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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, 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
52,763,055 shares of $0.01 par value common stock outstanding as of
October 31, 1998
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AMAZON.COM, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMAZON.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
1998 1997
- --------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Current assets:
Cash .......................................................... $ 14,856 $ 1,876
Marketable securities ......................................... 322,404 123,499
Inventories ................................................... 19,772 8,971
Prepaid expenses and other .................................... 17,625 3,363
------------- -------------
Total current assets .................................. 374,657 137,709
Fixed assets, net ............................................... 23,821 9,726
Deposits and other .............................................. 582 169
Goodwill and other purchased intangibles, net ................... 213,064 --
Deferred charges ................................................ 7,590 2,240
------------- -------------
Total assets .......................................... $ 619,714 $ 149,844
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 60,046 $ 33,027
Accrued advertising ........................................... 11,857 3,454
Other liabilities and accrued expenses ........................ 26,868 6,570
Current portion of long-term debt ............................. 684 1,500
------------- -------------
Total current liabilities ............................. 99,455 44,551
Long-term debt .................................................. 340,392 76,521
Long-term portion of capital lease obligation ................... 103 181
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 -- 52,725,622 and 48,302,958
shares, respectively ....................................... 527 483
Additional paid-in capital .................................... 298,322 67,552
Note receivable from officer for common stock ................. (1,099) --
Deferred compensation ......................................... (2,943) (1,930)
Accumulated other comprehensive income ........................ 590 --
Accumulated deficit ........................................... (115,633) (37,514)
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Total stockholders' equity ............................ 179,764 28,591
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Total liabilities and stockholders' equity ......... $ 619,714 $ 149,844
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See accompanying notes to condensed consolidated financial statements.
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AMAZON.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------------------------------------
1998 1997 1998 1997
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Net sales .......................................... $ 153,698 $ 37,887 $ 357,103 $ 81,747
Cost of sales ...................................... 118,823 30,717 276,679 65,842
------------- ------------- ------------- -------------
Gross profit ....................................... 34,875 7,170 80,424 15,905
Operating expenses:
Marketing and sales ............................. 37,517 11,516 84,522 23,596
Product development ............................. 13,374 3,998 29,526 8,650
General and administrative ...................... 4,978 1,972 10,342 4,930
Merger and acquisition related costs ............ 20,512 -- 25,925 --
------------- ------------- ------------- -------------
Total operating expenses ..................... 76,381 17,486 150,315 37,176
Loss from operations ............................... (41,506) (10,316) (69,891) (21,271)
Interest income .................................... 4,754 688 9,789 1,118
Interest expense ................................... (8,419) (19) (18,017) (59)
------------- ------------- ------------- -------------
Net interest income (expense) ................ (3,665) 669 (8,228) 1,059
Net loss ........................................... $ (45,171) $ (9,647) $ (78,119) $ (20,212)
============= ============= ============= =============
Basic and diluted loss per share ................... $ (0.90) $ (0.21) $ (1.60) $ (0.48)
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Shares used in computation of basic and diluted
loss per share .................................. 50,234 45,865 48,700 42,438
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See accompanying notes to condensed consolidated financial statements.
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AMAZON.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
1998 1997
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OPERATING ACTIVITIES:
Net loss ..................................................... $ (78,119) $ (20,212)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............................. 30,264 2,076
Amortization of deferred compensation related to stock
options.................................................. 570 993
Noncash interest expense .................................. 15,454 --
Changes in operating assets and liabilities:
Inventories ............................................. (10,784) (2,161)
Prepaid expenses and other .............................. (12,322) (1,486)
Deposits and other ...................................... (206) (202)
Accounts payable ........................................ 25,447 12,803
Accrued advertising ..................................... 8,403 (598)
Other liabilities and accrued expenses .................. 13,630 3,258
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Net cash used in operating activities ................. (7,663) (5,529)
INVESTING ACTIVITIES:
Maturities of marketable securities .......................... 117,669 4,311
Purchases of marketable securities ........................... (315,608) (45,875)
Purchases of fixed assets .................................... (18,779) (4,396)
Acquisitions of businesses ................................... (14,374) --
------------- -------------
Net cash used in investing activities ................. (231,092) (45,960)
FINANCING ACTIVITIES:
Proceeds from initial public offering ........................ -- 49,103
Proceeds from exercise of stock options ...................... 2,964 474
Proceeds from issuance of capital stock ...................... 8,361 2,758
Proceeds from debt ........................................... 325,987 --
Repayment of debt ............................................ (77,383) (7)
Financing costs related to debt issuance ..................... (7,783) (22)
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Net cash provided by financing activities ............. 252,146 52,306
Effect of exchange rate changes ................................. (411) --
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Net increase in cash ............................................ 12,980 817
Cash at beginning of period ..................................... 1,876 865
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Cash at end of period ........................................... $ 14,856 $ 1,682
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SUPPLEMENTAL CASH FLOW INFORMATION:
Common stock issued for fixed assets and accrued product
development ................................................... $ -- $ 1,500
Fixed assets acquired under capital lease ....................... $ -- $ 442
Common stock issued in connection with acquisitions ............. $ 217,241 $ --
See accompanying notes to condensed consolidated financial statements.
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AMAZON.COM, INC.
NOTES TO CONDENSED 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 over three million titles, easy-to-use search and locate features,
personalized recommendations, secure credit card payment, streamlined ordering
and direct shipping to customers.
Basis of Presentation
The accompanying condensed consolidated financial statements as of and for the
period ended September 30, 1998 and 1997 have been prepared by the Company in
accordance with generally accepted accounting principles and 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 condensed
consolidated 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 consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such SEC rules and regulations, although the Company
believes that the disclosures in these condensed consolidated financial
statements are adequate to make the information presented not misleading.
Operating results for the quarter ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the
accompanying notes included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, as amended by the Company's Current Report on Form
8-K dated August 27, 1998, filed September 11, 1998. Certain prior period
amounts have been reclassified to conform to the current period presentation.
Principles of Consolidation
The condensed 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, 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 accumulated other comprehensive income. Unrealized losses are
charged against income when a decline in fair value is determined to be other
than temporary. The specific identification method is used to determine the cost
of securities sold. The Company classifies all investments of cash as marketable
securities, including highly liquid investments with maturities of three months
or less, and reflects the related cash flows as investing cash flows. As a
result of the classification of highly liquid investments within marketable
securities, a significant portion of the Company's gross marketable securities
purchases and maturities disclosed as investing cash flows is related to highly
liquid investments.
Deferred Charges
In May 1998, the Company issued approximately $326 million gross proceeds of 10%
Senior Discount Notes due 2008 (the "Senior Discount Notes"). At September 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 $21.6 million at September 30, 1998. Goodwill and substantially
all other purchased intangibles are being amortized on a straight-line basis
over lives ranging from two to three years.
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Foreign Currency
The functional currency of the Company's foreign subsidiaries is the local
currency. Assets, liabilities, revenues and expenses of the foreign subsidiaries
are translated into U.S. dollars at period end exchange rates. Translation
adjustments are included in accumulated other comprehensive income, a separate
component of stockholders' equity. Transaction gains and losses arising from
transactions denominated in a currency other than the functional currency of the
entity involved, which have been insignificant, are included in the condensed
consolidated statements of operations. To date the Company has entered into no
foreign currency exchange contracts or other such derivative instruments.
Recent Pronouncements
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 131, Disclosures about Segments of an Enterprise and
Related Information. The adoption of this Statement had no material impact on
the Company's net loss or stockholders' equity.
NOTE 2 - BUSINESS COMBINATIONS
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 a wholly-owned subsidiary. IMDB operates a comprehensive
authoritative source of information on movies and entertainment programs 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 common stock and cash. 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 condensed consolidated balance sheets and is being amortized over
two years. The results of operations of the acquired companies are included in
the Company's condensed consolidated financial results beginning on the date of
acquisition.
The pro forma combined condensed consolidated financial information for the nine
months ended September 30, 1998 and 1997, as though the Bookpages, Telebook and
IMDB acquisitions had occurred on January 1 of each year, would have resulted in
net sales of $360.6 million and $86.7 million, net loss of $86.7 million and
$41.9 million, and basic and diluted loss per share of $1.78 and $0.96,
respectively. The pro forma net loss includes amortization of goodwill and other
purchased intangibles of $21.4 million for the nine months ended September 30,
1998 and 1997. This unaudited pro forma combined condensed consolidated
financial information is presented for illustrative purposes only and is not
necessarily indicative of the condensed consolidated results of operations in
future periods or the results that actually would have been realized had
Amazon.com and the acquired companies been a combined company during the
specified periods.
In August 1998, the Company acquired 100 percent of the outstanding capital
stock of Junglee Corp. ("Junglee"). Junglee is a leading provider of advanced
Web-based virtual database technology that can help shoppers find and discover
products on the Internet. The Company issued approximately 1.6 million shares of
common stock and assumed all outstanding options and warrants in connection with
the acquisition of Junglee. The Junglee acquisition was accounted for under the
purchase method of accounting, with substantially all of the approximately $180
million purchase price allocated to goodwill and other purchased intangibles.
The goodwill and substantially all other purchased intangible assets in the
accompanying condensed consolidated balance sheets are being amortized on a
straight-line basis over lives averaging approximately three years. The results
of operations of the acquired company are included in the Company's condensed
consolidated financial results beginning on the date of acquisition.
The pro forma combined condensed consolidated financial information for the nine
months ended September 30, 1998 and 1997, as though the Junglee acquisition had
occurred on January 1 of each year, would have resulted in net sales of $358.7
million and $82.7 million, net loss of $127.0 million and $66.6 million, and
basic and diluted loss per share of $2.54 and $1.51, respectively. The pro forma
net loss includes amortization of goodwill and other purchased intangibles of
$43.8 million for the nine months ended September 30, 1998 and 1997. This
unaudited pro forma combined condensed consolidated financial information is
presented for illustrative purposes only and is not necessarily indicative of
the condensed consolidated results of operations in future periods or the
results that actually would have been realized had Amazon.com and Junglee been a
combined company during the specified periods.
In August 1998, the Company acquired 100 percent of the outstanding capital
stock of Sage Enterprises, Inc. ("PlanetAll"). PlanetAll, based in Boston,
Massachusetts, provides a Web-based address book, calendar and reminder service.
The
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Company issued approximately 800,000 shares of common stock and assumed all
outstanding options in connection with the acquisition of PlanetAll. The
PlanetAll acquisition was accounted for as a pooling of interests and, as a
result, the Company's condensed consolidated financial statements have been
restated for all periods presented. The historical results of the pooled
entities reflect each of their actual operating cost structures and, as a
result, do not necessarily reflect the cost structure of the newly combined
entity. The historical results do not purport to be indicative of results which
may occur in the future.
Net sales for PlanetAll were not significant and net loss was $4.1 million and
$2.0 million for the nine months ended September 30, 1998 and 1997,
respectively. There were no significant intercompany transactions between the
two companies and no significant conforming accounting adjustments.
NOTE 3 - DEBT
In May 1998, the Company completed the offering of approximately $326 million
gross proceeds of the Senior Discount Notes due May 1, 2008. Pursuant
to a registration statement on Form S-4, in September 1998 the Company
completed an exchange offer of 10% Senior Discount Notes due 2008 (the
"Exchange Notes") which are registered under the Securities Act of 1933, as
amended, for all outstanding Senior Discount Notes. The Exchange Notes have
identical terms in all material respects to the terms of the original Senior
Discount Notes, except that the Exchange Notes generally are freely
transferable (the Exchange Notes are referred to throughout these notes to
condensed consolidated financial statements interchangeably with the Senior
Discount Notes). The Exchange Notes were issued under the indenture governing
the original Senior Discount Notes (the "Indenture"). The Senior Discount Notes
were sold at a substantial discount from their principal amount at maturity of
$530 million. Prior to November 1, 2003, no cash interest payments are
required; instead, interest will accrete during this period to the $530 million
aggregate principal amount at maturity. From and after May 1, 2003, the Senior
Discount Notes will bear interest at a rate of 10% per annum payable in cash on
each May 1 and November 1.
The Senior Discount Notes are redeemable, at the option of the Company, in whole
or in part, at any time on or after May 1, 2003, at the redemption prices set
forth in the Indenture, plus accrued interest, if any, to the date of
redemption. 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 (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 indebtedness outstanding as of
December 31, 1997.
NOTE 4 - STOCKHOLDERS' EQUITY
In June 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 condensed consolidated financial statements have been restated to
reflect the split.
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In June 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 - COMPREHENSIVE INCOME (LOSS)
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 established standards for the reporting and
display of comprehensive income and its components in the financial statements.
The adoption of SFAS No. 130 had no impact on the Company's net loss or
stockholders' equity. For the quarter and nine months ended September 30, 1998,
comprehensive loss was $44.5 million and $77.5 million, respectively. The
difference between net loss and comprehensive loss for each period presented is
due to unrealized gains or losses on marketable securities classified as
available-for-sale and foreign currency translation adjustments. The Company had
no comprehensive income items in fiscal year 1997.
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 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 amended by the Company's Current Report on Form
8-K dated August 27, 1998, filed September 11, 1998. 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 and the risks associated with capacity
constraints, systems development, management of growth, acquisitions, 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 Securities and
Exchange Commission (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,
competition 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 September
30, 1998, had an accumulated deficit of $115.6 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
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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 consolidated 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, purchasing, 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 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.
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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 a wholly-owned subsidiary. IMDB operates a comprehensive
authoritative source of information on movies and entertainment programs 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 common stock and cash. The Company issued an
aggregate of approximately 1.1 million shares of common stock to effect the
transactions. The Company will amortize the goodwill resulting from the
acquisitions over two years.
In August 1998, the Company acquired 100 percent of the outstanding capital
stock of Junglee Corp. ("Junglee"). Junglee is a leading provider of advanced
Web-based virtual database technology that can help shoppers find and discover
products on the Internet. The Company issued approximately 1.6 million shares of
common stock and assumed all outstanding options and warrants in connection with
the acquisition of Junglee. The Junglee acquisition was accounted for under the
purchase method of accounting, with substantially all of the approximately $180
million purchase price allocated to goodwill and other purchased intangibles.
The goodwill and substantially all other purchased intangible assets is being
amortized on a straight-line basis over lives averaging approximately three
years.
In August 1998, the Company acquired 100 percent of the outstanding capital
stock of Sage Enterprises, Inc. ("PlanetAll"). PlanetAll, based in Boston,
Massachusetts, provides a Web-based address book, calendar and reminder service.
The Company issued approximately 800,000 shares of common stock and assumed all
outstanding options in connection with the acquisition of PlanetAll. The
PlanetAll acquisition was accounted for as a pooling of interests and, as a
result, the Company's condensed consolidated financial statements have been
restated for all periods presented.
These entities are currently incurring operating losses. The Company intends to
increase spending 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 these entities for
the foreseeable future.
In October 1998, the Company formally entered the European market with the
launch of new stores in Germany and the United Kingdom. Amazon.de and
Amazon.co.uk replaced sites once operated by Telebook in Germany and Bookpages
in the United Kingdom.
PRO FORMA RESULTS OF OPERATIONS
Pro forma information regarding the Company's results excluding merger and
acquisition related costs is as follows:
Quarter Nine Months
Ended Ended
September 30, September 30,
1998 1998
------------- -------------
Pro forma loss from operations ................................... $ (20,994) $ (43,966)
Pro forma net loss ............................................... $ (24,659) $ (52,194)
Pro forma basic and diluted loss per share ....................... $ (0.49) $ (1.07)
Shares used in computation of basic and diluted loss per share ... 50,234 48,700
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RESULTS OF OPERATIONS
Net Sales
Quarter Ended September 30, Nine Months Ended September 30,
----------------------------------------------- ----------------------------------------------
1998 1997 % Change 1998 1997 % Change
------------ ------------ ------------ ------------ ------------ ------------
(in thousands) (in thousands)
Net sales .................... $ 153,698 $ 37,877 306% $ 357,103 $ 81,747 337%
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. Music sales totaled $14.4 million for the quarter ended September 30,
1998. This increase was partially offset by a decrease in prices effected in
June 1997. International sales represented 20% and 26% of net sales for the
quarters ended September 30, 1998 and 1997, respectively, and 21% and 27% of net
sales for the nine months ended September 30, 1998 and 1997, respectively.
Gross Profit
Quarter Ended September 30, Nine Months Ended September 30,
----------------------------------------------- ----------------------------------------------
1998 1997 % Change 1998 1997 % Change
------------ ------------ ------------ ------------ ------------ ------------
(in thousands) (in thousands)
Gross profit............... $ 34,875 $ 7,170 386% $ 80,424 $ 15,905 406%
Gross margin............... 22.7% 18.9% 22.5% 19.5%
Gross profit consists of 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, including increased direct
purchasing from publishers, as well as higher overall shipping margins, which
together more than offset the impact of lower prices and lower music margins.
The Company believes that offering its customers attractive prices is an
essential component of its business strategy. Accordingly, the Company offers
everyday discounts of up to 40% on hundreds of thousands of titles and certain
"special value" editions discounted up to 85%. The Company may in the future
expand or increase the discounts it offers to its customers and may otherwise
alter its pricing structure and policies.
The Company over time intends to expand its operations by promoting new or
complementary products or sales formats and by expanding the breadth and depth
of its product and service offerings. Gross margins attributable to new business
areas may be lower than those associated with the Company's existing business
activities. In particular, in June 1998 the Company launched its new music store
and has announced plans to launch a video store. Music and video gross margins
are lower than book gross margin. To the extent music or video 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 September 30, Nine Months Ended September 30,
----------------------------------------------- ----------------------------------------------
1998 1997 % Change 1998 1997 % Change
------------ ------------ ------------ ------------ ------------ ------------
(in thousands) (in thousands)
Marketing and sales........ $ 37,517 $ 11,516 226% $ 84,522 $ 23,596 258%
Percentage of net sales.... 24.4% 30.4% 23.7% 28.9%
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
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promotional expenditures, increased payroll and related costs associated with
fulfilling customer demand and increased credit card fees resulting from higher
sales, as well as increased marketing and sales activities associated with the
entry into music sales, the launch of new stores in Germany and the United
Kingdom and the acquired entities. 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 primarily on anticipated sales
growth. In addition, the Company intends to increase investments 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 September 30, Nine Months Ended September 30,
----------------------------------------------- ----------------------------------------------
1998 1997 % Change 1998 1997 % Change
------------ ------------ ------------ ------------ ------------ ------------
(in thousands) (in thousands)
Product development........ $ 13,374 $ 3,998 235% $ 29,526 $ 8,650 241%
Percentage of net sales.... 8.7% 10.6% 8.3% 10.6%
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. Such increases included investments associated with the entry
into music sales, the launch of new stores in Germany and the United Kingdom and
operating expenses associated with the acquired entities. Product development
expenses decreased as a percentage of net sales due to the significant increase
in net sales. To date, 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, as well as product
development activities of Junglee and PlanetAll. As a result, the Company
expects product development expenses to increase significantly in absolute
dollars.
General and Administrative
Quarter Ended September 30, Nine Months Ended September 30,
----------------------------------------------- ----------------------------------------------
1998 1997 % Change 1998 1997 % Change
------------ ------------ ------------ ------------ ------------ ------------
(in thousands) (in thousands)
General and administrative.. $ 4,978 $ 1,972 152% $ 10,342 $ 4,930 110%
Percentage of net sales..... 3.2% 5.2% 2.9% 6.0%
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 acquired entities, and legal and other professional fees related to the
Company's growth, international expansion 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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Merger and Acquisition Related Costs
Quarter Ended September 30, Nine Months Ended September 30,
----------------------------------------------- ----------------------------------------------
1998 1997 % Change 1998 1997 % Change
------------ ------------ ------------ ------------ ------------ ------------
Merger and acquisition (in thousands) (in thousands)
related costs.............. $ 20,512 - N/A $ 25,925 - N/A
Percentage of net sales.... 13.3% - 7.3% -
Merger and acquisition related costs primarily consist of amortization of
goodwill and other purchased intangibles incurred in connection with the
Company's April 1998 acquisitions of Bookpages, Telebook and IMDB and the August
1998 acquisition of Junglee. See " - Recent Events." Each of these acquisitions
was accounted for under the purchase method of accounting. The Company
anticipates that future amortization associated with these four acquisitions
will increase net loss by approximately $22 million per quarter until March 2000
and approximately $15 million thereafter until the related goodwill and other
purchased intangibles are fully amortized. Any subsequent acquisitions or
impairment of goodwill and other purchased intangibles could result in
additional merger and acquisition related costs.
Interest Income and Expense
Quarter Ended September 30, Nine Months Ended September 30,
----------------------------------------------- ----------------------------------------------
1998 1997 % Change 1998 1997 % Change
------------ ------------ ------------ ------------ ------------ ------------
(in thousands) (in thousands)
Interest income............ $ 4,754 $ 688 591% $ 9,789 $ 1,118 776%
Interest expense........... (8,419) (19) N/A (18,017) (59) 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 period May 1998 to September 1998 includes interest and amortization of
deferred charges related to the Company's Senior Discount Notes (as defined
below). Interest expense for the nine months ended September 30, 1998 also
includes 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"), as well as 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) and potentially increased financing of asset acquisitions through loans
and capital leases.
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 September 30, 1998, the Company's cash was $14.9 million, compared to $1.9
million at December 31, 1997. Marketable securities balances, which include
highly liquid investments with maturities of three months or less, were $322.4
million and $123.5 million at September 30, 1998 and December 31, 1997,
respectively.
Net cash used in operating activities of $7.7 million for the nine months ended
September 30, 1998 was primarily attributable to the net loss and increases in
inventories and prepaid expenses and other, largely offset by noncash expenses
and increases in accounts payable, accrued advertising and other liabilities and
accrued expenses. For the nine months ended September 30, 1997, cash used in
operating activities was $5.5 million and resulted primarily from the net loss
and increases in
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inventories and prepaid expenses and other, largely offset by increases in
accounts payable and other liabilities and accrued expenses, as well as noncash
expenses.
Net cash used in investing activities was $231.1 million for the nine months
ended September 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 nine months ended September 30, 1997, net cash
used in investing activities was $46.0 million and consisted of purchases of
marketable securities and fixed assets, partially offset by maturities of
marketable securities.
Net cash provided by financing activities of $252.1 million for the nine months
ended September 30, 1998 resulted from net proceeds of $318.2 million from the
Senior Discount Notes (as defined below) offering, PlanetAll's issuance of
capital stock for net proceeds of approximately $8.4 million and proceeds from
the exercise of stock options of $3.0 million, partially offset by the repayment
of the Senior Loan. Net cash provided by financing activities of $52.3 million
for the nine months ended September 30, 1997 resulted primarily from net
proceeds from the Company's initial public offering and proceeds from
PlanetAll's issuance of capital stock.
As of September 30, 1998, the Company's principal sources of liquidity consisted
of $14.9 million of cash and $322.4 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.
In August 1998, the Company entered into a long-term headquarters lease which
will result in increased lease obligations commencing in the second quarter of
1999 and significant leasehold improvement expenditures. 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.
In May 1998, the Company completed the offering of approximately $326 million
gross proceeds of the Senior Discount Notes due May 1, 2008 ("Senior Discount
Notes"). Pursuant to a registration statement on Form S-4, in September 1998 the
Company completed an exchange offer of 10% Senior Discount Notes due 2008 (the
"Exchange Notes") which are registered under the Securities Act of 1933, as
amended (the "Securities Act"), for all outstanding Senior Discount Notes. The
Exchange Notes have identical terms in all material respects to the terms of the
original Senior Discount Notes, except that the Exchange Notes generally are
freely transferable (the Exchange Notes are referred to throughout this
Quarterly Report interchangeably with the Senior Discount Notes). The Exchange
Notes were issued under the indenture governing the original Senior Discount
Notes (the "Indenture"). The Senior Discount Notes were sold at a substantial
discount from their principal amount at maturity of $530 million. Prior to
November 1, 2003, no cash interest payments are required; instead, interest will
accrete during this period to the $530 million aggregate principal amount at
maturity. From and after May 1, 2003, the Senior Discount Notes will bear
interest at 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, 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
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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
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 indebtedness outstanding as of
December 31, 1997. 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, video
and other 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.
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 amended by the
Company's Current Report on Form 8-K dated August 27, 1998, filed September 11,
1998, 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, music and video
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. ("Barnes & Noble"), Bertelsmann AG ("Bertelsmann") 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. The Company anticipates that as the online commerce market continues
to grow other companies may enter into business combinations or alliances in
order to strengthen their competitive positions. For example, (i) Bertelsmann
recently announced that it purchased a fifty percent interest in Barnes &
Noble's online venture, barnesandnoble.com inc. and intends to launch online
stores in several countries, (ii) Barnes & Noble recently announced the pending
acquisition of Ingram Book Group ("Ingram"), and (iii) online music retailers
CDnow, Inc. and N2K Inc. recently announced that they agreed to merge. 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 permit
customers to quickly compare the Company's prices with those of its competitors.
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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 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 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 and has announced plans to launch a video store.
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 in October
1998 formally entered the European market with the launch of new stores in
Germany and the United Kingdom. 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,
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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. The Company expects that as the
international online commerce market continues to grow other companies may enter
into business combinations or alliances in order to strengthen their competitive
positions and that competition in the international online commerce market will
intensify. For example Bertelsmann recently announced that it intends to launch
online stores in several countries. 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 affect 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 in such areas as content,
privacy, 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
Bookpages, Telebook and IMDB and the August acquisitions of Junglee and
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 other 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.
To remain competitive, the Company must continue to enhance and improve the
responsiveness, functionality and features of the Amazon.com online store. The
Internet and the online commerce industry are characterized by rapid
technological change, changes in user and customer requirements and preferences,
frequent new products and service introductions embodying new technologies and
the emergence of new industry standards and practices that could render the
Company's existing Web site and proprietary technology and systems obsolete. The
Company's success will depend, in part, on its ability to license leading
technologies useful in its business, enhance its existing services, develop new
services and technology that address the increasingly sophisticated and varied
needs of its prospective customers and respond to technological advances and
emerging industry standards and practices on a cost-effective and timely basis.
The development of a Web site and other proprietary technology entails
significant technical, financial and business risks. There can be no assurance
that the Company will successfully implement new technologies or adapt its Web
site, proprietary technology and transaction-processing systems to customer
requirements or emerging industry standards. If the Company is unable, for
technical, legal, financial or other reasons, to adapt in a timely manner in
response to changing market conditions or customer requirements, such inability
could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.
The Company's performance is substantially dependent on the continued services
and on the performance of its senior management and other key personnel,
particularly Jeffrey P. Bezos, its President, Chief Executive Officer and
Chairman of the Board. The Company does not have long-term employment agreements
with any of its key personnel and maintains no "key person" life insurance
policies. The loss of the services of its executive officers or other key
employees could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
The Company purchases a majority of its products from two major vendors, Ingram
and Baker & Taylor, Inc. Barnes & Noble recently announced an agreement to
purchase Ingram. Ingram is the Company's single largest supplier and accounted
for 58% and 59% of the Company's inventory purchases in 1997 and 1996,
respectively. During 1998 the Company has continued to purchase a majority of
its products from these suppliers with Ingram remaining the single largest
supplier. In addition, during 1998 the Company increased direct purchasing from
publishers (see "- Results of Operations") and intends to continue to do so in
future periods. The Company does not have long-term contracts or arrangements
with most of its vendors guaranteeing the availability of merchandise, the
continuation of particular payment terms or the extension of credit limits.
There can be no assurance that the Company's current vendors will continue to
sell merchandise to the Company on current terms or that the Company will be
able to establish new or extend current vendor relationships to ensure
acquisition
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of merchandise in a timely and efficient manner and on acceptable commercial
terms. If the Company were unable to develop and maintain relationships with
vendors that would allow it to obtain sufficient quantities of merchandise on
acceptable commercial terms, such inability could 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 asset 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 Company currently holds various Web domain names relating to its brand,
including the "Amazon.com" domain name. The acquisition and maintenance of
domain names generally is regulated by governmental agencies and their
designees. For example, in the United States, the National Science Foundation
has appointed Network Solutions, Inc. as the current exclusive registrar for the
".com," ".net" and ".org" generic top-level domains. The regulation of domain
names in the United States and in foreign countries is subject to change in the
near future. Such changes in the United States are expected to include a
transition from the current system to a system which is controlled by a
non-profit corporation and the creation of additional top-level domains.
Governing bodies may establish additional top-level domains, appoint additional
domain name registrars or modify the requirements for holding domain names. As a
result, there can be no assurance that the Company will be able to acquire or
maintain relevant domain names in all countries in which it conducts business.
Furthermore, the relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear. The
Company, therefore, may be unable to prevent third parties from acquiring domain
names that are similar to, infringe upon or otherwise decrease the value of its
trademarks and other proprietary rights. Any such inability could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.
The Company is not currently subject to direct regulation by any domestic or
foreign governmental agency, other than regulations applicable to businesses
generally and laws or regulations directly applicable to access to online
commerce. However, due to the increasing popularity and use of the Internet and
other online services, it is possible that a number of laws and regulations may
be adopted with respect to the Internet or other online services covering issues
such as user privacy, pricing, content, copyrights, distribution and
characteristics and quality of products and services. Furthermore, the growth
and development of the market for online commerce may prompt calls for more
stringent consumer protection laws that may impose additional burdens on those
companies conducting business online. The adoption of any additional laws or
regulations may decrease the growth of the Internet or other online services,
which could, in turn, decrease the demand for the Company's products and
services and increase the Company's cost of doing business, or otherwise have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. Moreover, the applicability to the Internet
and other online services of existing laws in various jurisdictions governing
issues such as property ownership, sales and other taxes, libel and personal
privacy is uncertain and may take years to resolve. Any such new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to the Company's business, or the application of
existing laws and regulations to the Internet and other online services could
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations.
The Company has never paid cash dividends on its common stock. The Company's
Board of Directors will determine future dividend policy based on the Company's
results of operations, financial condition, capital requirements and other
circumstances. The Indenture relating to the Senior Discount Notes, prohibits
the Company from paying cash dividends on its capital stock, subject to certain
exceptions. It is not anticipated that any cash dividends will be paid on the
common stock in the foreseeable future.
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The Company has developed a plan to modify its information technology to
recognize the Year 2000 and has, to the extent necessary, begun converting its
critical data processing systems. Since the Company's systems and software are
relatively new, management does not expect Year 2000 issues related to its own
internal systems to be significant and does not anticipate that it will incur
significant operating expenses or be required to invest heavily in computer
systems improvements to be Year 2000 compliant. The Company has initiated formal
communications with certain of its significant suppliers and service providers
to determine the extent to which the Company's interface systems may be
vulnerable should those third parties fail to address and correct their own Year
2000 issues. The Company currently expects the project to be completed in the
third quarter of 1999. There can be no guarantee that the systems of suppliers
or other companies on which the Company relies will be converted in a timely
manner and will not have a material adverse effect on the Company's systems.
Additionally, there can be no guarantee that the computer systems necessary to
maintain the viability of the Internet or any of the Web sites that direct
consumers to the Company's online store will be Year 2000 compliant. As part of
the Company's overall Year 2000 compliance plan, the Company intends to monitor
systems performance and plans to develop a rapid response program in the event
of any significant disruption as a result of the Year 2000 issues. To date the
Company has not developed a formal contingency plan. The Company believes it is
taking the steps necessary regarding Year 2000 compliance with respect to
matters within its control. However, no assurance can be given that the
Company's systems will be made Year 2000 compliant in a timely manner or that
the Year 2000 problem will not have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
The trading price of the common stock is subject to wide fluctuations. For
example, during the quarter ended September 30, 1998, the reported closing price
of the common stock on Nasdaq was as high as $139.50 and as low as $73.00 per
share (as adjusted for the Company's 2-for-1 stock split effected June 1, 1998).
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, music or other
product 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 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 filed a lawsuit in
the United States District Court for the Southern District of New York against
the Company, Barnes & Noble, Borders Group, Inc. and others alleging antitrust,
unfair competition and related claims under the Robinson-Patman Act, the Clayton
Act, the Donnelly Act and other New York state statutes and common law. As
originally filed the lawsuit sought class action certification, for certain
purposes, of a class comprised of independent retail booksellers. The complaint
was recently amended to drop the class action allegations and certain claims. A
claim for unfair competition was added. The plaintiffs request the following
relief: actual damages of approximately $11,250,000, treble damages, injunctive
relief, punitive damages, prejudgment and post-judgment interest, attorney' fees
and costs. The Company believes the lawsuit is without merit and intends to
defend against the plaintiffs' claims vigorously.
On October 16, 1998, Wal-Mart Stores, Inc. ("Wal-Mart") filed a lawsuit against
the Company, Kleiner Perkins Caufield & Byers, LLP, Richard Dalzell and
Drugstore.com, Inc. in the Chancery Court of Benton County, Arkansas. The First
Amended Complaint alleges that the defendants have or will inevitably
misappropriate Wal-Mart's trade secrets and asserts claims for violation of the
Arkansas Trade Secrets Act, the Arkansas Unfair Trade Practices Act, conspiracy,
unjust enrichment, tortious interference with business relations and other
common law claims. Wal-Mart's prayer for relief seeks entry of a temporary
restraining order, permanent injunctive relief, an accounting, compensatory
damages, pre-judgment and post-judgment interest, attorneys' fees and costs. The
Company was only recently served with the First Amended Complaint and has not as
of the date hereof prepared a formal answer. However, the Company believes the
lawsuit is without merit and intends to defend against Wal-Mart's claims
vigorously.
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Wal-Mart has filed a petition for a temporary restraining order. A hearing on
the petition was held on November 2, 1998 and thereafter postponed by order of
the Court, until December 2, 1998.
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
Changes in Securities
On May 8, 1998, the Company completed the offering of approximately $326 million
gross proceeds of the Senior Discount Notes. Pursuant to a registration
statement on Form S-4, on September 21, 1998 the Company completed an exchange
offer of the Exchange Notes which are registered under the Securities Act, for
all outstanding Senior Discount Notes. The Exchange Notes have identical terms
in all material respects to the terms of the original Senior Discount Notes,
except that the Exchange Notes generally are freely transferable. The Exchange
Notes were issued under the Indenture.
Unregistered Issuances of Securities
The Company issued 2,377,463 shares of common stock of Amazon.com, as follows:
(i) on August 12, 1998 in connection with the acquisition of the outstanding
capital stock of Junglee, and (ii) on August 27, 1998 in connection with the
acquisition of the outstanding capital stock of PlanetAll. No underwriters were
used and the recipients of the Company's common stock were the shareholders of
the acquired companies. The shares of common stock issued in the Junglee and
PlanetAll acquisitions were issued in reliance upon an exemption from the
registration requirements of the Securities Act provided, in each case, by Rule
506 of Regulation D thereof. The shareholders of the acquired companies made
certain representations to the Company as to investment intent, that they
possessed a sufficient level of financial sophistication and that they received
information about the Company. The shares issued in the transactions were
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. Subsequent to the fiscal period, the
Company registered such shares for resale on a registration statement on Form
S-3 declared effective by the SEC on October 22, 1998.
Use of Proceeds
The Company's registration statement (No. 333-23795) under the Securities Act
for its initial public offering (the "Registration Statement") was declared
effective by the SEC on May 14, 1997. Offering proceeds, net of aggregate
expenses of approximately $4.9 million, were $49.1 million. The Company used the
net proceeds of $49.1 million as follows: 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 acquisitions of businesses; and,
approximately $18.8 million for the purchase or installation of machinery and
equipment. The Company did not use any of the net offering proceeds for
construction of a plant, building or facilities, purchases of real estate, or
repayment of indebtedness. In addition, 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
None
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ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Lease Agreement, dated August 31, 1998, by and between Amazon.com,
Inc. and WRC.COM TOWER LLC.
27 Financial Data Schedule.
(b) Reports on Form 8-K
On August 7, 1998, the Company filed a Form 8-K under Item 5 announcing
that the Company entered into definitive agreements to acquire Junglee and
PlanetAll.
On August 27, 1998, the Company filed a Form 8-K under Items 2 and 7
regarding the completion of the Junglee acquisition.
On September 11, 1998, the Company filed a Form 8-K under Items 2 and 7
regarding the completion of the PlanetAll acquisition, which included a
restatement of the Company's condensed consolidated financial statements
to reflect the acquisition of PlanetAll which was accounted for as a
pooling of interests.
On October 26, 1998, the Company filed a Form 8-K/A under Item 7 amending
certain financial statements, exhibits and other portions of its Current
Report on Form 8-K filed August 27, 1998, relating to the completion of
the Junglee acquisition.
On October 28, 1998, the Company filed a Form 8-K under Item 5 announcing
the Company's financial results for the third quarter of 1998.
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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: November 13, 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
- -------------- --------------------------------------------------------------
10.1 Lease Agreement, dated August 31, 1998, by and between
Amazon.com, Inc. and WRC.COM TOWER LLC.
27 Financial Data Schedule.
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