Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------
For the year ended December 31, 1998 Commission File No. 000-22513
AMAZON.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 91-1646860
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
1516 SECOND AVENUE
SEATTLE, WASHINGTON 98101
(206) 622-2335
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.01 per share
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock held by
non-affiliates of the registrant as of February 28,
1999...................................................... $11,495,058,788
Number of shares of common stock outstanding as of February
28, 1999.................................................. 161,096,869
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Annual Report, to the extent
not set forth herein, is incorporated herein by reference from the registrant's
definitive proxy statement relating to the annual meeting of stockholders to be
held on May 20, 1999, which definitive proxy statement shall be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year to which this Annual Report relates.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
AMAZON.COM, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
INDEX
PAGE
----
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters......................................... 16
Item 6. Selected Consolidated Financial Data........................ 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 25
Item 8. Financial Statements and Supplementary Data................. 26
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 46
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 46
Item 11. Executive Compensation...................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 46
Item 13. Certain Relationships and Related Transactions.............. 46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 46
Signatures............................................................ 49
2
3
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements based on current expectations,
estimates and projections about the Company's industry, management's beliefs and
certain assumptions made by management. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Forward-Looking
Statements."
GENERAL
Amazon.com, Inc. ("Amazon.com" or the "Company"), the Internet's number one
book, music and video retailer, opened its virtual doors on the Web in July
1995. Amazon.com, one of the most widely known, used and cited commerce sites on
the Web, offers more than 4.7 million book, music CD, video, DVD, computer game
and other titles. The Company offers its customers a superior shopping
experience by providing value and a high level of customer service. Amazon.com
is a proven technology leader; it has developed electronic commerce innovations
such as 1-Click ordering, personalized shopping services and easy-to-use search
and browse features. Shopping at Amazon.com is fast and safe, incorporating a
simple ordering system, secure credit card transactions, e-mail communication
with customers and direct shipping worldwide.
The Internet is an increasingly significant global medium for online
commerce. According to Forrester Research, the total value of goods and services
purchased over the Web was $43 billion in 1998 and is expected to increase to
$1.3 trillion in 2003. Amazon.com believes it is well positioned to capitalize
on this growth. According to Media Metrix, approximately 16% of Web users
visited Amazon.com's stores in December 1998.
Amazon.com, Amazon.co.uk, Amazon.de, Internet Movie Database, Earth's
Biggest Bookstore and 1-Click are either registered trademarks or trademarks of
Amazon.com or its affiliates. All other names mentioned herein may be trademarks
of their respective owners.
Information contained on the Company's Web sites is not deemed to be a part
of this Annual Report on Form 10-K. As used herein, "titles" offered by the
Company means the items offered in the Company's catalogs and includes books,
CDs, videotapes, audiotapes and other products.
Amazon.com was incorporated in 1994 in the state of Washington and
reincorporated in 1996 in Delaware. The Company's principal corporate offices
are located in Seattle, Washington. Amazon.com completed its initial public
offering in May 1997 and its common stock is listed on the Nasdaq National
Market under the symbol "AMZN."
BUSINESS STRATEGY
The Company's objective is to become the best place to buy, find and
discover any product or service available online. Amazon.com will continue to
enhance and broaden its brand, customer base and electronic commerce expertise
with the goal of creating customers' preferred online shopping destination, in
the United States and around the world.
AMAZON.COM WEB SITES
The Company believes that the sale of books, music and other products and
services over the Web can offer attractive benefits to customers, including
greater selection, convenience, ease-of-use, competitive pricing and
personalization. Customers entering Amazon.com Web sites can, in addition to
ordering books and other products, purchase gift certificates, conduct targeted
searches, browse highlighted selections, view bestseller lists and other
features, read and post reviews, register for personalized services, participate
in promotions and check order status. The key components of Amazon.com's
offerings include browsing, searching, reviews and content, recommendations and
personalization, 1-Click technology, secure credit
3
4
card payment and availability and fulfillment. The Company's Web sites promote
brand loyalty and repeat purchases by providing an inviting experience that
encourages customers to return frequently and to interact with other customers.
Browsing. The Amazon.com sites offer visitors a variety of highlighted
subject areas, styles and special features arranged in a simple, easy-to-use
fashion intended to enhance product search and selection. In addition, the Web
sites present a variety of products and services and topical information. To
enhance the customers' shopping experience and increase sales, the Company
features a variety of products and services on a rotating basis throughout the
stores.
Searching. A primary feature of Amazon.com Web sites is its interactive,
searchable catalogs of more than 4.7 million books, music CD, video, DVD,
computer game and other titles. The Company provides a selection of search tools
to find books, music, video and other products based on keyword, title, subject,
author, artist, musical instrument, label, actor, director, publication date or
ISBN. Customers can also use more complex and precise search tools such as
Boolean search queries. The Company licenses some of its catalog and other
information from third parties.
Reviews and Content. The Amazon.com stores offer numerous forms of content
to enhance the customer's shopping experience and encourage purchases. Various
types of content are available for particular titles, including cover art,
synopses, annotations, reviews by editorial staff and other customers, and
interviews by authors and artists.
Recommendations and Personalization. Amazon.com personalizes its product
and service offerings. These features include greeting customers by name,
instant and personalized recommendations, bestseller and chart-topper listings,
personal notification services, purchase pattern filtering and a number of other
related features. The Company believes that personalization of a customer's
shopping experience at the Company's Web sites is an important element of the
value proposition it offers to customers and intends to continue to enhance its
personalized services.
1-Click Technology. Amazon.com provides customers with a streamlined
ordering process using 1-Click technology. If a customer has previously
activated 1-Click functionality, a customer can place an order by clicking one
button without having to fill out an order form. The customer's shipping and
billing information is automatically referenced on the Company's secure server.
Secure Credit Card Payment. Amazon.com utilizes secure server software for
secure commerce transactions. It encrypts all of the customer's personal
information, including credit card number, name and address, so that it cannot
be read as the information travels over the Internet.
Availability and Fulfillment. Many of the Company's products are available
for shipment within 24 hours, others are available within two to three days and
the remainder are generally available within four to six weeks, although some
products may not be available at all. Out-of-print books generally are available
in one to three months, although some books may not be available at all.
Customers can select from a variety of delivery options, including overnight and
various international shipping options, as well as gift-wrapping services. The
Company uses e-mail to notify customers of order status under various conditions
and provides links to shipping carriers so that the customers can track their
shipments. The Company seeks to provide rapid and reliable fulfillment of
customer orders and to continue to improve its speed of availability and
fulfillment.
Return Policy. Within 30 days following the customer's receipt of their
order, Amazon.com will provide a full refund for any book in its original
condition, any Amazon.com recommended book in any condition, any unopened music
CD, DVD, VHS tape or software, and any other merchandise item in new condition,
with its original packaging and accessories.
PRODUCTS, SERVICES AND GEOGRAPHIC EXPANSION
Products. The Company has offered books for sale since July 1995. The
Company expanded its product offerings beyond books with the June 1998 launch of
its music store. In the third quarter of 1998,
4
5
its first full quarter of online music sales, Amazon.com became the number one
online music seller. In November 1998, Amazon.com launched its video store and
an enhanced holiday gift store, offering a variety of products, including
selected personal electronics and toy products. In the fourth quarter of 1998,
its first quarter of online video sales, Amazon.com became the number one online
video seller. The Company plans to continue to expand its product offerings.
Services. Amazon.com intends to broaden the scope of its business with the
goal of becoming customers' preferred destination for online shopping. In August
1998, Amazon.com merged with Sage Enterprises, Inc. ("PlanetAll"), a Web-based
address book, calendar and reminder service, and Junglee Corp. ("Junglee"), a
leading provider of Web-based virtual database technology, which allows visitors
to access a variety of products sold by other merchants. The Company plans to
continue to expand its service offerings.
Geographic Expansion. In April 1998, Amazon.com acquired three Internet
companies in the United Kingdom and Germany. In October 1998, the Company
re-launched two of these businesses under the Amazon brand. The Company
incorporated Amazon.com's technology and look-and-feel into the European sites,
www.amazon.co.uk and www.amazon.de. During the fourth quarter of 1998, combined
sales on the European sites significantly increased over the third quarter,
establishing Amazon.com as the number one online bookseller in these markets.
For discussion of segment and geographic information, see Note 1 of Notes to
Consolidated Financial Statements.
MARKETING AND PROMOTION
Amazon.com's marketing strategy is designed to strengthen the Amazon brand
name, increase customer traffic to the Amazon.com Web sites, build customer
loyalty, encourage repeat purchases and develop incremental product and service
revenue opportunities.
Amazon.com creatively applies technology to deliver personalized programs
and services, as well as flexible merchandising. The Company employs a variety
of media, business development and promotional methods to achieve these goals.
The Company also benefits from public relations activities as well as online and
traditional advertising, including radio, television and print media.
Associates Program. The Company extends its market presence through its
Associates Program, which enables associated Web sites to make products
available to their audiences with order fulfillment by Amazon.com. Approximately
200,000 Web sites have enrolled in the Associates Program. Amazon.com associates
include Yahoo! Inc. ("Yahoo!"), American Online, Inc. ("AOL"), Excite, Inc.,
Netscape Communications Corporation, GeoCities, Microsoft Corporation and
AltaVista Company.
Advantage for Books and Music. The Advantage program is designed to
increase the visibility and sales of titles from independent publishers,
authors, artists and labels. This free program provides the tools and framework
to ensure their books and music appear more often, more prominently, and with
24-hour availability throughout Amazon.com's catalogs of book, music and other
titles.
CUSTOMER SERVICE
The Company believes that its ability to establish and maintain long-term
relationships with its customers and to encourage repeat visits and purchases
depends, in part, on the strength of its customer support and service operations
and staff. Furthermore, the Company seeks to achieve frequent communication with
and feedback from its customers to continually improve the Amazon.com stores and
services. The Company offers a number of e-mail addresses to enable customers to
request information and to encourage feedback and suggestions. Users can also
contact customer service representatives via telephone 24 hours a day, 7 days a
week. The Company has automated certain of the tools used by its customer
support and service staff and has plans for further enhancements.
5
6
WAREHOUSING, FULFILLMENT AND DISTRIBUTION
The Company sources products from a network of distributors, publishers,
labels and manufacturers. Although the Company carries its own inventory (some
of which is purchased directly from manufacturers), it also relies on rapid
fulfillment from major distributors and wholesalers that carry a broad selection
of titles. The Company purchases a majority of its products from Ingram Book
Group ("Ingram"), Baker & Taylor, Inc. ("B&T") and Valley Media, Inc. ("Valley
Media"). Ingram is the Company's single largest supplier and accounted for
approximately 40% and approximately 60% of the Company's inventory purchases in
1998 and 1997, respectively.
The Company utilizes automated interfaces for sorting and organizing its
orders to enable it to achieve rapid and economic purchase and delivery terms.
For orders that cannot be filled from the Company's inventory, the Company's
proprietary software selects the orders that can be filled via electronic
interfaces with vendors and forwards the remaining orders to its special orders
group. Under the Company's arrangements with distributors, electronically
ordered books often are shipped to the Company by the distributor within hours
of a receipt of an order from Amazon.com. The Company has developed customized
information systems and trained dedicated ordering personnel who specialize in
sourcing out-of-print books and other hard-to-find products.
The Company intends to continue developing its distribution infrastructure
to increase efficiency and to support greater customer demand. For example, in
December 1998, Amazon.com leased a highly mechanized distribution facility in
Fernley, Nevada. The new facility, which is expected to begin operations in
1999, should reduce standard shipping times to key markets in the western United
States. The facility will allow the Company to increase significantly the number
of products maintained in inventory for rapid shipment to customers.
TECHNOLOGY
The Company has implemented numerous site management, search, customer
interaction, recommendation, transaction-processing and fulfillment services and
systems using a combination of its own proprietary technologies and commercially
available, licensed technologies. The Company's current strategy is to focus its
development efforts on creating and enhancing the specialized, proprietary
software that is unique to its business and to license or acquire commercially
developed technology for other applications where available and appropriate.
The Company uses a set of applications for accepting and validating
customer orders, placing and tracking orders with suppliers, managing and
assigning inventory to customer orders and ensuring proper shipment of products
to customers based on various ordering criteria. The Company's transaction-
processing systems handle millions of items, a number of different availability
statuses, gift-wrapping requests and multiple shipment methods and allow the
customer to choose whether to receive single or several shipments based on
availability. These applications also manage the process of accepting,
authorizing and charging customer credit cards. Amazon.com Web sites also
incorporate a variety of search and database tools.
Systems administrators and network managers monitor and operate the
Company's Web sites, network operations and transaction-processing systems. The
continued uninterrupted operation of the Company's Web sites and
transaction-processing systems is essential to its business and it is the job of
the site operations staff to ensure their reliability. The Company uses the
services of five Internet service providers to obtain connectivity to the
Internet, both domestically and internationally, over multiple dedicated lines.
COMPETITION
The online commerce market, particularly over the Web, is new, rapidly
evolving and intensely competitive. In addition, the retail book, music and
video industries are intensely competitive. The Company's current or potential
competitors include (1) online booksellers and vendors of other products such as
CDs, videotapes and DVDs, (2) a number of indirect competitors, including Web
portals and
6
7
Web search engines such as Yahoo! and AOL, that are involved in online commerce
either directly or in collaboration with other retailers, (3) publishers,
distributors and retail vendors of books, music, video and other products,
including Barnes & Noble, Inc. ("Barnes & Noble"), Bertelsmann AG
("Bertelsmann") and other large specialty booksellers and media corporations,
many of which possess significant brand awareness, sales volume and customer
bases, and (4) traditional retailers who currently sell, or who may sell,
products or services through the Internet. The Company believes that the
principal competitive factors in its market are brand recognition, selection,
personalized services, convenience, price, accessibility, customer service,
quality of search tools, quality of editorial and other site content, and
reliability and speed of fulfillment.
As the online commerce market continues to grow, other companies may enter
into business combinations or alliances that strengthen their competitive
positions. For example, in late 1998, (1) Bertelsmann announced that it
purchased a 50% interest in Barnes & Noble's online venture, barnesandnoble.com
inc., and intends to launch online stores in several countries, (2) Barnes &
Noble announced its pending acquisition of Ingram, currently the Company's
largest single supplier, and (3) online music retailers CDnow, Inc. and N2K Inc.
announced a merger. The Company may not be able to compete successfully against
these and future competitors.
INTELLECTUAL PROPERTY
The Company regards its patents, copyrights, service marks, trademarks,
trade dress, trade secrets, proprietary technology and similar intellectual
property as critical to its success, and relies on trademark, copyright and
patent law, trade secret protection and confidentiality and/or license
agreements with its employees, customers, partners and others to protect its
proprietary rights. The Company has applied for the registration of certain of
its trademarks and service marks in the United States and internationally. In
addition, the Company has filed U.S. and international patent applications
covering certain of its proprietary technology. Effective trademark, service
mark, copyright, patent and trade secret protection may not be available in
every country in which the Company's products and services are made available
online. The Company has licensed in the past, and expects that it may license in
the future, certain of its proprietary rights, such as trademarks, technology or
copyrighted material, to third parties.
EMPLOYEES
As of December 31, 1998, the Company employed approximately 2,100
employees. The Company also employs independent contractors. None of the
Company's employees are represented by a labor union, and the Company considers
its employee relations to be good. Competition for qualified personnel in the
Company's industry is intense, particularly for software development and other
technical staff. The Company believes that its future success will depend in
part on its continued ability to attract, hire and retain qualified personnel.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The following risk factors and other information included in this Annual
Report should be carefully considered. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial also may impair our
business operations. If any of the following risks actually occur, our business,
financial condition and operating results could be materially adversely
affected.
We have a limited operating history. We incorporated in July 1994 and began
offering products for sale on our Web site in July 1995. Accordingly, 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 early stage online commerce companies. As
an early-stage online commerce company, we have an evolving and unpredictable
business model, we face intense competition, we must effectively manage our
growth and we must respond quickly to rapid changes in customer demands and
industry standards. We may not succeed in addressing these challenges and risks.
7
8
We have an accumulated deficit and anticipate further losses. We have
incurred significant losses since we began doing business. As of December 31,
1998, we had an accumulated deficit of $162.1 million. To succeed we must invest
heavily in marketing and promotion and in developing our product, technology and
operating infrastructure. In addition, the expenses associated with our recent
acquisitions and interest expense related to the February 1999 issuance of our
4 3/4% Convertible Subordinated Notes due 2009 (the "Convertible Notes") and the
May 1998 issuance of our 10% Senior Discount Notes due 2008 (the "Senior
Discount Notes") will adversely affect our operating results. Our aggressive
pricing programs have resulted in relatively low product gross margins, so we
need to generate and sustain substantially higher revenues in order to become
profitable. Although our revenues have grown, we cannot sustain our current rate
of growth. Our percentage growth rate will decrease in the future. For these
reasons we believe that we will continue to incur substantial operating losses
for the foreseeable future, and these losses may be significantly higher than
our current losses.
Unpredictability of future revenues; potential fluctuations in quarterly
operating results; seasonality. 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 or
financing decisions that could adversely affect our business results.
Our quarterly operating results will fluctuate for many reasons, including:
- our ability to retain existing customers, attract new customers and
satisfy our customers' demand,
- our ability to acquire merchandise, manage our inventory and fulfill
orders,
- changes in gross margins of our current and future products, services and
markets,
- introduction of our new sites, services and products or those of
competitors,
- 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 related
integration,
- technical difficulties, system downtime or Internet brownouts,
- introductions of popular books, music selections and other products or
services,
- our level of merchandise returns, and
- disruptions in service by common shipping carriers due to strikes or
otherwise.
Both seasonal fluctuations in Internet usage and traditional retail
seasonality may affect our business. Internet usage generally declines during
the summer. Sales in the traditional retail book and music industries usually
increase significantly in the fourth calendar quarter of each year.
For those 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.
Intense competition. The online commerce market is new, rapidly evolving
and intensely competitive. In addition, the retail book, music and video
industries are intensely competitive. Our current or potential competitors
include (1) online booksellers and vendors of other products such as CDs,
videotapes and DVDs, (2) a number of indirect competitors, including Web portals
and Web search engines, such as Yahoo! and AOL, that are involved in online
commerce either directly or in collaboration with other retailers, (3)
publishers, distributors and retail vendors of books, music, video and other
products, including Barnes & Noble, Bertelsmann and other large specialty
booksellers and media corporations, many of which possess significant brand
awareness, sales volume and customer bases, and (4) traditional
8
9
retailers who currently sell, or who may sell, products or services through the
Internet. We believe that the principal competitive factors in our market are
brand recognition, selection, personalized services, convenience, price,
accessibility, customer service, quality of search tools, quality of editorial
and other site content, and reliability and speed of fulfillment.
Many of 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. We also expect to
experience increased competition from online commerce sites that provide goods
and services at or near cost, relying on advertising revenues to achieve
profitability.
As the online commerce market continues to grow, other companies may enter
into business combinations or alliances that strengthen their competitive
positions. For example, in late 1998, (1) Bertelsmann announced that it
purchased a 50% interest in Barnes & Noble's online venture, barnesandnoble.com
inc., and intends to launch online stores in several countries, (2) Barnes &
Noble announced its pending acquisition of Ingram, currently our largest single
supplier, and (3) online music retailers CDnow, Inc. and N2K Inc. announced a
merger. We may not be able to compete successfully against these and future
competitors.
Competition in the Internet and online commerce markets probably 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. 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.
Risks of system interruption. Customers' access to our Web sites directly
affects the volume of orders we fulfill and thus affects our revenues. We
experience occasional system interruptions that make our Web sites unavailable
or prevent us from efficiently fulfilling orders, which may reduce the volume of
goods we sell and the attractiveness of our products and services. These
interruptions will continue. We need to add additional software and hardware and
upgrade our systems and network infrastructure to accommodate increased traffic
on our Web sites and increased sales volume. Without these upgrades, we 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.
We maintain substantially all of our computer and communications hardware
at a single leased facility in Seattle, Washington. Our systems and operations
could be damaged or interrupted by fire, flood, power loss, telecommunications
failure, break-ins, earthquake and similar events. We do not have backup systems
or a formal disaster recovery plan and we may not have sufficient business
interruption insurance to compensate us for losses from a major interruption.
Computer viruses, physical or electronic break-ins and similar disruptions could
cause system interruptions, delays, and loss of critical data and could prevent
us from providing services and accepting and fulfilling customer orders.
We may have difficulty managing our growth. We have rapidly and
significantly expanded our operations and will further expand our operations to
address potential growth of our product and service offerings and customer base.
We will expand our product and service offerings and our international
operations and will pursue other market opportunities. We need to significantly
expand our distribution center network and improve our transaction-processing,
operational and financial systems, procedures and controls. This expansion will
continue to place a significant strain on our management, operational facilities
and financial resources. Because it is difficult to predict sales increases, and
lead times for developing distribution centers are long, we may over-expand our
facilities, which may result in excess inventory, warehousing, fulfillment and
distribution capacity. We also need to expand, train and manage our
9
10
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.
Risk of entering new business areas. 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. 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 the Amazon brand.
Risk of international expansion. We plan to expand our presence in foreign
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. If revenues from international activities do not
offset the expense of establishing and maintaining foreign operations, our
business, prospects, financial condition and operating results will suffer.
As the international online commerce market continues to grow, competition
in this market will likely intensify. In addition, governments in foreign
jurisdictions may regulate Internet or other online services in such areas as
content, privacy, network security, encryption or distribution. This may affect
our ability to conduct business internationally.
Risks of business combinations and strategic alliances. We may expand our
operations or market presence by entering into business combinations,
investments, joint ventures or other strategic alliances with other companies.
These transactions create risks such as:
- difficulty assimilating the operations, technology and personnel of the
combined companies,
- disruption of our ongoing business,
- 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, and
- impairment of relationships with existing employees, customers and
business partners.
We may not succeed in addressing these risks. In addition, the businesses
we acquired in 1998 are incurring operating losses.
Rapid technological change. Technology in the online commerce industry
changes rapidly. Customer functionality requirements and preferences also
change. 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 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. We may not be able to adapt quickly enough to changing customer
requirements and industry standards.
We depend on key personnel. We depend on the continued services and
performance of our senior management and other key personnel, particularly
Jeffrey P. Bezos, our President, Chief Executive Officer and Chairman of the
Board. We do not have long-term employment agreements with any of our key
personnel, and 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.
10
11
We rely on a small number of suppliers. We purchase a majority of our
products from three major vendors, Ingram, B&T and Valley Media. In late 1998,
Barnes & Noble, one of our largest competitors, announced an agreement to
purchase Ingram. Ingram is our single largest supplier and supplied
approximately 40% of our inventory purchases in 1998 and approximately 60% of
our inventory purchases in 1997. Although we increased our direct purchasing
from manufacturers during 1998, we continue to purchase a majority of our
products from these three suppliers. 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 are highly leveraged. We have significant indebtedness. As of December
31, 1998, we were indebted under our Senior Discount Notes, capitalized lease
obligations and other asset financing. With the sale of the Convertible Notes in
February 1999, we incurred $1.25 billion of additional indebtedness. We may
incur substantial additional debt in the future. Our indebtedness could:
- make it difficult to make principal and interest payments on the Senior
Discount Notes and the Convertible Notes,
- make it difficult to obtain necessary financing for working capital,
capital expenditures, debt service requirements or other purposes,
- 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.
Risks associated with domain names. We hold rights to various Web domain
names, including "Amazon.com," "Amazon.co.uk" and "Amazon.de." 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.
Governmental regulation and legal uncertainties. At this time, we face
general business regulations and laws or regulations regarding taxation and
access to online commerce. For example, expanding our distribution center
network may result in additional sales and other tax obligations. 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 and characteristics and quality of products
and services. Changes in consumer protection laws also may impose additional
burdens on companies conducting business online. These laws or regulations may
impede the growth of the Internet or other online services. This could, in turn,
diminish the demand for our products and services and increase our cost of doing
business. Moreover, 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.
Risks of uncertain protection of intellectual property. 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 be subject to legal
proceedings and claims, regarding alleged infringement by us and our licensees
of the trademarks and other intellectual property rights of
11
12
third parties. Such claims, even if not meritorious, may result in the
expenditure of significant financial and managerial resources.
Risks of Year 2000 non-compliance. We have developed a plan to modify our
information technology to recognize the year 2000 and have begun converting our
critical data processing systems. We have initiated formal communications with
our significant suppliers and service providers to determine the extent to which
our systems may be vulnerable if they fail to address and correct their own Year
2000 issues. We cannot guarantee that the systems of suppliers or other
companies on which we rely will be Year 2000 compliant. Their failure to convert
their systems could disrupt our systems. In addition, the computer systems
necessary to maintain the viability of the Internet or any of the Web sites that
direct consumers to our online stores may not be Year 2000 compliant. Finally,
computers used by our customers to access our online stores may not be Year 2000
compliant, delaying our customers' purchases of our products. We are in the
process of developing a formal contingency plan. We cannot guarantee that our
systems will be Year 2000 compliant or that the Year 2000 problem will not
adversely affect our business, which includes limiting or precluding customer
purchases.
Our stock price is highly volatile. The trading price of our common stock
fluctuates significantly. For example, during the 52-week period ended February
28, 1999 (as adjusted for our 2-for-1 split of our common stock effected June 1,
1998 and 3-for-1 split of our common stock effected January 4, 1999), the
reported closing price of the common stock on the Nasdaq National Market was as
high as $184 5/8 and as low as $9 1/2 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,
- business combinations and investments by us or our competitors,
- changes in our operating expense levels or losses,
- changes in financial estimates and recommendations by securities
analysts,
- performance by other online commerce companies, and
- news reports relating to trends in the Internet, book, music, video or
other product or service industries.
Any of these events may cause our stock price to fall, which may adversely
affect our business and financing opportunities. In addition, the stock market
in general and the market prices for Internet-related companies in particular
have experienced significant volatility that often has been unrelated to the
operating performance of such companies. These broad market and industry
fluctuations may adversely affect the trading price of the common stock,
regardless of our operating performance.
12
13
EXECUTIVE OFFICERS AND DIRECTORS
The following tables set forth certain information regarding the executive
officers and Directors of the Company as of February 28, 1999:
EXECUTIVE OFFICERS
NAME AGE POSITION
---- --- --------
Jeffrey P. Bezos........................... 35 President, Chief Executive Officer and
Chairman of the Board
Joy D. Covey............................... 35 Chief Financial Officer and Vice President
of Finance and Administration
Richard L. Dalzell......................... 41 Vice President and Chief Information
Officer
Sheldon J. Kaphan.......................... 46 Vice President and Chief Technology Officer
John D. Risher............................. 33 Senior Vice President of Product
Development
Kavitark R. Shriram........................ 42 Vice President of Business Development
Jimmy M. Wright............................ 45 Vice President and Chief Logistics Officer
JEFFREY P. BEZOS. Mr. Bezos has been President and Chairman of the Board of
the Company since founding it in 1994, and Chief Executive Officer since May
1996, and served as Treasurer and Secretary from May 1996 to March 1997. From
December 1990 to June 1994, Mr. Bezos was employed by D.E. Shaw & Co., a Wall
Street investment firm, becoming Senior Vice President in 1992. From April 1988
to December 1990, Mr. Bezos was employed by Bankers Trust Company, becoming Vice
President in February 1990. Mr. Bezos received his B.S. in Electrical
Engineering and Computer Science, Summa Cum Laude, from Princeton University.
JOY D. COVEY. Ms. Covey joined the Company in December 1996 as Chief
Financial Officer and Vice President of Finance and Administration, and served
as Secretary from March 1997 to February 1999. Ms. Covey also served as
Treasurer of the Company from March 1997 to February 1998. From June 1995 to
February 1996, Ms. Covey served as Vice President, Operations of the Broadcast
Division of Avid Technology, Inc. ("Avid"), a developer of digital media
systems, and from January 1995 to June 1995, Ms. Covey served as Vice President
of Business Development for Avid. From July 1991 to January 1995, Ms. Covey
served as Chief Financial Officer of Digidesign, Inc., a developer of random
access digital audio systems and software. Prior to that, she was an associate
at Wasserstein Perella & Co., and a certified public accountant at Ernst & Young
LLP. Ms. Covey received her B.S. in Business Administration, Summa Cum Laude,
from California State University, Fresno, her M.B.A., With High Distinction,
from Harvard Business School and her J.D., Magna Cum Laude, from Harvard Law
School. She is a Certified Public Accountant and a member of the California
State Bar.
RICHARD L. DALZELL. Mr. Dalzell joined the Company in August 1997 as Vice
President and Chief Information Officer. From February 1990 to August 1997, Mr.
Dalzell held several management positions within the Information Systems
Division at Wal-Mart Stores, Inc., including Vice President of Information
Systems from January 1994 to August 1997. From 1987 to 1990, Mr. Dalzell acted
as the Business Development Manager for E-Systems, Inc. Prior to joining
E-Systems, Inc. he served seven years in the United States Army as a
teleprocessing officer. Mr. Dalzell received a B.S. in Engineering from the
United States Military Academy, West Point.
SHELDON J. KAPHAN. Mr. Kaphan has served as the Company's Vice President
and Chief Technology Officer since March 1997. From October 1994 to March 1997,
Mr. Kaphan served as Vice President of Research and Development of the Company.
From October 1992 to July 1994, Mr. Kaphan served as senior engineer at Kaleida
Labs Inc., a multimedia joint venture between Apple Computer Inc. and
International Business Machines Corporation. Mr. Kaphan received his B.A. in
Mathematics from the University of California, Santa Cruz.
JOHN D. RISHER. Mr. Risher joined the Company in February 1997 as Vice
President of Product Development. Mr. Risher was promoted to Senior Vice
President of Product Development in November
13
14
1997. From July 1991 to February 1997, Mr. Risher held a variety of marketing
and project management positions at Microsoft Corporation, including Team
Manager for Microsoft Access and Founder and Product Unit Manager for MS
Investor, Microsoft's Web site for personal investment. Mr. Risher received his
B.A. in Comparative Literature, Magna Cum Laude, from Princeton University and
his M.B.A. from Harvard Business School.
KAVITARK R. SHRIRAM. Mr. Shriram joined the Company in August 1998 and was
named Vice President of Business Development in October 1998. From May 1998 to
August 1998, Mr. Shriram served as President and Chief Operating Officer of
Junglee Corp. From November 1994 to July 1997, Mr. Shriram held several
positions at Netscape Communications Corporation, most recently Vice President
of OEM and WebSite Sales. From 1990 to 1994, Mr. Shriram served as director of
global channel sales at Network Computing Devices, Inc. Mr. Shriram holds a B.S.
from the University of Madras, India and an M.B.A. from the University of
Michigan.
JIMMY M. WRIGHT. Mr. Wright joined the Company in July 1998 as Vice
President and Chief Logistics Officer. From 1985 to 1998, Mr. Wright held a
variety of logistics management positions with Wal-Mart Stores, Inc., most
recently as Vice President of Distribution. Additionally, during 1998, Mr.
Wright served as managing partner of Diversified Retail Solutions, L.L.C., a
retail consulting firm. From 1972 to 1985, Mr. Wright held a variety of
positions at Fina Oil and Chemical Company, a branch of Petrofina S.A. based in
Brussels, most recently as General Manager of Distribution. Mr. Wright received
his B.B.A. in personnel management from the University of Texas.
BOARD OF DIRECTORS
NAME AGE
---- ---
Jeffrey P. Bezos........................... 35 Chairman of the Board, President and Chief
Executive Officer of the Company
Tom A. Alberg.............................. 59 Principal in Madrona Investment Group,
L.L.C.
Scott D. Cook.............................. 46 Founder and Chairman of the Executive
Committee of Intuit, Inc.
L. John Doerr.............................. 47 General Partner, Kleiner Perkins Caufield &
Byers
Patricia Q. Stonesifer..................... 42 Chairman of the Gates Learning Foundation
and Former Senior Vice President of the
Interactive Media Division of Microsoft
Corporation
ITEM 2. PROPERTIES
The Company's principal office facilities located in the United States
currently total approximately 150,000 square feet and are located in Seattle,
Washington under leases that expire in June 1999 through April 2003. The Company
also recently leased an office building of approximately 184,000 square feet in
Seattle, Washington under a lease that expires in 2009. The Company will occupy
the office building in 1999. The Company's warehousing and fulfillment
operations are housed in an approximately 93,000-square-foot facility in
Seattle, Washington under a lease that expires in October 1999, and in an
approximately 200,000-square-foot facility located in New Castle, Delaware under
a lease that expires in October 2002. In December 1998, the Company leased an
approximately 323,000-square-foot distribution facility in Fernley, Nevada under
a lease that expires in 2009. The facility is expected to begin operations in
1999.
The Company has additional properties in Europe. The German subsidiary's
headquarters and distribution center, located in Regensburg, Germany, total
approximately 32,000 square feet, under leases that expire in December 1999 and
2000. The editorial and marketing offices in Germany are approximately 9,000
square feet and are located in Munich under a lease that expires in 2001. The
headquarter offices and distribution center of the U.K. subsidiary total
approximately 41,000 square feet and are located in Slough, England under a
lease that expires in 2008.
14
15
The Company does not own any real estate as of December 31, 1998.
Additionally, the Company anticipates that it will require additional office
space within the next 12 months. There can be no assurance that suitable
additional space will be available on commercially reasonable terms.
The Company intends to establish one or more additional distribution
centers within the next 12 months, which would require it to commit to lease
obligations, stock inventories, purchase fixed assets, hire and train employees
and install leasehold improvements. In addition, the Company has announced plans
to continue developing distribution infrastructure to increase efficiency and
support greater customer demand, as well as to increase its inventory to provide
better availability to customers and achieve purchasing efficiencies.
ITEM 3. LEGAL PROCEEDINGS
Intimate Bookshop. In August 1998, The Intimate Bookshop and Wallace Kuralt
filed a lawsuit in the United States District Court for the Southern District of
New York against the Company, Barnes & Noble, Borders Group, Inc. and others
alleging antitrust, unfair competition and related claims under the
Robinson-Patman Act, the Clayton Act, the Donnelly Act and certain New York
state statutes and common law. The complaint was thereafter amended to drop the
class action allegations and certain claims. A claim for unfair competition was
added. The plaintiffs requested the following relief: actual damages of
approximately $11.25 million, treble damages, injunctive relief, punitive
damages, pre- and postjudgment interest, attorneys' fees and costs. Amazon.com
understands that the plaintiffs filed a voluntary dismissal of this action, with
prejudice, on March 4, 1999.
Wal-Mart Stores, Inc. In October 1998, Wal-Mart Stores, Inc. ("Wal-Mart")
filed a lawsuit in Bentonville, Arkansas against the Company and other
defendants alleging actual and threatened misappropriation of trade secrets and
ancillary common-law claims. Wal-Mart subsequently requested a temporary
restraining order preventing the defendants from misappropriating Wal-Mart's
alleged trade secrets, from placing employees in positions in which they would
"inevitably disclose" Wal-Mart's alleged trade secrets and from soliciting,
inducing or recruiting Wal-Mart employees. In January 1999, Wal-Mart filed an
identical action in Seattle, Washington, and the Arkansas court dismissed
Wal-Mart's action on jurisdictional grounds before deciding the temporary
restraining order. The dismissal is pending appeal. Wal-Mart has advised the
Company that it will file a preliminary injunction motion. In addition to
injunctive relief, Wal-Mart has requested compensatory damages, pre- and
postjudgment interest and attorneys' fees and costs. The Company believes that
Wal-Mart's claims are without merit and intends to vigorously defend against the
plaintiffs' claims. Amazon.com has filed a counterclaim based in part on unfair
competition and intentional interference. Litigation is inherently uncertain,
and there can be no assurance that the Company will prevail in the lawsuit.
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 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 and operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of stockholders of the Company during
the fourth quarter of the year ended December 31, 1998.
15
16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market Information
The common stock is traded on the Nasdaq National Market under the symbol
"AMZN." The following table sets forth the high and low closing sale prices for
the common stock for the periods indicated, as reported by the Nasdaq National
Market.
HIGH LOW
------- ------
Year ended December 31, 1997
Second Quarter (from May 15)............................ $ 3.92 $ 2.79
Third Quarter........................................... 9.25 3.03
Fourth Quarter.......................................... 10.78 7.25
Year ended December 31, 1998
First Quarter........................................... 14.31 8.52
Second Quarter.......................................... 33.27 13.50
Third Quarter........................................... 46.50 24.33
Fourth Quarter.......................................... 117.31 28.73
The prices in this table have been adjusted to reflect the 2-for-1 stock
split effected June 1, 1998 and the 3-for-1 stock split effected January 4,
1999.
Holders
As of February 28, 1999 there were 2,304 stockholders of record of the
common stock, although there are a larger number of beneficial owners.
Dividends
The Company has never declared or paid cash dividends on its common stock.
The Company intends to retain all future earnings to finance future growth and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future. In addition, the Company is restricted from paying cash dividends under
the Senior Discount Notes.
Changes in Securities
None.
Recent Sales of Unregistered Securities
None.
16
17
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes thereto and
the information contained herein in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Historical results
are not necessarily indicative of future results.
PERIOD FROM
JULY 5, 1994
YEARS ENDED DECEMBER 31, (INCEPTION) TO
-------------------------------------------- DECEMBER 31,
1998 1997 1996 1995 1994
--------- -------- -------- ------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA (1):
Net sales.................................. $ 609,996 $147,787 $ 15,746 $ 511 $ --
Cost of sales.............................. 476,155 118,969 12,287 409 --
--------- -------- -------- ------- -------
Gross profit............................... 133,841 28,818 3,459 102 --
Operating expenses:
Marketing and sales...................... 133,023 40,486 6,090 200 --
Product development...................... 46,807 13,916 2,401 171 38
General and administrative............... 15,799 7,011 1,411 35 14
Merger and acquisition related costs,
including amortization of goodwill and
other purchased intangibles............ 50,172 -- -- -- --
--------- -------- -------- ------- -------
Total operating expenses.......... 245,801 61,413 9,902 406 52
--------- -------- -------- ------- -------
Loss from operations....................... (111,960) (32,595) (6,443) (304) (52)
Interest income............................ 14,053 1,901 202 1 --
Interest expense........................... (26,639) (326) (5) -- --
--------- -------- -------- ------- -------
Net interest income (expense)..... (12,586) 1,575 197 1 --
--------- -------- -------- ------- -------
Net loss................................... $(124,546) $(31,020) $ (6,246) $ (303) $ (52)
========= ======== ======== ======= =======
Basic and diluted loss per share (2)....... $ (0.84) $ (0.24) $ (0.06) $ (0.00) $ (0.00)
========= ======== ======== ======= =======
Shares used in computation of basic and
diluted loss per share (2)............... 148,172 130,341 111,271 86,364 79,146
========= ======== ======== ======= =======
DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- -------- ------- --------------
(IN THOUSANDS)
BALANCE SHEET DATA (1):
Cash....................................... $ 25,561 $ 1,876 $ 864 $ 804 $ 52
Marketable securities...................... 347,884 123,499 5,425 192 --
Working capital (deficiency)............... 262,679 93,158 1,698 920 (16)
Total assets............................... 648,460 149,844 8,434 1,084 76
Long-term debt............................. 348,140 76,702 -- -- --
Stockholders' equity....................... 138,745 28,591 2,943 977 8
- ---------------
(1) Reflects restatement for pooling of interests. See Notes 1 and 2 of Notes to
Consolidated Financial Statements.
(2) For further discussion of loss per share see Notes 1 and 8 of Notes to
Consolidated Financial Statements.
17
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. This Act
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about themselves so long as they identify
these statements as forward looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact made
in this Annual Report on Form 10-K are forward looking. In particular, the
statements herein regarding industry prospects and future results of operations
or financial position are forward-looking statements. Forward-looking statements
reflect management's current expectations and are inherently uncertain. The
Company's actual results may differ significantly from management's
expectations. The following discussion and the section entitled
"Business -- Additional Factors That May Affect Future Results" describes some,
but not all, of the factors that could cause these differences.
RESULTS OF OPERATIONS
Net Sales
1998 % CHANGE 1997 % CHANGE 1996
-------- -------- -------- -------- -------
(IN THOUSANDS)
Net sales..................... $609,996 313% $147,787 839% $15,746
Net sales are composed of the selling price of books, music and other
products and services sold by the Company, net of returns, as well as outbound
shipping and handling charges. Growth in net sales in 1998 and 1997 reflects a
significant increase in units sold due to the growth of the Company's customer
base and repeat purchases from the Company's existing customers. The Company had
approximately 6.2 million and 1.5 million cumulative customer accounts as of
December 31, 1998 and 1997, respectively. Repeat customer orders accounted for
over 60% of orders placed on the Amazon.com Web site during the fiscal year
ended December 31, 1998. Additionally, the increase in net sales in 1998 was
partially due to the opening of the music store in June 1998, the United Kingdom
and German stores in October 1998 and the video store in November 1998.
International sales, including export sales from the United States,
represented approximately 20%, 25% and 33% of net sales for the years ended
December 31, 1998, 1997 and 1996, respectively. Although there can be no
assurances, the Company does not expect the introduction of the Euro resulting
from the European Monetary Union to significantly impact our competitive
position or operations.
Gross Profit
1998 % CHANGE 1997 % CHANGE 1996
-------- -------- ------- -------- ------
(IN THOUSANDS)
Gross profit.................... $133,841 364% $28,818 733% $3,459
Gross margin.................... 21.9% 19.5% 22.0%
Gross profit consists of sales less the cost of sales, which consists of
the cost of merchandise sold to customers, as well as outbound and inbound
shipping costs. Gross profit increased in 1998 and 1997 in absolute dollars,
reflecting the Company's increased sales volume. Gross margin increased in 1998
as a result of improvements in product costs through improved supply chain
management, including increased direct purchasing from publishers, which
together more than offset the impact of aggressive product pricing and lower
music and video margins. Gross margin decreased in 1997 due to a combination of
lower prices and lower overall shipping margins, partially offset by
improvements in product cost.
The Company believes that offering its customers attractive prices is an
essential component of its business strategy. Accordingly, the Company offers
everyday discounts of up to 40% on hundreds of
18
19
thousands of titles and certain "special value" editions discounted up to 85%.
The Company may in the future expand or increase the discounts it offers to its
customers and may otherwise alter its pricing structure and policies.
The Company over time intends to expand its operations by promoting new or
complementary products or sales formats and by expanding the breadth and depth
of its product and service offerings. Gross margins attributable to new business
areas may be lower than those associated with the Company's existing business
activities. In particular, in June 1998 the Company launched its new music store
and in November 1998 launched a video store. Music and video gross margins are
lower than book gross margins. To the extent music and video become a larger
portion of the Company's product mix, it is expected to have a proportionate
impact on overall product gross margin.
Marketing and Sales
1998 % CHANGE 1997 % CHANGE 1996
-------- -------- ------- -------- ------
(IN THOUSANDS)
Marketing and sales............. $133,023 229% $40,486 565% $6,090
Percentage of net sales......... 21.8% 27.4% 38.7%
Marketing and sales expenses consist primarily of advertising, promotional
and public relations expenditures, as well as payroll and related expenses for
personnel engaged in marketing, selling and fulfillment activities. All
fulfillment costs not included in cost of sales, including the cost of operating
and staffing distribution centers and customer service, are included in
marketing and sales. The Company expects its costs of fulfillment to increase
based primarily on anticipated sales growth and its planned distribution network
expansion. Marketing and sales expenses increased in 1998 and 1997 primarily due
to increases in the Company's advertising and promotional expenditures,
increased payroll and related costs associated with fulfilling customer demand
and increased credit card fees resulting from higher sales. The increase in 1998
was also attributable to the entry into music and video sales and the launch of
new stores in Germany and the United Kingdom. Marketing and sales expenses
decreased as a percentage of net sales due to the significant increase in net
sales. The Company intends to continue to pursue its aggressive branding and
marketing campaign, which includes radio, television and print advertising and
significant expenditures for online promotion and advertising relationships. In
addition, the Company intends to increase investments in marketing, promotion
and fulfillment activities related to its product, service and international
expansion. As a result of the foregoing, the Company expects marketing and sales
expenses to increase significantly in absolute dollars.
Product Development
1998 % CHANGE 1997 % CHANGE 1996
------- -------- ------- -------- ------
(IN THOUSANDS)
Product development.............. $46,807 236% $13,916 480% $2,401
Percentage of net sales.......... 7.7% 9.4% 15.2%
Product development expenses consist principally of payroll and related
expenses for development, editorial, systems and telecommunications operations
personnel and consultants; systems and telecommunications infrastructure; and
costs of acquired content, including freelance reviews. The increases in product
development expenses in 1998 and 1997 were primarily attributable to increased
staffing and costs related to continual feature, content and functionality
enhancements to the Company's Web sites and transaction-processing systems, as
well as increased investment in systems and telecommunications infrastructure.
Such increases in 1998 included investments associated with the entry into music
and video sales, the launch of an enhanced holiday gift store, new stores in
Germany and the United Kingdom and operating expenses associated with the
acquired entities. Product development expenses decreased as a percentage of net
sales due to the significant increase in net sales. To date, product development
costs have been expensed as incurred. The Company believes that continued
investment in product development is critical to attaining its strategic
objectives. In addition to ongoing investments in its Web stores and
infrastructure,
19
20
the Company intends to increase investments in products, services and
international expansion. As a result, the Company expects product development
expenses to increase significantly in absolute dollars.
General and Administrative
1998 % CHANGE 1997 % CHANGE 1996
------- -------- ------ -------- ------
(IN THOUSANDS)
General and administrative........ $15,799 125% $7,011 397% $1,411
Percentage of net sales........... 2.6% 4.7% 9.0%
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 1998 and 1997 increases in
general and administrative expenses were primarily a result of increased
salaries and related expenses associated with the hiring of additional personnel
and legal and other professional fees related to the Company's growth. In 1998,
additional expenses were incurred associated with the acquired entities and the
related international expansion and expanded activities. Beginning in 1997,
general and administrative costs have included costs attributable to being a
public company. General and administrative expenses decreased as a percentage of
net sales due to the significant increase in net sales. The Company expects
general and administrative expenses to increase in absolute dollars as the
Company expands its staff and incurs additional costs related to the growth of
its business, including investments associated with products, services and
international expansion.
Merger and Acquisition Related Costs, Including Amortization of Goodwill and
Other Purchased Intangibles
Merger and acquisition related costs, including amortization of goodwill
and other purchased intangibles, were approximately $50.2 million or 8.2% of net
sales in 1998. These costs were recorded in connection with the Company's April
1998 acquisitions of three Internet companies and its August 1998 acquisition of
Junglee. These acquisitions were accounted for under the purchase method of
accounting. Additionally, certain transaction costs were incurred in connection
with the August 1998 merger with PlanetAll, which was accounted for under the
pooling of interests method of accounting. Merger and acquisition related costs
consist of amortization of goodwill and other purchased intangibles of
approximately $42.6 million, as well as approximately $7.6 million, composed
primarily of equity in loss of investee and other merger and acquisition related
costs. The Company anticipates that future amortization of goodwill and other
purchased intangibles associated with its 1998 acquisitions will continue to be
amortized on a straight-line basis over lives of up to approximately three
years, and will amount to approximately $22 million per quarter until March 2000
and approximately $15 million per quarter thereafter until the related goodwill
and other purchased intangibles are fully amortized. It is likely that the
Company will continue to expand its business through acquisitions and internal
development. Any additional acquisitions or impairment of goodwill and other
purchased intangibles, as well as equity in losses of equity investees, could
result in additional merger and acquisition related costs.
Interest Income and Expense
1998 % CHANGE 1997 % CHANGE 1996
------- -------- ------ -------- ----
(IN THOUSANDS)
Interest income..................... $14,053 639% $1,901 841% $202
Interest expense.................... (26,639) N/M (326) N/M (5)
Interest income on cash and marketable securities increased in 1998 due to
higher investment balances resulting from the proceeds from the Senior Discount
Notes issued in May 1998, and in 1997 due to higher investment balances
resulting from the proceeds of the Company's initial public offering in May
1997. Interest expense in 1998 includes interest and amortization of deferred
charges related to the Senior Discount Notes.
Interest expense in 1998 and 1997 consists of interest and amortization of
deferred charges related to the Company's $75 million three-year senior secured
term loan (the "Senior Loan") entered into in
20
21
December 1997, as well as asset acquisitions financed through loans and capital
leases. In 1998, interest expense also includes the write-off of $2.0 million of
unamortized loan fees following prepayment of the Senior Loan in May 1998.
The Company expects interest expense to increase in the future as a result
of the Senior Discount Notes, the Convertible Notes and potentially increased
financing of asset acquisitions through loans and capital leases. The Company
also expects interest income to increase because of higher cash balances
resulting from the net proceeds of the Convertible Notes.
Income Taxes
The Company did not provide any current or deferred U.S. federal, state or
foreign income tax provision or benefit for any of the periods presented because
it has experienced operating losses since inception. Utilization of the
Company's net operating loss carryforwards, which begin to expire in 2011, may
be subject to certain limitations under Section 382 of the Internal Revenue Code
of 1986, as amended. The Company has provided a full valuation allowance on the
deferred tax asset, consisting primarily of net operating loss carryforwards,
because of uncertainty regarding its realizability.
PRO FORMA INFORMATION
In April 1998, the Company acquired all of the outstanding capital stock of
three Internet companies. Each of the acquisitions was accounted for under the
purchase method of accounting. The aggregate purchase price of the three
acquisitions, plus related charges, was approximately $55 million. The
consideration for the acquisitions was comprised of common stock and cash. The
Company issued an aggregate of approximately 3.2 million shares of common stock
to affect the transactions. The Company is amortizing the goodwill resulting
from the acquisitions on a straight-line basis over approximately two years.
In August 1998, the Company acquired all of the outstanding capital stock
of Junglee. The Company issued approximately 4.7 million shares of common stock
and assumed all outstanding options and warrants in connection with the
acquisition of Junglee. The Junglee acquisition was accounted for under the
purchase method of accounting, with substantially all of the approximately $180
million purchase price allocated to goodwill and other purchased intangibles.
The goodwill and substantially all other purchased intangible assets are being
amortized on a straight-line basis over lives averaging approximately three
years.
In August 1998, the Company exchanged common stock and options for all of
the outstanding capital stock of PlanetAll. The Company issued approximately 2.4
million shares of common stock and assumed all outstanding options in connection
with the merger. The PlanetAll merger was accounted for as a pooling of
interests and, as a result, the Company's consolidated financial statements have
been restated for all periods presented.
As of December 31, 1998, the Company has an investment of approximately 46%
in drugstore.com, inc., an online drugstore, that is accounted for under the
equity method of accounting. Under the equity method of accounting, the
Company's share of the investee's earnings or loss is included in consolidated
operating results. The Company's basis in its equity investment is classified
within other purchased intangibles in the accompanying consolidated balance
sheet and the Company's share of the investee's loss is classified in merger and
acquisition related costs, including amortization of goodwill and other
purchased intangibles. To date, this investment has not materially impacted the
Company's results of operations or its financial position.
Pro forma information regarding the Company's results, excluding
approximately $50.2 million of merger and acquisition related costs, which
include amortization of goodwill and other purchased
21
22
intangibles, for the business combinations discussed above, as well as the
Company's share of losses from its investee, is as follows:
YEAR ENDED
DECEMBER 31,
1998
--------------
(IN THOUSANDS)
Pro forma loss from operations.............................. $(61,788)
Pro forma net loss.......................................... $(74,374)
Pro forma basic and diluted loss per share.................. $ (0.50)
Shares used in computation of basic and diluted loss per
share..................................................... 148,172
The pro forma results for the year ended December 31, 1998 are presented
for informational purposes only and are not prepared in accordance with
generally accepted accounting principles.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company's cash was $25.6 million, compared to
$1.9 million at December 31, 1997. Marketable securities balances, which include
highly liquid investments with maturities of three months or less, were $347.9
million and $123.5 million at December 31, 1998 and 1997, respectively.
Net cash provided by operating activities of $31.0 million and $687,000 for
the years ended December 31, 1998 and 1997, respectively, was primarily
attributable to increases in accounts payable, other liabilities and accrued
expenses, accrued advertising and non-cash expenses, largely offset by the net
loss and increases in inventories and prepaid expenses and other.
Net cash used in investing activities was $261.8 million for the year ended
December 31, 1998 and consisted of net purchases of marketable securities,
purchases of fixed assets, and acquisitions, dispositions and investments in
businesses. For the year ended December 31, 1997, net cash used in investing
activities was $125.7 million and consisted of net purchases of marketable
securities and purchases of fixed assets.
Net cash provided by financing activities of $254.5 million for the year
ended December 31, 1998 resulted from net proceeds of approximately $318.2
million from the Senior Discount Notes offering, net proceeds of approximately
$8.4 million from PlanetAll's issuance of capital stock, and proceeds from the
exercise of stock options of $6.0 million, partially offset by the repayment of
the Senior Loan. Net cash provided by financing activities of $126.0 million for
the year ended December 31, 1997 resulted primarily from net proceeds from the
Senior Loan, the Company's initial public offering and PlanetAll's issuance of
capital stock.
As of December 31, 1998, the Company's principal sources of liquidity
consisted of $373.4 million of cash and marketable securities. As of that date,
the Company's principal commitments consisted of obligations outstanding under
its Senior Discount Notes, obligations in connection with the acquisition of
fixed assets, operating leases and commitments for advertising and promotional
arrangements. The Company anticipates a substantial increase in its capital
expenditures and lease commitments consistent with anticipated growth in
operations, infrastructure and personnel, including growth associated with
product and service offerings, geographic expansion and integration of business
combinations. For example, in August 1998, the Company entered into a long-term
office lease, which will result in increased lease obligations commencing in
1999, and, in December 1998, the Company leased a highly mechanized distribution
facility in Fernley, Nevada, which is expected to begin operations in 1999.
Bringing these facilities to operational readiness will require significant
leasehold improvement and capital expenditures, and require the Company to stock
inventories, purchase fixed assets and hire and train employees.
The Company intends to establish one or more additional distribution
centers within the next 12 months, which would require it to commit to lease
obligations, stock inventories, purchase fixed assets, hire and train employees
and install leasehold improvements. In addition, the Company has announced plans
to continue developing distribution infrastructure to increase efficiency and
support greater customer
22
23
demand and to increase its inventory to provide better availability to customers
and achieve purchasing efficiencies.
Senior Discount Notes
In May 1998, the Company completed the offering of approximately $326
million gross proceeds of the Senior Discount Notes. Pursuant to a registration
statement on Form S-4, in September 1998, the Company completed an exchange
offer of 10% Senior Discount Notes due 2008 (the "Exchange Notes"), which were
registered under the Securities Act of 1933, as amended (the "Securities Act"),
for all outstanding Senior Discount Notes. The Exchange Notes have identical
terms in all material respects to the terms of the original Senior Discount
Notes, except that the Exchange Notes generally are freely transferable (the
Exchange Notes are referred to throughout this Annual Report interchangeably
with the Senior Discount Notes). The Exchange Notes were issued under the
indenture governing the original Senior Discount Notes (the "Senior Notes
Indenture"). The Senior Discount Notes were sold at a substantial discount from
their principal amount at maturity of $530 million. Prior to November 1, 2003,
no cash interest payments are required; instead, interest will accrete during
this period to the $530 million aggregate principal amount at maturity. From and
after May 1, 2003, the Senior Discount Notes will bear interest at the rate of
10% per annum payable in cash on each May 1 and November 1. The Senior Discount
Notes are redeemable, at the option of the Company, in whole or in part, at any
time on or after May 1, 2003, at the redemption prices set forth in the Senior
Notes Indenture, plus accrued interest, if any, to the date of redemption.
Upon a Change of Control (as defined in the Senior Notes Indenture), the
Company would be required to make an offer to purchase the Senior Discount Notes
at a purchase price equal to 101% of their Accreted Value on the date of
purchase, plus accrued interest, if any. There can be no assurance that the
Company would have sufficient funds available at the time of any Change of
Control to make any required debt repayment (including repurchases of the Senior
Discount Notes).
The Senior Notes Indenture contains certain covenants that, among other
things, limit the ability of the Company and its Restricted Subsidiaries (as
defined in the Senior Notes Indenture) to incur indebtedness, pay dividends,
prepay subordinated indebtedness, repurchase capital stock, make investments,
create liens, engage in transactions with stockholders and affiliates, sell
assets and engage in mergers and consolidations. However, these limitations are
subject to a number of important qualifications and exceptions. The Company was
in compliance with all financial covenants at December 31, 1998.
Convertible Subordinated Notes
In February 1999, the Company completed an offering of approximately $1.25
billion of the Convertible Notes. Interest payments on the Convertible Notes of
4 3/4% per annum are due and payable semiannually in arrears in cash on February
1 and August 1 of each year, commencing August 1, 1999. The Convertible Notes
are unsecured and are subordinated to all existing and future Senior
Indebtedness as defined in the indenture governing the Convertible Notes (the
"Convertible Notes Indenture"). The Convertible Notes are generally convertible
into common stock of the Company, unless redeemed or repaid prior to maturity,
at a conversion price of $156.055 per share. The Convertible Notes may be
redeemed by the Company (the "Provisional Redemption"), in whole or in part, at
any time prior to February 6, 2002, at a redemption price equal to $1,000 per
Convertible Note to be redeemed plus accrued and unpaid interest, if any, to the
date of redemption (the "Provisional Redemption Date") if (1) the closing price
of the common stock shall have exceeded 150% of the conversion price then in
effect for at least 20 trading days in any consecutive 30-trading day period and
(2) the shelf registration statement covering resales of the Convertible Notes
and the common stock issuable upon conversion of the Convertible Notes is
effective and available for use and is expected to remain effective and
available for use for the 30 days following the Provisional Redemption Date.
Upon any Provisional Redemption, the Company will make an additional payment in
cash with respect to the Convertible Notes called for redemption in an amount
equal to $212.60 per $1,000 Convertible Note, less the amount of any interest
actually paid on such Convertible Note prior to the call for redemption. The
Company must make these
23
24
payments on all of the Convertible Notes called for redemption, including
Convertible Notes called after the date of the call for redemption. After
February 6, 2002, the Convertible Notes will be redeemable on at least 30 days'
notice at the option of the Company, in whole or in part, at any time, at the
redemption prices set forth in the Convertible Notes Indenture.
Upon occurrence of any Fundamental Change (as defined in the Convertible
Notes Indenture) prior to the maturity of the Convertible Notes, each holder of
the Convertible Notes has the right to require the Company to redeem all or any
part of the holder's Convertible Notes at a price equal to 100% of the principal
amount, plus any accrued interest, of the Convertible Notes being redeemed.
The Company will, for the benefit of the holders, file with the Securities
and Exchange Commission as soon as practicable, but in any event within 90 days
after the first date of original issuance of the Convertible Notes, a shelf
registration statement covering resales of the Convertible Notes and the common
stock issuable upon conversion of the Convertible Notes.
The Company has or may use the net proceeds from the offering of the
Convertible Notes for general corporate purposes, including working capital to
fund anticipated operating losses, the expansion of the Company's core business,
investments in new business segments and markets, capital expenditures,
acquisitions or investments in complementary businesses, products and
technologies and repurchases and retirement of debt.
The Company believes that current cash and marketable securities balances,
together with net proceeds from the Convertible Notes, will be sufficient to
meet its anticipated cash needs for at least the next 12 months. However, any
projections of future cash needs and cash flows are subject to substantial
uncertainty. If current cash, marketable securities and cash that may be
generated from operations are insufficient to satisfy the Company's liquidity
requirements, the Company may seek to sell additional equity or debt securities
or to obtain a line of credit. The sale of additional equity or convertible debt
securities could result in additional dilution to the Company's stockholders. In
addition, the Company will, from time to time, consider the acquisition of or
investment in complementary businesses, products, services and technologies, and
the repurchase and retirement of debt, which might impact the Company's
liquidity requirements or cause the Company to issue additional equity or debt
securities. There can be no assurance that financing will be available in
amounts or on terms acceptable to the Company, if at all.
YEAR 2000 IMPLICATIONS
Many current installed computer systems and software may be coded to accept
only two-digit entries in the date code field and cannot distinguish 21st
century dates from 20th century dates. As a result, many software and computer
systems may need to be upgraded or replaced. The Company is in the process of
assessing the Year 2000 issue and expects to complete the program in the second
quarter of 1999. The Company has not incurred material costs to date in the
process, and does not believe that the cost of additional actions will have a
material effect on its operating results or financial condition. However, the
Company has established a budget totaling approximately $1 million for the
acquisition of contract software services that will assist in the Year 2000
assessment and remediation activities to be completed no later than the third
quarter of 1999. Amazon.com's current systems and products may contain
undetected errors or defects with Year 2000 date functions that may result in
material costs. In addition, the Company utilizes third-party equipment,
software and content, including non-information technology systems, such as
security systems, building equipment and embedded micro-controllers that may not
be Year 2000 compliant. The Company is in the process of developing a plan to
assess whether its internally developed software, third-party systems and
non-information technology systems are adequately addressing the Year 2000
issue. Failure of third-party equipment, software or content to operate properly
with regard to the Year 2000 issue could require the Company to incur
unanticipated expenses to remedy problems, which could have a material adverse
effect on its business, operating results and financial condition.
Amazon.com is assessing whether third parties in its supply and
distribution chain are adequately addressing their Year 2000 compliance issues.
The Company has initiated formal communications with its significant suppliers
and service providers to determine the extent to which its systems may be
vulnerable
24
25
if such suppliers and providers fail to address and correct their own Year 2000
issues. The Company cannot guarantee that the systems of suppliers or other
companies on which the Company relies will be Year 2000 compliant. The Company
is in the process of developing a contingency plan that will address situations
that may result should Year 2000 compliance for critical operations not be fully
achieved in 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not have any derivative financial instruments as of
December 31, 1998. However, the Company is exposed to interest rate risk. The
Company employs established policies and procedures to manage its exposure to
changes in the market risk of its marketable securities, which are classified as
available-for-sale as of December 31, 1998. The Company's Senior Discount Notes,
Convertible Notes and other long-term debt have fixed interest rates and the
fair value of these instruments is affected by changes in market interest rates.
The Company believes that the market risk arising from holdings of its financial
instruments is not material.
Information relating to quantitative and qualitative disclosure about
market risk is set forth below and in "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The table below provides information about the Company's marketable
securities, including principal cash flows for 1999 through 2003 and the related
weighted average interest rates.
Principal (notional) amounts by expected maturity in U.S. dollars (in
thousands):
ESTIMATED FAIR
VALUE AT
DECEMBER 31,
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
-------- ------- ------- ------- ------- ---------- -------- --------------
Commercial paper and short-term
obligations...................... $114,579 $ -- $ -- $ -- $ -- $ -- $114,579 $114,180
Weighted average interest rate..... 5.34% 5.34%
Corporate notes and bonds.......... 4,250 46,500 -- -- -- -- 50,750 51,351
Weighted average interest rate..... 5.90% 5.20% 5.26%
Asset-backed and agency
securities....................... -- 21,500 8,746 7,087 10,086 35,497 82,916 83,569
Weighted average interest rate..... 5.57% 5.16% 5.29% 5.64% 5.82% 5.62%
Treasury notes and bonds........... 8,700 27,400 42,175 8,000 -- -- 86,275 89,013
Weighted average interest rate..... 5.63% 4.89% 4.64% 4.71% 4.82%
-------- ------- ------- ------- ------- ------- -------- --------
Total Portfolio, excluding
equity securities............ $127,529 $95,400 $50,921 $15,087 $10,086 $35,497 $334,520 $338,113
======== ======= ======= ======= ======= ======= ======== ========
25
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........... 27
Consolidated Balance Sheets................................. 28
Consolidated Statements of Operations....................... 29
Consolidated Statements of Stockholders' Equity............. 30
Consolidated Statements of Cash Flows....................... 31
Notes to Consolidated Financial Statements.................. 32
26
27
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Amazon.com, Inc.
We have audited the accompanying consolidated balance sheets of Amazon.com,
Inc. as of December 31, 1998 and 1997, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1998. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Amazon.com,
Inc. at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
ERNST & YOUNG LLP
Seattle, Washington
January 22, 1999, except for Note 11
as to which the date is February 10, 1999
27
28
AMAZON.COM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
DECEMBER 31,
--------------------
1998 1997
-------- --------
Current assets:
Cash...................................................... $ 25,561 $ 1,876
Marketable securities..................................... 347,884 123,499
Inventories............................................... 29,501 8,971
Prepaid expenses and other................................ 21,308 3,363
-------- --------
Total current assets.............................. 424,254 137,709
Fixed assets, net........................................... 29,791 9,726
Deposits and other.......................................... 626 169
Goodwill and other purchased intangibles, net............... 186,377 --
Deferred charges............................................ 7,412 2,240
-------- --------
Total assets...................................... $648,460 $149,844
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $113,273 $ 33,027
Accrued advertising....................................... 13,071 3,454
Other liabilities and accrued expenses.................... 34,547 6,570
Current portion of long-term debt......................... 684 1,500
-------- --------
Total current liabilities......................... 161,575 44,551
Long-term debt.............................................. 348,077 76,521
Long-term portion of capital lease obligation............... 63 181
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value:
Authorized shares -- 10,000
Issued and outstanding shares -- none..................... -- --
Common stock, $0.01 par value:
Authorized shares -- 300,000
Issued and outstanding shares -- 159,267 and 144,909
shares in 1998 and 1997, respectively.................. 1,593 1,449
Additional paid-in capital.................................. 300,130 66,586
Note receivable from officer for common stock............... (1,099) --
Deferred compensation....................................... (1,625) (1,930)
Accumulated other comprehensive income...................... 1,806 --
Accumulated deficit......................................... (162,060) (37,514)
-------- --------
Total stockholders' equity........................ 138,745 28,591
-------- --------
Total liabilities and stockholders' equity........ $648,460 $149,844
======== ========
See accompanying notes to consolidated financial statements.
28
29
AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- -------- --------
Net sales................................................. $ 609,996 $147,787 $ 15,746
Cost of sales............................................. 476,155 118,969 12,287
--------- -------- --------
Gross profit......................................... 133,841 28,818 3,459
Operating expenses:
Marketing and sales..................................... 133,023 40,486 6,090
Product development..................................... 46,807 13,916 2,401
General and administrative.............................. 15,799 7,011 1,411
Merger and acquisition related costs, including
amortization of goodwill and other purchased
intangibles.......................................... 50,172 -- --
--------- -------- --------
Total operating expenses........................ 245,801 61,413 9,902
--------- -------- --------
Loss from operations...................................... (111,960) (32,595) (6,443)
Interest income........................................... 14,053 1,901 202
Interest expense.......................................... (26,639) (326) (5)
--------- -------- --------
Net interest income (expense)........................ (12,586) 1,575 197
--------- -------- --------
Net loss.................................................. $(124,546) $(31,020) $ (6,246)
========= ======== ========
Basic and diluted loss per share.......................... $ (0.84) $ (0.24) $ (0.06)
========= ======== ========
Shares used in computation of basic and diluted loss per
share................................................... 148,172 130,341 111,271
========= ======== ========
See accompanying notes to consolidated financial statements.
29
30
AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
PREFERRED ADVANCES NOTE RECEIVABLE
STOCK COMMON STOCK RECEIVED FOR ADDITIONAL FROM OFFICER
--------------- ---------------- COMMON PAID-IN FOR DEFERRED
SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL COMMON STOCK COMPENSATION
------ ------ ------- ------ ------------ ---------- --------------- ------------
Balance at January 1,
1996.................... -- $-- 87,331 $1,075 $150 $ -- $ -- $ --
Net loss................ -- -- -- -- -- -- -- --
Reincorporation in
Delaware.............. -- -- -- (201) -- 201 -- --
Sale of preferred stock,
net of $30 issuance
costs................. 569 6 -- -- -- 7,964 -- --
Sale of common stock.... -- -- 5,043 50 (150) 136 -- --
Issuance of capital
stock................. -- -- 17 -- -- 11 -- --
Exercise of common stock
options............... -- -- 3,027 30 -- 165 -- --
Deferred compensation
related to stock
options............... -- -- -- -- -- 612 -- (612)
---- -- ------- ------ ---- -------- ------- -------
Balance at December 31,
1996.................... 569 6 95,418 954 -- 9,089 -- (612)
Net loss................ -- -- -- -- -- -- -- --
Sale of preferred
stock................. 5 -- -- -- -- 200 -- --
Public stock offering,
net of $4,897 issuance
costs................. -- -- 18,000 180 -- 48,923 -- --
Conversion of preferred
stock into common
stock................. (574) (6) 20,678 207 -- (201) -- --
Issuance of common stock
for fixed assets and
accrued product
development........... -- -- 1,350 13 -- 1,487 -- --
Issuance of capital
stock................. -- -- 1,270 13 -- 3,989 -- --
Exercise of common stock
options............... -- -- 8,193 82 -- 427 -- --
Deferred compensation
related to stock
options............... -- -- -- -- -- 2,741 -- (2,741)
Amortization of deferred
compensation related
to stock options...... -- -- -- -- -- (69) -- 1,423
---- -- ------- ------ ---- -------- ------- -------
Balance at December 31,
1997.................... -- -- 144,909 1,449 -- 66,586 -- (1,930)
Net loss................ -- -- -- -- -- -- -- --
Foreign currency
translation losses.... -- -- -- -- -- -- -- --
Unrealized gain on
marketable
securities............ -- -- -- -- -- -- -- --
Comprehensive loss.......
Issuance of capital
stock................. -- -- 9,025 90 -- 225,534 -- --
Exercise of common stock
options............... -- -- 5,333 54 -- 5,929 -- --
Note receivable from
officer for common
stock................. -- -- -- -- -- -- (1,099) --
Deferred compensation
related to stock
options............... -- -- -- -- -- 2,081 -- (2,081)
Amortization of deferred
compensation related
to stock options...... -- -- -- -- -- -- -- 2,386
---- -- ------- ------ ---- -------- ------- -------
Balance at December 31,
1998.................... -- $-- 159,267 $1,593 $ -- $300,130 $(1,099) $(1,625)
==== == ======= ====== ==== ======== ======= =======
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
INCOME DEFICIT EQUITY
------------- ----------- -------------
Balance at January 1,
1996.................... $ -- $ (248) $ 977
Net loss................ -- (6,246) (6,246)
Reincorporation in
Delaware.............. -- -- --
Sale of preferred stock,
net of $30 issuance
costs................. -- -- 7,970
Sale of common stock.... -- -- 36
Issuance of capital
stock................. -- -- 11
Exercise of common stock
options............... -- -- 195
Deferred compensation
related to stock
options............... -- -- --
------ --------- ---------
Balance at December 31,
1996.................... -- (6,494) 2,943
Net loss................ -- (31,020) (31,020)
Sale of preferred
stock................. -- -- 200
Public stock offering,
net of $4,897 issuance
costs................. -- -- 49,103
Conversion of preferred
stock into common
stock................. -- -- --
Issuance of common stock
for fixed assets and
accrued product
development........... -- -- 1,500
Issuance of capital
stock................. -- -- 4,002
Exercise of common stock
options............... -- -- 509
Deferred compensation
related to stock
options............... -- -- --
Amortization of deferred
compensation related
to stock options...... -- -- 1,354
------ --------- ---------
Balance at December 31,
1997.................... -- (37,514) 28,591
---------
Net loss................ -- (124,546) (124,546)
Foreign currency
translation losses.... (35) -- (35)
Unrealized gain on
marketable
securities............ 1,841 -- 1,841
---------
Comprehensive loss....... (122,740)
---------
Issuance of capital
stock................. -- -- 225,624
Exercise of common stock
options............... -- -- 5,983
Note receivable from
officer for common
stock................. -- -- (1,099)
Deferred compensation
related to stock
options............... -- -- --
Amortization of deferred
compensation related
to stock options...... -- -- 2,386
------ --------- ---------
Balance at December 31,
1998.................... $1,806 $(162,060) $ 138,745
====== ========= =========
See accompanying notes to consolidated financial statements.
30
31
AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- -------
OPERATING ACTIVITIES
Net loss.................................................. $(124,546) $ (31,020) $(6,246)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 9,692 3,442 296
Amortization of deferred compensation related to stock
options.............................................. 2,386 1,354 --
Non-cash merger and acquisition related costs, including
amortization of goodwill and other purchased
intangibles.......................................... 47,065 -- --
Non-cash interest expense............................... 23,970 64 --
Changes in operating assets and liabilities:
Inventories............................................. (20,513) (8,400) (554)
Prepaid expenses and other.............................. (16,465) (3,034) (315)
Deposits and other...................................... (293) (21) (148)
Accounts payable........................................ 78,674 30,172 2,756
Accrued advertising..................................... 9,617 2,856 598
Other liabilities and accrued expenses.................. 21,448 5,274 1,603
--------- --------- -------
Net cash provided by (used in) operating activities..... 31,035 687 (2,010)
INVESTING ACTIVITIES
Maturities of marketable securities....................... 332,084 4,311 --
Purchases of marketable securities........................ (546,509) (122,385) (5,233)
Purchases of fixed assets................................. (28,333) (7,603) (1,335)
Acquisitions, dispositions, and investments in
businesses.............................................. (19,019) -- --
--------- --------- -------
Net cash used in investing activities........... (261,777) (125,677) (6,568)
FINANCING ACTIVITIES
Net proceeds from initial public offering................. -- 49,103 --
Proceeds from exercise of stock options................... 5,983 509 195
Proceeds from issuance of capital stock................... 8,383 3,746 8,443
Proceeds from long-term debt.............................. 325,987 75,000 --
Repayment of long-term debt............................... (78,108) (47) --
Financing costs........................................... (7,783) (2,309) --
--------- --------- -------
Net cash provided by financing activities....... 254,462 126,002 8,638
Effect of exchange rate changes........................... (35) -- --
--------- --------- -------
Net increase in cash...................................... 23,685 1,012 60
Cash at beginning of period............................... 1,876 864 804
--------- --------- -------
Cash at end of period..................................... $ 25,561 $ 1,876 $ 864
========= ========= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Common stock issued in connection with acquisitions....... $ 217,241 $ -- $ --
Common stock issued for fixed assets and accrued product
development............................................. $ -- $ 1,500 $ --
Fixed assets acquired under capital lease................. $ -- $ 442 $ --
Fixed assets acquired under financing agreement........... $ -- $ 3,021 $ --
See accompanying notes to consolidated financial statements.
31
32
AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ACCOUNTING POLICIES
Description of Business
Amazon.com, Inc. ("Amazon.com" or the "Company"), an Internet retailer, was
incorporated in July 1994 and opened its virtual doors on the Web in July 1995.
Amazon.com offers book, music CD, video, DVD, computer game and other titles on
its Web sites.
Business Combinations and Investments
For business combinations which have been accounted for under the purchase
method of accounting, the Company includes the results of operations of the
acquired business from the date of acquisition. Net assets of the companies
acquired are recorded at their fair value at the date of acquisition. The excess
of the purchase price over the fair value of net assets acquired is included in
goodwill and other purchased intangibles in the accompanying consolidated
balance sheets.
Other business combinations are accounted for under the pooling of
interests method of accounting. In such cases, the assets, liabilities and
stockholders' equity of the acquired entities are combined with the Company's
respective accounts at recorded values. The consolidated financial statements
reflect the restatement of all periods presented to include the accounts of
merged entities accounted for under the pooling of interests method of
accounting. The historical results of the pooled entities reflect each of their
actual operating cost structures and, as a result, do not necessarily reflect
the cost structure of the newly combined entity. The historical results do not
purport to be indicative of future results.
Investments in affiliated entities in which the Company has the ability to
exercise significant influence of an investee, generally a 20% or greater
ownership interest of the voting stock, are accounted for under the equity
method of accounting. Under the equity method of accounting, the Company's share
of the investee's earnings or loss is included in consolidated operating
results.
All other investments, for which the Company does not have the ability to
exercise significant influence, are accounted for under the cost method of
accounting. Dividends and other distributions of earnings from other investees,
if any, are included in income when declared. The Company periodically evaluates
the carrying value of its investments accounted for under the cost method of
accounting and as of December 31, 1998, such investments were recorded at the
lower of cost or estimated net realizable value.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Marketable Securities
The Company's marketable securities consist primarily of high-quality
short- to intermediate-term fixed income securities and money market mutual
funds, are classified as available-for-sale and are reported at fair value.
Unrealized gains and losses are reported, net of taxes, as a component of
32
33
AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
stockholders' equity within accumulated other comprehensive income. Unrealized
losses are charged against income when a decline in fair value is determined to
be other than temporary. The specific identification method is used to determine
the cost of securities sold. The Company classifies all investments of cash as
marketable securities, including highly liquid investments with maturities of
three months or less, and reflects the related cash flows as investing cash
flows. As a result of the classification of highly liquid investments within
marketable securities, a significant portion of the Company's gross marketable
securities purchases and maturities disclosed as investing cash flows is related
to highly liquid investments.
Inventories
Inventories are valued at the lower of cost or market. The Company
purchases a majority of its products from three major vendors, Ingram Book Group
("Ingram"), Baker & Taylor, Inc. and Valley Media Inc. In late 1998, Barnes &
Noble announced an agreement to purchase Ingram. Ingram is the Company's single
largest supplier and accounted for approximately 40% and approximately 60% of
the Company's inventory purchases in 1998 and 1997, respectively. The Company
does not have long-term contracts or arrangements with most of its vendors to
guarantee the availability of merchandise, particular payment terms or the
extension of credit limits. The Company's current vendors may stop selling
merchandise to the Company on acceptable terms. The Company may not be able to
acquire merchandise from other suppliers in a timely and efficient manner and on
acceptable terms.
Fixed Assets
Fixed assets are stated at cost less accumulated depreciation and
amortization, which includes the amortization of assets recorded under capital
leases. Fixed assets are depreciated on a straight-line basis over the estimated
useful lives of the assets (generally one to ten years). Fixed assets purchased
under capital leases are amortized on a straight-line basis over the lesser of
the estimated useful life of the asset or the lease term.
Goodwill and Other Purchased Intangibles
Goodwill and other purchased intangibles represent the excess of the
purchase price over the fair value of assets acquired. Total goodwill of
approximately $215.7 million and other purchased intangibles of approximately
$13.3 million are stated net of total accumulated amortization of $42.6 million
at December 31, 1998 in the accompanying balance sheet. Goodwill and
substantially all other purchased intangibles are being amortized on a
straight-line basis over lives ranging from two to three years.
Long-Lived Assets
In accordance with Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standard ("SFAS") No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the carrying
value of intangible assets and other long-lived assets is reviewed on a regular
basis for the existence of facts or circumstances, both internally and
externally, that may suggest impairment. To date, no such impairment has been
indicated. Should there be an impairment in the future, the Company will measure
the amount of the impairment based on undiscounted expected future cash flows
from the impaired assets. The cash flow estimates that will be used will contain
management's best estimates, using appropriate and customary assumptions and
projections at the time.
Fair Value of Financial Instruments
The carrying amounts for the Company's cash, prepaid expenses and other,
deposits and other, accounts payable, accrued advertising, and other liabilities
and accrued expenses approximate fair value.
33
34
AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair market value for long-term debt and marketable securities is based on
quoted market prices where available.
Deferred Charges
In May 1998, the Company issued approximately $326 million gross proceeds
of 10% Senior Discount Notes due 2008 (the "Senior Discount Notes"). At December
31, 1998, deferred charges consisted of fees associated with the issuance of the
Senior Discount Notes. The fees are being amortized into interest expense over
the life of the Senior Discount Notes.
Income Taxes
The Company recognizes deferred tax assets and liabilities based on
differences between the financial reporting and tax bases of assets and
liabilities using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to be recovered.
Revenue Recognition
The Company recognizes revenue from product sales, net of any discounts,
when the products are shipped to customers. Outbound shipping and handling
charges are included in net sales. Revenue from gift certificates is recognized
upon product shipment following redemption. The Company provides an allowance
for sales returns, which has been insignificant, based on historical experience.
Advertising Costs
The cost of advertising is expensed as incurred. For the years ended
December 31, 1998, 1997 and 1996, the Company incurred advertising expense of
$60.2 million, $21.2 million and $3.4 million, respectively.
Product Development
Product development 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. To date, all product development costs have been
expensed as incurred.
Merger and Acquisition Related Costs
Merger and acquisition related costs consist primarily of amortization of
goodwill and other purchased intangibles of approximately $42.6 million, as well
as approximately $7.6 million, composed primarily of equity in loss of investee
and other merger and acquisition related costs.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB No. 25"), and related
interpretations, in accounting for its employee stock options rather than the
alternative fair value accounting allowed by SFAS No. 123, Accounting for
Stock-Based Compensation. APB No. 25 provides that the compensation expense
relative to the Company's employee stock options is measured based on the
intrinsic value of the stock option. SFAS No. 123 requires companies that
continue to follow APB No. 25 to provide a pro forma disclosure of the impact of
applying the fair value method of SFAS No. 123.
34
35
AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is the local
currency. Assets and liabilities of the foreign subsidiaries are translated into
U.S. dollars at year end exchange rates, and revenues and expenses are
translated at average rates prevailing during the year. Translation adjustments
are included in accumulated other comprehensive income, a separate component of
stockholders' equity. Transaction gains and losses arising from transactions
denominated in a currency other than the functional currency of the entity
involved, which have been insignificant, are included in the consolidated
statements of operations. To date, the Company has entered into no foreign
currency exchange contracts or other such derivative instruments.
Segment and Geographic Information
The Company operates in one principal business segment across domestic and
international markets. International sales, including export sales from the
United States, represented approximately 20%, 25%, and 33% of net sales for the
years ended December 31, 1998, 1997 and 1996, respectively. No foreign country
or geographic area accounted for more than 10% of net sales in any of the
periods presented. There were no transfers between geographic areas during the
years ended December 31, 1998 and 1997. Substantially all of the domestic
operating results and identifiable assets are in the United States.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of its holdings of cash and
marketable securities. The Company's credit risk is managed by investing its
cash and marketable securities in high-quality money market instruments and
securities of the U.S. government and its agencies, foreign governments and
high-quality corporate issuers. At December 31, 1998, the Company has no
significant concentrations of credit risk.
Earnings (Loss) Per Share
Basic earnings per share excludes any dilutive effects of options, warrants
and convertible securities. Basic earnings per share is computed using the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share is computed using the weighted-average number of common and
common stock equivalent shares outstanding during the period. Common equivalent
shares are excluded from the computation if their effect is antidilutive.
As a result of the Company's initial public offering in May 1997, all
preferred stock automatically converted into common stock. Accordingly, the 1997
and 1996 net loss per share is a pro forma loss per share based on the weighted
average number of shares of common stock outstanding and preferred stock on an
"as if" converted basis outstanding during each period. The Company believes
that this is a more meaningful presentation of earnings per share for periods
prior to its initial public offering.
Comprehensive Income (Loss)
As of January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income, which establishes standards for the reporting and display
of comprehensive income and its components in the financial statements. The only
items of comprehensive income (loss) that the Company currently reports are
unrealized gains (losses) on marketable securities and foreign currency
translation adjustments.
New Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1 ("SOP 98-1"), Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use.
35
36
AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SOP 98-1 requires all costs related to the development of internal use software
other than those incurred during the application development stage to be
expensed as incurred. Costs incurred during the application development stage
are required to be capitalized and amortized over the estimated useful life of
the software. SOP 98-1 is effective for the Company's fiscal year ending
December 31, 1999. Adoption is not expected to have a material effect on the
Company's consolidated financial statements as the Company's policies are
substantially in compliance with SOP 98-1.
In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5 is
effective for the Company's fiscal year ending December 31, 1999. SOP 98-5
requires costs of start-up activities and organization costs to be expensed as
incurred. Adoption is not expected to have a material effect on the Company's
consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. 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
comprehensive income, depending on whether a derivative is designed as part of a
hedge transaction and, if it is, the type of hedge transaction. The Company does
not expect that the adoption of SFAS No. 133 will have a material impact on its
consolidated financial statements because the Company does not currently hold
any derivative instruments.
Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation.
NOTE 2 -- BUSINESS COMBINATIONS AND INVESTMENTS
In April 1998, the Company acquired all of the outstanding capital stock of
three international Internet companies. The aggregate purchase price of the
three acquisitions, plus related charges, was approximately $55 million. The
consideration for the acquisitions was comprised of common stock and cash. The
Company issued an aggregate of approximately 3.2 million shares of common stock
to effect the transactions. The goodwill and other purchased intangibles are
being amortized on a straight-line basis over two years.
In August 1998, the Company acquired all the outstanding capital stock of
Junglee Corp. ("Junglee"). Junglee is a leading provider of Web-based virtual
database technology which allows visitors to access a variety of products sold
by other merchants. The Company issued approximately 4.7 million shares of
common stock and assumed all outstanding options and warrants in connection with
the acquisition of Junglee. The Junglee acquisition was accounted for under the
purchase method of accounting, with substantially all of the approximately $180
million purchase price allocated to goodwill and other purchased intangibles.
The goodwill and substantially all other purchased intangible assets are being
amortized on a straight-line basis over lives averaging approximately three
years. In November 1998, the Company sold the employment business unit of
Junglee in exchange for cash and approximately 1.7 million shares of the
purchaser's common stock. There was no gain or loss recorded from this sale. The
investment is recorded at cost and is classified within marketable securities in
the accompanying consolidated balance sheet.
The pro forma combined consolidated financial information for the aggregate
of all the business combinations described above and accounted for under the
purchase method of accounting, as though the acquisitions had occurred on
January 1 of each year, would have resulted in net sales of $615.0 million and
$155.8 million; net loss of $171.6 million and $118.7 million; and basic and
diluted loss per share of $1.12 and $0.86 for the years ended December 31, 1998
and 1997, respectively. The pro forma net loss includes amortization of goodwill
and purchased intangibles of $83.0 million for the years ended December 31,
36
37
AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1998 and 1997. This unaudited pro forma combined consolidated financial
information is presented for illustrative purposes only and is not necessarily
indicative of the consolidated results of operations in future periods or the
results that actually would have been realized had Amazon.com, the international
subsidiaries and Junglee been a combined company during the specified periods.
In August 1998, the Company exchanged common stock and options for all of
the outstanding capital stock of Sage Enterprises, Inc. ("PlanetAll"). The
Company issued approximately 2.4 million shares of common stock and assumed all
outstanding options in connection with the merger. The PlanetAll merger was
accounted for as a pooling of interests and, as a result, the Company's
consolidated financial statements have been restated for all periods presented.
PlanetAll issued approximately 167,000 shares of capital stock for proceeds of
approximately $1.0 million and approximately 896,000 shares of capital stock for
proceeds of approximately $7.4 million in January 1998 and April 1998,
respectively.
Net sales for PlanetAll were not significant and net loss was $4.1 million,
$3.4 million and $469,000 for the nine months ended September 30, 1998 and the
years ended December 31, 1997 and 1996, respectively, which represent separate
results of the combined entity through the periods preceding the merger. There
were no significant intercompany transactions between the two companies and no
significant conforming accounting adjustments.
As of December 31, 1998, the Company has an investment of approximately 46%
in drugstore.com, inc., an online drugstore, that is accounted for under the
equity method of accounting. The Company's basis in its equity investment is
classified within other purchased intangibles in the accompanying consolidated
balance sheet and the Company's share of the investee's loss is classified in
merger and acquisition related costs, including amortization of goodwill and
other purchased intangibles. To date, this investment has not materially
impacted the Company's results of operations or its financial position.
NOTE 3 -- MARKETABLE SECURITIES
The following tables summarize by major security type the Company's
marketable securities and their contractual maturities:
DECEMBER 31, 1998
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
Commercial paper and short-term
obligations........................... $114,158 $ 22 $ -- $114,180
Corporate notes and bonds............... 51,242 112 (3) 51,351
Asset-backed and agency securities...... 83,611 98 (140) 83,569
Treasury notes and bonds................ 88,952 230 (169) 89,013
Equity securities....................... 8,080 1,691 -- 9,771
-------- ------ ----- --------
$346,043 $2,153 $(312) $347,884
======== ====== ===== ========
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
(IN THOUSANDS)
Due within one year.................................... $121,411 $121,454
Due after one year through five years.................. 132,941 133,090
Asset-backed and agency securities with various
maturities........................................... 83,611 83,569
Equity securities...................................... 8,080 9,771
-------- --------
$346,043 $347,884
======== ========
37
38
AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The gross realized gains and losses on sales of available-for-sale
securities were not significant for the year ended December 31, 1998. The net
adjustment to unrealized holding gains on available-for-sale securities included
in accumulated other comprehensive income as a component of stockholders' equity
totaled approximately $1.8 million.
At December 31, 1997, marketable securities consist primarily of commercial
paper and short-term obligations and corporate notes and bonds and were carried
at cost, which approximates market. Unrealized holding gains and losses at
December 31, 1997 were not significant.
NOTE 4 -- FIXED ASSETS
Fixed assets, at cost, consist of the following:
DECEMBER 31,
-----------------
1998 1997
------- ------
(IN THOUSANDS)
Computers and equipment........................... $33,061 $7,562
Purchased software................................ 4,547 4,560
Leasehold improvements............................ 5,535 926
Leased assets..................................... 442 442
------- ------
43,585 13,490
Less accumulated depreciation and amortization.... 13,794 3,764
------- ------
Fixed assets, net............................ $29,791 $9,726
======= ======
NOTE 5 -- LONG-TERM DEBT
Senior Discount Notes
In May 1998, the Company completed the offering of approximately $326
million gross proceeds of the Senior Discount Notes due May 1, 2008. Pursuant to
a registration statement on Form S-4 in September 1998, the Company completed an
exchange offer of 10% Senior Discount Notes due 2008 (the "Exchange Notes"),
which were registered under the Securities Act of 1933, as amended, for all
outstanding Senior Discount Notes. The Exchange Notes have identical terms in
all material respects to the terms of the original Senior Discount Notes, except
that the Exchange Notes generally are freely transferable (the Exchange Notes
are referred to throughout these notes to consolidated financial statements
interchangeably with the Senior Discount Notes). The Exchange Notes were issued
under the indenture governing the original Senior Discount Notes (the
"Indenture"). The Senior Discount Notes were sold at a substantial discount from
their principal amount at maturity of $530 million. Prior to November 1, 2003,
no cash interest payments are required; instead, interest will accrete during
this period to the $530 million aggregate principal amount at maturity. From and
after May 1, 2003, the Senior Discount Notes will bear interest at a rate of 10%
per annum payable in cash on each May 1 and November 1. The Senior Discount
Notes are redeemable, at the option of the Company, in whole or in part, at any
time on or after May 1, 2003, at the redemption prices set forth in the
Indenture, plus accrued interest, if any, to the date of redemption.
The Senior Discount Notes are senior unsecured indebtedness of the Company
ranking pari passu with the Company's existing and future unsubordinated,
unsecured indebtedness and senior in right of payment to all subordinated
indebtedness of the Company. The Senior Discount Notes are effectively
subordinated to all secured indebtedness and to all existing and future
liabilities of the Company's subsidiaries.
38
39
AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Indenture contains certain covenants that, among other things, limit
the ability of the Company and its Restricted Subsidiaries (as defined in the
Indenture) to incur indebtedness, pay dividends, prepay subordinated
indebtedness, repurchase capital stock, make investments, create liens, engage
in transactions with stockholders and affiliates, sell assets and engage in
mergers and consolidations. However, these limitations are subject to a number
of important qualifications and exceptions. The Company was in compliance with
all financial covenants at December 31, 1998.
A portion of the net proceeds from the offering of the Senior Discount
Notes was used to retire approximately $75 million of indebtedness outstanding
as of December 31, 1997. Future principal payments related to the Senior
Discount Notes do not commence until 2008. The carrying amount of the Senior
Discount Notes is approximately $347.2 million as of December 31, 1998, which
approximates fair value.
Financing Agreement for Purchase of Fixed Assets
In November 1997, the Company purchased fixed assets through a financing
agreement with a vendor having an imputed interest rate of approximately 7.7%
and a term of three years. The debt is to be repaid in four equal payments.
Future debt payments related to this financing agreement are $684,000 and
$837,000 for the years ending December 31, 1999 and 2000, respectively, and none
thereafter.
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
Leases and Marketing Agreements
The Company currently leases office and distribution center facilities and
fixed assets under noncancelable operating and capital leases. Rental expense
under operating lease agreements for 1998, 1997 and 1996 was $8.5 million, $2.1
million and $270,000, respectively.
The Company has also entered into certain marketing agreements, which
include fixed fees through 2000. The costs associated with these agreements are
recognized on a systematic basis over the term of the related agreements as
services are received.
Future minimum commitments are as follows:
OPERATING
LEASES AND
CAPITAL MARKETING
LEASES AGREEMENTS
------- ----------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
1999.............................................. $145 $ 47,626
2000.............................................. 62 37,718
2001.............................................. -- 11,615
2002.............................................. -- 6,077
2003.............................................. -- 4,712
Thereafter........................................ -- 27,081
---- --------
Total minimum lease payments........................... $207 $134,829
========
Less imputed interest.................................. 20
----
Present value of net minimum lease payments............ 187
Less current portion.............................. 124
----
Long-term capital lease obligation..................... $ 63
====
39
40
AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Legal Proceedings
In October 1998, Wal-Mart Stores, Inc. ("Wal-Mart") filed a lawsuit in
Bentonville, Arkansas against the Company and other defendants alleging actual
and threatened misappropriation of trade secrets and ancillary common-law
claims. Wal-Mart subsequently requested a temporary restraining order preventing
the defendants from misappropriating Wal-Mart's alleged trade secrets, from
placing employees in positions in which they would "inevitably disclose"
Wal-Mart's alleged trade secrets and from soliciting, inducing or recruiting
Wal-Mart employees. In January 1999, Wal-Mart filed an identical action in
Seattle, Washington, and the Arkansas court dismissed Wal-Mart's action on
jurisdictional grounds before deciding the temporary restraining order. The
dismissal is pending appeal. Wal-Mart has advised the Company that it will file
a preliminary injunction motion. In addition to injunctive relief, Wal-Mart has
requested compensatory damages, pre- and postjudgment interest and attorneys'
fees and costs. The Company believes that Wal-Mart's claims are without merit
and intends to vigorously defend against the plaintiffs' claims. Amazon.com has
filed a counterclaim based in part on unfair competition and intentional
interference. Litigation is inherently uncertain, and there can be no assurance
that the Company will prevail in the lawsuit.
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 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 and operating results.
NOTE 7 -- STOCKHOLDERS' EQUITY
Reincorporation and Authorized Capital
In May 1996, the Company reincorporated in the state of Delaware with
authorized capital of 5 million shares of $0.01 par value preferred stock and 25
million shares of $0.01 par value common stock. In April 1997, the Company
increased its authorized common stock to 100 million shares and increased its
authorized preferred stock to 10 million shares. In June 1998, the Company
increased the number of authorized shares of common stock, from 100 million
shares to 300 million shares. The accompanying consolidated financial statements
have been restated to reflect these recapitalizations.
Preferred Stock
In June 1996, the Company issued 569,396 shares of Series A convertible
preferred stock at a price of $14.05 per share. In January and February 1997,
the Company sold an additional 5,000 shares of Series A preferred stock at $40
per share. The preferred stock was convertible into common stock at the option
of the holder, at any time, at an effective rate of 36 shares of common stock
for one share of preferred stock. As of the closing of the Company's initial
public offering, all of the preferred stock outstanding was converted into an
aggregate of 20,678,256 shares of common stock.
Common Stock
On November 23, 1996, the Company effected a 4-for-1 common stock split. On
April 18, 1997, the Company effected a 3-for-2 common stock split. On May 15,
1997, the Company completed an initial public offering of 18 million shares of
its common stock. Net proceeds to the Company aggregated $49.1 million. On June
1, 1998, the Company effected a 2-for-1 stock split in the form of a stock
dividend to stockholders of record on May 20, 1998. On January 4, 1999, the
Company effected a 3-for-1 stock split in the form of a stock dividend to the
stockholders of record on December 18, 1998. Accordingly, the accompanying
consolidated financial statements have been restated to reflect these stock
splits.
40
41
AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock Option Plans
The Company's stock option plans consist of the 1997 Stock Option Plan and
the 1994 Stock Option Plan. Shares reserved under the plans consist of 36.0
million shares in the 1997 Stock Option Plan and 28.8 million shares in the 1994
Stock Option Plan. Any shares of common stock available for issuance under the
1994 Stock Option Plan that are not issued under that plan may be added to the
aggregate number of shares available for issuance under the 1997 Stock Option
Plan. In connection with the acquisition of Junglee and the merger with
PlanetAll in August 1998, the Company assumed outstanding options to purchase
common stock originally issued under these companies' stock option plans. The
Company's stock options plans as well as the assumed stock option plans are
hereby collectively referred to as the "Plans."
Generally, options are granted by the Company's Board of Directors at an
exercise price of not less than the fair market value of the Company's common
stock at the date of grant. Each outstanding option granted prior to December
20, 1996 has a term of five years from the date of vesting. Each outstanding
option granted on or subsequent to December 20, 1996 has a term of ten years
from the date of grant. Subject to Internal Revenue Service limitations, options
granted under the Plans generally become exercisable immediately. Options
generally vest at the rate of 20% after year one, 20% after year two and 5% at
the end of each quarter for years three through five. Shares issued upon
exercise of options that are unvested are restricted and subject to repurchase
by the Company upon termination of employment or services and such restrictions
lapse over the original vesting schedule. At December 31, 1998, approximately
3.9 million shares of restricted common stock were subject to repurchase.
Stock Option Activity
The following table summarizes the Company's stock option activity:
NUMBER WEIGHTED-
OF AVERAGE
SHARES EXERCISE PRICE
-------------- --------------
(IN THOUSANDS)
Balance January 1, 1996........................... 10,616 $ 0.024
Options granted and assumed..................... 15,600 0.102
Options canceled................................ (3,172) 0.046
Options exercised............................... (3,027) 0.065
------
Balance December 31, 1996......................... 20,017 0.075
Options granted and assumed..................... 18,060 2.295
Options canceled................................ (2,552) 0.539
Options exercised............................... (8,193) 0.063
------
Balance December 31, 1997......................... 27,332 1.502
Options granted and assumed..................... 19,774 25.468
Options canceled................................ (3,768) 8.098
Options exercised............................... (5,333) 1.108
------
Balance December 31, 1998......................... 38,005 $13.375
======
At December 31, 1998, 12.8 million shares of common stock were available
for future grant under the Plans.
41
42
AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about options outstanding and
exercisable at December 31, 1998:
OPTIONS OUTSTANDING
---------------------------------------------
WEIGHTED- OPTIONS EXERCISABLE
AVERAGE -------------------------------
REMAINING WEIGHTED- WEIGHTED-
RANGE OF OPTIONS CONTRACTUAL AVERAGE OPTIONS AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- -------------- ----------- -------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
$ 0.029 -- $ 0.111 5,744 5.1 years $ 0.082 5,204 $ 0.083
0.167 -- 0.778 6,397 8.0 years 0.432 5,499 0.426
1.232 -- 4.021 4,959 8.4 years 2.141 3,714 2.157
4.094 -- 12.271 5,502 9.0 years 8.128 3,850 7.902
12.563 -- 17.875 7,303 9.3 years 14.599 5,675 14.679
19.604 -- 25.771 781 9.6 years 23.874 443 23.729
26.094 -- 39.479 3,225 9.7 years 33.618 2,383 33.375
39.667 -- 65.729 3,235 9.7 years 43.625 2,112 43.804
67.427 -- 94.479 626 9.9 years 79.702 493 80.068
103.625 -- 114.479 233 9.9 years 107.483 189 107.413
------ ------
$ 0.029 -- $114.479 38,005 8.4 years $ 13.375 29,562 $ 12.410
====== ======
Deferred Compensation
The Company recorded aggregate deferred compensation of $2.1 million, $2.7
million and $612,000 in 1998, 1997 and 1996, respectively. The amounts recorded
represent the difference between the grant price and the deemed fair value of
the Company's common stock for shares subject to options granted in 1998, 1997
and 1996. Options granted below fair market value and the associated weighted
average exercise price per share were 536,000 and $4.095, 8.3 million and
$0.473, and 9.3 million and $0.133 during the years ended December 31, 1998,
1997 and 1996, respectively. The amortization of deferred compensation is
charged to operations over the vesting period of the options, which is typically
five years. Total amortization recognized in 1998 and 1997 was $2.4 million and
$1.4 million, respectively. No amortization was recognized in 1996.
Pro Forma Disclosure
The Company follows the intrinsic value method in accounting for its stock
options. Had compensation cost been recognized based on the fair value at the
date of grant for options granted in 1998, 1997 and 1996, the pro forma amounts
of the Company's net loss and net loss per share for the years ended December
31, 1998, 1997 and 1996 would have been as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
----------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net loss -- as reported............................ $(124,546) $(31,020) $(6,246)
Net loss -- pro forma.............................. (194,269) (35,983) (6,278)
Basic and diluted loss per share -- as reported.... $ (0.84) $ (0.24) $ (0.06)
Basic and diluted loss per share -- pro forma...... (1.31) (0.28) (0.06)
42
43
AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair value for each option granted was estimated at the date of grant
using a Black-Scholes option pricing model, assuming no expected dividends and
the following weighted-average assumptions:
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- -------- -------
Average risk-free interest rates................... 4.7% 6.3% 6.4%
Average expected life (in years)................... 3.0 3.0 3.0
Volatility (1)..................................... 81.6% 50.0% 0.0%
- ---------------
(1) Options granted prior to the Company's initial public offering and by
PlanetAll prior to its merger with the Company were valued using the minimum
value method and therefore volatility was not applicable.
The weighted-average fair value of options granted during the years 1998,
1997 and 1996 was $19.07, $2.07 and $0.01, respectively, for options granted at
fair market value. The weighted-average fair value of options granted at less
than fair market value during 1998, 1997 and 1996 was $4.61, $0.55 and $0.09,
respectively. Compensation expense recognized in providing pro forma disclosures
may not be representative of the effects on pro forma earnings for future years
because SFAS No. 123 does not apply to stock option grants made prior to 1995.
Common Stock Reserved for Future Issuance
In June 1998, pursuant to a registration statement on Form S-4, the Company
registered 15 million shares of its common stock, which may from time to time be
offered in connection with the acquisition of entities. Such shares may be
issued in exchange for the shares of capital stock (by merger or otherwise),
partnership interests or other assets representing an interest in other
companies or other entities, or in exchange for assets used in or related to the
business of such entities.
At December 31, 1998, common stock reserved for future issuance is as
follows (in thousands):
Stock options............................................... 50,853
Shelf registration.......................................... 15,000
------
Total.................................................. 65,853
======
NOTE 8 -- EARNINGS (LOSS) PER SHARE
The following represents the calculations for net loss per share:
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
----------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net loss -- as reported.................... $(124,546) $(31,020) $(6,246)
========= ======== =======
Weighted average shares outstanding........ 152,472 126,559 90,795
Pro forma adjustment for preferred stock... -- 9,478 20,498
Weighted average common shares issued
subject to repurchase agreements......... (4,300) (5,696) (22)
--------- -------- -------
Shares used in computation of basic and
diluted loss per share................... 148,172 130,341 111,271
========= ======== =======
Basic and diluted loss per share........... $ (0.84) $ (0.24) $ (0.06)
========= ======== =======
43
44
AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
All of the Company's stock options (see Note 7) are excluded from diluted
loss per share since their effect is antidilutive.
NOTE 9 -- INCOME TAXES
The Company did not provide any current or deferred United States federal,
state or foreign income tax provision or benefit for any of the periods
presented because it has experienced operating losses since inception. The
Company has provided a full valuation allowance on the deferred tax asset,
consisting primarily of net operating loss carryforwards, because of uncertainty
regarding its realizability.
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $207 million related to U.S. federal, foreign and state
jurisdictions. Utilization of net operating loss carryforwards may be subject to
certain limitations under Section 382 of the Internal Revenue Code of 1986, as
amended. Substantially all of these carryforwards will begin to expire at
various times starting in 2011. To the extent that net operating loss
carryforwards, when realized, relate to stock option deductions of approximately
$103 million, the resulting benefits will be credited to stockholders' equity.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are approximately as follows:
DECEMBER 31,
------------------
1998 1997
------- -------
(IN THOUSANDS)
Net operating loss carryforwards......................... $73,100 $10,800
Depreciation and amortization............................ 7,400 --
Other.................................................... 5,400 2,400
------- -------
Total deferred tax assets......................... 85,900 13,200
Valuation allowance for deferred tax assets.............. (85,900) (13,200)
------- -------
Net deferred tax assets.................................. $ -- $ --
======= =======
NOTE 10 -- EMPLOYEE BENEFIT PLAN
The Company has a 401(k) savings plan covering substantially all of its
employees. Eligible employees may contribute through payroll deductions. The
Company matches employees' contributions at the discretion of the Company's
Board of Directors. To date, the Company has not matched employee contributions
to the 401(k) savings plan.
NOTE 11 -- SUBSEQUENT EVENTS
Convertible Subordinated Notes
On February 3, 1999, the Company completed an offering of $1.25 billion of
4 3/4% Convertible Subordinated Notes due 2009 (the "Convertible Notes"). The
Convertible Notes are convertible into the Company's common stock at a
conversion price of $156.055 per share, subject to adjustment in certain events
and at the holders' option. Interest on the Convertible Notes is payable
semiannually in arrears on February 1 and August 1 of each year, commencing on
August 1, 1999. The Convertible Notes are unsecured and are subordinated to all
existing and future Senior Indebtedness (as defined in the Convertible Notes
indenture) of the Company. The Convertible Notes may be redeemed at the option
of the Company prior to February 6, 2002, in whole or in part, at the redemption
prices set forth in the Convertible Notes indenture. The Company is obligated to
file by May 4, 1999, a shelf registration statement covering resales of the
Convertible Notes and the common stock issuable upon conversion of the
Convertible Notes.
44
45
AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Upon occurrence of any Fundamental Change (as defined in the Convertible
Notes indenture) prior to the maturity of the Convertible Notes, each holder of
the Convertible Notes has the right to require the Company to redeem all or any
part of the holder's Convertible Notes at a price equal to 100% of the principal
amount, plus any accrued interest, of the Convertible Notes being redeemed.
The Company has or may use the net proceeds from the offering of the
Convertible Notes for general corporate purposes, including working capital to
fund anticipated operating losses, the expansion of the Company's core business,
investments in new business segments and markets, capital expenditures,
acquisitions or investments in complementary businesses, products and
technologies and repurchases and retirement of debt.
Authorized Shares
On February 10, 1999, the Board of Directors approved an increase in
authorized shares of common stock and preferred stock, par value $0.01 per
share, from 300 million shares to 1.5 billion shares and from 10 million shares
to 150 million shares, respectively. This increase in authorized shares is
subject to approval by the stockholders at the Company's Annual Meeting on May
20, 1999.
Stock Option Plan
On February 10, 1999, the Board of Directors approved the 1999 Nonofficer
Employee Stock Option Plan, which reserves 20.0 million shares of common stock
available for future issuance.
NOTE 12 -- QUARTERLY RESULTS (UNAUDITED)
The following tables contain selected unaudited Statement of Operations
information for each quarter of 1998 and 1997. The Company believes that the
following information reflects all normal recurring adjustments necessary for a
fair presentation of the information for the periods presented. The operating
results for any quarter are not necessarily indicative of results for any future
period.
YEAR ENDED DECEMBER 31, 1998
--------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales....................................... $252,893 $153,698 $116,010 $ 87,395
Gross profit.................................... 53,417 34,875 26,216 19,333
Net loss........................................ (46,427) (45,171) (22,579) (10,369)
Basic and diluted loss per share(1)............. $ (0.30) $ (0.30) $ (0.15) $ (0.07)
Shares used in computation of basic and diluted
loss per share................................ 154,389 150,703 146,277 141,318
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales....................................... $ 66,040 $ 37,887 $ 27,855 $ 16,005
Gross profit.................................... 12,913 7,170 5,214 3,521
Net loss........................................ (10,808) (9,647) (7,345) (3,220)
Basic and diluted loss per share................ $ (0.08) $ (0.07) $ (0.06) $ (0.03)
Shares used in computation of basic and diluted
loss per share................................ 139,413 137,595 127,920 116,430
- ---------------
(1) The sum of quarterly per share amounts may not equal per share amounts
reported for year-to-date periods. This is due to changes in the number of
weighted average shares outstanding and the effects of rounding for each
period.
45
46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's executive officers required by Part
III, Item 10, is set forth in Item 1 of Part I herein under the caption
"Executive Officers and Directors." Information required by Part III, Item 10,
regarding the Company's directors is included in the Company's Proxy Statement
relating to the Company's annual meeting of stockholders to be held on May 20,
1999, and is incorporated herein by reference. Information relating to
compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended, is set forth in the Proxy Statement and incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Part III, Item 11, is included in the Company's
Proxy Statement relating to the Company's annual meeting of stockholders to be
held on May 20, 1999, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Part III, Item 12, is included in the Company's
Proxy Statement relating to the Company's annual meeting of stockholders to be
held on May 20, 1999, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain of the Company's relationships and related
transactions is included in the Company's Proxy Statement relating to the
Company's annual meeting of stockholders to be held on May 20, 1999, and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) LIST OF DOCUMENTS FILED AS A PART OF THIS ANNUAL REPORT:
(1) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for each of the three years
ended December 31, 1998
Consolidated Statements of Stockholders' Equity for each of the three
years ended December 31, 1998
Consolidated Statements of Cash Flows for each of the three years
ended December 31, 1998
Notes to Consolidated Financial Statements
(2) INDEX TO FINANCIAL STATEMENT SCHEDULES:
Schedule II -- Valuation and Qualifying Accounts
All other schedules have been omitted because the required information is
included in the consolidated financial statements or the notes thereto, or is
not applicable or required.
46
47
(3) INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Agreement and Plan of Merger dated as of August 3, 1998, by
and among Amazon.com, Inc., AJ Acquisition, Inc. and Junglee
Corporation (incorporated by reference to the Company's
Current Report on Form 8-K dated August 3, 1998).
2.2 Agreement and Plan of Merger dated as of August 3, 1998, by
and among Amazon.com, Inc., Pacific Acquisition, Inc. and
Sage Enterprises, Inc. (incorporated by reference to the
Company's Current Report on Form 8-K dated August 3, 1998).
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to the Company's Registration
Statement on Form S-4 (Registration No. 333-55943) filed
June 3, 1998).
3.2 Restated Bylaws of the Company (incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the
Quarterly Period Ended March 31, 1998).
4.1 Indenture, dated as of May 8, 1998, between Amazon.com, Inc.
and the Bank of New York, as trustee (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the Quarterly Period Ended March 31, 1998).
4.2 Form of 10% Senior Discount Notes Due 2008 (incorporated by
reference to the Company's Registration Statement on Form
S-4 (Registration No. 333-56723) filed June 12, 1998).
4.3 Registration Rights Agreement entered into on May 8, 1998,
between Amazon.com, Inc. and Morgan Stanley & Co.
Incorporated (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the Quarterly Period Ended
March 31, 1998).
4.4 Form of Investor Rights Agreement by and among Amazon.com,
Inc. and the former stockholders of Junglee Corp.
(incorporated by reference to the Company's Current Report
on Form 8-K dated August 3, 1998).
4.5 Form of Investor Rights Agreement by and among Amazon.com,
Inc. and the former stockholders of Sage Enterprises, Inc.
(incorporated by reference to the Company's Current Report
on Form 8-K dated August 3, 1998).
4.6 Registration Rights Agreement by and among Amazon.com, Inc.
and the former stockholders of Telebook, Inc. (incorporated
by reference to the Company's Registration Statement on Form
S-3 (Registration No. 333-65091) filed September 30, 1998).
4.7 Indenture, dated as of February 3, 1999, between Amazon.com,
Inc. and The Bank of New York, as trustee, including the
form of 4 3/4% Convertible Subordinated Note Due 2009
attached as Exhibit A thereto (incorporated by reference to
the Company's Current Report on Form 8-K dated February 3,
1999).
4.8 Registration Rights Agreement by and among Amazon.com, Inc.
and the Initial Purchasers (incorporated by reference to the
Company's Current Report on Form 8-K dated February 3,
1999).
10.1+ Amended and Restated 1994 Stock Option Plan (version as of
December 20, 1996 for Amended and Restated Grants and
version as of December 20, 1996 for New Grants)
(incorporated by reference to the Company's Registration
Statement on Form S-1 (Registration No. 333-23795) filed
March 24, 1997).
10.2+ 1997 Stock Option Plan (incorporated by reference to the
Company's Registration Statement on Form S-1 (Registration
No. 333-23795) filed March 24, 1997).
10.3+ Form of Indemnification Agreement between the Company and
each of its Directors and Executive Officers (incorporated
by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-23795) filed March 24, 1997).
47
48
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.4+ Non-Qualified Stock Option Letter Agreement, effective
December 6, 1995, from the Company to Tom A. Alberg
(incorporated by reference to the Company's Registration
Statement on Form S-1 (Registration No. 333-23795) filed
March 24, 1997).
10.5+ Non-Qualified Stock Option Letter Agreement, effective
December 6, 1995, from the Company to Tom A. Alberg
(incorporated by reference to the Company's Registration
Statement on Form S-1 (Registration No. 333-23795) filed
March 24, 1997).
10.6+ Non-Qualified Stock Option Letter Agreement, effective
December 20, 1996, from the Company to Joy D. Covey
(incorporated by reference to the Company's Registration
Statement on Form S-1 (Registration No. 333-23795) filed
March 24, 1997).
10.7+ Incentive Stock Option Letter Agreement, effective December
20, 1996, from the Company to Joy D. Covey (incorporated by
reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-23795) filed March 24, 1997).
10.8 Investor Rights Agreement, dated as of June 21, 1996, by and
among the Company, Kleiner Perkins Caufield & Byers VIII,
KPCB Information Sciences Zaibatsu Fund II and Jeffrey P.
Bezos (incorporated by reference to the Company's
Registration Statement on Form S-1 (Registration No.
333-23795) filed March 24, 1997).
10.9 Lease Agreement, dated August 22, 1997, by and between the
Company and McConnell Development, Inc. (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the Quarterly Period Ended September 30, 1997).
10.10 Lease Agreement, dated April 17, 1998, by and between
Bookpages Limited and Amazon.com, Inc. and Slough Trading
Estate Limited (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the Quarterly Period Ended
June 30, 1998).
10.11 Lease Agreement, dated August 31, 1998, by and between
Amazon.com, Inc. and WRC.COM Tower LLC (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the Quarterly Period Ended September 30, 1998).
10.12+ Junglee Corp. 1998 Equity Incentive Plan (incorporated by
reference to the Company's Registration Statement on Form
S-8 filed October 1, 1998).
10.13 Lease Agreement, dated December 14, 1998, by and between
Amazon.com, Inc. and Panattoni Carlsen Rieger.
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule.
- ---------------
+ Executive Compensation Plan or Agreement
(B) REPORTS ON FORM 8-K:
On October 26, 1998, the Company filed a Form 8-K/A under Item 5, which
amended the Company's Current Report on Form 8-K dated August 12, 1998,
regarding its acquisition of Junglee Corp.
On October 28, 1998, the Company filed a Form 8-K under Item 5 announcing
its financial results for the third quarter of 1998.
On November 20, 1998, the Company filed a Form 8-K under Item 5 announcing
the approval by the Board of Directors of a 3-for-1 stock split of its common
stock.
48
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMAZON.COM, INC.
Date: March 5, 1999
By: /s/ JEFFREY P. BEZOS
------------------------------------
Jeffrey P. Bezos
President, Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.
/s/ JEFFREY P. BEZOS Chairman of the Board, President and Chief
- -------------------------------------------- Executive Officer (Principal Executive
Jeffrey P. Bezos Officer)
/s/ JOY D. COVEY Chief Financial Officer and Vice President
- -------------------------------------------- of Finance and Administration (Principal
Joy D. Covey Financial and Accounting Officer)
/s/ TOM A. ALBERG Director
- --------------------------------------------
Tom A. Alberg
/s/ SCOTT D. COOK Director
- --------------------------------------------
Scott D. Cook
/s/ L. JOHN DOERR Director
- --------------------------------------------
L. John Doerr
/s/ PATRICIA Q. STONESIFER Director
- --------------------------------------------
Patricia Q. Stonesifer
49
50
AMAZON.COM, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
INVENTORY VALUATION ALLOWANCE
CHARGED/
BALANCE AT (CREDITED) INVENTORY BALANCE AT
BEGINNING TO COSTS DISPOSED OR END OF
YEAR ENDED OF PERIOD AND EXPENSES WRITTEN OFF PERIOD
---------- ---------- ------------------- ------------ ----------
(IN THOUSANDS)
December 31, 1998............... $800 $4,420 $(620) $4,600
==== ====== ===== ======
December 31, 1997............... $ -- $ 800 $ -- $ 800
==== ====== ===== ======
December 31, 1996............... $ -- $ -- $ -- $ --
==== ====== ===== ======
50
51
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Agreement and Plan of Merger dated as of August 3, 1998, by
and among Amazon.com, Inc., AJ Acquisition, Inc. and Junglee
Corporation (incorporated by reference to the Company's
Current Report on Form 8-K dated August 3, 1998).
2.2 Agreement and Plan of Merger dated as of August 3, 1998, by
and among Amazon.com, Inc., Pacific Acquisition, Inc. and
Sage Enterprises, Inc. (incorporated by reference to the
Company's Current Report on Form 8-K dated August 3, 1998).
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to the Company's Registration
Statement on Form S-4 (Registration No. 333-55943) filed
June 3, 1998).
3.2 Restated Bylaws of the Company (incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the
Quarterly Period Ended March 31, 1998).
4.1 Indenture, dated as of May 8, 1998, between Amazon.com, Inc.
and the Bank of New York, as trustee (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the Quarterly Period Ended March 31, 1998).
4.2 Form of 10% Senior Discount Notes Due 2008 (incorporated by
reference to the Company's Registration Statement on Form
S-4 (Registration No. 333-56723) filed June 12, 1998).
4.3 Registration Rights Agreement entered into on May 8, 1998,
between Amazon.com, Inc. and Morgan Stanley & Co.
Incorporated (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the Quarterly Period Ended
March 31, 1998).
4.4 Form of Investor Rights Agreement by and among Amazon.com,
Inc. and the former stockholders of Junglee Corp.
(incorporated by reference to the Company's Current Report
on Form 8-K dated August 3, 1998).
4.5 Form of Investor Rights Agreement by and among Amazon.com,
Inc. and the former stockholders of Sage Enterprises, Inc.
(incorporated by reference to the Company's Current Report
on Form 8-K dated August 3, 1998).
4.6 Registration Rights Agreement by and among Amazon.com, Inc.
and the former stockholders of Telebook, Inc. (incorporated
by reference to the Company's Registration Statement on Form
S-3 (Registration No. 333-65091) filed September 30, 1998).
4.7 Indenture, dated as of February 3, 1999, between Amazon.com,
Inc. and The Bank of New York, as trustee, including the
form of 4 3/4% Convertible Subordinated Note Due 2009
attached as Exhibit A thereto (incorporated by reference to
the Company's Current Report on Form 8-K dated February 3,
1999).
4.8 Registration Rights Agreement by and among Amazon.com, Inc.
and the Initial Purchasers (incorporated by reference to the
Company's Current Report on Form 8-K dated February 3,
1999).
10.1+ Amended and Restated 1994 Stock Option Plan (version as of
December 20, 1996 for Amended and Restated Grants and
version as of December 20, 1996 for New Grants)
(incorporated by reference to the Company's Registration
Statement on Form S-1 (Registration No. 333-23795) filed
March 24, 1997).
10.2+ 1997 Stock Option Plan (incorporated by reference to the
Company's Registration Statement on Form S-1 (Registration
No. 333-23795) filed March 24, 1997).
10.3+ Form of Indemnification Agreement between the Company and
each of its Directors and Executive Officers (incorporated
by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-23795) filed March 24, 1997).
52
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.4+ Non-Qualified Stock Option Letter Agreement, effective
December 6, 1995, from the Company to Tom A. Alberg
(incorporated by reference to the Company's Registration
Statement on Form S-1 (Registration No. 333-23795) filed
March 24, 1997).
10.5+ Non-Qualified Stock Option Letter Agreement, effective
December 6, 1995, from the Company to Tom A. Alberg
(incorporated by reference to the Company's Registration
Statement on Form S-1 (Registration No. 333-23795) filed
March 24, 1997).
10.6+ Non-Qualified Stock Option Letter Agreement, effective
December 20, 1996, from the Company to Joy D. Covey
(incorporated by reference to the Company's Registration
Statement on Form S-1 (Registration No. 333-23795) filed
March 24, 1997).
10.7+ Incentive Stock Option Letter Agreement, effective December
20, 1996, from the Company to Joy D. Covey (incorporated by
reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-23795) filed March 24, 1997).
10.8 Investor Rights Agreement, dated as of June 21, 1996, by and
among the Company, Kleiner Perkins Caufield & Byers VIII,
KPCB Information Sciences Zaibatsu Fund II and Jeffrey P.
Bezos (incorporated by reference to the Company's
Registration Statement on Form S-1 (Registration No.
333-23795) filed March 24, 1997).
10.9 Lease Agreement, dated August 22, 1997, by and between the
Company and McConnell Development, Inc. (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the Quarterly Period Ended September 30, 1997).
10.10 Lease Agreement, dated April 17, 1998, by and between
Bookpages Limited and Amazon.com, Inc. and Slough Trading
Estate Limited (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the Quarterly Period Ended
June 30, 1998).
10.11 Lease Agreement, dated August 31, 1998, by and between
Amazon.com, Inc. and WRC.COM Tower LLC (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the Quarterly Period Ended September 30, 1998).
10.12+ Junglee Corp. 1998 Equity Incentive Plan (incorporated by
reference to the Company's Registration Statement on Form
S-8 filed October 1, 1998).
10.13 Lease Agreement, dated December 14, 1998, by and between
Amazon.com, Inc. and Panattoni Carlsen Rieger.
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule.
- ---------------
+ Executive Compensation Plan or Agreement