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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 MARCH 31, 1999 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, 4th Floor, 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 [ ]
161,562,425 shares of $0.01 par value common stock outstanding as of April 30,
1999 (after adjusting for the three-for-one stock split payable on January 4,
1999)
Page 1 of 26
Exhibit Index on Page 26
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AMAZON.COM, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
Exhibit Index 26
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMAZON.COM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ---------------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
1999 1998
- ---------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Current assets:
Cash ............................................................... $ 5,248 $ 25,561
Marketable securities .............................................. 1,437,717 347,884
Inventories ........................................................ 45,236 29,501
Prepaid expenses and other ......................................... 37,077 21,308
------------ ------------
Total current assets ....................................... 1,525,278 424,254
Fixed assets, net .................................................... 60,600 29,791
Goodwill and other, net .............................................. 187,194 187,003
Deferred charges ..................................................... 39,912 7,412
------------ ------------
Total assets ............................................ $ 1,812,984 $ 648,460
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 133,018 $ 113,273
Accrued advertising ................................................ 16,187 13,071
Other liabilities and accrued expenses ............................. 45,194 34,423
Current portion of long-term debt and capital lease obligation ..... 7,186 808
------------ ------------
Total current liabilities .................................. 201,585 161,575
Long-term debt and capital lease obligation .......................... 1,533,862 348,140
Stockholders' equity:
Preferred stock, $0.01 par value:
Authorized shares -- 10,000
Issued and outstanding shares -- none ........................... -- --
Common stock, $0.01 par value:
Authorized shares -- 300,000
Issued and outstanding shares --161,371 and 159,267
shares at March 31, 1999 and December 31, 1998, respectively .. 1,614 1,593
Additional paid-in capital ......................................... 306,414 300,130
Note receivable from officer for common stock ...................... (1,099) (1,099)
Deferred compensation .............................................. (1,275) (1,625)
Accumulated other comprehensive income (loss) ...................... (4,390) 1,806
Accumulated deficit ................................................ (223,727) (162,060)
------------ ------------
Total stockholders' equity ................................. 77,537 138,745
------------ ------------
Total liabilities and stockholders' equity .............. $ 1,812,984 $ 648,460
============ ============
See accompanying notes to consolidated financial statements.
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AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------
QUARTER ENDED
MARCH 31,
--------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Net sales ................................................................... $ 293,643 $ 87,361
Cost of sales ............................................................... 228,852 68,063
------------ ------------
Gross profit ................................................................ 64,791 19,298
Operating expenses:
Marketing and sales ...................................................... 60,744 19,914
Product development ...................................................... 23,477 7,320
General and administrative ............................................... 11,165 2,049
Merger and acquisition related costs, including amortization of goodwill
and other purchased intangibles ........................................ 25,309 --
------------ ------------
Total operating expenses ............................................... 120,695 29,283
Loss from operations ........................................................ (55,904) (9,985)
Interest income ............................................................. 10,925 1,645
Interest expense ............................................................ (16,688) (2,029)
------------ ------------
Net interest expense ................................................... (5,763) (384)
------------ ------------
Net loss .................................................................... $ (61,667) $ (10,369)
============ ============
Basic and diluted loss per share ............................................ $ (0.39) $ (0.07)
============ ============
Shares used in computation of basic and diluted
loss per share ........................................................... 156,897 141,318
============ ============
See accompanying notes to consolidated financial statements.
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AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDED
MARCH 31,
----------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net loss ........................................................................ $ (61,667) $ (10,369)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............................................... 5,223 1,841
Amortization of deferred compensation related to stock options .............. 115 185
Non-cash merger and acquisition related costs, including amortization of
goodwill and other purchased intangibles ................................. 25,218 --
Loss on sale of marketable securities ....................................... 4,190 --
Non-cash interest expense ................................................... 7,468 --
Changes in operating assets and liabilities:
Inventories .............................................................. (15,735) (2,703)
Prepaid expenses and other ............................................... (14,423) (1,122)
Other non-current assets ................................................. (1,161) (127)
Accounts payable ......................................................... 19,745 1,582
Accrued advertising ...................................................... 3,116 1,895
Other liabilities and accrued expenses ................................... 10,717 1,547
------------ ------------
Net cash used in operating activities ................................. (17,194) (7,271)
INVESTING ACTIVITIES:
Sales and maturities of marketable securities ................................... 1,217,942 4,500
Purchases of marketable securities .............................................. (2,342,230) (7,499)
Purchases of fixed assets ....................................................... (19,062) (2,163)
------------ ------------
Net cash used in investing activities ................................. (1,143,350) (5,162)
FINANCING ACTIVITIES:
Proceeds from issuance of capital stock and exercise of stock options ........... 6,540 1,415
Proceeds from long-term debt .................................................... 1,250,000 --
Repayment of long-term debt ..................................................... (81,249) --
Financing costs ................................................................. (34,900) --
------------ ------------
Net cash provided by financing activities ............................. 1,140,391 1,415
Effect of exchange rate changes ...................................................... (160) --
------------ ------------
Net decrease in cash ................................................................. (20,313) (11,018)
Cash at beginning of period .......................................................... 25,561 110,119
------------ ------------
Cash at end of period ................................................................ $ 5,248 $ 99,101
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Fixed assets acquired under capital lease ............................................ $ 14,594 $ --
Fixed assets acquired under financing agreement ...................................... 4,421 --
See accompanying notes to consolidated financial statements.
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AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ACCOUNTING POLICIES
Unaudited Interim Financial Information
The financial statements as of March 31, 1999 and 1998 have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). These statements are unaudited and, in the opinion of
management, include all adjustments (consisting of normal recurring adjustments
and accruals) necessary to present fairly the results for the periods presented.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to such SEC rules and
regulations. Operating results for the quarter ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. These financial statements should be read in conjunction with
the audited financial statements and the accompanying notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
Certain prior period balances have been reclassified to conform to the current
period presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Comprehensive Loss
As of January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income, which establishes standards for the reporting and display of
comprehensive loss and its components in the financial statements. Comprehensive
loss was $67.9 million for the three-month period ended March 31, 1999, which
consisted of net loss, unrealized gains and losses on marketable securities and
foreign currency translation adjustments; and $10.4 million for the three-month
period ended March 31, 1998, which consisted of net loss.
NOTE 2 - LONG-TERM DEBT
Convertible Subordinated Notes
On February 3, 1999, Amazon.com completed the offering of $1.25 billion
aggregate principal amount of 4 3/4% Convertible Subordinated Notes
("Convertible Notes") due 2009. Interest is payable in arrears in cash
semi-annually on February 1 and August 1 of each year, commencing August 1,
1999. Holders of the Convertible Notes may convert any portion of a note, in
multiples of $1,000, into common stock of Amazon.com at an initial conversion
price of $156.055 per share. The Convertible Notes are unsecured general
obligations of the Company and are subordinated to the prior payment in full of
all of Amazon.com's senior debt and are also effectively subordinated to all
indebtedness and other liabilities.
Senior Discount Notes
During the quarter, the Company repurchased $126.0 million (face amount) of its
10% Senior Discount Notes (the "Senior Discount Notes"), representing accreted
value of $83.9 million. The Senior Discount Notes, which are due in May 2008,
were issued in May 1998. As of March 31, 1999, the remaining face amount
outstanding was $404 million.
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NOTE 3 - DEFERRED CHARGES
Deferred charges associated with the issuance of the Senior Discount Notes
(see Note 2) are amortized into interest expense over the life of the
Senior Discount Notes.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Legal Proceedings
In October 1998, Wal-Mart Stores, Inc. ("Wal-Mart") filed a lawsuit in
Bentonville, Arkansas against the Company and other defendants alleging actual
and threatened misappropriation of trade secrets and ancillary common-law
claims. In January 1999, Wal-Mart filed an identical action in Seattle,
Washington, and the Arkansas action was dismissed. The parties settled the
pending action without payment by either party on April 2, 1999.
On April 7, 1999, Amazon Bookstore, Inc. ("AB") filed a lawsuit in Minneapolis,
Minnesota against the Company alleging trademark infringement and unfair
competition under state and federal law. AB does not have a federal registration
and is attempting to obtain cancellation of the Company's registration of the
marks Amazon.com, Amazon.com Books and Amazon Books, injunctive relief
precluding the Company's use of these marks, damages, the Company's profits,
treble damages, costs and attorneys' fees. The Company is assessing the
claim.
From time to time, the Company is subject to other legal proceedings and claims
in the ordinary course of business, including employment related claims and
claims of alleged infringement of trademarks, copyrights and other intellectual
property rights. The Company currently is not aware of any such legal
proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its business, prospects, financial
condition and operating results.
NOTE 5 - STOCKHOLDERS' EQUITY
On June 1, 1998, the Company effected a two-for-one stock split to stockholders
of record on May 20, 1998, and on January 4, 1999, effected a three-for-one
stock split to stockholders of record on December 18, 1998. Both stock splits
were effected in the form of a stock dividend. The accompanying consolidated
financial statements have been restated to reflect the splits.
The Convertible Notes may be converted into, in the aggregate, 8,009,996 shares
of Amazon.com common stock.
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NOTE 6 - EARNINGS (LOSS) PER SHARE
The following represents the calculations for net loss per share:
QUARTER ENDED MARCH 31,
--------------------------------------
1999 1998
------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net loss - as reported ................ $ (61,667) $ (10,369)
============ ============
Weighted average shares outstanding ... 160,360 145,889
Weighted average common shares issued
subject to repurchase agreements .. (3,463) (4,571)
------------ ------------
Shares used in computation of basic and
diluted loss per share ............ 156,897 141,318
============ ============
Basic and diluted loss per share ...... $ (0.39) $ (0.07)
============ ============
All of the Company's stock options are excluded from diluted loss per share
since their effect is antidilutive.
NOTE 7 - SUBSEQUENT EVENTS
On April 12, 1999, the Company announced that it agreed to acquire LiveBid.com,
Inc., which provides the technology and ability to conduct live, event-based
auctions on the Internet.
On April 26, 1999, the Company announced that it agreed to acquire three
Internet companies: e-Niche Incorporated ("Exchange.com"), Accept.com and Alexa
Internet. Exchange.com operates Bibliofind and MusicFile, on-line marketplaces
for rare books and music and music memorabilia. Accept.com develops technology
aimed at simplifying person-to-person and business-to-consumer e-commerce
transactions. Alexa Internet offers a Web navigation service which enhances the
usability of Internet browsers. Consideration for these acquisitions totaled
approximately $645 million and was comprised mostly of common stock.
All four acquisitions will be accounted for under the purchase accounting
method. All acquisitions are expected to close in the second quarter, subject to
customary closing conditions, including clearance under the Hart-Scott Rodino
Antitrust Improvements Act and approval by shareholders of the acquired
companies.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition and
Results of Operations" includes "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. This Act provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about themselves so long as they identify these
statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact we
make in this Form 10-Q are forward-looking. In particular, the statements herein
regarding industry prospects and our future results of operations or financial
position are forward-looking statements. Forward-looking statements reflect our
current expectations and are inherently uncertain. Our actual results may differ
significantly from our expectations. The section entitled "Additional Factors
That May Affect Future Results" describes some, but not all, of the factors that
could cause these differences.
OVERVIEW
Amazon.com, Inc. ("Amazon.com" or the "Company") is the Internet's number one
book, music and video retailer. Amazon.com, one of the most widely known, used
and cited commerce sites on the Web, offers more than 4.7 million book, music
CD, video, DVD, computer game and other titles, and a free electronic greeting
card service. The Company also provides a community of on-line shoppers an easy
and safe way to purchase and sell a large selection of products through
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Amazon.com Auctions. Amazon.com is a proven technology leader; it has developed
electronic commerce innovations such as 1-Click ordering, personalized shopping
services and easy-to-use search and browse features.
The Company is expanding and enhancing the customer shopping experience by
actively investing in emerging internet technologies and markets through
internal development, acquisitions and investments.
RECENT EVENTS
During the quarter, the Company launched Amazon.com Auctions. New product
offerings and other lines of business generally result in incremental increases
in headcount and related costs, as well as technology and related infrastructure
costs.
A new distribution center was leased and opened in Nevada during the
quarter. Subsequent to March 31, 1999, the Company leased distribution centers
and is entering into leases for additional facilities. Expansion of the
Company's distribution center network has and will require it to commit to
lease obligations, stock inventories, purchase fixed assets and install
leasehold improvements.
The Company has been active in investing in or acquiring companies that have
strategic and complementary technologies and product offerings. Subsequent to
March, 31, 1999, the Company announced the planned acquisitions of e-Niche
Incorporated ("Exchange.com"), Accept.com, and Alexa Internet. These and any
additional acquisitions and investments will result in increased on-going
headcount and operating costs.
RESULTS OF OPERATIONS
Net Sales
Quarter Ended March 31,
-------------------------
1999 1998 % Change
------------ ------- --------
(in thousands)
Net sales.......................................................... $293,643 $87,361 236%
Net sales include the selling price of books, music, video and other products
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, repeat purchases from the
Company's existing customers, and the introduction of music and video product
offerings during the second half of 1998. The Company's approximately 2.3
million cumulative customer accounts, as of March 31, 1998, grew 265% to 8.4
million accounts as of March 31, 1999. Repeat customers represented 66% of the
orders placed during the quarter ended March 31, 1999. The Company launched
Amazon.co.uk in the United Kingdom, and amazon.de in Germany in the fourth
quarter of 1998.
International sales, including export sales from the United States, represented
22% and 21% of net sales for the quarters ended March 31, 1999 and 1998,
respectively.
The Company launched Amazon.com Auctions late in the quarter ended March 31,
1999. Revenue related to auction services was minimal.
Gross Profit
Quarter Ended March 31,
------------------------
1999 1998 % Change
---------- -------- --------
(in thousands)
Gross profit........................................................ $64,791 $19,298 236%
Gross margin........................................................ 22.1% 22.1%
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Gross profit is net 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. Improved book margins were offset by the addition of lower margin music
and video titles, leaving gross margin unchanged from the quarter ended March
31, 1998.
The Company believes that offering its customers attractive prices is an
essential component of its business strategy. Accordingly, the Company offers
20% and 30% discounts on hundreds of thousands of titles, with featured titles
discounted at 40% or more and certain "special value" editions discounted up to
89%. The Company may in the future expand or increase the discounts it offers to
its customers and may otherwise alter its pricing structure and policies.
The Company over time intends to expand its operations by promoting new or
complementary products or sales formats and by expanding the breadth and depth
of its product or service offerings. Gross margins attributable to new business
areas may be lower than those associated with the Company's existing business
activities.
Marketing and Sales
Quarter Ended March 31,
-------------------------
1999 1998 % Change
---------- ---------- --------
(in thousands)
Marketing and sales................................................. $60,744 $19,914 205%
Percentage of net sales............................................. 20.7% 22.8%
Marketing and sales expenses consist primarily of fulfillment costs and
advertising, public relations and promotional expenditures, and include 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 and customer service centers, are
included in marketing and sales. Marketing and sales expenses increased, in
absolute dollars, primarily due to increases in the Company's advertising and
promotional expenditures, increased payroll and related costs associated with
fulfilling customer demand, increased facilities costs associated with increased
distribution capacity and increased credit card merchant fees resulting from
higher sales. Such expenses decreased as a percentage of net sales due to the
significant increase in net sales. The Company intends to continue to pursue its
branding and marketing campaign and to expand its distribution network through
the addition of highly automated regional and international distribution centers
in anticipation of sales growth. Increases in sales will drive increases in
fulfillment costs. As a result, the Company expects marketing and sales expenses
to increase significantly in absolute dollars.
Product Development
Quarter Ended March 31,
-------------------------
1999 1998 % Change
---------- ---------- --------
(in thousands)
Product development................................................. $23,477 $ 7,320 221%
Percentage of net sales............................................. 8.0% 8.4%
Product development expenses consist principally of payroll and related expenses
for development, editorial, systems and telecommunications operations personnel
and consultants, systems and telecommunications infrastructure, and costs of
acquired content. The absolute dollar increase in product development expenses
was primarily attributable to increased staffing and associated costs related
to enhancing the features, content and functionality of the Company's Web site
and transaction-processing systems, as well as increased investment in systems
and telecommunications infrastructure. Such expenses decreased 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 stores and
infrastructure, the Company intends to increase investments in product,
service and international expansion. As a result, the Company expects product
development expenses to increase significantly in absolute dollars.
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General and Administrative
Quarter Ended March 31,
-------------------------
1999 1998 % Change
---------- ---------- --------
(in thousands)
General and administrative......................................... $11,165 $2,049 445%
Percentage of net sales............................................ 3.8% 2.3%
General and administrative expenses consist of payroll and related expenses for
executive, accounting and administrative personnel, recruiting, professional
fees and other general corporate expenses. The increase in general and
administrative expenses was primarily due to increased staffing and associated
costs, legal and professional fees, facilities and other related costs. 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,
service and international expansion.
Merger and Acquisition Related Costs, Including Amortization
of Goodwill and Other Purchased Intangibles Quarter Ended March 31,
-------------------------
1999 1998 % Change
---------- ---------- --------
(in thousands)
Merger and acquisition related costs, including amortization of
goodwill and other purchased intangibles........................ $25,309 -- --
Percentage of net sales......................................... 8.6% -- --
Merger and acquisition related costs consist of amortization of goodwill and
other purchased intangibles, equity in loss of investees, and certain
non-recurring merger and acquisition related costs. The increase in these costs
is largely the result of acquisition and investment related activity occurring
in the latter half of 1998. It is likely that the Company will continue to
expand its business through acquisitions and investments. Subsequent to March
31, 1999, the Company announced plans to acquire Exchange.com, Accept.com and
Alexa Internet. If these transactions close as planned, merger and acquisition
related costs will increase as a result of related goodwill amortization. Any
additional acquisitions or impairment of goodwill and other purchased
intangibles, as well as equity in losses of equity investees, could result in
additional merger and acquisition related costs.
Interest Income and Expense
Quarter Ended March 31,
-------------------------
1999 1998 % Change
---------- ---------- --------
(in thousands)
Interest income................................................. $10,925 $ 1,645 564%
Interest expense................................................ (16,688) (2,029) 722%
Interest income on cash and marketable securities increased due to higher
balances resulting from the Company's financing activities, principally the
February 1999 issuance of $1.25 billion aggregate principal amount of 4 3/4%
Convertible Subordinated Notes ("Convertible Notes"). Interest expense for the
quarter ended March 31, 1999 consists primarily of interest on the Convertible
Notes and Senior Discount Notes, the amortization of deferred charges related to
the Senior Discount Notes and interest on asset acquisitions financed through
loans and capital leases. Interest income and expense are expected to increase
because subsequent quarters will include a full three months of interest expense
for the Convertible Notes and interest income on related proceeds.
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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.
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PRO FORMA RESULTS OF OPERATIONS
Pro forma information regarding the Company's results, excluding merger and
acquisition related costs (discussed above) are presented for informational
purposes and are not in accordance with generally accepted accounting
principles.
Quarter Ended March 31,
-----------------------------
1999 1998
-----------------------------
(in thousands, except
per share data)
Pro forma loss from operations, excluding merger and acquisition related costs $ (30,595) $ (9,985)
=============================
Pro forma net loss, excluding merger and acquisition related costs $ (36,358) $ (10,369)
=============================
Pro forma basic and diluted loss per share, excluding merger and acquisition related costs $ (0.23) (0.07)
=============================
Shares used in computation of basic and diluted loss per share 156,897 141,318
=============================
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999 the Company's principal sources of liquidity consisted of $5.2
million of cash and $1.4 billion of marketable securities compared to $25.6
million of cash and $347.9 million of marketable securities at December 31,
1998.
Net cash used in operating activities was $17.2 million and $7.3 million for the
quarters ended March 31, 1999 and 1998, respectively. Net operating cash flows
were primarily attributable to quarterly net losses and increases in inventories
and prepaid expenses and other, partially offset by non-cash charges for
depreciation and amortization and merger and acquisition related costs, as well
as increases in accounts payable, accrued advertising and other liabilities and
accrued expenses.
Net cash used in investing activities was $1.1 billion and $5.2 million for the
quarters ended March 31, 1999 and March 31, 1998, respectively, and consisted of
purchases of marketable securities and fixed assets, partially offset by sales
and maturities of marketable securities. Cash available for investment purposes
increased substantially in 1999 as a result of the issuance of the Convertible
Notes.
Net cash provided by financing activities of $1.1 billion for the quarter ended
March 31, 1999 resulted from net proceeds from issuance of the Convertible Notes
offset by the repurchase of $126 million, face amount, of the Senior Discount
Notes. Net cash provided by financing activities of $1.4 million for the quarter
ended March 31, 1998 resulted from net proceeds from the exercise of stock
options and the issuance of capital stock.
As of March 31, 1999, the Company's principal commitments consisted of
obligations outstanding under its Convertible Notes and Senior Discount Notes,
obligations in connection with the acquisition of fixed assets and leases and
commitments for advertising and promotional arrangements. The Company
anticipates a substantial increase in its capital expenditures and lease
commitments consistent with anticipated growth in operations, infrastructure and
personnel, including growth associated with product and service offerings,
geographic expansion and integration of business combinations.
During the first quarter, the Company leased and opened a distribution center in
Nevada. In the second quarter, the Company entered into leases for
distribution centers in Kansas and Germany and is entering into leases for
additional facilities. The Company intends to continue to establish
additional distribution centers within the next 12 months. Expansion of the
Company's distribution center network has and will require it to commit to
lease obligations, stock inventories, purchase fixed assets and install
leasehold improvements. In addition, the Company may continue to increase its
merchandise inventory in order to provide better availability to customers and
achieve purchasing efficiencies.
On February 3, 1999, Amazon.com completed the offering of $1.25 billion
Convertible Notes. Interest on the Convertible Notes is payable semi-annually.
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The Company believes that current cash and marketable securities balances will
be sufficient to meet its anticipated cash needs for at least the next 12
months. However, any projections of future cash needs and cash flows are subject
to substantial uncertainty. If current cash, marketable securities and cash that
may be generated from operations are insufficient to satisfy the Company's
liquidity requirements, the Company may seek to sell additional equity or debt
securities or to obtain a line of credit. The sale of additional equity or
convertible debt securities could result in additional dilution to the Company's
stockholders. In addition, the Company will, from time to time, consider the
acquisition of or investment in complementary businesses, products, services and
technologies, and the repurchase and retirement of debt, which might impact the
Company's liquidity requirements or cause the Company to issue additional equity
or debt securities. There can be no assurance that financing will be available
in amounts or on terms acceptable to the Company, if at all.
YEAR 2000 IMPLICATIONS
Many current installed computer systems and software may be coded to accept only
two-digit entries in the date code field and can not distinguish 21st century
dates from 20th century dates. As a result, many software and computer systems
may need to be upgraded or replaced. The Company is in the process of assessing
and remediating the Year 2000 issue and expects its assessment to be completed
in the second quarter of 1999 and remediation efforts to be completed no later
than the third quarter. The Company has not incurred material costs to date in
the process, and does not believe that the cost of additional actions will have
a material effect on its operating results or financial condition. However, the
Company has established a budget totaling approximately $1 million for the
acquisition of contract software services that will assist in the Year 2000
assessment and remediation activities. Amazon.com's current systems and products
may contain undetected errors or defects with Year 2000 date functions that may
result in material costs. In addition, the Company utilizes third-party
equipment, software and content, including non-information technology systems,
such as security systems, building equipment and systems with embedded
micro-controllers that may not be Year 2000 compliant.
The Company has developed a plan to modify its information technology to
recognize the Year 2000 and has begun converting critical data-processing
systems. The Company is in the process of assessing whether its non-information
technology systems are adequately addressing the Year 2000 issue. Failure of
third-party equipment, software or content to operate properly with regard to
the Year 2000 issue could require the Company to incur unanticipated expenses to
remedy problems, which could have a material adverse effect on its business,
operating results and financial condition.
Amazon.com is assessing whether third parties in its supply and distribution
chain are adequately addressing Year 2000 compliance issues. The Company has
initiated formal communications with significant suppliers and service providers
to determine the extent to which its systems may be vulnerable if they fail to
address and correct their own Year 2000 issues. The Company cannot guarantee
that the systems of suppliers or other companies on which it relies will be Year
2000 compliant. Failure by suppliers or other companies to convert their systems
could disrupt the Company's systems. Additionally, 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 stores may not be Year 2000 compliant.
Computers used by customers to access the Company's online stores may not be
Year 2000 compliant, delaying customers' product purchases. The Company is in
the process of developing a contingency plan that will address situations that
may result should Year 2000 compliance for critical operations not be fully
achieved in 1999. The Company cannot guarantee that its systems will be Year
2000 compliant or that the Year 2000 problem will not adversely affect its
business, which includes limiting or precluding customer purchases.
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, 1998 the following
additional factors may affect the Company's future results:
We Have a Limited Operating History
We incorporated in July 1994 and began offering products for sale on our Web
site in July 1995. Accordingly, we have a relatively short operating history
upon which you can evaluate our business and prospects. You should consider our
prospects in light of the risks, expenses and difficulties frequently
encountered by early-stage online commerce companies. As an early-
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stage online commerce company, we have an evolving and unpredictable business
model, we face intense competition, we must effectively manage our growth and we
must respond quickly to rapid changes in customer demands and industry
standards. We may not succeed in addressing these challenges and risks.
We have an Accumulated Deficit and Anticipate Further Losses
We have incurred significant losses since we began doing business. As of March
31, 1999, we had an accumulated deficit of $223.7 million. To succeed we must
invest heavily in marketing and promotion and in developing our product,
technology and operating infrastructure. In addition, the expenses associated
with our recent acquisitions, and interest expense related to our outstanding
notes, will adversely affect our operating results. Our aggressive pricing
programs have resulted in relatively low product gross margins, so we need to
generate and sustain substantially higher revenues in order to become
profitable. Although our revenues have grown, we cannot sustain our current rate
of growth. Our percentage growth rate will decrease in the future. For these
reasons we believe that we will continue to incur substantial operating losses
for the foreseeable future, and these losses may be significantly higher than
our current losses.
Unpredictability of Future Revenues; Potential Fluctuations in Quarterly
Operating Results; Seasonality; Consumer Trends
Due to our limited operating history and the unpredictability of our industry,
we cannot accurately forecast our revenues. We base our current and future
expense levels on our investment plans and estimates of future revenues. Our
expenses are to a large extent fixed. We may not be able to adjust our spending
quickly if our revenues fall short of our expectations. Further, we may make
pricing, purchasing, service, marketing, acquisition or financing decisions that
could adversely affect our business results.
Our quarterly operating results will fluctuate for many reasons, including:
- our ability to retain existing customers, attract new customers and
satisfy our customers' demand,
- our ability to acquire merchandise, manage our inventory and fulfill
orders,
- changes in gross margins of our current and future products,
services and markets,
- introduction of our new sites, services and products or those of
competitors,
- changes in usage of the Internet and online services and consumer
acceptance of the Internet and online commerce,
- timing of upgrades and developments in our systems and
infrastructure,
- the level of traffic on our Web sites,
- the effects of acquisitions and other business combinations, and
related integration,
- technical difficulties, system downtime or Internet brownouts,
- introductions of popular books, music selections and other products
or services,
- our level of merchandise returns, and
- disruptions in service by common shipping carriers due to strikes or
otherwise.
The popularity of our auction services and certain items offered through our
auction services may vary over time due to perceived scarcity, subjective value,
"fads" and consumer trends in general. If the popularity of our auction services
or the items that are listed for sale declines, our revenues from our auction
services will fall.
Both seasonal fluctuations in Internet usage and traditional retail seasonality
may affect our business. Internet usage generally declines during the summer.
Sales in the traditional retail book and music industries usually increase
significantly in the fourth calendar quarter of each year.
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For these reasons, you should not rely on period-to-period comparisons of our
financial results to forecast our future performance. Our future operating
results may fall below the expectations of securities analysts or investors,
which would likely cause the trading price of our common stock to decline.
Intense Competition
The online commerce market is new, rapidly evolving and intensely competitive.
In addition, the retail book, music and video industries are intensely
competitive. Our current or potential competitors include:
- online booksellers and vendors of other products such as CDs,
videotape and DVDs,
- a number of indirect competitors, including Web portals and Web
search engines, such as Yahoo! Inc. and America Online, Inc., that
are involved in online commerce, either directly or in collaboration
with other retailers,
- online auction services, including eBay, Inc. and Yahoo! Auctions
run by Yahoo!,
- publishers, distributors and retail vendors of books, music, video
and other products, including Barnes & Noble, Inc., Bertelsmann AG
and other large specialty booksellers and media corporations, many
of which possess significant brand awareness, sales volume and
customer bases, and
- traditional retailers who currently sell, or who may sell, products
or services through the Internet.
We believe that the principal competitive factors in our market are brand
recognition, selection, personalized services, convenience, price,
accessibility, customer service, quality of search tools, quality of editorial
and other site content, and reliability and speed of fulfillment.
Many of our current and potential competitors have longer operating histories,
larger customer bases, greater brand recognition and significantly greater
financial, marketing and other resources than we have. They may be able to
secure merchandise from vendors on more favorable terms and may be able to adopt
more aggressive pricing or inventory policies. They also can devote more
resources to technology development and marketing than we can. We also expect to
experience increased competition from online commerce sites that provide goods
and services at or near cost, relying on advertising revenues to achieve
profitability.
As the online commerce market continues to grow, other companies may enter into
business combinations or alliances that strengthen their competitive positions.
For example, in late 1998, (1) Bertelsmann AG announced that it purchased a 50%
interest in Barnes & Noble's online venture, barnesandnoble.com inc., and
intends to launch online stores in several countries, (2) Barnes & Noble
announced its pending acquisition of Ingram Book Group, currently our largest
single supplier, and (3) online music retailers CDnow, Inc. and N2K Inc.
announced a merger. We may not be able to compete successfully against these and
future competitors.
Competition in the Internet and online commerce markets probably will intensify.
As various Internet market segments obtain large, loyal customer bases,
participants in those segments may use their market power to expand into the
markets in which we operate. In addition, new and expanded Web technologies may
increase the competitive pressures on online retailers. For example, "shopping
agent" technologies permit customers to quickly compare our prices with those of
our competitors. This increased competition may reduce our operating margins,
diminish our market share or impair the value of our brand.
Risks of System Interruption
Customer access to our Web sites directly affects the volume of orders we
fulfill and thus affects our revenues. We experience occasional system
interruptions that make our Web sites unavailable or prevent us from efficiently
fulfilling orders, which may reduce the volume of goods we sell and the
attractiveness of our products and services. These interruptions will continue.
We need to add additional software and hardware and upgrade our systems and
network infrastructure to accommodate increased traffic on our Web sites and
increased sales volume. Without these upgrades, we
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face additional system interruptions, slower response times, diminished customer
service, impaired quality and speed of order fulfillment, and delays in our
financial reporting. We cannot accurately project the rate or timing of any
increases in traffic or sales volume on our Web sites and, therefore, the
integration and timing of these upgrades are uncertain.
We maintain substantially all of our computer and communications hardware at a
single leased facility in Seattle, Washington. Our systems and operations could
be damaged or interrupted by fire, flood, power loss, telecommunications
failure, break-ins, earthquake and similar events. We do not have backup systems
or a formal disaster recovery plan and we may not have sufficient business
interruption insurance to compensate us for losses from a major interruption.
Computer viruses, physical or electronic break-ins and similar disruptions could
cause system interruptions, delays, and loss of critical data and could prevent
us from providing services and accepting and fulfilling customer orders.
We May Have Difficulty Managing Our Growth
We have rapidly and significantly expanded our operations and will further
expand our operations to address potential growth of our product and service
offerings and customer base. We will expand our product and service offerings
and our international operations and will pursue other market opportunities. We
need to expand significantly our distribution center network and improve our
transaction-processing, operational and financial systems, procedures and
controls. This expansion will continue to place a significant strain on our
management, operational facilities and financial resources. Because it is
difficult to predict sales increases and lead times for developing distribution
centers are long, we may over-expand our facilities, which may result in excess
inventory, warehousing, fulfillment and distribution capacity. We also need to
expand, train and manage our employee base. Our current and planned personnel,
systems, procedures and controls may not be adequate to support and effectively
manage our future operations. We may not be able to hire, train, retain,
motivate and manage required personnel or to successfully identify, manage and
exploit market opportunities, which may limit our growth.
Risk of Entering New Business Areas
We intend to expand our operations by promoting new or complementary products,
services or sales formats and by expanding our product or service offerings.
This will require significant additional expense and could strain our
management, financial and operational resources. We cannot expect to benefit in
these new markets from the first-to-market advantage that we experienced in the
online book market. Our gross margins in these new business areas may be lower
than our existing business activities. We may not be able to expand our
operations in a cost-effective or timely manner. Any new business that our
customers do not receive favorably could damage our reputation and the
Amazon brand.
Risk of International Expansion
We plan to expand our presence in foreign markets. We have relatively little
experience in purchasing, marketing and distributing products or services for
these markets and may not benefit from any first-to-market advantages. It will
be costly to establish international facilities and operations, promote our
brand internationally, and develop localized Web sites and stores and other
systems. We may not succeed in our efforts in these countries. If revenues from
international activities do not offset the expense of establishing and
maintaining foreign operations, our business prospects, financial condition and
operating results will suffer.
As the international online commerce market continues to grow, competition in
this market will likely intensify. In addition, governments in foreign
jurisdictions may regulate Internet or other online services in such areas as
content, privacy, network security, encryption or distribution. This may affect
our ability to conduct business internationally.
Risk of Business Combinations and Strategic Alliances
We may expand our operations or market presence by entering into business
combinations, investments, joint ventures or other strategic alliances with
other companies. These transactions create risks such as:
- difficulty assimilating the operations, technology and personnel of
the combined companies;
- disruption of our ongoing business;
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- problems retaining key technical and managerial personnel;
- expenses associated with amortization of goodwill and other
purchased intangible assets;
- additional operating losses and expenses of acquired businesses; and
- impairment of relationships with existing employees, customers and
business partners.
We may not succeed in addressing these risks. In addition, the businesses we
acquire may incur operating losses.
Rapid Technological Change
Technology in the online commerce industry changes rapidly. Customer
functionality requirements and preferences also change. Competitors often
introduce new products and services with new technologies. These changes and the
emergence of new industry standards and practices could render our existing Web
sites and proprietary technology obsolete. To succeed we must enhance our Web
site responsiveness, functionality and features, acquire and license leading
technologies, enhance our existing services, develop new services and technology
and respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis. We may not be able to adapt
quickly enough to changing customer requirements and industry standards.
We Depend on Key Personnel
We depend on the continued services and performance of our senior management and
other key personnel, particularly Jeffrey P. Bezos, our president, chief
executive officer and chairman of the board. We do not have long-term employment
agreements with any of our key personnel, and we do not have "key person" life
insurance policies. The loss of any of our executive officers or other key
employees could harm our business.
We Rely on a Small Number of Suppliers
We purchase a majority of our products from three major vendors, Ingram, Baker &
Taylor, Inc. and Valley Media, Inc. In late 1998, Barnes & Noble, one of our
largest competitors, announced an agreement to purchase Ingram. Ingram is our
single largest supplier and supplied approximately 40% of our inventory
purchases in 1998 and approximately 60% of our inventory purchases in 1997.
Although we increased our direct purchasing from manufacturers during 1998, we
continue to purchase a majority of our products from these three suppliers. We
do not have long-term contracts or arrangements with most of our vendors to
guarantee the availability of merchandise, particular payment terms or the
extension of credit limits. Our current vendors may stop selling merchandise to
us on acceptable terms. We may not be able to acquire merchandise from other
suppliers in a timely and efficient manner and on acceptable terms.
We are Highly Leveraged
We have significant indebtedness. As of March 31, 1999, we were indebted
under the Senior Discount Notes, the Convertible Notes, the capitalized lease
obligations and other asset financing totaling approximately $1.5 billion.
We may incur substantial additional debt in the future. Our indebtedness could:
- make it difficult to make principal and interest payments on the
Convertible Notes and the Senior Discount Notes,
- make it difficult to obtain necessary financing for working capital,
capital expenditures, debt service requirements or other purposes,
- limit our flexibility in planning for, or reacting to, changes in
our business and competition, and
- make it more difficult for us to react in the event of an economic
downturn.
We may not be able to meet our debt service obligations. If our cash flow is
inadequate to meet our obligations, we may face substantial liquidity problems.
If we are unable to generate sufficient cash flow or obtain funds for required
payments, or if
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we fail to comply with other covenants in our indebtedness, we will be in
default. This would permit our creditors to accelerate the maturity of our
indebtedness.
Risks Associated with Domain Names
We hold rights to various Web domain names, including "Amazon.com,"
"Amazon.co.uk" and "Amazon.de." Governmental agencies typically regulate domain
names. These regulations are subject to change. We may not be able to acquire or
maintain appropriate domain names in all countries in which we do business.
Furthermore, regulations governing domain names may not protect our trademarks
and similar proprietary rights. We may be unable to prevent third parties from
acquiring domain names that are similar to, infringe upon or diminish the value
of our trademarks and other proprietary rights.
Governmental Regulation and Legal Uncertainties
At this time, we face general business regulations and laws or regulations
regarding taxation and access to online commerce. For example, expanding our
distribution center network or other aspects of our business may result in
additional sales and other tax obligations. Regulatory authorities may adopt
specific laws and regulations governing the Internet or online commerce. These
regulations may cover taxation, user privacy, pricing, content, copyrights,
distribution, electronic contracts and characteristics and quality of products
and services. Changes in consumer protection laws also may impose additional
burdens on companies conducting business online. In addition, many states
currently regulate "auctions" and "auctioneers" in conducting auctions and may
regulate online auction services. These laws or regulations may impede the
growth of the Internet or other online services. This could, in turn, diminish
the demand for our products and services and increase our cost of doing
business. Moreover, it is not clear how existing laws governing issues such as
property ownership, sales and other taxes, libel and personal privacy apply to
the Internet and online commerce. Unfavorable resolution of these issues may
harm our business.
Risks Related to Auction Services
We may be unable to prevent users of our auction services from selling unlawful
goods, or from selling goods in an unlawful manner. We may face civil or
criminal liability for unlawful activities by our online auction users. Any
costs we incur as a result of liability relating to the sale of unlawful goods
or the unlawful sale of goods could harm our business.
In running our auction services, we rely on sellers of goods to make accurate
representations and provide reliable delivery and on buyers to pay the agreed
purchase price. We do not take responsibility for delivery of payment or goods
to any users of our services. While we can suspend or terminate the accounts of
users who fail to fulfill their delivery obligations to other users, we cannot
require users to make payments or deliver goods. We do not compensate users who
believe they have been defrauded by other users except through our limited
guarantee program.
Risk of Uncertain Protection of Intellectual Property
Third parties that license our proprietary rights, such as trademarks, patented
technology or copyrighted material, may take actions that diminish the value of
our proprietary rights or reputation. In addition, the steps we take to protect
our proprietary rights may not be adequate and third parties may infringe or
misappropriate our copyrights, trademarks, trade dress, patents and similar
proprietary rights. Other parties may claim that we infringed their proprietary
rights. We have been subject to claims, and expect to continue to be subject to
legal proceedings and claims, regarding alleged infringement by us and our
licensees of the trademarks and other intellectual property rights of third
parties. Such claims, whether or not meritorious, may result in the expenditure
of significant financial and managerial resources. Most recently, Amazon
Bookstore, Inc. filed suit against us alleging trademark infringement and unfair
competition under state and federal law. Amazon Bookstore is seeking injunctive
relief against our use of the marks Amazon.com, Amazon.com Books and Amazon
Books, the cancellation of our federal trademark registrations, damages,
profits, treble damages, costs and attorneys' fees. We have only recently been
served with the complaint and are assessing the claim.
Risks of Year 2000 Noncompliance
We have developed a plan to modify our information technology to recognize the
year 2000 and have begun converting our critical data processing systems. We
have initiated formal communications with our significant suppliers and service
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providers to determine the extent to which our systems may be vulnerable if they
fail to address and correct their own Year 2000 issues. We cannot guarantee that
the systems of suppliers or other companies on which we rely will be Year 2000
compliant. Their failure to convert their systems could disrupt our systems. In
addition, the computer systems necessary to maintain the viability of the
Internet or any of the Web sites that direct consumers to our online stores may
not be Year 2000 compliant. Finally, computers used by our customers to access
our online stores may not be Year 2000 compliant, delaying our customers'
purchases of our products. We are in the process of developing a formal
contingency plan. We cannot guarantee that our systems will be Year 2000
compliant or that the Year 2000 problem will not adversely affect our business,
which includes limiting or precluding customer purchases.
Our Stock Price is Highly Volatile
The trading price of our common stock fluctuates significantly. For example,
during the 52-week period ended May 14, 1999 (as adjusted for the 2-for-1 split
of our common stock on June 1, 1998 and 3-for-1 split of our common stock on
January 4, 1999), the reported closing price of our common stock on the Nasdaq
National Market was as high as $210.125 and as low as $13.646 per share. Trading
prices of our common stock may fluctuate in response to a number of events and
factors, such as:
- quarterly variations in operating results;
- announcements of innovations;
- new products, services and strategic developments by us or our
competitors, or business combinations and investments by us or our
competitors;
- changes in our operating expense levels or losses;
- changes in financial estimates and recommendations by securities
analysts;
- performance by other online commerce companies; and
- news reports relating to trends in the Internet, book, music, video
or other product or service industries.
Any of these events may cause our stock price to fall, which may adversely
affect our business and financing opportunities. In addition, the stock market
in general and the market prices for Internet-related companies in particular
have experienced significant volatility that often has been unrelated to such
companies' operating performance. These broad market and industry fluctuations
may adversely affect the trading price of our common stock regardless of our
operating performance.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any derivative financial instruments as of March 31,
1999. However, the Company is exposed to interest rate risk. The Company employs
established policies and procedures to manage its exposure to changes in the
market risk of its marketable securities, which are classified as
available-for-sale as of March 31, 1999. The Company's Senior Discount Notes,
Convertible Notes and other long-term debt have fixed interest rates and the
fair value of these instruments is affected by changes in market interest rates.
The Company believes that the market risk arising from holdings of its financial
instruments is not material.
Information relating to quantitative and qualitative disclosure about market
risk is set forth below and in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
The table below provides information about the Company's marketable securities,
including principal cash flows for 1999 through 2003 and thereafter and the
related weighted average interest rates.
Principal (notional) amounts by expected maturity in U.S. dollars (thousands):
ESTIMATED
FAIR VALUE
AT MARCH 31,
1999 2000 2001 2002 2003 THEREAFTER* TOTAL 1999
---------- ---------- --------- ---------- ----------- ---------- ----------- ------------
Commercial paper and
short obligations.......... 94,549 -- -- -- -- -- 94,549 109,781
Weighted average
interest rate....... 4.88%
Corporate notes and bonds..... 3,500 97,208 134,455 -- -- -- 235,163 235,167
Weighted average
interest rate....... 5.92% 5.89% 5.38%
Asset-backed and
agency securities.......... 194,409 93,792 127,760 51,946 52,545 117,060 637,512 494,995
Weighted average
interest rate....... 8.85% 6.54% 6.22% 6.02% 5.97% 6.07%
Treasury notes and bonds...... 146,106 91,696 97,525 29,129 124,500 -- 488,956 590,821
Weighted average
interest rate....... 5.00% 5.99% 5.05% 6.67% 5.12%
Equity Securities............. -- -- -- -- -- 8,080 8,080 6,953
----------- ----------- ----------- ---------- ----------- ----------- ------------- -------------
Total Portfolio............... 438,564 282,696 359,740 81,075 177,045 125,140 1,464,260 1,437,717
=========== =========== =========== ========== =========== =========== ============= =============
* includes equity securities which do not have expected maturities.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 4 - Commitments and Contingencies in Part I, Item 1. Financial
Statements
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Convertible Subordinated Notes
On February 3, 1999, Amazon.com completed the offering of $1.25 billion
aggregate principal amount of 4 3/4% Convertible Subordinated Notes
("Convertible Notes" or "notes") due 2009. Interest on the notes is payable in
arrears in cash semi-annually on February 1 and August 1 of each year,
commencing August 1, 1999.
Holders of the Convertible Notes may convert any portion of a note, in multiples
of $1,000, into common stock of Amazon.com at an initial conversion price of
$156.055 per share. In lieu of fractional shares, Amazon.com will pay a cash
adjustment based on the closing price of the common stock on the last business
day prior to the conversion. The initial conversion price of $156.055 shall be
adjusted by Amazon.com if various events occur, including: (i) the issuance of
common stock as a dividend or distribution on the common stock; (ii)
subdivisions and combinations of the common stock; (iii) issuance to all holders
of common stock of rights or warrants to purchase common stock; (iv)
distribution to all holders of common stock of capital stock (other than our
common stock), debt instruments or assets; (v) distributions of cash, other than
certain quarterly cash dividends on the common stock; (vi) payment on a tender
offer or exchange offer by Amazon.com or one of Amazon.com's subsidiaries for
all or any portion of the common stock if the payment exceeds the current market
price of the common stock on the trading day prior to the last date for tenders
or exchanges; and (vii) payment on certain tender offers or exchange offers by a
third party if, as of the closing date of the offer, Amazon.com's Board of
Directors does not recommend rejection of the offer.
Amazon.com may redeem the notes, in whole or in part, at any time prior
to February 6, 2002, at a price equal to $1,000 per note plus accrued and
unpaid interest if: (i) the closing price of Amazon.com's common stock has
exceeded 150% of the conversion price in effect for at least 20 trading days in
any consecutive 30-trading day period, ending on the trading day prior to the
mailing of the notice of redemption; and (ii) the shelf registration statement
covering resales of the notes and the common stock issuable upon conversion of
the notes is effective and available for use for the 30 days following the
redemption date. If Amazon.com redeems any of the notes prior to February 6,
2002, Amazon.com is required to make an additional cash payment with respect to
the notes called for redemption in an amount equal to $212.60 per $1,000 note,
less the amount of any interest paid.
After February 6, 2002, Amazon.com may redeem the notes on at least 30
days' notice at the redemption prices set forth in the indenture for the
Convertible Notes (the "Indenture"). If Amazon.com redeems less than all of the
outstanding notes, the trustee will select the notes to be redeemed in
multiples of $1,000 by lot, pro rata or any other method the trustee considers
fair and appropriate.
Upon the occurrence of a "fundamental change" (as defined in the Indenture)
prior to the maturity of the notes, each holder thereof shall have the right to
require Amazon.com to redeem all or any part of such holder's Convertible Notes
at a price equal to 100% of the principal amount of the notes being redeemed,
together with accrued interest to, but excluding, the date of redemption.
Amazon.com has, for the benefit of the holders of the Convertible Notes, filed
with the SEC a shelf registration statement covering resales of the notes and
the common stock issuable upon conversion thereof (the "Registrable
Securities"). Pursuant to a registration rights agreement, Amazon.com will use
commercially reasonable efforts to cause the shelf registration statement to
become effective as promptly as is practicable, but in any event within 180 days
of such first date of original issuance, and to keep the shelf registration
statement effective until the earlier of (i) the sale pursuant to the shelf
registration statement of all the Registrable Securities and (ii) the expiration
of the holding period applicable to such securities held by non-affiliates of
Amazon.com under Rule 144(k) of the Securities Act of 1933, as amended, or any
successor provision, subject to certain permitted exceptions.
The Convertible Notes are unsecured general obligations of Amazon.com.
The notes are subordinated to the prior payment in full of all of Amazon.com's
senior debt and are also effectively subordinated to all indebtedness and other
liabilities, including trade payables and lease obligations, of any of
Amazon.com's subsidiaries. As of March 31, 1999, Amazon.com had approximately
$291 million of outstanding senior indebtedness. The Indenture does not
prevent Amazon.com from incurring additional senior or subordinated debt.
The Indenture does not contain any financial covenants or restrictions on the
payment of dividends, the incurrence of indebtedness, including senior
indebtedness, or the issuance or repurchase of other outstanding securities of
Amazon.com.
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Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation and
Donaldson, Lufkin & Jenrette Securities Corporation, who acted as placement
agents for the Convertible Notes, received an aggregate fee of $35 million. The
notes were issued pursuant to safe-harbor exemptions from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
solely to qualified institutional buyers and institutional "accredited
investors" pursuant to Rule 144A and Regulation D of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT INDEX
EXHIBIT NUMBER TITLE
- -------------- -----
4.1* Indenture, dated as of February 3, 1999, between the
registrant and The Bank of New York, as Trustee, including
the form of 4 3/4% Convertible Subordinated Note due 2009
attached as Exhibit A thereto.
4.2* Registration Rights Agreement, dated as of February 3, 1999,
by and among the registrant and the Initial Purchasers
10.1** Sales Agreement, dated March 11, 1999, by and between
Amazon.com, Inc. and The Buschman Company
10.2** Sales Agreement, dated March 11, 1999, by and between
Amazon.com, Inc. and The Buschman Company
10.3** Sales Agreement, dated March 11, 1999, by and between
Amazon.com, Inc. and The Buschman Company
10.4** Sales Agreement, dated March 11, 1999, by and between
Amazon.com, Inc. and The Buschman Company
10.5** Sales Agreement, dated March 11, 1999, by and between
Amazon.com, Inc. and The Buschman Company
10.6** Lease Agreement, dated April 12, 1999, by and between
Amazon.com.ksdc, Inc. and TGFWII, L.L.C.
27.1 Financial Data Schedule
- ----------
* Incorporated by reference to the registrant's Current Report on Form 8-K
filed with the SEC on February 4, 1999.
** Contains omitted, confidential material, which material has been filed
separately with the SEC pursuant to a request for confidential treatment
under Rule 24b-2, promulgated by the SEC under the Securities Exchange Act
of 1934, as amended.
(b) Reports on Form 8-K
On January 5, 1999, the Company filed a Form 8-K under Item 5 announcing
the Company's financial results for the fourth quarter of 1998.
On January 27, 1999, the Company filed a Form 8-K under Item 5 announcing
the Company's financial results for the fourth quarter of 1998, and the
1998 fiscal year.
On January 28, 1999, the Company filed a Form 8-K under Item 5 announcing
a $500 million offering of Subordinated Convertible Notes.
On January 29, 1999, the Company filed a Form 8-K under Item 5 announcing
that it priced its private offering of 4 3/4% Convertible Subordinated
Notes, due 2009, and increased the size of the offering from $500 million
to approximately $1.25 billion.
On February 4, 1999, the Company filed a Form 8-K under Item 5 announcing
that it completed the sale of its private offering of $1.25 billion
aggregate principal amount of 4 3/4% Convertible Subordinated Notes due
2009.
On March 29, 1999, the Company filed a Form 8-K under Item 5 announcing
its plans to launch a person-to-person auction service.
On March 30, 1999, the Company filed a Form 8-K under Item 5 announcing
that it launched its online auction site.
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25
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: May 17, 1999
By: /s/ JOY D. COVEY
-----------------------------
Joy D. Covey
Chief Financial Officer and
Vice President of Finance and Administration
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26
EXHIBIT INDEX
EXHIBIT NUMBER TITLE
- -------------- -----
4.1* Indenture, dated as of February 3, 1999, between the
registrant and The Bank of New York, as Trustee, including
the form of 4 3/4% Convertible Subordinated Note due 2009
attached as Exhibit A thereto.
4.2* Registration Rights Agreement, dated as of February 3, 1999,
by and among the registrant and the Initial Purchasers
10.1** Sales Agreement, dated March 11, 1999, by and between
Amazon.com, Inc. and The Buschman Company
10.2** Sales Agreement, dated March 11, 1999, by and between
Amazon.com, Inc. and The Buschman Company
10.3** Sales Agreement, dated March 11, 1999, by and between
Amazon.com, Inc. and The Buschman Company
10.4** Sales Agreement, dated March 11, 1999, by and between
Amazon.com, Inc. and The Buschman Company
10.5** Sales Agreement, dated March 11, 1999, by and between
Amazon.com, Inc. and The Buschman Company
10.6** Lease Agreement, dated April 12, 1999, by and between
Amazon.com.ksdc, Inc. and TGFWII, L.L.C.
27.1 Financial Data Schedule
- ----------
* Incorporated by reference to the registrant's Current Report on Form 8-K
filed with the SEC on February 4, 1999.
** Contains omitted, confidential material, which material has been filed
separately with the SEC pursuant to a request for confidential treatment
under Rule 24b-2, promulgated by the SEC under the Securities Exchange Act
of 1934, as amended.
Page 26