-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WTaKA/QH1LS5nWBZODo5a6bNRcfYtXQv7aXd6EAsxDNrx+zlZ42TPV2IyNxHAkPQ edaZ2b1NbkEJWtswzITiNg== 0000891020-99-001938.txt : 19991117 0000891020-99-001938.hdr.sgml : 19991117 ACCESSION NUMBER: 0000891020-99-001938 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMAZON COM INC CENTRAL INDEX KEY: 0001018724 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 911646860 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22513 FILM NUMBER: 99754317 BUSINESS ADDRESS: STREET 1: 1200 12TH AVENUE S SUITE 1200 CITY: SEATTLE STATE: WA ZIP: 98144 BUSINESS PHONE: 2062661000 MAIL ADDRESS: STREET 1: 1200 12TH AVENUE S SUITE 1200 CITY: SEATTLE STATE: WA ZIP: 98144 10-Q 1 FORM 10-Q FOR PERIOD ENDED SEPTEMBER 30, 1999 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-Q ---------------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 Commission File No. 000-22513 AMAZON.COM, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 91-1646860 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1200 12TH AVENUE SOUTH, SUITE 1200, SEATTLE, WASHINGTON 98144-2734 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 266-1000 ---------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 340,787,400 shares of $0.01 par value common stock outstanding as of October 31, 1999 (after adjusting for the three-for-one stock split paid on January 4, 1999 and the two-for-one stock split paid on September 1, 1999) Page 1 of 28 Exhibit Index on Page 28 2 AMAZON.COM, INC. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999 INDEX
PAGE ---- PART I -- FINANCIAL INFORMATION Item 1. Consolidated Financial Statements......................................... 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................... 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk................ 24 PART II -- OTHER INFORMATION Item 1. Legal Proceedings......................................................... 26 Item 2. Changes in Securities and Use of Proceeds................................. 26 Item 3. Defaults Upon Senior Securities........................................... 26 Item 4. Submission of Matters to a Vote of Security Holders....................... 26 Item 5. Other Information......................................................... 26 Item 6. Exhibits and Reports on Form 8-K.......................................... 26 Signature............................................................................. 27 Exhibit Index......................................................................... 28
2 3 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMAZON.COM, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------ ------------ (UNAUDITED) Current assets: Cash ................................................................. $ 43,149 $ 25,561 Marketable securities ................................................ 862,536 347,884 Inventories .......................................................... 118,793 29,501 Prepaid expenses and other ........................................... 55,590 21,308 ------------ ------------ Total current assets ......................................... 1,080,068 424,254 Fixed assets, net ...................................................... 221,243 29,791 Other investments ...................................................... 196,317 7,740 Intangibles and other, net ............................................. 705,932 179,263 Deferred charges ....................................................... 36,239 7,412 ------------ ------------ Total assets ................................................. $ 2,239,799 $ 648,460 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ..................................................... $ 236,711 $ 113,273 Accrued advertising .................................................. 24,567 13,071 Interest payable ..................................................... 10,045 10 Other liabilities and accrued expenses ............................... 73,572 34,413 Current portion of long-term debt and other .......................... 12,776 808 ------------ ------------ Total current liabilities .................................... 357,671 161,575 Long-term debt and other ............................................... 1,462,203 348,140 Commitments and contingencies Stockholders' equity: Preferred stock, $0.01 par value: Authorized shares -- 150,000 Issued and outstanding shares -- none .............................. -- -- Common stock, $0.01 par value: Authorized shares -- 1,500,000 Issued and outstanding shares -- 339,235 and 318,534 shares at September 30, 1999 and December 31, 1998, respectively ................................................ 3,393 3,186 Additional paid-in capital ........................................... 1,027,655 298,537 Note receivable from officer for common stock ........................ (1,171) (1,099) Stock-based compensation ............................................. (32,180) (1,625) Accumulated other comprehensive (loss) income ........................ (18,957) 1,806 Accumulated deficit .................................................. (558,815) (162,060) ------------ ------------ Total stockholders' equity ................................... 419,925 138,745 ------------ ------------ Total liabilities and stockholders' equity ................... $ 2,239,799 $ 648,460 ============ ============
See accompanying notes to consolidated financial statements. 3 4 AMAZON.COM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
QUARTER ENDED NINE-MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------ ------------------------------ 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Net sales ...................................... $ 355,777 $ 153,648 $ 963,797 $ 356,992 Cost of sales .................................. 285,300 118,823 760,998 276,680 ---------- ---------- ---------- ---------- Gross profit ................................... 70,477 34,825 202,799 80,312 Operating expenses: Marketing and sales .......................... 86,555 37,454 233,222 84,325 Product development .......................... 44,608 13,227 102,298 29,168 General and administrative ................... 18,512 4,951 44,301 10,220 Merger, acquisition and investment related costs, including amortization of intangibles and equity in losses of affiliates................................. 99,481 19,486 175,255 24,901 Stock-based compensation ..................... 11,789 1,214 16,570 1,591 ---------- ---------- ---------- ---------- Total operating expenses ............. 260,945 76,332 571,646 150,205 Loss from operations ........................... (190,468) (41,507) (368,847) (69,893) Interest income ................................ 12,699 4,755 36,479 9,790 Interest expense ............................... (21,470) (8,419) (66,424) (18,017) Other income, net .............................. 2,159 - 2,037 - ---------- ---------- ---------- ---------- Net interest expense and other ............... (6,612) (3,664) (27,908) (8,227) ---------- ---------- ---------- ---------- Net loss ....................................... $ (197,080) $ (45,171) $ (396,755) $ (78,120) ========== ========== ========== ========== Basic and diluted loss per share ............... $ (0.59) $ (0.15) $ (1.23) $ (0.27) ========== ========== ========== ========== Shares used in computation of basic and diluted loss per share ....................... 332,488 301,405 323,064 292,206 ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. 4 5 AMAZON.COM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE-MONTHS ENDED SEPTEMBER 30, ---------------------------------- 1999 1998 ------------ ------------ OPERATING ACTIVITIES: Net loss ................................................ $ (396,755) $ (78,120) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ........................ 22,935 6,182 Amortization of deferred compensation related to stock options ....................................... 16,570 570 Non-cash merger, acquisition, and investment related costs, including amortization of intangibles and equity in losses of affiliates................... 175,255 24,082 Loss on sale of marketable securities ................ 6,086 -- Non-cash interest expense ............................ 26,116 15,455 ------------ ------------ Net cash used in operating activities before changes (149,793) (31,831) in operating assets and liabilities Changes in operating assets and liabilities, net of effects of acquisitions: Inventories .......................................... (89,292) (10,784) Prepaid expenses and other ........................... (32,685) (12,528) Accounts payable ..................................... 121,771 25,447 Accrued advertising .................................. 11,057 8,403 Interest payable ..................................... 10,035 (61) Other liabilities and accrued expenses ............... 6,526 13,691 ------------ ------------ Net cash provided by changes in operating assets and liabilities, net of effects from acquisitions ..... 27,412 24,168 Net cash used in operating activities ........... (122,381) (7,663) INVESTING ACTIVITIES: Sales and maturities of marketable securities ........... 3,460,139 117,669 Purchases of marketable securities ...................... (3,993,422) (315,608) Purchases of fixed assets ............................... (181,859) (18,779) Acquisitions and investments in businesses ............. (222,853) (14,374) ------------ ------------ Net cash used in investing activities ........... (937,995) (231,092) FINANCING ACTIVITIES: Proceeds from issuance of capital stock and exercise of stock options......................................... 36,930 11,325 Proceeds from long-term debt ............................ 1,260,639 325,987 Repayment of long-term debt ............................. (184,710) (77,383) Financing costs ......................................... (35,151) (7,783) ------------ ------------ Net cash provided by financing activities ....... 1,077,708 252,146 Effect of exchange rate changes ........................... 256 (411) ------------ ------------ Net increase in cash ...................................... 17,588 12,980 Cash at beginning of period ............................... 25,561 1,876 ------------ ------------ Cash at end of period ..................................... $ 43,149 $ 14,856 ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Fixed assets acquired under capital leases ................ $ 25,850 $ -- Fixed assets acquired under financing agreements .......... 5,608 -- Stock issued in connection with business acquisitions ..... 635,343 217,241
See accompanying notes to consolidated financial statements. 5 6 AMAZON.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -- ACCOUNTING POLICIES Unaudited Interim Financial Information The interim consolidated financial statements as of September 30, 1999 have been prepared by Amazon.com, Inc. ("Amazon.com" or the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") for interim financial reporting. These consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the consolidated balance sheets, consolidated operating results, and consolidated cash flows for the periods presented in accordance with generally accepted accounting principles. The consolidated balance sheet at December 31, 1998 has been derived from the audited consolidated financial statements at that date. Operating results for the quarter and nine-month periods ended September 30, 1999 may not be indicative of the results for the year ending December 31, 1999. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted in accordance with the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements, and accompanying notes, included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Certain prior period amounts have been reclassified to conform to the current period presentation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Comprehensive Loss Comprehensive loss is comprised of net loss, unrealized gains and losses on marketable securities and foreign currency translation adjustments. Comprehensive loss was $206.6 million and $44.6 million for the quarters ended September 30, 1999 and 1998, and $417.5 million and $77.5 million for the nine-month periods ended September 30, 1999 and 1998, respectively. NOTE 2 -- BUSINESS COMBINATIONS AND INVESTMENTS The Company completed three significant acquisitions during the nine-month period ended September 30, 1999: e-Niche Incorporated ("Exchange.com"), Accept.com Financial Services Corporation ("Accept.com"), and Alexa Internet ("Alexa"). Each acquisition was recorded using the purchase method of accounting under Accounting Principles Board ("APB") Opinion No. 16. The Company issued an aggregate of approximately 8.0 million shares of common stock to effect the transactions. The aggregate purchase price of the acquired companies, plus related charges, was approximately $579.7 million, and was comprised of common stock and cash. Results of operations for each acquired company have been included in the financial results of the Company from the closing date of each transaction forward. In accordance with APB Opinion No. 16, all identifiable assets were assigned a portion of the cost of the acquired companies (purchase price) on the basis of their respective fair values. Identifiable intangible assets and goodwill are included in "Intangibles and other, net" on the accompanying consolidated balance sheets and are amortized over their estimated useful lives which approximates 3 years. Intangible assets were identified and valued by considering the Company's intended use of acquired assets and analysis of data concerning products, technologies, markets, historical financial performance, and underlying assumptions of future performance. The economic and competitive environment in which the Company and the acquired companies operate was also considered in the valuation analysis. The Company periodically evaluates its intangible assets for impairment and as of September 30, 1999 no write-downs have been recorded. An immaterial portion of the purchase price of the Accept.com and Alexa transactions attributable to in-process research and development efforts has been expensed because, at the time of acquisition, technological feasibility had not been established and no 6 7 alternative future uses existed. Purchased in-process research and development was identified and valued through discussions with the acquired companies' management and the analysis of data concerning developmental products, their respective stage of development, the time and resources needed to complete them, their expected income generating ability, target markets and associated risks. On May 14, 1999, the Company completed its acquisition of Exchange.com, a developer of Internet marketplaces and related online communities that bring together buyers and sellers of rare and hard-to-find items. In connection with the acquisition, the Company assumed all outstanding Exchange.com stock options and issued 1,893,944 shares of Amazon.com common stock to acquire all of the outstanding common shares of Exchange.com. Pursuant to the terms of the agreement, the purchase price may increase by up to $27.5 million based on the tenure of certain employees. On June 9, 1999, the Company completed its acquisition of Accept.com, an e-commerce company developing technology to simplify person-to-person and business-to-consumer transactions on the Internet. In connection with the acquisition, the Company assumed all outstanding Accept.com stock options and issued 1,755,314 shares of Amazon.com common stock to acquire all of the outstanding common shares of Accept.com. On June 10, 1999, the Company completed its acquisition of Alexa, a developer of a web navigation service that works with Internet browsers to provide useful information about the sites being viewed and suggests related sites. In connection with the acquisition, the Company assumed all outstanding Alexa stock options and issued 4,369,884 shares of Amazon.com common stock to acquire all of the outstanding common shares of Alexa. The Company made additional immaterial acquisitions and other investments during the nine-month period ended September 30, 1999 totaling $298.9 million. Equity investments are reflected in "Other investments" in the consolidated balance sheets and are accounted for under the equity method. The Company's share of affiliates' losses has been included in results from operations from the closing date of the related transactions forward. In connection with certain acquisitions, the Company has conditioned a portion of the acquisition consideration on the continued tenure of key employees. Under generally accepted accounting principles, a portion of this amount is accounted for as compensation rather than as a component of purchase price. Consequently, a maximum of $52.7 million in additional consideration relating to the Company's acquisitions for the nine-month period ended September 30, 1999 may be recorded as compensation expense and classified between stock-based compensation and merger, acquisition and investment related costs in the results of operations. Amounts will be "earned" based on tenure of certain employees and will be recognized as expense over a period of 12-36 months. The pro forma consolidated financial information for the nine-month period ended September 30, 1999 and 1998, determined as if all acquisitions had occurred on January 1 of each period, would have resulted in net sales of $966.2 million and $358.1 million, net loss of $532.3 million and $296.6 million, and basic and diluted loss per share of $1.60 and $0.98, respectively. This unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the results of operations in future periods or results that would have been achieved had Amazon.com and the acquired companies been combined during the specified periods. NOTE 3 -- MARKETABLE SECURITIES Marketable securities available-for-sale, at fair value, consist of the following:
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------ ------------ (IN THOUSANDS) Asset-backed and agency securities .... $ 333,529 $ 83,569 Commercial paper and short-term obligations........................ 128,139 114,180 Treasury notes and bonds .............. 218,926 89,013 Corporate notes and bonds ............. 181,942 51,351 Equity securities ..................... -- 9,771 ------------ ------------ Total marketable securities..... $ 862,536 $ 347,884 ============ ============
The Company's marketable securities consist primarily of high quality short- to intermediate-term fixed income securities and money market mutual funds. The Company classifies all uninvested funds on deposit with investment managers as marketable securities, as well as highly liquid investments with maturities of three months or less. The Company reflects the related cash flows as investing cash flows in the Consolidated Statements of Cash Flows. As a result of the classification of highly liquid investments 7 8 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. At September 30, 1999 and December 31, 1998 the cost of the Company's marketable securities approximated fair value. NOTE 4 -- FIXED ASSETS Fixed assets, at cost, consist of the following:
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------ ------------ (IN THOUSANDS) Computers, equipment and software ............ $ 68,031 $ 35,848 Leasehold improvements ....................... 29,316 5,535 Leased assets ................................ 50,858 442 Construction/installation in progress ........ 108,669 1,760 ------------ ------------ 256,874 43,585 Less accumulated depreciation and amortization (35,631) (13,794) ------------ ------------ Fixed assets, net .......................... $ 221,243 $ 29,791 ============ ============
NOTE 5 -- INTANGIBLES AND OTHER Intangibles and other, arising primarily from business acquisitions, consists of $664.7 million in goodwill and $216.2 million in purchased intangibles and other assets, net of accumulated amortization of $175.0 million as of September 30, 1999. Total net intangibles and other assets were $179.3 million as of December 31, 1998 and were comprised primarily of goodwill. The Company periodically evaluates its intangible assets for impairment and as of September 30, 1999 no write-downs have been recorded. NOTE 6 -- DEFERRED CHARGES Deferred charges relate to fees and charges resulting from the issuance of the Company's debt. The net increase in deferred charges relates to the February 1999 issuance of 4 3/4% Convertible Subordinated Notes due 2009, offset by amortization charges and periodic repurchases of the 10% Senior Discount Notes due 2003 (see Note 7). Net deferred charges are amortized into interest expense over the life of the underlying debt. NOTE 7 -- LONG-TERM DEBT Convertible Subordinated Notes On February 3, 1999, the Company completed an offering of $1.25 billion of 4 3/4% Convertible Subordinated Notes due 2009 (the "Convertible Notes"). The Convertible Notes are convertible into the Company's common stock at the holders' option at a conversion price of $78.0275 per share, subject to adjustment in certain events. Interest on the Convertible Notes is payable semi-annually in arrears on February 1 and August 1 of each year, and commenced August 1, 1999. The Convertible Notes are unsecured and are subordinated to the prior payment in full of all of Amazon.com's senior debt and are also effectively subordinated to all indebtedness and other liabilities of the Company. Subject to certain conditions, the Convertible Notes may be redeemed at the option of the Company prior to February 6, 2002, in whole or in part, at the redemption price of $1,000 per note, plus accrued and unpaid interest, if the closing price for the Company's common stock has exceeded 150% of the conversion price for at least 20 trading days within a period of 30 consecutive trading days ending on the trading day prior to the date of mailing of the notice of redemption. Upon any redemption made prior to February 6, 2002, the Company will also make an additional cash payment with respect to the Convertible Notes called for redemption in an amount equal to $212.60 per $1,000 note redeemed, less the amount of any interest actually paid on such Convertible Notes prior to the call for redemption. At any time on and after February 6, 2002, the Company may redeem the Notes, in whole or in part, at the redemption prices set forth in the Convertible Notes indenture. Upon the occurrence of a "fundamental change" (as defined in the Convertible Notes indenture) prior to the maturity of the Convertible Notes, each holder thereof shall have the right to require Amazon.com to redeem all or any part of such holder's Convertible Notes at a price equal to 100% of the principal amount of the notes being redeemed, together with accrued interest. 8 9 Senior Discount Notes In May 1998, the Company completed the offering of approximately $530 million aggregate principal amount of 10% Senior Discount Notes due 2003 (the "Senior Discount Notes") for aggregate gross proceeds of approximately $326 million. 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 principal amount at maturity. From and after May 1, 2003, the Senior Discount Notes will bear interest of a rate of 10% per annum payable in cash on each May 1 and November 1. During the nine-month period ended September 30, 1999 the Company repurchased $266.0 million (face amount) of the Senior Discount Notes, representing accreted value of $178.4 million. As of September 30, 1999, the remaining face amount outstanding was $264.0 million. NOTE 8 -- STOCKHOLDERS' EQUITY On January 4, 1999, the Company effected a three-for-one stock split to stockholders of record on December 18, 1998; and on September 1, 1999, the Company effected a two-for-one stock split to stockholders of record on August 12, 1999. Each stock split was effected in the form of a stock dividend. The accompanying consolidated financial statements have been restated to reflect the splits. The Convertible Notes (see Note 7) initially may be converted into an aggregate of 16,019,992 shares of Amazon.com common stock. NOTE 9 -- LOSS PER SHARE The following represents the calculations for basic and diluted net loss per share:
QUARTER ENDED NINE-MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net loss -- as reported ....................... $ 197,080 $ 45,171 $ 396,755 $ 78,120 ========== ========== ========== ========== Weighted average shares outstanding ........... 337,959 309,975 329,064 300,748 Less weighted average common shares issued subject to repurchase agreements ............ (5,471) (8,570) (6,000) (8,542) ---------- ---------- ---------- ---------- Shares used in computation of basic and diluted loss per share .............................. 332,488 301,405 323,064 292,206 ========== ========== ========== ========== Basic and diluted loss per share .............. $ (0.59) $ (0.15) $ (1.23) $ (0.27) ========== ========== ========== ==========
All of the Company's stock options are excluded from diluted loss per share since their effect is antidilutive. NOTE 10 -- STOCK-BASED COMPENSATION Stock-based compensation is comprised of the portion of acquisition-related consideration conditioned on the continued tenure of key employees, which must be classified as compensation expense rather than as a component of purchase price under generally accepted accounting principles. Stock-based compensation also includes stock-based charges such as option-related deferred compensation recorded at the Company's initial public offering, as well as certain other compensation and severance arrangements. The following table shows the amounts of stock-based compensation that would have been recorded under the following income statement categories had stock-based compensation not been separately stated in the Consolidated Statements of Operations:
QUARTER ENDED NINE-MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- (IN THOUSANDS) Marketing and sales .......... $ 2,595 $ 1,062 $ 2,772 $ 1,132 Product development .......... 8,689 86 13,151 297 General and administrative ... 505 66 647 162 ---------- ---------- ---------- ---------- $ 11,789 $ 1,214 $ 16,570 $ 1,591 ========== ========== ========== ==========
9 10 NOTE 11 -- COMMITMENTS AND CONTINGENCIES Legal Proceedings On April 7, 1999, Amazon Bookstore Cooperative, Inc. filed a lawsuit in the United States District Court for the District of Minnesota, Third Division, against the Company alleging trademark infringement and unfair competition under state and federal law. The parties settled the lawsuit on November 4, 1999. From time to time, the Company is subject to other legal proceedings and claims in the ordinary course of business. The Company currently is not aware of any such legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on its business, prospects, financial condition or operating results. 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" includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact we make in this Form 10-Q are forward-looking. In particular, the statements herein regarding industry prospects and our future results of operations or financial position are forward-looking statements. Forward-looking statements reflect our current expectations and are inherently uncertain. Our actual results may differ significantly from our expectations. The section entitled "Additional Factors That May Affect Future Results" describes some, but not all, of the factors that could cause these differences. OVERVIEW Amazon.com, Inc. ("Amazon.com" or the "Company") is the Internet's number one music, video and book retailer. Amazon.com, one of the most widely known, used and cited commerce sites on the Web, offers more than 18 million unique items in categories including books, music, video, toys, electronics, home improvement products and software. Amazon.com offers a free electronic greeting card service and also provides a community of online shoppers an easy and safe way to purchase and sell a large selection of products through Amazon.com Auctions and zShops. Amazon.com is a proven technology leader; the Company developed electronic commerce innovations such as 1-Click ordering, All Products Search, Amazon.com Payments, Amazon.com Anywhere, personalized shopping services and easy-to-use search and browse features. Amazon.com, Amazon.com Auctions, Amazon.co.uk, Amazon.de, Amazon.com Cards, Amazon.com Anywhere, Internet Movie Database, PlanetAll, Earth's Biggest Selection, Bid-Click, zShops, All Products Search, and 1-Click are either registered trademarks or trademarks of Amazon.com or its affiliates. All other names that are mentioned in this document may be trademarks of their respective owners. RECENT EVENTS The Company's recent initiatives include: o In March 1999, the Company launched Amazon.com Auctions, an on-line auctions service that is designed to help people find, discover, buy and sell a large selection of products online. o In April 1999, the Company launched Amazon.com Cards, a free electronic greeting card service. o In July 1999, the Company launched two new broad product offerings: toys and electronics. o In late September 1999, the Company introduced three e-commerce innovations: zShops, which enables anyone to offer merchandise for sale on Amazon.com; Amazon.com Payments, which allows individuals and small businesses to accept payments through Amazon.com's 1-Click payment feature; and All Products Search, which helps shoppers find anything for sale on the Internet. o In October 1999, the Company launched Amazon.com Anywhere, a wireless e-commerce service which allows customers to securly shop and check the status of auction items at Amazon.com when they are away from their desktop computers, and expanded its music, auctions, and zShops offerings to Germany and the United Kingdom. o In November 1999, the Company launched its home improvement store, including a tool store, and expanded its toy and electronics offerings to include video games and software. 10 11 The Company announced several strategic acquisitions in the nine-month period ended September 30, 1999, including Exchange.com, Alexa Internet and Accept.com. In late June 1999 Amazon.com named Joseph Galli, Jr. as its President and Chief Operating Officer, and in September 1999 named Warren C. Jenson as its Senior Vice President and Chief Financial Officer. Mr. Galli reports to Amazon.com's founder and CEO, Jeff Bezos, and has been elected to the Company's Board of Directors. During the nine-month period ended September 30, 1999 the Company opened new distribution centers in Nevada, Georgia, Kentucky, Kansas and North Dakota and announced additional new distribution centers to be located in Kentucky, Germany and the United Kingdom. Expansion of the Company's network of highly automated distribution centers has and will continue to require the Company to enter into lease obligations, stock inventories, purchase fixed assets and install leasehold improvements. Distribution center expenditures will continue to increase as the Company brings new facilities into service. On May 19, 1999, the Company filed a universal shelf registration statement on Form S-3 with the SEC which will permit the Company, from time to time, to offer and sell various types of securities, up to a total value of $2 billion. The registration statement was declared effective by the SEC on June 11, 1999. RESULTS OF OPERATIONS Net Sales
QUARTER ENDED NINE-MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- 1999 1998 % CHANGE 1999 1998 % CHANGE --------- --------- -------- --------- --------- -------- (IN THOUSANDS) (IN THOUSANDS) Net sales....... $ 355,777 $ 153,648 132% $ 963,797 $ 356,992 170%
Net sales include the selling price of books, music, video, toys, electronics and other products sold by the Company, net of returns and gift certificate discounts, and also includes outbound shipping and handling charges. Net sales also include commissions from auctions and zShops transactions, which includes placement fees, sales commissions and fees from payment service transactions. Growth in net sales reflects a significant increase in units sold due to the growth of the Company's customer base, repeat purchases from existing customers, and new product offerings including music and video product offerings in the second half of 1998 and toys and electronics in July 1999. At September 30, 1999 the Company's cumulative customer accounts (inclusive of accounts with Amazon.com Auctions) reached 13.1 million, compared with 10.7 million at June 30, 1999, and 6.2 million and 4.5 million at December 31, and September 30, 1998, respectively. Net foreign sales, including domestic export and foreign-domicile sales, represented 24.5% and 20.1% of net sales for the quarters ended September 30, 1999 and 1998, and 23.7% and 20.6% of net sales for the nine-month periods ended September 30, 1999 and 1998, respectively. The Company launched Amazon.co.uk in the United Kingdom and Amazon.de in Germany in the fourth quarter of 1998. Gross Profit
QUARTER ENDED NINE-MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- --------------------- 1999 1998 % CHANGE 1999 1998 % CHANGE -------- -------- -------- --------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) Gross Profit....... $ 70,477 $ 34,825 102% $ 202,799 $ 80,312 153% Gross Margin....... 19.8% 22.7% 21.0% 22.5%
Gross profit is calculated as net sales less the cost of sales, which consists of the cost of merchandise sold to customers and inbound and outbound shipping costs. For the quarter and nine-month periods ended September 30, 1999, gross profit increased in absolute dollars over the same periods in 1998, primarily reflecting the Company's increased sales volume. Gross margin percentages declined over the same periods due primarily to the introduction of newer product lines such as music, video, toys and electronics, as well as inventory reserves taken in the third quarter of 1999 due to large inventory purchases in advance of holiday sales. Gross profit was also impacted by the Company's 50% discount on every book on the New York Times bestseller list. Offsetting these declines in gross margin was the effect of improved product sourcing. 11 12 The Company over time intends to expand its operations by promoting new or complementary products or sales formats and by expanding the breadth and depth of its product or service offerings. Gross margins attributable to new business areas may be lower than those associated with the Company's existing business activities. Additionally, the Company may be unable to accurately forecast inventory needs in new and existing product lines resulting in additional inventory reserves that will negatively impact gross margin. In particular, the Company anticipates that the introduction of toys, electronics, home improvement products and software will result in continued lower overall gross margins in upcoming quarters. The Company anticipates a negative impact on shipping margins during the fourth quarter of 1999 resulting primarily from complimentary upgrades and increased split-shipments in order to ensure timely delivery for the holidays. Split shipments may also increase due to recent openings of distribution centers that may not be fully optimized thereby necessitating partial shipments from two or more locations. The Company believes that offering its customers attractive prices is an essential component of its business strategy. Accordingly, in addition to the 50% discount on every book on the New York Times bestseller list, the Company continues to offer up to 40% off on hundreds of thousands of other titles. The Company may in the future expand or increase the discounts it offers to its customers and may otherwise alter its pricing structure and policies. Additionally, although the Company can provide no assurances, the Company forecasts that its U.S. books business will be profitable in the fourth quarter of 1999 (see "Additional Factors that May Affect Future Results"). 12 13 Marketing and Sales
QUARTER ENDED NINE-MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- ---------------------- 1999 1998 % CHANGE 1999 1998 % CHANGE ------- ------- -------- --------- ------- -------- (IN THOUSANDS) (IN THOUSANDS) Marketing and sales....... $86,555 $37,454 131% $ 233,222 $84,325 177% Percentage of sales....... 24.3% 24.4% 24.2% 23.6%
Marketing and sales expenses consist primarily of fulfillment costs, advertising, public relations and promotional expenditures, and all payroll and related expenses for personnel engaged in marketing, selling and fulfillment activities. Fulfillment costs include the cost of operating and staffing distribution and customer service centers. Marketing and sales expenses increased during the quarter and nine-month periods ended September 30, 1999 due to several factors including the opening of new distribution and customer service centers, increases in the Company's advertising and promotional expenditures, increases in payroll and related costs associated with fulfilling customer demand, costs associated with new product offerings, and increases in credit card merchant fees resulting from higher sales. The Company intends to continue pursuing its branding and marketing campaign and plans to significantly increase marketing spending in the fourth quarter of 1999 in relation to third-quarter spending levels. Additionally, the Company will incur significant incremental fulfillment costs relating to the implementation of its announced distribution center expansion plan, as well as incremental fulfillment costs associated with any increases in sales volumes. As a result, the Company continues to expect marketing and sales expenses to increase significantly. Product Development
QUARTER ENDED NINE-MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- --------------------- 1999 1998 % CHANGE 1999 1998 % CHANGE -------- ------- -------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) Product development.... $ 44,608 $13,227 237% $102,298 $ 29,168 251% Percentage of sales.... 12.5% 8.6% 10.6% 8.2%
Product development expenses consist principally of payroll and related expenses for development, editorial, systems and telecommunications operations personnel and consultants, systems and telecommunications infrastructure, and costs of acquired content. The increase in product development expenses was primarily attributable to increased staffing and associated costs related to enhancing the features, content and functionality of the Company's Web sites and transaction-processing systems, as well as increased investment in systems and telecommunications infrastructure and new product offerings. Product development costs are generally expensed as incurred, except for certain costs relating to the development of internal-use software that are capitalized and depreciated over estimated useful lives. The Company believes that continued investment in product development is critical to attaining its strategic objectives. In addition to ongoing investments in its Web stores and infrastructure, the Company intends to increase investments in product, service and international expansion. As a result, the Company expects product development expenses to increase significantly. General and Administrative
QUARTER ENDED NINE-MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- --------------------- 1999 1998 % CHANGE 1999 1998 % CHANGE -------- ------ -------- -------- ------- -------- (IN THOUSANDS) (IN THOUSANDS) General and administrative... $ 18,512 $4,951 274% $ 44,301 $10,220 333% Percentage of sales......... 5.2% 3.2% 4.6% 2.9%
General and administrative ("G&A") expenses consist of payroll and related expenses for executive, finance and administrative personnel, recruiting, professional fees and other general corporate expenses. Increases in G&A costs are largely attributable to increased payroll-related and infrastructure costs associated with the Company's expansion efforts, legal and other professional fees, and recruiting costs. The company expects G&A costs to continue to increase commensurate with its expansion plans. 13 14 Merger, Acquisition and Investment Related Costs, Including Amortization of Intangibles and Equity in Losses of Affiliates
QUARTER ENDED NINE-MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- ---------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- (IN THOUSANDS) (IN THOUSANDS) Merger, acquisition and investment related costs including amortization of intangibles and equity in losses of affiliates ............................ $ 99,481 $ 19,486 $ 175,255 $ 24,901
Merger, acquisition and investment related costs ("M&A Costs") consist of amortization of goodwill and other purchased intangibles, equity in the losses of affiliates, and certain merger, acquisition and investment related charges. Increases in M&A Costs are largely attributable to amortization charges resulting from the acquisitions of Exchange.com, Alexa Internet and Accept.com, increases in losses by unconsolidated subsidiaries, as well as several insignificant acquisitions and investments during 1999. It is likely that the Company will continue to expand its business through acquisitions and investments which would cause M&A Costs to increase. Stock-Based Compensation
QUARTER ENDED NINE-MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 1999 1998 1999 1998 ------- ------ ------- ------ (IN THOUSANDS) (IN THOUSANDS) Stock-based compensation........ $11,789 $1,214 $16,570 $1,591
Stock-based compensation is comprised of the portion of acquisition related consideration conditioned on the continued tenure of key employees, which must be classified as compensation expense rather than as a component of purchase price under generally accepted accounting principles. Stock-based compensation also includes stock-based charges such as option-related deferred compensation recorded at the Company's initial public offering, as well as certain other compensation and severance arrangements. The increase in stock-based compensation results primarily from 1999 acquisition activity. Stock-based compensation for the three-month and nine-month periods ended September 30, 1998 relates primarily to option related deferred compensation recorded at the time of the Company's initial public offering. Interest Income and Expense
QUARTER ENDED NINE-MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 1999 1998 % CHANGE 1999 1998 % CHANGE -------- ------- -------- -------- ------- -------- (IN THOUSANDS) (IN THOUSANDS) Interest income..... $ 12,699 $ 4,755 167% $ 36,479 $ 9,790 273% Interest expense.... (21,470) (8,419) 155% (66,424) (18,017) 269%
Interest income on cash and marketable securities increased due to higher balances resulting from the Company's financing activities, principally the February 1999 issuance of $1.25 billion aggregate principal amount of 4 3/4% Convertible Subordinated Notes due 2009 ("Convertible Notes"). Interest expense for the quarter and nine-month period ended September 30, 1999 consists primarily of interest on the Convertible Notes and the 10% Senior Discount Notes due 2003 ("Senior Discount Notes"), the amortization of deferred charges and interest on asset acquisitions financed through loans and capital leases. Other Income, net
QUARTER ENDED NINE-MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 1999 1998 1999 1998 -------- ------ -------- ------ (IN THOUSANDS) (IN THOUSANDS) Other income, net... $ 2,159 $ - $ 2,037 $ -
Other income is comprised of net gains and losses on sales of marketable securities, fixed assets and other miscellaneous items. For the three and nine-month periods ended September 30, 1999 other income, net was primarily related to the disposition of an investment security. No comparable activity was recorded in the respective periods of the prior year. 14 15 Income Taxes The Company has not generated any taxable income to date and therefore has not paid any federal income taxes since inception. Utilization of the Company's net operating loss carryforwards, which begin to expire in 2011, may be subject to certain limitations under Section 382 of the Internal Revenue Code of 1986, as amended. Due to uncertainties regarding realizability of the deferred tax assets, the Company has provided a valuation allowance on the deferred tax asset in an amount necessary to reduce the net deferred tax asset to zero. Pro Forma Results of Operations Pro forma information regarding the Company's results, excluding merger, acquisition, investment related costs, and stock-based compensation (discussed above) are presented for informational purposes and are not presented in accordance with generally accepted accounting principles.
QUARTER ENDED NINE-MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- ------------------------------ 1999 1998 1999 1998 ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Pro forma loss from operations, excluding merger and acquisition, investment and stock-based compensation costs ............. $ (79,198) $ (20,807) $ (177,022) $ (43,401) ========== ========== ========== ========== Pro forma net loss, excluding merger and acquisition, investment and stock-based compensation costs ......................... $ (85,810) $ (24,471) $ (204,930) $ (51,628) ========== ========== ========== ========== Pro forma basic and diluted loss per share, excluding merger and acquisition, investment and stock-based compensation costs ......... $ (0.26) $ (0.08) $ (0.63) $ (0.18) ========== ========== ========== ========== Shares used in computation of pro forma basic and diluted loss per share ................. 332,488 301,405 323,064 292,206 ========== ========== ========== ==========
LIQUIDITY AND CAPITAL RESOURCES At September 30, 1999 the Company's principal sources of liquidity consisted of $43.1 million of cash and $862.5 million of marketable securities compared to $25.6 million of cash and $347.9 million of marketable securities at December 31, 1998. Net cash used in operating activities was $122.4 million and $7.7 million for the nine-month periods ended September 30, 1999 and 1998, respectively. Net operating cash flows were primarily attributable to quarterly net losses and increases in inventories and prepaid expenses and other, partially offset by non-cash charges for depreciation and amortization and merger and acquisition related costs, as well as increases in accounts payable, accrued advertising and interest payable. Net cash used in investing activities was $938.0 million and $231.1 million for the nine-month periods ended September 30, 1999 and 1998, respectively, and consisted of net purchases of marketable securities, purchases of fixed assets primarily for distribution center expansion, and cash paid for acquisitions and equity investments. Cash available for investment purposes increased substantially in 1999 as a result of the issuance of the Convertible Notes. Net cash provided by financing activities of $1.1 billion for the nine-month period ended September 30, 1999 resulted from proceeds relating to the issuance of the Convertible Notes, net of financing costs, and proceeds from issuance of capital stock and exercises of stock options, offset by cash payments of $184.7 million on long-term debt including $182.5 million for repurchases of the Senior Discount Notes. As of September 30, 1999, the Company's principal commitments consisted of obligations outstanding under its Convertible Notes (including interest payments) and Senior Discount Notes, obligations in connection with the acquisition of fixed assets and leases, and commitments for advertising and promotional arrangements. Expansion of the Company's distribution center network has and will require it to continue to commit to lease obligations, stock inventories, and purchase fixed assets and install leasehold improvements. Failure to achieve favorable financing for asset acquisitions could negatively impact the Company's cash flows. In addition, the Company plans to continue to increase its merchandise inventory in order to provide broader product offerings and better availability to customers and to support the recently introduced toys, electronics, home improvement and software product lines. Geographic expansion and continued acquisitions and investments will also require future capital expenditures. 15 16 The Company believes that current cash and marketable securities balances will be sufficient to meet its anticipated operating cash needs for at least the next 12 months. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. If current cash, marketable securities and cash that may be generated from operations are insufficient to satisfy the Company's liquidity requirements, the Company may seek to sell additional equity or debt securities or to obtain a line of credit. The Company has on file with the SEC an effective universal shelf registration statement which will permit the Company, from time to time, to offer and sell various types of securities, up to a total value of $2 billion. The sale of additional equity or convertible debt securities could result in additional dilution to the Company's stockholders. In addition, the company will periodically consider the acquisition of or investment in complementary businesses, products, services and technologies, and the repurchase and retirement of debt, which might impact the Company's liquidity requirements or cause the Company to issue additional equity or debt securities. There can be no assurance that financing will be available in amounts or on terms acceptable to the Company, if at all. YEAR 2000 IMPLICATIONS Many currently installed computer systems, software programs, and embedded data chips are programmed using a 2-digit date field and are therefore unable to distinguish dates beyond the 20th century (collectively, the "Year 2000" issue). A failure to identify and correct any mission-critical internal or third party Year 2000 processing problem could have a material adverse operational or financial consequence to the Company. State of Readiness The Company has established a Year 2000 Project Team that, together with external consultants, has developed a process for addressing the Year 2000 issue including performing an inventory, an assessment, remediation procedures (to the extent necessary) and testing procedures of all mission-critical information systems and equipment and machinery that contain embedded technology, as well as obtaining assurances from all mission-critical third parties as to their own Year 2000 preparedness. The Company assesses as "mission-critical" any information systems, equipment and machinery and third parties that substantially affect the Company's ability to take, process and fulfill orders, impact the Company's ability to gather and process financial information, or otherwise significantly impact the customer experience. Many of the steps taken to address the Year 2000 issue are performed concurrently. A description of each phase of the process is as follows: Inventory -- this phase includes the identification of all internal information systems, machinery and equipment of the Company and third party relationships. The inventory phase is greater than 95% complete and is expected to be completed by the end of the fourth quarter of 1999. Assessment -- this phase includes the application of a structured code-release process/routine to evaluate the Year 2000 compliance status of all mission-critical internal information systems. This phase also includes formal communications with mission-critical third parties regarding their own Year 2000 preparedness and with manufacturers as to whether mission-critical equipment and machinery are Year 2000 compliant. The assessment phase, as it relates to internal information systems is greater than 80% complete with an estimated completion in November 1999. The assessment of mission critical third parties, including manufacturers of mission-critical equipment and machinery, is greater than 90% complete and is expected to be completed in the fourth quarter of 1999. Remediation -- this phase includes all measures necessary to correct Year 2000 non-compliance in mission-critical internal information systems. Such measures primarily include the re-programming of internal code or replacement of non-compliant mission-critical information systems, equipment and machinery. Remediation of mission-critical internal information systems is greater than 90% complete and is expected to be complete in the fourth quarter of 1999. Remediation of mission-critical third parties will be addressed through contingency planning. Testing -- this phase includes the application of a structured code-release process/routine to re-evaluate the Year 2000 compliance status of previously non-compliant mission-critical information systems, date-forward testing of mission-critical equipment and machinery and electronic data interchange testing with mission-critical third parties. The testing phase is approximately 50% complete with the remaining testing expected to be completed in the fourth quarter of 1999. Year 2000 Costs 16 17 The Company has not incurred to date and does not expect to incur material costs in its efforts to address the Year 2000 issue. A Year 2000 budget of approximately $1 million has been established for external costs (costs of consultants and purchases of hardware and software) associated with the project. A majority of the budgeted amount has been spent, and remaining amounts will be directed toward third-party consulting efforts in the fourth quarter of 1999. The Company has not tracked the costs of Company employees working on the Year 2000 issue. No significant information technology projects have been deferred due to the Year 2000 issue, and all costs related to the Year 2000 issue have been funded from operations. Year 2000 Risks There can be no assurance that the Company will be completely successful in its efforts to address the Year 2000 issue or that problems arising from the Year 2000 issue will not cause a material adverse effect on the operating results or financial condition of the Company. The Company believes, however, that its most reasonably likely worst-case scenario would relate to problems with the systems of third parties rather than with the Company's internal systems, including computer systems necessary to maintain the viability of the Internet or any of the Web sites that direct consumers to our online stores, temporary power outages at distribution centers, delayed transportation of products by third parties, temporary building management issues (e.g. false fire alarms, malfunction of elevators, etc.), and delayed customer purchases due to non-compliant personal computers. The Company is limited in its efforts to address the Year 2000 issue as it relates to third parties and is relying solely on the assurances of these third parties as to their Year 2000 preparedness. Contingency Planning The Company views contingency planning as broader than the Year 2000 issue and believes that a comprehensive contingency plan should address any known circumstance that may cause a disruption of operations or an adverse customer experience. To that end, the Company is developing business continuity plans to address each critical process and activity that it believes would cause a significant disruption to operations if not functional for 24 hours. The Company has identified 100% of known critical processes and activities and expects all business continuity plans to be complete by mid-December 1999. Additionally, the Company has formed an incident management team comprised of senior-level management personnel to evaluate and respond to business continuity issues. If a business continuity issue arises, the incident management team will dispatch emergency response teams who will be on call to remedy these issues from November 15, 1999 through January 15, 2000. Despite these efforts, the Company cannot guarantee that the contingency plan will adequately address all circumstances that may disrupt operations or that such planning will prevent circumstances that may cause a material adverse effect on the operating results or financial condition of the Company. ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS In addition to the factors discussed in the "Liquidity and Capital Resources" sections of this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, the following additional factors may affect the Company's future results: We Have a Limited Operating History We incorporated in July 1994 and began offering products for sale on our Web site in July 1995. Accordingly, we have a relatively short operating history upon which you can evaluate our business and prospects. You should consider our prospects in light of the risks, expenses and difficulties frequently encountered by online commerce companies. As an online commerce company, we have an evolving and unpredictable business model, we face intense competition, we must effectively manage our growth and we must respond quickly to rapid changes in customer demands and industry standards. We may not succeed in addressing these challenges and risks. We Have an Accumulated Deficit and Anticipate Further Losses We have incurred significant losses since we began doing business. As of September 30, 1999, we had an accumulated deficit of $558.8 million. To succeed we must invest heavily in marketing and promotion and in developing our product, technology and operating infrastructure. In addition, the expenses associated with our recent acquisitions, and interest expense related to our outstanding notes, will adversely affect our operating results. Our aggressive pricing programs have resulted in relatively low product gross margins, so we need to generate and sustain substantially higher revenues in order to become profitable. Although our revenues have grown, we cannot sustain our current rate of growth. Our percentage growth rate will decrease in the future. For these reasons we 17 18 believe that we will continue to incur substantial operating losses for the foreseeable future, and these losses may be significantly higher than our current losses. Unpredictability of Future Revenues; Potential Fluctuations in Quarterly Operating Results; Seasonality; Consumer Trends Due to our limited operating history and the unpredictability of our industry, we cannot accurately forecast our revenues. We base our current and future expense levels on our investment plans and estimates of future revenues. Our expenses are to a large extent fixed. We may not be able to adjust our spending quickly if our revenues fall short of our expectations. Further, we may make pricing, purchasing, service, marketing, acquisition or financing decisions that could adversely affect our business results. Our quarterly operating results will fluctuate for many reasons, including: o our ability to retain existing customers, attract new customers and satisfy our customers' demands, o our ability to acquire merchandise, manage our inventory and fulfill orders, o changes in gross margins of our current and future products, services and markets, o purchases of large quantities of toys, electronics products, home improvement products and software particularly in advance of the holidays for which demand may not materialize, o introduction of our new sites, services and products or those of competitors, o changes in usage of the Internet and online services and consumer acceptance of the Internet and online commerce, o timing of upgrades and developments in our systems and infrastructure, o the level of traffic on our Web sites, o the effects of acquisitions and other business combinations, and related integration, o technical difficulties, system downtime or Internet brownouts, o introductions of popular books, music selections, videos, toys, electronics products, home improvement products, software and other products or services, and our ability to properly anticipate demand, o the mix of books, music, videos, toys, electronics products, home improvement products, software and other products sold by us, o our ability to prevent fraud perpetrated by third parties through credit card transactions, Amazon.com payments transactions, and auction and zShops transactions, o our level of merchandise returns, and o disruptions in service by common shipping carriers due to strikes or otherwise. The popularity of our auction and our zShops services, both of which permit anyone to offer merchandise for sale at Amazon.com, and of certain items offered through our auction and zShops services may vary over time due to perceived scarcity, subjective value, "fads" and consumer trends in general. If the popularity of our auction and zShops services or the items that are listed for sale declines, our revenues from these services will fall. Both seasonal fluctuations in Internet usage and traditional retail seasonality may affect our business. Internet usage generally declines during the summer. Sales in the traditional retail book, music, toy, electronics and home improvement industries usually increase significantly in the fourth calendar quarter of each year. The fourth quarter seasonal impact may be even more pronounced in our toys and electronics businesses. For these reasons, you should not rely on period-to-period comparisons of our financial results to forecast our future performance. Our future operating results may fall below the expectations of securities analysts or investors, which would likely cause the trading price of our common stock to decline. 18 19 Intense Competition The online commerce market is new, rapidly evolving and intensely competitive. In addition, the retail book, music, video, toy, electronics, home improvement and software industries are intensely competitive. Our current or potential competitors include: o online vendors of books, music, video, toys, electronics, home improvement products and software, o a number of indirect competitors, including Web portals and Web search engines, such as Yahoo! Inc. and America Online, Inc., that are involved in online commerce, either directly or in collaboration with other retailers, o online auction services, including eBay, Inc. and Yahoo! Auctions run by Yahoo!, o publishers, distributors and retail vendors of books, music, video and other products, including Barnes & Noble, Inc., Bertelsmann AG and other large specialty booksellers and media corporations, many of which possess significant brand awareness, sales volume and customer bases, o major store-based retailers of toys, other children's products and electronics, o major store-based retailers of home improvement products, o major store-based retailers of software and o traditional retailers and manufacturers who currently sell, or who may sell, products or services through the Internet, mail order or direct marketing. We believe that the principal competitive factors in our market are brand recognition, selection, personalized services, convenience, price, accessibility, customer service, quality of search tools, quality of editorial and other site content, and reliability and speed of fulfillment. Many of our current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we have. They may be able to secure merchandise from vendors on more favorable terms and may be able to adopt more aggressive pricing or inventory policies. They also can devote more resources to technology development and marketing than we can. We also expect to experience increased competition from online commerce sites that provide goods and services at or near cost, relying on advertising revenues to achieve profitability. As the online commerce market continues to grow, other companies may enter into business combinations or alliances that strengthen their competitive positions. For example, (1) Bertelsmann purchased a significant interest in Barnes & Noble's online venture, barnesandnoble.com inc., and has launched online stores in several countries, and (2) CDNow, Inc. agreed to merge with Columbia House, the jointly owned music retail arm of Sony and Time Warner. We may not be able to compete successfully against these and future competitors. Competition in the Internet and online commerce markets probably will intensify. As various Internet market segments obtain large, loyal customer bases, participants in those segments may use their market power to expand into the markets in which we operate. In addition, new and expanded Web technologies may increase the competitive pressures on online retailers. For example, "shopping agent" technologies, including our own "shopping agent" technology, All Products Search, permit customers to quickly compare our prices with those of our competitors. This increased competition may reduce our operating margins, diminish our market share or impair the value of our brand. System Risks Customer access to our Web sites directly affects the volume of orders we fulfill and thus affects our revenues. We experience occasional system interruptions that make our Web sites unavailable or prevent us from efficiently fulfilling orders, which may reduce the volume of goods we sell and the attractiveness of our products and services. These interruptions will continue. We need to add additional software and hardware and upgrade our systems and network infrastructure to accommodate increased traffic on our Web sites, increased sales volume and fully integrate our systems. Without these upgrades, we may face additional system interruptions, slower response times, diminished customer service, impaired quality and speed of order fulfillment, and delays in our financial reporting. In addition, our inventory management systems are not fully integrated with our financial reporting systems, and a significant amount of manual effort may be necessary to reconcile our inventory and other financial accounts. 19 20 accurately project the rate or timing of any increases in traffic or sales volume on our Web sites and, therefore, the integration and timing of these upgrades are uncertain. We maintain substantially all of our computer and communications hardware at a single leased facility in Seattle, Washington. Our systems and operations could be damaged or interrupted by fire, flood, power loss, telecommunications failure, break-ins, earthquake and similar events. We do not have backup systems or a formal disaster recovery plan and we may not have sufficient business interruption insurance to compensate us for losses from a major interruption. Computer viruses, physical or electronic break-ins and similar disruptions could cause system interruptions, delays, and loss of critical data and could prevent us from providing services and accepting and fulfilling customer orders. We May Have Difficulty Managing Our Growth We have rapidly and significantly expanded our operations and will further expand our operations to address potential growth of our product and service offerings and customer base. We will expand our product and service offerings and our international operations and will pursue other market opportunities. We need to successfully execute our announced distribution center expansion plan and continue to improve our transaction-processing, operational and financial systems, procedures and controls. This expansion will continue to place a significant strain on our management, operational and financial resources. Our distribution center expansion plan may not be completed in time to meet the increase in demand expected for the holiday season in the fourth quarter. Because it is difficult to predict sales increases and lead times for developing distribution centers are long, we may over-expand our facilities, which may result in excess inventory, warehousing, fulfillment and distribution capacity. We will also need to retain flexibility within our distribution and logistics network, including the ability to manage the operational challenges of shipping non-uniform and sometimes heavy products as part of the fulfillment of toy, electronics and home improvement orders. We also need to expand, train and manage our employee base. Our current and planned personnel, systems, procedures and controls may not be adequate to support and effectively manage our future operations. We may not be able to hire, train, retain, motivate and manage required personnel or to successfully identify, manage and exploit market opportunities, which may limit our growth. Risk of Entering New Business Areas We intend to expand our operations by promoting new or complementary products, services or sales formats and by expanding our product or service offerings. This will require significant additional expense and could strain our management, financial and operational resources. We cannot expect to benefit in these new markets from the first-to-market advantage that we experienced in the online book market. Our gross margins in these new business areas may be lower than our existing business activities. We may not be able to expand our operations in a cost-effective or timely manner. Any new business that our customers do not receive favorably could damage our reputation and the Amazon.com brand. Risk of Distribution Center Expansion We are in the process of implementing our previously announced distribution center expansion plan. During the nine-month period ended September 30, 1999, we opened distribution centers in Nevada, Georgia, Kentucky, Kansas and North Dakota and announced plans to open new distribution centers in Kentucky, Germany and the United Kingdom. These distribution centers are or will be highly automated and we have no previous experience with automated distribution centers, as the two distribution centers in operation prior to 1999, in Washington and Delaware, were manually operated. The new distribution centers may fail to operate properly to ensure that customer demand is met, particularly during the fourth quarter of 1999. If we do not successfully expand our distribution operations to accommodate peak volumes or if distribution centers fail to operate properly, it could significantly limit our ability to meet customer demand. Our distribution center expansion may cause disruptions in our business. We are not experienced in coordinating and managing distribution operations in geographically distant locations. Risks Related to the Fourth Quarter Because we expect a disproportionate amount of the our net sales to be realized during the holiday season in the fourth quarter of our fiscal year, we face significant risks in the fourth quarter. We may fail to accurately predict the optimal inventory levels at our distribution centers for the fourth quarter. If we do not sufficiently stock popular products during the fourth quarter and fail to meet customer demand, it could significantly impact our revenue. Because we have significantly increased inventory levels in anticipation of the fourth quarter, if we overstock products that are not popular with consumers we may be required to take significant inventory markdowns, most likely in the first quarter, which could reduce gross margins. A failure to optimize inventory at our distribution centers will negatively impact our shipping margins by requiring us to make partial shipments from two or more locations. In addition, we anticipate a negative impact on our shipping margins due to complimentary upgrades and split-shipments necessary to ensure timely delivery for the holiday season. Furthermore, if too many customers access our Web sites within a short period of time due to increased holiday demand, we may experience system interruptions that make our Web sites unavailable or prevent us from efficiently fulfilling orders, which may reduce the volume of goods we sell and the attractiveness of our products and services. Finally, our new automated distribution centers may fail to operate properly to ensure customer demand is met in the fourth quarter. Risk of International Expansion We plan to expand our presence in foreign markets. We have relatively little experience in purchasing, marketing and distributing products or services for these markets and may not benefit from any first-to-market advantages. It will be costly to establish international facilities and operations, promote our brand internationally, and develop localized Web sites and stores and other systems. We may not succeed in our efforts in these countries. If revenues from international activities do not offset the expense of establishing and maintaining foreign operations, our business, prospects, financial condition and operating results will suffer. As the international online commerce market continues to grow, competition in this market will likely intensify. In addition, governments in foreign jurisdictions may regulate Internet or other online services in such areas as content, privacy, network security, encryption or distribution. This may affect our ability to conduct business internationally. Risks of Business Combinations and Strategic Alliances We plan to continue to expand our operations and market presence by entering into business combinations, investments, joint ventures or other strategic alliances with other companies. These transactions create risks such as: o difficulty assimilating the operations, technology and personnel of the combined companies, o disruption of our ongoing business, 20 21 o problems retaining key technical and managerial personnel, o expenses associated with amortization of goodwill and other purchased intangible assets, o additional operating losses and expenses of acquired businesses, and o impairment of relationships with existing employees, customers and business partners. We may not succeed in addressing these risks. In addition, the businesses we have acquired, and in the future may acquire, may incur operating losses. Rapid Technological Change Technology in the online commerce industry changes rapidly. Customer functionality requirements and preferences also change. Competitors often introduce new products and services with new technologies. These changes and the emergence of new industry standards and practices could render our existing Web sites and proprietary technology obsolete. To succeed we must enhance our Web site responsiveness, functionality and features, acquire and license leading technologies, enhance our existing services, develop new services and technology and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. We may not be able to adapt quickly enough to changing customer requirements and industry standards. We Depend on Key Personnel We depend on the continued services and performance of our senior management and other key personnel, particularly Jeffrey P. Bezos, our chief executive officer and chairman of the board. We do not have "key person" life insurance policies. The loss of any of our executive officers or other key employees could harm our business. We Rely on a Small Number of Suppliers We purchase a majority of our book, music, and video titles from three major vendors, Ingram Book Group, Baker & Taylor, Inc. and Valley Media, Inc. Although we increased our direct purchasing from manufacturers during 1999, we continue to purchase a majority of our book, music, and video titles from these three suppliers. We do not have long-term contracts or arrangements with most of our vendors to guarantee the availability of merchandise, particular payment terms or the extension of credit limits. Our current vendors may stop selling merchandise to us on acceptable terms. We may not be able to acquire merchandise from other suppliers in a timely and efficient manner and on acceptable terms. We Face Inventory and Forecasting Risk with our Toy, Electronics, Home Improvement and Software Businesses The toy, electronics, home improvement and software businesses are difficult to manage and have inherent complexities that differ from those encountered in the book, music, and video businesses. Because we are a new participant in these markets, we do not yet have a basis to forecast product demand. Further, the acquisition of many of the toy, electronics, home improvement and software products that we offer involves a significant lead-time and up-front financial commitment. We will be exposed to significant inventory risks as a result of seasonality and rapid changes in product cycles, consumer tastes and "fads" in the market for such products. In order to achieve success in our toy, electronics, home improvement and software sales categories, we must seek to predict these trends and attempt neither to overstock unpopular nor understock popular products. The demand for products can change between the time they are ordered and the date of eventual sale. We will be particularly exposed to this risk in the first year of operations in our toy, electronics, home improvement and software businesses, particularly in anticipation of the holiday selling season. Our ability to negotiate satisfactory terms with manufacturers or suppliers so that we might stock certain "preferred" products or brands in the toy, electronics, home improvement and software businesses may be affected by our time of entry in such lines of business and the competitive positions of other physical stores and catalog and online retailers. In order to provide customers with a high quality experience and minimize the risk of stocking-out, we will carry a broad selection and significant inventory levels of toy, electronics, home improvement and software products. In the event that one or more of these products 21 22 do not sell through in sufficient quantities to consumers at anticipated prices or during anticipated selling seasons, we may be required to markdown some of our prices or write down inventory, which will reduce our revenues and gross margins. We Are Highly Leveraged We have significant indebtedness. As of September 30, 1999, we had indebtedness under senior discount notes, convertible subordinated notes, capitalized lease obligations and other asset financing totaling approximately $1.5 billion. We may incur substantial additional debt in the future. Our indebtedness could: o make it difficult to make principal and interest payments on the convertible subordinated notes and the senior discount notes, o make it difficult to obtain necessary financing for working capital, capital expenditures, debt service requirements or other purposes, o limit our flexibility in planning for, or reacting to, changes in our business and competition, and o make it more difficult for us to react in the event of an economic downturn. We may not be able to meet our debt service obligations. If our cash flow is inadequate to meet our obligations, we may face substantial liquidity problems. If we are unable to generate sufficient cash flow or obtain funds for required payments, or if we fail to comply with other covenants in our indebtedness, we will be in default. This would permit our creditors to accelerate the maturity of our indebtedness. Risks Associated With Domain Names We hold rights to various Web domain names, including "Amazon.com," "Amazon.co.uk," "Amazon.de" and "zShops.com." Governmental agencies typically regulate domain names. These regulations are subject to change. We may not be able to acquire or maintain appropriate domain names in all countries in which we do business. Furthermore, regulations governing domain names may not protect our trademarks and similar proprietary rights. We may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or diminish the value of our trademarks and other proprietary rights. Governmental Regulation and Legal Uncertainties At this time, we face general business regulations and laws or regulations regarding taxation and access to online commerce. For example, expanding our distribution center network or other aspects of our business may result in additional sales and other tax obligations. Regulatory authorities may adopt specific laws and regulations governing the Internet or online commerce. These regulations may cover taxation, user privacy, pricing, content, copyrights, distribution, electronic contracts and characteristics and quality of products and services. Changes in consumer protection laws also may impose additional burdens on companies conducting business online. In addition, many states currently regulate "auctions" and "auctioneers" in conducting auctions and may regulate online auction services. These laws or regulations may impede the growth of the Internet or other online services. States may also regulate consumer to consumer fixed price online markets, like zShops. This could, in turn, diminish the demand for our products and services and increase our cost of doing business. Moreover, it is not clear how existing laws governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the Internet and online commerce. Unfavorable resolution of these issues may harm our business. Risks Related to Auction and zShops Services We may be unable to prevent users of our auction and zShops services from selling unlawful goods, or from selling goods in an unlawful manner. We may face civil or criminal liability for unlawful and fraudulent activities by our auction and zShops users. Any costs we incur as a result of liability relating to the 22 23 sale of unlawful goods, the unlawful sale of goods, the fraudulent receipt of goods or the fraudulent collection of payments, could harm our business. In running our auction and zShops services, we rely on sellers of goods to make accurate representations and provide reliable delivery and on buyers to pay the agreed purchase price. For our auction and zShops services, we do not take responsibility for delivery of payment or goods to any users of our services. While we can suspend or terminate the accounts of users of auctions or zShops who fail to fulfill their delivery obligations to other users, we cannot require users to make payments or deliver goods. We do not compensate users who believe they have been defrauded by other users except through our guarantee program. In addition, we are aware that governmental agencies are currently investigating the conduct of online auctions. Risks Related to Fraud and Amazon.com Payments Although we have developed systems and processes to mitigate fraudulent credit card transactions, failure to prevent such fraud may impact our financial results. In addition, fraudulent activities by our auction and zShops users, such as the fraudulent receipt of goods and the fraudulent collection of payments, may create liability for us through our guarantee program. We guarantee payments made through Amazon.com Payments for both buyers and sellers and we may be unable to prevent users of Amazon.com Payments from fraudulently receiving goods when no payment will be made to a seller or fraudulently collecting payments when no goods will be shipped to a buyer. The law relating to the liability of providers of online payment services is currently unsettled. Our liability risk will increase as we encourage or require sellers to use Amazon.com Payments. Any costs we incur as a result of liability because of our guarantee of payments made through Amazon.com Payments could harm our business. In addition, the functionality of Amazon.com Payments depends on certain third-party vendors delivering services. If these vendors are unable or unwilling to provide services, Amazon.com Payments will not be viable (and our businesses that use Amazon.com Payments may not be viable). Risk of Uncertain Protection of Intellectual Property Third parties that license our proprietary rights, such as trademarks, patented technology or copyrighted material, may take actions that diminish the value of our proprietary rights or reputation. In addition, the steps we take to protect our proprietary rights may not be adequate and third parties may infringe or misappropriate our copyrights, trademarks, trade dress, patents and similar proprietary rights. Other parties may claim that we infringed their proprietary rights. We have been subject to claims, and expect to continue to be subject to legal proceedings and claims, regarding alleged infringement by our licensees and us of the trademarks and other intellectual property rights of third parties. Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources. Risks of Year 2000 Noncompliance We are in the process of assessing and remediating the year 2000 issues associated with the computer systems, software, other property and equipment we use. Our year 2000 readiness plan includes a multi-phased analysis of key information technology and non-information technology-related components of our business, operations and infrastructure. Many aspects of this phased approach are not yet complete. In particular, our testing phase is only 50% complete and failure to complete testing of mission-critical systems could harm our business. As part of the implementation of our year 2000 readiness plan, we will continue to inventory and identify all significant internal and external hardware, software and data chips to assess and evaluate the year 2000 preparedness of these systems, correct or convert our critical data-processing systems and information technology to recognize the year 2000, and test and evaluate the year 2000 compliance of previously non-compliant hardware, software and data chips. We cannot guarantee that we will be successful in our efforts to make our critical systems year 2000 compliant or that the year 2000 problem will not adversely affect our business. As part of our year 2000 readiness plan, we have engaged in formal communications with our significant suppliers and service providers to determine the extent to which our systems may be vulnerable if such third parties fail to address and correct their own year 2000 issues. We cannot guarantee that the systems of suppliers or other companies on which we rely will be year 2000 compliant. In addition, the computer systems necessary to maintain the viability of the Internet or any of the Web sites that direct consumers to our online stores may not be year 2000 compliant. Another area of vulnerability that is beyond our control is the year 2000 integrity of the computers and software used by our customers to access our online stores. We are limited in our efforts to address the year 2000 problem as it relates to third parties and must rely solely on the assurances of these third parties as to their year 2000 preparedness. We have engaged a third-party consulting firm to assist in the development of a formal contingency plan. We believe that such contingency plan will be completed in the fourth quarter of 1999. We cannot guarantee that the contingency plan will adequately address all circumstances that may disrupt our operations or that such planning will prevent circumstances that may cause a material adverse effect on our operating results or financial condition. Our Stock Price Is Highly Volatile The trading price of our common stock fluctuates significantly. For example, during the 52-week period ended September 30, 1999 (as adjusted for the 3-for-1 split of our common stock on January 4, 1999 and the 2-for-1 split of our common stock on September 1, 1999), the reported closing price of our common stock on the NASDAQ National Market was as high as $105.0625 and as low as $42.75 per share. Trading prices of our common stock may fluctuate in response to a number of events and factors, such as: 23 24 o quarterly variations in operating results, o announcements of innovations, o new products, services and strategic developments by us or our competitors, or business combinations and investments by us or our competitors, o changes in our operating expense levels or losses, o changes in financial estimates and recommendations by securities analysts, o performance by other online commerce companies, and o news reports relating to trends in the Internet, book, music, video, toys, electronics, home improvement products, software, auctions, consumer to consumer fixed price online markets, or other product or service industries. Any of these events may cause our stock price to fall, which may adversely affect our business and financing opportunities. In addition, the stock market in general and the market prices for Internet-related companies in particular have experienced significant volatility that often has been unrelated to such companies' operating performance. These broad market and industry fluctuations may adversely affect the trading price of our common stock regardless of our operating performance. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk for the impact of interest rate changes and changes in the market values of its investments. The Company's exposure to market risk for changes in interest rates relate primarily to the Company's investment portfolio and its long-term debt. The Company's entire investment portfolio is designated as available-for-sale, and accordingly is presented at fair value on the consolidated balance sheets. The Company has not utilized derivative financial instruments in its investment portfolio. The Company's long-term debt includes the Senior Discount Notes and the Convertible Notes. Long-term debt is stated at amortized cost on the consolidated balance sheets. The Company employs established investment policies and procedures to manage the market risk of its marketable securities. The Company's Senior Discount Notes, Convertible Notes and other long-term debt have fixed interest rates and the fair value of these instruments is affected by changes in market interest rates. The Company believes that the market risk arising from holdings of its financial instruments is not material. Information relating to quantitative and qualitative disclosure about market risk is set forth below and in "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The table below provides information about the Company's marketable securities, including principal cash flows for 1999 through 2003 and thereafter and the related weighted average interest yields. 24 25 Market value amounts and other information as of September 30, 1999 are as follows (in thousands):
AFTER 1999 2000 2001 2002 2003 2003 TOTAL -------- -------- -------- -------- -------- ----------- -------- Asset-backed and agency securities(1) ............. $ 1,249 $ 45,109 $103,995 $ 58,198 $ 28,988 $ 95,990 $333,529 Weighted average yield .... 5.61% 6.72% 6.75% 6.62% 6.79% 7.91% 7.05% Effective duration ........ 0.0 yrs 0.7 yrs 1.2 yrs 1.1 yrs 1.8 yrs 3.2 yrs 1.7 yrs Commercial paper and short-term obligations .... 45,713 11,641 23,601 28,746 11,911 6,527 128,139 Weighted average yield .... 4.71% 6.44% 7.04% 7.39% 6.76% 6.83% 6.17% Effective duration ........ 0.0 yrs 0.8 yrs 1.0 yrs 1.3 yrs 0.6 yrs 0.4 yrs 0.6 yrs Treasury notes and bonds .... -- 12,360 23,709 182,857 -- -- 218,926 Weighted average yield .... -- 5.21% 5.21% 5.79% -- -- 5.70% Effective duration ........ -- 0.8 yrs 1.5 yrs 1.4 yrs -- -- 1.3 yrs Corporate notes and bonds ... 3,496 42,030 136,416 -- -- -- 181,942 Weighted average yield .... 5.92% 5.69% 5.98% -- -- -- 5.87% Effective duration ........ 0.3 yrs 1.6 yrs 1.7 yrs -- -- -- 1.7 yrs Total portfolio ..... $ 50,458 $111,140 $287,721 $269,801 $ 40,899 $ 102,517 $862,536 ======== ======== ======== ======== ======== =========== ========
- ---------- (1) Asset-backed and agency securities reflect current market prepayment assumptions. 25 26 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 11 -- Commitments and Contingencies in Part I, Item 1. Financial Statements ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
EXHIBIT NUMBER TITLE ------- ----- 10.1 + Amazon.com, Inc. 1997 Stock Option Plan (as restated on September 8, 1999) 27.1 Financial Data Schedule
- ---------- + Executive Compensation Plan or Agreement (b) Reports on Form 8-K On July 22, 1999, the Company filed a Form 8-K under Item 5 announcing the Company's financial results for the second quarter ended June 30, 1999 and two-for-one stock split. 26 27 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, thereunto duly authorized. AMAZON.COM, INC. (Registrant) DATED: November 15, 1999 By: /s/ KELYN J. BRANNON ---------------------------------------- Kelyn J. Brannon Vice President of Finance, and Chief Accounting Officer 27 28 EXHIBIT INDEX
EXHIBIT NUMBER TITLE ------- ----- 10.1 + Amazon.com, Inc. 1997 Stock Option Plan (as restated on September 8, 1999) 27.1 Financial Data Schedule
- ---------- + Executive Compensation Plan or Agreement 28 EX-10.1 2 AMAZON.COM, INC. 1997 STOCK OPTION PLAN 1 AMAZON.COM, INC. 1997 STOCK OPTION PLAN (AS RESTATED ON SEPTEMBER 8, 1999) SECTION 1. PURPOSE The purpose of the Amazon.com, Inc. 1997 Stock Option Plan (the "Plan") is to enhance the long-term stockholder value of Amazon.com, Inc., a Delaware corporation (the "Company"), by offering opportunities to employees, directors, officers, consultants, agents, advisors and independent contractors of the Company and its Subsidiaries (as defined in Section 2) to participate in the Company's growth and success, and to encourage them to remain in the service of the Company and its Subsidiaries and to acquire and maintain stock ownership in the Company. SECTION 2. DEFINITIONS For purposes of the Plan, the following terms shall be defined as set forth below: 2.1 AWARD "Award" means an award or grant made pursuant to the Plan, including, without limitation, awards or grants of Stock Awards and Options, or any combination of the foregoing. 2.2 BOARD "Board" means the Board of Directors of the Company. 2.3 CAUSE "Cause" means dishonesty, fraud, misconduct, unauthorized use or disclosure of confidential information or trade secrets, or conviction or confession of a crime punishable by law (except minor violations), in each case as determined by the Plan Administrator, and its determination shall be conclusive and binding. 2.4 CODE "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.5 COMMON STOCK "Common Stock" means the common stock, par value $.01 per share, of the Company. 2.6 CORPORATE TRANSACTION "Corporate Transaction" means any of the following events: 2 (a) Consummation of any merger or consolidation of the Company in which the Company is not the continuing or surviving corporation, or pursuant to which shares of the Common Stock are converted into cash, securities or other property (other than a merger of the Company in which the holders of Common Stock immediately prior to the merger have the same proportionate ownership of capital stock of the surviving corporation immediately after the merger); (b) Consummation of any sale, lease, exchange or other transfer in one transaction or a series of related transactions of all or substantially all of the Company's assets other than a transfer of the Company's assets to a majority-owned subsidiary corporation (as the term "subsidiary corporation" is defined in Section 8.3) of the Company; or (c) Approval by the holders of the Common Stock of any plan or proposal for the liquidation or dissolution of the Company. Ownership of voting securities shall take into account and shall include ownership as determined by applying Rule 13d-3(d)(1)(i) (as in effect on the date of adoption of the Plan) under the Exchange Act. 2.7 DISABILITY "Disability" means "disability" as that term is defined for purposes of Section 22(e)(3) of the Code. 2.8 EARLY RETIREMENT "Early Retirement" means early retirement as that term is defined by the Plan Administrator from time to time for purposes of the Plan. 2.9 EXCHANGE ACT "Exchange Act" means the Securities Exchange Act of 1934, as amended. 2.10 FAIR MARKET VALUE The "Fair Market Value" shall be as established in good faith by the Plan Administrator or (a) if the Common Stock is listed on the Nasdaq National Market, the average of the high and low per share sales prices for the Common Stock as reported by the Nasdaq National Market for a single trading day or (b) if the Common Stock is listed on the New York Stock Exchange or the American Stock Exchange, the average of the high and low per share sales prices for the Common Stock as such price is officially quoted in the composite tape of transactions on such exchange for a single trading day. If there is no such reported price for the Common Stock for the date in question, then such price on the last preceding date for which such price exists shall be determinative of the Fair Market Value. -2- 3 2.11 GRANT DATE "Grant Date" means the date the Plan Administrator adopted the granting resolution and all conditions precedent to the grant have been satisfied, provided that conditions to the exercisability or vesting of Awards shall not defer the Grant Date. If, however, the Plan Administrator designates in a resolution a later date as the date an Award is to be granted, then such later date shall be the "Grant Date." 2.12 INCENTIVE STOCK OPTION "Incentive Stock Option" means an Option to purchase Common Stock granted under Section 7 with the intention that it qualify as an "incentive stock option" as that term is defined in Section 422 of the Code. 2.13 NONQUALIFIED STOCK OPTION "Nonqualified Stock Option" means an Option to purchase Common Stock granted under Section 7 other than an Incentive Stock Option. 2.14 OPTION "Option" means the right to purchase Common Stock granted under Section 7. 2.15 PARTICIPANT "Participant" means (a) the person to whom an Award is granted; (b) for a Participant who has died, the personal representative of the Participant's estate, the person(s) to whom the Participant's rights under the Award have passed by will or by the applicable laws of descent and distribution, or the beneficiary designated in accordance with Section 10; or (c) person(s) to whom an Award has been transferred in accordance with Section 10. 2.16 PLAN ADMINISTRATOR "Plan Administrator" means the Board or any committee of the Board designated to administer the Plan under Section 3.1. 2.17 RETIREMENT "Retirement" means retirement as of the individual's normal retirement date as that term is defined by the Plan Administrator from time to time for purposes of the Plan. 2.18 SECURITIES ACT "Securities Act" means the Securities Act of 1933, as amended. -3- 4 2.19 STOCK AWARD "Stock Award" means shares of Common Stock or units denominated in Common Stock granted under Section 9, the rights of ownership of which may be subject to restrictions prescribed by the Plan Administrator. 2.20 SUBSIDIARY "Subsidiary," except as provided in Section 8.3 in connection with Incentive Stock Options, means any entity that is directly or indirectly controlled by the Company or in which the Company has a significant ownership interest, as determined by the Plan Administrator, and any entity that may become a direct or indirect parent of the Company. SECTION 3. ADMINISTRATION 3.1 PLAN ADMINISTRATOR The Plan shall be administered by the Board or a committee or committees (which term includes subcommittees) appointed by, and consisting of two or more members of, the Board. If and so long as the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, the Board shall consider in selecting the Plan Administrator and the membership of any committee acting as Plan Administrator, with respect to any persons subject or likely to become subject to Section 16 of the Exchange Act, the provisions regarding (a) "outside directors" as contemplated by Section 162(m) of the Code and (b) "nonemployee directors" as contemplated by Rule 16b-3 under the Exchange Act. The Board may delegate the responsibility for administering the Plan with respect to designated classes of eligible persons to different committees consisting of one or more members of the Board, subject to such limitations as the Board deems appropriate. Committee members shall serve for such term as the Board may determine, subject to removal by the Board at any time. 3.2 ADMINISTRATION AND INTERPRETATION BY THE PLAN ADMINISTRATOR Except for the terms and conditions explicitly set forth in the Plan, the Plan Administrator shall have exclusive authority, in its discretion, to determine all matters relating to Awards under the Plan, including the selection of individuals to be granted Awards, the type of Awards, the number of shares of Common Stock subject to an Award, all terms, conditions, restrictions and limitations, if any, of an Award and the terms of any instrument that evidences the Award. The Plan Administrator shall also have exclusive authority to interpret the Plan and may from time to time adopt, and change, rules and regulations of general application for the Plan's administration. The Plan Administrator's interpretation of the Plan and its rules and regulations, and all actions taken and determinations made by the Plan Administrator pursuant to the Plan, shall be conclusive and binding on all parties involved or affected. The Plan Administrator may delegate administrative duties to such of the Company's officers as it so determines. -4- 5 SECTION 4. STOCK SUBJECT TO THE PLAN 4.1 AUTHORIZED NUMBER OF SHARES Subject to adjustment from time to time as provided in Section 11.1, a maximum of 72 million(1) shares of Common Stock shall be available for issuance under the Plan, except that any shares of Common Stock that, as of the date the Plan is approved by the Company's stockholders, are available for issuance under the Company's Amended and Restated 1994 Stock Option Plan (or that thereafter become available for issuance under that Plan in accordance with its terms as in effect on such date) and that are not issued under that Plan shall be added to the aggregate number of shares available for issuance under the Plan. Shares issued under the Plan shall be drawn from authorized and unissued shares or shares now held or subsequently acquired by the Company as treasury shares. 4.2 LIMITATIONS Subject to adjustment from time to time as provided in Section 11.1, not more than 4,500,000 shares of Common Stock may be made subject to Awards under the Plan to any individual in the aggregate in any one fiscal year of the Company, except that the Company may make additional one-time grants of up to 18 million shares to newly hired individuals, such limitation to be applied in a manner consistent with the requirements of, and only to the extent required for compliance with, the exclusion from the limitation on deductibility of compensation under Section 162(m) of the Code. 4.3 REUSE OF SHARES Any shares of Common Stock that have been made subject to an Award that cease to be subject to the Award (other than by reason of exercise or payment of the Award to the extent it is exercised for or settled in shares) and/or shares of Common Stock subject to repurchase or forfeiture which are subsequently reacquired by the Company, shall again be available for issuance in connection with future grants of Awards under the Plan; provided, however, that for purposes of Section 4.2, any such shares shall be counted in accordance with the requirements of Section 162(m) of the Code. SECTION 5. ELIGIBILITY Awards may be granted under the Plan to those officers, directors and employees of the Company and its Subsidiaries as the Plan Administrator from time to time selects. Awards may also be granted to consultants, agents, advisors and independent contractors who provide services to the Company and its Subsidiaries. - -------- (1) This number and all other share numbers referred to in this Plan reflect the adjustments pursuant to the Company's stock splits through September 1, 1999. -5- 6 SECTION 6. AWARDS 6.1 FORM AND GRANT OF AWARDS The Plan Administrator shall have the authority, in its sole discretion, to determine the type or types of Awards to be made under the Plan. Such Awards may include, but are not limited to, Incentive Stock Options, Nonqualified Stock Options and Stock Awards. Awards may be granted singly or in combination. 6.2 SETTLEMENT OF AWARDS The Company may settle Awards through the delivery of shares of Common Stock, cash payments, the granting of replacement Awards or any combination thereof as the Plan Administrator shall determine. Any Award settlement, including payment deferrals, may be subject to such conditions, restrictions and contingencies as the Plan Administrator shall determine. The Plan Administrator may permit or require the deferral of any Award payment, subject to such rules and procedures as it may establish, which may include provisions for the payment or crediting of interest, or dividend equivalents, including converting such credits into deferred stock equivalents. The Plan Administrator may at any time offer to buy out, for a payment in cash or Common Stock, an Award previously granted based on such terms and conditions as the Plan Administrator shall establish and communicate to the Participant at the time such offer is made. 6.3 ACQUIRED COMPANY OPTION AWARDS Notwithstanding anything in the Plan to the contrary, the Plan Administrator may grant Awards under the Plan in substitution for awards issued under other plans, or assume under the Plan awards issued under other plans, if the other plans are or were plans of other acquired entities ("Acquired Entities") (or the parent of an Acquired Entity) and the new Award is substituted, or the old award is assumed, by reason of a merger, consolidation, acquisition of property or of stock, reorganization or liquidation (the "Acquisition Transaction"). In the event that a written agreement pursuant to which the Acquisition Transaction is completed is approved by the Board and said agreement sets forth the terms and conditions of the substitution for or assumption of outstanding awards of the Acquired Entity, said terms and conditions shall be deemed to be the action of the Plan Administrator without any further action by the Plan Administrator, except as may be required for compliance with Rule 16b-3 under the Exchange Act, and the persons holding such awards shall be deemed to be Participants. SECTION 7. TERMS AND CONDITIONS OF OPTIONS 7.1 GRANT OF OPTIONS The Plan Administrator is authorized under the Plan, in its sole discretion, to issue Options as Incentive Stock Options or as Nonqualified Stock Options, which shall be appropriately designated. -6- 7 7.2 OPTION EXERCISE PRICE The exercise price for shares purchased under an Option shall be as determined by the Plan Administrator, but shall not be less than 100% of the Fair Market Value of the Common Stock on the Grant Date with respect to Incentive Stock Options. 7.3 TERM OF OPTIONS The term of each Option shall be as established by the Plan Administrator or, if not so established, shall be 10 years from the Grant Date. 7.4 EXERCISE AND VESTING OF OPTIONS The Plan Administrator shall establish and set forth in each instrument that evidences an Option the time at which, or the installments in which, the Option shall vest and become exercisable, which provisions may be waived or modified by the Plan Administrator at any time. If not so established in the instrument evidencing the Option, the Option will be immediately exercisable and the shares subject to the Option will vest according to the following schedule, which may be waived or modified by the Plan Administrator at any time:
Period of Participant's Continuous Employment or Service With the Company or Its Subsidiaries Percent of Total Option From the Grant Date That Is Vested ------------------------------------------------ ----------------------- After 1 year 20% After 2 years 40% Each three-month period completed thereafter An additional 5% After 5 years 100%
Any unvested shares acquired upon exercise of an Option shall be subject to repurchase by the Company upon termination of the Participant's employment or services in accordance with the provisions of Section 14.1. To the extent that the right to purchase shares has accrued thereunder, an Option may be exercised from time to time by written notice to the Company, in accordance with procedures established by the Plan Administrator, setting forth the number of shares with respect to which the Option is being exercised and accompanied by payment in full as described in Section 7.5. The Plan Administrator may determine at any time that an Option may not be exercised as to less than 100 shares at any one time for vested shares and any number in its discretion for unvested shares (or the lesser number of remaining shares covered by the Option). To the extent required by the Plan Administrator, as a condition to exercise by the Participant of an Award, the Participant shall execute and deliver to the Company a Shareholders Agreement in substantially the form in use at the time of exercise, unless either (i) the Participant has previously executed and delivered such Shareholder Agreement and it is in effect at the time -7- 8 the Participant exercises the Award or (ii) such Shareholders Agreement is no longer in effect with respect to other holders of Common Stock. 7.5 PAYMENT OF EXERCISE PRICE The exercise price for shares purchased under an Option shall be paid in full to the Company by delivery of consideration equal to the product of the Option exercise price and the number of shares purchased. Such consideration must be paid in cash or by check or, unless the Plan Administrator in its sole discretion determines otherwise, either at the time the Option is granted or at any time before it is exercised, a combination of cash and/or check (if any) and one or both of the following alternative forms: (a) tendering (either actually or, if and so long as the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, by attestation) Common Stock already owned by the Participant for at least six months (or any shorter period necessary to avoid a charge to the Company's earnings for financial reporting purposes) having a Fair Market Value on the day prior to the exercise date equal to the aggregate Option exercise price or (b) if and so long as the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, delivery of a properly executed exercise notice, together with irrevocable instructions, to (i) a brokerage firm designated by the Company to deliver promptly to the Company the aggregate amount of sale or loan proceeds to pay the Option exercise price and any withholding tax obligations that may arise in connection with the exercise and (ii) the Company to deliver the certificates for such purchased shares directly to such brokerage firm, all in accordance with the regulations of the Federal Reserve Board. In addition, the exercise price for shares purchased under an Option may be paid, either singly or in combination with one or more of the alternative forms of payment authorized by this Section 7.5, by (y) a promissory note delivered pursuant to Section 12 or (z) such other consideration as the Plan Administrator may permit. 7.6 POST-TERMINATION EXERCISES The Plan Administrator shall establish and set forth in each instrument that evidences an Option whether the Option will continue to be exercisable, and the terms and conditions of such exercise, if a Participant ceases to be employed by, or to provide services to, the Company or its Subsidiaries, which provisions may be waived or modified by the Plan Administrator at any time. If not so established in the instrument evidencing the Option, the Option will be exercisable according to the following terms and conditions, which may be waived or modified by the Plan Administrator at any time. In case of termination of the Participant's employment or services other than by reason of death or Cause, the Option shall be exercisable, to the extent of the number of shares vested at the date of such termination, only (a) within one year if the termination of the Participant's employment or services is coincident with Retirement, Early Retirement at the Company's request or Disability or (b) within three months after the date the Participant ceases to be an employee, director, officer, consultant, agent, advisor or independent contractor of the Company or a Subsidiary if termination of the Participant's employment or services is for any reason other than Retirement, Early Retirement at the Company's request or Disability, but in no event later than the remaining term of the Option. Any Option exercisable at the time of the Participant's death may be exercised, to the extent of the number of shares vested at the date of the Participant's death, by -8- 9 the personal representative of the Participant's estate, the person(s) to whom the Participant's rights under the Option have passed by will or the applicable laws of descent and distribution or the beneficiary designated pursuant to Section 10 at any time or from time to time within one year after the date of death, but in no event later than the remaining term of the Option. Any portion of an Option that is not vested on the date of termination of the Participant's employment or services shall terminate on such date, unless the Plan Administrator determines otherwise. In case of termination of the Participant's employment or services for Cause, the Option shall automatically terminate upon first notification to the Participant of such termination, unless the Plan Administrator determines otherwise. If a Participant's employment or services with the Company are suspended pending an investigation of whether the Participant shall be terminated for Cause, all the Participant's rights under any Option likewise shall be suspended during the period of investigation. With respect to employees, unless the Plan Administrator at any time determines otherwise, "termination of the Participant's employment or services" for purposes of the Plan (including without limitation this Section 7 and Section 14) shall mean any reduction in the Participant's regular hours of employment to less than thirty (30) hours per week. A transfer of employment or services between or among the Company and its Subsidiaries shall not be considered a termination of employment or services. The effect of a Company-approved leave of absence on the terms and conditions of an Option shall be determined by the Plan Administrator, in its sole discretion. SECTION 8. INCENTIVE STOCK OPTION LIMITATIONS To the extent required by Section 422 of the Code, Incentive Stock Options shall be subject to the following additional terms and conditions: 8.1 DOLLAR LIMITATION To the extent the aggregate Fair Market Value (determined as of the Grant Date) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time during any calendar year (under the Plan and all other stock option plans of the Company) exceeds $100,000, such portion in excess of $100,000 shall be subject to delayed exercisability or treated as a Nonqualified Stock Option as set forth by the Plan Administrator in the agreement(s) evidencing the Option. In the event the Participant holds two or more such Options that become exercisable for the first time in the same calendar year, such limitation shall be applied on the basis of the order in which such Options are granted. 8.2 10% STOCKHOLDERS If an individual owns more than 10% of the total voting power of all classes of the Company's stock, then the exercise price per share of an Incentive Stock Option shall not be less than 110% of the Fair Market Value of the Common Stock on the Grant Date and the Option term shall not exceed five years. The determination of 10% ownership shall be made in accordance with Section 422 of the Code. -9- 10 8.3 ELIGIBLE EMPLOYEES Individuals who are not employees of the Company or one of its parent corporations or subsidiary corporations may not be granted Incentive Stock Options. For purposes of this Section 8.3, "parent corporation" and "subsidiary corporation" shall have the meanings attributed to those terms for purposes of Section 422 of the Code. 8.4 TERM The term of an Incentive Stock Option shall not exceed 10 years. 8.5 EXERCISABILITY To qualify for Incentive Stock Option tax treatment, an Option designated as an Incentive Stock Option must be exercised within three months after termination of employment for reasons other than death, except that, in the case of termination of employment due to total disability, such Option must be exercised within one year after such termination. Employment shall not be deemed to continue beyond the first 90 days of a leave of absence unless the Participant's reemployment rights are guaranteed by statute or contract. For purposes of this Section 8.5, "total disability" shall mean a mental or physical impairment of the Participant that is expected to result in death or that has lasted or is expected to last for a continuous period of 12 months or more and that causes the Participant to be unable, in the opinion of the Company, to perform his or her duties for the Company and to be engaged in any substantial gainful activity. Total disability shall be deemed to have occurred on the first day after the Company has furnished its opinion of total disability to the Plan Administrator. 8.6 TAXATION OF INCENTIVE STOCK OPTIONS In order to obtain certain tax benefits afforded to Incentive Stock Options under Section 422 of the Code, the Participant must hold the shares issued upon the exercise of an Incentive Stock Option for two years after the Grant Date of the Incentive Stock Option and one year from the date of exercise. A Participant may be subject to the alternative minimum tax at the time of exercise of an Incentive Stock Option. The Plan Administrator may require a Participant to give the Company prompt notice of any disposition of shares acquired by the exercise of an Incentive Stock Option prior to the expiration of such holding periods. 8.7 PROMISSORY NOTES The amount of any promissory note delivered pursuant to Section 13 in connection with an Incentive Stock Option shall bear interest at a rate specified by the Plan Administrator but in no case less than the rate required to avoid imputation of interest (taking into account any exceptions to the imputed interest rules) for federal income tax purposes. -10- 11 SECTION 9. STOCK AWARDS 9.1 GRANT OF STOCK AWARDS The Plan Administrator is authorized to make Awards of Common Stock or Awards denominated in units of Common Stock on such terms and conditions and subject to such restrictions, if any (which may be based on continuous service with the Company or the achievement of performance goals, where such goals may be stated in absolute terms or relative to comparison companies), as the Plan Administrator shall determine, in its sole discretion, which terms, conditions and restrictions shall be set forth in the instrument evidencing the Award. The terms, conditions and restrictions that the Plan Administrator shall have the power to determine shall include, without limitation, the manner in which shares subject to Stock Awards are held during the periods they are subject to restrictions and the circumstances under which forfeiture of the Stock Award shall occur by reason of termination of the Participant's employment or service relationship. 9.2 ISSUANCE OF SHARES Upon the satisfaction of any terms, conditions and restrictions prescribed in respect to a Stock Award, or upon the Participant's release from any terms, conditions and restrictions of a Stock Award, as determined by the Plan Administrator, the Company shall release, as soon as practicable, to the Participant or, in the case of the Participant's death, to the personal representative of the Participant's estate or as the appropriate court directs, the appropriate number of shares of Common Stock. 9.3 WAIVER OF RESTRICTIONS Notwithstanding any other provisions of the Plan, the Plan Administrator may, in its sole discretion, waive the forfeiture period and any other terms, conditions or restrictions on any Stock Award under such circumstances and subject to such terms and conditions as the Plan Administrator shall deem appropriate. SECTION 10. ASSIGNABILITY No Awards granted under the Plan or any interest therein may be assigned, pledged or transferred by the Participant other than by will or by the applicable laws of descent and distribution, and, during the Participant's lifetime, such Award may be exercised only by the Participant or a permitted assignee or transferee of the Participant (as provided below). Notwithstanding the foregoing, and to the extent permitted by Section 422 of the Code, the Plan Administrator, in its sole discretion, may permit such assignment, transfer and exercisability and may permit a Participant to designate a beneficiary who may exercise the Award or receive compensation under the Award after the Participant's death; provided, however, that any Award so assigned or transferred shall be subject to all the same terms and conditions contained in the instrument evidencing the Award. -11- 12 SECTION 11. ADJUSTMENTS 11.1 ADJUSTMENT OF SHARES In the event that, at any time or from time to time, a stock dividend, stock split, spin-off, combination or exchange of shares, recapitalization, merger, consolidation, distribution to stockholders other than a normal cash dividend, or other change in the Company's corporate or capital structure results in (a) the outstanding shares, or any securities exchanged therefor or received in their place, being exchanged for a different number or class of securities of the Company or of any other corporation or (b) new, different or additional securities of the Company or of any other corporation being received by the holders of shares of Common Stock of the Company, then the Plan Administrator shall make proportional adjustments in (i) the maximum number and kind of securities subject to the Plan as set forth in Section 4.1, (ii) the maximum number and kind of securities that may be made subject to Awards to any individual as set forth in Section 4.2, and (iii) the number and kind of securities that are subject to any outstanding Award and the per share price of such securities, without any change in the aggregate price to be paid therefor. The determination by the Plan Administrator as to the terms of any of the foregoing adjustments shall be conclusive and binding. 11.2 CORPORATE TRANSACTION 11.2.1 OPTIONS Except as otherwise provided in the instrument that evidences the Option, in the event of a Corporate Transaction, the Plan Administrator shall determine whether provision will be made in connection with the Corporate Transaction for an appropriate assumption of the Options theretofore granted under the Plan (which assumption may be effected by means of a payment to each Participant (by the Company or any other person or entity involved in the Corporate Transaction), in exchange for the cancellation of the Options held by such Participant, of the difference between the then Fair Market Value of the aggregate number of shares of Common Stock then subject to such Options and the aggregate exercise price that would have to be paid to acquire such shares) or for substitution of appropriate new options covering stock of a successor corporation to the Company or stock of an affiliate of such successor corporation. If the Plan Administrator determines that such an assumption or substitution will be made, the Plan Administrator shall give notice of such determination to the Participants, and the provisions of such assumption or substitution, and any adjustments made (i) to the number and kind of shares subject to the outstanding Options (or to the options in substitution therefor), (ii) to the exercise prices, and/or (iii) to the terms and conditions of the stock options, shall be binding on the Participants. Any such determination shall be made in the sole discretion of the Plan Administrator and shall be final, conclusive and binding on all Participants. If the Plan Administrator, in its sole discretion, determines that no such assumption or substitution will be made, the Plan Administrator shall give notice of such determination to the Participants, and each Option that is at the time outstanding shall automatically accelerate so that each such Option shall, immediately prior to the specified effective date for the Corporate Transaction, become 100% vested and exercisable, except that such acceleration will not occur if, in the opinion of the Company's outside accountants, it would render unavailable "pooling of interest" accounting for a -12- 13 Corporate Transaction that would otherwise qualify for such accounting treatment. All such Options shall terminate and cease to remain outstanding immediately following the consummation of the Corporate Transaction, except to the extent assumed by the successor corporation or an affiliate thereof. 11.2.2 STOCK AWARDS Except as otherwise provided in the instrument that evidences the Award, in the event of a Corporate Transaction, the vesting of shares subject to Stock Awards shall accelerate, and the forfeiture provisions to which such shares are subject shall lapse, if and to the same extent that the vesting of outstanding Options accelerates in connection with the Corporate Transaction. If unvested Options are to be assumed, continued or substituted by a successor corporation without acceleration upon the occurrence of a Corporate Transaction, the forfeiture provisions to which such Stock Awards are subject will continue with respect to shares of the successor corporation that may be issued in exchange for such shares subject to Stock Awards. 11.3 FURTHER ADJUSTMENT OF AWARDS Subject to Section 11.2, the Plan Administrator shall have the discretion, exercisable at any time before a sale, merger, consolidation, reorganization, liquidation or change in control of the Company, as defined by the Plan Administrator, to take such further action as it determines to be necessary or advisable, and fair and equitable to Participants, with respect to Awards. Such authorized action may include (but shall not be limited to) establishing, amending or waiving the type, terms, conditions or duration of, or restrictions on, Awards so as to provide for earlier, later, extended or additional time for exercise and other modifications, and the Plan Administrator may take such actions with respect to all Participants, to certain categories of Participants or only to individual Participants. The Plan Administrator may take such action before or after granting Awards to which the action relates and before or after any public announcement with respect to such sale, merger, consolidation, reorganization, liquidation or change in control that is the reason for such action. 11.4 LIMITATIONS The grant of Awards will in no way affect the Company's right to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. SECTION 12. WITHHOLDING The Company may require the Participant to pay to the Company the amount of any withholding taxes that the Company is required to withhold with respect to the grant, vesting or exercise of any Award. Subject to the Plan and applicable law, the Plan Administrator may, in its sole discretion, permit the Participant to satisfy withholding obligations, in whole or in part, (a) by paying cash, (b) by electing to have the Company withhold shares of Common Stock or (c) by transferring shares of Common Stock to the Company, in such amounts as are equivalent to the Fair Market Value of the withholding obligation. The Company shall have the right to withhold from any shares of Common Stock issuable pursuant to an Award or from any cash amounts -13- 14 otherwise due or to become due from the Company to the Participant an amount equal to such taxes. The Company may also deduct from any Award any other amounts due from the Participant to the Company or a Subsidiary. SECTION 13. LOANS, INSTALLMENT PAYMENTS AND LOAN GUARANTEES To assist a Participant (including a Participant who is an officer or a director of the Company) in acquiring shares of Common Stock pursuant to an Award granted under the Plan, the Plan Administrator, in its sole discretion, may authorize, either at the Grant Date or at any time before the acquisition of Common Stock pursuant to the Award, (a) the extension of a loan to the Participant by the Company, (b) the payment by the Participant of the purchase price, if any, of the Common Stock in installments, or (c) the guarantee by the Company of a loan obtained by the Participant from a third party. The terms of any loans, installment payments or loan guarantees, including the interest rate and terms of repayment, will be subject to the Plan Administrator's discretion. Loans, installment payments and loan guarantees may be granted with or without security. The maximum credit available is the purchase price, if any, of the Common Stock acquired, plus the maximum federal and state income and employment tax liability that may be incurred in connection with the acquisition. SECTION 14. REPURCHASE RIGHTS; ESCROW 14.1 REPURCHASE RIGHTS The Plan Administrator shall have the discretion to authorize the issuance of unvested shares of Common Stock pursuant to the exercise of an Option. In the event of termination of the Participant's employment or services, all shares of Common Stock issued upon exercise of an Option which are unvested at the time of cessation of employment or services shall be subject to repurchase at the exercise price paid for such shares. The terms and conditions upon which such repurchase right shall be exercisable (including the period and procedure for exercise) shall be established by the Plan Administrator and set forth in the agreement evidencing such right. All of the Company's outstanding repurchase rights under this Section 14.1 are assignable by the Company at any time and shall remain in full force and effect in the event of a Corporate Transaction; provided that if the vesting of Options is accelerated pursuant to Section 11.2, the repurchase rights under this Section 14.1 shall terminate and all shares subject to such terminated rights shall immediately vest in full. The Plan Administrator shall have the discretionary authority, exercisable either before or after the Participant's cessation of employment or services, to cancel the Company's outstanding repurchase rights with respect to one or more shares purchased or purchasable by the Participant under an Option and thereby accelerate the vesting of such shares in whole or in part at any time. 14.2 ESCROW To ensure that shares of Common Stock acquired pursuant to an Award that are subject to any repurchase or forfeiture right, stockholders agreement and/or security for any promissory -14- 15 note will be available for repurchase or forfeiture, the Plan Administrator may require the Participant to deposit the certificate or certificates evidencing such shares with an agent designated by the Plan Administrator under the terms and conditions of escrow and security agreements approved by the Plan Administrator. If the Plan Administrator does not require such deposit as a condition of exercise of an Option or grant of a Stock Award, the Plan Administrator reserves the right at any time to require the Participant to so deposit the certificate or certificates in escrow. The Company shall bear the expenses of the escrow. As soon as practicable after the expiration of any repurchase or forfeiture rights or stockholders agreement, and after full repayment of any promissory note secured by the shares in escrow, the agent shall deliver to the Participant the shares no longer subject to such restrictions and no longer security for any promissory note. In the event shares held in escrow are subject to the Company's exercise of a repurchase or forfeiture right or a stockholders agreement, the notices required to be given to the Participant shall be given to the agent and any payment required to be given to the Participant shall be given to the agent. Within 30 days after payment by the Company, the agent shall deliver the shares which the Company has purchased to the Company and shall deliver the payment received from the Company to the Participant. In the event of any stock dividend, stock split or consolidation of shares or any like capital adjustment of any of the outstanding securities of the Company, any and all new, substituted or additional securities or other property to which the Participant is entitled by reason of ownership of shares acquired upon exercise of an Option or grant of a Stock Award shall be subject to any repurchase or forfeiture rights, stockholders agreement, and/or security for any promissory note with the same force and effect as the shares subject to such repurchase or forfeiture rights, stockholders agreement and/or security interest immediately before such event. SECTION 15. MARKET STANDOFF In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company's initial public offering, a person shall not sell, or make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to, any shares issued pursuant to an Award granted under the Plan without the prior written consent of the Company or its underwriters. Such limitations shall be in effect only if and to the extent and for such period of time as may be requested by the Company or such underwriters and agreed to by the Company's officers and directors; provided, however, that in no event shall the weighted average number of days in such period exceed 180 days. The limitations of this paragraph shall in all events terminate two years after the effective date of the Company's initial public offering. In the event of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the Company's outstanding Common Stock effected as a class without the Company's receipt of consideration, then any new, substituted or additional securities distributed with respect to the purchased shares shall be immediately subject to the -15- 16 provisions of this Section 15, to the same extent the purchased shares are at such time covered by such provisions. In order to enforce the limitations of this Section 15, the Company may impose stop-transfer instructions with respect to the purchased shares and any new, substituted or additional securities distributed with respect to the purchased shares until the end of the applicable standoff period. SECTION 16. AMENDMENT AND TERMINATION OF PLAN 16.1 AMENDMENT OF PLAN The Plan may be amended only by the Board in such respects as it shall deem advisable; however, to the extent required for compliance with Section 422 of the Code or any applicable law or regulation, stockholder approval will be required for any amendment that will (a) increase the total number of shares available for issuance under the Plan, (b) modify the class of persons eligible to receive Options, or (c) otherwise require stockholder approval under any applicable law or regulation. 16.2 TERMINATION OF PLAN The Board may suspend or terminate the Plan at any time. The Plan will have no fixed expiration date; provided, however, that no Incentive Stock Options may be granted more than 10 years after the earlier of the Plan's adoption by the Board and approval by the stockholders. 16.3 CONSENT OF PARTICIPANT The amendment or termination of the Plan shall not, without the consent of the Participant, impair or diminish any rights or obligations under any Award theretofore granted under the Plan. Any change or adjustment to an outstanding Incentive Stock Option shall not, without the consent of the Participant, be made in a manner so as to constitute a "modification" that would cause such Incentive Stock Option to fail to continue to qualify as an Incentive Stock Option. SECTION 17. GENERAL 17.1 EVIDENCE OF AWARDS Awards granted under the Plan shall be evidenced by a written agreement that shall contain such terms, conditions, limitations and restrictions as the Plan Administrator shall deem advisable and that are not inconsistent with the Plan. 17.2 CONTINUED EMPLOYMENT OR SERVICES; RIGHTS IN AWARDS None of the Plan, participation in the Plan or any action of the Plan Administrator taken under the Plan shall be construed as giving any person any right to be retained in the employ of the Company or limit the Company's right to terminate the employment or services of any person. -16- 17 17.3 REGISTRATION The Company shall be under no obligation to any Participant to register for offering or resale or to qualify for exemption under the Securities Act, or to register or qualify under state securities laws, any shares of Common Stock, security or interest in a security paid or issued under, or created by, the Plan, or to continue in effect any such registrations or qualifications if made. The Company may issue certificates for shares with such legends and subject to such restrictions on transfer and stop-transfer instructions as counsel for the Company deems necessary or desirable for compliance by the Company with federal and state securities laws. Inability of the Company to obtain, from any regulatory body having jurisdiction, the authority deemed by the Company's counsel to be necessary for the lawful issuance and sale of any shares hereunder or the unavailability of an exemption from registration for the issuance and sale of any shares hereunder shall relieve the Company of any liability in respect of the nonissuance or sale of such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of an Award, the Company may require the Participant to represent and warrant at the time of any such exercise or receipt that such shares are being purchased or received only for the Participant's own account and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any relevant provision of the aforementioned laws. At the option of the Company, a stop-transfer order against any such shares may be placed on the official stock books and records of the Company, and a legend indicating that such shares may not be pledged, sold or otherwise transferred, unless an opinion of counsel is provided (concurred in by counsel for the Company) stating that such transfer is not in violation of any applicable law or regulation, may be stamped on stock certificates to ensure exemption from registration. The Plan Administrator may also require such other action or agreement by the Participant as may from time to time be necessary to comply with the federal and state securities laws. 17.4 NO RIGHTS AS A STOCKHOLDER No Option or Stock Award denominated in units shall entitle the Participant to any dividend, voting or other right of a stockholder unless and until the date of issuance under the Plan of the shares that are the subject of such Award, free of all applicable restrictions. 17.5 COMPLIANCE WITH LAWS AND REGULATIONS Notwithstanding anything in the Plan to the contrary, the Board, in its sole discretion, may bifurcate the Plan so as to restrict, limit or condition the use of any provision of the Plan to Participants who are officers or directors subject to Section 16 of the Exchange Act without so restricting, limiting or conditioning the Plan with respect to other Participants. Additionally, in interpreting and applying the provisions of the Plan, any Option granted as an Incentive Stock Option pursuant to the Plan shall, to the extent permitted by law, be construed as an "incentive stock option" within the meaning of Section 422 of the Code. -17- 18 17.6 NO TRUST OR FUND The Plan is intended to constitute an "unfunded" plan. Nothing contained herein shall require the Company to segregate any monies or other property, or shares of Common Stock, or to create any trusts, or to make any special deposits for any immediate or deferred amounts payable to any Participant, and no Participant shall have any rights that are greater than those of a general unsecured creditor of the Company. 17.7 SEVERABILITY If any provision of the Plan or any Option is determined to be invalid, illegal or unenforceable in any jurisdiction, or as to any person, or would disqualify the Plan or any Option under any law deemed applicable by the Plan Administrator, such provision shall be construed or deemed amended to conform to applicable laws, or, if it cannot be so construed or deemed amended without, in the Plan Administrator's determination, materially altering the intent of the Plan or the Option, such provision shall be stricken as to such jurisdiction, person or Option, and the remainder of the Plan and any such Option shall remain in full force and effect. SECTION 18. EFFECTIVE DATE The Plan's effective date is the date on which it is adopted by the Board, so long as it is approved by the Company's stockholders at any time within 12 months of such adoption. Adopted by the Board on February 25, 1997 and approved by the Company's stockholders on February 26, 1997. Amended and restated on September 8, 1999 to permit issuance of stock awards in addition to option grants. -18- 19 PLAN ADOPTION AND AMENDMENTS/ADJUSTMENTS
Date of Adoption/ Amendment/ Date of Stockholder Adjustment Section Effect of Amendment Approval ---------- ------- ------------------- -------------------
-1- EX-27.1 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AMAZON.COM INC. FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 43,149 862,536 0 0 118,793 1,080,068 256,874 35,631 2,239,799 357,671 1,462,203 0 0 3,393 416,532 2,239,799 963,797 963,797 760,998 760,998 571,646 0 66,424 (396,755) 0 (396,755) 0 0 0 (396,755) 1.23 1.23
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