Some of the risks LOL:-)
"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-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.
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We Have an Accumulated Deficit and Anticipate Further Losses
We have incurred significant losses since we began doing business. As of
June 30, 1999, we had an accumulated deficit of $361.7 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' demands,
- our ability to acquire merchandise, manage our inventory and fulfill
orders,
- changes in gross margins of our current and future products, services and
markets,
- purchases of large quantities of toys and electronics products,
particularly in advance of the holidays for which demand may not
materialize,
- 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, videos, toys,
electronic products and other products or services, and our ability to
properly anticipate demand,
- the mix of books, music, videos, toys, electronics products and other
products sold by us,
- 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, music, toy and
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electronics industries usually increase significantly in the fourth calendar
quarter of each year. The fourth quarter seasonal impact may be even more
pronounced in our toys and consumer electronics businesses.
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, video, toy and consumer
electronics industries are intensely competitive. Our current or potential
competitors include:
- online vendors of books, CDs, videotapes, DVDs, toys and electronics,
- 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,
- major store-based retailers of toys, other children's products and
electronics, and
- traditional retailers and manufacturers who currently sell, or who may
sell, products or services through the Internet, mail order or direct
marketing.
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, (1) Bertelsmann purchased a significant interest in
Barnes & Noble's online venture, barnesandnoble.com inc., and has launched
online stores in several countries, and (2) CDNow, Inc. agreed to merge with
Columbia House, the jointly owned music retail arm of Sony and Time Warner. 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
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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 may 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 successfully execute our announced distribution center expansion plan
and continue to improve our transaction-processing, operational and financial
systems, procedures and controls. This expansion will continue to place a
significant strain on our management, operational 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 will also need to retain flexibility within our distribution and logistics
network, including the ability to manage the operational challenges of shipping
non-uniform and sometimes heavy products as part of the fulfillment of toy and
electronics orders. 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
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such areas as content, privacy, network security, encryption or distribution.
This may affect our ability to conduct business internationally.
Risks of Business Combinations and Strategic Alliances
We plan to continue to expand our operations and 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,
- 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 have acquired, and in the future may 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 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 book, music, and video titles from three
major vendors, Ingram Book Group, Baker & Taylor, Inc. and Valley Media, Inc.
Although we increased our direct purchasing from manufacturers during 1998, we
continue to purchase a majority of our book, music, and video titles 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 Face Inventory and Forecasting Risk with our Toy and Electronics Businesses
The toy and electronics businesses are difficult to manage and have
inherent complexities that differ from those encountered in the book, music, and
video businesses. Because we are a new participant in these markets, we do not
yet have a basis to forecast product demand. Further, the acquisition of many of
the toy and electronics products that we offer involves a significant lead-time
and up-front financial commitment.
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We will be exposed to significant inventory risks as a result of
seasonality and rapid changes in product cycles, consumer tastes and "fads" in
the market for such products. In order to achieve success in our toy and
electronics sales categories, we must seek to predict these trends and attempt
neither to overstock unpopular nor understock popular products. The demand for
products can change between the time they are ordered and the date of eventual
sale. We will be particularly exposed to this risk in the first year of
operations in our toy and consumer electronics businesses, particularly in
anticipation of the holiday selling season.
Our ability to negotiate satisfactory terms with manufacturers or suppliers
so that we might stock certain "preferred" products or brands in the toy and
consumer electronics businesses may be affected by our time of entry in such
lines of business and the competitive positions of other physical stores and
catalog and online retailers.
In order to provide customers with a high quality experience and minimize
the risk of stocking-out, we will carry a broad selection and significant
inventory levels of toy and electronics products. In the event that one or more
of these products do not sell through in sufficient quantities to consumers at
anticipated prices or during anticipated selling seasons, we may be required to
markdown some of our prices or write down inventory, which will reduce our
revenues and gross margins.
We Are Highly Leveraged
We have significant indebtedness. As of June 30, 1999, we had indebtedness
under senior discount notes, convertible subordinated notes, 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 subordinated 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 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
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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 Cooperative, Inc. filed suit against us alleging trademark
infringement and unfair competition under state and federal law. Amazon
Bookstore Cooperative, Inc. 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.
Risks of Year 2000 Noncompliance
We are in the process of assessing and remediating the year 2000 issues
associated with the computer systems, software, other property and equipment we
use. Our year 2000 readiness plan includes a multi-phased analysis of key
information technology and non-information technology-related components of our
business, operations and infrastructure. We expect that many aspects of this
phased approach will not be complete until the fourth quarter of 1999. As part
of the implementation of our year 2000 readiness plan, we will continue to
inventory and identify all significant internal and external hardware, software
and data chips to assess and evaluate the year 2000 preparedness of these
systems, correct or convert our critical data-processing systems and information
technology to recognize the year 2000, and test and evaluate the year 2000
compliance of previously non-compliant hardware, software and data chips. We
cannot guarantee that we will be successful in our efforts to make our critical
systems year 2000 compliant or that the year 2000 problem will not adversely
affect our business.
As part of our year 2000 readiness plan, we have engaged in formal
communications with our significant suppliers and service providers to determine
the extent to which our systems may be vulnerable if such third parties 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. 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. Another area of vulnerability that is
beyond our control is the year 2000 integrity of the computers and software used
by our customers to access our online stores. We are limited
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in our efforts to address the year 2000 problem as it relates to third parties
and must rely solely on the assurances of these third parties as to their year
2000 preparedness.
We have engaged a third-party consulting firm to assist in the development
of a formal contingency plan. We believe that such contingency plan will be
completed in the fourth quarter of 1999. We cannot guarantee that the
contingency plan will adequately address all circumstances that may disrupt our
operations or that such planning will prevent circumstances that may cause a
material adverse effect on our operating results or financial condition.
Our Stock Price Is Highly Volatile
The trading price of our common stock fluctuates significantly. For
example, during the 52-week period ended July 30, 1999 (as adjusted for the
2-for-1 split of our common stock on June 1, 1998 and the 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 $14.563 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,
auctions, toys, electronics 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk for the impact of interest rate
changes and changes in the market values of its investments.
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio and its long-term debt. The
Company's entire investment portfolio is designated as available-for sale, and
accordingly is presented at fair value on the consolidated balance sheets. The
Company has not utilized derivative financial instruments in its investment
portfolio. The Company's long-term debt includes the Senior Discount Notes and
the Convertible Notes. Long-term debt is stated at amortized cost on the
consolidated balance sheets.
The Company employs established investment policies and procedures to
manage the market risk of its marketable securities. 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." |
