8-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

October 21, 2003
DATE OF REPORT
(DATE OF EARLIEST EVENT REPORTED)

AMAZON.COM, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

DELAWARE
(STATE OR OTHER JURISDICTION
OF INCORPORATION) 000-22513
(COMMISSION FILE NO.) 91-1646860
(IRS EMPLOYER
IDENTIFICATION NO.)

1200 12TH AVENUE SOUTH, SUITE 1200, SEATTLE, WASHINGTON 98144

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

(206) 266-1000

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

TABLE OF CONTENTS

	ITEM 12. RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SIGNATURES
EXHIBIT INDEX
EXHIBIT 99.1
EXHIBIT 99.2

ITEM 12. RESULTS OF OPERATIONS AND FINANCIAL CONDITION

     On October 21, 2003, Amazon.com, Inc. announced its third quarter 2003 financial results. A copy of the press release containing the announcement is included as Exhibit 99.1 and additional information regarding non-GAAP financial measures included in certain of Amazon.com’s public disclosures, including its third quarter 2003 financial results announcement, is included as Exhibit 99.2. Both of these exhibits are incorporated herein by reference.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	AMAZON.COM, INC. (REGISTRANT)
	By:	/s/ THOMAS J. SZKUTAK Thomas J. Szkutak Senior Vice President and Chief Financial Officer
Dated: October 21, 2003

EXHIBIT INDEX

Exhibit Number	Description
Item 99.1	Press Release dated October 21, 2003 announcing Amazon.com, Inc.’s Third Quarter 2003 Financial Results.
Item 99.2	Information Regarding Certain Non-GAAP Financial Measures.

EX-99.1 3 v93742exv99w1.htm EXHIBIT 99.1

Exhibit 99.1

AMAZON.COM ANNOUNCES THIRD-QUARTER FINANCIAL RESULTS; EXPECTS
RECORD HOLIDAY SHOPPING SEASON

SEATTLE-(BUSINESS WIRE)-October 21, 2003-Amazon.com, Inc. (NASDAQ: AMZN) today announced financial results for its third quarter ended September 30, 2003.

Operating cash flow was $284 million for the trailing twelve months, compared with $151 million for the trailing twelve months ended September 30, 2002. Free cash flow was $239 million for the trailing twelve months, compared with $120 million for the trailing twelve months ended September 30, 2002.

Common shares outstanding plus shares underlying stock-based employee awards totaled 433 million at September 30, 2003, an increase of 1% compared with a year ago.

Net sales were $1.13 billion in the third quarter, compared with $851 million in third quarter 2002, an increase of 33%. Net sales benefited by $29 million from changes in foreign exchange rates compared with third quarter 2002.

Operating income was $52 million in the third quarter, or 5% of net sales, compared with an operating loss of $10 million in third quarter 2002. Consolidated segment operating income improved $46 million to $74 million, or 6% of net sales, compared with $27 million, or 3% of net sales, in third quarter 2002.

Net income was $16 million in the third quarter, or $0.04 per diluted share, compared with a net loss of $35 million, or $0.09 per share, in third quarter 2002. Pro forma net income in the third quarter grew to $48 million, or $0.11 per diluted share, compared with $0 million, or $0.00 per diluted share, in third quarter 2002.

“Thanks to free shipping and low prices, we expect more customers to turn to us for their holiday gifting needs this year — producing our biggest holiday shopping season ever,” said Jeff Bezos, Amazon.com founder and CEO.

The Company currently offers Free Super Saver Shipping on orders over $25 at www.amazon.com and free shipping options at its U.K., German, French, Japanese and Canadian sites. Amazon.com also offers 30% off books over $15 and continues to lower prices every day across its product offerings including electronics, tools and bestselling CDs and DVDs. To encourage customers to try its newest stores, the Company is currently offering promotional discounts in apparel and sporting goods.

See “Financial Measures” for additional information.

Quarterly Highlights

• Worldwide unit growth was 36%, compared with third quarter 2002.

• Third-party seller units (new, used and refurbished items sold on the Company’s Websites by businesses and individuals) grew to 22% of worldwide units in the third quarter, compared with 17% of units a year ago.

• North America segment sales, representing the Company’s U.S. and Canadian sites, grew 21% to $709 million in the third quarter and segment operating income grew 137% to $63 million, or 9% of net sales, compared with third quarter 2002.

• International segment sales, representing the Company’s U.K., German, French and Japanese sites, grew 61% to $425 million in the third quarter and benefited by $28 million from changes in foreign exchange rates compared with third quarter 2002. International segment operating income was $11 million, or 3% of net sales.

• Inventory turns for the trailing twelve months were 19, consistent with a year ago.

• The Company expanded selection by launching a sporting goods store in the U.S. and an electronics store in Japan.

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Financial Guidance

The following forward-looking statements reflect Amazon.com’s expectations as of October 21, 2003. Results may be materially affected by many factors, such as fluctuations in foreign exchange rates, changes in global economic conditions and consumer spending, world events, the emerging nature and rate of growth of the Internet and online commerce, and the various factors detailed below.

     Fourth Quarter 2003 Guidance

• Fourth quarter net sales are expected to be between $1.76 billion and $1.91 billion, or grow between 23% and 34%, compared with fourth quarter 2002.

• Consolidated segment operating income is expected to be between $125 million and $155 million.

• Operating income is expected to be between $110 million and $140 million, assuming, among other things, that the Company does not record any revisions to its restructuring-related estimates and that the closing price of Amazon.com common stock on December 31, 2003 is identical to the closing price of $48.43 on September 30, 2003.

     Full Year 2004 Expectations

• Net sales are expected to be between $5.75 billion and $6.25 billion.

• Consolidated segment operating income is expected to be between $375 million and $475 million.

• Operating income is expected to be between $315 million and $415 million, assuming, among other things, that the Company does not record any revisions to its restructuring-related estimates and that the closing price of Amazon.com common stock on December 31, 2003 and December 31, 2004 is identical to the closing price of $48.43 on September 30, 2003.

A conference call will be Webcast live today at 2 p.m. PT/5 p.m. ET and will be available at least through December 31, 2003, at www.amazon.com/ir. This call will contain forward-looking statements and other material information regarding the Company’s financial and operating results.

These forward-looking statements are inherently difficult to predict. Actual results could differ materially for a variety of reasons, including, in addition to the factors discussed above, the amount that Amazon.com invests in new business opportunities and the timing of those investments; the mix of products sold to customers; the mix of net sales derived from products as compared with services; competition; risks of inventory management; the degree to which the Company enters into, maintains and develops commercial agreements and strategic transactions; seasonality; international growth and expansion; and risks of fulfillment throughput and productivity. Other risks and uncertainties include, among others, risk of future losses, significant amount of indebtedness, potential fluctuations in operating results, management of potential growth, system interruptions, consumer trends, fulfillment center optimization, limited operating history, government regulation and taxation, fraud and new business areas. More information about factors that potentially could affect Amazon.com’s financial results is included in Amazon.com’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2002, and all subsequent filings.

Financial Measures

The following measures are defined by the Securities and Exchange Commission as non-GAAP financial measures.

Free Cash Flow

Operating cash flow is net cash provided by (used in) operating activities, including cash outflows for interest and excluding proceeds from the exercise of stock-based employee awards. Free cash flow is operating cash flow less cash outflows for purchases of fixed assets including internal-use software and Website development. A tabular reconciliation of differences from the comparable GAAP measure-operating cash flow-is included in the attached “Supplemental Financial Information and Business Metrics.”

2

Consolidated Segment Operating Income

Consolidated segment operating income is the sum of segment operating income of our individual segments and excludes the following line items on the Company’s statements of operations:

• Stock-based compensation,

• Amortization of other intangibles, and

• Restructuring-related and other.

A tabular reconciliation of differences from the comparable GAAP measure - operating income (loss) - is included in the attached “Pro Forma Statements of Operations.”

Pro Forma Net Income

Pro forma net income excludes the following line items on the Company’s statements of operations:

• Stock-based compensation,

• Amortization of other intangibles,

• Restructuring-related and other,

• Remeasurement of 6.875% PEACS and other,

• Equity in losses of equity-method investees, net, and

• Cumulative effect of change in accounting principle.

A tabular reconciliation of differences from the comparable GAAP measure-net income (loss)-is included in the attached “Pro Forma Statements of Operations.”

For additional information regarding these non-GAAP financial measures, see exhibit 99.2 to our Form 8-K filed contemporaneously with the issuance of this release.

About Amazon.com

Amazon.com, a Fortune 500 company based in Seattle, opened on the World Wide Web in July 1995 and today offers Earth’s Biggest Selection. Amazon.com seeks to be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer its customers the lowest possible prices. Amazon.com and other sellers list millions of unique new and used items in categories such as sporting goods, apparel and accessories, books, music, DVDs, electronics and office, kids and baby and home and garden.

Amazon.com operates six Websites: www.amazon.com, www.amazon.co.uk, www.amazon.de, www.amazon.fr, www.amazon.co.jp and www.amazon.ca.

Contacts:

Amazon.com Investor Relations	Amazon.com Public Relations
Tim Stone, 206/266-2171, ir@amazon.com	Bill Curry, 206/266-7180

3

AMAZON.COM, INC.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

		Three Months Ended						Nine Months Ended						Twelve Months Ended
		September 30,						September 30,						September 30,
		2003			2002			2003			2002			2003			2002
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		$	641,728		$	270,438		$	738,254		$	540,282		$	327,564		$	432,307
OPERATING ACTIVITIES:
Net income (loss)			15,563			(35,080	)		(37,872	)		(151,783	)		(35,221	)		(146,696	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
	Depreciation of fixed assets and other amortization		18,338			20,501			57,091			62,411			76,955			83,458
	Stock-based compensation		20,936			(832	)		72,712			33,247			108,392			35,184
	Equity in losses of equity-method investees, net		—			557			436			3,469			1,136			5,324
	Amortization of goodwill and other intangibles		786			1,212			2,611			4,565			3,524			42,102
	Non-cash restructuring-related and other		—			2,370			—			2,370			1,100			5,253
	Gain on sale of marketable securities, net		(141	)		(3,020	)		(9,393	)		(3,833	)		(11,260	)		(4,031	)
	Remeasurement of 6.875% PEACS and other		11,142			(2,261	)		93,156			55,677			133,752			39,365
	Non-cash interest expense and other		1,343			7,911			12,752			22,436			19,902			28,946
	Cumulative effect of change in accounting principle		—			—			—			(801	)		—			(801	)
Changes in operating assets and liabilities:
	Inventories		(62,147	)		(24,029	)		(34,001	)		(2,935	)		(82,369	)		(16,748	)
	Accounts receivable, net and other current assets		(14,844	)		(14,670	)		18,303			(31,420	)		16,775			(28,779	)
	Accounts payable		49,535			49,408			(131,584	)		(106,296	)		131,254			103,250
	Accrued expenses and other current liabilities		(5,109	)		40,895			(99,312	)		(37,455	)		(57,366	)		27,788
	Additions to unearned revenue		29,932			26,237			78,652			75,641			98,415			113,739
	Amortization of previously unearned revenue		(27,816	)		(29,487	)		(85,719	)		(97,741	)		(123,444	)		(138,149	)
	Interest payable		(701	)		(1,604	)		(26,773	)		(25,840	)		2,093			1,627
Net cash provided by (used in) operating activities			36,817			38,108			(88,941	)		(198,288	)		283,638			150,832
INVESTING ACTIVITIES:
Sales and maturities of marketable securities			21,988			50,621			581,011			400,532			733,768			467,848
Purchases of marketable securities			(71,880	)		(28,186	)		(414,194	)		(462,290	)		(587,714	)		(748,504	)
Purchases of fixed assets, including internal-use software and Website development			(15,192	)		(11,353	)		(28,727	)		(23,647	)		(44,243	)		(31,181	)
Proceeds from sale of subsidiary and other			5,072			—			5,072			—			5,072			—
Investments in equity-method investees and other investments			—			—			—			—			—			(6,198	)
Net cash provided by (used in) investing activities			(60,012	)		11,082			143,162			(85,405	)		106,883			(318,035	)
FINANCING ACTIVITIES:
Proceeds from exercises of stock options and other			41,235			6,038			132,832			56,313			198,208			58,360
Repayment of long-term debt, capital lease obligations, and other			(3,437	)		(4,126	)		(287,576	)		(12,121	)		(290,250	)		(16,561	)
Net cash provided by (used in) financing activities			37,798			1,912			(154,744	)		44,192			(92,042	)		41,799
Foreign-currency effect on cash and cash equivalents			10,087			6,024			28,687			26,783			40,375			20,661
Net increase (decrease) in cash and cash equivalents			24,690			57,126			(71,836	)		(212,718	)		338,854			(104,743	)
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	666,418		$	327,564		$	666,418		$	327,564		$	666,418		$	327,564
SUPPLEMENTAL CASH FLOW INFORMATION:
Fixed assets acquired under capital leases and other financing arrangements		$	1,572		$	162		$	2,648		$	2,297		$	3,374		$	3,411
Cash paid for interest			30,019			29,898			116,835			110,947			117,477			112,141
Stock issued in connection with minority investment			—			—			—			—			—			5,000

Note: The attached “Financial and Operational Highlights” are an integral part of the press release financial statements.

AMAZON.COM, INC.
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)

			Three Months Ended						Nine Months Ended
			September 30,						September 30,
			2003			2002			2003			2002
Net sales			$	1,134,456		$	851,299		$	3,317,927		$	2,504,326
Cost of sales				848,635			635,132			2,487,596			1,846,867
Gross profit				285,821			216,167			830,331			657,459
Operating expenses:
	Fulfillment			107,057			90,342			318,217			265,908
	Marketing			28,943			26,728			82,496			87,804
	Technology and content			53,775			52,907			155,998			166,569
	General and administrative			22,393			18,698			65,318			59,034
	Stock-based compensation (1)			20,936			(832	)		72,712			33,247
	Amortization of other intangibles			786			1,212			2,611			4,565
	Restructuring-related and other			—			36,757			—			46,731
		Total operating expenses		233,890			225,812			697,352			663,858
Income (loss) from operations				51,931			(9,645	)		132,979			(6,399	)
Interest income				4,324			5,600			16,625			16,902
Interest expense				(29,802	)		(35,922	)		(100,680	)		(106,817	)
Other income, net				252			3,183			6,796			2,876
Remeasurement of 6.875% PEACS and other				(11,142	)		2,261			(93,156	)		(55,677	)
		Total non-operating expenses, net		(36,368	)		(24,878	)		(170,415	)		(142,716	)
Income (loss) before equity in losses of equity-method investees				15,563			(34,523	)		(37,436	)		(149,115	)
Equity in losses of equity-method investees, net				—			(557	)		(436	)		(3,469	)
Income (loss) before change in accounting principle				15,563			(35,080	)		(37,872	)		(152,584	)
Cumulative effect of change in accounting principle				—			—			—			801
Net income (loss)			$	15,563		$	(35,080	)	$	(37,872	)	$	(151,783	)
Basic and diluted earnings (loss) per share:
	Prior to cumulative effect of change in accounting principle		$	0.04		$	(0.09	)	$	(0.10	)	$	(0.41	)
	Cumulative effect of change in accounting principle			—			—			—			(0.01	)
			$	0.04		$	(0.09	)	$	(0.10	)	$	(0.40	)
Weighted average shares used in computation of earnings (loss) per share:
	Basic			397,912			379,650			393,477			376,564
	Diluted			422,802			379,650			393,477			376,564
(1) Components of stock-based compensation:
	Fulfillment		$	4,374		$	(98	)	$	16,221		$	5,512
	Marketing			1,582			115			4,167			2,419
	Technology and content			12,013			(765	)		39,807			17,305
	General and administrative			2,967			(84	)		12,517			8,011
			$	20,936		$	(832	)	$	72,712		$	33,247

Note: The attached “Financial and Operational Highlights” are an integral part of the press release financial statements.

AMAZON.COM, INC.
Pro Forma Statements of Operations
(in thousands, except per share data)
(unaudited)

			Three Months Ended									Three Months Ended
			September 30, 2003									September 30, 2002
			As Reported (1)			Adjustments			Pro Forma			As Reported (1)			Adjustments			Pro Forma
Net sales			$	1,134,456		$	—		$	1,134,456		$	851,299		$	—		$	851,299
Cost of sales				848,635			—			848,635			635,132			—			635,132
Gross profit				285,821			—			285,821			216,167			—			216,167
Operating expenses:
	Fulfillment			107,057			—			107,057			90,342			—			90,342
	Marketing			28,943			—			28,943			26,728			—			26,728
	Technology and content			53,775			—			53,775			52,907			—			52,907
	General and administrative			22,393			—			22,393			18,698			—			18,698
	Stock-based compensation			20,936			(20,936	)		—			(832	)		832			—
	Amortization of other intangibles			786			(786	)		—			1,212			(1,212	)		—
	Restructuring-related and other			—			—			—			36,757			(36,757	)		—
		Total operating expenses		233,890			(21,722	)		212,168			225,812			(37,137	)		188,675
Income (loss) from operations				51,931			21,722			73,653	(2)		(9,645	)		37,137			27,492	(2)
Interest income				4,324			—			4,324			5,600			—			5,600
Interest expense				(29,802	)		—			(29,802	)		(35,922	)		—			(35,922	)
Other income, net				252			—			252			3,183			—			3,183
Remeasurement of 6.875% PEACS and other				(11,142	)		11,142			—			2,261			(2,261	)		—
		Total non-operating expenses, net		(36,368	)		11,142			(25,226	)		(24,878	)		(2,261	)		(27,139	)
Income (loss) before equity in losses of equity-method investees				15,563			32,864			48,427			(34,523	)		34,876			353
Equity in losses of equity-method investees, net				—			—			—			(557	)		557			—
Net income (loss)			$	15,563		$	32,864		$	48,427		$	(35,080	)	$	35,433		$	353
Basic earnings (loss) per share			$	0.04		$	0.08		$	0.12		$	(0.09	)	$	0.09		$	—
Diluted earnings (loss) per share			$	0.04		$	0.07		$	0.11		$	(0.09	)	$	0.09		$	—
Weighted average shares used in computation of earnings (loss) per share:
		Basic		397,912						397,912			379,650						379,650
		Diluted		422,802						422,802			379,650						398,361
Net cash provided by operating activities									$	36,817								$	38,108
Purchases of fixed assets, including internal-use software and Website development										(15,192	)								(11,353	)
Free cash flow									$	21,625								$	26,755
Net cash provided by (used in) investing activities									$	(60,012	)							$	11,082
Net cash provided by financing activities									$	37,798								$	1,912

(1)  In accordance with accounting principles generally accepted in the United States.

(2)  Consolidated segment operating income.

Note: The attached “Financial and Operational Highlights” are an integral part of the press release financial statements.

AMAZON.COM, INC.
Pro Forma Statements of Operations
(in thousands, except per share data)
(unaudited)

			Nine Months Ended									Nine Months Ended
			September 30, 2003									September 30, 2002
			As Reported (1)			Adjustments			Pro Forma			As Reported (1)			Adjustments			Pro Forma
Net sales			$	3,317,927		$	—		$	3,317,927		$	2,504,326		$	—		$	2,504,326
Cost of sales				2,487,596			—			2,487,596			1,846,867			—			1,846,867
Gross profit				830,331			—			830,331			657,459			—			657,459
Operating expenses:
	Fulfillment			318,217			—			318,217			265,908			—			265,908
	Marketing			82,496			—			82,496			87,804			—			87,804
	Technology and content			155,998			—			155,998			166,569			—			166,569
	General and administrative			65,318			—			65,318			59,034			—			59,034
	Stock-based compensation			72,712			(72,712	)		—			33,247			(33,247	)		—
	Amortization of other intangibles			2,611			(2,611	)		—			4,565			(4,565	)		—
	Restructuring-related and other			—			—			—			46,731			(46,731	)		—
		Total operating expenses		697,352			(75,323	)		622,029			663,858			(84,543	)		579,315
Income (loss) from operations				132,979			75,323			208,302	(2)		(6,399	)		84,543			78,144	(2)
Interest income				16,625			—			16,625			16,902			—			16,902
Interest expense				(100,680	)		—			(100,680	)		(106,817	)		—			(106,817	)
Other income, net				6,796			—			6,796			2,876			—			2,876
Remeasurement of 6.875% PEACS and other				(93,156	)		93,156			—			(55,677	)		55,677			—
		Total non-operating expenses, net		(170,415	)		93,156			(77,259	)		(142,716	)		55,677			(87,039	)
Income (loss) before equity in losses of equity-method investees				(37,436	)		168,479			131,043			(149,115	)		140,220			(8,895	)
Equity in losses of equity-method investees, net				(436	)		436			—			(3,469	)		3,469			—
Income (loss) before change in accounting principle				(37,872	)		168,915			131,043			(152,584	)		143,689			(8,895	)
Cumulative effect of change in accounting principle				—			—			—			801			(801	)		—
Net income (loss)			$	(37,872	)	$	168,915		$	131,043		$	(151,783	)	$	142,888		$	(8,895	)
Basic earnings (loss) per share:
	Prior to cumulative effect of change in accounting principle		$	(0.10	)	$	0.43		$	0.33		$	(0.41	)	$	0.39		$	(0.02	)
	Cumulative effect of change in accounting principle			—			—			—			0.01			(0.01	)		—
			$	(0.10	)	$	0.43		$	0.33		$	(0.40	)	$	0.38		$	(0.02	)
Diluted earnings (loss) per share:
	Prior to cumulative effect of change in accounting principle		$	(0.10	)	$	0.41		$	0.31		$	(0.41	)	$	0.39		$	(0.02	)
	Cumulative effect of change in accounting principle			—			—			—			0.01			(0.01	)		—
			$	(0.10	)	$	0.41		$	0.31		$	(0.40	)	$	0.38		$	(0.02	)
Weighted average shares used in computation of earnings (loss) per share:
		Basic		393,477						393,477			376,564						376,564
		Diluted		393,477						418,359			376,564						376,564
Net cash used in operating activities									$	(88,941	)							$	(198,288	)
Purchases of fixed assets, including internal-use software and Website development										(28,727	)								(23,647	)
Free cash flow									$	(117,668	)							$	(221,935	)
Net cash provided by (used in) investing activities									$	143,162								$	(85,405	)
Net cash provided by (used in) financing activities									$	(154,744	)							$	44,192

(1)  In accordance with accounting principles generally accepted in the United States.

(2)  Consolidated segment operating income.

Note: The attached “Financial and Operational Highlights” are an integral part of the press release financial statements.

AMAZON.COM, INC.
Segment Information
(in thousands)
(unaudited)

			Three Months Ended						Nine Months Ended
			September 30,						September 30,
			2003			2002			2003			2002
North America
	Net sales		$	709,271		$	587,004		$	2,116,506		$	1,794,786
	Cost of sales			508,150			432,319			1,538,496			1,296,450
	Gross profit			201,121			154,685			578,010			498,336
	Direct segment operating expenses			138,606			128,339			409,236			400,903
	Segment operating income			62,515			26,346			168,774			97,433
International
	Net sales			425,185			264,295			1,201,421			709,540
	Cost of sales			340,485			202,813			949,100			550,417
	Gross profit			84,700			61,482			252,321			159,123
	Direct segment operating expenses			73,562			60,336			212,793			178,412
	Segment operating income (loss)			11,138			1,146			39,528			(19,289	)
Consolidated
	Net sales			1,134,456			851,299			3,317,927			2,504,326
	Cost of sales			848,635			635,132			2,487,596			1,846,867
	Gross profit			285,821			216,167			830,331			657,459
	Direct segment operating expenses			212,168			188,675			622,029			579,315
	Segment operating income			73,653			27,492			208,302			78,144
	Stock-based compensation			20,936			(832	)		72,712			33,247
	Amortization of other intangibles			786			1,212			2,611			4,565
	Restructuring-related and other			—			36,757			—			46,731
	Income (loss) from operations			51,931			(9,645	)		132,979			(6,399	)
	Total non-operating expenses, net			(36,368	)		(24,878	)		(170,415	)		(142,716	)
	Equity in losses of equity-method investees, net			—			(557	)		(436	)		(3,469	)
	Cumulative effect of change in accounting principle			—			—			—			801
	Net income (loss)		$	15,563		$	(35,080	)	$	(37,872	)	$	(151,783	)
Segment Highlights:
	Y / Y net sales growth:
		North America		21	%		17	%		18	%		12	%
		International		61			91			69			78
		Consolidated		33			33			32			25
	Y / Y gross profit growth:
		North America		30			15			16			14
		International		38			118			59			86
		Consolidated		32			33			26			25
	Gross margin:
		North America		28			26			27			28
		International		20			23			21			22
		Consolidated		25			25			25			26
	Segment operating margin:
		North America		9			4			8			5
		International		3			N/A			3			(3	)
		Consolidated		6			3			6			3
	Net sales mix:
		North America		63			69			64			72
		International		37			31			36			28

Note: The attached “Financial and Operational Highlights” are an integral part of the press release financial statements.

AMAZON.COM, INC.
Supplemental Net Sales Information
(in thousands)
(unaudited)

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2003			2002			2003			2002
North America
	Media	$	502,271		$	435,793		$	1,518,581		$	1,346,381
	Electronics and other general merchandise		180,418			133,355			526,002			391,202
	Other		26,582			17,856			71,923			57,203
			709,271			587,004			2,116,506			1,794,786
International
	Media		374,989			249,855			1,096,735			673,047
	Electronics and other general merchandise		49,804			13,875			103,756			34,918
	Other		392			565			930			1,575
			425,185			264,295			1,201,421			709,540
Consolidated
	Media		877,260			685,648			2,615,316			2,019,428
	Electronics and other general merchandise		230,222			147,230			629,758			426,120
	Other		26,974			18,421			72,853			58,778
		$	1,134,456		$	851,299		$	3,317,927		$	2,504,326
Y / Y Net Sales Growth:
North America:
	Media		15	%		16	%		13	%		10	%
	Electronics and other general merchandise		35			21			34			17
	Other		49			25			26			24
International:
	Media		50			85			63			71
	Electronics and other general merchandise		259			327			197			528
	Other		(31	)		N/A			(41	)		N/A
Consolidated:
	Media		28			34			30			25
	Electronics and other general merchandise		56			30			48			25
	Other		46			29			24			27
Consolidated Net Sales Mix:
	Media		77			81			79			81
	Electronics and other general merchandise		20			17			19			17
	Other		2			2			2			2

Note: The attached “Financial and Operational Highlights” are an integral part of the press release financial statements.

AMAZON.COM, INC.
Consolidated Balance Sheets
(in thousands, except per share data)
(unaudited)

					September 30,			December 31,			September 30,
					2003			2002			2002
ASSETS
Current assets:
	Cash and cash equivalents				$	666,418		$	738,254		$	327,564
	Marketable securities					398,242			562,715			538,238
		Cash, cash equivalents, and marketable securities				1,064,660			1,300,969			865,802
	Inventories					241,667			202,425			151,514
	Accounts receivable, net and other current assets					103,873			112,282			102,291
			Total current assets			1,410,200			1,615,676			1,119,607
Fixed assets, net						221,459			239,398			239,238
Goodwill, net						69,121			70,811			70,811
Other intangibles, net						659			3,460			4,373
Other equity investments						12,949			15,442			16,498
Other assets						35,297			45,662			46,878
			Total assets		$	1,749,685		$	1,990,449		$	1,497,405
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
	Accounts payable				$	499,189		$	618,128		$	347,519
	Accrued expenses and other current liabilities					236,184			314,935			241,674
	Unearned revenue					40,843			47,916			65,878
	Interest payable					44,476			71,661			42,793
	Current portion of long-term debt and other					6,058			13,318			13,134
			Total current liabilities			826,750			1,065,958			710,998
Long-term debt and other						2,080,969			2,277,305			2,264,846
Commitments and contingencies
Stockholders’ deficit:
	Preferred stock, $0.01 par value:
		Authorized shares — 500,000 Issued and outstanding shares — none				—			—			—
	Common stock, $0.01 par value:
		Authorized shares — 5,000,000 Issued and outstanding shares — 400,422, 387,906 and 381,216				4,004			3,879			3,812
	Additional paid-in capital					1,852,308			1,649,946			1,550,118
	Deferred stock-based compensation					(3,525	)		(6,591	)		(7,775	)
	Accumulated other comprehensive income (loss)					36,761			9,662			(12,233	)
	Accumulated deficit					(3,047,582	)		(3,009,710	)		(3,012,361	)
			Total stockholders’ deficit			(1,158,034	)		(1,352,814	)		(1,478,439	)
				Total liabilities and stockholders’ deficit	$	1,749,685		$	1,990,449		$	1,497,405

Note: The attached “Financial and Operational Highlights” are an integral part of the press release financial statements.

AMAZON.COM, INC.
Supplemental Financial Information and Business Metrics
(in millions, except per share data)
(unaudited)

																	Y / Y %
		Q3 2002			Q4 2002			Q1 2003			Q2 2003			Q3 2003			Change
Cash Flows and Shares
Operating cash flow — trailing twelve months (TTM)		$	151		$	174		$	164		$	285		$	284			88	%
Purchases of fixed assets — TTM		$	31		$	39		$	41		$	40		$	44			42	%
Free cash flow (operating cash flow less purchases of fixed assets) — TTM		$	120		$	135		$	123		$	245		$	239			100	%
Common shares and stock-based awards outstanding			430			433			432			433			433			1	%
Common shares outstanding			381			388			392			397			400			5	%
Stock-based employee awards outstanding			48			45			41			36			33			(33	%)
Stock-based employee awards outstanding — % of common shares outstanding			13	%		12	%		10	%		9	%		8	%		N/A
Results of Operations
Worldwide (WW) net sales		$	851		$	1,429		$	1,084		$	1,100		$	1,134			33	%
WW net sales — Y / Y growth, excluding the effect of foreign exchange rates			30	%		25	%		22	%		30	%		30	%		N/A
WW net sales — TTM		$	3,619		$	3,933		$	4,169		$	4,463		$	4,747			31	%
WW net sales shipped outside the U.S. — % of net sales — TTM			33	%		36	%		37	%		39	%		40	%		N/A
Gross profit		$	216		$	335		$	271		$	274		$	286			32	%
Gross margin — % of WW net sales			25.4	%		23.5	%		25.0	%		24.9	%		25.2	%		N/A
Gross profit — TTM		$	932		$	993		$	1,040		$	1,096		$	1,165			25	%
Gross margin — TTM % of WW net sales			25.7	%		25.2	%		24.9	%		24.6	%		24.6	%		N/A
Fulfillment costs — % of WW net sales			10.6	%		8.9	%		9.6	%		9.8	%		9.4	%		N/A
Fulfillment costs — TTM % of WW net sales			10.4	%		10.0	%		9.7	%		9.6	%		9.4	%		N/A
Consolidated direct segment operating expenses		$	189		$	233		$	203		$	207		$	212			12	%
Consolidated direct segment operating expenses — TTM		$	795		$	813		$	817		$	832		$	855			8	%
Consolidated segment operating income		$	27		$	102		$	67		$	67		$	74			168	%
Consolidated segment operating margin — % of WW net sales			3.2	%		7.1	%		6.2	%		6.1	%		6.5	%		N/A
Consolidated segment operating income — TTM		$	137		$	180		$	223		$	264		$	310			127	%
Consolidated segment operating margin — TTM % of WW net sales			3.8	%		4.6	%		5.3	%		5.9	%		6.5	%		N/A
GAAP operating income (loss)		$	(10	)	$	71		$	39		$	42		$	52			N/A
GAAP operating margin — % of WW net sales			(1.1	%)		4.9	%		3.6	%		3.8	%		4.6	%		N/A
GAAP operating income — TTM		$	8		$	64		$	102		$	142		$	204			N/A
GAAP operating margin — TTM % of WW net sales			0.2	%		1.6	%		2.4	%		3.2	%		4.3	%		N/A
Pro forma net income		$	0		$	75		$	40		$	42		$	48			N/A
Diluted pro forma net income per share		$	0.00		$	0.19		$	0.10		$	0.10		$	0.11			N/A
Pro forma net income — TTM		$	26		$	66		$	112		$	158		$	206			697	%
GAAP net income (loss)		$	(35	)	$	3		$	(10	)	$	(43	)	$	16			N/A
GAAP net income (loss) per share		$	(0.09	)	$	0.01		$	(0.03	)	$	(0.11	)	$	0.04			N/A
GAAP net loss — TTM		$	(147	)	$	(149	)	$	(136	)	$	(86	)	$	(35	)		(76	%)
North America segment:
	Net sales	$	587		$	967		$	705		$	703		$	709			21	%
	Net sales — TTM	$	2,647		$	2,761		$	2,845		$	2,961		$	3,083			16	%
	Gross profit	$	155		$	243		$	187		$	190		$	201			30	%
	Gross margin — % of North America net sales		26	%		25	%		27	%		27	%		28	%		N/A
	Gross profit — TTM	$	717		$	741		$	754		$	774		$	821			15	%
	Gross margin — TTM % of North America net sales		27	%		27	%		27	%		26	%		27	%		N/A
	Operating income	$	26		$	82		$	52		$	55		$	63			137	%
	Operating margin — % of North America net sales		4	%		9	%		7	%		8	%		9	%		N/A
	Operating income — TTM	$	166		$	180		$	196		$	215		$	251			51	%
	Operating margin — TTM % of North America net sales		6	%		7	%		7	%		7	%		8	%		N/A

Note: The attached “Financial and Operational Highlights” are an integral part of this Supplemental Financial Information and Business Metrics.

Page 1 of 2

AMAZON.COM, INC.
Supplemental Financial Information and Business Metrics
(in millions, except inventory turnover, accounts payable days, and employee data)
(unaudited)

																	Y / Y %
		Q3 2002			Q4 2002			Q1 2003			Q2 2003			Q3 2003			Change
International segment:
	Net sales	$	264		$	462		$	379		$	397		$	425			61	%
	Net sales — Y / Y growth, excluding the effect of foreign exchange rates		75	%		62	%		45	%		57	%		50	%		N/A
	Net sales — TTM	$	973		$	1,172		$	1,324		$	1,502		$	1,663			71	%
	Gross profit	$	61		$	93		$	84		$	84		$	85			38	%
	Gross margin — % of International net sales		23	%		20	%		22	%		21	%		20	%		N/A
	Gross profit — TTM	$	215		$	252		$	286		$	322		$	345			60	%
	Gross margin — TTM % of International net sales		22	%		21	%		22	%		21	%		21	%		N/A
	Operating income	$	1		$	20		$	16		$	13		$	11			872	%
	Operating margin — % of International net sales		0	%		4	%		4	%		3	%		3	%		N/A
	Operating income (loss) — TTM	$	(29	)	$	0		$	27		$	49		$	59			N/A
	Operating margin — TTM % of International net sales		(3	%)		0	%		2	%		3	%		4	%		N/A
Supplemental North America Segment Net Sales:
	Media	$	436		$	649		$	517		$	499		$	502			15	%
	Media — TTM	$	1,930		$	1,995		$	2,041		$	2,101		$	2,167			12	%
	Electronics and other general merchandise	$	133		$	290		$	168		$	177		$	180			35	%
	Electronics and other general merchandise — TTM	$	633		$	681		$	722		$	769		$	816			29	%
	Other	$	18		$	28		$	19		$	26		$	27			49	%
	Other — TTM	$	84		$	85		$	82		$	91		$	100			20	%
Supplemental International Segment Net Sales:
	Media	$	250		$	431		$	356		$	366		$	375			50	%
	Media — TTM	$	925		$	1,104		$	1,245		$	1,402		$	1,527			65	%
	Electronics and other general merchandise	$	14		$	31		$	23		$	31		$	50			259	%
	Electronics and other general merchandise — TTM	$	45		$	66		$	77		$	99		$	135			196	%
	Other	$	1		$	0		$	0		$	0		$	0			(31	%)
	Other — TTM	$	2		$	2		$	2		$	1		$	1			(38	%)
Supplemental Worldwide Net Sales:
	Media	$	686		$	1,079		$	873		$	865		$	877			28	%
	Media — TTM	$	2,855		$	3,099		$	3,286		$	3,503		$	3,695			29	%
	Electronics and other general merchandise	$	147		$	321		$	191		$	209		$	230			56	%
	Electronics and other general merchandise — TTM	$	679		$	747		$	799		$	868		$	951			40	%
	Other	$	18		$	29		$	20		$	26		$	27			46	%
	Other — TTM	$	86		$	87		$	84		$	93		$	101			19	%
Balance Sheet
Cash and marketable securities		$	866		$	1,301		$	1,083		$	989		$	1,065			23	%
Inventory, net		$	152		$	202		$	173		$	178		$	242			60	%
Inventory — TTM, % of TTM net sales			4	%		4	%		4	%		4	%		4	%		N/A
Inventory turnover — TTM			19.4			19.3			19.7			20.2			18.9			(3	%)
Fixed assets, net		$	239		$	239		$	228		$	222		$	221			(7	%)
Accounts payable days — ending			50			52			44			49			54			8	%
Other
Employees (full-time and part-time)			7,800			7,500			7,700			7,600			7,900			1	%

Note: The attached “Financial and Operational Highlights” are an integral part of this Supplemental Financial Information and Business Metrics.

Page 2 of 2

AMAZON.COM, INC.
Financial and Operational Highlights
(unaudited)

Third Quarter 2003 Results of Operations (comparisons are with the equivalent period of the prior year, unless otherwise stated)

Net Sales

• Shipping revenue, which excludes amounts earned from third-party sellers, was approximately $77 million, up 5% from $73 million.

• Worldwide unit growth was 36%, compared with 41% in second quarter 2003, and third-party units as a percentage of worldwide units were 22%, compared with 19% in second quarter 2003.

Gross Profit

• Gross profit benefited by approximately $6 million, and consolidated segment operating income by approximately $1 million, from changes in foreign exchange rates compared with third quarter 2002.

• Shipping loss was approximately $27 million, up from a loss of $10 million. We continue to measure our shipping results relative to their effect on our overall financial results and intend to continue providing our customers with free shipping offers.

Fulfillment

• Fulfillment costs represent those costs incurred in operating and staffing our fulfillment and customer service centers, credit card fees and bad debt costs, including costs associated with our guarantee for certain third-party seller transactions. Fulfillment costs also include amounts paid to third-parties, who assist us in fulfillment and customer service operations.

• Certain of our fulfillment-related costs incurred on behalf of other businesses, such as Toysrus.com and Target, are classified as cost of sales rather than fulfillment.

• Credit card fees associated with third-party seller transactions represent a significant percentage relative to commission amounts earned, and as a result, negatively affect fulfillment as a percentage of net sales.

Stock-Based Compensation

• We granted less than a half million stock awards during the quarter with vesting periods generally ranging from three to six years.

• At September 30, 2003, there were 33 million stock awards outstanding, which are excluded from common stock outstanding, consisting of 28 million stock options ($12 average exercise price) and 5 million restricted stock units. There are also 1 million shares of restricted stock, which are included in common stock outstanding.

• Since October 2002, we have awarded restricted stock units as our primary form of stock-based compensation. Restricted stock units, under fixed accounting, are generally measured at fair value on the date of grant based on the number of shares granted and the quoted price of our common stock. Such value is recognized as an expense over the corresponding service period. To the extent that restricted stock units are forfeited prior to vesting, the corresponding previously recognized expense is reversed as an offset to stock-based compensation.

• At September 30, 2003, 1 million stock awards were subject to variable accounting. Stock option grants after December 31, 2002 are subject to variable accounting treatment. Under variable stock award accounting, we will incur unpredictable charges or credits dependent on the fluctuations in market prices of our common stock, which we are unable to forecast. For example, if at the end of any quarter the quoted price of our common stock is lower than the quoted price at the end of the previous quarter, or to the extent previously-recorded amounts relate to unvested portions of awards that were cancelled, compensation expense associated with variable accounting will be recalculated using the cumulative expense method and may result in a net benefit to our results of operations.

• “Stock-based compensation” consisted of $10 million for stock awards under variable accounting and $10 million for stock awards under fixed accounting. “Stock-based compensation” includes matching stock contributions under our 401(k) program but excludes payroll tax expense resulting from exercises of stock-based awards.

• Using the following hypothetical market prices of our common stock above and below our September 30, 2003 closing price of $48.43, our hypothetical stock-based compensation expense for the three months ended September 30, 2003 would have been affected by variable accounting treatment as follows (in millions, except percentages and per share amounts):

Percentage					Hypothetical			Hypothetical vs.
Difference			Hypothetical Market		Stock-Based			Actual Stock-Based
Closing Price (1)			Price per Share (1)		Compensation Expense			Compensation Expense
	(25	)%	$	36.32	$	14		$	(7	)
	(10	)%		43.59		18			(3	)
	0	%		48.43		21	(2)		—
	10	%		53.27		24			3
	25	%		60.54		29			8

(1)	Hypothetical - not a prediction of future quoted prices of our common stock.
(2)	Represents actual stock-based compensation expense for third quarter 2003.

Restructuring-Related and Other

• In first quarter 2001 we announced and began implementation of our operational restructuring plan. The restructuring is complete; however, we may adjust our restructuring-related estimates in the future, if necessary.

• Cash payments resulting from our operational restructuring were $3 million, compared with $8 million in third quarter 2002.

• We estimate, based on currently available information, the remaining net cash outflows associated with restructuring-related leases and other commitments will be $2 million in the remainder of 2003, $11 million in 2004, and $20 million thereafter. Amounts due within 12 months are included within “Accrued expenses and other current liabilities” and the remaining amounts within “Long-term debt and other” on our balance sheet. These amounts are net of anticipated sublease income of approximately $45 million (we have signed sublease agreements on $15 million in future income) on gross lease and other obligations of $79 million.

Remeasurement of 6.875% PEACS and Other

• “Remeasurement of 6.875% PEACS and other” primarily consisted of foreign-currency losses on remeasurement of 6.875% PEACS from Euros to U.S. Dollars of $12 million, compared with $0 million in third quarter 2002.

• Other includes a $2 million gain on sale of our mail order toy catalog business, for $5 million in cash.

Income Taxes

• At September 30, 2003, we had net operating loss carryforwards (NOLs) of approximately $2.9 billion related to U.S. federal, state and foreign jurisdictions. Utilization of NOLs, which begin to expire at various times starting in 2010, may be subject to certain limitations. Approximately $1.6 billion of our NOLs relate to tax deductible stock-based compensation in excess of amounts recognized for financial reporting purposes-to the extent that any of this amount is realized for tax purposes but not financial reporting purposes, the resulting benefit will be credited to stockholders’ equity, rather than results of operations.

Net Income (Loss)

• Although we reported net income for third quarter of 2003, we believe that this positive net income result should not be viewed as a material positive event and is not predictive of future trends for a variety of reasons. For example, we are unable to forecast the effect on our future reported results of certain items, including the stock-based compensation associated with variable accounting treatment and the gain or loss associated with the remeasurement of our 6.875% PEACS that results from fluctuations in foreign exchange. These items represented significant charges during the first, second and third quarters of 2003 and may result in significant charges or gains in future periods.

Cash Flows and Balance Sheet

• Operating cash flows and free cash flows can be volatile and are sensitive to many factors, including changes in working capital. Working capital at any specific point in time is subject to many variables, including world events, seasonality, the timing of expense payments, discounts offered by vendors, and vendor payment terms.

• Our cash, cash equivalents and marketable securities of $1.1 billion, at fair value, primarily consist of cash, commercial paper and short-term securities, U.S. Treasury notes and bonds and asset-backed and agency securities.

• We have pledged approximately $106 million of our marketable securities as collateral for property leases and other contractual obligations, compared with $135 million at September 30, 2002.

• “Unearned revenue” includes amounts received from third-parties in advance of us providing the associated service.

• “Accrued expenses and other current liabilities” includes, among other things, liabilities for gift certificates, marketing activities, and workforce costs, including accrued payroll, vacation, and other benefits.

• “Long-term debt and other” primarily includes the following (in millions):

	Principal						Principal
	at Maturity			Interest Rate			Due Date
Convertible Subordinated Notes	$	1,250	(1)		4.750	%	February 2009
PEACS		805	(2)		6.875	%	February 2010
	$	2,055	(3)

(1)	Convertible at the holders’ option into our common stock at $78.0275 per share. We have the right to redeem the Convertible Subordinated Notes, in whole or in part, at a redemption price of 102.85% of the principal, which decreases to 100% over time, plus any accrued and unpaid interest.
(2)	€690 million principal amount, convertible at the holders’ option into our common stock at €84.883 per share. The U.S. Dollar equivalent principal, interest, and conversion price fluctuates based on the Euro/U.S. Dollar exchange ratio. We have the right to redeem the PEACS, in whole or in part,

	by paying the €690 million, plus any accrued and unpaid interest. Because we do not hedge any portion of the PEACS, we have interest expense exposure to fluctuations in the Euro/US dollar exchange ratio.
(3)	The “if converted” number of shares associated with each of our convertible debt instruments (approximately 24 million total shares) are excluded from diluted shares as their effect is anti-dilutive.

Certain Definitions and Other

• We present segment information along two lines: North America and International. We measure operating results of our segments using an internal performance measure of direct segment operating expenses that excludes stock-based compensation, amortization of goodwill and other intangibles, and restructuring-related and other charges, each of which is not allocated to segment results. All other centrally-incurred operating costs are fully allocated to segment results. Our operating results, particularly for the International segment, are affected by movements in foreign exchange rates.

• The North America segment consists of amounts earned from retail sales of consumer products through www.amazon.com and www.amazon.ca (including from third-party sellers), from North America focused Syndicated Stores, such as www.cdnow.com, mail-order catalogs and from non-retail activities such as North America focused Merchant.com, marketing and promotional agreements.

• The International segment consists of amounts earned from retail sales of consumer products through www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp (including from third-party sellers), from internationally focused Syndicated Stores and from non-retail activities such as internationally focused marketing and promotional agreements. This segment includes export sales from www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp (including export sales from these sites to customers in the U.S. and Canada), but excludes export sales from www.amazon.com and www.amazon.ca.

• We provide supplemental revenue information within each segment for three categories: “Media”, “Electronics and other general merchandise” and “Other.” Media consists of amounts earned from retail sales from all sellers of books, music, DVD/video, magazine subscriptions, software, video games and video game consoles. Electronics and other general merchandise consists of amounts earned from retail sales from all sellers of items not included in Media, such as electronics and office, kids and baby, home and garden, apparel and sporting goods. The Other category consists of non-retail activities, such as the Merchant.com program and miscellaneous marketing and promotional activities.

• All references to customers mean customer accounts, which are unique e-mail addresses, established either when a customer’s initial order is shipped or when a customer orders from certain third-party sellers on our Websites. Customer accounts include customers of Amazon Marketplace, Auctions and zShops and our Merchants@ and Syndicated Stores Programs, but exclude Merchant.com Program customers, Amazon.com Payments customers, our catalog customers and the customers of select companies with whom we have a technology alliance or marketing and promotional relationships. A customer is considered active upon placing an order.

• All references to units mean units sold (net of returns and cancellations) by us and third-party sellers at Amazon.com domains worldwide-such as www.amazon.com, www.amazon.ca, www.amazon.fr, www.amazon.co.uk, www.amazon.de and www.amazon.co.jp-and at Syndicated Stores domains, as well as Amazon.com-owned items sold at non-Amazon.com domains, such as books, music and DVD/video items ordered from Amazon.com’s store at www.target.com. Units do not include Amazon.com gift certificates.

EX-99.2 4 v93742exv99w2.htm EXHIBIT 99.2

Exhibit 99.2

Information Regarding Certain Non-GAAP Financial Measures

     Regulation G, “Conditions for Use of Non-GAAP Financial Measures,” and other provisions of the 1934 Act define and prescribe the conditions for use of certain non-GAAP financial information. We believe that certain of our financial measures which meet the definition of a non-GAAP financial measure are important supplemental information to investors. We provide: “consolidated segment operating income (loss),” “pro forma net income (loss),” “pro forma net earnings (loss) per share,” and “free cash flow.”

     We use these non-GAAP financial measures for internal managerial purposes, when publicly providing guidance on possible future results, and as a means to evaluate period-to-period comparisons. These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with GAAP. These non-GAAP financial measures should not be relied upon to the exclusion of GAAP financial measures. These non-GAAP financial measures reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business. Management strongly encourages investors to review our financial statements and publicly-filed reports in their entirety and to not rely on any single financial measure.

     Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies’ non-GAAP financial measures having the same or similar names. For example, certain companies disclose a financial measure of earnings before certain charges such as interest, taxes, depreciation, and amortization, commonly referred to as EBITDA. We considered the use of EBITDA as a supplemental performance measure to GAAP, but believe consolidated segment operating income (loss) and pro forma net income (loss) are superior for our Company as certain periodic costs associated with our invested capital, such as fixed asset depreciation expense and amortization of software development costs, and certain costs associated with our capital structure, such as interest expense, are relevant and important factors affecting our management decisions. For information about our financial results as reported in accordance with GAAP, see Item 8 of Part II, “Financial Statements and Supplementary Data” in our Annual Report on Form 10-K for the year ended December 31, 2002 and for a quantitative reconciliation of our non-GAAP financial measures to the most comparable GAAP financial measures, see “Pro Forma Statements of Operations” in Exhibit 99.1 to this Current Report on Form 8-K.

     Consolidated Segment Operating Income (Loss)

     We measure operating results of our segments using an internal performance measure of direct segment operating expenses that excludes:

• Stock-based compensation;

• Amortization of other intangibles; and

• Restructuring-related and other.

     These operating expense line items are not allocated to segment results, and all other centrally-incurred operating costs are fully allocated to segment results. The sum of our individual segment results is consolidated segment operating income (loss), which we reconcile to GAAP operating income (loss). Pursuant to SEC staff interpretations of Regulation G, when presented in our financial statement footnotes, consolidated segment operating income is a GAAP financial measure; however, since we also present this financial measure outside the context of our financial statement footnotes, we have included this financial measure in our discussion of non-GAAP financial measures.

     We use consolidated segment operating income (loss), and ratios based on it, to manage and evaluate our business operations and overall financial performance. Our management evaluates consolidated segment income (loss) because it excludes certain cash and non-cash items that are either beyond our immediate control or that we believe are not characteristic of our underlying business operations for the period in which they are recorded, or both.

     Items Excluded From Consolidated Segment Operating Income

          Stock-Based Compensation

     We exclude stock-based compensation for the following reasons:

• Stock-based compensation expense is excluded from our internal operating plans and measurement of financial performance, although we consider the dilutive impact to our investors when awarding stock-based compensation and value such awards accordingly;

• Stock-based compensation charges or gains are non-cash; and

• The measurement of stock-based compensation is determined under a variety of methods depending on the underlying award. These methods include: (a) fixed accounting on stock options granted at market prices, resulting in no compensation expense, (b) variable accounting on certain stock options and restricted stock units, resulting in unpredictable charges or gains beyond our control, and (c) fixed accounting for certain restricted stock units, resulting in the estimated fair value of the award recognized over the service period.

     We record the employer portion of payroll tax expense resulting from exercises of stock-based awards in “Fulfillment,” “Marketing,” “Technology and content,” and

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“General and administrative” on our consolidated statements of operations and do not include such expenses in “Stock-based compensation.”

          Amortization of Other Intangibles

     We exclude “Amortization of other intangibles” for the following reasons:

• Amortization of other intangibles is excluded from our internal operating plans and measurement of financial performance;

• Amortization of other intangibles is a non-cash charge to current operations; and

• Amortization of other intangibles has diminished, is currently immaterial, and is scheduled to fully amortize by the end of 2004.

          Restructuring-Related and Other

     We exclude restructuring-related and other expenses, which are cash and non-cash amounts, for the following reasons:

• We have implemented only one restructuring event in our history, which we announced in January 2001, and accordingly we believe internally that this line item is not as important to understanding our quarterly trends as other line items;

• Since we do not have current restructuring charges, the exclusion of such charges from prior periods provides better comparability of our results of operations as viewed by management; and

• Our restructuring-related and other charges have diminished, and except for periodic adjustments to our estimates that may be required from time to time, we do not currently expect to record additional restructuring-related charges in the foreseeable future.

          Impairment of Goodwill

     If, in the future, we incur impairment losses on our goodwill, such charges would be excluded from consolidated segment operating income (loss) since they would be non-cash, and not in the immediate control of management. We have elected to perform our annual analysis during the fourth calendar quarter of each year. No indicators of impairment were identified during the nine months ended September 30, 2003.

     Limitations of Consolidated Segment Operating Income (Loss)

     Consolidated segment operating income (loss) has certain limitations. First, because it excludes “Stock-based compensation,” the financial measure does not include all expenses primarily related to our workforce. We compensate for this limitation by

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providing supplemental information about stock-based compensation on the face of our consolidated statements of operations and in the footnotes to our financial statements. We also provide supplemental information about outstanding stock-based awards, including their dilutive effect on shareholders, in the footnotes to our financial statements.

     Second, consolidated segment operating income (loss) excludes “Restructuring-related and other.” For companies that periodically undergo restructuring events, excluding such costs from performance measures could provide an incomplete summary of ongoing costs that would affect future cash flows. However, we compensate for this limitation by disclosing cash flow measures, including operating cash flow, that incorporate all ongoing cash obligations associated with our January 2001 restructuring event and by providing disclosure of future estimated cash flows and remaining commitments associated with this event. There can be no assurance that we will not undertake another restructuring event in the future that would affect future cash flows. If we have a restructuring event in the future, we will re-evaluate our decision to exclude such charges from our consolidated segment operating income (loss) based on those future facts and circumstances at that time.

     Pro Forma Net Income (Loss)

     Pro forma net income, including the related pro forma net earnings per share, which we reconcile to net income (loss) and net earnings (loss) per share, excludes, in addition to the line items described above as excluded from consolidated segment operating income (loss), the following line items on our consolidated statements of operations:

• Remeasurement of 6.875% PEACS and other;

• Equity in losses of equity-method investees, net; and

• Cumulative effect of change in accounting principle.

     We use pro forma net income (loss), and ratios based on it, to manage and evaluate our business operations and overall financial performance. Our decision to use this financial measure is due to the fact that pro forma net income (loss) excludes certain cash and non-cash items that are either beyond our immediate control or are not characteristic of our underlying business operations for the period in which they are recorded, or both.

     Items Excluded From Pro Forma Net Income (Loss)

     See “Consolidated Segment Operating Income – Excluded Items” for an explanation of “Stock-based compensation,” “Amortization of other intangibles,” “Restructuring-related and other,” and “Impairment of goodwill.”

          Remeasurement of 6.875% PEACS and Other

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     The majority of “Remeasurement of 6.875% PEACS and other” consists of gains or charges due to our quarterly remeasurement of the principal of our 6.875% PEACS from Euros to U.S. Dollars. We exclude the effect of these periodic remeasurements from our pro forma net income (loss) because the ultimate cash effect resulting from changes in exchange rates is inherently uncertain. These gains or charges would only affect near-term cash flows if we redeem or, in certain cases, restructure, our 6.875% PEACS in the next several years, rather than over a longer term or at maturity in 2010. Because these charges and gains vary based on exchange rates between the U.S. Dollar and Euro, these amounts are beyond our immediate control and are difficult to predict for future periods. Additionally, this line item includes $15 million of losses associated with the redemption of our 10% Senior Discount Notes and $6 million of losses associated with the termination of our Euro Currency Swap, each of which occurred in the second quarter of 2003.

          Equity in Losses of Equity-Method Investees, Net

     We exclude equity in losses of equity-method investees, net, because it generates potential non-cash gains or losses, which are based on the financial results of other companies that we do not manage or control and are difficult to predict. In addition, we believe these non-cash gains and losses are not indicative of our financial or operating performance. Finally, in recent quarters, these amounts represented insignificant charges and, absent future investments, we expect this trend to continue. In the third quarter 2003, we recorded no equity method losses or gains.

          Cumulative Effect of Change in Accounting Principle

     We exclude cumulative effect of change in accounting principle because it generates non-cash charges, which we believe are not indicative of our financial or operating performance.

     Limitations of Pro Forma Net Income (Loss)

     Pro forma net income (loss) has the same limitations as consolidated segment operating income. See “Consolidated Segment Operating Income – Limitations of Consolidated Segment Operating Income” above. In addition, when the 6.875% PEACS are retired, whether by early redemption or restructuring or at maturity in 2010, the foreign currency effect of changes in the exchange ratio between the U.S. Dollar and the Euro will result in a cash effect. We compensate for this limitation by valuing the 6.875% PEACS at fair value on our consolidated balance sheets and including that fair value in our summary of commitments in the notes to our financial statements.

     Free Cash Flow

     Free cash flow, which we reconcile to “Net cash provided by (used in) operating activities,” is cash flow from operations reduced by “Purchases of fixed assets, including internal-use software and Website development.” We use free cash flow, and ratios based

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on it, to conduct and evaluate our business because, although it is similar to cash flow from operations, we believe it is a more conservative measure of cash flows since purchases of fixed assets are a necessary component of ongoing operations. In limited circumstances where proceeds from sales of fixed assets exceed purchases, free cash flow would exceed cash flow from operations. However, since we do not anticipate selling significant portions of fixed assets, we expect free cash flow to be less than operating cash flows.

     Limitations of Free Cash Flow

     Free cash flow has limitations due to the fact that it does not represent the residual cash flow available for discretionary expenditures. For example, free cash flow does not incorporate payments made on capital lease obligations. Therefore, we believe it is important to view free cash flow as a complement to our entire consolidated statements of cash flows.

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EX-99.1

Exhibit 99.1

EX-99.2

Exhibit 99.2