Continued:
"Description of Business
Amazon.com, Inc. ("Amazon.com" or the "Company") was incorporated on July 5, 1994. The Company is the leading online retailer of books and music and offers a catalog of over three million titles, easy-to-use search and locate features, personalized recommendations, secure credit card payment, streamlined ordering and direct shipping to customers.
Basis of Presentation
The accompanying condensed consolidated financial statements as of and for the period ended September 30, 1998 and 1997 have been prepared by the Company in accordance with generally accepted accounting principles and pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). These statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the results for the periods presented. The condensed consolidated balance sheet at December 31, 1997 has been derived from the audited financial statements at that date. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations, although the Company believes that the disclosures in these condensed consolidated financial statements are adequate to make the information presented not misleading. Operating results for the quarter ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997, as amended by the Company's Current Report on Form 8-K dated August 27, 1998, filed September 11, 1998. Certain prior period amounts have been reclassified to conform to the current period presentation.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
Marketable Securities
The Company's marketable securities consist primarily of high-quality short to intermediate term fixed income securities and money market mutual funds, are classified as available-for-sale and are reported at fair value. Unrealized gains and losses are reported, net of taxes, as a component of stockholders' equity within accumulated other comprehensive income. Unrealized losses are charged against income when a decline in fair value is determined to be other than temporary. The specific identification method is used to determine the cost of securities sold. The Company classifies all investments of cash as marketable securities, including highly liquid investments with maturities of three months or less, and reflects the related cash flows as investing cash flows. As a result of the classification of highly liquid investments within marketable securities, a significant portion of the Company's gross marketable securities purchases and maturities disclosed as investing cash flows is related to highly liquid investments.
Deferred Charges
In May 1998, the Company issued approximately $326 million gross proceeds of 10% Senior Discount Notes due 2008 (the "Senior Discount Notes"). At September 30, 1998, deferred charges consisted of fees associated with the issuance of the Senior Discount Notes. The fees are being amortized into interest expense over the life of the Senior Discount Notes.
Goodwill and Other Purchased Intangibles
Goodwill and other purchased intangibles is stated net of total accumulated amortization of $21.6 million at September 30, 1998. Goodwill and substantially all other purchased intangibles are being amortized on a straight-line basis over lives ranging from two to three years.
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Foreign Currency
The functional currency of the Company's foreign subsidiaries is the local currency. Assets, liabilities, revenues and expenses of the foreign subsidiaries are translated into U.S. dollars at period end exchange rates. Translation adjustments are included in accumulated other comprehensive income, a separate component of stockholders' equity. Transaction gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved, which have been insignificant, are included in the condensed consolidated statements of operations. To date the Company has entered into no foreign currency exchange contracts or other such derivative instruments.
Recent Pronouncements
As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 131, Disclosures about Segments of an Enterprise and Related Information. The adoption of this Statement had no material impact on the Company's net loss or stockholders' equity.
NOTE 2 - BUSINESS COMBINATIONS
In April 1998, the Company acquired 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 a wholly-owned subsidiary. IMDB operates a comprehensive authoritative source of information on movies and entertainment programs on the Internet. Each of the acquisitions was accounted for under the purchase method of accounting. The aggregate purchase price of the three acquisitions, plus related charges, was approximately $55 million. The consideration for the acquisitions was comprised of common stock and cash. The Company issued an aggregate of approximately 1.1 million shares of common stock to effect the transactions. The excess of the purchase price over the fair value of net assets acquired is included in goodwill and other purchased intangibles in the accompanying condensed consolidated balance sheets and is being amortized over two years. The results of operations of the acquired companies are included in the Company's condensed consolidated financial results beginning on the date of acquisition.
The pro forma combined condensed consolidated financial information for the nine months ended September 30, 1998 and 1997, as though the Bookpages, Telebook and IMDB acquisitions had occurred on January 1 of each year, would have resulted in net sales of $360.6 million and $86.7 million, net loss of $86.7 million and $41.9 million, and basic and diluted loss per share of $1.78 and $0.96, respectively. The pro forma net loss includes amortization of goodwill and other purchased intangibles of $21.4 million for the nine months ended September 30, 1998 and 1997. This unaudited pro forma combined condensed consolidated financial information is presented for illustrative purposes only and is not necessarily indicative of the condensed consolidated results of operations in future periods or the results that actually would have been realized had Amazon.com and the acquired companies been a combined company during the specified periods.
In August 1998, the Company acquired 100 percent of the outstanding capital stock of Junglee Corp. ("Junglee"). Junglee is a leading provider of advanced Web-based virtual database technology that can help shoppers find and discover products on the Internet. The Company issued approximately 1.6 million shares of common stock and assumed all outstanding options and warrants in connection with the acquisition of Junglee. The Junglee acquisition was accounted for under the purchase method of accounting, with substantially all of the approximately $180 million purchase price allocated to goodwill and other purchased intangibles. The goodwill and substantially all other purchased intangible assets in the accompanying condensed consolidated balance sheets are being amortized on a straight-line basis over lives averaging approximately three years. The results of operations of the acquired company are included in the Company's condensed consolidated financial results beginning on the date of acquisition.
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