<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 JUNE 30, 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 [ ]
355,864,012 shares of $0.01 par value common stock outstanding as of
July 20, 2000
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AMAZON.COM, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance sheets--June 30, 2000 and December 31, 1999......................................... 3
Statements of operations--Three months and six months ended June 30, 2000 and 1999.......... 4
Statements of cash flows--Six months ended June 30, 2000 and 1999........................... 5
Notes to financial statements--June 30, 2000................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................................... 11
Item 3. Quantitative and Qualitative Disclosure of Market Risk...................................... 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 28
Item 2. Changes in Securities and Use of Proceeds................................................... 28
Item 3. Defaults Upon Senior Securities............................................................. 28
Item 4. Submission of Matters to a Vote of Security Holders......................................... 28
Item 5. Other Information........................................................................... 29
Item 6. Exhibits and Reports on Form 8-K............................................................ 29
Signature............................................................................................... 30
Exhibit Index........................................................................................... 31
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMAZON.COM, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ --------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 720,377 $ 133,309
Marketable securities ......................................... 187,244 572,879
Inventories ................................................... 172,360 220,646
Prepaid expenses and other current assets ..................... 86,659 85,344
----------- -----------
Total current assets .................................. 1,166,640 1,012,178
Fixed assets, net ............................................... 344,042 317,613
Goodwill, net ................................................... 441,240 534,699
Other intangibles, net .......................................... 155,538 195,445
Investments in equity-method investees .......................... 211,715 226,727
Other investments ............................................... 88,261 144,735
Other assets .................................................... 53,294 40,154
----------- -----------
Total assets .......................................... $ 2,460,730 $ 2,471,551
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable .............................................. $ 286,239 $ 463,026
Accrued expenses and other current liabilities ................ 146,874 181,909
Unearned revenue .............................................. 115,566 54,790
Interest payable .............................................. 41,213 24,888
Current portion of long-term debt and other ................... 17,731 14,322
----------- -----------
Total current liabilities ............................. 607,623 738,935
Long-term debt .................................................. 2,131,531 1,466,338
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.01 par value:
Authorized shares - 500,000
Issued and outstanding shares -- none ...................... -- --
Common stock, $0.01 par value:
Authorized shares - 5,000,000
Issued and outstanding shares - 355,400 and 345,155
shares at June 30, 2000 and December 31, 1999,
respectively .............................................. 3,554 3,452
Additional paid-in capital .................................... 1,335,733 1,194,369
Stock-based compensation ...................................... (25,410) (47,806)
Accumulated other comprehensive loss .......................... (84,664) (1,709)
Accumulated deficit ........................................... (1,507,637) (882,028)
----------- -----------
Total stockholders' equity (deficit) .................. (278,424) 266,278
----------- -----------
Total liabilities and stockholders' equity (deficit) .. $ 2,460,730 $ 2,471,551
=========== ===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
AMAZON.COM, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales ................................... $ 577,876 $ 314,377 $ 1,151,765 $ 608,019
Cost of sales ............................... 441,812 246,846 887,567 475,696
----------- ----------- ----------- -----------
Gross profit ................................ 136,064 67,531 264,198 132,323
Operating expenses:
Marketing, sales and fulfillment .......... 129,813 86,165 269,924 146,883
Technology and content .................... 67,132 34,149 128,376 57,552
General and administrative ................ 28,468 14,469 54,513 25,712
Stock-based compensation .................. 8,166 4,669 21,818 4,780
Amortization of goodwill and other
intangibles ............................. 80,413 37,150 163,368 58,050
Merger, acquisition and investment-
related costs ........................... 2,449 3,809 4,468 4,208
----------- ----------- ----------- -----------
Total operating expenses .......... 316,441 180,411 642,467 297,185
----------- ----------- ----------- -----------
Loss from operations ........................ (180,377) (112,880) (378,269) (164,862)
Interest income ............................. 10,314 12,860 20,440 23,780
Interest expense ............................ (33,397) (28,320) (61,018) (44,954)
Other expense, net .......................... (3,272) (74) (8,046) (122)
----------- ----------- ----------- -----------
Net interest expense and other ......... (26,355) (15,534) (48,624) (21,296)
----------- ----------- ----------- -----------
Loss before equity in losses of equity-
method investees .......................... (206,732) (128,414) (426,893) (186,158)
Equity in losses of equity-method investees . (110,452) (9,594) (198,716) (13,517)
----------- ----------- ----------- -----------
Net loss .................................... $ (317,184) $ (138,008) $ (625,609) $ (199,675)
=========== =========== =========== ===========
Basic and diluted loss per share ............ $ (0.91) $ (0.43) $ (1.80) $ (0.63)
=========== =========== =========== ===========
Shares used in computation of basic and
diluted loss per share .................... 349,886 322,340 346,680 318,106
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
AMAZON.COM, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .............. $ 133,309 $ 71,583
OPERATING ACTIVITIES:
Net loss ...................................................... (625,609) (199,675)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of fixed assets ............... 38,862 13,325
Amortization of deferred stock-based compensation ........... 21,818 4,780
Equity in losses of equity-method investees ................. 198,716 13,517
Amortization of goodwill and other intangibles .............. 163,368 58,050
Non-cash merger, acquisition, and
investment-related costs .................................. 4,468 4,208
Amortization of previously unearned revenue ................. (37,266) --
(Gain) loss on sale of marketable securities ................ (952) 7,440
Non-cash interest expense and other ......................... (4,217) 20,526
Changes in operating assets and liabilities:
Inventories .............................................. 48,286 (29,886)
Prepaid expenses and other current assets ................ 6,738 (31,513)
Accounts payable ......................................... (176,787) 51,539
Accrued expenses and other current liabilities ........... (37,995) 16,931
Unearned revenue ......................................... 203 --
Interest payable ......................................... 9,654 23,950
----------- -----------
Net cash used in operating activities ............... (390,713) (46,808)
INVESTING ACTIVITIES:
Sales and maturities of marketable securities ................. 449,294 3,096,250
Purchases of marketable securities ............................ (50,786) (3,803,494)
Purchases of fixed assets ..................................... (55,479) (111,097)
Investments in equity-method investees and other
investments ................................................. (56,082) (107,362)
----------- -----------
Net cash provided by (used in) investing activities . 286,947 (925,703)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options ....................... 35,153 21,626
Proceeds from long-term debt .................................. 680,999 1,250,000
Repayment of long-term debt ................................... (9,220) (182,479)
Financing costs ............................................... (16,122) (34,937)
----------- -----------
Net cash provided by financing activities ........... 690,810 1,054,210
Effect of exchange rate changes ............................... 24 137
----------- -----------
Net increase in cash and cash equivalents ..................... 587,068 81,836
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................... $ 720,377 $ 153,419
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Fixed assets acquired under capital leases .................... $ 4,346 $ 22,637
Fixed assets acquired under financing agreements .............. 4,844 5,608
Stock issued in connection with business acquisitions ......... 30,000 617,007
Equity securities for unearned Amazon Commerce
Network services ............................................ 97,839 --
</TABLE>
See accompanying notes to financial statements.
5
<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 and six-month periods ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000 due to seasonal and other factors. 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.
Cash and Cash Equivalents
Effective April 1, 2000, the Company changed its policy for determining
which investments are treated as cash equivalents. Effective April 1, 2000, the
Company now classifies all highly liquid instruments with an original maturity
of three months or less as cash equivalents. Prior to April 1, 2000, such
investments were included in marketable securities. The Company believes this
change is preferable because it results in a presentation that is consistent
with practice in the Company's industry and because it results in a better
reflection of the Company's liquidity. The balance sheet as of December 31, 1999
and the statements of cash flows for the six-month periods ended June 30, 2000
and 1999 presented in this Form 10-Q have been restated to reflect this change.
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 $355.5 million and
$143.0 million for the three-month periods ended June 30, 2000 and 1999,
respectively. Comprehensive loss was $708.6 million and $210.9 million for the
six-month periods ended June 30, 2000 and 1999, respectively.
Loss per Share
The number of shares used in calculating loss per share for the
three-month periods ended June 30, 2000 and 1999 was reduced by 3.2 million and
5.6 million shares, and the number of shares used in calculating loss per share
for the six-month periods ended June 30, 2000 and 1999 was reduced by 3.7
million and 7.2 million shares, respectively. Such reductions reflect the
weighted average number of outstanding shares subject to repurchase. Stock
options are antidilutive and accordingly excluded from diluted loss per share.
Recent Accounting Pronouncements
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
6
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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.
In March 2000, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation (FIN) No. 44, "Accounting for Certain Transactions Involving
Stock Compensation." FIN 44 clarifies the application of Accounting Principles
Board Opinion No. 25 for certain issues relating to stock compensation. FIN 44
is effective July 1, 2000, but certain conclusions in it cover specific events
that occur after either December 15, 1998, or January 12, 2000. To the extent
that FIN 44 covers events occurring during the period after December 15, 1998,
or January 12, 2000, but before the effective date of July 1, 2000, the effects
of applying FIN 44 are recognized on a prospective basis from July 1, 2000. The
Company does not expect FIN 44 to have a material effect on its financial
position or results of operations.
In May 2000, the EITF reached a consensus on EITF Issue 00-14,
"Accounting for Certain Sales Incentives." This consensus provides guidance on
the recognition, measurement, and income statement classification for sales
incentives offered voluntarily by a vendor without charge to customers that can
be used in, or that are exercisable by a customer as a result of, a single
exchange transaction. This consensus must be adopted no later than October 1,
2000. The Company does not expect the adoption of this consensus to have a
material impact on its financial position or results of operations.
In July 2000, the EITF reached a consensus on EITF Issue 00-10,
"Accounting for Shipping and Handling Fees and Costs." This consensus requires
that all amounts billed to a customer in a sale transaction related to shipping
and handling, if any, represent revenue and should be classified as revenue. The
Company already classifies shipping charges to customers as revenue. The EITF
did not reach a consensus with respect to the classification of costs related to
shipping and handling incurred by the seller. The Company classifies inbound and
outbound shipping costs and the cost of tangible supplies used to package
product for shipment to customers as cost of sales. The Company does not
currently impose separate handling charges on customers and classifies 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;
and responding to inquiries from customers) and credit card fees as marketing,
sales and fulfillment expenses.
NOTE 2 -- MARKETABLE SECURITIES
Marketable securities available for sale, at fair value, consist of the
following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Asset-backed and agency securities ......................................... $ 94,462 $247,667
Commercial paper and short-term obligations ................................ 16,813 57,210
Treasury notes and bonds ................................................... 60,510 164,158
Corporate notes and bonds .................................................. -- 103,844
Equity securities .......................................................... 15,459 --
-------- --------
Total marketable securities ...................................... $187,244 $572,879
======== ========
</TABLE>
The Company's marketable securities consist primarily of high quality
short- to intermediate-term fixed income securities and equity securities.
At June 30, 2000 and December 31, 1999, the cost (amortized cost in the
case of debt securities) of the Company's marketable securities was $182.7
million and $601.4 million, respectively.
NOTE 3 -- BUSINESS COMBINATIONS
In May 2000, the Company made a final payment for its May 1999
acquisition of e-Niche Incorporated (Exchange.com) in the form of common stock
of the Company. This payment was made pursuant to the terms of the original
agreement and resulted in an increase in goodwill of $30 million related to the
Exchange.com acquisition. This additional goodwill was recorded during the
three-month period ended June 30, 2000 and will be amortized over a 2-year
period.
NOTE 4 -- INVESTMENTS IN EQUITY-METHOD INVESTEES
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<PAGE> 8
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 and the impact of commercial arrangements,
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 generally one month in arrears for private companies and one quarter
in arrears for public companies.
In June 2000, one of the Company's equity-method investees,
HomeGrocer.com, Inc. (HomeGrocer), agreed to an acquisition of all of its
outstanding common stock by Webvan Group, Inc. Upon closing of this transaction,
the Company will no longer account for its investment in HomeGrocer under the
equity method as its investment will not give it the ability to exercise
significant influence over the combined entity. As a result, the Company will
record a gain or loss representing the difference between the fair value and the
recorded book value of the investment upon closing of the transaction. As of
June 30, 2000, the book value of the Company's investment in HomeGrocer averaged
$1.89 per share and the Company owned 27,733,990 shares of HomeGrocer common
stock. The Company expects to record additional equity-method losses in
HomeGrocer prior to closing of the transaction. The Company has agreed to
certain restrictions on sale of the Webvan Group, Inc. common stock it will
receive upon closing of the transaction.
NOTE 5 -- OTHER INVESTMENTS
At June 30, 2000, Other Investments included $26.6 million of
investments accounted for under the cost method and $61.7 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 June 30, 2000 was $151.3 million.
NOTE 6 -- 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 provided by the Company to these
partners is measured by the consideration paid to the Company by these ACN
partners, and has consisted of cash, equity securities of ACN partners or a
combination of the two. The Company holds equity securities of most of its 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 appropriate
adjustments for significant restrictions on marketability, at the date the
agreement is consummated for ACN partners that are public companies and by an
estimate of fair value, based on 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
has not affected the Company's accounting through June 30, 2000 for any of the
past transactions in which the Company received an equity instrument in
conjunction with providing services. To the extent that previously received
equity securities are subsequently modified, these or new equity securities
received are subject to vesting or forfeiture provisions and/or no performance
commitment exists upon signing of the agreements, as defined in EITF 00-8, the
amount of revenue recorded by the Company for ACN transactions during each
period will fluctuate based on the then-current fair value of any equity
securities.
Unearned revenue is recognized over the period in which the service for
which consideration has been received is performed (generally one to three
years). During the three months and six months ended June 30, 2000, the Company
recorded $24.3 million and $44.2 million, respectively, of revenue from ACN
partners. For the three months ended June 30, 2000, this revenue was comprised
of $4.2 million of cash, $19.2 million of equity securities of public companies
and $0.9 million of equity securities of private companies.
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For the six months ended June 30, 2000, this revenue was comprised of $7.0
million of cash, $33.5 million of equity securities of public companies and $3.7
million of equity securities of private companies.
The Company has recently entered into amendments and negotiations to
restructure its agreements with certain ACN partners and has accepted or has
been asked to accept lower future cash payments, revisions to the related term
of the agreements, or both. The Company has adjusted the amortization of
previously unearned revenue to reflect these modifications. As a result, during
the three months ended June 30, 2000, revenue recognized from certain ACN
agreements was reduced by a total of $2.9 million.
The Company accounts for several of its investments in ACN partners
using the equity method. During the three months and six months ended June 30,
2000, the Company recorded $109.9 million and $197.8 million of equity-method
losses for investments in ACN partners.
NOTE 7 -- LONG-TERM DEBT
On February 16, 2000, the Company completed an offering of E690,000,000
($656,397,000 as of June 30, 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 than E84.883 per share. Subject to certain conditions, the
PEACS may be redeemed at the Company's option on or after February 20, 2003, in
whole or in part, at the redemption price of E1,000 per note, plus accrued and
unpaid interest.
NOTE 8 -- 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Marketing, sales and fulfillment . $ (1,591) $ 81 $ (1,260) $ 178
Technology and content ........... 9,331 4,386 22,160 4,462
General and administrative ....... 426 202 918 140
-------- -------- -------- --------
$ 8,166 $ 4,669 $ 21,818 $ 4,780
======== ======== ======== ========
</TABLE>
NOTE 9 -- 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 have been
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.
9
<PAGE> 10
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 10 -- SEGMENT INFORMATION
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 JUNE 30, 2000:
Net sales ................................. $ 385,275 $ 73,393 $ 119,208 $ 577,876
Gross profit .............................. 86,862 16,286 32,916 136,064
Segment profit (loss) ..................... 10,056 (34,503) (64,902) (89,349)
Other operating expenses .................. -- -- -- (91,028)
Net interest expense and other ............ -- -- -- (26,355)
Equity in losses of equity-method
Investees .............................. -- -- -- (110,452)
-----------
Net loss .................................. -- -- -- $ (317,184)
===========
THREE MONTHS ENDED JUNE 30, 1999:
Net sales ................................. 279,593 31,345 3,439 $ 314,377
Gross profit (loss) ....................... 61,680 6,575 (724) 67,531
Segment loss .............................. (11,147) (16,034) (40,071) (67,252)
Other operating expenses .................. -- -- -- (45,628)
Net interest expense and other ............ -- -- -- (15,534)
Equity in losses of equity-method
Investees .............................. -- -- -- (9,594)
-----------
Net loss .................................. -- -- -- $ (138,008)
===========
SIX MONTHS ENDED JUNE 30, 2000:
Net sales ................................. 786,689 148,525 216,551 $ 1,151,765
Gross profit .............................. 169,716 32,323 62,159 264,198
Segment profit (loss) ..................... 7,630 (61,949) (134,296) (188,615)
Other operating expenses .................. -- -- -- (189,654)
Net interest expense and other ............ -- -- -- (48,624)
Equity in losses of equity-method
Investees .............................. -- -- -- (198,716)
-----------
Net loss .................................. -- -- -- $ (625,609)
===========
SIX MONTHS ENDED JUNE 30, 1999:
Net sales ................................. 547,114 57,064 3,841 $ 608,019
Gross profit (loss) ....................... 120,946 11,732 (355) 132,323
Segment loss .............................. (14,264) (30,287) (53,273) (97,824)
Other operating expenses .................. -- -- -- (67,038)
Net interest expense and other ............ -- -- -- (21,296)
Equity in losses of equity-method
investees .............................. -- -- -- (13,517)
-----------
Net loss .................................. -- -- -- $ (199,675)
===========
</TABLE>
Revenue and gross profit of $24.3 million and $23.6 million,
respectively, was generated on ACN services for the three months ended June 30,
2000. Revenue and gross profit of $44.2 million and $43.1 million, respectively,
was generated on ACN services for the six months ended June 30, 2000. Such
amounts are included within the results of the Early-Stage Businesses and Other
segment. There was no revenue or gross profit on ACN services during the three
months or six months ended June 30, 1999.
10
<PAGE> 11
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.
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 sales, pro forma
operating loss and cash balances, the decrease in fulfillment costs as a
percentage of sales, the sufficiency of the Company's cash and marketable
securities balances to meet our cash needs over the next twelve months, 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, the magnitude of losses arising from
investments accounted for under the equity method, the degree to which the
Company enters into ACN and other strategic transactions, fluctuations in the
value of securities and non-cash payments Amazon.com receives in such
transactions, risks of inventory management, and risks of distribution and
fulfillment throughput and productivity. Other risks and uncertainties include
Amazon.com's limited operating history, anticipated losses, potential
fluctuations in quarterly operating results, seasonality, consumer trends,
competition, risks associated with distribution center expansion, adverse
consequences arising from system interruptions, risks associated with management
of potential growth, risks related to auction and zShops services, risks related
to fraud and Amazon.com Payments, and risks of new business areas, international
expansion, business combinations, and strategic alliances. 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 merchandiser. We have
served over 22.5 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. Our customers can find and discover
over 18 million new and used items and purchase them through a variety of
methods, including directly from our retail store, through our zShops and Amazon
Commerce Network merchants or by participating in auctions at Amazon Auctions or
sothebys.amazon.com. 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.
Through our Amazon Commerce Network (ACN), we have recently 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
11
<PAGE> 12
Amazon Web site. Under these commercial agreements, we received equity
securities in our ACN partners with a fair value of $97.8 million, net of cash
paid, during the six months ended June 30, 2000 in return for services to be
provided by us in the future and recorded such amounts as unearned revenue. We
determined fair value of the equity securities at the time these commercial
agreements were entered into by the quoted market prices, appropriately
considering significant restrictions on marketability, for the public companies,
and by independent, third-party valuations for the private companies. Such
unearned revenue and any additional proceeds to be received under the
arrangements will be recognized in revenue as we provide the related services
over the term of the arrangement (generally over the next one to three years).
We have recently entered into amendments and negotiations to restructure our
agreements with certain ACN partners. We have accepted or have been asked to
accept lower future cash payments, revisions to the related term of the
agreements, or both. To the extent lower future cash payments in future years
resulted from these modifications, the amount recorded as unearned revenue is
being recognized as revenue over a longer period of time than contemplated under
the terms of the original agreements. See Note 6 of Notes to Financial
Statements.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2000 1999 % CHANGE 2000 1999 % CHANGE
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT GROSS (IN THOUSANDS, EXCEPT GROSS
MARGIN) MARGIN)
<S> <C> <C> <C> <C> <C> <C>
Net sales ....................... $ 577,876 $ 314,377 84% $ 1,151,765 $ 608,019 89%
Gross profit .................... 136,064 67,531 101% 264,198 132,323 100%
Gross margin .................... 23.5% 21.5% 9% 22.9% 21.8% 5%
Marketing, sales and
fulfillment................... 129,813 86,165 51% 269,924 146,883 84%
Technology and content .......... 67,132 34,149 97% 128,376 57,552 123%
General and administrative ...... 28,468 14,469 97% 54,513 25,712 112%
Stock-based compensation ........ 8,166 4,669 75% 21,818 4,780 356%
Amortization of goodwill and
other intangibles ............ 80,413 37,150 116% 163,368 58,050 181%
Loss from operations ............ (180,377) (112,880) 60% (378,269) (164,862) 129%
Interest income ................. 10,314 12,860 (20)% 20,440 23,780 (14)%
Interest expense ................ (33,397) (28,320) 18% (61,018) (44,954) 36%
Other expense, net .............. (3,272) (74) 4,322% (8,046) (122) 6,495%
Equity in losses of equity-method
investees .................... (110,452) (9,594) 1,051% (198,716) (13,517) 1,370%
</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 $73.5 million and $49.0
million for the three-month periods ended June 30, 2000 and 1999, and $148.1
million and $93.1 million for the six-month periods ended June 30, 2000 and
1999. Net sales also includes ACN revenues of $24.3 million and $44.2 million
for the three months and six months ended June 30, 2000, as well as commissions
from auctions and zShops transactions. For the three months ended June 30, 2000,
ACN revenue was comprised of $4.2 million of cash, $19.2 million of equity
securities of public companies and $0.9 million of equity securities of private
companies. For the six months ended June 30, 2000, ACN revenue was comprised of
$7.0 million of cash, $33.5 million of equity securities of public companies and
$3.7 million of equity securities of private companies. Growth in net sales for
the six-month period is primarily related to an increase in units sold due to
the growth of the Company's customer base, repeat purchases from existing
customers, the introduction of new product lines and ACN revenues. Subsequent to
June 30, 1999, the Company added the new product lines of toys, electronics,
software, video games, tools and hardware, lawn and patio, and kitchen products.
At June 30, 2000, the number of customer accounts, which includes
customer accounts for marketplace services but excludes customer accounts of our
ACN partners, reached 22.5 million, compared with 10.7 million at June 30, 1999.
Sales to customers outside of the US, including export sales from our US
website and sales from our internationally focused Web sites located at
www.amazon.co.uk and www.amazon.de, represented approximately 23% and 24% of net
sales for the three months ended June 30, 2000 and 1999, and 23% for each of the
six-month periods ended June 30, 2000 and 1999.
Gross Profit
12
<PAGE> 13
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. For the three-month and six-month periods
ended June 30, 2000, gross profit increased in absolute dollars over the same
periods in 1999, reflecting our increased sales volume. Gross margin increased
for the three-month and six-month periods ended June 30, 2000 compared to the
same periods in 1999 primarily due to the generation of revenue from the
higher-margin service activities of ACN. Gross profit from ACN activities was
$23.6 million and $43.1 million for the three months and six months ended June
30, 2000. Excluding the effect of ACN, gross margin would have been 20.3% during
the three months ended June 30, 2000 and 20.0% during the six months ended June
30, 2000, decreases of 1.2% and 1.8% compared to the same periods in 1999. This
1.8% decrease in gross margin (excluding ACN) for the six months ended June 30,
2000, as compared to the same period in 1999, is a result of lower gross profit
from shipping and the addition of new product lines that generated lower gross
margins. Gross profit from shipping, which represents shipping revenues less
outbound shipping costs, declined to $7.5 million (5.1% of shipping revenues)
from $11.6 million (12.4% of shipping revenues) for the six-month periods ended
June 30, 2000 and 1999, respectively. The change in gross profit from shipping
for these periods is primarily a function of the addition of the toys,
electronics, tools and hardware and lawn and patio product lines since June 30,
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 led to increased split-shipments.
For the three months ended June 30, 2000 as compared to the same period
in 1999, gross profit from shipping remained constant at 9.6% of shipping
revenues. The 1.2% decrease in gross margin (excluding ACN) for the three-month
period ended June 30, 2000 as compared to the same period in 1999 is primarily a
function of the addition of new product lines that generated lower gross
margins.
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.
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 represent 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; and responding to inquiries from
customers), and credit card fees. Fulfillment costs amounted to $87.6 million
and $42.4 million for the three-month periods ended June 30, 2000 and 1999, and
$187.1 million and $76.5 million for the six-month periods ended June 30, 2000
and 1999. Advertising, promotional and public relations costs totaled $42.2
million and $43.8 million for the three-month periods ended June 30, 2000 and
1999, and $82.8 million and $70.4 million for the six-month periods ended June
30, 2000 and 1999. 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 decreased as a percentage of net sales for the
three months ended June 30, 2000 as compared to the same period in 1999, from
27.4% of net sales in 1999 to 22.5% of net sales in 2000, due to decreased
marketing expenses. Marketing, sales and fulfillment expenses also decreased as
a percentage of net sales for the six-month period ended June 30, 2000 as
compared to the same period in 1999, from 24.2% of net sales in 1999 to 23.4% of
net sales in 2000, primarily due to decreased marketing expenses. The decrease
in marketing expenses as a percentage of net sales outweighed an increase in
fulfillment expenses as a percentage of net sales caused by the significant
expansion of our distribution center network during 1999. We expect that
fulfillment costs will decline as a percentage of net sales in the future as we
improve efficiency in distribution and customer service and as additional
capacity of our existing distribution center network is more fully utilized.
However, due to risks related to seasonality, inventory management and other
factors, fulfillment costs may not decline as a percentage of net sales. See
"Additional Factors That May Affect Future Results."
In July 2000, the Emerging Issues Task Force (EITF) reached a consensus
on EITF Issue 00-10, "Accounting for Shipping and Handling Fees and Costs." This
consensus requires that all amounts billed to a customer in a sale transaction
related to shipping and handling, if any, represent revenue and should be
classified as revenue. The Company already classifies shipping charges to
customers as revenue. The EITF did not reach a consensus with respect to the
classification of costs related to shipping and handling incurred by the seller.
The Company classifies inbound and outbound shipping costs and the cost of
tangible supplies used to package product for shipment to customers as cost of
sales. The Company does not currently impose separate handling charges on
customers and classifies 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; and responding to inquiries from customers) and
credit
13
<PAGE> 14
card fees as marketing, sales and fulfillment expenses. It is possible that
organizations responsible for promulgating accounting standards may address the
classification of costs related to shipping and handling incurred by a seller in
the future.
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.
Technology and content expenses were 10.9% and 9.5% of net sales for the
three-month and six-month periods ended June 30, 1999, increasing to 11.6% and
11.1% for the three-month and six-month periods ended June 30, 2000. The
increase in technology and content expenses for the three-month and six-month
periods ended June 30, 2000 as compared to the same periods in 1999, both in
absolute dollars and as a percentage of sales, was primarily attributable to
expenses associated with preparations for opening a second data center to house
the Company's technology equipment, as well as expenses associated with
developing content for the Company's Web sites for new product launches.
Technology and content costs are generally expensed as incurred, except for
costs incurred during the application and infrastructure 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
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 for the three-month and six-month periods ended June
30, 2000 as compared to the same periods in 1999 was primarily a result of
increased salaries and related expenses associated with the hiring of additional
personnel and legal and other professional fees. As a percentage of net sales,
general and administrative expenses were 4.6% and 4.2% for the three-month and
six-month periods ended June 30, 1999, increasing to 4.9% and 4.7% for the
three-month and six-month periods ended June 30, 2000. These increases are
primarily due to legal and other professional fees increasing as a percentage of
net sales.
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 for the three-month and six-month periods as
compared to the same periods in 1999 resulted primarily from acquisitions
consummated in 1999.
Amortization of Goodwill and Other Intangibles
Increases in amortization of goodwill and other intangibles for the
three-month and six-month periods ended June 30, 2000 as compared to the same
periods in 1999 primarily resulted from the 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) and 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 for the three-month and six-month
periods ended June 30, 2000 as compared to the same periods in 1999 due to
increases in marketing, sales and fulfillment, technology and content, general
and administrative expenses, stock-based compensation and amortization of
goodwill and other intangibles. The increases in these expense categories were
partially offset by an increase in gross profit.
Interest Income and Expense
14
<PAGE> 15
Interest income decreased slightly for the three-month and six-month
periods ended June 30, 2000 as compared to the same periods in 1999 due to a
lower average balance of cash equivalents and marketable securities in 2000.
Interest expense increased due to the February 2000 issuance of E690,000,000
($656,397,000 as of June 30, 2000) of PEACS.
Other Expense, Net
Other expense, net 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 for the three-month and six-month
periods ended June 30, 2000 as compared to the same periods in 1999 is primarily
due to higher net foreign exchange transaction losses and higher net realized
losses on sales of marketable securities during 2000. The increase in net
foreign exchange transaction losses is commensurate with an increase in foreign
exchange transactions, primarily in the first quarter related to the issuance of
the PEACS, and the increase in net realized losses is a result of a decline in
the value of debt instruments in an environment of rising interest rates.
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. The increase
in the amounts recorded for equity in losses of equity-method investees for the
three-month and six-month periods ended June 30, 2000, as compared to the
comparable periods in 1999, is due to a substantial increase in the number of
investments that are accounted for under the equity method, as well as increased
net losses of the investees. As of June 30, 1999, the Company had four
equity-method investments, three of which were made during the three-month
period ended June 30, 1999. As of June 30, 2000, the Company had 11
equity-method investments. 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. (HomeGrocer)
and Pets.com, Inc., completed the initial public offerings of their common stock
during the six months ended June 30, 2000. Additionally, another of our
equity-method investees, drugstore.com, inc., completed a secondary offering of
its common stock during the six months ended June 30, 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 six months ended June 30, 2000, representing the difference between
the fair value and the carrying value of the portion of our investments that
have been deemed to have been sold by the investees.
In June 2000, HomeGrocer agreed to an acquisition of all of its
outstanding common stock by Webvan Group, Inc. Upon closing of this transaction,
the Company will no longer account for its investment in HomeGrocer under the
equity method as its investment will not give it the ability to exercise
significant influence over the combined entity. As a result, the Company will
record a gain or loss representing the difference between the fair value and the
recorded book value of the investment upon closing of the transaction. As of
June 30, 2000, the book value of the Company's investment in HomeGrocer averaged
$1.89 per share and the Company owned 27,733,990 shares of HomeGrocer common
stock. The Company expects to record additional equity-method losses in
HomeGrocer prior to closing of the transaction. The Company has agreed to
certain restrictions on sale of the Webvan Group, Inc. common stock it will
receive upon closing of the transaction.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT (IN THOUSANDS, EXCEPT
PER SHARE DATA) PER SHARE DATA)
<S> <C> <C> <C> <C>
Pro forma loss from operations ........... $ (89,349) $ (67,252) $(188,615) $ (97,824)
Pro forma net loss ....................... $(115,704) $ (82,786) $(237,239) $(119,120)
Pro forma basic and diluted loss per
share.................................... $ (0.33) $ (0.26) $ (0.68) $ (0.37)
Shares used in computation of pro forma
basic and diluted loss per share ......... 349,886 322,340 346,680 318,106
</TABLE>
15
<PAGE> 16
Presentation of pro forma results from operations on the face of the
financial statements is not in conformity with generally accepted accounting
principles. We are providing pro forma results of operations for informational
purposes only. The pro forma results are derived from information recorded in
our financial statements.
We expect that our pro forma loss from operations will continue to
decline as a percentage of net sales, that our pro forma loss from operations
will be less than 10% of net sales for the fourth quarter of 2000, and that our
US Books, Music and DVD/video segment will generate income on a pro forma
operating basis for the full year in 2000. However, any such projections are
subject to substantial uncertanty. See "Additional Factors That May Affect
Future Results."
FINANCIAL CONDITION
At June 30, 2000 the Company's total balance of cash and cash
equivalents and marketable securities was $907.6 million, compared to $706.2
million at December 31, 1999. Cash and cash equivalents increased from $133.3
million at December 31, 1999 to $720.4 million at June 30, 2000 as a result of
the investment of the proceeds from the issuance of the PEACS into a money
market fund that is a cash equivalent. Marketable securities decreased from
$572.9 million at December 31, 1999 to $187.2 million at June 30, 2000 because
marketable securities were liquidated during the period to fund the Company's
operating cash outflow for the period.
Net cash used in operating activities was $390.7 million and $46.8
million for the six-month periods ended June 30, 2000 and 1999. Our net
operating cash flow for both periods was primarily a result of our operating
loss, exclusive of certain non-cash expenses resulting from depreciation and
amortization, equity in losses of equity-method investees and amortization of
goodwill and other intangibles. For further information regarding our operating
cash flows, see the Statements of Cash Flows included in our unaudited interim
financial statements.
Net cash provided by (used in) investing activities was $286.9 million
and $(925.7) million for the six-month periods ended June 30, 2000 and 1999, and
consisted of net purchases and sales of marketable securities, purchases of
fixed assets and cash paid for equity investments. Cash available for investment
purposes increased substantially in both 2000 and 1999 as a result of the
issuances of the PEACS and Convertible Notes.
Net cash provided by financing activities of $690.8 million and $1.1
billion for the six-month periods ended June 30, 2000 and 1999, was primarily a
result of the issuances of the PEACS and Convertible Notes in 2000 and 1999.
As of June 30, 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 two quarters of fiscal 2000 combined. The Company also expects that it
will have approximately $1 billion in cash and cash equivalents and marketable
securities as of December 31, 2000. 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 and
additional interest expense. 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 "Financial
Condition" 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:
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, industry standards and technology. We may not succeed in addressing
these challenges and risks.
WE HAVE AN ACCUMULATED DEFICIT AND ANTICIPATE FURTHER LOSSES
16
<PAGE> 17
We have incurred significant losses since we began doing business. As of
June 30, 2000, we had an accumulated deficit of $1.51 billion and our
stockholders' equity was a deficit of $278.4 million. 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. Today's tight
labor market and the recent volatility in our stock price could force us to
increase our cash compensation to employees or grant larger stock option awards
than we have historically, which could hurt our operating results and/or reduce
the percentage ownership of our existing stockholders. In addition, the expenses
associated with our past 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 June 30, 2000, we had
indebtedness under senior discount notes, convertible notes, capitalized lease
obligations and other asset financings totaling approximately $2.15 billion. We
may incur substantial additional debt in the future. Our indebtedness could:
- make it difficult to make principal and interest payments on our
debt,
- make it difficult to obtain necessary additional financing for
working capital, capital expenditures, debt service requirements or
other purposes in the future,
- limit our flexibility in planning for, or reacting to, changes in
our business and competition, and
- 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 impacting the conversion.
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:
- our ability to retain and increase sales to existing customers,
attract new customers and satisfy our customers' demands,
- our ability to acquire merchandise, manage our inventory and
fulfill orders,
- changes in gross margins of our current and future products and
services,
- the introduction by us or our competitors of Web sites, products or
services, and our ability to properly anticipate demand,
- purchases of large quantities of products, particularly in advance
of the holidays, for which demand may not materialize,
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- termination of Web sites, service offerings or product sales that
we determine are not viable,
- changes in usage of the Internet and online services and consumer
acceptance of the Internet and online commerce,
- timing of upgrades and developments in our systems and
infrastructure,
- the level of traffic on our Web sites,
- the effects of acquisitions and other business combinations, and
our ability to successfully integrate those acquisitions and
business combinations,
- technical difficulties, system downtime or Internet brownouts,
- variations in the mix of products we sell,
- changes in the mix of revenues derived from products as compared to
services,
- our inability to prevent fraud perpetrated by third parties through
credit card transactions, Amazon Payments transactions, and auction
and zShops transactions,
- variations in our level of merchandise and vendor returns, and
- 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:
- online vendors of books, music, DVDs, videos, toys, electronics,
software, video games, tools and hardware, lawn and patio products,
kitchen products and other products,
- 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,
- online auction services,
- Web-based retailers using alternative distribution capabilities,
and
- 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.
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We believe that the principal competitive factors in our market include
brand recognition, selection, personalized services, price, convenience,
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 goods we
sell 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.
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
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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, kitchen 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 would interfere with
our ability to meet customer demand.
We expect that our inventory balance will increase substantially in
advance of the Christmas holiday. Payments for purchases of much of this
inventory will not occur until the first quarter of the following fiscal year.
Because we are paid for sales of product upon shipment, we anticipate an
increase in available cash in the fourth quarter of our fiscal year, followed by
a decrease in the first quarter as we make payments for inventory purchased in
the previous fiscal year.
WE MAY NOT BE SUCCESSFUL IN OUR EFFORTS TO EXPAND INTO INTERNATIONAL MARKETS
We plan to expand rapidly 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 these
operations 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:
- currency exchange rate fluctuations,
- local economic and political conditions,
- restrictive governmental actions (such as trade protection
measures, including export duties and quotas and custom duties and
tariffs),
- changes in legal or regulatory requirements,
- import or export licensing requirements,
- limitations on the repatriation of funds,
- difficulty in obtaining distribution and support,
- nationalization,
- different accounting practices and potentially longer payment
cycles,
- seasonal reductions in business activity,
- higher costs of doing business,
- consumer protection laws and restrictions on pricing or discounts,
- lower level of adoption or use of the Internet and other
technologies vital to our business, and the lack of or the failure
to implement the appropriate infrastructure to support widespread
Internet usage,
- lower level of credit card usage,
- difficulty in developing staffing and simultaneously managing a
larger number of unique foreign operations as a result of distance,
language and cultural differences,
- disruptions of capital and trading markets,
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- laws and policies of the US affecting trade, foreign investment and
loans, and
- tax and other laws.
As the international online commerce market continues to grow,
competition in this market will likely intensify. Local companies may have a
substantial competitive advantage because of their greater understanding of and
focus on the local markets, as well as their more established local brand name
recognition. In addition, governments in foreign jurisdictions may regulate the
Internet or other online services in such areas as content, privacy, network
security, copyright, 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
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. Business combinations, investments,
joint ventures and other strategic alliances with other companies create risks
such as:
- difficulty assimilating the operations, technology and personnel of
combined companies,
- disruption of our ongoing business, including loss of management
focus on existing businesses and other market developments,
- problems retaining key technical and managerial personnel,
- expenses associated with amortization of goodwill and other
purchased intangible assets,
- additional operating losses and expenses of acquired businesses,
- impairment of relationships with existing employees, customers and
business partners, and
- fluctuations in value and losses that may arise from our equity
investments.
We may not succeed in addressing these risks.
We may not be able to identify suitable candidates for business
combinations and strategic investments or to make such business combinations and
strategic investments on terms that are acceptable to us. In addition, the
businesses we have acquired, and in the future may acquire, may incur operating
losses.
OUR AMAZON COMMERCE NETWORK SUBJECTS US TO A NUMBER OF RISKS
In the fall of 1999, we began our Amazon Commerce Network (ACN) program.
As part of this program, we enter into agreements with companies in which we
agree to jointly establish co-branded sections of the Amazon Web site for the
sale of products and services by these companies. In exchange for the services
we provide under these agreements, we receive cash, equity securities of these
companies, or a combination of the two. Since beginning the ACN program, we have
entered into agreements with 15 different companies. As part of this program, we
may in the future enter into additional agreements with both existing ACN
partners or new companies.
We hold several investments in third parties that are accounted for
using the equity method, including several investments in our ACN partners.
Under the equity method, we are required to record our equity percentage of the
income or losses of these companies as income or losses for us. We record these
amounts generally one month in arrears for private companies and one quarter in
arrears for public companies. At June 30, 2000, we accounted for our investments
in nine ACN partners under the equity method, three of which are public
companies and six of which are private companies. The public companies are
drugstore.com, HomeGrocer.com and Pets.com. The companies in which we have
equity method investments are engaged in the Internet and e-commerce industries,
are likely to experience large losses for the forseeable future and may not be
successful. While
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the future losses we will record under the equity method are limited to our
investment balance, we expect to record additional equity method losses in the
future. Our investments in equity securities not accounted for under the equity
method are included in "Marketable securities" and "Other investments" on our
balance sheet. Certain of these investments are also in ACN partners.
We regularly review all of our investments in public and private
companies for permanent impairment. If we determine that an investment is
permanently impaired, we would reduce the carrying value of the securities we
hold in these companies, perhaps by the entire amount being carried on our
balance sheet, and record a loss in the amount of that impairment. Through June
30, 2000, we had not recorded any permanent impairment for any investment,
although we had unrealized losses of $89.6 million on available-for-sale
securities included in accumulated other comprehensive loss as of June 30, 2000
and have recorded $198.7 million of equity-method losses for the six months
ended June 30, 2000. In recent months, companies in the Internet and e-commerce
industries have experienced difficulties, including difficulties in raising
proceeds to fund expansion or to continue operations. Because the companies in
which we have investments are part of the Internet and e-commerce industries, we
may conclude in future quarters that some of these investments have been
permanently impaired.
We have recently entered into amendments and negotiations to restructure
our agreements with certain ACN partners. We have accepted or have been asked to
accept lower future cash payments, revisions to the related term of the
agreements, or both. To the extent lower future cash payments in future years
resulted from these modifications, the amount recorded as unearned revenue is
being recognized as revenue over a longer period of time than contemplated under
the terms of the original agreements. See Note 6 of Notes to Financial
Statements.
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 as a medium for commerce 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, tools and hardware products and kitchen 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 25% of all of our purchases and 35% of our
book, music, DVD and video titles, during the three months ended June 30, 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 jurisdictions currently regulate "auctions" and
"auctioneers" in conducting auctions and may regulate online auction services.
Jurisdictions 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.
IF WE ARE REQUIRED TO COLLECT TAXES IN ADDITIONAL JURISDICTIONS ON THE PRODUCTS
WE SELL, WE MAY BE SUBJECT TO LIABILITY FOR PAST SALES AND OUR FUTURE SALES MAY
DECREASE
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 decrease our future sales.
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
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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 managerial resources, injunctions against us or the imposition of
damages that we must pay. We may need to obtain licenses from third parties who
allege that we have infringed their rights, but such licenses 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 June 30, 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 $32.47 per share. Trading prices of our common stock may fluctuate in
response to a number of events and factors, such as:
- quarterly variations in operating results,
- announcements of innovations,
- new products, services and strategic developments by us or our
competitors, or business combinations and investments by us or our
competitors,
- changes in financial estimates and recommendations by securities
analysts,
- changes in interest rates or other general economic conditions,
- conditions or trends in the Internet and the online commerce
industry,
- developments in Internet regulation,
- sales of our common stock in the open market,
- additions or departures of key personnel,
- changes in the valuation of or performance by other online commerce
companies, and
- news reports relating to trends in the Internet, products we
currently sell or in the future may sell, or services we perform or
in the future may perform.
Any of these events may cause our stock price to fall, which may
adversely affect our business and financing opportunities. The valuations of
many Internet stocks are high based on conventional valuation standards such as
price to earnings and price to sales ratios. 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 or
disproportionate 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. In the past, securities class
action litigation has been more likely to be brought against various companies
following a period of volatility in the market price of their securities. We may
be the target of similar litigation in the future, which could result in
substantial costs and divert management's attention and resources, which could
seriously harm our financial condition and operating results.
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. The Company has not utilized derivative financial instruments in
its investment portfolio.
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 our balance
sheets. 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
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<PAGE> 27
adversely impacted due to a rise in interest rates, and the Company may suffer
losses in principal if forced to sell securities that 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 and six months ended
June 30, 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 June 30, 2000 was
not material. At June 30, 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 ($656.4 million as of June 30, 2000) and expose the
Company to risks of fluctuations in the euro/US dollar exchange rate. At June
30, 2000, the Company held E698.4 million ($664.4 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.
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 and the impact of commercial
arrangements, 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 June 30, 2000, the Company had equity-method
investments of $211.7 million, investments in private companies recorded under
the cost method of $26.6 million, and available-for-sale equity securities at
fair value totaling $77.2 million ($15.5 million of which was included in
marketable securities and $61.7 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 have been
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.
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
The Company's annual meeting of stockholders was held on May 10, 2000.
The following nominees were elected as directors, each to hold office
until his or her successor is elected and qualified, by the vote set forth
below:
<TABLE>
<CAPTION>
NOMINEE FOR WITHHELD
------------------------------ ----------- -----------
<S> <C> <C>
Jeffrey P. Bezos ............. 314,795,113 895,025
Tom A. Alberg ................ 315,210,320 479,818
Scott D. Cook ................ 307,151,459 8,538,679
L. John Doerr ................ 314,736,128 954,010
Joseph Galli, Jr. ............ 314,427,144 1,262,994
Patricia Q. Stonesifer ....... 315,126,708 563,430
</TABLE>
The proposal to approve an amendment to the Company's Restated
Certificate of Incorporation to increase the number of authorized shares of
common stock from 1,500,000,000 shares to 5,000,000,000 shares and increase the
number of authorized shares of preferred stock from 150,000,000 shares to
500,000,000 shares was approved by the vote set forth below:
FOR AGAINST ABSTAIN
228,632,499 16,518,120 259,892
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The proposal to approve the amendment to the Company's 1997 Stock Option
Plan was approved by the vote set forth below:
FOR AGAINST ABSTAIN
295,884,941 19,303,196 502,001
ITEM 5. OTHER INFORMATION
None
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
3.2 Restated Bylaws of the Company
10.1 Executive Compensation Letter to Jeff Wilke, dated May 16, 2000
10.2 Executive Compensation Letter to Warren Jenson, dated May 16, 2000
12.1 Computation of Ratio of Earnings to Fixed Charges
18.1 Letter Regarding Change in Accounting Principles
27.1 Financial Data Schedule
</TABLE>
----------
(b) Reports on Form 8-K
On May 1, 2000, the Company filed a Form 8-K under Item 5 announcing the
Company's financial results for the first quarter of 2000.
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<PAGE> 30
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: August 2, 2000
By: /s/ MARK S. PEEK
------------------------------------
Mark S. Peek
Chief Accounting Officer
and Vice President, Finance
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
------ -----
<S> <C>
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the Quarterly Period ended March 31, 2000)
3.2 Restated Bylaws of the Company (incorporated by reference to the
Company's Current Report on Form 8-K dated February 28, 2000)
10.1 Executive Compensation Letter to Jeff Wilke, dated May 16, 2000
10.2 Executive Compensation Letter to Warren Jenson, dated May 16, 2000
12.1 Computation of Ratio of Earnings to Fixed Charges
18.1 Letter Regarding Change in Accounting Principles
27.1 Financial Data Schedule
</TABLE>
----------
31
