PART 2 OF THE 10k:
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COMPETITION. The online commerce market, particularly over the Web, is new,
rapidly evolving and intensely competitive. In addition, the retail book
industry is intensely competitive. The Company's current or potential
competitors include (i) various online booksellers and vendors of other
information-based products such as CDs and videotapes, including entrants into
narrow specialty niches, (ii) a number of indirect competitors that specialize
in online commerce or derive a substantial portion of their revenues from online
commerce, through which retailers other than the Company may offer products and
(iii) publishers, distributors and retail vendors of books, music and
videotapes, including Barnes & Noble, Inc., Bertelsmann AG and other large
specialty booksellers and integrated media corporations, many of which possess
significant brand awareness, sales volume and customer bases. The Company
believes that the principal competitive factors in its market are brand
recognition, selection, personalized services, convenience, price,
accessibility, customer service, quality of search tools, quality of editorial
and other site content and reliability and speed of fulfillment. Many of the
Company's competitors have longer operating histories, larger customer bases,
greater brand recognition and significantly greater financial, marketing and
other resources than the Company. Certain of the Company's competitors may be
able to secure merchandise from vendors on more favorable terms, devote greater
resources to marketing and promotional campaigns, adopt more aggressive pricing
or inventory availability policies and devote substantially more resources to
Web site and systems development than the Company. Increased competition may
result in reduced operating margins, loss of market share and a diminished brand
franchise. There can be no assurance that the Company will be able to compete
successfully against current and future competitors.
The Company expects that competition in the online commerce market will
intensify in the future. For example, as various market segments obtain large,
loyal customer bases, participants in those segments may seek to leverage their
market power to the detriment of participants in other market segments. In
addition, new technologies and the expansion of existing technologies may
increase the competitive pressures on online retailers, including the Company.
For example, "shopping agent" technologies will permit customers to quickly
compare the Company's prices with those of its competitors. Competitive
pressures created by any one of the Company's competitors, or by the Company's
competitors collectively, could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
SYSTEM DEVELOPMENT AND OPERATION RISKS. The Company's revenues depend on
the number of visitors who shop on its Web site and the volume of orders it
fulfills. Any system interruptions that result in the unavailability of the
Company's Web site or reduced order fulfillment performance would reduce the
volume of goods sold and the attractiveness of the Company's product and service
offerings. The Company has experienced periodic system interruptions, which it
believes will continue to occur from time to time. The Company uses an
internally developed system for its Web site, search engine and substantially
all aspects of transaction processing, including order management, cash and
credit card processing, purchasing, inventory management and shipping. The
Company will be required to add additional software and hardware and further
develop and upgrade its existing technology, transaction-processing systems and
network infrastructure to accommodate increased traffic on its Web site and
increased sales volume through its transaction-processing systems. Any inability
to do so may cause unanticipated system disruptions, slower response times,
degradation in levels of customer service, impaired quality and speed of order
fulfillment, or delays in reporting accurate financial information. There can be
no assurance that the Company will be able to accurately project the rate or
timing of increases, if any, in the use of its Web site or in a timely manner to
effectively upgrade and expand its transaction-processing systems or to
integrate smoothly any newly developed or purchased modules with its existing
systems. Any inability to do so could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
Substantially all of the Company's computer and communications hardware is
located at a single leased facility in Seattle, Washington. The Company's
systems and operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, break-ins, earthquake and similar
events. The Company does not currently have redundant systems or a formal
disaster recovery plan and does not carry sufficient business interruption
insurance to compensate it for losses that may occur. Despite the implementation
of network security measures by the Company, its servers are vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions,
which could lead to interruptions, delays, loss of critical data or
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the inability to accept and fulfill customer orders. The occurrence of any of
the foregoing events could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
MANAGEMENT OF POTENTIAL GROWTH. The Company has rapidly and significantly
expanded its operations and anticipates that further expansion will be required
to address potential growth in its customer base, to expand its product and
service offerings and its international operations and to pursue other market
opportunities. The Company's employee base has similarly expanded, growing from
158 employees as of December 31, 1996 to 614 employees as of December 31, 1997.
The expansion of the Company's operations and employee base has placed, and is
expected to continue to place, a significant strain on the Company's management,
operational and financial resources. To manage the expected growth of its
operations and personnel, the Company will be required to improve existing and
implement new transaction-processing, operational and financial systems,
procedures and controls and to expand, train and manage its growing employee
base. There can be no assurance that the Company's current and planned
personnel, systems, procedures and controls will be adequate to support the
Company's future operations, that management will be able to hire, train,
retain, motivate and manage required personnel or that Company management will
be able to successfully identify, manage and exploit existing and potential
market opportunities. If the Company is unable to manage growth effectively,
such inability could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
RISKS OF NEW BUSINESS AREAS. 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. Expansion
of the Company's operations in this manner would require significant additional
expenses and development, operations and editorial resources and would strain
the Company's management, financial and operational resources. Furthermore, the
Company may not benefit from the first-mover advantage that it experienced in
the online book market and gross margins attributable to new business areas may
be lower than those associated with the Company's existing business activities.
There can be no assurance that the Company will be able to expand its operations
in a cost-effective or timely manner. Furthermore, any new business launched by
the Company that is not favorably received by consumers could damage the
Company's reputation or the Amazon.com brand. The lack of market acceptance of
such efforts or the Company's inability to generate satisfactory revenues from
such expanded services or products to offset their cost could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations.
RISKS OF INTERNATIONAL EXPANSION. The Company over time intends to expand
its presence in foreign markets. To date, the Company has only limited
experience in sourcing, marketing and distributing products on an international
basis and in developing localized versions of its Web site and other systems.
The Company expects to incur significant costs in establishing international
facilities and operations, in promoting its brand internationally, in developing
localized versions of its Web site and other systems and in sourcing, marketing
and distributing products in foreign markets. There can be no assurance that the
Company's international efforts will be successful. If the revenues resulting
from international activities are inadequate to offset the expense of
establishing and maintaining foreign operations, such inadequacy could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. In addition, there are certain risks
inherent in doing business on an international level, such as unexpected changes
in regulatory requirements, export and import restrictions, tariffs and other
trade barriers, difficulties in staffing and managing foreign operations, longer
payment cycles, political instability, fluctuations in currency exchange rates,
seasonal reductions in business activity in other parts of the world and
potentially adverse tax consequences, any of which could adversely impact the
success of the Company's international operations. There can be no assurance
that one or more of such factors will not have a material adverse impact on the
Company's future international operations and, consequently, on the Company's
business, prospects, financial condition and results of operations.
RISKS OF BUSINESS COMBINATIONS AND STRATEGIC ALLIANCES. The Company may
choose to expand its operations or market presence by entering into business
combinations, investments, joint ventures or other strategic alliances with
third parties. Any such transaction would be accompanied by the risks commonly
encountered in such transactions. These include, among others, the difficulty of
assimilating the operations,
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technology and personnel of the combined companies, the potential disruption of
the Company's ongoing business, the inability to retain key technical and
managerial personnel, the inability of management to maximize the financial and
strategic position of the Company through the successful integration of acquired
businesses, additional expenses associated with amortization of acquired
intangible assets, the maintenance of uniform standards, controls and policies
and the impairment of relationships with existing employees and customers. There
can be no assurance that the Company would be successful in overcoming these
risks or any other problems encountered in connection with such business
combinations, investments, joint ventures or other strategic alliances, or that
such transactions will not have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE. To remain competitive, the Company must
continue to enhance and improve the responsiveness, functionality and features
of the Amazon.com online store. The Internet and the online commerce industry
are characterized by rapid technological change, changes in user and customer
requirements and preferences, frequent new product and service introductions
embodying new technologies and the emergence of new industry standards and
practices that could render the Company's existing Web site and proprietary
technology and systems obsolete. The Company's success will depend, in part, on
its ability to license leading technologies useful in its business, enhance its
existing services, develop new services and technology that address the
increasingly sophisticated and varied needs of its prospective customers and
respond to technological advances and emerging industry standards and practices
on a cost-effective and timely basis. The development of Web site and other
proprietary technology entails significant technical, financial and business
risks. There can be no assurance that the Company will successfully implement
new technologies or adapt its Web site, proprietary technology and
transaction-processing systems to customer requirements or emerging industry
standards. If the Company is unable, for technical, legal, financial or other
reasons, to adapt in a timely manner in response to changing market conditions
or customer requirements, such inability could have a material adverse effect on
the Company's business, prospects, financial condition and results of
operations.
DEPENDENCE ON KEY PERSONNEL. The Company's performance is substantially
dependent on the continued services and on the performance of its senior
management and other key personnel, particularly Jeffrey P. Bezos, its
President, Chief Executive Officer and Chairman of the Board. The Company does
not have long-term employment agreements with any of its key personnel and
maintains no "key person" life insurance policies. The loss of the services of
any of its executive officers or other key employees could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations.
RELIANCE ON CERTAIN SUPPLIERS. The Company purchases a substantial majority
of its products from two major vendors, Ingram and B&T. Ingram is the Company's
single largest supplier and accounted for 58% and 59% of the Company's inventory
purchases in 1997 and 1996, respectively. The Company has no long-term contracts
or arrangements with any of its vendors that guarantee the availability of
merchandise, the continuation of particular payment terms or the extension of
credit limits. There can be no assurance that the Company's current vendors will
continue to sell merchandise to the Company on current terms or that the Company
will be able to establish new or extend current vendor relationships to ensure
acquisition of merchandise in a timely and efficient manner and on acceptable
commercial terms. If the Company were unable to develop and maintain
relationships with vendors that would allow it to obtain sufficient quantities
of merchandise on acceptable commercial terms, such inability could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.
IMPACT OF LOAN FACILITY. On December 23, 1997, the Company borrowed $75
million pursuant to a three-year senior secured term credit agreement (the
"Loan"). See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." The Loan includes
covenants restricting certain activities by the Company, including (i) the
incurrence of additional indebtedness, (ii) consolidations, mergers and sales of
assets and (iii) dividends and distributions to stockholders. In addition,
financial covenants require the Company to, among other things, maintain a
minimum cash balance, maintain certain levels of earnings or losses before
interest, taxes, depreciation and amortization, limit its accounts payable aging
and limit its capital and acquisition expenditures. The Loan contains standard
events of default including, among other things, a change in ownership or
control. As a result, the Loan may reduce
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the Company's operational flexibility and may limit its ability to pursue market
opportunities. The Company's ability to generate planned future revenues, and
therefore its ability to comply with the Loan covenants, may be affected by
events beyond its control. If the Company were unable to satisfy the Loan
covenants, the lending institutions would be entitled to exercise their
remedies, including the right to declare all principal and interest immediately
due and payable. If the Company were unable to make such payment, or were unable
to repay the amount owing under the Loan at the end of its term, the lending
institutions could foreclose on the Company's assets, substantially all of which
are pledged as security for the Loan. In connection with the Loan, the Company
issued warrants to purchase a total of 750,000 shares of the Company's common
stock. All or a portion of the warrants will be canceled if the Company repays
the Loan in full prior to certain specified dates. If the Company does not repay
the Loan prior to such dates, and if any of the warrants are exercised, such
exercise may dilute the economic interests of the Company's stockholders.
RISKS ASSOCIATED WITH DOMAIN NAMES. The Company currently holds various Web
domain names relating to its brand, including the "Amazon.com" domain name. The
acquisition and maintenance of domain names generally is regulated by
governmental agencies and their designees. For example, in the United States,
the National Science Foundation has appointed Network Solutions, Inc. as the
exclusive registrar for the ".com, " ".net" and ".org" generic top-level
domains. The regulation of domain names in the United States and in foreign
countries is subject to change. Governing bodies may establish additional
top-level domains, appoint additional domain name registrars or modify the
requirements for holding domain names. As a result, there can be no assurance
that the Company will be able to acquire or maintain relevant domain names in
all countries in which it conducts business. Furthermore, the relationship
between regulations governing domain names and laws protecting trademarks and
similar proprietary rights is unclear. The Company, therefore, may be unable to
prevent third parties from acquiring domain names that are similar to, infringe
upon or otherwise decrease the value of its trademarks and other proprietary
rights. Any such inability could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES. The Company is not
currently subject to direct regulation by any domestic or foreign governmental
agency, other than regulations applicable to businesses generally and laws or
regulations directly applicable to access to online commerce. However, due to
the increasing popularity and use of the Internet and other online services, it
is possible that a number of laws and regulations may be adopted with respect to
the Internet or other online services covering issues such as user privacy,
pricing, content, copyrights, distribution and characteristics and quality of
products and services. Furthermore, the growth and development of the market for
online commerce may prompt calls for more stringent consumer protection laws
that may impose additional burdens on those companies conducting business
online. The adoption of any additional laws or regulations may decrease the
growth of the Internet or other online services, which could, in turn, decrease
the demand for the Company's products and services and increase the Company's
cost of doing business, or otherwise have an adverse effect on the Company's
business, prospects, financial condition and results of operations. Moreover,
the applicability to the Internet and other online services of existing laws in
various jurisdictions governing issues such as property ownership, sales and
other taxes, libel and personal privacy is uncertain and may take years to
resolve. Any such new legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to the
Company's business, or the application of existing laws and regulations to the
Internet and other online services could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
.......BUT , OF COURSE, I HAVE ALREADY TOLD YOU ALL THIS FOR THE LAST 2 MONTHS..............;^) |
