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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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)
<TABLE>
<S> <C>
DELAWARE 91-1646860
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
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 [ ]
356,173,613 shares of $0.01 par value common stock outstanding as of
October 16, 2000
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AMAZON.COM, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance sheets--September 30, 2000 and December 31, 1999 ................................. 3
Statements of operations--Three months and nine months ended
September 30, 2000 and 1999 ............................................................ 4
Statements of cash flows--Three months and nine months ended
September 30, 2000 and 1999 ............................................................ 5
Notes to financial statements--September 30, 2000 ........................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................................. 12
Item 3. Quantitative and Qualitative Disclosure of Market Risk ................................... 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................................................ 32
Item 2. Changes in Securities and Use of Proceeds ................................................ 32
Item 3. Defaults Upon Senior Securities .......................................................... 32
Item 4. Submission of Matters to a Vote of Security Holders ...................................... 32
Item 5. Other Information ........................................................................ 32
Item 6. Exhibits and Reports on Form 8-K ......................................................... 33
Signature .......................................................................................... 34
Exhibit Index ...................................................................................... 35
</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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .............................................. $ 647,048 $ 133,309
Marketable securities .................................................. 252,976 572,879
Inventories ............................................................ 163,880 220,646
Prepaid expenses and other current assets .............................. 99,181 85,344
------------- -------------
Total current assets ........................................... 1,163,085 1,012,178
Fixed assets, net ........................................................ 352,290 317,613
Goodwill, net ............................................................ 383,996 534,699
Other intangibles, net ................................................... 136,474 195,445
Investments in equity-method investees ................................... 91,131 226,727
Other investments ........................................................ 73,345 144,735
Other assets ............................................................. 54,306 40,154
------------- -------------
Total assets ................................................... $ 2,254,627 $ 2,471,551
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ....................................................... $ 304,709 $ 463,026
Accrued expenses and other current liabilities ......................... 160,073 181,909
Unearned revenue ....................................................... 142,046 54,790
Interest payable ....................................................... 35,056 24,888
Current portion of long-term debt and other ............................ 17,213 14,322
------------- -------------
Total current liabilities ...................................... 659,097 738,935
Long-term debt ........................................................... 2,082,697 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 -- 356,102 and 345,155 shares at
September 30, 2000 and December 31, 1999,
respectively ....................................................... 3,561 3,452
Additional paid-in capital ............................................. 1,342,574 1,194,369
Stock-based compensation ............................................... (19,504) (47,806)
Accumulated other comprehensive loss ................................... (65,637) (1,709)
Accumulated deficit .................................................... (1,748,161) (882,028)
------------- -------------
Total stockholders' equity (deficit) ........................... (487,167) 266,278
------------- -------------
Total liabilities and stockholders' equity (deficit) ........... $ 2,254,627 $ 2,471,551
============= =============
</TABLE>
See accompanying notes to financial statements.
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AMAZON.COM, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales .............................................. $ 637,858 $ 355,777 $ 1,789,623 $ 963,797
Cost of sales .......................................... 470,579 285,300 1,358,146 760,998
----------- ----------- ----------- -----------
Gross profit ........................................... 167,279 70,477 431,477 202,799
Operating expenses:
Marketing, sales and fulfillment ..................... 138,342 86,842 408,266 233,725
Technology and content ............................... 71,159 44,451 199,535 102,002
General and administrative ........................... 26,217 18,382 80,730 44,094
Stock-based compensation ............................. 4,091 11,789 25,909 16,569
Amortization of goodwill and other
intangibles ........................................ 79,194 74,343 242,562 132,393
Acquisition-related and other ........................ 11,791 1,779 16,259 5,987
----------- ----------- ----------- -----------
Total operating expenses ..................... 330,794 237,586 973,261 534,770
----------- ----------- ----------- -----------
Loss from operations ................................... (163,515) (167,109) (541,784) (331,971)
Interest income ........................................ 9,402 12,699 29,842 36,479
Interest expense ....................................... (33,809) (21,470) (94,827) (66,424)
Other income (expense), net ............................ 3,353 2,159 (4,693) 2,037
Non-cash investment gains and losses, net .............. 12,366 -- 12,366 --
----------- ----------- ----------- -----------
Net interest expense and other .................... (8,688) (6,612) (57,312) (27,908)
----------- ----------- ----------- -----------
Loss before equity in losses of equity-
method investees ..................................... (172,203) (173,721) (599,096) (359,879)
Equity in losses of equity-method investees, net ....... (68,321) (23,359) (267,037) (36,876)
----------- ----------- ----------- -----------
Net loss ............................................... $ (240,524) $ (197,080) $ (866,133) $ (396,755)
=========== =========== =========== ===========
Basic and diluted loss per share ....................... $ (0.68) $ (0.59) $ (2.48) $ (1.23)
=========== =========== =========== ===========
Shares used in computation of basic and
diluted loss per share ............................... 353,954 332,488 349,258 323,064
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
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AMAZON.COM, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................. $ 720,377 $ 105,757 $ 133,309 $ 71,583
OPERATING ACTIVITIES:
Net loss ......................................................... (240,524) (197,080) (866,133) (396,755)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization of fixed assets .................. 22,857 9,610 61,719 22,935
Amortization of deferred stock-based compensation .............. 4,091 11,789 25,909 16,569
Equity in losses of equity-method investees, net ............... 68,321 23,359 267,037 36,876
Amortization of goodwill and other intangibles ................. 79,194 74,343 242,562 132,393
Non-cash acquisition-related and other costs ................... 11,791 1,779 16,259 5,987
Unearned revenue ............................................... 57,466 -- 59,091 --
Amortization of previously unearned revenue .................... (26,870) -- (65,558) --
Non-cash investment gains and losses, net ...................... (12,366) -- (12,366) --
(Gain) loss on sale of marketable securities ................... (3,205) (1,353) (4,157) 6,086
Non-cash interest expense and other ............................ 6,227 5,590 18,316 26,116
Changes in operating assets and liabilities:
Inventories ................................................. 8,480 (59,406) 56,766 (89,292)
Prepaid expenses and other current assets ................... (6,034) (1,173) 704 (32,685)
Accounts payable ............................................ 18,470 70,232 (158,317) 121,771
Accrued expenses and other current liabilities .............. 12,887 652 (25,108) 17,583
Interest payable ............................................ (4,473) (13,915) 5,181 10,035
----------- ----------- ----------- -----------
Net cash used in operating activities .................. (3,688) (75,573) (378,095) (122,381)
INVESTING ACTIVITIES:
Sales and maturities of marketable securities .................... 72,619 390,010 521,913 1,660,374
Purchases of marketable securities ............................... (44,954) (184,015) (95,740) (2,209,285)
Purchases of fixed assets ........................................ (41,948) (70,762) (97,427) (181,859)
Investments in equity-method investees and other
investments .................................................... (5,760) (115,491) (61,842) (222,853)
----------- ----------- ----------- -----------
Net cash provided by (used in) investing activities .... (20,043) 19,742 266,904 (953,623)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options .......................... 4,564 15,304 39,717 36,930
Proceeds from long-term debt ..................................... 500 10,639 681,499 1,260,639
Repayment of long-term debt ...................................... (3,777) (2,231) (12,997) (184,710)
Financing costs .................................................. -- (214) (16,122) (35,151)
----------- ----------- ----------- -----------
Net cash provided by financing activities .............. 1,287 23,498 692,097 1,077,708
Effect of exchange rate changes on cash and cash equivalents ..... (50,885) 119 (67,167) 256
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ............. (73,329) (32,214) 513,739 1,960
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ....................... $ 647,048 $ 73,543 $ 647,048 $ 73,543
=========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Fixed assets acquired under capital leases ....................... $ -- $ 3,213 $ 4,346 $ 25,850
Fixed assets acquired under financing agreements ................. -- -- 4,844 5,608
Stock issued in connection with business acquisitions ............ 2,130 18,336 32,130 635,343
Equity securities for unearned Amazon Commerce
Network services ............................................... 9,009 -- 106,848 --
</TABLE>
See accompanying notes to financial statements.
5
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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 months and nine months ended September 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/A 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 classifies all highly liquid instruments with an original maturity of
three months or less as cash equivalents. Prior to April 1, 2000, such
instruments 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 three months and nine months ended
September 30, 2000 and 1999 presented in this Form 10-Q 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 $221.5 million and
$206.6 million for the three months ended September 30, 2000 and 1999,
respectively. Comprehensive loss was $930.1 million and $417.5 million for the
nine months ended September 30, 2000 and 1999, respectively.
Loss per Share
The number of shares used in calculating loss per share for the three months
ended September 30, 2000 and 1999 was reduced by 2.1 million and 5.5 million
shares, and the number of shares used in calculating loss per share for the nine
months ended September 30, 2000 and 1999 was reduced by 3.7 million and 6.0
million shares, respectively. Such reductions reflect the weighted average
number of outstanding shares subject to repurchase. The effect of stock options
is antidilutive and accordingly excluded from diluted loss per share.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 138,
which was issued in June 2000. The Company will adopt SFAS No. 133 on January 1,
2001. SFAS No. 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other
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comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. The Company
has not yet determined the impact of adoption of SFAS No. 133 on its
financial condition, results of operations, or business practices.
In March 2000, the Emerging Issues Task Force (EITF) of the FASB 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 Company adopted this consensus on July 1,
2000. During the three months ended September 30, 2000, the Company capitalized
$1.6 million of Web site development costs. Such capitalized costs are included
in "Fixed assets, net" and will be depreciated over a period of two years.
In September 2000, the EITF reached a final 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 historically has classified shipping charges to customers as revenue.
With respect to the classification of costs related to shipping and handling
incurred by the seller, the EITF determined that the classification of such
costs is an accounting policy decision that should be disclosed. It also
determined that if shipping costs or handling costs are significant and are not
included in cost of sales (that is, if those costs are accounted for together or
separately on other income statement line items), a company should disclose both
the amount(s) of such costs and the line item(s) on the income statement that
include them. The Company historically has classified both inbound and outbound
shipping charges and the cost of tangible supplies used to package product for
shipment to customers as cost of sales. The Company classifies fulfillment
costs, which are those costs incurred in operating and staffing distribution and
customer service centers (including costs attributable to receiving, inspecting
and warehousing inventories; picking, packaging and preparing customers' orders
for shipment; and responding to inquiries from customers) and credit card fees,
as marketing, sales and fulfillment expenses. Fulfillment costs, as defined
above, totaled $283.5 million and $130.2 million for the nine months ended
September 30, 2000 and 1999, and totaled $96.4 million and $53.7 million for the
three months ended September 30, 2000 and 1999.
In July 2000, the EITF reached a consensus on EITF Issue 99-19, "Reporting
Revenue Gross as a Principal versus Net as an Agent." This consensus provides
guidance concerning under what circumstances a company should report revenue
based on (a) the gross amount billed to a customer because it has earned revenue
from the sale of the goods or services or (b) the net amount retained (that is,
the amount billed to the customer less the amount paid to a supplier) because it
has earned a commission or fee. Application of the provisions of this consensus
did not change the Company's existing accounting policies.
NOTE 2 -- MARKETABLE SECURITIES
Marketable securities available for sale, at fair value, consist of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Asset-backed and agency securities ................ $ 59,317 $ 247,667
Commercial paper and short-term obligations ....... 9,213 57,210
Treasury notes and bonds .......................... 73,886 164,158
Corporate notes and bonds ......................... 12,653 103,844
Equity securities ................................. 97,907 --
------------- -------------
Total marketable securities ............. $ 252,976 $ 572,879
============= =============
</TABLE>
The Company's marketable securities consist primarily of A-rated or higher
short- to intermediate-term fixed income securities, as well as equity
securities.
NOTE 3 -- BUSINESS COMBINATIONS
In May 2000 and September 2000, the Company made final payments for two 1999
acquisitions in the form of common stock of the Company. These payments were
made pursuant to the terms of the original agreements and resulted in an
increase in goodwill of $32.1 million related to these acquisitions ($30 million
in May 2000 and $2.1 million in September 2000). This additional goodwill will
be amortized over a 2-year period from the issuance of the additional stock.
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NOTE 4 -- INVESTMENTS IN EQUITY-METHOD INVESTEES
The Company holds certain investments accounted for under the equity method.
The Company accounts for an investment under the equity method if the investment
gives the Company the ability to exercise significant influence, but not
control, over an investee. Significant influence is generally deemed to exist if
the Company has an ownership interest in the voting stock of the investee of
between 20% and 50%, although other factors, such as representation on the
investee's Board of Directors 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 three months
in arrears for public companies.
In September 2000, Webvan Group, Inc. (Webvan) completed the acquisition of
all of the outstanding common stock of one of the Company's equity-method
investees, HomeGrocer.com, Inc. (HomeGrocer), in exchange for common stock of
Webvan. The Company does not account for its resulting investment in Webvan
under the equity method because it does not have the ability to exercise
significant influence over Webvan. During the three months ended September 30,
2000, the Company recorded its Webvan common stock investment at its estimated
fair value at the date of closing of the transaction of $84.0 million, which was
determined by management after considering an independent estimate of value, and
recorded a gain of $40.2 million on its common stock investment in HomeGrocer
based on this estimated fair value. This gain is included in "Non-cash
investment gains and losses, net" in the accompanying statements of operations.
As of September 30, 2000, the Company still holds all of the Webvan common stock
it received in the transaction. Substantially all of the Company's investment in
Webvan is classified as an available-for-sale investment, is accounted for at
its quoted market price and is included in "Marketable securities" at September
30, 2000.
NOTE 5 -- OTHER INVESTMENTS
At September 30, 2000, "Other investments" included $41.2 million of
investments accounted for at cost and $32.1 million of investments in equity
securities with ready markets that are recorded at fair value and classified as
available-for-sale securities pursuant to SFAS No. 115. The cost of such
available-for-sale equity securities included in "Other investments" at
September 30, 2000 was $68.4 million, resulting in unrealized losses included in
"Accumulated other comprehensive loss" of $36.3 million.
During the three months ended September 30, 2000, the Company determined
that the declines in value from the Company's accounting basis for two of its
investments were other than temporary. The Company recognized losses totaling
$33.8 million to record its investments in Audible, Inc. and Nextcard, Inc. at
their estimated current fair values as of September 30, 2000. This amount is
included in "Non-cash investment gains and losses, net" in the accompanying
statements of operations. Prior to September 30, 2000, unrealized losses from
these investments had been recorded in "Accumulated other comprehensive loss."
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. These
relationships have consisted of the Company entering into commercial agreements
that involve the sale of products and services by these companies on co-branded
sections of the Amazon Web site and other promotional services, such as
advertising placements and customer referrals. The Company has also made
minority investments in some of the companies with which it has entered into
such agreements. 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 several of its
ACN partners, some of which are accounted for under the equity method. Fair
value of securities is generally determined at the date the agreement is
consummated. For securities of ACN partners that are public companies, the
Company generally determines fair value based on the quoted market price at
the time the Company enters into the underlying agreement, and adjusts such
market price appropriately if significant restrictions on marketability exist.
As an observable market price does not exist for equity securities of private
companies, estimates of fair value of such securities are more subjective than
for securities of public companies. For significant transactions involving
equity securities in private companies, the Company obtains and considers
independent, third-party valuations where appropriate. Such valuations use a
variety of methodologies to estimate fair value, including comparing the
security with securities of publicly traded companies in similar lines of
business, applying price multiples to estimated future operating results for the
private company, and then also estimating discounted cash flows for that
company. These valuations also reduce the fair value to account for restrictions
on control and marketability where appropriate. Using these valuations and other
information available to the Company, such as the Company's knowledge of the
industry and knowledge of specific information about the investee, the Company
determines the estimated fair value of the securities received. As required by
EITF 00-8, to the extent that equity securities received or modified after March
16, 2000 are subject to forfeiture or
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vesting provisions and no significant performance commitment exists upon signing
of the agreements, the fair value of the securities is determined as of the date
the respective forfeiture or vesting provisions lapse.
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 nine months ended September 30, 2000, the
Company recorded $49.6 million and $94.8 million, respectively, of revenue from
ACN partners. For the three months ended September 30, 2000, ACN revenue
recognized during the period consisted of consideration, either received during
the period or amortized from previously unearned revenue, in the form of $28.7
million of cash, $20.1 million of equity securities of public companies and $0.8
million of equity securities of private companies. For the nine months ended
September 30, 2000, ACN revenue recognized during the period consisted of
consideration, either received during the period or amortized from previously
unearned revenue, in the form of $36.6 million of cash, $53.7 million of equity
securities of public companies and $4.5 million of equity securities of private
companies.
The Company accounts for several of its investments in ACN partners using
the equity method. During the three months and nine months ended September 30,
2000, the Company recorded $69.1 million and $266.9 million of equity-method
losses for investments in ACN partners.
During the three months ended September 30, 2000, one of the Company's
equity-method investees, living.com, Inc. (living.com) declared bankruptcy. In
February 2000, the Company closed the purchase of shares of preferred stock of
living.com for $10 million in cash in connection with a commercial agreement
with living.com. The Company received additional living.com preferred stock with
an estimated fair value of $21 million in consideration for services to be
provided under the commercial agreement and recorded a total investment of $31
million and unearned revenue of $21 million. Through the date of living.com's
bankruptcy, the Company had recorded $16.9 million of equity-method losses and
had earned $0.9 million of revenue under the commercial agreement, resulting in
an investment balance at the date of living.com's bankruptcy of $14.1 million
(the difference between the $31 million initial total investment and the $16.9
million in equity-method losses) and an unearned revenue balance relating to the
commercial agreement of $20.1 million (the difference between the initial $21
million unearned revenue balance and the $0.9 million of revenue recognized). As
a result of the bankruptcy, the Company incurred a loss of $14.1 million, the
amount of its remaining investment balance in living.com at the time of the
bankruptcy. The Company also recorded a gain as a result of the termination of
the commercial agreement in the amount of $20.1 million, the amount of the
unearned revenue balance at the time of the bankruptcy. Both the gain and the
loss are included in "Non-cash investment gains and losses" in the accompanying
statement of operations.
NOTE 7 -- LONG-TERM DEBT
On February 16, 2000, the Company completed an offering of E690,000,000 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.
In order to hedge a portion of the risk of exchange rate fluctuations
between the US dollar and the Euro, in September 2000, the Company entered into
a cross-currency swap agreement. Under the swap agreement, the Company agreed to
pay at inception and receive upon maturity E75 million in exchange for receiving
at inception and paying at maturity $67.1 million. In addition, the Company
agreed to receive in February of each year E26.8 million for interest payments
on E390 million of the PEACS and, simultaneously, to pay $31.9 million. This
agreement is cancelable, in whole or in part, at the Company's option at no cost
on or after February 20, 2003 if the Company's underlying stock price (converted
into Euros) is greater than or equal to the minimum conversion price of the
PEACS. The Company accounts for these agreements as a hedge of the risk of
exchange rate fluctuations. Currency gains and losses on the hedge agreements
are recognized upon the recognition of the corresponding currency gains and
losses on the hedged liabilities.
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:
9
<PAGE> 10
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Marketing, sales and fulfillment ..... $ 193 $ 2,595 $ (1,067) $ 2,772
Technology and content ............... 5,838 8,689 27,997 13,150
General and administrative ........... (1,940) 505 (1,021) 647
---------- ---------- ---------- ----------
$ 4,091 $ 11,789 $ 25,909 $ 16,569
========== ========== ========== ==========
</TABLE>
NOTE 9 -- ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Unrealized loss on Ashford.com, Inc. common stock ........... $ (36,329) $ --
Unrealized loss on Webvan common stock ...................... (14,989) --
Unrealized loss on Sotheby's Holdings, Inc. common stock .... (10,563) (5,437)
Unrealized gains (losses) on other marketable
securities, net ............................................. (3,984) 3,273
Foreign currency related gains, net ......................... 228 455
------------- -------------
$ (65,637) $ (1,709)
============= =============
</TABLE>
NOTE 10 -- ACQUISITION-RELATED AND OTHER EXPENSES
Acquisition-related and other expenses include certain expenses incurred in
connection with the acquisition of other companies, such as bonuses paid to
employees of acquired companies and other miscellaneous acquisition-related
expenses. Also included in this caption for the three months ended September 30,
2000 is $11.1 million related to the retirement of certain computer equipment
and distribution center fixed assets to be disposed of. These retirements
resulted from changes in certain fulfillment-related and customer service
processes in preparation for the upcoming holiday season and from the Company's
ongoing consolidation of office space in the Seattle, Washington area.
NOTE 11 -- 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.
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.
10
<PAGE> 11
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 12 -- 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 SEPTEMBER 30, 2000:
Net sales ................................. $ 399,905 $ 87,665 $ 150,288 $ 637,858
Gross profit .............................. 108,746 18,882 39,651 167,279
Segment profit (loss) ..................... 24,688 (39,569) (53,558) (68,439)
Other operating expenses .................. -- -- -- (95,076)
Net interest expense and other ............ -- -- -- (8,688)
Equity in losses of equity-method
investees, net ......................... -- -- -- (68,321)
--------------
Net loss .................................. -- -- -- $ (240,524)
==============
THREE MONTHS ENDED SEPTEMBER 30, 1999:
Net sales ................................. 301,307 39,682 14,788 $ 355,777
Gross profit (loss) ....................... 64,100 8,995 (2,618) 70,477
Segment loss .............................. (109) (18,138) (60,951) (79,198)
Other operating expenses .................. -- -- -- (87,911)
Net interest expense and other ............ -- -- -- (6,612)
Equity in losses of equity-method
investees, net ......................... -- -- -- (23,359)
--------------
Net loss .................................. -- -- -- $ (197,080)
==============
NINE MONTHS ENDED SEPTEMBER 30, 2000:
Net sales ................................. 1,186,595 236,190 366,838 $ 1,789,623
Gross profit .............................. 278,463 51,205 101,809 431,477
Segment profit (loss) ..................... 32,319 (101,519) (187,854) (257,054)
Other operating expenses .................. -- -- -- (284,730)
Net interest expense and other ............ -- -- -- (57,312)
Equity in losses of equity-method
investees, net ......................... -- -- -- (267,037)
--------------
Net loss .................................. -- -- -- $ (866,133)
==============
NINE MONTHS ENDED SEPTEMBER 30, 1999:
Net sales ................................. 848,422 96,746 18,629 $ 963,797
Gross profit (loss) ....................... 185,046 20,728 (2,975) 202,799
Segment loss .............................. (14,373) (48,425) (114,224) (177,022)
Other operating expenses .................. -- -- -- (154,949)
Net interest expense and other ............ -- -- -- (27,908)
Equity in losses of equity-method
investees, net ......................... -- -- -- (36,876)
--------------
Net loss .................................. -- -- -- $ (396,755)
==============
</TABLE>
Revenue and gross profit of $49.6 million and $28.0 million, respectively,
were generated on ACN services for the three months ended September 30, 2000.
Revenue and gross profit of $94.8 million and $72.1 million, respectively, were
generated on ACN services for the nine months ended September 30, 2000. Such
amounts are included within the results of the Early-Stage Businesses and Other
segment. Although the ACN program formally commenced in the fourth quarter of
1999, the Company earned advertising-related revenues in the first three
quarters of 1999. Revenue and gross profit generated from these advertising
services for the three
11
<PAGE> 12
months ended September 30, 1999 were both $1.2 million. Revenue and gross profit
generated from these services for the nine months ended September 30, 1999 were
both $1.6 million.
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,
acquisition-related and other costs, and non-cash investment gains and losses,
net.
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 profit and loss, cash balances, return on invested capital, the
decrease in fulfillment costs as a percentage of sales, the sufficiency of our
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, gross margins 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. Our
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 we invest 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 we enter into ACN and other strategic
transactions, fluctuations in the value of securities we receive in such
transactions or from our investments in companies, risks of inventory
management, and risks of distribution and fulfillment throughput and
productivity. Other risks and uncertainties include our 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
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 our 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 25 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 and games, electronics, camera and photo, software, computer and
video games, tools and hardware, lawn and patio products and kitchen products.
Our customers can find and discover millions of 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. In addition to our US Web site, we currently have three
internationally focused Web sites located at www.amazon.co.uk, www.amazon.de and
www.amazon.fr. We offer our customers a superior shopping experience by
providing 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. Our 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 entered into a number of
strategic relationships with selected companies. These relationships have
consisted of our entry into commercial agreements that involve the sale of
products and services
12
<PAGE> 13
by these companies on co-branded sections of the Amazon Web site and other
promotional services, such as advertising placements and customer referrals. In
exchange for the services we provide under these agreements, we receive cash,
equity securities of these companies, or a combination of the two. In some
cases, we have also made separate investments in an ACN partner by making a cash
payment in exchange for equity securities of that partner. During the nine
months ended September 30, 2000, we received cash from our ACN partners of $59.1
million and equity securities in our ACN partners with an estimated fair value
of $106.8 million, net of cash paid by us, in return for services to be provided
by us in the future, and recorded such amounts as unearned revenue. For equity
securities of public companies, we generally determine fair value based on the
quoted market price at the time we enter into the underlying commercial
agreement, and adjust such market price appropriately if significant
restrictions on marketability exist. As an observable market price does not
exist for equity securities of private companies, estimates of fair value of
such securities are more subjective than for securities of public companies. For
significant transactions involving equity securities in private companies, we
obtain and consider independent, third-party valuations where appropriate. Such
valuations use a variety of methodologies to estimate fair value, including
comparing the security with securities of publicly traded companies in similar
lines of business, applying price multiples to estimated future operating
results for the private company, and then also estimating discounted cash flows
for that company. These valuations also reduce the fair value to account for
restrictions on control and marketability where appropriate. Using these
valuations and other information available to us, such as our knowledge of the
industry and knowledge of specific information about the investee, we determine
the estimated fair value of the securities received.
The fair value of these securities, less the net amount of cash paid by us,
is then recorded as unearned revenue. Our recorded unearned revenue resulting
from these transactions and any additional proceeds received under the
arrangements is recognized as revenue over the terms (generally, one to three
years) of the commercial agreements with our ACN partners. To the extent that
equity securities either increase or decrease in value subsequent to their
initial measurement (and such securities are either not subject to vesting or
forfeiture or, if subject to vesting or forfeiture were not modified after March
16, 2000, pursuant to Emerging Issues Task Force Issue No. 00-8), unearned
revenue is not adjusted. During the three months ended September 30, 2000, we
entered into amendments to restructure our agreements with some of our ACN
partners. We have accepted lower future cash consideration, revisions to the
related term of the underlying agreements, or both. Modifications to these
agreements whereby we agreed to receive lower amounts of future consideration
do not affect the recorded balance of unearned revenue. However, the
amortization of unearned revenue will be affected. If a modification resulted
in lower future payments to be received in future years, even if the term
of the agreement is unchanged, any amount received as a prepayment under the
agreement that we recorded as unearned revenue will represent compensation
under the amended agreement for a longer period of time than under the original
agreement. As such, the unearned revenue for consideration previously received
will be amortized into revenue over a longer period of time.
During the three months ended September 30, 2000, we entered into an
agreement with Toysrus.com under which each company has agreed to assume
responsibility for specific aspects of a co-branded toy and video games and baby
products store. Toysrus.com will be responsible for merchandising and content
for the co-branded store and will identify, buy, manage and bear the financial
risk of inventory. We will handle site development, order fulfillment, customer
service, and the housing of Toysrus.com's inventory in our U.S. distribution
centers. We are compensated for services performed under the arrangement through
a combination of a one-time upfront cash payment, quarterly fixed cash payments,
per unit cash payments and a percentage of revenue generated from the co-branded
store payable in cash. We will not record sales of Toysrus.com inventory for
which we provide the services discussed above as our sales. Rather, revenues
earned by us under the agreement will constitute revenues from ACN activities
because such revenues are generated by our performance of services for
Toysrus.com. In addition, we sold $19.6 million of certain related inventory to
Toysrus.com at our cost, which did not exceed market, in connection with this
arrangement. The revenue from that sale is included in revenue from ACN
activities. Shipping revenue earned from customers by us associated with the
shipment of products ordered from the co-branded store is not included in ACN
revenue and is included with shipping revenue associated with the associated
product lines. In connection with the agreement, we also received a warrant to
purchase 5% of Toysrus.com, which expires December 31, 2004, and the right to
nominate a member to the board of directors of Toysrus.com. The cash payments
received from Toysrus.com, excluding those received for the sale of inventory,
and an immaterial amount representing the estimated fair value of the warrant,
have been recorded as unearned revenue. During the three months ended September
30, 2000, we received advance cash payments from Toysrus.com, in the amount of
$19.5 million, which will be recognized as revenue over the term of the
agreement and in the amount of $14.5 million, most of which will be recognized
as revenue during the fourth quarter of 2000.
Our ACN relationships, particularly those in which we receive securities in
payment for our services, require reporting and disclosure that involve
estimates to determine fair value, the recognition of revenue over time, and the
ongoing accounting for our investments in our partners. Estimates of fair value
are based on the use of independent third party appraisals when appropriate. We
have received informal inquiries from the SEC staff with respect to accounting
treatment and disclosures for some of our initial ACN transactions and have
responded to those questions. We reviewed the accounting for the transactions
with our auditors and the SEC staff, and we believe that the accounting
treatment, and disclosures, were appropriate. We will continue to cooperate with
the SEC staff if they have further questions.
The ACN relationships discussed above have resulted in significant changes
to several of our balance sheet items at September 30, 2000, as compared to
December 31, 1999. During the nine months ended September 30, 2000, we recorded
$267.0 million of equity-method
13
<PAGE> 14
losses, which have reduced our equity-method investment balance. Offsetting
this reduction are new investments we have made since December 31, 1999. These
investments involved cash payments by us of $45.9 million to purchase securities
of ACN partners, and non-cash consideration we received from ACN partners
consisting of their equity securities with an estimated fair value of $80.0
million, as well as increases arising from offerings of common stock by some
of our investees (see the "Equity in Losses of Equity-Method Investees" section
of "Results of Operations" below).
Our "Other investments" balance has decreased from December 31, 1999 to
September 30, 2000 primarily as a result of declines in the fair value of our
investments in Ashford.com, Inc. and Nextcard, Inc. (Nextcard), two of our ACN
partners. Additionally, investments with a fair value of $30.8 million as of
September 30, 2000 were included in "Marketable securities" at September 30,
2000 that were previously included in "Other investments" as of December 31,
1999. "Other investments" includes investments in private companies and
investments in public companies that we intend to hold for over one year from
the balance sheet date. We reclassified some of our investments from "Other
investments" to "Marketable securities" during the nine months ended September
30, 2000 because we no longer have the positive intent to hold such investments
for one year from the balance sheet date.
Our "Unearned revenue" has increased from $54.8 million at December 31, 1999
to $142.0 million at September 30, 2000 due to the receipt of consideration in
the form of cash payments and equity securities from ACN partners in advance of
services we have agreed to provide to them in the future. Offsetting these
increases in unearned revenue, we have recognized $65.6 million of revenue
during the nine months ended September 30, 2000 that was previously unearned,
and have also recognized previously unearned revenue of $20.1 million associated
with the termination of our commercial agreement with living.com (see "Non-Cash
Investment Gains and Losses, net" section of "Results of Operations" below).
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2000 1999 % CHANGE 2000 1999 % CHANGE
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT (IN THOUSANDS, EXCEPT
GROSS MARGIN) GROSS MARGIN)
<S> <C> <C> <C> <C> <C> <C>
Net sales ........................ $ 637,858 $ 355,777 79% $ 1,789,623 $ 963,797 86%
Gross profit ..................... 167,279 70,477 137% 431,477 202,799 113%
Gross margin ..................... 26.2% 19.8% 32% 24.1% 21.0% 15%
Marketing, sales and
fulfillment ................... 138,342 86,842 59% 408,266 233,725 75%
Technology and content ........... 71,159 44,451 60% 199,535 102,002 96%
General and administrative ....... 26,217 18,382 43% 80,730 44,094 83%
Stock-based compensation ......... 4,091 11,789 (65)% 25,909 16,569 56%
Amortization of goodwill and
other intangibles ............. 79,194 74,343 7% 242,562 132,393 83%
Acquisition-related and other .... 11,791 1,779 563% 16,259 5,987 172%
Loss from operations ............. (163,515) (167,109) (2)% (541,784) (331,971) 63%
Interest income .................. 9,402 12,699 (26)% 29,842 36,479 (18)%
Interest expense ................. (33,809) (21,470) 57% (94,827) (66,424) 43%
Other income (expense), net ...... 3,353 2,159 55% (4,693) 2,037 --
Non-cash investment gains and
losses, net .................... 12,366 -- -- 12,366 -- --
Equity in losses of
equity-method Investees ........ (68,321) (23,359) 192% (267,037) (36,876) 624%
</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. Net product sales were $510.2 million and $301.3
million for the three months ended September 30, 2000 and 1999, and $1,468.5
million and $815.8 million for the nine months ended September 30, 2000 and
1999. Shipping revenue was $78.1 million and $53.3 million for the three months
ended September 30, 2000 and 1999, and $226.3 million and $146.4 million for the
nine months ended September 30, 2000 and 1999. Net sales also includes ACN
revenues of $49.6 million and $94.8 million for the three months and nine months
ended September 30, 2000. Although the ACN program formally commenced in the
fourth quarter of 1999, we earned advertising revenues prior to the ACN
program's existence during the first three quarters of 1999. These advertising
revenues totaled $1.2 million and $1.6 million for the three months and nine
months ended September 30, 1999. For the three months ended September 30, 2000,
ACN revenue recognized during the period consisted of consideration, either
received during the period or amortized from previously unearned revenue, in the
form of $28.7 million of cash, $20.1 million of equity securities of public
companies and $0.8 million of equity securities of private companies. For the
nine months ended September 30, 2000, ACN revenue recognized during the period
consisted of consideration, either received during the period or amortized from
14
<PAGE> 15
previously unearned revenue, in the form of $36.6 million of cash, $53.7 million
of equity securities of public companies and $4.5 million of equity securities
of private companies. A majority of the cash revenues recognized from the ACN
program for the three months and nine months ended September 30, 2000,
represents revenue associated with the sale of $19.6 million of inventory to
Toysrus.com at our cost, which did not exceed market. Future ACN revenue will be
affected by such factors as the health of our ACN partners, the ability to
successfully renew agreements with ACN partners and the terms of such renewals,
and the ability to successfully attract new ACN partners and the terms of any
such agreements. Growth in net sales for the three months and nine months ended
September 30, 2000, as compared to the comparable periods in 1999, is primarily
related to an increase in units sold due to the growth of our customer base,
repeat purchases from existing customers, the introduction of new product lines,
a favorable mix of customer discounts in our various product lines and increased
ACN and advertising-related revenues. Subsequent to September 30, 1999, we added
the new product lines of software, computer and video games, tools and hardware,
lawn and patio, and kitchen products. We expect that our net sales for the
fourth quarter of 2000 will be between $950 million and $1.05 billion and that
net sales for 2001 will be approximately $4 billion. Over the longer term, we
expect to average a double-digit percentage share of the online retail market
segment. However, any such projections are subject to substantial uncertainty.
See "Additional Factors That May Affect Future Results."
At September 30, 2000, the number of customer accounts, which includes
customer accounts for marketplace services but excludes customer accounts of our
ACN partners, exceeded 25 million, compared with over 13 million at September
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, www.amazon.de and www.amazon.fr, represented approximately 23%
and 25% of net sales for the three months ended September 30, 2000 and 1999, and
23% and 24% for the nine months ended September 30, 2000 and 1999.
Gross Profit
Gross profit consists of net sales less the cost of sales, which consists of
the cost of merchandise sold to customers, as well as inbound and outbound
shipping costs and the cost of tangible supplies used to package product for
shipment to customers. Cost of sales for ACN activities includes costs directly
associated with the generation of ACN revenue. Such costs have generally
consisted of employee costs associated with the creation of content for
co-branded Web sites with our ACN partners. During the three months and nine
months ended September 30, 2000, cost of sales for ACN activities also included
the cost of product sold to Toysrus.com, and in the future will include costs to
provide services under our agreement with Toysrus.com, such as costs to ship
product sold through the co-branded store and other associated costs. For the
three months and nine months ended September 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 months and nine months ended
September 30, 2000 compared to the same periods in 1999 due to several factors.
First, we have improved our management of vendors and the terms we have with
many of our vendors. This has been accomplished primarily through an increase in
the amount of product purchased directly from publishers, labels and studios in
our US Books, Music and DVD/video segment, as opposed to purchasing product from
distributors, which often costs more than direct purchasing. Second, we have
improved our inventory management practices, including improvements in inventory
tracking, processing of returns of product to vendors, and geographical location
of inventory within our distribution center network to minimize shipping costs.
Third, we have seen a favorable mix of customer discounts in our various product
lines. Finally, gross margin from ACN activities has generally been higher than
gross margin associated with product sales and as ACN revenues increase, gross
profit tends to increase at a faster pace. Gross margin from ACN activities was
56.1% (gross profit of $28.0 million) and 76.1% (gross profit of $72.1 million)
for the three months and nine months ended September 30, 2000, compared to an
overall gross margin for the same periods of 26.2% and 24.1%. Although the ACN
program formally commenced in the fourth quarter of 1999, we recognized gross
profit of $1.2 million and $1.6 million from advertising activities prior to the
ACN program's existence, during the three months and nine months ended September
30, 1999. Although the decrease in ACN gross margin for the three months ended
September 30, 2000, as compared to the nine months ended September 30, 2000, was
due to the sale of inventory to Toysrus.com, we expect future ACN gross margins
to be comparable to the gross margin for the three months ended September 30,
2000. As noted in the "Net Sales" section above, we sold the inventory to
Toysrus.com at our cost, resulting in no gross profit. Excluding the effect of
our ACN activities, gross margin would have been 23.7% during the three months
ended September 30, 2000 and 21.2% during the nine months ended September 30,
2000, increases of 4.2% and 0.3% compared to the same periods in 1999.
Gross profit from shipping, which represents shipping revenues less outbound
shipping costs, was $15.6 million (6.9% of shipping revenues) for the nine
months ended September 30, 2000, as compared to $16.5 million (11.3% of shipping
revenues) for the nine months ended September 30, 1999. Gross profit from
shipping for the three months ended September 30, 2000 was $8.2 million (10.5%
of shipping revenues), as compared to $4.9 million (9.2% of shipping revenues)
for the three months ended September 30, 1999. The increase in gross profit from
shipping for the three months ended September 30, 2000, as compared to the
comparable period in 1999, is primarily due to a decrease in split shipments and
other improvements in logistics. The decrease in gross profit from shipping for
the nine-month period ended September 30, 2000, as compared to the comparable
period in 1999, is due to a gross loss from shipping in the first quarter of
2000 caused by increased split shipments.
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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. We expect
that gross margins for the fourth quarter of 2000 will be lower than for the
three months ended September 30, 2000, due to seasonal factors such as increased
split shipments, long-zone shipments and complimentary delivery upgrades to
ensure delivery for the holiday season, and increased promotional activity.
However, we expect that gross margins for the fourth quarter of 2000 will be
higher than for the fourth quarter of 1999. Any such projections are subject to
substantial uncertainty. See "Additional Factors That May Affect Future
Results."
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 $96.4 million
and $53.7 million for the three months ended September 30, 2000 and 1999, and
$283.5 million and $130.2 million for the nine months ended September 30, 2000
and 1999. Advertising, promotional and public relations costs totaled $41.9
million and $33.1 million for the three months ended September 30, 2000 and
1999, and $124.8 million and $103.5 million for the nine months ended September
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 September 30, 2000, as compared to the same period in 1999,
from 24.4% of net sales in 1999 to 21.7% of net sales in 2000, primarily due to
a decrease in marketing expenses as a percentage of net sales. Marketing, sales
and fulfillment expenses also decreased as a percentage of net sales for the
nine-month period ended September 30, 2000 as compared to the same period in
1999, from 24.3% of net sales in 1999 to 22.8% of net sales in 2000, primarily
due to a decrease in marketing expenses as a percentage of net sales. Due to the
expansion of the distribution center network, which was completed in 1999, we
have incurred higher fulfillment expenses as a percentage of net sales for the
nine months ended September 30, 2000 compared to the comparable period of 1999.
However, the decrease in marketing expenses as a percentage of net sales
outweighed this fulfillment expense increase, resulting in a decrease in
marketing, sales and fulfillment expenses as a percentage of net sales overall.
We expect that fulfillment costs will be in the low teens as a
percentage of net sales in the fourth quarter of 2000. 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 September 2000, the Emerging Issues Task Force (EITF) reached a final
consensus on EITF Issue 00-10, "Accounting for Shipping and Handling Fees and
Costs." This consensus states 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. We already classify shipping charges to
customers as revenue. With respect to the classification of costs related to
shipping and handling incurred by the seller, the EITF determined that the
classification of such costs is an accounting policy decision that should be
disclosed. We classify inbound and outbound shipping costs and the cost of
tangible supplies used to package product for shipment to customers as cost of
sales. We classify 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.
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 increased in absolute dollars from 1999 to 2000 due to continued
development of content for new product launches on the US and internationally
focused Web sites, the launch of the www.amazon.fr Web site, and increases in
infrastructure expenses, including expenses associated with opening a second
data center to house our technology equipment in 2000. Technology and content
expenses were 11.2% of net sales for the three months ended September 30, 2000,
as compared to 12.5% of net sales for the comparable period in 1999. This
decrease in technology and content expenses as a percentage of net sales is
primarily due to less activity related to new product launches during the three
months ended September 30, 2000 than in the comparable period of 1999. For the
nine months ended September 30, technology and content expenses as a percentage
of net sales increased from 10.6% in 1999 to 11.1% in 2000. This increase is
primarily due to expenses
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associated with the development of content for the www.amazon.fr Web site and
preparations associated with, and the opening of, a second data center for our
technology equipment. 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 our 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 months and nine months ended September 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 5.2% and 4.6% for the three months and nine months
ended September 30, 1999, decreasing to 4.1% and 4.5% for the three months and
nine months ended September 30, 2000. These decreases are primarily due to the
fixed nature of many of these costs being applied to a larger base of net sales
for the periods in 2000 as compared to the comparable periods of 1999.
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.
Amortization of Goodwill and Other Intangibles
Increases in amortization of goodwill and other intangibles for the three
months and nine months ended September 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.
Acquisition-Related and Other
Acquisition-related and other expenses include certain expenses incurred in
connection with the acquisition of other companies, such as bonuses paid to
employees of acquired companies and other miscellaneous acquisition-related
expenses. Also included in this caption for the three months ended September 30,
2000 is $11.1 million related to the retirement of certain computer equipment
and distribution center fixed assets to be disposed of. These retirements
resulted from changes in certain fulfillment-related and customer service
processes in preparation for the upcoming holiday season and from our ongoing
consolidation of office space in the Seattle, Washington area.
Loss from Operations
Our loss from operations decreased by 2% for the three months ended
September 30, 2000, as compared to the same period in 1999, due to increased
gross profit, which was partially offset by increases in marketing, sales and
fulfillment, technology and content, general and administrative expenses and
amortization of goodwill and other intangibles. For the nine-month period ended
September 30, 2000, the loss from operations increased by 63% compared to the
same period in 1999. For this period, the increases in the expense categories
listed above exceeded the increase in gross profit.
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Interest Income and Expense
Interest income decreased for the three months and nine months ended
September 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 of PEACS.
Other Income (Expense), Net
Other income (expense), net primarily consists of net realized gains and
losses on sales of marketable securities and net foreign exchange transaction
gains and losses. Other income, net increased for the three months ended
September 30, 2000, as compared to the same period in 1999, due to higher net
realized gains on sales of marketable securities. For the nine months ended
September 30, 2000, we incurred higher foreign exchange transaction losses, as
compared to 1999, commensurate with an increase in foreign exchange
transactions, resulting in other expense, net of $4.7 million in 2000 as
compared to other income, net of $2.0 million in 1999.
Non-Cash Investment Gains and Losses, Net
Non-cash investment gains and losses, net for the three months and nine
months ended September 30, 2000 includes net realized gains and losses on
investments described below during the three months ended September 30, 2000. We
had no comparable gains or losses on non-cash investments during the same
periods in 1999. We recorded a gain of $40.2 million upon the September 2000
acquisition of one of our equity-method investees, HomeGrocer, by Webvan Group,
Inc. (Webvan), representing the difference between our book value in the common
stock in HomeGrocer we held prior to the acquisition and the fair value of the
Webvan common stock we received upon closing of the transaction. Substantially
all of our investment in Webvan is now included in marketable securities. We
have recorded a net unrealized loss of $15.0 million as of September 30, 2000,
in accordance with Statement of Financial Accounting Standards No. 115,
representing the decline in the market value of the Webvan stock following the
close of the transaction. This unrealized loss is included in accumulated other
comprehensive loss.
In February 2000, we closed the purchase of shares of preferred stock in
living.com for $10 million in cash in connection with a commercial agreement
with living.com. We received additional living.com preferred stock in
consideration for services to be provided under the commercial agreement, as
well as the right to nominate a member of the Board of Directors of living.com,
a right we never exercised. The balance sheet included with our press release
for the three months ended March 31, 2000 recorded the value of our equity
securities from living.com at approximately $93 million, and unearned revenue of
approximately $83 million based on an initial independent third party valuation.
After issuing our earnings release but prior to publishing our financial
statements in our Quarterly Report on Form 10-Q filing for the three months
ended March 31, 2000, and after learning of the pricing in a subsequent private
equity offering by living.com, we requested additional valuation work by the
independent third party which considered that pricing as well as revised and
updated forecasts from living.com management and other relevant information. Our
financial statements for the three months ended March 31, 2000, published in our
Quarterly Report on Form 10-Q, reflected our estimate of fair value of our
investment in living.com at $31 million and unearned revenue at $21 million. No
revenue was recognized from our commercial arrangement with living.com until
after the launch of the "Home living tab" on our Web site in May 2000. Through
the date of living.com's bankruptcy, we had recorded $16.9 million of
equity-method losses and had earned $0.9 million of revenue under the commercial
agreement, resulting in an investment balance at the date of living.com's
bankruptcy of $14.1 million (the difference between the $31 million initial
total investment and the $16.9 million in equity-method losses) and an unearned
revenue balance relating to the commercial agreement of $20.1 million (the
difference between the initial $21 million unearned revenue balance and the $0.9
million of revenue recognized). As a result of the bankruptcy, we incurred a
loss of $14.1 million, the amount of our remaining investment balance in
living.com at the time of the bankruptcy. We also recorded a gain as a result of
the termination of the commercial agreement in the amount of $20.1 million, the
amount of the unearned revenue balance at the time of the bankruptcy.
During the three months ended September 30, 2000, we determined that the
declines in value from our accounting basis for two of our other investments
were other than temporary. We recognized non-cash losses totaling $33.8 million
to record our investments in Audible, Inc. and Nextcard at their current fair
values as of September 30, 2000. This amount is included in "Non-cash investment
gains and losses, net" in our statements of operations. In addition, at
September 30, 2000, "accumulated other comprehensive loss" on our balance sheet
includes approximately $66 million in unrealized losses on investments in public
companies. See Note 9 to the financial statements. We periodically evaluate
whether the declines in fair value of these investments are other than
temporary. This evaluation consists of a review by members of senior management
in finance, treasury, corporate development and our ACN group. For investments
with publicly quoted market prices, we compare the market price to our
accounting basis and, if the quoted market price is less than our accounting
basis for an extended period of time, we then consider additional factors to
determine whether the
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decline in fair value is other than temporary, such as the financial condition,
results of operations and operating trends for the company. We also review
publicly available information regarding the investee companies, including
reports from investment analysts. We also evaluate whether: 1) we have both the
intent and ability to hold the investment for a period of time sufficient to
allow for any anticipated recovery in fair value; 2) the decline in fair value
is attributable to specific adverse conditions affecting a particular
investment; 3) the decline is attributable to more general conditions, such as
conditions in an industry or geographic area; 4) the decline in fair value is
attributable to seasonal factors; 5) a debt security has been downgraded by a
rating agency; 6) the financial condition of the issuer has deteriorated; and 7)
if applicable, dividends have been reduced or eliminated, or scheduled interest
payments on debt securities have not been made. For investments in private
companies with no quoted market price, we consider similar qualitative factors
and also consider the implied value from any recent rounds of financing
completed by the investee as well as market prices of comparable public
companies. We require our private investees to deliver annual, quarterly and
monthly financial statements to assist us in reviewing relevant financial data
and to assist us in determining whether such data may indicate
other-than-temporary declines in fair value below our accounting basis.
Equity in Losses of Equity-Method Investees, Net
Equity in losses of equity-method investees, net represents our net share of
income and 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, net for the three months and nine months ended September 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 September 30, 1999, we had
four equity-method investments, compared to nine equity-method investments as of
September 30, 2000. We may 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 significant
losses on our equity-method investments for the foreseeable future.
Two of our equity-method investees, HomeGrocer and Pets.com, Inc., completed
the initial public offerings of their common stock during the nine months ended
September 30, 2000. Additionally, another of our equity-method investees,
drugstore.com, inc., completed secondary offerings of its common stock during
the nine months ended September 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 in a total amount of $77.8 million
during the nine months ended September 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 September 2000, Webvan completed its acquisition of all of the
outstanding common stock of HomeGrocer. We accounted for our investment in
HomeGrocer under the equity method but do not account for our investment in
Webvan under the equity method as we do not have the ability to exercise
significant influence over Webvan.
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, net; acquisition-related and other costs; and non-cash
investment gains and losses, net, is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 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 ........... $ (68,439) $ (79,198) $(257,054) $(177,022)
Pro forma net loss ....................... $ (89,493) $ (85,810) $(326,732) $(204,930)
Pro forma basic and diluted loss per
share ................................... $ (0.25) $ (0.26) $ (0.94) $ (0.63)
Shares used in computation of pro forma
basic and diluted loss per share ......... 353,954 332,488 349,258 323,064
</TABLE>
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.
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We expect that our pro forma loss from operations will continue to decline
as a percentage of net sales, to between 5% and 8% of net sales for the fourth
quarter of 2000 and to less than 5% for the full year in 2001. We also expect
that our US Books, Music and DVD/video segment will generate income on a pro
forma operating basis for the full year in 2000. Over the longer term, we expect
pro forma operating profit to average in the low double-digits as a percentage
of net sales and expect our return on invested capital to average in the low
triple-digits. However, any such projections are subject to substantial
uncertainty. See "Additional Factors That May Affect Future Results."
FINANCIAL CONDITION
At September 30, 2000, our balance of cash and cash equivalents and
marketable securities was $900 million, compared to $706.2 million at December
31, 1999. Cash and cash equivalents increased from $133.3 million at December
31, 1999 to $647.0 million at September 30, 2000 primarily as a result of the
proceeds from the issuance of E690,000,000 of 6.875% Convertible Subordinated
Notes due 2010, also known as PEACS. Marketable securities decreased from $572.9
million at December 31, 1999 to $253.0 million at September 30, 2000 as
marketable securities were liquidated during the period to fund our operating
cash outflow for the period. Marketable securities as of September 30, 2000
includes $97.9 million (substantially consisting of our investment in Webvan
common stock and Sotheby's Holdings, Inc. common stock). Our investment in
HomeGrocer, which was exchanged for our investment in Webvan, was previously
included in "Investments in equity-method investees." The investment in
Sotheby's Holdings, Inc. was previously included in "Other investments."
Net cash used in operating activities was $378.1 million and $122.4 million
for the nine months ended September 30, 2000 and 1999. Our net operating cash
use 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, net 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 $266.9 million and
$(953.6) million for the nine months ended September 30, 2000 and 1999, and
consisted of net purchases and sales of marketable securities, purchases of
fixed assets and cash paid for equity investments. In 2000, net cash was
provided by investing activities as marketable securities were sold and invested
in a cash-equivalent Euro-denominated money market fund. In 1999, net cash was
used by investing activities as proceeds from the offering of $1.25 billion of 4
3/4% Convertible Subordinated Notes due 2009 (the "Convertible Notes") were used
to purchase marketable securities. Cash available for investment purposes
increased substantially in both 2000 and 1999 as a result of the issuances of
the PEACS and the Convertible Notes.
Net cash provided by financing activities of $692.1 million and $1.1 billion
for the nine months ended September 30, 2000 and 1999, was primarily a result of
the issuances of the PEACS in 2000 and the Convertible Notes in 1999.
The effect of exchange rate changes on cash and cash equivalents for the
nine-month period ended September 30, 2000 was a decrease of $67.2 million,
representing a decrease in the US dollar equivalent of our investment in a
Euro-denominated money market fund. The decrease in the US dollar equivalent of
this money market fund approximates the decrease in the US dollar equivalent of
our PEACS, which are also denominated in Euros.
For the three months ended September 30, 2000 and 1999, net cash used by
operating activities was $3.7 million and $75.6 million, respectively. Our net
operating cash use for both periods was primarily a result of our operating
loss, exclusive of non-cash expenses resulting from depreciation and
amortization, equity in losses of equity-method investees, net and amortization
of goodwill and other intangibles. Partially offsetting these items for the
three months ended September 30, 2000 is amortization of previously unearned
revenue totaling $26.9 million. During the three months ended September 30,
2000, we received $57.5 million of cash payments from ACN partners in advance of
services we have agreed to provide to them in the future. Many of our ACN
partners are obligated to make additional cash payments to us under our
agreements with them as we perform services. As part of our business strategy,
we may also enter into additional ACN agreements under which the parties to
those agreements are obligated to make payments in the form of cash or, in some
cases, their securities, in advance of our performance of services for them or
as we perform those services. Net cash provided (used) in investing activities
for the three months ended September 30, 2000 and 1999 was $(20.0) million and
$19.7 million, respectively, and consisted of net sales of marketable
securities, offset by purchases of fixed assets and investments made in
equity-method investees and other investments. Net cash provided by financing
activities for these periods was $1.3 million and $23.5 million, respectively,
and consisted of proceeds from stock option exercises, offset by net borrowings
and repayments of long-term debt. The effect of exchange rate changes on cash
and cash equivalents resulted in a reduction in cash and cash equivalents,
amounting to $50.9 million for the three months ended September 30, 2000, as a
result of a decrease in the US dollar equivalent of our investment in a
Euro-denominated money market fund. This decrease approximates the decrease in
the US dollar equivalent of our PEACS, which are also denominated in Euros.
As of September 30, 2000, our 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. We
believe that current cash and marketable securities balances will be sufficient
to meet our anticipated cash needs for at least the next 12 months and that we
will generate positive cash flow from operations in the fourth quarter of fiscal
2000. We also expect that we will have over $1 billion in cash and cash
equivalents and marketable securities as of December 31, 2000 and approximately
$700 million as of March 31, 2001. In addition, we expect to generate positive
cash flow from operations for the nine months ended December 31, 2001. However,
these projections are subject to substantial uncertainty. See "Additional
Factors That May Affect Future Results." We may seek to sell additional equity
or debt securities or to obtain a line of credit at such times as we deem
appropriate. The sale of additional equity or convertible debt securities could
result in additional dilution to our stockholders and additional interest
expense. In addition, we 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 our liquidity
requirements or cause us to issue additional equity or debt securities. There
can be no assurance that financing will be available in amounts or on terms
acceptable to us, 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 our future results:
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WE HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU CAN EVALUATE OUR BUSINESS AND
PROSPECTS
We have a relatively short operating history upon which you can evaluate our
business and prospects. You should consider our prospects in light of the risks,
expenses and difficulties frequently encountered by online commerce companies.
As an online commerce company, we have a rapidly evolving and unpredictable
business model, we face intense competition, we must effectively manage our
growth, and we must respond quickly to rapid changes in customer demands,
industry standards and technology. We may not succeed in addressing these
challenges and risks.
WE HAVE AN ACCUMULATED DEFICIT AND ANTICIPATE FURTHER LOSSES
We have incurred significant losses since we began doing business. As of
September 30, 2000, we had an accumulated deficit of $1.75 billion and our
stockholders' equity was a deficit of $487.2 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 September 30, 2000, we had
indebtedness under senior discount notes, convertible notes, capitalized lease
obligations and other asset financings totaling approximately $2.1 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:
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- adverse changes in general economic conditions,
- 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,
- 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, toys
and games, electronics, computer and video games, 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
and games, electronics and computer 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 market segments in which we participate are
intensely competitive. Our current or potential competitors include:
- online vendors of products in market segments in which we participate,
- 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,
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- 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.
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.
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,
split-shipments and additional long-zone shipments necessary to ensure timely
delivery 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 newer 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.
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
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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 manual effort may
be necessary to reconcile our inventory and other financial accounts.
We maintain substantially all of our computer and communications hardware at
two leased facilities on the East and West Coast. 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 have inadequate insurance
coverage or insurance limits 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 may expand our
operations further to address potential growth of our product and service
offerings and customer base. The management of our operations will continue to
place a significant strain on our management, operational and financial
resources. We need to continue to successfully execute any further 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
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. As a result of our agreement with
Toysrus.com, Toysrus.com will be responsible for merchandising and content for
the co-branded toy and video games and baby products store, and will identify,
buy, manage and bear the financial risk of inventory. As a result, if
Toysrus.com fails to forecast product demand or optimize inventory, we would
receive reduced revenues under the agreement and our business and our brand name
could be harmed.
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.
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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 capacity or 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
and in 2000 we have added a distribution center in France. Most of these
distribution centers are 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 toys and games, electronics, tools and hardware,
lawn and patio, kitchen and other product orders.
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 markets may not offset the expense of
establishing and maintaining the related operations and therefore these
operations may never be profitable.
Our international sales and related operations are subject to a number of
risks inherent in selling 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,
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- 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,
- 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.
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OUR AMAZON COMMERCE NETWORK SUBJECTS US TO A NUMBER OF RISKS
In the fall of 1999, we began our Amazon Commerce Network (ACN) program, in
which we entered into agreements with selected companies that involve the sale
of products and services by these companies on co-branded sections of the Amazon
Web site and other promotional services, such as advertising placements and
customer referrals. In exchange for the services we provide under these
agreements, we receive cash, equity securities of these companies, or a
combination of the two. In some cases, we have also made separate investments in
an ACN partner by making a cash payment in exchange for equity securities of
that partner. As part of this program, we may in the future enter into
additional agreements with existing ACN partners or new ones and may also make
additional investments.
We hold several investments in third parties that are accounted for using
the equity method, primarily 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 three months in arrears for
public companies. At September 30, 2000, we accounted for our investments in
seven ACN partners under the equity method, two of which are public companies
and five of which are private companies. The public companies are drugstore.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 foreseeable future and may not be successful. While 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. Most of these equity method investments are in ACN partners.
We regularly review all of our investments in public and private companies
for other-than-temporary declines in fair value. When we determine that the
decline in fair value of an investment below our accounting basis is other than
temporary, we reduce the carrying value of the securities we hold and record a
loss in the amount of any such decline. During the three months ended September
30, 2000, we determined that the declines in value of two of our investments in
our ACN partners were other than temporary, and we recognized losses totaling
$33.8 million to record these investments at their current fair value as of
September 30, 2000. Another of our ACN partners in which we also had an
investment, living.com, declared bankruptcy during the three months ended
September 30, 2000. In February 2000, we closed the purchase of shares of
preferred stock in living.com for $10 million in connection with a commercial
agreement with living.com. We received additional living.com preferred stock
with an estimated fair value of $21 million in consideration for services to be
provided under the commercial agreement, and recorded a total investment of $31
million and unearned revenue of $21 million. Through the date of living.com's
bankruptcy, we had recorded $16.9 million of equity-method losses and had earned
$0.9 million of revenue under the commercial agreement, resulting in an
investment balance at the date of living.com's bankruptcy of $14.1 million (the
difference between the $31 million initial total investment and the $16.9
million in equity-method losses) and an unearned revenue balance relating to the
commercial agreement of $20.1 million (the difference between the initial $21
million unearned revenue balance and the $0.9 million of revenue recognized). As
a result of the bankruptcy, we incurred a loss of $14.1 million, the amount of
our remaining investment balance in living.com at the time of the bankruptcy. We
also recorded a gain as a result of the termination of the commercial agreement
in the amount of $20.1 million, the amount of the unearned revenue balance at
the time of the bankruptcy.
We also had unrealized losses of $65.9 million on available-for-sale
securities included in accumulated other comprehensive loss as of September 30,
2000 and have recorded $267.0 million of equity-method losses for the nine
months ended September 30, 2000. In recent months, companies in the Internet and
e-commerce industries have experienced difficulties, including difficulties in
raising capital 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 the fair values of other of
these investments have experienced an other-than-temporary decline. In addition,
if our ACN partners experience such difficulties, we may not receive the
consideration owed to us and the value of our investment may become worthless.
As agreements with ACN partners expire or otherwise terminate, we may be unable
to renew or replace these agreements on terms that are as favorable to us.
During the three months ended September 30, 2000, we entered into amendments
to restructure our agreements with certain ACN partners. We have accepted lower
future consideration, revisions to the term of the underlying agreements, or
both. Modifications to these agreements whereby we agreed to receive lower
amounts of future consideration do not affect the recorded balance of unearned
revenue. However, the amortization of unearned revenue will be affected. If a
modification resulted in lower future payments to be received in future years,
even if the term of the agreement is unchanged, any amount received as a
prepayment under the agreement that we recorded as unearned revenue will
represent compensation under the amended agreement for a longer period of time
than under the original agreement. As such, the unearned revenue for
consideration previously received will be amortized into revenue over a longer
period of time.
WE MAY NOT BE ABLE TO ADAPT QUICKLY ENOUGH TO CHANGING CUSTOMER REQUIREMENTS AND
INDUSTRY STANDARDS
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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 sell products, such as toys,
tools, hardware, and kitchen products, that 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.
Our ACN partners also may sell products that may indirectly increase our
exposure to product liability claims. 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.
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 17% of all of our purchases and 30% of our book,
music, DVD and video titles, during the three months ended September 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," "Amazon.fr" 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
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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, www.amazon.de and www.amazon.fr and that
are 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.
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
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A fundamental requirement for electronic commerce is the secure transmission
of confidential information over public networks. Although we have developed
systems and processes to prevent fraudulent credit card transactions and other
security breaches, failure to mitigate such fraud or breaches may impact our
financial results.
The law relating to the liability of providers of online payment services is
currently unsettled. We guarantee payments made through Amazon Payments up to
certain limits for both buyers and sellers, and we may be unable to prevent
users of Amazon Payments from fraudulently receiving goods when payment may not
be made to a seller or fraudulently collecting payments when goods may not be
shipped to a buyer. Our liability risk will increase as a larger fraction of our
sellers use Amazon Payments. Any costs we incur as a result of liability because
of our guarantee of payments made through Amazon Payments or otherwise could
harm our business. In addition, the functionality of Amazon Payments depends on
certain third-party vendors delivering services. If these vendors are unable or
unwilling to provide services, Amazon Payments will not be viable (and our
businesses that use Amazon Payments may not be viable).
WE COULD BE SUBJECT TO RISKS ASSOCIATED WITH INFORMATION POSTED ON OUR WEB SITE
BY THIRD PARTIES
Our Web site features customer reviews of the products we sell and customer
ratings of sellers on our auctions and zShops sites. Although these reviews and
ratings are generated by customers and not by us, it is possible that a claim
could be made against us for reviews and ratings posted on our Web site. If we
become liable for information posted on our Web site by customers, we could be
harmed and may be forced to discontinue certain services.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR MAY
BE ACCUSED OF INFRINGING INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES
We regard our trademarks, service marks, copyrights, patents, trade dress,
trade secrets, proprietary technology and similar intellectual property as
critical to our success, and we rely on trademark, copyright and patent law,
trade secret protection and confidentiality and/or license agreements with our
employees, customers, partners and others to protect our proprietary rights. We
have been issued a number of trademarks, service marks, patents and copyrights
by US and foreign governmental authorities. We also have applied for the
registration of some other trademarks, service marks, copyrights and patents in
the US and internationally. In addition, we have filed US and international
patent applications covering certain of our proprietary technology. Effective
trademark, service mark, copyright, patent and trade secret protection may not
be available in every country in which our products and services are made
available online. The protection of our intellectual property may require the
expenditure of significant financial and managerial resources.
Third parties that license our proprietary rights, such as trademarks,
patented technology or copyrighted material, may take actions that diminish the
value of our proprietary rights or reputation. In addition, the steps we take to
protect our proprietary rights may not be adequate and third parties may
infringe or misappropriate our copyrights, trademarks, trade dress, patents and
similar proprietary rights. Other parties may claim that we infringed their
proprietary rights. We have been subject to claims, and expect to continue to be
subject to legal proceedings and claims, regarding alleged infringement by our
licensors and us of the trademarks and other intellectual property rights of
third parties. Such claims, whether or not meritorious, may result in the
expenditure of significant financial and 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 September 30, 2000, the reported sale price of
our common stock on the NASDAQ National Market was as high as $113.00 and as low
as $27.88 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,
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- 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. 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
We are exposed to market risk for the impact of interest rate changes,
foreign currency fluctuations and changes in the market values of its
investments. We have not utilized derivative financial instruments in our
investment portfolio.
Interest rate risk. Our exposure to market risk for changes in interest
rates relates primarily to our investment portfolio and our long-term debt. All
of our marketable securities are designated as available for sale and
accordingly are presented at fair value on our balance sheets. We generally
invest our excess cash in A-rated or higher short- to intermediate-term fixed
income securities and money market mutual funds. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates, and
we may suffer losses in principal if forced to sell securities that have
declined in market value due to changes in interest rates.
Foreign currency exchange rate risk. Revenues from our foreign subsidiaries
accounted for 14% of total revenues for the three months and nine months ended
September 30, 2000. Sales made by our 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. We are also
exposed to foreign currency 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
currency exchange rate fluctuations in the three months ended September 30, 2000
was not material. At September 30, 2000, we were also exposed to foreign
currency risk related to the euro-denominated PEACS, which have an outstanding
principal balance of E690 million and expose us to risks of fluctuations in the
Euro/US dollar exchange rate. At September 30, 2000, we held E620.0 million
($545.0 million) in Euro-denominated cash and marketable securities, which
provide partially offsetting changes in exchange rate fluctuations. In order to
hedge a portion of the risk of exchange rate fluctuations between the US dollar
and the Euro, in September 2000, we entered into a cross-currency swap
agreement. Under the swap agreement, we agreed to pay at inception and receive
upon maturity E75 million in exchange for receiving at inception and paying at
maturity $67.1 million. In addition, we agreed to receive in February of each
year E26.8 million for interest payments on E390 million of the PEACS and,
simultaneously, to pay $31.9 million. This agreement is cancelable, in whole or
in part, at our option at no cost on or after February 20, 2003, if our
underlying stock price (converted into Euros) is greater than or equal to the
minimum conversion price of the PEACS. We account for these agreements as a
hedge of the risk of exchange rate fluctuations. Currency gains and losses on
the hedge agreements are recognized upon the recognition of the corresponding
currency gains and losses on the hedged liabilities. 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.
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Investment risk. We invest in both private and public companies, including
our ACN partners, primarily for strategic purposes. We have also received
securities from some of our ACN partners in exchange for services provided by us
to those partners. These investments are accounted for under the equity method
if they give us 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 our 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. We regularly
review the carrying value of our investments and identify and record losses when
events and circumstances indicate that such declines in the fair value of such
assets below our accounting basis are other than temporary. As of September 30,
2000, we had equity-method investments of $91.1 million, investments recorded at
cost of $41.2 million, and available-for-sale equity securities at fair value
totaling $130.0 million ($97.9 million of which was included in marketable
securities and $32.1 million of which was included in other investments). All of
these investments are in companies involved in the Internet and e-commerce
industries and their fair values are subject to significant fluctuations due to
volatility of the stock market and changes in general economic conditions.
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 us and our 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 we dispute
the allegations of wrongdoing in these complaints, there can be no assurance
that we 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 we have engaged in unfair or deceptive acts in connection with
the advertisement and operation of certain services provided by Alexa. We are
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 our business, future results of
operations or cash flows in a particular period.
From time to time, we are 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. We
currently are not aware of any such legal proceedings or claims that we believe
will have, individually or in the aggregate, a material adverse effect on our
business, prospects, financial condition or operating results.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
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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 (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)
12.1 Computation of Ratio of Earnings to Fixed Charges
27.1 Financial Data Schedule
99.1 Press Release Dated October 24, 2000 Announcing the
Company's Third Quarter Financial Results
</TABLE>
----------
(b) Reports on Form 8-K
On July 28, 2000, the Company filed a Form 8-K under Item 5 announcing the
Company's financial results for the second quarter of 2000 and announcing the
resignation of the Company's President and COO, Joseph Galli.
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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: October 27, 2000
By: /s/ MARK S. PEEK
--------------------------------
Mark S. Peek
Chief Accounting Officer and
Vice President, Finance
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<PAGE> 35
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)
12.1 Computation of Ratio of Earnings to Fixed Charges
27.1 Financial Data Schedule
99.1 Press Release Dated October 24, 2000 Announcing the
Company's Third Quarter Financial Results
</TABLE>
35
