Basic accounting definitions according to AMZN from 10Q:
As of January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income, which establishes standards for the reporting and display of
comprehensive income and its components. The adoption of this Statement had no
impact on the Company's net loss or stockholders' equity.
NOTE 2 - FIXED ASSETS
Fixed assets, at cost, consist of the following (in thousands):
March 31, December 31,
1998 1997
--------- ------------
Computers and equipment $ 8,416 $ 7,118
Purchased software 4,993 4,505
Leasehold improvements 1,199 914
Leased assets 362 362
------- -------
14,970 12,899
Less accumulated depreciation
and amortization 5,197 3,634
------- -------
Fixed asssets, net $ 9,773 $ 9,265
======= =======
NOTE 3 - SUBSEQUENT EVENTS
On April 27, 1998, the Company announced that its Board of Directors approved a
2-for-1 stock split of the common stock effected in the form of a dividend.
Shareholders will receive an additional share of common stock for every share
held on the
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record date of May 20, 1998. The additional shares will be payable on June 1,
1998. Accordingly, the accompanying financial statements have been restated to
reflect the stock split effected in the form of a dividend.
On April 27, 1998, the Company announced the acquisition of three Internet
companies: Bookpages Limited ("Bookpages"), Telebook, Inc. ("Telebook") and
Internet Movie Database Limited ("IMDB"). Bookpages and Telebook are online
booksellers. Bookpages has operations in the United Kingdom and Telebook has
operations primarily in Germany through its ABC Bucherdienst subsidiary. IMDB
operates a comprehensive repository for movie information on the Internet. Each
of the acquisitions will be accounted for under the purchase method of
accounting. The Company will incur charges of approximately $55 million in the
aggregate in connection with the three transactions. The consideration for the
acquisitions was comprised of cash and common stock. The Company issued an
aggregate of approximately 540,000 shares of common stock to effect the
transactions. The Company expects to amortize the intangibles resulting from the
acquisitions over approximately two years.
On May 8, 1998, the Company completed an offering of approximately $326 million
gross proceeds of 10% Senior Discount Notes due 2008 (the "Senior Discount
Notes"). The Senior Discount Notes will mature on May 1, 2008. The Senior
Discount Notes were sold at a substantial discount from their principal amount
at maturity of $530 million. There will not be any payment of interest on the
Senior Discount Notes prior to November 1, 2003. From and after May 1, 2003, the
Senior Discount Notes will bear interest, which will be payable in cash, at a
rate of 10% per annum on each May 1 and November 1, commencing November 1, 2003.
The net proceeds from the offering have and will be used to retire approximately
$75 million of existing indebtedness, and for general corporate purposes,
including working capital to fund anticipated operating losses, the expansion of
the Company's core business, investments in new business segments and markets,
including the Company's planned sales of music products and international
expansion, and capital expenditures. The Company expects, if the opportunity
arises, to use an unspecified portion of the net proceeds to acquire or invest
in complementary businesses, products and technologies. See Item 2.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward-looking statements based on current
expectations, estimates and projections about the Company's industry,
management's beliefs and certain assumptions made by management. All statements,
trends, analyses and other information contained in this report relative to
trends in net sales, gross margin, anticipated expense levels, liquidity and
capital resources, as well as other statements, including, but not limited to,
words such as "anticipate," "believe," "plan," "estimate," "expect," "seek" and
"intend," and other similar expressions, constitute forward-looking statements.
These forward-looking statements involve risks and uncertainties, and actual
results may differ materially from those anticipated or expressed in such
statements. Potential risks and uncertainties include, among others, those set
forth under "Overview," "Liquidity and Capital Resources," and "Additional
Factors That May Affect Future Results" included in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and in
the "Risk Factors" section of the Company's annual report on Form 10-K for the
year ended December 31, 1997, as filed with the SEC. Particular attention should
be paid to the cautionary statements involving the Company's limited operating
history, the unpredictability of its future revenues, the unpredictable and
evolving nature of its business model, the intensely competitive online commerce
and retail book and music industries, and the risks associated with capacity
constraints, systems development, management of growth, acquisitions, any new
products and international or domestic business expansion. Except as required by
law, the Company undertakes no obligation to update any forward-looking
statement, whether as a result of new information, future events or otherwise.
Readers, however, should carefully review the factors set forth in other reports
or documents that the Company files from time to time with the SEC.
OVERVIEW
Amazon.com is the leading online retailer of books. The Company also sells CDs,
videotapes, audiotapes and other products. All of these products are sold
through the Company's Web site. The Company was incorporated in July 1994 and
Page 7
commenced offering products for sale on its Web site in July 1995. Accordingly,
the Company has a limited operating history on which to base an evaluation of
its business and prospects. The Company's prospects must be considered in light
of the risks, expenses and difficulties frequently encountered by companies in
their early stage of development, particularly companies in new and rapidly
evolving markets such as online commerce. Such risks for the Company include,
but are not limited to, an evolving and unpredictable business model and the
management of growth. To address these risks, the Company must, among other
things, maintain and increase its customer base, implement and successfully
execute its business and marketing strategy and its expansion into new product
or geographic markets, continue to develop and upgrade its technology and
transaction-processing systems, improve its Web site, provide superior customer
service and order fulfillment, respond to competitive developments, and attract,
retain and motivate qualified personnel. There can be no assurance that the
Company will be successful in addressing such risks, and the failure to do so
could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.
Since inception, the Company has incurred significant losses and as of March 31,
1998, had an accumulated deficit of $42.9 million. The Company believes that its
success will depend in large part on its ability to (i) extend its brand
position, (ii) provide its customers with outstanding value and a superior
shopping experience and (iii) achieve sufficient sales volume to realize
economies of scale. Accordingly, the Company intends to continue to invest
heavily in marketing and promotion, product development and technology, and
operating infrastructure development. The Company also offers attractive pricing
programs, which have reduced its gross margins. Because the Company has
relatively low product gross margins, achieving profitability given planned
investment levels depends upon the Company's ability to generate and sustain
substantially increased revenue levels. As a result, the Company believes that
it will continue to incur substantial operating losses for the foreseeable
future and that the rate at which such losses will be incurred may increase
significantly from current levels. In addition, expenses associated with the
amortization of intangibles resulting from the Company's recent acquisitions and
interest expenses related to the Senior Discount Notes (as defined below) will
further affect the Company's net loss. Although the Company has experienced
significant revenue growth in recent periods, such growth rates are not
sustainable and will decrease in the future. In view of the rapidly evolving
nature of the Company's business and its limited operating history, the Company
believes that period-to-period comparisons of its operating results, including
the Company's gross profit and operating expenses as a percentage of net sales,
are not necessarily meaningful and should not be relied upon as an indication of
future performance.
As a result of the Company's limited operating history and the emerging nature
of the markets in which it competes, the Company is unable to accurately
forecast its revenues. The Company's current and future expense levels are based
largely on its investment plans and estimates of future revenues and are to a
large extent fixed. Sales and operating results generally depend on the volume
of, timing of and ability to fulfill orders received, which are difficult to
forecast. The Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall in revenues in relation to the Company's planned expenditures would
have an immediate adverse effect on the Company's business, prospects, financial
condition and results of operations. Further, as a strategic response to changes
in the competitive environment, the Company may from time to time make certain
pricing, service, marketing or acquisition decisions that could have a material
adverse effect on its business, prospects, financial condition and results of
operations. For example, the Company has agreed in certain of its promotional
arrangements with Internet aggregators to make significant fixed payments. There
can be no assurance that these arrangements will generate adequate revenues to
cover the associated expenditures, and any significant shortfall would have a
material adverse effect on the Company's financial condition and results of
operations.
The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside the Company's control. Factors that may adversely affect the Company's
quarterly operating results include (i) the Company's ability to retain existing
customers, attract new customers at a steady rate and maintain customer
satisfaction, (ii) the Company's ability to acquire product, to maintain
appropriate inventory levels and to manage fulfillment operations, (iii) the
Company's ability to maintain gross margins in its existing business and in
future product lines and markets, (iv) the development, announcement or
introduction of new sites, services and products by the Company and its
competitors, (v) price competition or higher wholesale prices in the industry,
(vi) the level of use of the Internet and online services and increasing
consumer acceptance of the Internet and other online services for the purchase
of consumer products such as those offered by the Company, (vii) the Company's
ability to upgrade and develop its systems and infrastructure, (viii) the
Company's ability to attract new personnel in a timely and effective manner,
(ix) the level of traffic on the Company's Web site, (x) the Company's ability
to manage effectively its development of new business segments and markets, (xi)
the Company's ability to successfully manage the integration of operations and
technology of acquisitions and other business combinations, (xii) technical
difficulties, system downtime or Internet brownouts, (xiii) the amount and
timing
Page 8
of operating costs and capital expenditures relating to expansion of the
Company's business, operations and infrastructure, (xiv) the number of popular
books introduced during the period, (xv) the level of merchandise returns
experienced by the Company, (xvi) governmental regulation and taxation policies,
(xvii) disruptions in service by common carriers due to strikes or otherwise and
(xviii) general economic conditions and economic conditions specific to the
Internet, online commerce and the book industry.
The Company expects that it will experience seasonality in its business,
reflecting a combination of seasonal fluctuations in Internet usage and
traditional retail seasonality patterns. Internet usage and the rate of Internet
growth may be expected to decline during the summer. Further, sales in the
traditional retail book industry are generally significantly higher in the
fourth calendar quarter of each year.
Due to the foregoing factors, in one or more future quarters the Company's
operating results may fall below the expectations of securities analysts or
investors. In such event, the trading price of the common stock would likely be
materially adversely affected.
RESULTS OF OPERATIONS
Net Sales
Quarter Ended March 31,
-----------------------
1998 1997 % Change
------- ------- --------
(in thousands)
Net sales.............................. $87,375 $16,005 446%
Net sales are composed of the selling price of books and other merchandise sold
by the Company, net of returns, as well as outbound shipping and handling
charges. Growth in net sales reflects a significant increase in units sold due
to the growth of the Company's customer base and repeat purchases from the
Company's existing customers. This increase was partially offset by a decrease
in prices. International sales represented 21% and 28% of net sales for the
quarters ended March 31, 1998 and 1997, respectively.
Gross Profit
Quarter Ended March 31,
-----------------------
1998 1997 % Change
------- ------- --------
(in thousands)
Gross profit............................ $19,321 $ 3,521 449%
Gross margin............................ 22.1% 22.0%
Gross profit is sales less the cost of sales, which consists of the cost of
merchandise sold to customers, and outbound and inbound shipping costs. Gross
profit increased in absolute dollars, reflecting the Company's increased sales
volume. Gross margin increased slightly as improvements in product costs and
other sourcing activities were largely offset by lower prices and lower overall
shipping margins.
The Company believes that offering its customers attractive prices is an
essential component of its business strategy. Accordingly, the Company offers
20% and 30% discounts on more than 400,000 titles, with featured titles
discounted at 40% and certain "special value" editions discounted up to 89%. The
Company may in the future expand or increase the discounts it offers to its
customers and may otherwise alter its pricing structure and policies.
The Company over time intends to expand its operations by promoting new or
complementary products or sales formats and by expanding the breadth and depth
of its product or service offerings. Gross margins attributable to new business
areas may be lower than those associated with the Company's existing business
activities. In particular, the Company has announced plans to offer music to
customers, and anticipates that music product gross margin, which is expected to
be lower than book gross margin, will affect overall gross margin
proportionately to its impact on product mix.
Page 9
Marketing and Sales
Quarter Ended March 31,
-----------------------
1998 1997 % Change
------- ------- --------
(in thousands)
Marketing and sales..................... $19,503 $ 3,906 399%
Percentage of net sales................. 22.3% 24.4%
Marketing and sales expenses consist primarily of advertising, public relations
and promotional expenditures, as well as payroll and related expenses for
personnel engaged in marketing, selling and fulfillment activities. All
fulfillment costs not included in cost of sales, including the cost of operating
and staffing distribution centers and customer service, are included in
marketing and sales. Marketing and sales expenses increased primarily due to
increases in the Company's advertising and promotional expenditures (including
expenses associated with Internet aggregator promotional relationships),
increased payroll and related costs associated with fulfilling customer demand
and increased credit card merchant fees resulting from higher sales. Such
expenses decreased as a percentage of net sales due to the significant increase
in net sales. The Company intends to continue to pursue its aggressive branding
and marketing campaign and expects its costs of fulfillment to increase based on
anticipated sales growth. Therefore, the Company expects marketing and sales
expenses to increase significantly in absolute dollars.
Product Development
Quarter Ended March 31,
-----------------------
1998 1997 % Change
------- ------- --------
(in thousands)
Product development..................... $ 6,729 $ 1,575 327%
Percentage of net sales................. 7.7% 9.8%
Product development expenses consist principally of payroll and related expenses
for development, editorial, systems and telecommunications operations personnel
and consultants, systems and telecommunications infrastructure, and costs of
acquired content. The increases in product development expenses were primarily
attributable to increased staffing and associated costs related to enhancing the
features, content and functionality of the Company's Web site and
transaction-processing systems, as well as increased investment in systems and
telecommunications infrastructure. Such expenses decreased as a percentage of
net sales due to the significant increase in net sales. To date, all product
development costs have been expensed as incurred. The Company believes that
continued investment in product development is critical to attaining its
strategic objectives and, as a result, expects product development expenses to
increase significantly in absolute dollars.
General and Administrative
Quarter Ended March 31,
-----------------------
1998 1997 % Change
------- ------- --------
(in thousands)
General and administrative............. $ 1,963 $ 1,142 72%
Percentage of net sales................ 2.2% 7.1%
General and administrative expenses consist of payroll and related expenses for
executive, accounting and administrative personnel, recruiting, professional
fees and other general corporate expenses. The increase in general and
administrative expenses was primarily due to increased salaries and related
expenses associated with the hiring of additional personnel. Such expenses
decreased as a percentage of net sales due to the significant increase in net
sales. The Company expects general and administrative expenses to increase in
absolute dollars as the Company expands its staff and incurs additional costs
related to the growth of its business.
Page 10
Interest Income and Expense
Quarter Ended March 31,
-----------------------
1998 1997 % Change
------- ------- --------
(in thousands)
Interest income...................... $ 1,640 $ 64 2,463%
Interest expense..................... (2,025) -- N/A
Interest income on cash, cash equivalents and short-term investments increased
due to higher cash, cash equivalents and short-term investment balances
resulting from the Company's financing activities. Interest expense for the
quarter ended March 31, 1998 consists of interest and amortization of deferred
charges related to the Company's three-year senior secured term loan (the
"Senior Loan") and interest on asset acquisitions financed through loans and
capital leases. The Company expects interest income and interest expense to
increase in the future as a result of the Senior Discount Notes (as defined
below).
Income Taxes
The Company has not generated any taxable income to date and therefore has not
paid any federal income taxes since inception. Utilization of the Company's net
operating loss carryforwards, which begin to expire in 2011, may be subject to
certain limitations under Section 382 of the Internal Revenue Code of 1984, as
amended. The Company has provided a full valuation allowance on the deferred tax
asset, consisting primarily of net operating loss carryforwards, because of
uncertainty regarding its realizability.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998 the Company's cash and cash equivalents were $98.6 million,
compared to $109.8 million at December 31, 1997.
Net cash used in operating activities of $6.6 million for the quarter ended
March 31, 1998 was primarily attributable to the net loss and increases in
inventories and prepaid expenses and other, partially offset by depreciation and
amortization, as well as increases in accrued advertising, accounts payable and
other liabilities and accrued expenses. For the quarter ended March 31, 1997,
cash provided by operating activities was $1.2 million and resulted from
increases in accounts payable and other liabilities and accrued expenses, as
well as depreciation and amortization, partially offset by the net loss and
increases in prepaid expenses and other and in inventories.
Net cash used in investing activities was $5.1 million for the quarter ended
March 31, 1998 and consisted of purchases of short-term investments and fixed
assets, partially offset by maturities of short-term investments. For the
quarter ended March 31, 1997, net cash used in investing activities consisted of
$926,000 for the purchase of fixed assets.
Net cash provided by financing activities of $415,000 for the quarter ended
March 31, 1998 resulted from net proceeds from the exercise of stock options.
Net cash provided by financing activities of $637,000 for the quarter ended
March 31, 1997 resulted from net proceeds from the exercise of stock options and
from the issuance of preferred stock.
As of March 31, 1998, the Company's principal sources of liquidity consisted of
$98.6 million of cash and cash equivalents and $18.2 million of short-term
investments. As of that date, the Company's principal commitments consisted of
obligations outstanding under its Senior Loan, obligations in connection with
the acquisition of fixed assets, operating leases and commitments for
advertising and promotional arrangements. Although the Company has no material
commitments for capital expenditures, it anticipates a substantial increase in
its capital expenditures and lease commitments consistent with anticipated
growth in operations, infrastructure and personnel. The Company may establish
one or more additional distribution centers within the next 12 months, which
would require it to commit to lease obligations, stock inventories, purchase
fixed assets and install leasehold improvements. In addition, the Company has
announced plans to continue to increase its merchandise inventory in order to
provide better availability to customers and achieve purchasing efficiencies.
Page 11
On April 27, 1998, the Company announced the acquisition of three Internet
companies: Bookpages Limited ("Bookpages"), Telebook, Inc. ("Telebook") and
Internet Movie Database Limited ("IMDB"). Bookpages and Telebook are online
booksellers. Bookpages has operations in the United Kingdom, and Telebook has
operations primarily in Germany through its ABC Bucherdienst subsidiary. IMDB
operates a comprehensive repository for movie information on the Internet. Each
of the acquisitions will be accounted for under the purchase method of
accounting. The Company will incur charges of approximately $55 million in the
aggregate in connection with the three transactions. The consideration for the
acquisitions was comprised of cash and common stock. The Company issued an
aggregate of approximately 540,000 shares of common stock to effect the
transactions. The Company expects to amortize the intangibles resulting from the
acquisitions over approximately two years.
On May 8, 1998, the Company completed an offering of approximately $326 million
gross proceeds of 10% Senior Discount Notes due 2008 ("Senior Discount Notes").
The Senior Discount Notes will mature on May 1, 2008. The Senior Discount Notes
were sold at a substantial discount from their principal amount at maturity of
$530 million. There will not be any payment of interest on the Senior Discount
Notes prior to November 1, 2003. From and after May 1, 2003, the Senior Discount
Notes will bear interest, which will be payable in cash, at a rate of 10% per
annum on each May 1 and November 1, commencing November 1, 2003. |
