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"The pro forma combined condensed consolidated financial information for the nine months ended September 30, 1998 and 1997, as though the Junglee acquisition had occurred on January 1 of each year, would have resulted in net sales of $358.7 million and $82.7 million, net loss of $127.0 million and $66.6 million, and basic and diluted loss per share of $2.54 and $1.51, respectively. The pro forma net loss includes amortization of goodwill and other purchased intangibles of $43.8 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 Junglee been a combined company during the specified periods.
In August 1998, the Company acquired 100 percent of the outstanding capital stock of Sage Enterprises, Inc. ("PlanetAll"). PlanetAll, based in Boston, Massachusetts, provides a Web-based address book, calendar and reminder service. The
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Company issued approximately 800,000 shares of common stock and assumed all outstanding options in connection with the acquisition of PlanetAll. The PlanetAll acquisition was accounted for as a pooling of interests and, as a result, the Company's condensed consolidated financial statements have been restated for all periods presented. The historical results of the pooled entities reflect each of their actual operating cost structures and, as a result, do not necessarily reflect the cost structure of the newly combined entity. The historical results do not purport to be indicative of results which may occur in the future.
Net sales for PlanetAll were not significant and net loss was $4.1 million and $2.0 million for the nine months ended September 30, 1998 and 1997, respectively. There were no significant intercompany transactions between the two companies and no significant conforming accounting adjustments.
NOTE 3 - DEBT
In May 1998, the Company completed the offering of approximately $326 million gross proceeds of the Senior Discount Notes due May 1, 2008. Pursuant to a registration statement on Form S-4, in September 1998 the Company completed an exchange offer of 10% Senior Discount Notes due 2008 (the "Exchange Notes") which are registered under the Securities Act of 1933, as amended, for all outstanding Senior Discount Notes. The Exchange Notes have identical terms in all material respects to the terms of the original Senior Discount Notes, except that the Exchange Notes generally are freely transferable (the Exchange Notes are referred to throughout these notes to condensed consolidated financial statements interchangeably with the Senior Discount Notes). The Exchange Notes were issued under the indenture governing the original Senior Discount Notes (the "Indenture"). The Senior Discount Notes were sold at a substantial discount from their principal amount at maturity of $530 million. Prior to November 1, 2003, no cash interest payments are required; instead, interest will accrete during this period to the $530 million aggregate principal amount at maturity. From and after May 1, 2003, the Senior Discount Notes will bear interest at a rate of 10% per annum payable in cash on each May 1 and November 1.
The Senior Discount Notes are redeemable, at the option of the Company, in whole or in part, at any time on or after May 1, 2003, at the redemption prices set forth in the Indenture, plus accrued interest, if any, to the date of redemption. At any time prior to May 1, 2001, the Company also may redeem up to 35% of the aggregate principal amount at maturity of the Senior Discount Notes with the proceeds of one or more sales of Capital Stock (as defined in the Indenture) (other than Disqualified Stock (as defined in the Indenture)), at 110 % of their Accreted Value (as defined in the Indenture) on the redemption date, plus accrued interest, if any, to the date of redemption; provided that after any such redemption at least 65% of the aggregate principal amount at maturity of Senior Discount Notes originally issued remains outstanding. In addition, at any time prior to May 1, 2003, the Company may redeem all, but not less than all, of the Senior Discount Notes at a redemption price equal to the sum of (i) the Accreted Value (as defined in the Indenture) on the redemption date, plus (ii) accrued interest, if any, to the redemption date, plus (iii) the Applicable Premium (as defined in the Indenture).
Upon a Change of Control (as defined in the Indenture), the Company would be required to make an offer to purchase the Senior Discount Notes at a purchase price equal to 101% of their Accreted Value on the date of purchase, plus accrued interest, if any. There can be no assurance that the Company would have sufficient funds available at the time of any Change of Control to make any required debt repayment (including repurchases of the Senior Discount Notes).
The Senior Discount Notes are senior unsecured indebtedness of the Company ranking pari passu with the Company's existing and future unsubordinated, unsecured indebtedness and senior in right of payment to all subordinated indebtedness of the Company. The Senior Discount Notes are effectively subordinated to all secured indebtedness and to all existing and future liabilities of the Company's subsidiaries.
The Indenture contains certain covenants that, among other things, limit the ability of the Company and its Restricted Subsidiaries (as defined in the Indenture) 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 and consolidations. However, these limitations are subject to a number of important qualifications and exceptions.
A portion of the net proceeds from the offering of the Senior Discount Notes has been used to retire approximately $75 million of indebtedness outstanding as of December 31, 1997.
NOTE 4 - STOCKHOLDERS' EQUITY
In June 1998, the Company effected a two-for-one stock split in the form of a stock dividend to stockholders of record on May 20, 1998. Accordingly, the accompanying condensed consolidated financial statements have been restated to reflect the split.
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In June 1998, the Company increased the number of authorized shares of common stock, par value $0.01 per share, from 100 million shares to 300 million shares.
NOTE 5 - COMPREHENSIVE INCOME (LOSS)
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 established standards for the reporting and display of comprehensive income and its components in the financial statements. The adoption of SFAS No. 130 had no impact on the Company's net loss or stockholders' equity. For the quarter and nine months ended September 30, 1998, comprehensive loss was $44.5 million and $77.5 million, respectively. The difference between net loss and comprehensive loss for each period presented is due to unrealized gains or losses on marketable securities classified as available-for-sale and foreign currency translation adjustments. The Company had no comprehensive income items in fiscal year 1997.
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 amended by the Company's Current Report on Form 8-K dated August 27, 1998, filed September 11, 1998. 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 Securities and Exchange Commission (the "SEC").
OVERVIEW
Amazon.com is the leading online retailer of books and music. The Company also sells 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 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, competition 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, effectively manage and integrate acquisitions and other business combinations, 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 September 30, 1998, had an accumulated deficit of $115.6 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
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