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 would 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 products 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 a 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 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 Book Group ("Ingram") and Baker & Taylor, Inc. 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.
SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE DEBT
As of March 31, 1998, as adjusted for the offering of the Original Notes and application of the net proceeds therefrom, the Company would have had approximately $2.4 million of indebtedness outstanding (other than the Notes), consisting of capitalized lease obligations and other equipment financing. The
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accretion of original issue discount on the Notes will cause an increase in indebtedness of approximately $204.0 million by May 1, 2003. The Indenture permits the incurrence of substantial amounts of additional indebtedness by the Company and its subsidiaries. The Company may incur substantial additional indebtedness in the future. The level of the Company's indebtedness could have important consequences to Holders of the Notes, including the following: (i) the debt service requirements of any additional indebtedness could make it more difficult for the Company to make payments on the Notes; (ii) the ability of the Company to obtain any necessary financing in the future for working capital, capital expenditures, debt service requirements or other purposes may be limited; (iii) in the future, the Company may be required to dedicate a substantial portion of its cash flow from operations to the payment of principal and interest on its indebtedness and other obligations; (iv) the Company's level of indebtedness could in the future limit its flexibility in planning for, or reacting to changes in, its business; and (v) the Company's level of indebtedness in the future could make it more vulnerable in the event of a downturn in its business. The Company has experienced earnings before interest, taxes, depreciation and amortization ("EBITDA") losses since inception. For the year ended December 31, 1997, and the quarter ended March 31, 1998, as adjusted for the offering of the Original Notes and application of the net proceeds therefrom, the Company's earnings before fixed charges would have been insufficient to cover fixed charges by $27.6 million and $9.3 million, respectively. There can be no assurance that the Company will be able to improve its earnings before fixed charges or that the Company will be able to meet its debt service obligations, including its obligations under the Notes. In the event the Company's cash flow is inadequate to meet its obligations, the Company could face substantial liquidity problems. If the Company is unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, or if the Company otherwise fails to comply with the various covenants in its indebtedness, it would be in default under the terms thereof, which would permit the holders of such indebtedness to accelerate the maturity of such indebtedness and could cause defaults under other indebtedness of the Company. Such defaults could result in a default on the Notes and could delay or preclude payment of principal of, or interest on, the Notes. The ability of the Company to meet its obligations will be dependent upon its future performance, which will be subject to prevailing economic conditions and to financial, business and other factors beyond the control of the Company.
ORIGINAL ISSUE DISCOUNT; POSSIBLE UNFAVORABLE TAX AND OTHER LEGAL CONSEQUENCES FOR HOLDER OF NOTES
The Original Notes were, and the Exchange Notes will be, sold at a substantial discount from their principal amount at maturity. Although cash interest will not accrue on the Notes prior to May 1, 2003, and there will be no periodic payments of cash interest on the Notes prior to November 1, 2003, original issue discount (the difference between the stated redemption price at maturity and the issue price of the Notes) will accrue from the issue date of the Original Notes. Original issue discount will be includible as interest income periodically in a U.S. holder's gross income for U.S. federal income tax purposes in advance of receipt of the cash payments to which the income is attributable. See "Certain Federal Income Tax Consequences." Prospective investors should consult their tax advisors about the application of U.S. federal income tax law, as well as any applicable state, local or foreign tax laws. If a bankruptcy case were commenced by or against the Company under the U.S. Bankruptcy Code after the issuance of the Notes, the claim of a holder of a Note with respect to the principal amount thereof may be limited to an amount equal to the sum of (i) the initial Accreted Value and (ii) that portion of the original issue discount that is not deemed to constitute "unmatured interest' for purposes of the U.S. Bankruptcy Code. Any original issue discount that was not amortized as of any such bankruptcy filing would constitute "unmatured interest."
POTENTIAL DEPENDENCE OF COMPANY ON SUBSIDIARIES FOR REPAYMENT OF NOTES
The Original Notes are, and the Exchange Notes will be, obligations of the Company exclusively. The Company anticipates that in the future an increasing portion of its operations will be conducted through direct and indirect subsidiaries. The Company's cash flow and, consequently, its ability to service its indebtedness, including the Notes, will therefore depend to some extent upon the cash flow of its subsidiaries and the payment of funds by those subsidiaries to the Company in the form of loans, dividends or otherwise. The subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the Notes or to make any funds available therefor, whether in the form of loans,
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dividends or otherwise. In addition, the Company's subsidiaries are likely to become parties to financing arrangements, including secured financing arrangements, and such financing arrangements may contain limitations on the ability of such subsidiaries to pay dividends or to make loans or advances to the Company. Because the Company's subsidiaries will not guarantee the payment of the principal or interest on the Notes, any right of the Company to receive assets of any of its subsidiaries upon liquidation or reorganization (and the consequent right of holders of the Notes to participate in the distribution or realize proceeds from those assets) will be effectively subordinated to the claims of the creditors of any such subsidiary (including trade creditors and holders of indebtedness, including subordinated indebtedness, of such subsidiary), except if and to the extent the Company is itself a creditor of such subsidiary, in which case the claims of the Company would nonetheless be effectively subordinated to any security interests in the assets of the general unsecured obligations of such subsidiary.
The Notes are unsecured and therefore will be effectively subordinated to any secured indebtedness of the Company with respect to the assets securing such indebtedness. The Indenture permits the Company and its subsidiaries to incur indebtedness to finance, among other things, the acquisition of inventory, equipment and real property and to finance working capital and capital expenditures for its business and to secure such indebtedness. In the event of bankruptcy, liquidation, dissolution, reorganization or similar proceedings with respect to the Company, the holders of secured indebtedness will be entitled to proceed against the collateral that secures such indebtedness, and to receive proceeds from the sale and other distributions in respect of such collateral, and such collateral will not be available for satisfaction of any amounts owed under the Notes. In addition, to the extent such assets do not satisfy in full the secured indebtedness, the holders of such indebtedness would have a claim for any shortfall that would be pari passu (or effectively senior if such indebtedness were issued by a subsidiary) with the Notes. Accordingly, there may only be limited assets remaining to satisfy any claims of the holders of the Notes upon an acceleration of the Notes.
FINANCIAL AND OPERATING RESTRICTIONS
Certain covenants contained in the Indenture impose operating and financial restrictions on the Company and its Restricted Subsidiaries. Such restrictions affect, and in certain cases significantly limit, among other things, the ability of the Company or its Restricted Subsidiaries to incur indebtedness, pay dividends, prepay subordinated indebtedness, repurchase capital stock, make investments, create liens, engage in transactions with stockholders and affiliates, sell assets and engage in mergers or consolidations. A default under such indebtedness could result in an acceleration of the Notes, in which case the holders of the Notes may not be paid in full.
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 |
