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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 JUNE 30, 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 (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 [ ]
49,865,617 shares of $0.01 par value common stock outstanding as of
July 31, 1998
Page 1 of 22
Exhibit Index on Page 22
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AMAZON.COM, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
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 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibit Index 22
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMAZON.COM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- ----------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
1998 1997
- ----------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Current assets:
Cash............................................................ $ 2,523 $ 1,567
Marketable securities........................................... 337,396 123,499
Inventories..................................................... 17,035 8,971
Prepaid expenses and other...................................... 12,487 3,298
------------ ------------
Total current assets.................................... 369,441 137,335
Fixed assets, net................................................. 14,014 9,265
Deposits and other................................................ 284 166
Goodwill and other purchased intangibles, net..................... 52,398 --
Deferred charges.................................................. 7,622 2,240
------------ ------------
Total assets............................................ $ 443,759 $ 149,006
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 47,556 $ 32,697
Accrued advertising............................................. 9,971 3,454
Other liabilities and accrued expenses.......................... 13,713 6,167
Current portion of long-term debt............................... 684 1,500
------------ ------------
Total current liabilities............................... 71,924 43,818
Long-term portion of debt......................................... 332,225 76,521
Long-term portion of capital lease obligation..................... 181 181
Stockholders' equity:
Preferred stock, $0.01 par value:
Authorized shares -- 10,000,000
Issued and outstanding shares -- none........................ -- --
Common stock, $0.01 par value:
Authorized shares -- 300,000,000
Issued and outstanding shares -- 49,669,601 and 47,874,338
shares, respectively........................................ 497 479
Additional paid-in capital...................................... 104,368 63,552
Deferred compensation........................................... (1,301) (1,930)
Other gains (losses)............................................ (35) --
Accumulated deficit............................................. (64,100) (33,615)
------------ ------------
Total stockholders' equity.............................. 39,429 28,486
------------ ------------
Total liabilities and stockholders' equity.............. $ 443,759 $ 149,006
============ ============
See accompanying notes.
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AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Net sales ......................................... $ 115,977 $ 27,855 $ 203,352 $ 3,860
Cost of sales ..................................... 89,786 22,633 157,840 35,117
---------- ---------- ---------- ----------
Gross profit ...................................... 26,191 5,222 45,512 8,743
Operating expenses:
Marketing and sales ............................ 26,452 7,773 45,955 11,679
Product development ............................ 8,060 2,808 14,789 4,383
General and administrative ..................... 3,262 1,708 5,225 2,850
Amortization of goodwill and other purchased
intangibles .................................. 5,413 -- 5,413 --
---------- ---------- ---------- ----------
Total operating expenses ................... 43,187 12,289 71,382 18,912
Loss from operations .............................. (16,996) (7,067) (25,870) (10,169)
Interest income ................................... 3,334 366 4,974 430
Interest expense .................................. (7,564) (4) (9,589) (4)
---------- ---------- ---------- ----------
Net interest income (expense) .............. (4,230) 362 (4,615) 426
Net loss .......................................... $ (21,226) $ (6,705) $ (30,485) $ (9,743)
========== ========== ========== ==========
Basic and diluted loss per share .................. $ (0.44) $ (0.16) $ (0.64) $ (0.24)
========== ========== ========== ==========
Shares used in computation of basic and diluted
loss per share ................................. 47,977 42,634 47,299 40,719
========== ========== ========== ==========
See accompanying notes.
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AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
----------------------------
1998 1997
---------- ----------
OPERATING ACTIVITIES:
Net loss ........................................................ $ (30,485) $ (9,743)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization ................................ 8,773 1,022
Amortization of unearned compensation related to stock options 629 625
Noncash interest expense ..................................... 7,085 --
Changes in operating assets and liabilities:
Inventories ............................................... (8,047) (1,081)
Prepaid expenses and other ................................ (8,029) (841)
Deposits and other ........................................ (93) (182)
Accounts payable .......................................... 13,639 7,475
Accrued advertising ....................................... 6,517 2,574
Other liabilities and accrued expenses .................... 5,591 2,757
---------- ----------
Net cash provided by (used in) operating activities ..... (4,420) 2,606
INVESTING ACTIVITIES:
Maturities of marketable securities ............................. 55,136 969
Purchases of marketable securities .............................. (269,068) (45,875)
Purchases of fixed assets ....................................... (7,714) (2,239)
Acquisition of businesses ....................................... (14,993) --
---------- ----------
Net cash used in investing activities ................... (236,639) (47,145)
FINANCING ACTIVITIES:
Proceeds from initial public offering ........................... -- 49,103
Proceeds from exercise of stock options ......................... 1,022 474
Proceeds from sale of preferred stock ........................... -- 200
Proceeds from debt .............................................. 325,987 --
Repayment of debt ............................................... (77,209) --
Financing costs related to debt issuance ........................ (7,750) --
---------- ----------
Net cash provided by financing activities ............... 242,050 49,777
Effect of exchange rate changes ..................................... (35) --
---------- ----------
Net increase in cash ................................................ 956 5,238
Cash at beginning of period ......................................... 1,567 823
---------- ----------
Cash at end of period ............................................... $ 2,523 $ 6,061
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Common stock issued for fixed assets and accrued product development $ -- $ 1,500
Fixed assets acquired under capital lease ........................... $ -- $ 362
Common stock issued in connection with acquisitions ................. $ 39,812 $ --
See accompanying notes.
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AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ACCOUNTING POLICIES
Description of Business
Amazon.com, Inc. ("Amazon.com" or the "Company") was incorporated on July 5,
1994. The Company is the leading online retailer of books and music and offers a
catalog of approximately three million titles, easy-to-use search and browse
features, email services, personalized shopping services, secure Web-based
credit card payment and direct shipping to customers.
Unaudited Interim Financial Information
The consolidated financial statements as of June 30, 1998 and 1997 have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission (the "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, 1997 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 June 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. These consolidated financial
statements should be read in conjunction with the audited financial statements
and the accompanying notes included in the Company's annual report on Form 10-K
for the year ended December 31, 1997. Certain prior period balances have been
reclassified to conform to the current period presentation.
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.
Marketable Securities
The Company's marketable securities consist primarily of high-quality short to
intermediate term fixed income securities and money market mutual funds and 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 stockholders'
equity within other gains (losses). Unrealized losses are charged against income
when a decline in fair value is determined to be other than temporary. Realized
and unrealized gains and losses were immaterial for all periods presented. 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.
Deferred Charges
On May 8, 1998, the Company issued approximately $326 million gross proceeds of
10% Senior Discount Notes due 2008 (the "Senior Discount Notes"). At June 30,
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.
Goodwill and Other Purchased Intangibles
Goodwill and other purchased intangibles is stated net of total accumulated
amortization of $5.4 million at June 30, 1998. Goodwill is being amortized over
a two-year period.
Foreign Currency
Exchange gains and losses arising from transactions denominated in a currency
other than the functional currency of the entity involved are included in other
gains (losses). To date the Company has entered into no foreign currency
exchange contracts or other such derivative instruments.
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New Accounting Pronouncements
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income, which establishes
standards for the reporting and display of comprehensive income and its
components, and SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information. The adoption of these Statements had no material impact on
the Company's net loss or stockholders' equity.
NOTE 2 - BUSINESS ACQUISITIONS
In April 1998, the Company acquired three Internet companies: Bookpages Limited
("Bookpages"), Telebook, Inc. ("Telebook") and Internet Movie Database Limited
("IMDB"). Bookpages and Telebook are online booksellers. Bookpages has
operations in the United Kingdom, and Telebook has operations primarily in
Germany through its ABC Bucherdienst subsidiary. IMDB operates a comprehensive
repository for movie information on the Internet. 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 cash and common
stock. The Company issued an aggregate of approximately 1.1 million shares of
common stock to effect the transactions. 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 and is
being amortized over two years. The results of operations of the acquired
companies are included in the Company's consolidated financial results beginning
on the date of acquisition.
The following table presents unaudited consolidated pro forma financial
information for the six months ended June 30, 1998 and 1997, as though the
acquisitions made in 1998 had occurred on January 1 of each year:
For the Six For the Six
Months Ended Months Ended
June 30, 1998 June 30, 1997
-------------- -------------
Net sales $ 206,800 $ 47,016
Net loss (40,726) (24,261)
Basic and diluted loss per share (0.85) (0.58)
Net loss in the above table includes amortization of goodwill and other
purchased intangibles of $14.7 million and $14.3 million for the six months
ended June 30, 1998 and 1997, respectively. The unaudited pro forma financial
information is presented for information purposes only and is not necessarily
indicative of the operating results that would have occurred had the
acquisitions taken place on the basis assumed above. In addition, the pro forma
results are not intended to be a projection of future results and do not reflect
any synergies that might have been achieved from the combined operations.
NOTE 3 - DEBT
On May 8, 1998, the Company completed the offering of approximately $326 million
gross proceeds of the Senior Discount Notes due May 1, 2008. 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 for the Senior Discount Notes (the "Indenture"), plus
accrued interest, if any, to the date of redemption. At any time prior to May 1,
2001, the Company also may redeem up to 35% of the aggregate principal amount at
maturity of the Senior Discount Notes with the proceeds of one or more sales of
Capital Stock (as defined in the Indenture) (other than Disqualified Stock (as
defined in the Indenture)), at 110 % of their Accreted Value (as defined in the
Indenture) on the redemption date, plus accrued interest, if any, to the date of
redemption; provided that after any such redemption at least 65% of the
aggregate principal amount at maturity of Senior Discount Notes originally
issued remains outstanding. In addition, at any time prior to May 1, 2003, the
Company may redeem all, but not less than all, of the Senior Discount Notes at a
redemption price equal to the sum of (i) the Accreted Value (as defined in the
Indenture) on the redemption date, plus (ii) accrued interest, if any, to the
redemption date, plus (iii) the Applicable Premium (as defined in the
Indenture).
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Upon a Change of Control (as defined in the 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 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.
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.
A portion of the net proceeds from the offering of the Senior Discount Notes has
been used to retire approximately $75 million of existing indebtedness. The
Company expects to use the remaining net proceeds 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, including the Company's sale of music products and international
expansion, and capital expenditures. The Company expects, if the opportunity
arises, to use an unspecified portion of the net proceeds to acquire or invest
in complementary businesses, products and technologies.
NOTE 4 - STOCKHOLDERS' EQUITY
On June 1, 1998, the Company effected a two-for-one stock split in the form of a
stock dividend to stockholders of record on May 20, 1998. Accordingly, the
accompanying consolidated financial statements have been restated to reflect the
split.
On June 3, 1998, the Company increased the number of authorized shares of common
stock, par value $0.01 per share, from 100 million shares to 300 million shares.
NOTE 5 - SUBSEQUENT EVENTS
On August 4, 1998, the Company announced that it had entered into definitive
agreements to acquire 100% of the outstanding shares and assume all outstanding
options of Junglee Corporation ("Junglee") and Sage Enterprises, Inc.
("PlanetAll") in exchange for equity having an aggregate value of approximately
$280 million. The Junglee acquisition closed on August 12, 1998. Junglee
develops Web-based virtual database technologies to help consumers find products
on the Internet. PlanetAll provides contact management services via the
Internet, including Web-based address, calendar and reminder features. The
Company has issued approximately 1.6 million shares of common stock and assumed
all (approximately 300,000) outstanding options in connection with the
acquisition of Junglee and will account for this transaction under the purchase
method of accounting. The Company will issue approximately 800,000 shares of
common stock and assume all (approximately 100,000) outstanding options in
connection with the acquisition of PlanetAll and anticipates accounting for this
transaction as a pooling of interests. The PlanetAll transaction is expected to
close during the quarter ending September 30, 1998, subject to customary closing
conditions.
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 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, liquidity and
capital resources, as well as other statements, including, but not limited to,
words such as "anticipate," "believe," "plan," "estimate," "expect," "seek" 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
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Analysis of Financial Condition and Results of Operations" and in the "Risk
Factors" section of the Company's annual report on Form 10-K for the year ended
December 31, 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 and retail book
and music industries, the risks associated with management and integration of
business combinations, and the risks associated with capacity constraints,
systems development, management of growth, any new products and international or
domestic business expansion. 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 and music. The Company also
sells videotapes, audiotapes and other products. 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 Company must, among other
things, maintain and increase its customer base, implement and successfully
execute its business and marketing strategy and its expansion into new product
or geographic markets, effectively manage and integrate acquisitions and other
business combinations, 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 June 30,
1998, had an accumulated deficit of $64.1 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 resulted in relatively low product gross margins. As a
result, achieving profitability given planned investment levels depends on the
Company's ability to generate and sustain substantially increased revenue
levels. In addition, amounts associated with the Company's recent acquisitions,
including amortization of goodwill and other purchased intangibles and ongoing
operating expenses of those companies, as well as interest expense related to
the Senior Discount Notes (as defined below) will further affect the Company's
operating results. As a result of the foregoing factors, 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 will 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 recently announced acquisitions that
will result in the Company's incurring significant charges, including
amortization of goodwill and other purchased intangibles and ongoing operating
expenses of the acquired companies.
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
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results include, among others, (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 acquire product, to maintain
appropriate inventory levels and to manage fulfillment operations, (iii) the
Company's ability to maintain gross margins in its existing business and in
future product lines and markets, (iv) the development, announcement or
introduction of new sites, services and products by the Company and its
competitors, (v) price competition or higher wholesale prices in the industry,
(vi) 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 products such as those offered by the Company, (vii) the Company's ability to
upgrade and develop its systems and infrastructure, (viii) the Company's ability
to attract new personnel in a timely and effective manner, (ix) the level of
traffic on the Company's Web site, (x) the Company's ability to manage
effectively its development of new business segments and markets, (xi) the
Company's ability to successfully manage the integration of operations and
technology of acquisitions and other business combinations, (xii) technical
difficulties, system downtime or Internet brownouts, (xiii) the amount and
timing of operating costs and capital expenditures relating to expansion of the
Company's business, operations and infrastructure, (xiv) the number of popular
books, music selections and other products introduced during the period, (xv)
the level of merchandise returns experienced by the Company, (xvi) governmental
regulation and taxation policies, (xvii) disruptions in service by common
carriers due to strikes or otherwise, and (xviii) general economic conditions
and economic conditions specific to the Internet, online commerce and the book
and music industries.
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 and music industries are generally significantly higher
in the fourth calendar quarter of each year.
Due to the foregoing factors, in one or more future quarters the Company's
operating results may fall below the expectations of securities analysts or
investors. In such event, the trading price of the common stock would likely be
materially adversely affected.
RECENT EVENTS
In April 1998, the Company acquired three Internet companies: Bookpages Limited
("Bookpages"), Telebook, Inc. ("Telebook") and Internet Movie Database Limited
("IMDB"). Bookpages and Telebook are online booksellers. Bookpages has
operations in the United Kingdom, and Telebook has operations primarily in
Germany through its ABC Bucherdienst subsidiary. IMDB operates a comprehensive
repository for movie information on the Internet. 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 cash and common
stock. The Company issued an aggregate of approximately 1.1 million shares of
common stock to effect the transactions. The Company will amortize the
intangibles resulting from the acquisitions over two years.
On August 4, 1998, the Company announced that it had entered into definitive
agreements to acquire 100% of the outstanding shares and assume all outstanding
options of Junglee Corporation ("Junglee") and Sage Enterprises, Inc.
("PlanetAll") in exchange for equity having an aggregate value of approximately
$280 million. The Junglee acquisition closed on August 12, 1998. Junglee
develops Web-based virtual database technologies to help consumers find products
on the Internet. PlanetAll provides contact management services via the
Internet, including Web-based address, calendar and reminder features. The
Company has issued approximately 1.6 million shares of common stock and assumed
all (approximately 300,000) outstanding options in connection with the
acquisition of Junglee and will account for this transaction under the purchase
method of accounting. The Company will issue approximately 800,000 shares of
common stock and assume all (approximately 100,000) outstanding options in
connection with the acquisition of PlanetAll and anticipates accounting for this
transaction as a pooling of interests. The PlanetAll transaction is expected to
close during the quarter ending September 30, 1998, subject to customary closing
conditions.
The Company anticipates that the application of purchase accounting guidelines
to the Junglee purchase will result in substantial additional charges to its
operating results. Under the purchase method of accounting, the purchase price
is allocated to the assets acquired and liabilities assumed based on their
estimated fair values. Management anticipates allocating the purchase price to
the fair values of the tangible assets, intangible assets and technology, some
of which has not reached technological feasibility and therefore has no
alternative future use. In addition, the Company anticipates recording costs
related to the Junglee and PlanetAll acquisitions in the quarter ending
September 30, 1998. In addition, both entities are currently incurring operating
losses. The Company intends to continue investing in product development,
marketing and sales, and general and administrative activities for the acquired
companies, and expects that such expenses, combined with amortization of
goodwill and other purchased intangibles, will significantly exceed revenues
generated by the companies for the foreseeable future.
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RESULTS OF OPERATIONS
Net Sales
Quarter Ended Six Months Ended
---------------------------------------- -----------------------------------------
June 30, June 30, June 30, June 30,
1998 1997 % Change 1998 1997 % Change
---------- ---------- ----------- ----------- ---------- -----------
(in thousands) (in thousands)
Net sales................. $115,977 $27,855 316% $203,352 $43,860 364%
Net sales are composed of the selling price of books, music 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 growth of the Company's customer base and repeat purchases
from the Company's existing customers and, to a smaller extent, increased sales
of music following the opening of the Company's music store in June 1998 and the
inclusion of sales from the companies acquired in April 1998. This increase was
partially offset by a decrease in prices effected in June 1997. International
sales represented 22% and 28% of net sales for the quarters ended June 30, 1998
and 1997, respectively, and 21% and 28% of net sales for the six months ended
June 30, 1998 and 1997, respectively.
Gross Profit
Quarter Ended Six Months Ended
---------------------------------------- ----------------------------------------
June 30, June 30, June 30, June 30,
1998 1997 % Change 1998 1997 % Change
---------- ---------- ----------- ---------- ---------- -----------
(in thousands) (in thousands)
Gross profit..................... $26,191 $ 5,222 401% $45,512 $ 8,743 421%
Gross margin..................... 22.6% 18.7% 22.4% 19.9%
Gross profit is sales less the 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. Gross margin increased as a result of improvements in product costs
through improved supply chain management, as well as higher overall shipping
margins, which together more than offset the impact of lower prices.
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 30% on more than 400,000 titles, with featured book
and music titles discounted at 40% and certain "special value" editions
discounted up to 89%. 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 or service offerings. Gross margins attributable to new business
areas may be lower than those associated with the Company's existing business
activities. In particular, the Company has launched its new music store and
music gross margin is lower than book gross margin. To the extent music becomes
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
Quarter Ended Six Months Ended
----------------------------------------- ----------------------------------------
June 30, June 30, June 30, June 30,
1998 1997 % Change 1998 1997 % Change
----------- ---------- ----------- ---------- ---------- -----------
(in thousands) (in thousands)
Marketing and sales.............. $26,452 $ 7,773 240% $45,955 $11,679 293%
Percentage of net sales.......... 22.8% 27.9% 22.6% 26.6%
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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. 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. Marketing and sales expenses increased 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. 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. In addition, the Company intends to invest in marketing, promotion
and fulfillment activities related to its product and international expansion,
as well as in marketing and sales activities of Junglee and PlanetAll. As a
result of the foregoing, the Company expects marketing and sales expenses to
increase significantly in absolute dollars.
Product Development
Quarter Ended Six Months Ended
---------------------------------------- ----------------------------------------
June 30, June 30, June 30, June 30,
1998 1997 % Change 1998 1997 % Change
---------- ---------- ----------- ---------- ---------- -----------
(in thousands) (in thousands)
Product development.............. $8,060 $ 2,808 187% $14,789 $ 4,383 237%
Percentage of net sales.......... 6.9% 10.1% 7.3% 10.0%
Product development expenses consist principally of payroll and related expenses
for development, editorial, systems and telecommunications operations personnel
and consultants, as well as systems and telecommunications infrastructure, and
costs of acquired content partially attributable to the recent entry into music
sales. 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, including investments associated with entry into music sales and
operating expenses associated with the acquisitions of Telebook, Bookpages and
IMDB. Product development expenses decreased 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. In
addition to ongoing investments in its Web store and infrastructure, the Company
intends to increase investments in product and international expansion and to
continue investments by Junglee and PlanetAll. As a result, the Company expects
product development expenses to increase significantly in absolute dollars.
General and Administrative
Quarter Ended Six Months Ended
---------------------------------------- ----------------------------------------
June 30, June 30, June 30, June 30,
1998 1997 % Change 1998 1997 % Change
---------- ---------- ----------- ---------- ---------- -----------
(in thousands) (in thousands)
General and administrative....... $ 3,262 $ 1,708 91% $ 5,225 $ 2,850 83%
Percentage of net sales.......... 2.8% 6.1% 2.6% 6.5%
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 a result of increased salaries and related
expenses associated with the hiring of additional personnel, expenses associated
with newly acquired subsidiaries, and legal and other professional fees related
to the Company's growth and expanded activities. 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, including investments associated with product and
international expansion and the operations of Junglee and PlanetAll.
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Amortization of Goodwill and Other Purchased Intangibles
Quarter Ended Six Months Ended
---------------------------------------- ----------------------------------------
June 30, June 30, June 30, June 30,
1998 1997 % Change 1998 1997 % Change
---------- ---------- ----------- ---------- ---------- -----------
(in thousands) (in thousands)
Amortization of goodwill and
other purchased intangibles...... $ 5,413 - N/A $ 5,413 - N/A
Percentage of net sales.......... 4.7% 2.7% -
Amortization of goodwill and other purchased intangibles consists of
amortization of goodwill and other purchased intangibles incurred in connection
with the Company's April 1998 acquisitions of three Internet companies:
Bookpages, Telebook and IMDB. See " - Recent Events." Each of the acquisitions
was accounted for under the purchase method of accounting. The Company
anticipates that future amortization associated with these three acquisitions
will increase net loss by approximately $7.1 million per quarter until related
goodwill and other purchased intangibles are fully amortized. As a result of the
recently completed acquisition of Junglee, the Company expects that operating
expenses will increase to reflect the amortization of associated goodwill and
other intangibles. Any additional acquisitions could result in additional
amortization charges.
Interest Income and Expense
Quarter Ended Six Months Ended
---------------------------------------- ----------------------------------------
June 30, June 30, June 30, June 30,
1998 1997 % Change 1998 1997 % Change
---------- ---------- ----------- ---------- ---------- -----------
(in thousands) (in thousands)
Interest income.................. $ 3,334 $ 366 811% $ 4,974 $ 430 1,057%
Interest expense................. (7,564) (4) N/A (9,589) (4) N/A
Interest income on cash and marketable securities increased due to higher
balances resulting from the Company's financing activities. Interest expense for
the quarter ended June 30, 1998 includes interest and amortization of deferred
charges related to the Company's Senior Discount Notes (as defined below) and
the write-off of $2.0 million of unamortized loan fees following prepayment of
the Company's three-year senior secured term loan (the "Senior Loan"). Interest
expense for the quarter and six months ended June 30, 1998 also includes
interest on the Senior Loan and asset acquisitions financed through loans and
capital leases. The Company expects interest expense to increase in the future
as a result of the Senior Discount Notes (as defined below).
Income Taxes
The Company has not generated any taxable income to date and therefore has not
paid any federal income taxes 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.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company's cash was $2.5 million, compared to $1.6 million
at December 31, 1997. Marketable securities balances, which include highly
liquid investments with maturities of three months or less, were $337.4 million
and $123.5 million at June 30, 1998 and December 31, 1997, respectively.
Net cash used in operating activities of $4.4 million for the six months ended
June 30, 1998 was primarily attributable to the net loss and increases in
inventories and prepaid expenses and other, partially offset by noncash expenses
and increases in
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accounts payable, accrued advertising and other liabilities and accrued
expenses. For the six months ended June 30, 1997, cash provided by operating
activities was $2.6 million and resulted from increases in accounts payable,
other liabilities and accrued expenses and accrued advertising, as well as
depreciation and amortization, partially offset by the net loss and increases in
inventories.
Net cash used in investing activities was $236.6 million for the six months
ended June 30, 1998 and consisted of purchases of marketable securities and
acquisitions of businesses and fixed assets, partially offset by maturities of
marketable securities. For the six months ended June 30, 1997, net cash used in
investing activities was $47.1 million and consisted of purchases of marketable
securities and fixed assets.
Net cash provided by financing activities of $242.1 million for the six months
ended June 30, 1998 resulted from net proceeds of $318.2 million from the Senior
Discount Notes (as defined below) offering partially offset by the repayment of
the Senior Loan. Net cash provided by financing activities of $49.8 million for
the six months ended June 30, 1997 resulted primarily from net proceeds from the
Company's initial public offering.
As of June 30, 1998, the Company's principal sources of liquidity consisted of
$2.5 million of cash and $337.4 million of marketable securities. As of that
date, the Company's principal commitments consisted of obligations outstanding
under its Senior Discount Notes (as defined below), obligations in connection
with the acquisition of fixed assets, 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 including growth associated
with product and geographic expansion and integration of business combinations.
The Company recently entered into lease arrangements to increase its
distribution center capacity in the United Kingdom and expanded its Seattle
distribution center to 93,000 square feet. In addition, the Company is currently
pursuing a long-term headquarters lease and may enter into such a lease as soon
as the third quarter of 1998. The Company may 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 and install
leasehold improvements. In addition, the Company has announced plans to continue
to increase its merchandise inventory in order to provide better availability to
customers and achieve purchasing efficiencies.
On May 8, 1998, the Company completed the offering of approximately $326 million
gross proceeds of the Senior Discount Notes ("Senior Discount Notes") due May 1,
2008. 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 Indenture for the Senior Discount Notes (the "Indenture"), plus
accrued interest, if any, to the date of redemption. At any time prior to May 1,
2001, the Company also may redeem up to 35% of the aggregate principal amount at
maturity of the Senior Discount Notes with the proceeds of one or more sales of
Capital Stock (as defined in the Indenture) (other than Disqualified Stock (as
defined in the Indenture)), at 110 % of their Accreted Value (as defined in the
Indenture) on the redemption date, plus accrued interest, if any, to the date of
redemption; provided that after any such redemption at least 65% of the
aggregate principal amount at maturity of Senior Discount Notes originally
issued remains outstanding. In addition, at any time prior to May 1, 2003, the
Company may redeem all, but not less than all, of the Senior Discount Notes at a
redemption price equal to the sum of (i) the Accreted Value (as defined in the
Indenture) on the redemption date, plus (ii) accrued interest, if any, to the
redemption date, plus (iii) the Applicable Premium (as defined in the
Indenture).
Upon a Change of Control (as defined in the 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 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.
The Indenture contains certain covenants that, among other things, limit the
ability of the Company and its Restricted Subsidiaries to incur indebtedness,
pay dividends, prepay subordinated indebtedness, repurchase capital stock, make
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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.
A portion of the net proceeds from the offering of the Senior Discount Notes has
been used to retire approximately $75 million of existing indebtedness. The
Company expects to use the remaining net proceeds 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, including the Company's sales of music products and international
expansion, and capital expenditures. The Company expects, if the opportunity
arises, to use an unspecified portion of the net proceeds to acquire or invest
in complementary businesses, products and technologies.
The Company believes that current cash and marketable securities balances will
be sufficient to meet its anticipated cash needs for at least 12 months.
However, any projections of future cash needs and cash flows are subject to
substantial uncertainty. If current cash, marketable securities and cash which
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. 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. For example, the Company recently announced the acquisitions
of Junglee and PlanetAll, which together will result in the issuance of
approximately 2.4 million shares of common stock and assumption of approximately
400,000 outstanding options.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the factors discussed in the "Overview" and "Liquidity and
Capital Resources" sections of this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in the Company's annual
report on Form 10-K for the year ended December 31, 1997, as filed with the SEC,
the following additional factors may affect the Company's future results.
The online commerce market, particularly over the Web, is new, rapidly evolving
and intensely competitive. In addition, the retail book and music industries are
intensely competitive. The Company's current or potential competitors include
(i) various online booksellers and vendors of other 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 retailers other
than the Company may offer products, and (iii) publishers, distributors and
retail vendors of books, music and other products, including Barnes & Noble,
Inc., Bertelsmann AG and other large specialty booksellers and integrated media
corporations, many of which possess significant brand awareness, sales volume
and customer bases. 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. Many of the Company's competitors have longer operating histories,
larger customer bases, greater brand recognition and significantly greater
financial, marketing and other resources than the Company. Certain of the
Company's competitors may be able to secure merchandise from vendors on more
favorable terms, devote greater resources to marketing and promotional
campaigns, adopt more aggressive pricing or inventory availability policies and
devote substantially more resources to Web site and systems development than the
Company. Increased competition may result in reduced operating margins, loss of
market share and a diminished brand franchise. There can be no assurance that
the Company will be able to compete successfully against current and future
competitors.
The Company expects that competition in the Internet and online commerce markets
will intensify in the future. For example, as various Internet market segments
obtain large, loyal customer bases, participants in those segments may seek to
leverage their market power to the detriment of participants in other market
segments. In addition, new technologies and the expansion of existing
technologies may increase the competitive pressures on online retailers,
including the Company. For example, "shopping agent" technologies will permit
customers to quickly compare the Company's prices with those of its competitors.
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,
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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
could 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 have redundant systems or a formal
disaster recovery plan and in the event of a major interruption may not have
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
critical 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 expansion will be required to address potential growth
in its customer base, to expand its product and service offerings and its
international operations, and to pursue other market opportunities. The
expansion of the Company's operations and employee base 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, as well as 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,
such inability could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
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 or service offerings. For example, the Company introduced its
music store in June 1998. Expansion of the Company's operations in this manner
will require significant additional expenses and development, operations and
editorial resources and could strain the Company's management, financial and
operational resources. Furthermore, the Company may not benefit from the
first-mover advantage that it experienced in the online book market, and gross
margins attributable to new business areas may be lower than those associated
with the Company's existing business activities. There can be no assurance that
the Company will be able to expand its operations in a cost-effective or timely
manner. Furthermore, any new business launched by the Company that is not
favorably received by consumers could damage the Company's reputation or the
Amazon.com brand. 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.
The Company expects to expand its presence in foreign markets and has recently
acquired two international online booksellers to accelerate this expansion. To
date, the Company has only limited experience in sourcing, marketing and
distributing products on an international basis and in developing localized
versions of its Web site and other systems. The Company expects to incur
significant costs in establishing international facilities and operations, in
promoting its brand internationally, in developing localized versions of its Web
site and other systems and in sourcing, marketing and distributing products in
foreign markets. There can be no assurance that the Company's international
efforts will be successful. If the revenues resulting from international
activities are inadequate to offset the expense of establishing and maintaining
foreign operations, such inadequacy could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations. In
addition, there are certain risks inherent in doing business on an international
level, such as unexpected changes in regulatory requirements, export and import
restrictions, tariffs and other trade barriers, difficulties in staffing and
managing foreign operations, longer payment cycles, political instability,
fluctuations in currency exchange rates, seasonal reductions in business
activity in other parts of the world and potentially adverse tax consequences,
any of which could adversely effect the success of the Company's international
operations. Furthermore, it is possible that governments in certain foreign
jurisdictions may have or enact legislation with respect to the Internet or
other online services
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in such areas as content, network security, encryption or distribution that may
affect the Company's ability to conduct business abroad. There can be no
assurance that one or more of such factors will not have a material adverse
effect on the Company's future international operations and, consequently, on
the Company's business, prospects, financial condition and results of
operations.
The Company may choose to expand its operations or market presence by entering
into business combinations, investments, joint ventures or other strategic
alliances with third parties, such as the Company's April acquisitions of three
international Internet companies, the August acquisition of Junglee and the
pending acquisition of PlanetAll. Any such transaction will be accompanied by
risks commonly encountered in such transactions, which include, among others,
the difficulty of assimilating the operations, technology and personnel of the
combined companies, the potential disruption of the Company's ongoing business,
the possible inability to retain key technical and managerial personnel, the
potential inability of management to maximize the financial and strategic
position of the Company through the successful integration of acquired
businesses, additional expenses associated with amortization of goodwill and
purchased intangible assets, additional operating losses and expenses associated
with the activities and expansion of acquired businesses, the maintenance of
uniform standards, controls and policies and the possible impairment of
relationships with existing employees and customers. There can be no assurance
that the Company will be successful in overcoming these risks or any other
problems encountered in connection with such business combinations, investments,
joint ventures or other strategic alliances, or that such transactions will not
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations.
The Company has significant indebtedness outstanding, principally the Senior
Discount Notes (see " - Liquidity and Capital Resources"), capitalized lease
obligations and other equipment financing. The Company may incur substantial
additional indebtedness in the future. The level of the Company's indebtedness,
among other things, could (i) make it difficult for the Company to make payments
on the Senior Discount Notes, (ii) make it difficult for the Company to obtain
any necessary financing in the future for working capital, capital expenditures,
debt service requirements or other purposes, (iii) limit the Company's
flexibility in planning for, or reacting to changes in, its business, and (iv)
make it more vulnerable in the event of a downturn in its business. There can be
no assurance that the Company will be able to improve its earnings before fixed
charges or that the Company will be able to meet its debt service obligations,
including its obligations under the Senior Discount Notes. In the event the
Company's cash flow is inadequate to meet its obligations, the Company could
face substantial liquidity problems. If the Company is unable to generate
sufficient cash flow or otherwise obtain funds necessary to make required
payments, or if the Company otherwise fails to comply with the various covenants
in its indebtedness, it would be in default under the terms thereof, which would
permit the holders of such indebtedness to accelerate the maturity of such
indebtedness and could cause defaults under other indebtedness of the Company.
Any such default could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
The trading price of the Company's common stock is subject to wide fluctuations.
For example, during the quarter ended June 30, 1998, the reported closing price
of the common stock on the Nasdaq National Market was as high as $99.81 and as
low as $40.50 per share. Trading prices of the 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, strategic
developments or business combinations by the Company or its competitors, changes
in the Company's expected operating expense levels or losses, changes in
financial estimates and recommendations by securities analysts, the operating
and stock price performance of other companies that investors may deem
comparable to the Company, news reports relating to trends in the Internet, book
or music industries and other events or factors, many of which are beyond the
Company's control. In addition, the stock market in general, and the market
prices for Internet-related companies in particular, have experienced extreme
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 Company's common stock, regardless of the Company's
operating performance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 5, 1998, The Intimate Bookshop and Wallace Kuralt (the "Named
Plaintiffs") filed a lawsuit in the United States District Court for the
Southern District of New York against Amazon.com, Inc., Barnes & Noble, Inc.,
Borders Group, Inc. and others alleging antitrust, unfair competition and
related claims under the Robinson-Patman Act, the Clayton Act, the Donnelly Act
and other New York state statutes and common law (the "Lawsuit"). The Lawsuit
seeks class action
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certification, for certain purposes, of a class comprised of independent retail
booksellers (the "Class") and requests the following relief: damages on behalf
of the Named Plaintiffs (approximately $11,250,000) and the Class, treble
damages on behalf of the Named Plaintiffs and the Class, disgorgement of
allegedly discriminatory discounts, rebates and deductions, injunctive relief,
punitive damages, prejudgment and post-judgment interest, attorney's fees and
costs.
The Company has not yet been served with the Complaint. The Company has not yet
had an opportunity to evaluate the merits of the Lawsuit and is not in a
position at this time to estimate possible outcomes. The Company intends to
defend against the Lawsuit vigorously.
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 results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Sale of Senior Discount Notes
On May 8, 1998, the Company completed the offering of approximately $326 million
gross proceeds of the Senior Discount Notes due May 1, 2008. 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
(expressed in percentages of principal amount at maturity) set forth below, plus
accrued interest, if any, to the date of redemption, if redeemed during the
12-month period commencing May 1 of the years set forth below:
YEAR REDEMPTION PRICE
2003 105.000%
2004 103.333
2005 101.667
2006 and thereafter 100.000
At any time prior to May 1, 2001, the Company also may redeem up to 35% of the
aggregate principal amount at maturity of the Senior Discount Notes with the
proceeds of one or more sales of Capital Stock (as defined in the Indenture)
(other than Disqualified Stock (as defined in the Indenture)), at 110% of their
Accreted Value on the redemption date, plus accrued interest, if any, to the
date of redemption; provided that after any such redemption at least 65% of the
aggregate principal amount at maturity of Senior Discount Notes originally
issued remains outstanding. In addition, at any time prior to May 1, 2003, the
Company may redeem all, but not less than all, of the Senior Discount Notes at a
redemption price equal to the sum of (i) the Accreted Value on the redemption
date, plus (ii) accrued interest, if any, to the redemption date, plus (iii) the
Applicable Premium (as defined in the Indenture).
Upon a Change of Control (as defined in the 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.
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.
The Senior Discount Notes were issued pursuant to an Indenture dated as of May
8, 1998 between the Company and the Bank of New York, as trustee. The Indenture
for the Senior Discount Notes 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. These limitations are, however, subject to
a number of important qualifications and exceptions.
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Recent Sales of Unregistered Equity Securities
The Company issued 1.1 million shares of its common stock in connection with the
acquisitions of the following companies: Bookpages on April 17, 1998; Telebook
on April 24, 1998; and IMDB on April 24, 1998. The form of the transactions for
Bookpages and IMDB was an exchange of the Company's common stock plus, in the
case of IMDB, cash for the entire issued share capital of the acquired
businesses. For Telebook, the form of the transaction was a merger, whereby
Telebook was merged into a wholly-owned subsidiary of the Company in exchange
for shares of the Company's common stock. No underwriters were used and the
recipients of the Company's common stock were the shareholders of the acquired
companies.
Twenty-one of the former shareholders of the acquired companies are non-U.S.
residents who collectively received 702,648 shares of the Company's common
stock. The shares were not registered under the Securities Act of 1933, as
amended (the "Securities Act") pursuant to the safe harbor contained in
Regulation S thereunder. The shares issued to non-U.S. residents were sold in
offshore transactions in accordance with the offering restrictions of Regulation
S and no directed selling efforts were made in the United States.
Five of the former shareholders of the acquired companies are U.S. residents who
collectively received 377,484 shares of the Company's common stock. The shares
were not registered under the Securities Act pursuant to the exemption set forth
in Section 4(2) thereof. All U.S. residents who received shares of the Company's
common stock made certain representations to the Company as to investment
intent, possessed a sufficient level of financial sophistication and received or
had access to information about the Company. The shares issued in the
transactions are subject to restrictions on transfer absent registration under
the Securities Act, and no offers to sell the securities were made by any form
of general solicitation or general advertisement.
Use of Proceeds
The Company's registration statement (No. 333-23795) under the Securities Act
for its initial public offering (the "Registration Statement") became effective
on May 14, 1997. Offering proceeds, net of aggregate expenses of approximately
$4.9 million, were $49.1 million. The Company has used approximately $15.3
million of the net offering proceeds for working capital paid directly or
indirectly to third parties, approximately $15.0 million for the acquisition of
businesses, approximately $14.9 million for the purchase or installation of
machinery and equipment and approximately $3.9 million for the purchase of
temporary investments consisting of cash and marketable securities. The Company
has not used any of the net offering proceeds for construction of a plant,
building or facilities, purchases of real estate, or repayment of indebtedness.
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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on May 28, 1998.
The following nominees were elected as directors, each to hold office until his
or her successor is elected and qualified, by the vote set forth below:
NOMINEE FOR WITHHELD
Jeffrey P. Bezos 44,904,922 13,400
Tom A. Alberg 44,904,862 13,460
Scott D. Cook 44,904,722 13,600
L. John Doerr 44,904,862 13,460
Patricia Q. Stonesifer 44,902,496 15,826
The proposal to approve an amendment to the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of common stock from
100 million shares to 300 million shares was approved by the vote set forth
below:
FOR AGAINST ABSTAIN BROKER NONVOTES
43,565,608 1,241,268 111,446 0
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ITEM 5. OTHER INFORMATION
In accordance with the Company's Bylaws, a stockholder proposing to transact
business at the Company's annual meeting must provide written notice of such
proposal, in the manner provided by the Company's Bylaws, not fewer than 60 nor
more than 90 days prior to the date specified in the Bylaws for such annual
meeting (or, if less than 60 days' notice or prior public disclosure of the date
of the annual meeting is given or made to the stockholders, not later than the
tenth day following the day on which the notice of the meeting was mailed or
such public disclosure was made). In addition, for the Company's 1999 annual
meeting of stockholders, if the Company receives notice of a stockholder
proposal after March 6, 1999 and the proposal is otherwise eligible to be
considered at the meeting, the persons named as proxies in such proxy statement
and proxy will have discretionary authority to vote on such stockholder
proposal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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 Exhibit 2.1 of the
Company's Report on Form 8-K filed August 7, 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 Exhibit 2.2 of
the Company's Report on Form 8-K filed August 7, 1998).
10.1 Amendment to Lease Agreement, dated June 17, 1998, by and
between Amazon.com, Inc. and Pacific Northwest Group A.
10.2 Lease Agreement, dated July 21, 1998, by and between Bookpages
Limited with Amazon.com, Inc. and Slough Trading Estate Limited.
27 Financial Data Schedule.
99.1 Form of Investor Rights Agreement by and between Amazon.com,
Inc. and certain stockholders of Junglee Corporation named
therein (incorporated by reference to Exhibit 99.1 of the
Company's Report on Form 8-K filed August 7, 1998).
99.2 Form of Investor Rights Agreement by and between Amazon.com,
Inc. and the stockholders of Sage Enterprises, Inc.
(incorporated by reference to Exhibit 99.2 of the Company's
Report on Form 8-K filed August 7, 1998).
(b) Reports on Form 8-K
On April 27, 1998, the Company filed a Form 8-K under Item 5 of Form 8-K
in connection with the Senior Discount Notes.
On April 28, 1998, the Company filed a Form 8-K under Item 5 of Form 8-K
in connection with the Senior Discount Notes.
On May 1, 1998, the Company filed a Form 8-K under Item 9 of Form 8-K in
connection with the sale of unregistered securities pursuant to
Regulation S in connection with the acquisition of Telebook, Bookpages
and IMDB.
On May 6, 1998, the Company filed a Form 8-K under Item 5 of Form 8-K in
connection with the Senior Discount Notes.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMAZON.COM, INC.
(REGISTRANT)
DATED: August 14, 1998
By: /S/ Joy D. Covey
Joy D. Covey
Chief Financial Officer,
Vice President of Finance and Administration
and Secretary
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EXHIBIT INDEX
Exhibit Number Title
- -------------- -----
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 Exhibit 2.1 of the
Company's Report on Form 8-K filed August 7, 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 Exhibit 2.2 of
the Company's Report on Form 8-K filed August 7, 1998).
10.1 Amendment to Lease Agreement, dated June 17, 1998, by and
between Amazon.com, Inc. and Pacific Northwest Group A.
10.2 Lease Agreement, dated July 21, 1998, by and between Bookpages
Limited with Amazon.com, Inc. and Slough Trading Estate Limited.
27 Financial Data Schedule.
99.1 Form of Investor Rights Agreement by and between Amazon.com,
Inc. and certain stockholders of Junglee Corporation named
therein (incorporated by reference to Exhibit 99.1 of the
Company's Report on Form 8-K filed August 7, 1998).
99.2 Form of Investor Rights Agreement by and between Amazon.com,
Inc. and the stockholders of Sage Enterprises, Inc.
(incorporated by reference to Exhibit 99.2 of the Company's
Report on Form 8-K filed August 7, 1998).