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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended SEPTEMBER 30, 1997 Commission File No. 000-22513
AMAZON.COM, INC.
(Exact name of registrant as specified in its charter)
Delaware 91-1646860
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1516 Second Avenue, Seattle, Washington, 98101
(address of principal executive offices, Zip Code)
Registrant's telephone number, including area code (206) 622-2335
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 [ ]
23,858,702 shares of $0.01 par value common stock outstanding
as of October 31, 1997
Page 1 of 16
Exhibit Index on Page 16
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AMAZON.COM, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit Index 16
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMAZON.COM, INC.
BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------
September 30, December 31,
1997 1996
- -------------------------------------------------------------------------------------------------------
(in thousands, except share data) (unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 44,687 $ 6,248
Short-term investments 3,494 -
Inventories 2,732 571
Prepaid expenses and other 1,784 321
-------- -------
TOTAL CURRENT ASSETS 52,697 7,140
Equipment, net 4,403 985
Deposits 347 146
======== =======
TOTAL ASSETS $ 57,447 $ 8,271
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 15,386 $ 2,852
Accrued advertising - 598
Accrued product development - 500
Other liabilities and accrued expenses 4,462 920
-------- -------
TOTAL CURRENT LIABILITIES 19,848 4,870
LONG-TERM LEASE OBLIGATIONS 181 -
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value -
Authorized, 10,000,000 shares
Issued and outstanding, none
and 569,396 shares, respectively - 6
Common stock, $0.01 par value -
Authorized, 100,000,000 shares
Issued and outstanding, 23,858,702
and 15,900,229 shares, respectively 238 159
Additional paid-in capital 63,749 9,873
Deferred compensation (2,291) (612)
Accumulated deficit (24,278) (6,025)
-------- -------
TOTAL STOCKHOLDERS' EQUITY 37,418 3,401
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 57,447 $ 8,271
======== =======
SEE NOTES TO FINANCIAL STATEMENTS
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AMAZON.COM, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------
Quarter Ended Nine Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Net sales $37,887 $ 4,173 $ 81,747 $ 7,278
Cost of sales 30,709 3,262 65,826 5,710
---------------------- ----------------------
Gross profit 7,178 911 15,921 1,568
Operating expenses:
Marketing and sales 10,979 2,251 22,658 3,152
Product development 3,582 755 7,965 1,412
General and administrative 1,803 377 4,653 588
---------------------- ----------------------
16,364 3,383 35,276 5,152
Loss from operations (9,186) (2,472) (19,355) (3,584)
Interest income 676 92 1,102 106
---------------------- ----------------------
$ (8,510) $(2,380) $(18,253) $(3,478)
====================== ======================
Net loss per share $ (0.36) $ (0.10) $ (0.78) $ (0.15)
====================== ======================
Shares used in computation of net loss
per share 23,859 22,967 23,508 22,550
====================== ======================
SEE NOTES TO FINANCIAL STATEMENTS
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AMAZON.COM, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
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September 30, September 30,
FOR THE NINE MONTHS ENDED 1997 1996
- ------------------------------------------------------------------------------------------------------
(in thousands)
OPERATING ACTIVITIES
Net loss $(18,253) $(3,478)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 1,997 135
Amortization of unearned compensation - stock options 993 -
Changes in operating assets and liabilities:
Inventories (2,161) (157)
Prepaid expenses and other assets (1,463) (226)
Deposits (201) (94)
Accounts payable 12,534 1,597
Accrued advertising (598) 564
Other accrued expenses 3,361 937
-------- -------
Net cash used in operating activities (3,791) (722)
INVESTING ACTIVITIES:
Maturities of short-term investments 5,198 -
Purchases of short-term investments (8,692) -
Additions to equipment (4,053) (675)
-------- -------
Net cash used for investing activities (7,547) (675)
FINANCING ACTIVITIES:
Proceeds from initial public offering 49,103 -
Proceeds from exercise of stock options and sale of stock 474 60
Proceeds from sale of preferred stock 200 7,970
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Net cash provided by financing activities 49,777 8,030
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Net increase in cash and cash equivalents 38,439 6,633
Cash and cash equivalents at beginning of period 6,248 996
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Cash and cash equivalents at end of period $ 44,687 $ 7,629
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SUPPLEMENTAL CASH FLOW INFORMATION
Common stock issued for software and
accrued product development $ 1,500 $ -
Equipment acquired under capital lease 362 -
SEE NOTES TO FINANCIAL STATEMENTS
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AMAZON.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ACCOUNTING POLICIES
Description of Business
Amazon.com, Inc. (the Company) was incorporated on July 5, 1994. The Company is
an online retailer of books and other information-based products on the
Company's Internet site, and offers more than 2.5 million titles.
Unaudited Interim Financial Information
The financial statements as of September 30, 1997 and 1996 have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). These statements are unaudited and, in the opinion of
management, include all adjustments (consisting of normal recurring adjustments
and accruals) necessary to present fairly the results for the periods presented.
The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
SEC rules and regulations. Operating results for the quarter ended September 30,
1997 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997. These financial statements should be read in
conjunction with the financial statements and the accompanying notes included in
the Company's Registration Statement on Form S-1 (No. 333-23795), including the
related Prospectus dated May 15, 1997 as filed with the SEC (the "Registration
Statement"). Certain prior period balances have been reclassified to conform to
current period presentation.
Net Loss per Share
Net loss per share is computed using the weighted average number of common and
common equivalent shares outstanding during the period. Common equivalent shares
consist of the incremental common shares issuable upon conversion of the
convertible preferred stock and shares issuable upon the exercise of stock
options using the treasury stock method. Common equivalent shares are excluded
from the computation if their effect is antidilutive, except that, pursuant to
the SEC Staff Accounting Bulletins, the convertible preferred stock and common
equivalent shares (using the treasury stock method and the public offering
price) issued during the 12 months previous to the initial public offering have
been included in the computation through May 15, 1997, regardless of
antidilutive effect, as if they were outstanding for all periods presented.
The Financial Accounting Standards Board recently issued Statement No. 128,
Earnings per Share, which requires the presentation of basic earnings per share
(EPS) and, for companies with complex capital structures, diluted EPS. Statement
No. 128 is effective for annual and interim periods ending after December 15,
1997. The Company expects that for profitable periods, basic EPS will be higher
than primary earnings per share as presented in the accompanying financial
statements and diluted EPS will not differ materially from earnings per share as
presented in the accompanying financial statements. Computations for loss
periods should not change significantly.
NOTE 2 - INVESTMENTS
The Company invests certain of its excess cash in debt instruments of the U.S.
government and its agencies, foreign governments and of high quality corporate
issuers. All highly liquid instruments with an original maturity of three months
or less are considered cash equivalents; those with original maturities greater
than three months are considered short-term investments and those with
maturities greater than twelve months from the balance sheet date are considered
long-term investments. The Company classifies investment securities in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities."
At September 30, 1997, short-term investments consist primarily of government
securities and were classified as held-to-maturity. At December 31, 1996, the
Company did not hold any short-term investments. Unrealized holding gains and
losses at September 30, 1997 were not significant.
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NOTE 3 - EQUIPMENT
Equipment, at cost, consisted of the following components (in thousands):
September 30, December 31,
1997 1996
------------- ------------
Computers and equipment $4,337 $1,031
Purchased software 1,394 134
Leasehold improvements 617 130
Leased equipment 362 -
------ ------
6,710 1,295
Less accumulated depreciation
and amortization 2,307 310
====== ======
$4,403 $ 985
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NOTE 4 - STOCKHOLDERS' EQUITY
On May 15, 1997, the Company completed its initial public offering of 3,000,000
shares of its common stock. Net proceeds to the Company aggregated $49,103,000.
As of the closing date of the offering, all of the convertible preferred stock
outstanding was converted into an aggregate of 3,446,376 shares of common stock.
NOTE 5 - CONTINGENCY
On May 12, 1997, Barnes & Noble, Inc. ("B&N") filed suit against the Company in
the United States District Court for the Southern District of New York. The suit
alleged one count of false and misleading advertising in violation of the Lanham
Act. In October 1997, B&N and the Company agreed to a settlement of the lawsuit
with no admission of liability of any type and no payment of damages.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements based on management's
current expectations, estimates and projections about the Company's industry,
management's beliefs and certain assumptions made by management. All statements,
trends, analyses and other information contained in this report relative to
trends in net sales, gross margin, anticipated expense levels and liquidity and
capital resources, as well as other statements, including words such as
"anticipate," "believe," "plan," "estimate," "expect" and "intend" and other
similar expressions, constitute forward-looking statements. These
forward-looking statements involve risks and uncertainties, and actual results
may differ materially from those anticipated or expressed in such statements.
Potential risks and uncertainties include, among others, those set forth under
"Overview," "Liquidity and Capital Resources" and "Additional Factors That May
Affect Future Results" included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and in the "Risk Factors" section
of the Company's final prospectus dated May 15, 1997, as filed with the SEC.
Particular attention should be paid to the cautionary statements involving the
Company's limited operating history, the unpredictability of its future
revenues, the unpredictable and evolving nature of its business model, the
intensely competitive online commerce environment and the risks associated with
capacity constraints, systems development and management of growth. Except as
required by law, the Company undertakes no obligation to update any
forward-looking statement, whether as a result of new information, future events
or otherwise. Readers, however, should carefully review the factors set forth in
other reports or documents that the Company files from time to time with the
SEC.
OVERVIEW
Amazon.com is the leading online retailer of books. The Company also sells a
smaller number of CDs, videotapes and audiotapes. All of these products are sold
through the Company's Web site. The Company was incorporated in July 1994 and
commenced offering products for sale on its Web site in July 1995. Accordingly,
the Company has a limited operating history on which to base an evaluation of
its business and prospects. The Company's prospects must be considered in light
of the risks, expenses and difficulties frequently encountered by companies in
their early stage of development, particularly companies in new and rapidly
evolving markets such as online commerce. Such risks for the Company include,
but are not limited to, an evolving and unpredictable business model and the
management of growth. To address these risks, the
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Company must, among other things, maintain and increase its customer base,
implement and successfully execute its business and marketing strategy, continue
to develop and upgrade its technology and transaction-processing systems,
improve its Web site, provide superior customer service and order fulfillment,
respond to competitive developments, and attract, retain and motivate qualified
personnel. There can be no assurance that the Company will be successful in
addressing such risks, and the failure to do so could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations.
Since inception, the Company has incurred significant losses, and as of
September 30, 1997 had an accumulated deficit of $24.3 million. The Company
believes that its success will depend in large part on its ability to (i) extend
its brand position, (ii) provide its customers with outstanding value and a
superior shopping experience, and (iii) achieve sufficient sales volume to
realize economies of scale. Accordingly, the Company intends to continue to
invest heavily in marketing and promotion, product development and technology
and operating infrastructure development. The Company also offers attractive
pricing programs, which have reduced its gross margins. Because the Company has
relatively low product gross margins, achieving profitability given planned
investment levels depends upon the Company's ability to generate and sustain
substantially increased revenue levels. As a result, the Company believes that
it will continue to incur substantial operating losses for the foreseeable
future, and that the rate at which such losses will be incurred may increase
significantly from current levels. Although the Company has experienced
significant revenue growth in recent periods, such growth rates are not
sustainable and will decrease in the future. In view of the rapidly evolving
nature of the Company's business and its limited operating history, the Company
believes that period-to-period comparisons of its operating results, including
the Company's gross profit and operating expenses as a percentage of net sales,
are not necessarily meaningful and should not be relied upon as an indication of
future performance.
As a result of the Company's limited operating history and the emerging nature
of the markets in which it competes, the Company is unable to accurately
forecast its revenues. The Company's current and future expense levels are based
largely on its investment plans and estimates of future revenues and are to a
large extent fixed. Sales and operating results generally depend on the volume
of, timing of and ability to fulfill orders received, which are difficult to
forecast. The Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall in revenues in relation to the Company's planned expenditures would
have an immediate adverse effect on the Company's business, prospects, financial
condition and results of operations. Further, as a strategic response to changes
in the competitive environment, the Company may from time to time make certain
pricing, service, marketing or acquisition decisions that could have a material
adverse effect on its business, prospects, financial condition and results of
operations. For example, the Company has agreed in certain of its promotional
arrangements with Internet aggregators to make significant fixed payments. There
can be no assurance that these arrangements will generate adequate revenues to
cover the associated expenditures, and any significant shortfall would have a
material adverse effect on the Company's financial condition and results of
operations.
The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside the Company's control. Factors that may adversely affect the Company's
quarterly operating results include (i) the Company's ability to retain existing
customers, attract new customers at a steady rate and maintain customer
satisfaction, (ii) the Company's ability to manage buying, inventory and
fulfillment operations and maintain gross margins, (iii) the development,
announcement or introduction of new sites, services and products by the Company
and its competitors, (iv) price competition or higher wholesale prices in the
industry, (v) the level of use of the Internet and online services and
increasing consumer acceptance of the Internet and other online services for the
purchase of consumer products such as those offered by the Company, (vi) the
Company's ability to upgrade and develop its systems and infrastructure and
attract new personnel in a timely and effective manner, (vii) the level of
traffic on the Company's Web site, (viii) technical difficulties, system
downtime or Internet brownouts, (ix) the amount and timing of operating costs
and capital expenditures relating to expansion of the Company's business,
operations and infrastructure, (x) the number of popular books introduced during
the period, (xi) the level of merchandise returns experienced by the Company,
(xii) governmental regulation, (xiii) disruptions in service by common carriers
due to strikes or otherwise, and (xiv) general economic conditions and economic
conditions specific to the Internet, online commerce and the book industry.
The Company expects that it will experience seasonality in its business,
reflecting a combination of seasonal fluctuations in Internet usage and
traditional retail seasonality patterns. Internet usage and the rate of Internet
growth may be expected to decline during the summer. Further, sales in the
traditional retail book industry are significantly higher in the fourth calendar
quarter of each year than in the preceding three quarters.
Due to the foregoing factors, in one or more future quarters the Company's
operating results may fall below the expectations of securities analysts and
investors. In such event, the trading price of the common stock would likely be
materially adversely affected.
The Company has recorded aggregate deferred compensation of approximately $3.3
million. The amount recorded represents the difference between the grant price
and the deemed fair value of the Company's common stock for shares subject to
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options granted in 1997 and 1996. Deferred compensation is amortized over the
vesting period of the options, which is typically five years. Amortization for
the quarter and nine months ended September 30, 1997 was $368,000 and $993,000,
respectively.
RESULTS OF OPERATIONS
NET SALES
Quarter Ended Nine Months Ended
(in thousands) September 30, September 30, September 30, September 30,
1997 1996 1997 1996
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Net sales $37,887 $ 4,173 $81,747 $ 7,278
- -----------------------------------------------------------------------------------------------------
Net sales are composed of the selling price of books and other merchandise sold
by the Company, net of returns, as well as outbound shipping and handling
charges. Growth in net sales reflects a significant increase in units sold due
to the significant growth of the Company's customer base and repeat purchases
from the Company's existing customers. International sales represented 26% and
35% of net sales for the quarters ended September 30, 1997 and 1996,
respectively, and 27% and 36% of net sales for the nine months ended September
30, 1997 and 1996, respectively.
GROSS PROFIT
Quarter Ended Nine Months Ended
(in thousands) September 30, September 30, September 30, September 30,
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------
Gross profit $7,178 $911 $15,921 $1,568
Gross margin 18.9% 21.8% 19.5% 21.5%
- -----------------------------------------------------------------------------------------------------
Gross profit equals sales less cost of sales, which consists of the cost of
merchandise sold to customers and outbound and inbound shipping costs. Gross
profit increased in absolute dollars reflecting the Company's increased sales
volume. The Company's gross margin decreased 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
20% and 30% discounts on more than 400,000 titles, with featured titles
discounted at 40%. 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.
MARKETING AND SALES
Quarter Ended Nine Months Ended
(in thousands) September 30, September 30, September 30, September 30,
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------
Marketing and sales $10,979 $2,251 $22,658 $3,152
Percentage of net sales 29.0% 53.9% 27.7% 43.3%
- -----------------------------------------------------------------------------------------------------
Marketing and sales expenses consist primarily of advertising, public relations
and promotional expenditures, as well as payroll and related expenses for
personnel engaged in marketing, selling and fulfillment activities. Marketing
and sales expenses increased primarily due to increases in the Company's
promotional expenditures, including $3.4 million and $5.2 million for the
quarter and nine months ended September 30, 1997, respectively, associated with
the Internet aggregator promotional relationships, and increased personnel and
related expenses required to implement the Company's marketing strategy and
fulfill customer demand. Such 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 and expects its costs of
fulfillment to increase based on anticipated sales growth and costs associated
with the Company's distribution center expansion (see "Liquidity and Capital
Resources"). Therefore, the Company expects marketing and sales expenses to
increase significantly in absolute dollars.
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PRODUCT DEVELOPMENT
Quarter Ended Nine Months Ended
(in thousands) September 30, September 30, September 30, September 30,
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------
Product development $3,582 $755 $7,965 $1,412
Percentage of net sales 9.5% 18.1% 9.7% 19.4%
- -----------------------------------------------------------------------------------------------------
Product development expenses consist principally of payroll and related expenses
for development, editorial and network operations personnel and consultants,
systems and telecommunications infrastructure and costs of acquired content. The
increases in product development expenses were primarily attributable to
increased staffing and associated costs related to enhancing the features,
content and functionality of the Company's Web site and transaction-processing
systems, as well as increased investment in systems and telecommunications
infrastructure. Such expenses decreased significantly as a percentage of net
sales due to the significant increase in net sales. To date, all product
development costs have been expensed as incurred. The Company believes that
continued investment in product development is critical to attaining its
strategic objectives and, as a result, expects product development expenses to
increase significantly in absolute dollars.
GENERAL AND ADMINISTRATIVE
Quarter Ended Nine Months Ended
(in thousands) September 30, September 30, September 30, September 30,
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------
General and administrative $1,803 $377 $4,653 $588
Percentage of net sales 4.8% 9.0% 5.7% 8.1%
- -----------------------------------------------------------------------------------------------------
General and administrative expenses consist of payroll and related expenses for
executive, accounting and administrative personnel, recruiting, professional
fees and other general corporate expenses. The increase in general and
administrative expenses was primarily due to increased salaries and related
expenses associated with the hiring of additional personnel, increases in
professional fees and costs attributable to being a public company. Such
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 and being a public
company.
INTEREST INCOME
Quarter Ended Nine Months Ended
(in thousands) September 30, September 30, September 30, September 30,
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------
Interest income $676 $92 $1,102 $106
Percentage of net sales 1.8% 2.2% 1.3% 1.5%
- -----------------------------------------------------------------------------------------------------
Interest income on cash, cash equivalents and short-term investments increased
due to higher cash, cash equivalents and short-term investment balances
resulting primarily from the Company's initial public offering of common stock
in May 1997.
INCOME TAXES
The Company has not generated any net income to date and therefore has not paid
any federal income taxes since inception. Utilization of the Company's net
operating loss carryforwards may be subject to certain limitations under Section
382 of the Internal Revenue Code. 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.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997 the Company's cash and cash equivalents were $44.7
million, compared to $6.2 million at December 31, 1996. On May 15, 1997, the
Company completed an initial public offering of 3,000,000 shares of common stock
at a price of $18.00 per share. The net proceeds to the Company from the
offering were approximately $49.1 million.
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Net cash used in operating activities of $3.8 million for the nine months ended
September 30, 1997 was primarily attributable to a net loss of $18.3 million and
increases of $2.2 million in inventories and $1.5 million in prepaid expenses
and other assets and a decrease of $598,000 in accrued advertising, largely
offset by increases of $12.5 million in accounts payable and $3.4 million in
other accrued expenses and $3.0 million in depreciation and amortization. For
the nine months ended September 30, 1996, cash used in operating activities of
$722,000 resulted primarily from a net loss of $3.5 million, largely offset by
increases in accounts payable, other accrued expenses and accrued advertising.
Net cash used in investing activities was $7.5 million for the nine months ended
September 30, 1997, and consisted of purchases of short-term investments of $8.7
million and purchases of equipment of $4.0 million, partially offset by
maturities of short-term investments of $5.2 million. Cash used in investing
activities of $675,000 for the nine months ended September 30, 1996 was
attributable to purchases of equipment. The large increases in the components of
working capital on a period-to-period basis are a direct result of the rapid
growth of the Company's revenues and related activities. Such growth has
required the Company to purchase additional equipment and software and increase
purchases of products, which resulted in corresponding increases in inventories
and accounts payable.
Cash flows provided by financing activities of $49.8 million for the nine months
ended September 30, 1997 consisted of net proceeds of approximately $49.1
million from the initial public offering, $474,000 from the exercise of common
stock options and $200,000 from the issuance of preferred stock. Cash flows of
$8.0 million attributable to financing activities for the nine months ended
September 30, 1996 consisted primarily of net proceeds from the issuance of
preferred stock.
As of September 30, 1997 the Company's principal sources of liquidity consisted
of $44.7 million of cash and cash equivalents and $3.5 million of short-term
investments. As of that date, the Company's principal commitments consisted of
obligations outstanding under operating leases and commitments for advertising
and promotional arrangements. Although the Company has no material commitments
for capital expenditures, it anticipates a substantial increase in its capital
expenditures and lease commitments consistent with anticipated growth in
operations, infrastructure and personnel. The Company has entered into lease
arrangements to increase its distribution center capacity pursuant to which the
Company intends to open a 200,000 square foot facility in Delaware and to expand
its Seattle distribution center by approximately 35,000 square feet. The Company
may establish one or more additional distribution centers within the next twelve
months, which would require it to commit to lease obligations, stock
inventories, purchase equipment and install leasehold improvements. In addition,
the Company has announced plans to maintain a larger merchandise inventory in
order to provide better availability to customers and achieve purchasing
efficiencies.
On November 7, 1997, the Company entered into a commitment letter for a $75
million three year senior secured term credit facility (the "Facility") with
Deutsche Bank AG, New York Branch ("Deutsche") as administrative agent and
Deutsche Morgan Grenfell, Inc. ("DMG") as arranger. The Facility may be
increased to an amount not to exceed $100 million, at the determination of both
the Company and DMG.
The purpose of the Facility is to finance working capital, capital additions,
acquisitions, operations, joint ventures and general corporate purposes. The
Facility will be secured by a first priority lien on substantially all of the
Company's assets. The Company has the option to choose from the following
interest rate options: (i) a variable rate adjusted every one, two, three or six
months at the Company's option and based on the London Interbank Offered Rate
("LIBOR") plus 3.50% per annum for the first six months of the Facility and
4.00% thereafter, or (ii) a variable rate of interest based on Deutsche's Base
Rate plus 1.50% per annum for the first six months of the Facility and 2.00%
thereafter. In connection with the Facility, the Company will enter into certain
interest rate risk management agreements. The Company is required to make
mandatory prepayments on the Facility equal to 50% of the proceeds from any debt
and/or equity offerings (other than the proceeds of certain permitted debt) and
100% of the proceeds from certain sales of assets that are not reinvested in
replacement assets.
The Facility will include covenants restricting certain activities by the
Company, including (i) the incurrence of additional indebtedness, (ii)
consolidations, mergers and sales of assets and (iii) dividends and
distributions to stockholders. In addition, financial covenants will require the
Company to, among other things, maintain a minimum cash balance, maintain
certain levels of earnings or losses before interest, taxes, depreciation and
amortization, limit its accounts payable aging and limit its capital and
acquisition expenditures. The Facility will contain standard events of default
including, among other things, a change in ownership or control.
The Company will issue to Deutsche warrants to purchase a total of 750,000
shares of the Company's Common Stock. The warrants will be canceled if the
Company repays the Facility in full according to the following schedule: all
warrants if repayment occurs within 12 months; warrants to purchase 675,000
shares if repayment occurs within 15 months; warrants to purchase 562,500 shares
if repayment occurs within 18 months; warrants to purchase 450,000 shares if
repayment occurs within 24 months; warrants to purchase 225,000 shares if
repayment occurs within 30 months; and no warrants if repayment occurs after 30
months. Warrants become exercisable when they can no longer be canceled and
remain exercisable for five years after such date. The exercise price for the
warrants will be $52.11.
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The Facility has been approved by the Company's Board of Directors and Deutsche,
but is subject to the satisfaction of several conditions, including the absence
of material adverse change, satisfactory completion of definitive documents and
satisfactory completion of Deutsche's due diligence. Subject to the fulfillment
of these conditions, the Company expects to close the Facility in December 1997.
The Company expects to use the proceeds of the Facility to support its strategy
of investing heavily in marketing and promotion, product development and
technology and operating infrastructure development and may commit to
significant fixed expenditures. The ability of the Company to generate planned
future revenues, and therefore its ability to comply with the covenants
contained in the Facility, may be affected by events beyond its control. If the
Company cannot satisfy the Facility's covenants, the Company will be in default.
In such event, the lending institutions will be able to exercise their remedies,
including the right to declare all principal and interest immediately due and
payable. If the Company were unable to make such payment, or to repay the amount
owing under the Facility at the end of its term, the lending institutions could
foreclose on the Company's assets, substantially all of which will be pledged as
security for the Facility.
The Company believes that current cash and cash equivalent balances and
short-term investments will be sufficient to meet its anticipated cash needs for
at least 12 months. However, any projection of future cash needs and cash flows
is subject to substantial uncertainty. If cash generated from operations is
insufficient to satisfy the Company's liquidity requirements, the Company may
seek to sell additional equity or debt securities or to obtain additional credit
facilities. The sale of additional equity or convertible debt securities could
result in additional dilution to the Company's stockholders. There can be no
assurance that financing will be available in amounts or on terms acceptable to
the Company, if at all. In addition, the Company will, from time to time,
consider the acquisition of or investment in complementary businesses, products
and technologies, which might increase the Company's liquidity requirements or
cause the Company to issue additional equity or debt securities.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the factors discussed in the "Overview" section of this
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Company's final prospectus dated May 15, 1997, as filed with
the SEC, including, among others, the Company's limited operating history, the
unpredictability of its future revenues and the unpredictable and evolving
nature of its business model, the following additional factors may affect the
Company's future results.
The online commerce market, particularly over the Internet, is new, rapidly
evolving and intensely competitive, which competition the Company expects will
intensify in the future. In addition, the retail book industry is intensely
competitive. The Company's current or potential competitors include (i) various
online booksellers and vendors of other information-based products such as CDs
and videotapes, including entrants into narrow specialty niches, (ii) a number
of indirect competitors that specialize in online commerce or derive a
substantial portion of their revenues from online commerce, through which
bookstores other than the Company may offer products, and (iii) publishers and
retail vendors of books, music and videotapes, including large specialty
booksellers, with significant brand awareness, sales volume and customer bases.
Many of these competitors have longer operating histories, larger customer
bases, greater brand recognition and significantly greater financial, marketing
and other resources than the Company. In addition, new technologies and the
expansion of existing technologies may increase the competitive pressures on the
Company. Competitive pressures created by any one of the Company's competitors,
or by the Company's competitors collectively, could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations.
The Company's revenues depend on the number of visitors who shop on its Web site
and the volume of orders it fulfills. Any system interruptions that result in
the unavailability of the Company's Web site or reduced order fulfillment
performance would reduce the volume of goods sold and the attractiveness of the
Company's product and service offerings. The Company has experienced periodic
system interruptions, which it believes will continue to occur from time to
time. The Company uses an internally developed system for its Web site, search
engine and substantially all aspects of transaction processing, including order
management, cash and credit card processing, purchasing, inventory management
and shipping. The Company will be required to add additional software and
hardware and further develop and upgrade its existing technology,
transaction-processing systems and network infrastructure to accommodate
increased traffic on its Web site and increased sales volume through its
transaction-processing systems. Any inability to do so may cause unanticipated
system disruptions, slower response times, degradation in levels of customer
service, impaired quality and speed of order fulfillment, or delays in reporting
accurate financial information. There can be no assurance that the Company will
be able to accurately project the rate or timing of increases, if any, in the
use of its Web site or in a timely manner to effectively upgrade and expand its
transaction-processing systems or to integrate smoothly any newly developed or
purchased modules with its existing systems. Any inability to do so would have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. Substantially all of the Company's computer
and communications hardware is located at a single leased facility in Seattle,
Washington. The Company's systems and operations are vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure,
break-ins, earthquake and similar events. The Company does not currently
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have redundant systems or a formal disaster recovery plan and does not carry
sufficient business interruption insurance to compensate it for losses that may
occur. Despite the implementation of network security measures by the Company,
its servers are vulnerable to computer viruses, physical or electronic break-ins
and similar disruptions, which could lead to interruptions, delays, loss of data
or the inability to accept and fulfill customer orders. The occurrence of any of
the foregoing events could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
The Company has rapidly and significantly expanded its operations, and
anticipates that further significant expansion will be required to address
potential growth in its customer base and market opportunities. This expansion
has placed, and is expected to continue to place, a significant strain on the
Company's management, operational and financial resources. To manage the
expected growth of its operations and personnel, the Company will be required to
improve existing and implement new transaction-processing, operational and
financial systems, procedures and controls, and to expand, train and manage its
growing employee base. There can be no assurance that the Company's current and
planned personnel, systems, procedures and controls will be adequate to support
the Company's future operations, that management will be able to hire, train,
retain, motivate and manage required personnel or that Company management will
be able to successfully identify, manage and exploit existing and potential
market opportunities. If the Company is unable to manage growth effectively, its
business, prospects, financial condition and results of operations will be
materially adversely affected.
The Company may choose to develop new Web sites, promote new or complementary
products or sales formats, expand the breadth and depth of products and services
offered or, expand its market presence through relationships with third parties
or acquisition of new or complementary businesses, products or technologies.
Expansion of the Company's operations in this manner would require significant
additional development, operations and editorial expenditures and would strain
the Company's management, financial and operational resources. The lack of
market acceptance of such efforts or the Company's inability to generate
satisfactory revenues from such expanded services or products to offset their
cost could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations. Furthermore, any such activity
that is not favorably received by customers could damage the Company's
reputation or the Amazon.com brand.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 12, 1997, B&N filed suit against the Company in the United
States District Court for the Southern District of New York. The
suit alleged one count of false and misleading advertising in
violation of the Lanham Act. In October 1997, B&N and the Company
agreed to a settlement of the lawsuit with no admission of
liability of any type and no payment of damages.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Changes in Securities - None
Use of Proceeds - The Company's registration statement under the
Securities Act of 1933, as amended, for its initial public
offering (the "Registration Statement") became effective on May
14, 1997, and the initial public offering commenced on May 15,
1997. The offering terminated after the sale of all securities
that were registered under the Registration Statement. Deutsche
Morgan Grenfell Inc., Alex. Brown & Sons Incorporated and
Hambrecht & Quist LLC were the managing underwriters of the
offering. The Company registered and sold 3,000,000 shares of
common stock, par value $0.01 per share, with an aggregate price
of $54.0 million. The Company incurred a total of approximately
$4.9 million of expenses in connection with the registration and
distribution of common stock in the offering, of which
approximately $3.8 million were paid in underwriting discounts
and commissions and approximately $1.1 million were paid to third
parties for other expenses. Offering proceeds, net of aggregate
expenses of approximately $4.9 million, were $49.1 million. The
Company has used approximately $8.3 million of the net offering
proceeds for working capital and approximately $40.8 million of
the offering proceeds for the purchase of temporary investments
consisting of cash, cash equivalents and short-term investments.
The Company has not used any of the net offering proceeds for
construction of plant, building or facilities; purchase or
installation of machinery and equipment; purchases of real
estate; acquisition of other businesses; or repayment of
indebtedness. None of the expenses paid in connection with the
registration and distribution of the common stock in the
offering, and none of the net offering proceeds, were paid
directly or indirectly to directors, officers, or general
partners of the Company or their associates, persons owning 10%
or more of any class of the Company's securities, or affiliates
of the Company. Approximately $8.3 million of the net offering
proceeds used as working capital were paid directly or indirectly
to third parties.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Lease Agreement, dated August 22, 1997, by and
between the Company and McConnell Development, Inc.
10.2 Amendment 1 to Lease Agreement, dated July 16, 1997,
by and between the Company and Pacific Northwest
Group A.
10.3 Amendment 2 to Lease Agreement, dated September 11,
1997, by and between the Company and Pacific
Northwest Group A.
11. Statement Regarding Computation of Net Loss Per Share
27. Financial Data Schedule
(b) Reports on Form 8-K
None
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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.
(REGISTRANT)
DATED: November 14, 1997
By: /s/ Joy D. Covey
Joy D. Covey
Chief Financial Officer
Vice President
Finance and Administration
Treasurer and Secretary
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EXHIBIT INDEX
Exhibit Number Title
10.1 Lease Agreement, dated August 22, 1997, by and between the
Company and McConnell Development, Inc.
10.2 Amendment 1 to Lease Agreement, dated July 16, 1997, by and
between the Company and Pacific Northwest Group A.
10.3 Amendment 2 to Lease Agreement, dated September 11, 1997, by
and between the Company and Pacific Northwest Group A.
11 Statement Regarding Computation of Net Loss per Share
27 Financial Data Schedule
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