in the Internet and online commerce markets will
intensify. As various Internet market segments obtain large, loyal customer
bases, participants in those segments may use their market power to expand into
the markets in which we operate. In addition, new and expanded Web technologies
may increase the competitive pressures on online retailers. The nature of the
Internet as an electronic marketplace may facilitate competitive entry and
comparison shopping and render it inherently more competitive than conventional
retailing formats. For example, "shopping agent" technologies permit customers
to quickly compare our prices with those of our competitors. This increased
competition may reduce our operating margins, diminish our market share or
impair the value of our brand.
SYSTEM INTERRUPTIONS AND THE LACK OF INTEGRATION AND REDUNDANCY IN OUR SYSTEMS
MAY AFFECT THE VOLUME OF ORDERS WE FULFILL AND THEREFORE OUR REVENUES, AND MAY
HAVE AN ADVERSE IMPACT ON THE VALUE OF OUR BRAND
Customer access to our Web sites directly affects the volume of orders we
fulfill and thus affects our revenues. We experience occasional system
interruptions that make our Web sites unavailable or prevent us from efficiently
fulfilling orders, which may reduce the volume of goods we sell and the
attractiveness of our products and services. These interruptions will continue.
We need to add additional software and hardware and upgrade our systems and
network infrastructure to accommodate both increased traffic on our Web sites
and increased sales volume and to fully integrate our systems. Without these
upgrades, we may face additional system interruptions, slower response times,
diminished customer service, impaired quality and speed of order fulfillment and
delays in our financial reporting. We cannot accurately project the rate or
timing of any increases in traffic or sales volume on our Web sites and,
therefore, the integration and timing of these upgrades are uncertain. In
addition, our inventory management systems are not fully integrated with our
financial reporting systems, and a significant amount of manual effort may be
necessary to reconcile our inventory and other financial accounts.
We maintain substantially all of our computer and communications hardware at
a single leased facility in Seattle, Washington. Our systems and operations
could be damaged or interrupted by fire, flood, power loss, telecommunications
failure, break-ins, earthquake and similar events. We do not have backup systems
or a formal disaster recovery plan, and we may not have sufficient business
interruption insurance to compensate us for losses from a major interruption.
Computer viruses, physical or electronic break-ins and similar disruptions could
cause system interruptions, delays and loss of critical data and could
significantly diminish our reputation and brand name and prevent us from
providing services and accepting and fulfilling customer orders.
OUR PLANNED GROWTH WILL CONTINUE TO PLACE A SIGNIFICANT STRAIN ON OUR
MANAGEMENT, OPERATIONAL AND FINANCIAL RESOURCES
We have rapidly and significantly expanded our operations and will further
expand our operations to address potential growth of our product and service
offerings and customer base. This expansion will continue to place a significant
strain on our management, operational and financial resources. We need to
continue to successfully execute our expansion of our distribution centers and
customer service centers and continue to improve our transaction-processing and
operational and financial systems, procedures and controls. We also need to
expand, train and manage our employee base. Our current and planned personnel,
systems, procedures and controls may not be adequate to support and effectively
manage our future operations. We may not be able to hire, train, retain,
motivate and manage required personnel or to successfully identify, manage and
exploit market opportunities, which may limit our growth.
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WE FACE SIGNIFICANT INVENTORY RISK ARISING OUT OF CHANGES IN CONSUMER DEMAND AND
PRODUCT CYCLES. WE FACE ADDITIONAL INVENTORY RISKS BECAUSE OUR INVENTORY
MANAGEMENT SYSTEMS ARE NOT WELL INTEGRATED DUE TO THE MANUAL NATURE OF SOME OF
OUR OPERATIONAL PROCESSES
We are exposed to significant inventory risks as a result of seasonality,
new product launches, rapid changes in product cycles and changes in consumer
tastes with respect to our products. In order to be successful, we must
accurately predict these trends and avoid overstocking or understocking
products. Demand for products, however, can change significantly between the
time inventory is ordered and the date of sale. In addition, when we begin
selling a new product, it is particularly difficult to forecast product demand
accurately. These issues are particularly pronounced with respect to our
inventory of products that are based on current trends. A failure to optimize
inventory will harm our shipping margins by requiring us to make partial
shipments from one or more locations.
We may also be exposed to inventory risk if we are unable to negotiate
satisfactory terms and conditions with our manufacturers, distributors and other
suppliers. The acquisition of certain types of inventory, or inventory from
certain sources, may require a significant lead-time and pre-payment, and such
inventory may not be returnable. We carry a broad selection and significant
inventory levels of products, and we may be unable to sell products in
sufficient quantities or during the relevant selling seasons.
We are also exposed to significant inventory risks because our inventory
forecasting, purchasing, receiving, reconciliation, accounting and payment
systems are not well developed and are not well integrated. The lack of systems
integration makes it a difficult and manual process to receive inventory,
reconcile inventory invoices to purchase orders, account for inventory
efficiently, request refunds from suppliers and pay supplier invoices. In
addition, certain manual operational processes further complicate our ability to
manage inventory efficiently.
Any one of the factors set forth above may require us to mark-down or
write-off inventory. Substantial inventory mark-downs or write-offs will
decrease gross margins. In the fourth quarter of 1999, for example, we incurred
inventory-related charges that significantly decreased our gross margins.
ENTERING NEW BUSINESS AREAS WILL REQUIRE SIGNIFICANT EXPENSE AND COULD STRAIN
MANAGEMENT, FINANCIAL AND OPERATIONAL RESOURCES
We intend to expand our operations by promoting new or complementary
products, services or sales formats and by expanding our product or service
offerings. This will require significant additional expense and could strain our
management, financial and operational resources. We cannot expect to benefit in
these new markets from the first-to-market advantage that we experienced in the
online book market. Our gross margins in these new business areas may be lower
than our existing business activities. In addition, we may have limited or no
experience in these new business areas. We may not be able to expand our
operations in a cost-effective or timely manner. Any new business that our
customers do not receive favorably could damage our reputation and brand name.
IF WE DO NOT SUCCESSFULLY EXPAND AND OPERATE OUR DISTRIBUTION CENTERS, OUR
BUSINESS COULD BE HARMED
If we do not successfully expand and our distribution centers fail to
operate properly, it could significantly limit our ability to meet customer
demand. During the fiscal year ended December 31, 1999, we added distribution
centers in Nevada, Georgia, Kentucky, Kansas, North Dakota, Germany and the UK.
Most of these distribution centers are or will be highly automated, and we have
had limited experience with automated distribution centers. The two distribution
centers we operated prior to 1999, in Washington and Delaware, are manually
operated. We are not experienced in coordinating and managing distribution
operations in geographically distant locations. Because it is difficult to
predict sales increases, we may over-expand our facilities, which may result in
excess inventory, warehousing, fulfillment and distribution capacity. We need to
retain flexibility within our distribution and logistics network, including the
ability to manage the operational challenges of shipping non-uniform and heavy
products as part of the fulfillment of toy, electronics, tools and hardware,
lawn and patio and other product orders.
THE DISPROPORTIONATE AMOUNT OF OUR NET SALES THAT WE EXPECT TO REALIZE DURING
THE FOURTH QUARTER OF OUR FISCAL YEAR PLACES SIGNIFICANT STRAIN ON OUR BUSINESS
Because we expect a disproportionate amount of our net sales to be realized
during the holiday season in the fourth quarter of our fiscal year, we face
significant risks in the fourth quarter. We may fail to accurately predict the
optimal inventory levels at our distribution centers for the fourth quarter. If
we do not stock popular products in sufficient amounts during the fourth quarter
and fail to meet customer demand, it could significantly impact our revenue and
our future growth. If we overstock products, we may be required to take
significant inventory mark-downs or write-offs, which could reduce gross
margins. In the fourth quarter of 1999, we incurred inventory-related charges,
which significantly decreased our gross margins. A failure to optimize inventory
at our distribution centers will harm our shipping margins by requiring us to
make partial shipments from one or more locations. In addition, we may
experience a decline in our shipping margins due to complimentary upgrades and
split-shipments necessary to ensure timely delivery
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for the holiday season. If too many customers access our Web sites within a
short period of time due to increased holiday demand, we may experience system
interruptions that make our Web sites unavailable or prevent us from efficiently
fulfilling orders, which may reduce the volume of goods we sell and the
attractiveness of our products and services, and may also harm our brand. In
addition, we may be unable to adequately staff our distribution and customer
service centers during these peak periods. Finally, our new automated
distribution centers may fail to operate properly, which will interfere with our
ability to meet customer demand.
WE MAY NOT BE SUCCESSFUL IN OUR EFFORTS TO EXPAND INTO INTERNATIONAL MARKETS
We plan to expand our presence in international markets. We have relatively
little experience in purchasing, marketing and distributing products or services
for these markets and may not benefit from any first-to-market advantages. It
will be costly to establish international facilities and operations, promote our
brand internationally, and develop localized Web sites and stores and other
systems. We may not succeed in our efforts in these countries. Our revenues from
international activities may not offset the expense of establishing and
maintaining foreign operations and therefore may never be profitable.
Our international sales and operations are subject to a number of risks
inherent in selling and operating abroad, including, but not limited to, risks
with respect to:
o currency exchange rate fluctuations,
o local economic and political conditions,
o disruptions of capital and trading markets,
o restrictive governmental actions (such as restrictions on transfer
of funds and trade protection measures, including export duties
and quotas and custom duties and tariffs),
o changes in legal or regulatory requirements,
o import or export licensing requirements,
o limitations on the repatriation of funds,
o difficulty in obtaining distribution and support,
o nationalization,
o laws and policies of the US affecting trade, foreign investment
and loans, and
o tax and other laws.
As the international online commerce market continues to grow, competition
in this market will likely intensify. We may have to compete with local
companies who understand the local markets better than we do and who have better
local brand name recognition than we do. In addition, governments in foreign
jurisdictions may regulate the Internet or other online services in such areas
as content, privacy, network security, encryption or distribution. This may
affect our ability to conduct business internationally. We may not be able to
hire, train, retain, motivate and manage required personnel, which may limit our
growth in international markets.
OUR BUSINESS COULD SUFFER IF WE ARE UNSUCCESSFUL IN MAKING AND INTEGRATING
BUSINESS COMBINATIONS AND STRATEGIC ALLIANCES, INCLUDING THOSE ASSOCIATED WITH
THE AMAZON COMMERCE NETWORK
We plan to continue to expand our operations and market presence by entering
into business combinations, investments, joint ventures or other strategic
alliances with other companies. During the three months ended March 31, 2000, we
entered into several transactions whereby we received equity securities of other
companies in exchange for agreeing to jointly establish co-branded sections of
the Amazon Web site for the sale of products and services. Business
combinations, investments, joint ventures and other strategic alliances with
other companies create risks such as:
o difficulty assimilating the operations, technology and personnel
of combined companies,
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<PAGE> 20
o disruption of our ongoing business, including loss of management
focus on existing businesses and other market developments,
o problems retaining key technical and managerial personnel,
o expenses associated with amortization of goodwill and other
purchased intangible assets,
o additional operating losses and expenses of acquired businesses,
o impairment of relationships with existing employees, customers and
business partners, and
o fluctuations in value and losses that may arise from our equity
investments.
We may not succeed in addressing these risks.
As part of our business strategy, we intend to increase the number of our
strategic investments and alliances with online commerce businesses and other
companies pursuant to which they pay us licensing or other fees, such as fees to
establish co-branded stores on our Web sites or to participate in our auction or
zShops services. While we believe these arrangements will have a positive impact
on our results of operations, particularly our gross margins, this strategy may
not be successful and these transactions create additional risk. For example,
for strategic alliances where we create a co-branded store on our Web site, we
may experience difficulty integrating the other company's systems to create a
seamless customer experience, the other company may be unable to pay amounts
owed to us in the future and we may suffer harm to our brand if the other
company fails to meet our standards for customer service, Web site performance
and privacy, which would decrease customer satisfaction with our Web sites. In
addition, because we often receive a portion of our fees for establishing a
co-branded store in the form of equity securities of the other company, we may
never realize the full value of that portion of our fee. In many cases, we
account for these investments under the equity method and, to the extent these
investees continue to recognize net losses, we will recognize our share of these
net losses. The fair values of these investments are subject to significant
volatility.
We may not be able to make business combinations and strategic investments
that are acceptable to us. If not, our gross margins may not improve. In
addition, the businesses we have acquired, and in the future may acquire, may
incur operating losses.
WE MAY NOT BE ABLE TO ADAPT QUICKLY ENOUGH TO CHANGING CUSTOMER REQUIREMENTS AND
INDUSTRY STANDARDS
Technology in the online commerce industry changes rapidly. We may not be
able to adapt quickly enough to changing customer requirements and preferences
and industry standards. Competitors often introduce new products and services
with new technologies. These changes and the emergence of new industry standards
and practices could render our existing Web sites and proprietary technology
obsolete. To succeed, we must enhance our Web site responsiveness, functionality
and features, acquire and license leading technologies, enhance our existing
services, develop new services and technology and respond to technological
advances and emerging industry standards and practices on a cost-effective and
timely basis.
THE LOSS OF KEY SENIOR MANAGEMENT PERSONNEL COULD NEGATIVELY AFFECT OUR BUSINESS
We depend on the continued services and performance of our senior management
and other key personnel, particularly Jeffrey P. Bezos, our chief executive
officer and chairman of the board. We do not have "key person" life insurance
policies. The loss of any of our executive officers or other key employees could
harm our business.
THE LONG-TERM VIABILITY OF THE INTERNET AS A MEDIUM FOR COMMERCE IS NOT CERTAIN
Consumer use of the Internet as a medium for commerce is a recent
phenomenon and is subject to a high level of uncertainty. While the number of
Internet users has been rising, the Internet infrastructure may not expand fast
enough to meet the increased levels of demand. The increased use of the
Internet as a medium for commerce raises concerns regarding Internet security,
reliability, pricing, accessibility and quality of service. If use of the
Internet does not continue to grow, or grows at a slower rate than we
anticipate, or if the necessary Internet infrastructure or complementary
services are not developed to effectively support growth that may occur, our
business would be harmed.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS IF PEOPLE OR PROPERTY ARE HARMED
BY THE PRODUCTS WE SELL
As we enter new lines of business, we may increasingly sell products, such
as toys and tools and hardware products, that may increase our exposure to
product liability claims relating to personal injury, death or property damage
caused by such products, and that may require us to take actions such as product
recalls. We maintain liability insurance, but we cannot be certain that our
coverage will be adequate for liabilities actually incurred or that insurance
will continue to be available to us on economically reasonable terms, if at all.
In addition, some of our vendor agreements with our suppliers do not indemnify
us from product liability.
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WE RELY ON A SMALL NUMBER OF SUPPLIERS; OUR BUSINESS WOULD BE HARMED IF OUR
CURRENT SUPPLIERS STOP SELLING MERCHANDISE TO US ON ACCEPTABLE TERMS
Although we have recently continued to increase our direct purchasing from
manufacturers, approximately 33% of all of our purchases during the three months
ended March 31, 2000 were from three major vendors, Ingram Book Group, Baker &
Taylor, Inc. and Valley Media, Inc., from which we purchase book, music, DVD and
video titles. We do not have long-term contracts or arrangements with most of
our vendors to guarantee the availability of merchandise, particular payment
terms or the extension of credit limits. Our current vendors may stop selling
merchandise to us on acceptable terms. We may not be able to acquire merchandise
from other suppliers in a timely and efficient manner and on acceptable terms.
WE MAY NOT BE ABLE TO ACQUIRE OR MAINTAIN APPROPRIATE DOMAIN NAMES
We hold rights to various Web domain names, including "Amazon.com,"
"Amazon.co.uk," "Amazon.de" and "zShops.com." Governmental agencies typically
regulate domain names. These regulations are subject to change. We may not be
able to acquire or maintain appropriate domain names in all countries in which
we do business. Furthermore, regulations governing domain names may not protect
our trademarks and similar proprietary rights. We may be unable to prevent third
parties from acquiring domain names that are similar to, infringe upon or
diminish the value of our trademarks and other proprietary rights.
GOVERNMENT REGULATION OF INTERNET COMMERCE IS EVOLVING AND UNFAVORABLE CHANGES
COULD HARM OUR BUSINESS
We are subject to general business regulations and laws or regulations
regarding taxation and access to online commerce. These laws or regulations may
impede the growth of the Internet or other online services. Regulatory
authorities may adopt specific laws and regulations governing the Internet or
online commerce. These regulations may cover taxation, user privacy, pricing,
content, copyrights, distribution, electronic contracts, and characteristics and
quality of products and services. Changes in consumer protection laws also may
impose additional burdens on companies conducting business online, both in the
US and internationally. It is not clear how existing laws governing issues such
as property ownership, sales and other taxes, libel and personal privacy apply
to the Internet and online commerce. Unfavorable resolution of these issues may
harm our business.
In addition, many states currently regulate "auctions" and "auctioneers" in
conducting auctions and may regulate online auction services. States may also
regulate consumer-to-consumer fixed price online markets, like zShops. This
could, in turn, diminish the demand for our products and services and increase
our cost of doing business.
WE COULD BE REQUIRED TO COLLECT TAXES ON THE PRODUCTS WE SELL
In accordance with current industry practice, we do not currently collect
sales taxes or other taxes with respect to shipments of goods into states other
than Washington. In addition, we collect Value Added Tax, or VAT, for products
that are ordered on www.amazon.co.uk and www.amazon.de and shipped into European
Union member countries. Our new distribution center and customer service center
networks, and any future expansion of those networks, along with other aspects
of our evolving business, may result in additional sales and other tax
obligations. One or more states or foreign countries may seek to impose sales or
other tax collection obligations on out-of-jurisdiction companies which engage
in electronic commerce as we do. A successful assertion by one or more states or
foreign countries that we should collect sales or other taxes on the sale of
merchandise could result in substantial tax liabilities for past sales, decrease
our ability to compete with traditional retailers and otherwise harm our
business.
Recent federal legislation limits the imposition of US state and local taxes
on Internet-related sales. In 1998, Congress passed the Internet Tax Freedom
Act, which places a three-year moratorium on state and local taxes on Internet
access, unless such tax was already imposed prior to October 1, 1998, and on
discriminatory taxes on electronic commerce. There is a possibility that
Congress may not renew this legislation in 2001. If Congress chooses not to
renew this legislation, US state and local governments would be free to impose
new taxes on electronically purchased goods. The imposition of taxes on goods
sold over the Internet by US state and local governments would create
administrative burdens for us and could reduce one competitive advantage that
the purchase of goods over the Internet now possesses.
The European Commission is currently evaluating its VAT position on
electronic commerce transactions. It is possible that future VAT legislation in
the European Union or changes to our business model may result in additional VAT
collection obligations and administrative burdens.
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WE COULD BE LIABLE FOR UNLAWFUL OR FRAUDULENT ACTIVITIES BY USERS OF OUR
AUCTION, ART AND COLLECTIBLES, AND zSHOPS SERVICES
We may be unable to prevent users of our auction, art and collectibles, and
zShops services from selling unlawful goods, or from selling goods in an
unlawful manner. We may face civil or criminal liability for unlawful and
fraudulent activities by our users. Any costs we incur as a result of liability
relating to the sale of unlawful goods, the unlawful sale of goods, the
fraudulent receipt of goods or the fraudulent collection of payments could harm
our business.
In running our auction, art and collectibles and zShops services, we rely on
sellers of goods to make accurate representations and provide reliable delivery
and on buyers to pay the agreed purchase price. For our auction, art and
collectibles, and zShops services, we do not take responsibility for delivery of
payment or goods and while we can suspend or terminate the accounts of users who
fail to fulfill their delivery obligations to other users, we cannot require
users to make payments or deliver goods. We do not compensate users who believe
they have been defrauded by other users except through our guarantee program.
Under the guarantee program, fraudulent activities by our users, such as the
fraudulent receipt of goods and the fraudulent collection of payments, may
create liability for us. In addition, we are aware that governmental agencies
are currently investigating the conduct of online auctions.
WE COULD BE LIABLE FOR BREACHES OF SECURITY ON OUR WEB SITE AND FRAUDULENT
ACTIVITIES OF USERS OF OUR AMAZON PAYMENTS PROGRAM
A fundamental requirement for electronic commerce is the secure transmission
of confidential information over public networks. Although we have developed
systems and processes to prevent fraudulent credit card transactions and other
security breaches, failure to mitigate such fraud or breaches may impact our
financial results.
The law relating to the liability of providers of online payment services is
currently unsettled. We guarantee payments made through Amazon Payments up to
certain limits for both buyers and sellers, and we may be unable to prevent
users of Amazon Payments from fraudulently receiving goods when payment may not
be made to a seller or fraudulently collecting payments when goods may not be
shipped to a buyer. Our liability risk will increase as a larger fraction of our
sellers use Amazon Payments. Any costs we incur as a result of liability because
of our guarantee of payments made through Amazon Payments or otherwise could
harm our business. In addition, the functionality of Amazon Payments depends on
certain third-party vendors delivering services. If these vendors are unable or
unwilling to provide services, Amazon Payments will not be viable (and our
businesses that use Amazon Payments may not be viable).
WE COULD BE SUBJECT TO RISKS ASSOCIATED WITH INFORMATION POSTED ON OUR WEB SITE
BY THIRD PARTIES
Our Web site features customer reviews of the products we sell and customer
ratings of sellers on our auctions and zShops sites. Although these reviews and
ratings are generated by customers and not by us, it is possible that a claim
could be made against us for reviews and ratings posted on our Web site. If we
become liable for information posted on our Web site by customers, we could be
harmed and may be forced to discontinue certain services.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR MAY
BE ACCUSED OF INFRINGING INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES
We regard our trademarks, service marks, copyrights, patents, trade dress,
trade secrets, proprietary technology and similar intellectual property as
critical to our success, and we rely on trademark, copyright and patent law,
trade secret protection and confidentiality and/or license agreements with our
employees, customers, partners and others to protect our proprietary rights. We
have been issued a number of trademarks, service marks, patents and copyrights
by US and foreign governmental authorities. We also have applied for the
registration of some other trademarks, service marks, copyrights and patents in
the US and internationally. In addition, we have filed US and international
patent applications covering certain of our proprietary technology. Effective
trademark, service mark, copyright, patent and trade secret protection may not
be available in every country in which our products and services are made
available online. The protection of our intellectual property may require the
expenditure of significant financial and managerial resources.
Third parties that license our proprietary rights, such as trademarks,
patented technology or copyrighted material, may take actions that diminish the
value of our proprietary rights or reputation. In addition, the steps we take to
protect our proprietary rights may not be adequate and third parties may
infringe or misappropriate our copyrights, trademarks, trade dress, patents and
similar proprietary rights. Other parties may claim that we infringed their
proprietary rights. We have been subject to claims, and expect to continue to be
subject to legal proceedings and claims, regarding alleged infringement by our
licensors and us of the trademarks and other intellectual property rights of
third parties. Such claims, whether or not meritorious, may result in the
expenditure of significant financial and
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managerial resources, injunctions against us or the imposition of damages that
we must pay. We may need to obtain a license from third parties who allege that
we have infringed their rights, but such license may not be available on terms
acceptable to us, or at all.
OUR STOCK PRICE IS HIGHLY VOLATILE
The trading price of our common stock fluctuates significantly. For example,
during the 52-week period ended March 31, 2000 (as adjusted for the 2-for-1
split of our common stock on September 1, 1999), the reported sale price of our
common stock on the NASDAQ National Market was as high as $113.00 and as low as
$41.00 per share. Trading prices of our common stock may fluctuate in response
to a number of events and factors, such as:
o quarterly variations in operating results,
o announcements of innovations,
o new products, services and strategic developments by us or our
competitors, or business combinations and investments by us or our
competitors,
o changes in our operating expense levels or losses,
o changes in financial estimates and recommendations by securities
analysts,
o changes in interest rates or other general economic conditions,
o performance by other online commerce companies, and
o news reports relating to trends in the Internet, book, music,
DVD/video, toys, electronics, software, video game, tools and
hardware, lawn and patio products, kitchen products, auctions,
consumer-to-consumer fixed price online markets, or other product
or service industries.
Any of these events may cause our stock price to fall, which may adversely
affect our business and financing opportunities. In addition, the stock market
in general and the market prices for Internet-related companies in particular
have experienced significant volatility that often has been unrelated to such
companies' operating performance. These broad market and industry fluctuations
may adversely affect the trading price of our common stock regardless of our
operating performance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The Company is exposed to market risk for the impact of interest rate
changes, foreign currency fluctuations and changes in the market values of its
investments.
Interest rate risk. The Company's exposure to market risk for changes in
interest rates relates primarily to the Company's investment portfolio and its
long-term debt. All of the Company's marketable securities are designated as
available-for sale and accordingly are presented at fair value on the balance
sheets. The Company has not utilized derivative financial instruments in its
investment portfolio. The Company generally invests its excess cash in high
quality short- to intermediate-term fixed income securities and money market
mutual funds. Fixed rate securities may have their fair market value adversely
impacted due to a rise in interest rates and the Company may suffer losses in
principal if forced to sell securities which have declined in market value due
to changes in interest rates.
Foreign currency risk. Revenues from the Company's foreign subsidiaries
accounted for 13% of total revenues for the three months ended March 31, 2000.
Sales made by the Company's foreign subsidiaries are typically denominated in
the local currency of each country. These subsidiaries also incur most of their
expenses in the local currency. Accordingly, all foreign subsidiaries use the
local currency as their functional currency. The Company is also exposed to
foreign exchange rate fluctuations as the financial results of foreign
subsidiaries are translated into US dollars in consolidation. As exchange rates
vary, these results, when translated, may vary from expectations and adversely
impact overall expected profitability. The effect of foreign exchange rate
fluctuations on the Company in the quarter ended March 31, 2000 was not
material. At March 31, 2000, the Company was also exposed to foreign currency
risk related to the euro-denominated PEACS, which have an outstanding principal
balance of E690 million and expose the Company to risks of fluctuations in the
euro/US dollar exchange rate. At March 31, 2000, the Company held E691.9 million
($665
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million) in a euro-denominated money market fund, which provides offsetting
changes in exchange rate fluctuations. Additionally, because the conversion
option in the PEACS is denominated in euros, changes in the euro/US dollar
exchange rate may affect the future conversion of the debt, including by
potentially triggering reset provisions in the PEACS that would lower the
conversion price.
Investment risk. The Company invests in both private and public companies,
including its ACN partners, primarily for strategic purposes. Such investments
are accounted for under the equity method if they give the Company the ability
to exercise significant influence, but not control, over an investee. This is
generally defined as an ownership interest of the voting stock of the investee
of between 20% and 50%, although other factors, such as representation on the
investee's Board of Directors, are considered in determining whether the equity
method is appropriate. Some of the Company's cost-method investments are in
private companies and are accounted for at cost and others are in public
companies and are accounted for as available-for-sale securities and recorded at
fair value. The Company regularly reviews the carrying value of its investments
and identifies and records impairment losses when events and circumstances
indicate that such assets are permanently impaired. To date, the Company has not
recorded any such impairment losses. As of March 31, 2000, the Company had
equity-method investments of $271.5 million, investments in private companies
recorded under the cost method of $68.7 million, and available-for-sale equity
securities at fair value totaling $117.1 million ($35.0 million of which was
included in marketable securities and $82.1 million of which was included in
other investments). All of these investments are in companies involved in the
Internet and e-commerce industries and their fair values are subject to
significant fluctuations due to volatility of the stock market and changes in
general economic conditions.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the first quarter of 2000, Supnick v. Amazon.com and Alexa Internet
and four similar class action complaints were filed against the Company and its
wholly owned subsidiary, Alexa Internet. The complaints, which are currently
being consolidated in the United States District Court for the Western District
of Washington, allege that Alexa Internet's tracking and storage of Internet Web
usage paths violates federal and state statutes prohibiting computer fraud,
unfair competition, and unauthorized interception of private electronic
communications, as well as common law proscriptions against trespass and
invasion of privacy. The complaints seek actual, statutory and punitive damages,
as well as restitution, on behalf of all users of Alexa Internet's Web
navigation service, as well as injunctive relief prohibiting Alexa Internet from
tracking and storing such information or disclosing it to third parties.
Although the Company disputes the allegations of wrongdoing in these complaints,
there can be no assurance that the Company will prevail in these lawsuits.
In addition, the Federal Trade Commission has requested information and
documents regarding Alexa Internet's practices and has opened a formal
investigative file in connection with its inquiry. The Commission is seeking to
determine whether the Company has engaged in unfair or deceptive acts in
connection with the advertisement and operation of certain services provided by
Alexa. The Company is cooperating voluntarily with the Commission's
investigation.
From time to time, the Company is subject to other legal proceedings and
claims in the ordinary course of business, including claims of alleged
infringement of trademarks, copyrights, patents and other intellectual property
rights. The Company currently is not aware of any such legal proceedings or
claims that it believes will have, individually or in the aggregate, a material
adverse effect on its business, prospects, financial condition or operating
results.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On May 10, 2000, the shareholders of Amazon.com, Inc. amended the
Certificate of Incorporation to increase the number of authorized shares of
common stock and preferred stock of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
------ -----
<S> <C>
3.1 Restated Certificate of Incorporation of the Company
4.1 Indenture, dated as of February 16, 2000, between Amazon.com, Inc. and the Bank of New York, as trustee
(incorporated by Reference to the Company's Current Report on Form 8-K dated February 16, 2000)
4.2 Forms of 6 7/8% Convertible Subordinated Notes due 2010 (incorporated by reference to the Company's Current
Report on Form 8-K dated February 28, 2000)
12.1 Computation of Ratio of Earnings to Fixed Charges
27.1 Financial Data Schedule
</TABLE>
- ----------
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(b) Reports on Form 8-K
On February 4, 2000, the Company filed a Form 8-K under Item 5 announcing
the Company's entering into promotional agreements with, and investments in,
drugstore.com, Inc., living.com, Inc., and Greenlight.com, Inc.
On February 7, 2000, the Company filed a Form 8-K under Item 5 announcing
the Company's financial results for the fourth quarter of 1999.
On February 7, 2000, the Company filed a Form 8-K under Item 5 announcing
that it had filed a Preliminary Prospectus Supplement to the Prospectus dated
June 11, 1999 in connection with the issuance of E600,000,000 in principal
amount of Euro Denominated Convertible Subordinated Notes due 2010.
On February 14, 2000, the Company filed a Form 8-K under Item 5 announcing
that it had filed a Final Prospectus Supplement to the Prospectus dated June 11,
1999, and that it had priced its offering of 6.875% of Convertible Subordinated
Notes due 2010.
On February 16, 2000, the Company filed a Form 8-K under Item 5 announcing
the filing of its Underwriting Agreement and Indenture in connection with the
offering of E690,000,000 principal amount of 6.875% of Convertible Subordinated
Notes due 2010.
On February 28, 2000, the Company filed a Form 8-K under Item 5 announcing
that it had completed the sale of its offering of E690,000,000 aggregate
principal amount of 6.875% Convertible Subordinated Notes due 2010. The Company
also announced that its Board of Directors approved an amendment to Section 2.1
of its Bylaws which allows the Board of Directors to set its annual meeting on a
date prior to as well as later than the second Thursday in May.
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<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMAZON.COM, INC. (Registrant)
DATED: May 12, 2000
By: /s/ MARK S. PEEK
---------------------------------
Mark S. Peek
Chief Accounting Officer,
and Vice President, Finance
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<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
------ -----
<S> <C>
3.1 Restated Certificate of Incorporation of the Company
4.1 Indenture, dated as of February 16, 2000, between Amazon.com, Inc. and the Bank of New York, as trustee
(incorporated by Reference to the Company's Current Report on Form 8-K dated February 16, 2000)
4.2 Forms of 6 7/8% Convertible Subordinated Notes due 2010 (incorporated by reference to the Company's Current
Report on Form 8-K dated February 28, 2000)
12.1 Computation of Ratio of Earnings to Fixed Charges
27.1 Financial Data Schedule
</TABLE>
- ----------
29
<PAGE> 1
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
AMAZON.COM, INC.
Amazon.com, Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware, does hereby certify:
1. The original Certificate of Incorporation was filed with the Secretary
of State on May 28, 1996.
2. The following Restated Certificate of Incorporation was duly adopted by
the corporation's Board of Directors in accordance with the provisions of
Section 245 of the General Corporation Law of the State of Delaware and only
restates and integrates and does not further amend the provisions of the
corporation's Certificate of Incorporation as heretofore amended and
supplemented, and there is no discrepancy between those provisions and the
following.
ARTICLE 1. NAME
The name of this corporation is Amazon.com, Inc.
ARTICLE 2. REGISTERED OFFICE AND AGENT
The address of the registered office of this corporation is 1013 Centre
Road, Wilmington, County of New Castle, State of Delaware 19805, and the name of
its registered agent at such address is Corporation Service Company.
ARTICLE 3. PURPOSES
The purpose of this corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE 4. SHARES
The total authorized stock of the corporation shall consist of
5,000,000,000 shares of Common Stock having a par value of $.01 per share and
500,000,000 shares of Preferred Stock having a par value of $.01 per share.
Authority is hereby expressly granted to the Board of Director to fix by
resolution or resolutions any of the designations and the powers, preferences
and rights, and the qualifications, limitations or restrictions which are
permitted by Delaware General Corporation Law in respect
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<PAGE> 2
of any class or classes of stock or any series of any class of stock of the
corporation. The corporation shall from time to time in accordance with the laws
of the State of Delaware increase the authorized amount of its Common Stock if
at any time the number of shares of Common Stock remaining unissued and
available for issuance shall not be sufficient to permit the conversion of
Preferred Stock.
ARTICLE 5. DIRECTORS
The number of Directors of the corporation shall be determined in the
manner provided by the Bylaws and may be increased or decreased from time to
time in the manner provided therein. Written ballots are not required in the
election of Directors.
ARTICLE 6. BY-LAWS
The Board of Directors shall have the power to adopt, amend or repeal the
Bylaws of the corporation; provided, however, the Board of Directors may not
repeal or amend any bylaw that the stockholders have expressly provided may not
be amended or repealed by the Board of Directors. The stockholders shall also
have the power to adopt, amend or repeal the Bylaws for this corporation.
ARTICLE 7. PREEMPTIVE RIGHTS
Preemptive rights shall not exist with respect to shares of stock or
securities convertible into shares of stock of this corporation.
ARTICLE 8. CUMULATIVE VOTING
The right to cumulate votes in the election of Directors shall not exist
with respect to shares of stock of this corporation.
ARTICLE 9. AMENDMENTS TO CERTIFICATE OF INCORPORATION
This corporation reserves the right to amend or repeal, by the affirmative
vote of the holders of a majority of the outstanding shares entitled to vote,
any of the provisions contained in this Certificate of Incorporation. The rights
of the stockholders of the corporation are granted subject to this reservation.
ARTICLE 10. LIMITATION OF DIRECTOR LIABILITY
To the full extent that the Delaware General Corporation Law, as it exists
on the date hereof or may hereafter be amended, permits the limitation or
elimination of the liability of directors, a director of this corporation shall
not be liable to this corporation or its stockholders for monetary damages for
breach of fiduciary duty as a
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<PAGE> 3
director. Any amendment to or repeal of this Article 10 shall not adversely
affect any right or protection of a director of this corporation for or with
respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
ARTICLE 11. ACTION BY STOCKHOLDERS WITHOUT A MEETING
Only action properly brought before the stockholders by or at the direction
of the Board of Directors may be taken without a meeting, without prior notice
and without a vote, if a written consent setting forth the action so taken is
signed by the holders of outstanding shares of capital stock entitled to be
voted with respect to the subject matter thereof having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted.
ARTICLE 12. SPECIAL MEETING OF STOCKHOLDERS
The Chairman of the Board of Directors, the Chief Executive Officer, the
President or the Board of Directors may call special meetings of the
stockholders for any purpose. A special meeting of the stockholders shall be
held if the holders of not less than thirty percent (30%) of all the votes
entitled to be cast on any issue proposed to be considered at such special
meeting have dated, signed and delivered to the Secretary one or more written
demands for such meeting, describing the purpose or purposes for which it is to
be held.
ARTICLE 13. BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS
The corporation expressly elects not to be governed by Section 203(a) of
Title 8 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, the corporation has caused this Restated Certificate of
Incorporation to be signed by its duly authorized officer this 10th day of May,
2000.
AMAZON.COM, INC.
By /s/ L. Michelle Wilson
-----------------------------------
L. Michelle Wilson, Vice President,
Secretary, and General Counsel
Page 3
<PAGE> 1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
EXHIBIT 12.1
<TABLE>
<CAPTION>
Three
months ended
March 31, Year Ended December 31,
2000 1999 1998 1997 1996 1995
---------------------------------------------------------------------------------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net loss $(308,425) $(719,968) $(124,546) $ (31,020) $ (6,246) $ (303)
Equity in losses of equity-method investees 88,264 76,769 2,905 -- -- --
---------------------------------------------------------------------------------
Net loss before equity in losses of
equity-method investees (220,161) (643,199) (121,641) (31,020) (6,246) (303)
---------------------------------------------------------------------------------
Plus fixed charges:
Interest expense including amortization
of debt issuance costs 27,621 84,566 26,639 326 5 --
Assumed interest element included in
rent expense(1) 2,494 4,732 2,833 700 90 4
---------------------------------------------------------------------------------
30,115 89,298 29,472 1,026 95 4
---------------------------------------------------------------------------------
Adjusted earnings (loss) (190,046) (553,901) (92,169) (29,994) (6,151) (299)
Fixed charges (30,115) (89,298) (29,472) (1,026) (95) (4)
---------------------------------------------------------------------------------
$(220,161) $(643,199) $(121,641) $ (31,020) $ (6,246) $ (303)
=================================================================================
</TABLE>
(1) Total rent expense for the period times the Company's estimated
incremental borrowing rate. This is the portion of rental expense which
the Company believes to be representative of interest cost.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AMAZON.COM. INC. FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 84,087
<SECURITIES> 924,794
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 172,257
<CURRENT-ASSETS> 270,949
<PP&E> 400,246
<DEPRECIATION> 65,850
<TOTAL-ASSETS> 2,729,743
<CURRENT-LIABILITIES> 567,165
<BONDS> 2,136,961
0
0
<COMMON> 3,500
<OTHER-SE> 22,117
<TOTAL-LIABILITY-AND-EQUITY> 2,729,743
<SALES> 573,889
<TOTAL-REVENUES> 573,889
<CGS> 445,755
<TOTAL-COSTS> 445,755
<OTHER-EXPENSES> 326,026
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,621
<INCOME-PRETAX> (308,425)
<INCOME-TAX> 0
<INCOME-CONTINUING> (308,425)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (308,425)
<EPS-BASIC> (0.90)<F1>
<EPS-DILUTED> (0.90)
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
