1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
June 9, 1999
------------------------------------
Date of Report
(Date of earliest event reported)
AMAZON.COM, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
DELAWARE 000-22513 91-1646860
- ----------------------------- --------------------- -------------------
(State or Other Jurisdiction (Commission File No.) (IRS Employer
of Incorporation) Identification No.)
1200 - 12TH AVENUE SOUTH, SUITE 1200, SEATTLE, WASHINGTON 98144
- --------------------------------------------------------------------------------
(Address of principal executive offices, including Zip Code)
(206) 266-1000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On June 9, 1999, pursuant to an Agreement and Plan of Merger, dated as
of April 25, 1999 (the "Merger Agreement"), by and among Amazon.com, Inc., a
Delaware corporation ("Amazon.com"), ADC Acquisitions, Inc., a Delaware
corporation and wholly owned subsidiary of Amazon.com ("ADC"), and Accept.com
Financial Services Corporation, a California corporation ("Accept.com"), ADC was
merged with and into Accept.com, with Accept.com being the surviving corporation
(the "Merger").
Accept.com is an e-commerce company currently developing longer-range
solutions to simplify person-to-person and business-to-consumer transactions on
the Internet. Accept.com was incorporated in the State of California in August
1997 as "Emptor, Inc." and changed its name in April 1999 to "Accept.com
Financial Services Corporation."
At the closing of the Merger, Amazon.com issued 877,657 shares of
Amazon.com common stock, par value $0.01 per share ("Amazon.com Common Stock"),
and assumed all outstanding options of Accept.com pursuant to the formula set
forth below. Such consideration was determined in arm's-length negotiations
between Amazon.com and Accept.com.
Pursuant to the terms of the Merger Agreement, at the effective time of
the Merger, each outstanding share of Accept.com common stock, no par value
("Accept.com Common Stock"), was converted into the right to receive that number
of shares of Amazon.com Common Stock determined by dividing (a) 948,831 by (b)
the total number of shares of Accept.com capital stock outstanding immediately
prior to the effective time of the Merger on a fully diluted basis, assuming the
exercise of all outstanding options and warrants to purchase shares of
Accept.com Common Stock (the "Exchange Ratio").
In addition, each option to purchase shares of Accept.com Common Stock
outstanding at the effective time of the Merger was assumed by Amazon.com and
will be treated as an option to purchase that number of shares of Amazon.com
Common Stock equal to the product of the Exchange Ratio and the number of shares
of Accept.com Common Stock subject to such option.
All shares of Amazon.com Common Stock issued at the closing of the
Merger have been registered under the Securities Act of 1933, as amended.
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The Merger will be accounted for under the purchase method of
accounting.
Pursuant to the Merger Agreement, the shareholders of Accept.com have
agreed to indemnify and hold Amazon.com harmless from losses that Amazon.com or
its affiliates may suffer as a result of (1) any inaccuracy or misrepresentation
in, or breach of, any representation or warranty made by Accept.com or such
shareholders in the Merger Agreement or related agreements; and (2) any failure
by Accept.com or such shareholders to perform or comply, in whole or in part,
with any covenant or agreement in the Merger Agreement or related agreements. A
total of 142,268 shares of Amazon.com Common Stock issued in connection with the
Merger have been deposited with an escrow agent to secure these indemnification
obligations.
The description of the Merger Agreement herein, which is filed as an
exhibit to this Form 8-K, does not purport to be complete and is qualified in
its entirety by the provisions of the Merger Agreement.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired
Accept.com Audited Financial Statements:
(i) Report of Ernst & Young LLP, Independent Auditors
(ii) Accept.com (a development stage company) Consolidated
Balance Sheets as of December 31, 1998 and 1997
(iii) Accept.com (a development stage company) Consolidated
Statements of Operations for the year ended December 31,
1998 and for the period from August 5, 1997 (inception) to
December 31, 1997 and cumulative period from August 5,
1997 (inception) to December 31, 1998
(iv) Accept.com (a development stage company) Consolidated
Statement of Shareholders' Equity for the period from
August 5, 1997 (inception) to December 31, 1998
(v) Accept.com (a development stage company) Consolidated
Statements of Cash Flows for the year ended December 31,
1998 and for the period
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from August 5, 1997 (inception) to December 31, 1997 and
cumulative period from August 5, 1997 (inception) to
December 31, 1998
(vi) Accept.com Notes to Consolidated Financial Statements
Accept.com Condensed Consolidated Financial Statements
(unaudited):
(i) Accept.com (a development stage company) Condensed
Consolidated Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998
(ii) Accept.com (a development stage company) Condensed
Consolidated Statements of Operations for the three month
periods ended March 31, 1999 and 1998 (unaudited) and for
the cumulative period from August 5, 1997 (inception) to
March 31, 1999 (unaudited)
(iii) Accept.com (a development stage company) Condensed
Consolidated Statements of Cash Flows for the three month
periods ended March 31, 1999 and 1998 (unaudited) and for
the cumulative period from August 5, 1997 (inception) to
March 31, 1999 (unaudited)
(iv) Accept.com Notes to Condensed Consolidated Financial
Statements
(b) Pro Forma Financial Information
Pro Forma Combined Condensed Consolidated Financial Statements
(unaudited):
(i) Pro Forma Combined Condensed Consolidated Balance Sheet as
of March 31, 1999 (unaudited)
(ii) Pro Forma Combined Condensed Consolidated Statement of
Operations for the three month period ended March 31, 1999
(unaudited)
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(iii) Pro Forma Combined Condensed Consolidated Statement of
Operations for the year ended December 31, 1998
(unaudited)
(iv) Notes to Pro Forma Combined Condensed Consolidated
Financial Statements (unaudited)
(c) Exhibits
2.1 Agreement and Plan of Merger, dated as of April 25,
1999, by and among Amazon.com, Inc., ADC Acquisitions,
Inc. and Accept.com Financial Services Corporation
23.1 Consent of Ernst & Young LLP, Independent Auditors
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Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
Accept.com
We have audited the accompanying consolidated balance sheets of Accept.com (a
development stage company) as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year ended December 31, 1998 and for the period from August 5, 1997
(inception) to December 31, 1997 and cumulative from August 5, 1997
(inception) to December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Accept.com at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for the year ended December 31, 1998 and for the
period from August 5, 1997 (inception) to December 31, 1997 and cumulative from
August 5, 1997 (inception) to December 31, 1998, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
San Jose, California
May 12, 1999
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Accept.com
(a development stage company)
Consolidated Balance Sheets
DECEMBER 31,
--------------------------------
1998 1997
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 4,253,057 $ 2,286
Prepaid expenses and other 12,840 --
----------- -----------
Total current assets 4,265,897 2,286
Furniture and equipment 44,212 2,846
Accumulated depreciation 3,755 474
----------- -----------
40,457 2,372
Other assets 4,000 --
----------- -----------
Total assets $ 4,310,354 $ 4,658
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 35,862 $ --
Accrued vacation 22,204 --
Accrued expenses 60,895 275
----------- -----------
Total current liabilities 118,961 275
Shareholders' equity:
Series A convertible preferred stock, no par value:
Authorized shares - 9,202,400
Issued and outstanding shares - 8,852,789
(aggregate liquidation preference of $5,160,291 at
December 31, 1998) 5,139,870 --
Common stock, no par value:
Authorized shares - 20,000,000 in 1998 and
10,000,000 in 1997
Issued and outstanding shares - 7,123,802 in 1998 and
800,000 in 1997 76,506 8,000
Shareholders' notes receivable (69,248) --
Deficit accumulated during the development stage (955,735) (3,617)
----------- -----------
Total shareholders' equity 4,191,393 4,383
----------- -----------
Total liabilities and shareholders' equity $ 4,310,354 $ 4,658
=========== ===========
See accompanying notes.
8
Accept.com
(a development stage company)
Consolidated Statements of Operations
PERIOD FROM CUMULATIVE FROM
AUGUST 5, 1997 AUGUST 5, 1997
YEAR ENDED (INCEPTION) TO (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998
----------- -------------- ---------------
Operating expenses:
Research and development $ 309,388 $ -- $ 309,388
Sales and marketing 152,263 -- 152,263
General and administrative 517,334 3,617 520,951
--------- --------- ---------
Total operating expenses 978,985 3,617 982,602
--------- --------- ---------
Loss from operations (978,985) (3,617) (982,602)
Interest and other income 29,965 -- 29,965
Interest expense (3,098) -- (3,098)
--------- --------- ---------
(952,118) (3,617) (955,735)
--------- --------- ---------
Net loss $(952,118) $ (3,617) $(955,735)
========= ========= =========
See accompanying notes.
9
Accept.com
(a development stage Company)
Consolidated Statements of Shareholders' Equity
Period from August 5, 1997 (inception) to December 31, 1998
DEFICIT
CONVERTIBLE PREFERRED ACCUMULATED
STOCK COMMON STOCK SHAREHOLDERS' DURING TOTAL
------------------------- ------------------------- NOTES DEVELOPMENT SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT RECEIVABLE STAGE EQUITY
----------- ----------- ----------- ----------- ----------- ----------- -----------
Issuance of common stock
to founder at
inception in exchange
for cash and
services rendered -- $ -- 800,000 $ 8,000 $ -- $ -- $ 8,000
Net loss -- -- -- -- -- (3,617) (3,617)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 -- -- 800,000 8,000 -- (3,617) 4,383
Issuance of Series A
preferred stock in
October and November
1998 at $0.5829
per share, net of
issuance costs 8,852,789 5,107,418 -- -- (12,439) -- 5,094,979
Issuance of warrants
for Series A
preferred stock in
October 1998 in
exchange for services
at $0.50 per share -- 32,452 -- -- -- -- 32,452
Issuance of common
stock in March,
August, and October
1998 at $0.01 and
$0.05 per share for
cash, services,
and shareholders'
notes receivable -- -- 6,323,802 68,506 (56,809) -- 11,697
Net loss -- -- -- -- -- (952,118) (952,118)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 8,852,789 $ 5,139,870 7,123,802 $ 76,506 $ (69,248) $ (955,735) $ 4,191,393
=========== =========== =========== =========== =========== =========== ===========
See accompanying notes.
10
Accept.com
(a development stage company)
Consolidated Statements of Cash Flows
PERIOD FROM CUMULATIVE FROM
AUGUST 5, 1997 AUGUST 5, 1997
YEAR ENDED (INCEPTION) TO (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998
------------ -------------- ---------------
OPERATING ACTIVITIES
Net loss $ (952,118) $ (3,617) $ (955,735)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 3,281 474 3,755
Issuance of warrants for Series A preferred stock in
exchange for services 32,452 -- 32,452
Changes in operating assets and liabilities:
Prepaid expenses and other assets (16,840) -- (16,840)
Accounts payable 35,862 -- 35,862
Accrued vacation 22,204 -- 22,204
Accrued expenses 60,620 275 60,895
----------- ----------- -----------
Net cash used in operating activities (814,539) (2,868) (817,407)
INVESTING ACTIVITIES
Purchase of furniture and equipment (41,366) (2,846) (44,212)
----------- ----------- -----------
Net cash used in investing activities (41,366) (2,846) (44,212)
FINANCING ACTIVITIES
Borrowings under bridge loans from related party 220,000 -- 220,000
Repayment of bridge loans from related party (220,000) -- (220,000)
Net proceeds from issuance of preferred stock 5,094,979 -- 5,094,979
Proceeds from issuance of common stock 11,697 8,000 19,697
----------- ----------- -----------
Net cash provided by financing activities 5,106,676 8,000 5,114,676
----------- ----------- -----------
Net increase in cash and cash equivalents 4,250,771 2,286 4,253,057
Cash and cash equivalents at beginning of period 2,286 -- --
----------- ----------- -----------
Cash and cash equivalents at end of period $ 4,253,057 $ 2,286 $ 4,253,057
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 3,097 $ -- $ 3,097
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Issuance of Series A preferred stock in
exchange for consulting services $ 129,589 $ -- $ 129,589
Issuance of common stock in exchange for computer
equipment and services rendered $ 13,381 $ 4,000 $ 17,381
Issuance of common and preferred stock in exchange
for notes receivable from shareholders $ 69,248 $ -- $ 69,248
Issuance of warrants for Series A preferred
stock in exchange for consulting services $ 32,452 $ -- $ 32,452
See accompanying notes.
11
Accept.com
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accept.com (the Company), formerly Emptor, Inc., was formed August 5, 1997
(Inception) to provide online service solutions for electronic commerce.
Operating activities relate primarily to the design and development of the
Company's online service solutions and corporate infrastructure, and the Company
is therefore classified as a development stage company.
USE OF ESTIMATES
The preparation of consolidated 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 at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary. Significant intercompany accounts and transactions
have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments in money market funds with
original maturities of three months or less at the time of acquisition. Cash
equivalents approximated fair value as of December 31, 1998 and 1997.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost, net of accumulated depreciation.
Depreciation is provided on a straight-line basis over the estimated useful life
of the respective assets, generally three years.
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Accept.com
(a development stage company)
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB Opinion No. 25), and related
interpretations in accounting for its employee stock options because, as
discussed in Note 2, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123), requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB Opinion No. 25,
when the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (FAS 130), in the year ended December 31, 1998.
FAS 130 establishes standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The Company does not have comprehensive income items to report for the year
ended December 31, 1998.
RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133), which the Company will be required to adopt
for the year ending December 31, 2000. This statement establishes a new model
for accounting for derivatives and hedging activities. FAS 133 establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities.
Because the Company currently holds no derivative financial instruments and does
not currently engage in hedging activities, adoption of FAS 133 is expected to
have no material impact on the Company's financial condition or results of
operations.
13
Accept.com
(a development stage company)
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT PRONOUNCEMENTS (CONTINUED)
In March 1998, the American Institute of Certified Public Accountants issued SOP
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1). SOP 98-1 requires that entities capitalize certain
costs related to internal use software once certain criteria have been met. The
Company is required to implement SOP 98-1 for the year ending December 31, 1999.
Adoption of SOP 98-1 is not expected to have a material impact on the Company's
financial condition or results of operations.
In April 1998, the Accounting Standards Executive Committee issued SOP 98-5,
"Reporting on the Costs of Start-up Activities" (SOP 98-5). Start-up activities
are defined broadly as those one-time activities related to the opening of a new
facility, introducing a new product or service, conducting business in a new
territory, conducting business with a new class customer, commencing some new
operation, or organizing a new entity. SOP 98-5 requires that the cost of
start-up activities be expensed as incurred. SOP 98-5 is effective for the
Company beginning in fiscal 1999. Adoption of SOP 98-5 is not expected to have a
material impact on the Company's financial condition or results of operations.
2. SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue up to 9,202,400 shares of preferred stock,
issuable in series, with the rights and preferences of each designated series to
be determined by the Board of Directors. To date, such shares have been
designated as Series A convertible preferred stock (the Series A preferred
stock). Holders of Series A preferred stock have voting rights equal to the
common shares issuable upon conversion of the Series A preferred stock.
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Accept.com
(a development stage company)
Notes to Consolidated Financial Statements (continued)
2. SHAREHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK (CONTINUED)
Each share of Series A preferred stock is convertible, at the option of the
holder, into one share of common stock, subject to certain adjustments for
dilutive issuance. Outstanding shares of Series A preferred stock automatically
convert into common stock upon either the closing of an underwritten public
offering of the Company's common stock with gross proceeds of at least
$20,000,000 and a per share price of at least $4.00 or the election of the
holders of more than 50% of outstanding Series A preferred stock.
Holders of Series A preferred stock are entitled to noncumulative dividends of
8% per annum per outstanding share. Dividends will be paid only when declared by
the Board of Directors out of legally available funds. No dividends have been
declared as of December 31, 1998.
Holders of Series A preferred stock are entitled to receive, upon a liquidating
event, an amount per share equal to the issuance price plus all declared but
unpaid dividends. The remaining assets and funds, if any, shall be distributed
among the holders of the Series A preferred stock and common stock pro rata
based on the number of shares of common stock held by each (assuming conversion
of all such Series A preferred stock). If any assets remain after the holders of
Series A preferred stock have received an aggregate of $0.5829 per share, the
remaining assets will be distributed to the holders of the common stock pro rata
based on the number of shares of common stock held by each.
WARRANTS
At December 31, 1998, warrants to purchase 170,800 shares of Series A preferred
stock were outstanding at an exercise price of $0.50 per share. The warrants
were issued in exchange primarily for consulting services. The warrants are
exercisable immediately upon issuance and expire October 28, 2003. The fair
value of the warrant at the date of grant was $32,452, as determined using the
Black-Scholes option pricing model. Such amount has been included in research
and development expense for the year ended December 31, 1998.
15
Accept.com
(a development stage company)
Notes to Consolidated Financial Statements (continued)
2. SHAREHOLDERS' EQUITY (CONTINUED)
COMMON STOCK
The Company is authorized to issue up to 20,000,000 shares of common stock as of
December 31, 1998. At December 31, 1998, a total of 7,123,802 shares of common
stock were issued and outstanding. Each share of common stock is entitled to one
vote. The holders of common stock are also entitled to receive dividends from
legally available funds when and if declared by the Board of Directors, subject
to the prior rights of holders of Series A preferred stock.
The Company issues common stock under restricted stock purchase agreements.
Common stock issued under restricted stock purchase agreements are immediately
exercisable and subject to repurchase by the Company. Such shares generally
vest and the repurchase right lapses ratably over a four-year period from the
date of grant. As of December 31, 1998, there were 4,338,639 shares subject to
repurchase.
STOCK OPTION PLAN
In July 1998, the Board of Directors adopted the 1998 Stock Plan (the 1998 Plan)
for issuance of common stock to eligible participants. The 1998 Plan provides
for the granting of incentive stock options and nonstatutory stock options for
shares of common stock. Incentive stock options and nonstatutory stock options
may be granted under the 1998 Plan at prices not less than 100% and 85% of the
fair value, respectively, at the date of grant, or at prices not less than 110%
for individuals owning more than 10% of the combined voting power of all classes
of stock at the date of grant. Options generally expire after ten years. Options
under the 1998 Plan generally vest over a period of four years from the date of
grant.
Upon consummation of a consolidation or merger of the Company with another
corporation in which, immediately following such transaction, the shareholders
of the Company hold 50% or less of the voting equity securities of the surviving
corporation following the transaction, the vesting of all outstanding options
shall accelerate by 25%. Any outstanding options not assumed by the surviving
corporation shall become immediately vested.
16
Accept.com
(a development stage company)
Notes to Consolidated Financial Statements (continued)
2. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
Pro forma information regarding net loss and net loss per share is required by
FAS 123 and has been determined as if the Company had accounted for its employee
stock options under the fair value method provided for in FAS 123. The fair
value of options was estimated at the date of grant using a minimum value option
pricing model with the following weighted average assumptions for options
granted during the year ended December 31, 1998: a risk-free interest rate of
6.0%, an expected life of four years, and no dividends.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense ratably over the vesting period of the options. The
effects of applying FAS 123 for pro forma disclosures are not likely to be
representative of the effects on reported net loss for future years.
The option valuation models were developed for use in estimating the fair value
of traded options which have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. The compensation cost
for the year ended December 31, 1998 and for the period from August 5, 1997
(inception) to December 31, 1997 and cumulative from August 5, 1997 (inception)
to December 31, 1998 calculated under the minimum value method was not material.
As a result, pro forma information regarding net loss is not presented.
17
Accept.com
(a development stage company)
Notes to Consolidated Financial Statements (continued)
2. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
Activity under 1998 Plan was as follows:
OPTIONS OUTSTANDING
------------------------------------------
WEIGHTED
SHARES NUMBER AVERAGE
AVAILABLE OF PRICE PER EXERCISE
FOR GRANT SHARES SHARE PRICE
---------- ---------- -------- --------
Authorized 1,554,956 -- $ -- $ --
Granted (465,800) 465,800 $ 0.05 $ 0.05
---------- ---------- -------- --------
Balance at December 31, 1998 1,089,156 465,800 $ 0.05 $ 0.05
========== ========== ======== ========
The weighted average contractual life of options outstanding as of December 31,
1998 was approximately 9.8 years. There were no options exercisable as of
December 31, 1998 and 1997. The weighted average fair value of options granted
during the year ended December 31, 1998 was $0.01.
3. COMMITMENTS
The Company leases its office facility under a noncancelable operating lease
that expires in 1999. Future minimum payments under this noncancelable operating
lease total $182,838 in 1999.
Rent expense under noncancelable operating leases was approximately $32,000, $0,
and $32,000 for the year ended December 31, 1998, the period from August 5, 1997
(inception) to December 31, 1997, and cumulative from August 5, 1997 (inception)
to December 31, 1998, respectively.
18
Accept.com
(a development stage company)
Notes to Consolidated Financial Statements (continued)
4. INCOME TAXES
The expected income tax benefit derived by applying the federal statutory rate
to the net loss incurred for the year ended December 31, 1998 and the period
from August 5, 1997 (inception) to December 31, 1998 was offset by a
corresponding increase in the deferred tax asset valuation allowance.
As of December 31, 1998, the Company had federal and state net operating loss
carryforwards each of approximately $900,000. The net operating loss
carryforwards will expire at various dates beginning in 2005, if not utilized.
Utilization of the net operating loss carryforwards may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986, as amended, and similar state provisions.
The annual limitation may result in the expiration of net operating loss
carryforwards before utilization.
As of December 31, 1998, the Company had net deferred tax assets of
approximately $350,000 relating primarily to net operating loss carryforwards.
Realization of deferred tax assets is dependent upon future earnings, if any,
the timing and amount of which are uncertain. Accordingly, the net deferred tax
assets have been fully offset by a valuation allowance. The valuation allowance
for deferred tax assets increased by $350,000 during 1998 and the period from
August 5, 1997 (inception) to December 31, 1998.
5. RELATED PARTY TRANSACTIONS
In August 1998 the Company received bridge loans totaling $220,000 from a
related party, payable upon demand and with interest compounded at 6% per annum.
In September and October 1998, in exchange for cancelation of the loans, the
Company issued 377,423 shares of Series A preferred stock to the related party.
Such shares issued were transferred to the investors of the related party, who
are also current investors of the Company. This same related party also provided
the Company with certain consulting services in exchange for shares of Series A
preferred stock in the amount of $129,589.
19
Accept.com
(a development stage company)
Notes to Consolidated Financial Statements (continued)
6. YEAR 2000 (UNAUDITED)
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The year 2000 problem is
pervasive and complex as virtually every computer operation will be affected in
some way by the rollover of the two-digit year value to 00. The issue is whether
computer systems will properly recognize date-sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail.
Based on assessments to date, management does not anticipate that the Company
will incur significant operating expenses or be required to invest heavily in
computer system improvements to be year 2000 compliant. However, significant
uncertainty exists concerning the potential costs and effects associated with
any year 2000 compliance. Year 2000 compliance problems of either the Company or
its vendors could have a material adverse effect on the Company's business,
results of operations, and financial condition.
7. SUBSEQUENT EVENTS
In April 1999, the Company entered into an Agreement and Plan of Merger (the
Merger Agreement) with another company (acquiring company). Under the terms of
the Merger Agreement, the acquiring company will acquire all of the outstanding
shares of the Company's stock and assume all outstanding stock options in
exchange for approximately 949,000 shares of the acquiring company's common
stock valued at approximately $189 million.
In April 1999, the Board of Directors approved an amendment to the Company's
1998 Stock Option Plan to cancel the provision for acceleration of vesting of
outstanding options upon consummation of a consolidation or merger of the
Company with another Company.
20
Accept.com
(a development stage company)
Condensed Consolidated Balance Sheets
(in thousands)
March 31, 1999 December 31, 1998
-------------- -----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $3,168 $4,253
Prepaid expenses and other 31 13
------ ------
Total current assets 3,199 4,266
Furniture and equipment, net 352 40
Other assets 61 4
------ ------
Total assets $3,612 $4,310
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 91 $ 36
Accrued vacation 20 22
Accrued expenses 177 61
------ ------
Total current liabilities 288 119
Shareholders' equity:
Series A convertible preferred stock,
no par value 5,244 5,140
Common stock, no par value 86 76
Shareholders' notes receivable (56) (69)
Deficit accumulated during the development stage (1,950) (956)
------ ------
Total shareholders' equity 3,324 4,191
------ ------
Total liabilities and shareholders' equity $3,612 $4,310
====== ======
See Notes to Condensed Consolidated Financial Statements.
21
Accept.com
(a development stage company)
Condensed Consolidated Statements of Operations
(in thousands)
(unaudited)
Cumulative from
August 5, 1997
Three Months Ended Three Months Ended (Inception) to
March 31, 1999 March 31, 1998 March 31, 1999
------------------ ------------------ ------------------
Operating expenses:
Research and development $ 300 $ - $ 610
Sales and marketing 398 - 550
General and administrative 325 7 846
------- ---- -------
Total operating expenses 1,023 7 2,006
------- ---- -------
Loss from operations (1,023) (7) (2,006)
Interest and other income 29 - 59
Interest expense - - (3)
------- ---- -------
29 - 56
------- ---- -------
Net loss $ (994) $ (7) $(1,950)
======= ==== =======
See Notes to Condensed Consolidated Financial Statements.
22
Accept.com
(a development stage company)
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Cumulative From
Three Three August 5, 1997
Months Ended Months Ended (Inception) to
March 31, 1999 March 31, 1998 March 31, 1999
------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (994) $ (7) $ (1,950)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 10 - 14
Issuance of warrants for Series A preferred stock in
exchange for services - - 32
Changes in operating assets and liabilities:
Prepaid expenses and other assets (18) - (35)
Accounts payable 55 7 91
Accrued vacation (2) - 20
Accrued expenses 116 - 177
------------------------------------------------
Net cash used in operating activities (833) - (1,651)
INVESTING ACTIVITIES
Purchase of furniture and equipment (322) - (366)
Other (57) - (57)
------------------------------------------------
Net cash used in investing activities (379) - (423)
FINANCING ACTIVITIES
Borrowings under bridge loans from related party - - 220
Repayment of bridge loans from related party - - (220)
Net proceeds from issuance of preferred stock 104 - 5,199
Proceeds from issuance of common stock 23 - 43
------------------------------------------------
Net cash provided by financing activities 127 - 5,242
------------------------------------------------
Net increase in cash and cash equivalents (1,085) - 3,168
Cash and cash equivalents at beginning of period 4,253 2 -
------------------------------------------------
Cash and cash equivalents at end of period $ 3,168 $ 2 $ 3,168
================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ - $ - $ 3
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Issuance of Series A preferred stock in
exchange for consulting services $ - $ - $ 130
Issuance of common stock in exchange for computer
equipment and services rendered $ 1 $ - $ 18
Issuance of common and preferred stock in exchange
for notes receivable from shareholders $ - $ - $ 56
Issuance of warrants for Series A preferred
stock in exchange for consulting services $ - $ - $ 32
See Notes to Condensed Consolidated Financial Statements.
23
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring accruals),
considered necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. For further information, refer to the consolidated financial statements
for the year ended December 31, 1998 and for the period from August 5, 1997
(inception) to December 31, 1997 and cumulative period from August 5, 1997
(inception) to December 31, 1998, and notes thereto included herein.
SUBSEQUENT EVENT
On April 25, 1999, Amazon.com, Inc. ("Amazon.com"), ADC Acquisitions, Inc., a
wholly owned subsidiary of Amazon.com, and Accept.com Financial Services
Corporation (Accept.com) entered into a definitive Agreement and Plan of Merger
(the "Merger Agreement"). Pursuant to the Merger Agreement, and subject to the
terms and conditions thereof, Amazon.com will acquire all of the capital stock
and assume all outstanding options of Accept.com. The Merger will be accounted
for under the purchase method of accounting.
Amazon.com will issue Amazon.com common stock, par value $.01 per share,
totaling approximately $189 million.
RECLASSIFICATION ADJUSTMENTS
Certain amounts for Accept.com have been reclassified to conform to
our financial statement presentation.
24
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed consolidated financial
statements give effect to previously reported acquisitions, which include
Exchange.com and Alexa Internet, and the Accept.com Merger as reported herein.
The Amazon.com pro forma column represents the combined balances and results of
operations for Amazon.com, Exchange.com, and Alexa Internet to reflect the
impact of previously reported acquisitions as reported on the Current Report on
Form 8-K filed on May 12, 1999.
The Accept.com Merger will be accounted for under the purchase method of
accounting in accordance with APB Opinion No. 16. Under the purchase method of
accounting, the purchase price is allocated to the assets acquired and
liabilities assumed based on their estimated fair values. The estimated fair
values contained herein are preliminary in nature, and may not be indicative of
the final purchase price allocation, which will be based on an assessment of
fair value to be performed by an independent appraiser. Any amounts that may be
allocable to in process research and development would be recorded as one time
charges that would reduce the goodwill reflected in the pro forma combined
condensed consolidated balance sheet and reduce the amount of amortization of
goodwill reflected in the pro forma combined condensed consolidated statements
of operations. Such preliminary estimates of the fair values of the assets and
liabilities of Accept.com have been combined with the Amazon.com pro forma
column in the unaudited pro forma combined condensed consolidated financial
statements.
The unaudited pro forma combined condensed consolidated balance sheet has been
prepared to reflect the previously reported acquisitions and the Accept.com
Merger as if they occurred on March 31, 1999. The unaudited pro forma combined
condensed consolidated statements of operations reflect the combined results of
operations of Amazon.com, the previously reported acquisitions and Accept.com
for the year ended December 31, 1998 and the three months ended March 31, 1999
as if the acquisitions occurred on January 1, 1998.
The unaudited pro forma combined condensed consolidated financial statements are
presented for illustrative purposes only and are not necessarily indicative of
the combined condensed consolidated financial position or results of operations
in future periods or the results that actually would have been realized had
Amazon.com, the previously reported acquisitions, and Accept.com been a combined
company during the specified periods. The unaudited pro forma combined condensed
consolidated financial statements, including the notes thereto, are qualified in
their entirety by reference to, and should be read in conjunction with, the
historical consolidated financial statements of Amazon.com included in its: (a)
Annual Report on Form 10-K for the year ended December 31, 1998; (b) Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999; and (c) Current
Reports on Form 8-K filed on August 27, 1998, October 26, 1998, May 12, 1999 and
May 19, 1999.
PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
(IN THOUSANDS)
(UNAUDITED)
ACCEPT.COM
AMAZON.COM PRO FORMA PRO FORMA
PRO FORMA ACCEPT.COM ADJUSTMENTS BALANCES
----------------------------------------------------
ASSETS
Current assets:
Cash $ 9,460 $3,168 $ - $ 12,628
Marketable securities 1,439,556 - - 1,439,556
Inventories 45,236 - - 45,236
Prepaid expenses and other 38,502 31 - 38,533
----------------------------------------------------
Total current assets 1,532,754 3,199 - 1,535,953
Fixed assets, net 61,797 352 - 62,149
Goodwill and other, net 565,530 61 186,096 c 751,687
Deferred charges 39,912 - 39,912
----------------------------------------------------
Total assets $2,199,993 $3,612 $186,096 $2,389,701
====================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 133,365 $ 91 $ - $ 133,456
Accrued advertising 16,294 - - 16,294
Other liabilities and accrued expenses 47,756 197 1,100 a 49,053
Current portion of long-term debt and
capital lease obligation 7,621 - - 7,621
----------------------------------------------------
Total current liabilities 205,036 288 1,100 206,424
Long-term debt and capital lease obligation 1,534,165 - - 1,534,165
Redeemable preferred stock - - - -
Stockholders' equity:
Convertible preferred stock - 5,244 (5,244)b
Common stock 1,633 86 (86)b
8 a 1,641
Additional paid-in capital 701,724 - 188,312 a 890,036
Deferred compensation and other (14,448) - - (14,448)
Accumulated other comprehensive income (4,390) - - (4,390)
Accumulated deficit and other stockholder's
equity (223,727) (2,006) 2,006 b (223,727)
----------------------------------------------------
Total stockholders' equity 460,792 3,324 184,996 649,112
----------------------------------------------------
Total liabilities and stockholders'
equity $2,199,993 $ 3,612 $186,096 $2,389,701
====================================================
See Notes to Pro Forma Combined Condensed Consolidated
Financial Statements.
25
PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
ACCEPT.COM
AMAZON.COM PRO FORMA PRO FORMA
PRO FORMA ACCEPT.COM ADJUSTMENTS BALANCES
----------------------------------------------------
Net sales $294,198 $ - $ - $294,198
Cost of sales 228,923 - - 228,923
---------------------------------------------------
Gross profit 65,275 - - 65,275
Operating expenses:
Marketing and sales 61,914 398 - 62,312
Product development 24,291 300 - 24,591
General and administrative 12,160 325 - 12,485
Merger and acquisition related costs,
including amortization of goodwill and
other purchased intangibles 57,732 - 15,508 c 73,240
---------------------------------------------------
Total operating expenses 156,097 1,023 15,508 172,628
Loss from operations (90,822) (1,023) (15,508) (107,353)
Interest income 10,979 29 - 11,008
Interest expense (16,724) - - (16,724)
----------------------------------------------------
Net interest expense (5,745) 29 - (5,716)
Net loss $(96,567) $ (994) $(15,508) $(113,069)
===================================================
Basic and diluted loss per share $ (0.61) $ (0.71)
========= =========
Shares used in computation of basic
and diluted loss per share 159,020 878 159,898
========= ========== =========
See Notes to Pro Forma Combined Condensed Consolidated Financial Statements.
26
PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
ACCEPT.COM
AMAZON.COM PRO FORMA PRO FORMA
PRO FORMA ACCEPT.COM ADJUSTMENTS BALANCES
------------------------------------------------------
Net sales $ 610,368 $ - $ - $ 610,368
Cost of sales 476,160 - - 476,160
------------------------------------------------------
Gross profit 134,208 - - 134,208
Operating expenses:
Marketing and sales 135,296 152 - 135,448
Product development 48,630 309 - 48,939
General and administrative 17,064 517 - 17,581
Merger and acquisition related costs,
including amortization of goodwill
and other purchased intangibles 184,486 - 62,032c 246,518
------------------------------------------------------
Total operating expenses 385,476 978 62,032 448,486
Loss from operations (251,268) (978) (62,032) (314,278)
Interest income 14,164 30 - 14,194
Interest expense (26,641) (4) - (26,645)
------------------------------------------------------
Net interest expense (12,477) 26 - (12,451)
Net loss $(263,745) $(952) $(62,032) $(326,729)
======================================================
Basic and diluted loss per share $ (1.75) $ (2.16)
========= =========
Shares used in computation of basic
and diluted loss per share 150,295 878 151,173
========== ========== ==========
See Notes to Pro Forma Combined Condensed Consolidated Financial Statements.
27
NOTES TO PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The pro forma combined condensed consolidated financial statements reflect the
issuance of Amazon.com common stock, par value $.01 per share ("Amazon.com
Common Stock"), and the issuance of Amazon.com replacement options for all
outstanding shares of Accept.com. The Accept.com Merger will be accounted for
under the purchase method of accounting in accordance with APB Opinion No. 16.
Amazon.com Pro Forma
The combined balances and results of operations as of and for the three month
period ended March 31, 1999, and for the period ended December 31, 1999, for
Amazon.com and previously reported acquisitions, which include Exchange.com and
Alexa Internet, are combined in the Amazon.com pro forma column to reflect the
impact of the previously reported acquisitions, as reported on the Current
Report on Form 8-K filed on May 12, 1999. The unaudited pro forma combined
condensed consolidated balance sheet has been prepared to reflect the
previously reported acquisitions and the Accept.com Merger as if they occurred
on March 31, 1999. The unaudited pro forma combined condensed consolidated
statements of operations reflect the combined results of operations of
Amazon.com, the previously reported acquisitions and Accept.com for the year
ended December 31, 1998 and the three months ended March 31, 1999 as if the
acquisitions occurred on January 1, 1998.
Accept.com
Subject to the satisfaction of all conditions precedent, the purchase price for
Accept.com is approximately $189 million and will be comprised of 877,657 shares
of Amazon.com Common Stock and replacement options, including approximately $1.1
million of acquisition costs.
Substantially all of the approximate $189 million purchase price will be
allocated to goodwill and other purchased intangibles. Preliminary estimates of
the fair value of assets and liabilities of Accept.com have been combined with
the Amazon.com proforma column in the unaudited pro forma combined condensed
consolidated financial statements.
28
PRO FORMA ADJUSTMENTS FOR ACCEPT.COM
(a) To reflect the issuance of Amazon.com Common Stock and the assumption
of all outstanding options, having an aggregate value of approximately
$189 million, including approximately $1.1 million of transaction
costs, to consummate the Accept.com Merger Agreement.
(b) To eliminate the historical stockholders' equity of Accept.com.
(c) To record the excess of the purchase price over the estimated fair
value of assets and liabilities acquired in connection with the
Accept.com Merger Agreement and the related amortization. The purchase
price allocation is based on management's preliminary estimates of the
fair values of the tangible assets and intangible assets. The book
value of tangible assets acquired and liabilities are assumed to
approximate fair value. The estimated useful life of the goodwill and
other purchased intangible assets averages approximately 3 years.
PRO FORMA LOSS PER COMMON SHARE
Basic pro forma earnings per share is computed using the weighted average
number of Amazon.com common shares outstanding during the period, excluding
Amazon.com Common Stock subject to repurchase, plus shares of Amazon.com Common
Stock issued in connection with the previously reported acquisitions and the
Accept.com Merger. Diluted pro forma earnings per share is computed using the
weighted average number of common and common equivalent shares outstanding
during the period plus shares of Amazon.com Common Stock and common equivalent
shares assumed as part of the acquisition. Common equivalent shares consist of
the incremental common shares issuable upon the exercise of stock options and
warrants (using the treasury stock method). Common equivalent shares are
excluded from the computation as their effect is antidilutive. Shares, options
and warrants issued in connection with the Mergers are assumed outstanding at
the beginning of the period.
CONFORMING AND RECLASSIFICATION ADJUSTMENTS
There were no material adjustments required to conform the accounting
policies of Accept.com. Certain amounts for Accept.com have been reclassified to
conform to Amazon.com's financial statement presentation. There have been no
significant intercompany transactions.
29
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 hereunto duly authorized.
AMAZON.COM, INC.
(Registrant)
Dated: June 9, 1999 By: /s/ Kelyn J. Brannon
-------------------------------
Kelyn J. Brannon
Vice President of Finance and
Chief Accounting Officer
30
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
2.1 Agreement and Plan of Merger, dated as of April 25, 1999,
by and among Amazon.com, Inc., ADC Acquisitions, Inc. and
Accept.com Financial Services Corporation
23.1 Consent of Ernst & Young LLP, Independent Auditors