EX-99.1 4 dex991.htm PRESS RELEASE DATED JULY 23, 2002 Prepared by R.R. Donnelley Financial -- Press Release Dated July 23, 2002
Exhibit 99.1
LOGO
 
AMAZON.COM ANNOUNCES 21% SALES GROWTH DRIVEN BY LOWER PRICES AND EXPANDED SELECTION; RAISES FINANCIAL GUIDANCE
 
SEATTLE—(BUSINESS WIRE)—July 23, 2002—Amazon.com, Inc. (NASD: AMZN) today announced financial results for its second quarter ended June 30, 2002.
 
Free cash flow was $16 million for the trailing four quarters, compared with negative $270 million for the four quarters ended June 2001. Free cash flow includes interest payments and capital expenditures and excludes proceeds from exercise of stock options.
 
Common stock outstanding was 380 million shares at June 30, 2002, an increase of 5% compared to June 30, 2001 (approximately half of the increase was in connection with a July 2001 $100 million investment in the Company).
 
Net sales were $806 million, compared with $668 million in the second quarter 2001, an increase of 21%.
 
Operating profit was $1 million, compared with a loss of $140 million a year ago. Pro forma operating profit was $26 million, or 3% of net sales, exceeding the Company’s guidance of $5 million to $15 million. This compares with a pro forma operating loss of $28 million in the second quarter 2001, an improvement of $54 million.
 
Net loss was $94 million, or $0.25 per share, compared with a second quarter 2001 net loss of $168 million, or $0.47 per share. Pro forma net loss, which includes interest expense, was $4 million, or $0.01 per share, compared with a pro forma net loss of $58 million, or $0.16 per share, in the second quarter 2001. (Details on the differences between GAAP results and pro forma results are included below, with a tabular reconciliation of those differences included in the attached financial statements.)
 
“I’m especially pleased with the outstanding job our U.S. Books team is doing—posting another quarter of 20% year-over-year book unit growth, up from 15% growth this past fourth quarter,” said Jeff Bezos, founder and CEO of Amazon.com. “Also, Electronics, Tools and Kitchen revenues accelerated as we lowered prices and expanded Electronics selection by 40% to over 60,000 items, including products from Sony, Toshiba, Yamaha and Microsoft.”
 
In June, Amazon.com announced its fourth significant price decrease in the past year. In July 2001, the Company lowered book prices to 30% off books over $20, and in January introduced its Free Super Saver Shipping option on orders over $99. In April, Amazon.com extended the 30% discount to books over $15, and in June extended its Free Super Saver Shipping option to qualifying orders over $49 as a long-term test. Additionally, Amazon.com recently reduced prices on electronics, tools and many bestselling CDs and DVDs.
 
Highlights of Second Quarter Results (comparisons are with the equivalent period of 2001)
 
 
Ÿ
 
Third-party transactions (new, used and refurbished items sold on Amazon.com product detail pages by businesses and individuals) grew sequentially to 20% of North American units, representing 35% of North American orders, compared with 10% of units and 18% of orders.
 
Ÿ
 
International segment sales, from the Company’s U.K., German, French and Japanese sites, grew 70% to $218 million, and pro forma operating results improved by 66% to a loss of $10 million, or 5% of International sales.
 
Ÿ
 
Electronics, Tools and Kitchen segment sales growth accelerated to 16% from 8% growth in the first quarter 2002, and pro forma operating losses declined 55% to $18 million.
 
Ÿ
 
Books unit growth was 20%. Books, Music and DVD/Video segment sales grew 6% to $412 million. Pro forma operating profit grew 26% to $49 million, a record 12% of Books, Music and DVD/Video sales.
 
Ÿ
 
Pro forma operating profit was $82 million for the trailing four quarters, or 2% of net sales.
 
Ÿ
 
Inventory turns improved 35% to 19 for the trailing four quarters, up from 14.

Page 1 of 16

 
Stock Options
 
The Company announced that by the beginning of 2003 all stock-based awards granted thereafter will be expensed.
 
Financial Guidance
 
The following forward-looking statements reflect Amazon.com’s expectations as of July 23, 2002. Results may be materially affected by many factors, such as changes in general economic conditions and consumer spending, the emerging nature and rate of growth of the Internet and online commerce, and the various factors detailed below.
 
Third Quarter 2002 Expectations
 
·
 
Net sales are expected to be between $780 million and $830 million.
 
·
 
Pro forma operating income is expected to be between $8 million and $17 million, or between 1% and 2% of net sales.
 
Full Year 2002 Expectations
 
·
 
Free cash flow is expected.
 
·
 
Net sales are expected to grow by over 18%.
 
·
 
Pro forma net income is expected.
 
A conference call will be Webcast live at www.amazon.com/ir today at 2 p.m. PT/5 p.m. ET and will be available through September 30, 2002. This call will contain forward-looking statements and other material information.
 
These forward-looking statements are inherently difficult to predict. Actual results could differ materially for a variety of reasons, including, among others,the rate of growth of the economy in general and of the Internet and online commerce; customer spending patterns; the amount that Amazon.com invests in new business opportunities and the timing of those investments; the mix of products sold to customers; the mix of net sales derived from products as compared with services; competition; risks of inventory management; the degree to which the Company enters into, maintains and develops service relationships with third-party sellers and other strategic transactions; foreign-currency exchange risks; seasonality; international growth and expansion; risks of fulfillment throughput and productivity; and fluctuations in the value of securities and non-cash payments Amazon.com receives in connection with such transactions. Other risks and uncertainties include, among others, risk of future losses, significant amount of indebtedness, potential fluctuations in operating results, management of potential growth, system interruptions, consumer trends, fulfillment center optimization, inventory, limited operating history, government regulation and taxation, customer or third-party sellers fraud, Amazon.com Payments, and new business areas, business combinations and strategic alliances. More information about factors that potentially could affect Amazon.com’s financial results is included in Amazon.com’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2001, and all subsequent filings.
 
The Company intends to continue its practice of not updating forward-looking statements other than in publicly available documents.
 
Pro Forma Results
 
Pro forma results, which generally exclude non-operational, non-cash charges and benefits as well as one-time charges, are provided as a complement to results provided in accordance with accounting principles generally accepted in the United States (known as “GAAP”). Management uses such pro forma measures internally to evaluate the Company’s performance and manage its operations. A reconciliation of GAAP to pro forma is included in the attached financial statements.
 
Pro forma operating results exclude the following line items on the Company’s statements of operations:
 
 
·
 
Stock-based compensation,
 
·
 
Amortization of goodwill and other intangibles, and
 
·
 
Restructuring-related and other.

Page 2 of 16

 
Pro forma net results exclude, in addition to the line items described above, the following line items on the Company’s statements of operations:
 
·
 
Other gains (losses), net,
 
·
 
Equity in losses of equity-method investees, net, and
 
·
 
Cumulative effect of change in accounting principle.
 
About Amazon.com
 
Amazon.com, a Fortune 500 company based in Seattle, opened its virtual doors on the World Wide Web in July 1995 and today offers Earth’s Biggest Selection. Amazon.com seeks to be the world’s most customer-centric company, where customers can find and discover anything they might want to buy online. Amazon.com and sellers list millions of unique new and used items in categories such as electronics, computers, kitchenware and housewares, books, music, DVDs, videos, camera and photo items, toys, baby items and baby registry, software, computer and video games, cell phones and service, tools and hardware, travel services, magazine subscriptions and outdoor living items. Through Amazon Marketplace, zShops and Auctions, any business or individual can sell virtually anything to Amazon.com’s millions of customers, and with Amazon.com Payments, sellers can accept credit card transactions, avoiding the hassles of offline payments.
 
Amazon.com operates five international Web sites: www.amazon.ca, www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp. It also operates the Internet Movie Database (www.imdb.com), the Web’s comprehensive and authoritative source of information on more than 300,000 movies and entertainment titles and 1 million cast and crew members dating from the birth of film.
 
Contact:
 
Amazon.com Investor Relations
Tim Halladay, 206/266-2171, ir@amazon.com
 
Amazon.com Public Relations
Bill Curry, 206/266-7180

Page 3 of 16

 
AMAZON.COM, INC.
Statements of Cash Flows
(in thousands)
(unaudited)
 
   
Three Months Ended
    
Six Months Ended
  
   
June 30,
    
June 30,
  
   
2002
    
2001
    
2002
    
2001
  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
  
$
296,689
 
  
$
446,944
 
  
$
540,282
 
  
$
822,435
 
OPERATING ACTIVITIES:
                                
Net loss
  
 
(93,553
)
  
 
(168,359
)
  
 
(116,703
)
  
 
(402,490
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
                                
Depreciation of fixed assets and other amortization
  
 
20,970
 
  
 
20,794
 
  
 
41,910
 
  
 
43,867
 
Stock-based compensation
  
 
23,148
 
  
 
2,351
 
  
 
34,079
 
  
 
5,267
 
Equity in losses of equity-method investees, net
  
 
1,168
 
  
 
10,315
 
  
 
2,912
 
  
 
23,490
 
Amortization of goodwill and other intangibles
  
 
1,374
 
  
 
50,830
 
  
 
3,353
 
  
 
101,661
 
Non-cash restructuring-related and other
  
 
—  
 
  
 
6,525
 
  
 
—  
 
  
 
68,529
 
Loss (gain) on sale of marketable securities, net
  
 
(437
)
  
 
187
 
  
 
(813
)
  
 
214
 
Other losses (gains), net
  
 
63,454
 
  
 
(11,315
)
  
 
57,938
 
  
 
(45,172
)
Non-cash interest expense and other
  
 
7,464
 
  
 
6,713
 
  
 
14,525
 
  
 
13,285
 
Cumulative effect of change in accounting principle
  
 
—  
 
  
 
—  
 
  
 
(801
)
  
 
10,523
 
Changes in operating assets and liabilities:
                                
Inventories
  
 
16,420
 
  
 
25,277
 
  
 
21,094
 
  
 
45,100
 
Prepaid expenses and other current assets
  
 
(13,430
)
  
 
(12,203
)
  
 
(16,750
)
  
 
15,131
 
Accounts payable
  
 
(27,418
)
  
 
(1,632
)
  
 
(155,704
)
  
 
(231,390
)
Accrued expenses and other current liabilities
  
 
(12,489
)
  
 
52,271
 
  
 
(78,350
)
  
 
(5,491
)
Unearned revenue
  
 
20,688
 
  
 
25,192
 
  
 
49,404
 
  
 
43,197
 
Amortization of previously unearned revenue
  
 
(30,921
)
  
 
(31,908
)
  
 
(68,254
)
  
 
(65,300
)
Interest payable
  
 
28,199
 
  
 
27,447
 
  
 
(24,236
)
  
 
(24,920
)
   
 
 
 
Net cash provided by (used in) operating activities
  
 
4,637
 
  
 
2,485
 
  
 
(236,396
)
  
 
(404,499
)
INVESTING ACTIVITIES:
                                
Sales and maturities of marketable securities and other investments
  
 
213,336
 
  
 
66,971
 
  
 
349,911
 
  
 
161,337
 
Purchases of marketable securities
  
 
(299,877
)
  
 
(26,743
)
  
 
(434,104
)
  
 
(57,121
)
Purchases of fixed assets, including internal-use software and Web site development
  
 
(7,440
)
  
 
(10,425
)
  
 
(12,294
)
  
 
(29,862
)
   
 
 
 
Net cash provided by (used in) investing activities
  
 
(93,981
)
  
 
29,803
 
  
 
(96,487
)
  
 
74,354
 
FINANCING ACTIVITIES:
                                
Proceeds from exercise of stock options and other
  
 
42,866
 
  
 
7,644
 
  
 
50,275
 
  
 
13,477
 
Proceeds from long-term debt and other
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
10,000
 
Repayment of capital lease obligations and other
  
 
(3,432
)
  
 
(4,094
)
  
 
(7,995
)
  
 
(8,669
)
   
 
 
 
Net cash provided by financing activities
  
 
39,434
 
  
 
3,550
 
  
 
42,280
 
  
 
14,808
 
Effect of exchange-rate changes on cash and cash equivalents
  
 
23,659
 
  
 
(19,833
)
 
 
20,759
 
  
 
(44,149
)
   
 
 
 
Net increase (decrease) in cash and cash equivalents
  
 
(26,251
)
 
 
16,005
 
  
 
(269,844
)
  
 
(359,486
)
   
 
 
 
CASH AND CASH EQUIVALENTS, END OF PERIOD
  
$
270,438
 
  
$
462,949
 
  
$
270,438
 
  
$
462,949
 
   
 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION:
                                
Fixed assets acquired under capital leases
  
$
1,211
 
  
$
171
 
  
$
2,135
 
  
$
2,469
 
Equity securities received for commercial agreements
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
331
 
Cash paid for interest
  
 
566
 
  
 
1,198
 
  
 
81,049
 
  
 
80,715
 
 
Note:
 
The attached “Financial and Operational Highlights” are an integral part of the press release financial statements.

Page 4 of 16

 
AMAZON.COM, INC.
Statements of Operations
(in thousands, except per share data)
(unaudited
    
Three Months Ended
June 30,
     
Six Months Ended
June 30,
  
    
2002
     
2001
     
2002
     
2001
  
Net sales
   
$
805,605
 
   
$
667,625
 
   
$
1,653,027
 
   
$
1,367,981
 
Cost of sales
   
 
587,438
 
   
 
487,905
 
   
 
1,211,735
 
   
 
1,005,664
 
    
  
  
  
Gross profit
   
 
218,167
 
   
 
179,720
 
   
 
441,292
 
   
 
362,317
 
Operating expenses:
                                    
Fulfillment
   
 
85,751
 
   
 
85,583
 
   
 
175,566
 
   
 
183,831
 
Marketing
   
 
28,832
 
   
 
34,658
 
   
 
61,076
 
   
 
71,296
 
Technology and content
   
 
58,165
 
   
 
64,710
 
   
 
113,662
 
   
 
134,994
 
General and administrative
   
 
19,425
 
   
 
22,778
 
   
 
40,336
 
   
 
48,806
 
Stock-based compensation
   
 
23,148
 
   
 
2,351
 
   
 
34,079
 
   
 
5,267
 
Amortization of goodwill and other intangibles
   
 
1,374
 
   
 
50,830
 
   
 
3,353
 
   
 
101,661
 
Restructuring-related and other
   
 
—  
 
   
 
58,650
 
   
 
9,974
 
   
 
172,910
 
    
  
  
  
Total operating expenses
   
 
216,695
 
   
 
319,560
 
   
 
438,046
 
   
 
718,765
 
    
  
  
  
Income (loss) from operations
   
 
1,472
 
   
 
(139,840
)
   
 
3,246
 
   
 
(356,448
)
Interest income
   
 
5,650
 
   
 
6,807
 
   
 
11,302
 
   
 
16,757
 
Interest expense
   
 
(35,651
)
   
 
(35,148
)
   
 
(70,895
)
   
 
(68,896
)
Other income (expense), net
   
 
(402
)
   
 
(1,178
)
   
 
(307
)
   
 
(5,062
)
Other gains (losses), net
   
 
(63,454
)
   
 
11,315
 
   
 
(57,938
)
   
 
45,172
 
    
  
  
  
Total non-operating expenses, net
   
 
(93,857
)
   
 
(18,204
)
   
 
(117,838
)
   
 
(12,029
)
    
  
  
  
Loss before equity in losses of equity-method investees
   
 
(92,385
)
   
 
(158,044
)
   
 
(114,592
)
   
 
(368,477
)
Equity in losses of equity-method investees, net
   
 
(1,168
)
   
 
(10,315
)
   
 
(2,912
)
   
 
(23,490
)
Loss before change in accounting principle
   
 
(93,553
)
   
 
(168,359
)
   
 
(117,504
)
   
 
(391,967
)
Cumulative effect of change in accounting principle
   
 
—  
 
   
 
—  
 
   
 
801
 
   
 
(10,523
)
Net loss
   
$
(93,553
)
   
$
(168,359
)
   
$
(116,703
)
   
$
(402,490
)
    
  
  
  
Basic and diluted loss per share:
                  
Prior to cumulative effect of change in accounting principle
   
$
(0.25
)
   
$
(0.47
)
   
$
(0.31
)
   
$
(1.09
)
Cumulative effect of change in accounting principle
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(0.03
)
    
$
(0.25
)
   
$
(0.47
)
   
$
(0.31
)
   
$
(1.12
)
    
  
  
  
Shares used in computation of basic and diluted loss per share:
   
 
376,937
 
   
 
359,752
 
   
 
374,995
 
   
 
358,595
 
    
  
  
  
 
Note: The attached “Financial and Operational Highlights” are an integral part of the press release financial statements.

Page 5 of 16

 
AMAZON.COM, INC.
Pro Forma Statements of Operations
(in thousands, except per share data)
(unaudited)
 
    
Three Months Ended
  
    
June 30, 2002
    
June 30, 2001
  
    
As Reported (1)
    
Pro Forma Adjustments
    
Pro Forma
    
As Reported (1)
    
Pro Forma
Adjustments
    
Pro Forma
  
Net sales
   
$
805,605
 
  
$
—  
 
  
$
805,605
 
  
$
667,625
 
  
$
—  
 
  
$
667,625
 
Cost of sales
   
 
587,438
 
  
 
—  
 
  
 
587,438
 
  
 
487,905
 
  
 
—  
 
  
 
487,905
 
    
 
 
 
 
 
Gross profit
   
 
218,167
 
  
 
—  
 
  
 
218,167
 
  
 
179,720
 
  
 
—  
 
  
 
179,720
 
Operating expenses:
                                                 
Fulfillment
  
 
85,751
 
  
 
—  
 
  
 
85,751
 
  
 
85,583
 
  
 
—  
 
  
 
85,583
 
Marketing
  
 
28,832
 
  
 
—  
 
  
 
28,832
 
  
 
34,658
 
  
 
—  
 
  
 
34,658
 
Technology and content
   
 
58,165
 
  
 
—  
 
  
 
58,165
 
  
 
64,710
 
  
 
—  
 
  
 
64,710
 
General and administrative
  
 
19,425
 
  
 
—  
 
  
 
19,425
 
  
 
22,778
 
  
 
—  
 
  
 
22,778
 
Stock-based compensation
  
 
23,148
 
  
 
(23,148
)
  
 
—  
 
  
 
2,351
 
  
 
(2,351
)
  
 
—  
 
Amortization of goodwill and other intangibles
  
 
1,374
 
  
 
(1,374
)
  
 
—  
 
  
 
50,830
 
  
 
(50,830
)
  
 
—  
 
Restructuring-related and other
   
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
58,650
 
  
 
(58,650
)
  
 
—  
 
    
 
 
 
 
 
Total operating expenses
  
 
216,695
 
  
 
(24,522
)
  
 
192,173
 
  
 
319,560
 
  
 
(111,831
)
  
 
207,729
 
    
 
 
 
 
 
Income (loss) from operations
   
 
1,472
 
  
 
24,522
 
  
 
25,994
 
  
 
(139,840
)
  
 
111,831
 
  
 
(28,009
)
Interest income
   
 
5,650
 
  
 
—  
 
  
 
5,650
 
  
 
6,807
 
  
 
—  
 
  
 
6,807
 
Interest expense
   
 
(35,651
)
  
 
—  
 
  
 
(35,651
)
  
 
(35,148
)
  
 
—  
 
  
 
(35,148
)
Other income (expense), net
   
 
(402
)
  
 
—  
 
  
 
(402
)
  
 
(1,178
)
  
 
—  
 
  
 
(1,178
)
Other gains (losses), net
   
 
(63,454
)
  
 
63,454
 
  
 
—  
 
  
 
11,315
 
  
 
(11,315
)
  
 
—  
 
    
 
 
 
 
 
Total non-operating expenses, net
   
 
(93,857
)
  
 
63,454
 
  
 
(30,403
)
  
 
(18,204
)
  
 
(11,315
)
  
 
(29,519
)
    
 
 
 
 
 
Loss before equity in losses of equity-method investees
   
 
(92,385
)
  
 
87,976
 
  
 
(4,409
)
  
 
(158,044
)
  
 
100,516
 
  
 
(57,528
)
Equity in losses of equity-method investees, net
   
 
(1,168
)
  
 
1,168
 
  
 
—  
 
  
 
(10,315
)
  
 
10,315
 
  
 
—  
 
    
 
 
 
 
 
Net loss
   
$
(93,553
)
  
$
89,144
 
  
$
(4,409
)
  
$
(168,359
)
  
$
110,831
 
  
$
(57,528
)
    
 
 
 
 
 
Net cash provided by operating activities
   
$
4,637
 
          
$
4,637
 
  
$
2,485
 
          
$
2,485
 
    
         
 
         
Basic and diluted loss per share
   
$
(0.25
)
  
$
0.24
 
  
$
(0.01
)
  
$
(0.47
)
  
$
0.31
 
  
$
(0.16
)
    
 
 
 
 
 
Shares used in computation of basic and diluted loss per share:
   
 
376,937
 
          
 
376,937
 
  
 
359,752
 
          
 
359,752
 
    
         
 
         
 
Note:
 
The attached “Financial and Operational Highlights” are an integral part of the press release financial statements
 
(1)
 
In accordance with accounting principles generally accepted in the United States.

Page 6 of 16

 
AMAZON.COM, INC.
Pro Forma Statements of Operations
(in thousands, except per share data)
(unaudited)
   
Six Months Ended
  
   
June 30, 2002
    
June 30, 2001
  
   
As Reported (1)
    
Pro Forma
Adjustments
    
Pro Forma
    
As Reported (1)
    
Pro Forma
Adjustments
    
Pro Forma
  
Net sales
  
$
1,653,027
 
  
$
—  
 
  
$
1,653,027
 
  
$
1,367,981
 
  
$
—  
 
  
$
1,367,981
 
Cost of sales
  
 
1,211,735
 
  
 
—  
 
  
 
1,211,735
 
  
 
1,005,664
 
  
 
—  
 
  
 
1,005,664
 
   
 
 
 
 
 
Gross profit
  
 
441,292
 
  
 
—  
 
  
 
441,292
 
  
 
362,317
 
  
 
—  
 
  
 
362,317
 
Operating expenses:
                                                
Fulfillment
 
 
175,566
 
  
 
—  
 
  
 
175,566
 
  
 
183,831
 
  
 
—  
 
  
 
183,831
 
Marketing
 
 
61,076
 
  
 
—  
 
  
 
61,076
 
  
 
71,296
 
  
 
—  
 
  
 
71,296
 
Technology and content
 
 
113,662
 
  
 
—  
 
  
 
113,662
 
  
 
134,994
 
  
 
—  
 
  
 
134,994
 
General and administrative
 
 
40,336
 
  
 
—  
 
  
 
40,336
 
  
 
48,806
 
  
 
—  
 
  
 
48,806
 
Stock-based compensation
 
 
34,079
 
  
 
(34,079
)
  
 
—  
 
  
 
5,267
 
  
 
(5,267
)
  
 
—  
 
Amortization of goodwill and other intangibles
 
 
3,353
 
  
 
(3,353
)
  
 
—  
 
  
 
101,661
 
  
 
(101,661
)
  
 
—  
 
Restructuring-related and other
 
 
9,974
 
  
 
(9,974
)
  
 
—  
 
  
 
172,910
 
  
 
(172,910
)
  
 
—  
 
   
 
 
 
 
 
Total operating expenses
 
 
438,046
 
  
 
(47,406
)
  
 
390,640
 
  
 
718,765
 
  
 
(279,838
)
  
 
438,927
 
   
 
 
 
 
 
Income (loss) from operations
  
 
3,246
 
  
 
47,406
 
  
 
50,652
 
  
 
(356,448
)
  
 
279,838
 
  
 
(76,610
)
Interest income
  
 
11,302
 
  
 
—  
 
  
 
11,302
 
  
 
16,757
 
  
 
—  
 
  
 
16,757
 
Interest expense
  
 
(70,895
)
  
 
—  
 
  
 
(70,895
)
  
 
(68,896
)
  
 
—  
 
  
 
(68,896
)
Other income (expense), net
  
 
(307
)
  
 
—  
 
  
 
(307
)
  
 
(5,062
)
  
 
—  
 
  
 
(5,062
)
Other gains (losses), net
  
 
(57,938
)
  
 
57,938
 
  
 
—  
 
  
 
45,172
 
  
 
(45,172
)
  
 
—  
 
   
 
 
 
 
 
Total non-operating expenses, net
 
 
(117,838
)
  
 
57,938
 
  
 
(59,900
)
  
 
(12,029
)
  
 
(45,172
)
  
 
(57,201
)
   
 
 
 
 
 
Loss before equity in losses of equity-method investees
  
 
(114,592
)
  
 
105,344
 
  
 
(9,248
)
  
 
(368,477
)
  
 
234,666
 
  
 
(133,811
)
Equity in losses of equity-method investees, net
  
 
(2,912
)
  
 
2,912
 
  
 
—  
 
  
 
(23,490
)
  
 
23,490
 
  
 
—  
 
   
 
 
 
 
 
Loss before change in accounting principle
  
 
(117,504
)
  
 
108,256
 
  
 
(9,248
)
  
 
(391,967
)
  
 
258,156
 
  
 
(133,811
)
Cumulative effect of change in accounting principle
  
 
801
 
  
 
(801
)
  
 
—  
 
  
 
(10,523
)
  
 
10,523
 
  
 
—  
 
   
 
 
 
 
 
Net loss
  
$
(116,703
)
  
$
107,455
 
  
$
(9,248
)
  
$
(402,490
)
  
$
268,679
 
  
$
(133,811
)
   
 
 
 
 
 
Net cash used in operating activities
  
$
(236,396
)
          
$
(236,396
)
  
$
(404,499
)
          
$
(404,499
)
   
         
 
         
Basic and diluted loss per share:
  
$
(0.31
)
  
 
0.29
 
  
$
(0.02
)
  
$
(1.09
)
  
 
0.72
 
  
$
(0.37
)
Prior to cumulative effect of change in accounting principle
 
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
(0.03
)
  
 
0.03
 
  
 
—  
 
   
 
 
 
 
 
Cumulative effect of change in accounting principle
 
$
(0.31
)
  
 
0.29
 
  
 
(0.02
)
  
$
(1.12
)
  
$
0.75
 
  
$
(0.37
)
   
 
 
 
 
 
Shares used in computation of basic and diluted loss per share:
 
 
374,995
 
          
 
374,995
 
  
 
358,595
 
          
 
358,595
 
   
         
 
         
 
Note:
 
The attached “Financial and Operational Highlights” are an integral part of the press release financial statements.
 
(1)
 
In accordance with accounting principles generally accepted in the United States

Page 7 of 16

 
AMAZON.COM, INC.
Segment Information
(in thousands)
(unaudited)
 
    
Three Months Ended June 30, 2002
  
    
North America
                    
    
Books, Music
and DVD/Video
   
Electronics,
Tools and Kitchen
    
Total
    
International
    
Services
    
Consolidated
  
Net sales
   
$
411,727
   
$
128,431
 
  
$
540,158
 
  
$
218,457
 
  
$
46,990
 
  
$
805,605
 
Gross profit
   
 
123,673
   
 
18,518
 
  
 
142,191
 
  
 
47,369
 
  
 
28,607
 
  
 
218,167
 
Pro forma income (loss) from operations
   
 
49,093
   
 
(18,498
)
  
 
30,595
 
  
 
(10,187
)
  
 
5,586
 
  
 
25,994
 
Stock-based compensation
                                          
 
(23,148
)
Amortization of other intangibles
                                          
 
(1,374
)
Total non-operating expenses, net
                                          
 
(93,857
)
Equity in losses of equity-method investees, net
                                          
 
(1,168
)
                                           
Net loss
                                          
$
(93,553
)
                                           
Segment highlights:
                                                
Y / Y net sales growth
   
 
6%
   
 
16%
 
  
 
8%
 
  
 
70%
 
  
 
22%
 
  
 
21%
 
Y / Y gross profit growth
   
 
12%
   
 
41%
 
  
 
15%
 
  
 
61%
 
  
 
9%
 
  
 
21%
 
Gross margin
   
 
30%
   
 
14%
 
  
 
26%
 
  
 
22%
 
  
 
61%
 
  
 
27%
 
Pro forma operating margin
   
 
12%
   
 
(14%
)
  
 
6%
 
  
 
(5%
)
  
 
12%
 
  
 
3%
 
Net sales mix
   
 
51%
   
 
16%
 
  
 
67%
 
  
 
27%
 
  
 
6%
 
  
 
100%
 
    
Three Months Ended June 30, 2001
  
    
North America
                    
    
Books, Music
   
Electronics,
                          
    
and DVD/Video
   
Tools and Kitchen
    
Total
    
International
    
Services
    
Consolidated
  
Net sales
   
$
389,723
   
$
110,957
 
  
$
500,680
 
  
$
128,346
 
  
$
38,599
 
  
$
667,625
 
Gross profit
   
 
110,844
   
 
13,159
 
  
 
124,003
 
  
 
29,365
 
  
 
26,352
 
  
 
179,720
 
Pro forma income (loss) from operations
   
 
38,967
   
 
(41,322
)
  
 
(2,355
)
  
 
(29,993
)
  
 
4,339
 
  
 
(28,009
)
Stock-based compensation
                                          
 
(2,351
)
Amortization of goodwill and other intangibles
                                          
 
(50,830
)
Restructuring-related and other
                                          
 
(58,650
)
Total non-operating expenses, net
                                          
 
(18,204
)
Equity in losses of equity-method investees, net
                                          
 
(10,315
)
                                           
Net loss
                                          
$
(168,359
)
                                           
Segment highlights:
                                                
Y / Y net sales growth
   
 
1%
   
 
21%
 
  
 
5%
 
  
 
75%
 
  
 
41%
 
  
 
16%
 
Y / Y gross profit growth
   
 
28%
   
 
111%
 
  
 
33%
 
  
 
80%
 
  
 
(1%
)
  
 
32%
 
Gross margin
   
 
28%
   
 
12%
 
  
 
25%
 
  
 
23%
 
  
 
68%
 
  
 
27%
 
Pro forma operating margin
   
 
10%
   
 
(37%
)
  
 
(0%
)
  
 
(23%
)
  
 
11%
 
  
 
(4%
)
Net sales mix
   
 
58%
   
 
17%
 
  
 
75%
 
  
 
19%
 
  
 
6%
 
  
 
100%
 
 
Note:
 
The attached “Financial and Operational Highlights” are an integral part of the press release financial statements.

Page 8 of 16

 
AMAZON.COM, INC.
Segment Information
(in thousands)
(unaudited)
 
    
Six Months Ended June 30, 2002
  
    
North America
                  
    
Books, Music
   
Electronics,
                        
    
and DVD/Video
   
Tools and Kitchen
    
Total
    
International
    
Services
  
Consolidated
  
Net sales
   
$
854,765
   
$
254,634
 
  
$
1,109,399
 
  
$
443,977
 
  
$
99,651
  
$
1,653,027
 
Gross profit
   
 
246,808
   
 
37,941
 
  
 
284,749
 
  
 
96,373
 
  
 
60,170
  
 
441,292
 
Pro forma income (loss) from operations
   
 
95,456
   
 
(39,254
)
  
 
56,202
 
  
 
(21,451
)
  
 
15,901
  
 
50,652
 
Stock-based compensation
                                        
 
(34,079
)
Amortization of other intangibles
                                        
 
(3,353
)
Restructuring-related and other
                                        
 
(9,974
)
Total non-operating expenses, net
                                        
 
(117,838
)
Equity in losses of equity-method investees, net
                                        
 
(2,912
)
Cumulative effect of change in accounting principle
                                        
 
801
 
                                         
Net loss
                                        
$
(116,703
)
                                         
Segment highlights:
                                              
Y / Y net sales growth
   
 
7%
   
 
12%
 
  
 
8%
 
  
 
70%
 
  
 
23%
  
 
21%
 
Y / Y gross profit growth
   
 
12%
   
 
25%
 
  
 
14%
 
  
 
68%
 
  
 
10%
  
 
22%
 
Gross margin
   
 
29%
   
 
15%
 
  
 
26%
 
  
 
22%
 
  
 
60%
  
 
27%
 
Pro forma operating margin
   
 
11%
   
 
(15%
)
  
 
5%
 
  
 
(5%
)
  
 
16%
  
 
3%
 
Net sales mix
   
 
52%
   
 
15%
 
  
 
67%
 
  
 
27%
 
  
 
6%
  
 
100%
 
    
Six Months Ended June 30, 2001
  
    
North America
                  
    
Books, Music
   
Electronics,
                        
    
and DVD/Video
   
Tools and Kitchen
    
Total
    
International
    
Services
  
Consolidated
  
Net sales
   
$
799,309
   
$
227,464
 
  
$
1,026,773
 
  
$
260,451
 
  
$
80,757
  
$
1,367,981
 
Gross profit
   
 
219,963
   
 
30,379
 
  
 
250,342
 
  
 
57,415
 
  
 
54,560
  
 
362,317
 
Pro forma income (loss) from operations
   
 
66,592
   
 
(87,155
)
  
 
(20,563
)
  
 
(64,562
)
  
 
8,515
  
 
(76,610
)
Stock-based compensation
                                        
 
(5,267
)
Amortization of goodwill and other intangibles
                                        
 
(101,661
)
Restructuring-related and other
                                        
 
(172,910
)
Total non-operating expenses, net
                                        
 
(12,029
)
Equity in losses of equity-method investees, net
                                        
 
(23,490
)
Cumulative effect of change in accounting principle
                                        
 
(10,523
)
                                         
Net loss
                                        
$
(402,490
)
                                         
Segment highlights:
                                              
Y / Y net sales growth
   
 
2%
   
 
37%
 
  
 
8%
 
  
 
75%
 
  
 
61%
  
 
19%
 
Y / Y gross profit growth
   
 
30%
   
 
128%
 
  
 
37%
 
  
 
78%
 
  
 
12%
  
 
37%
 
Gross margin
   
 
28%
   
 
13%
 
  
 
24%
 
  
 
22%
 
  
 
68%
  
 
26%
 
Pro forma operating margin
   
 
8%
   
 
(38%
)
  
 
(2%
)
  
 
(25%
)
  
 
11%
  
 
(6%
)
Net sales mix
   
 
58%
   
 
17%
 
  
 
75%
 
  
 
19%
 
  
 
6%
  
 
100%
 
 
Note:
 
The attached “Financial and Operational Highlights” are an integral part of the press release financial statements.

Page 9 of 16

 
AMAZON.COM, INC.
Balance Sheets
(in thousands, except per share data)
(unaudited)
 
    
June 30,
2002
     
December 31, 2001
  
ASSETS
                  
Current assets:
                  
Cash and cash equivalents
   
$
270,438
 
   
$
540,282
 
Marketable securities
  
 
553,141
 
   
 
456,303
 
Inventories
   
 
126,794
 
   
 
143,722
 
Prepaid expenses and other current assets
   
 
93,204
 
   
 
67,613
 
    
  
Total current assets
   
 
1,043,577
 
   
 
1,207,920
 
Fixed assets, net
   
 
249,452
 
   
 
271,751
 
Goodwill, net
   
 
70,811
 
   
 
45,367
 
Other intangibles, net
   
 
5,585
 
   
 
34,382
 
Investments in equity-method investees
   
 
3,188
 
   
 
10,387
 
Other equity investments
   
 
15,288
 
   
 
17,972
 
Other assets
   
 
47,146
 
   
 
49,768
 
    
  
Total assets
   
$
1,435,047
 
   
$
1,637,547
 
    
  
LIABILITIES AND STOCKHOLDERS’ DEFICIT
                  
Current liabilities:
                  
Accounts payable
   
$
296,368
 
   
 
444,748
 
Accrued expenses and other current liabilities
   
 
236,234
 
   
 
305,064
 
Unearned revenue
   
 
69,128
 
   
 
87,978
 
Interest payable
   
 
44,396
 
   
 
68,632
 
Current portion of long-term debt and other
   
 
14,406
 
   
 
14,992
 
    
  
Total current liabilities
   
 
660,532
 
   
 
921,414
 
Long-term debt and other
   
 
2,218,426
 
   
 
2,156,133
 
Commitments and contingencies
                  
Stockholders’ deficit:
                  
Preferred stock $0.01 par value:
                  
Authorized shares —  500,000
                  
Issued and outstanding shares —   none
   
 
—  
 
   
 
—  
 
Common stock, $0.01 par value:
                 
Authorized shares —  5,000,000
                  
Issued and outstanding shares —   380,304 and 373,218, respectively
   
 
3,803
 
   
 
3,732
 
Additional paid-in capital
   
 
1,546,941
 
   
 
1,462,769
 
Deferred stock-based compensation
   
 
(9,778
)
   
 
(9,853
)
Accumulated other comprehensive loss
   
 
(7,596
)
   
 
(36,070
)
Accumulated deficit
   
 
(2,977,281
)
   
 
(2,860,578
)
    
  
Total stockholders’ deficit
   
 
(1,443,911
)
   
 
(1,440,000
)
    
  
Total liabilities and stockholders’ deficit
   
$
1,435,047
 
   
$
1,637,547
 
    
  
 
Note: The attached “Financial and Operational Highlights” are an integral part of the press release financial statements.

Page 10 of 16

 
AMAZON.COM, INC.
Supplemental Financial Information and Business Metrics
(unaudited)
(in millions, except per share data)
   
Q2 2001
    
Q3 2001
    
Q4 2001
    
Q1 2002
    
Q2 2002
    
Y/ Y% Growth
  
Results of Operations
                                              
Net sales
  
$
668
 
  
$
639
 
  
$
1,115
 
  
$
847
 
  
$
806
 
  
21%
 
Net sales — trailing twelve months (TTM)
  
$
2,978
 
  
$
2,980
 
  
$
3,122
 
  
$
3,269
 
  
$
3,407
 
  
14%
 
Net sales shipped outside the U.S. (excluding Marketplace) — % of net sales
  
 
28
%
  
 
29
%
  
 
29
%
  
 
34
%
  
 
34
%
  
N/A
 
Gross profit
  
$
180
 
  
$
162
 
  
$
274
 
  
$
223
 
  
$
218
 
  
21%
 
Gross margin — % of net sales
  
 
26.9
%
  
 
25.4
%
  
 
24.6
%
  
 
26.3
%
  
 
27.1
%
  
N/A
 
Gross profit — TTM
  
$
754
 
  
$
749
 
  
$
799
 
  
$
839
 
  
$
878
 
  
16%
 
Gross margin — TTM % of net sales
  
 
25.3
%
  
 
25.1
%
  
 
25.6
%
  
 
25.7
%
  
 
25.8
%
  
N/A
 
Fulfillment costs — % of net sales
  
 
12.8
%
  
 
12.7
%
  
 
9.8
%
  
 
10.6
%
  
 
10.6
%
  
N/A
 
Fulfillment costs — TTM % of net sales
  
 
13.8
%
  
 
13.3
%
  
 
12.0
%
  
 
11.2
%
  
 
10.7
%
  
N/A
 
Fulfillment costs — % of North America and International combined net sales
  
 
13.6
%
  
 
13.7
%
  
 
10.7
%
  
 
11.3
%
  
 
11.3
%
  
N/A
 
Pro forma operating expenses
  
$
208
 
  
$
189
 
  
$
215
 
  
$
198
 
  
$
192
 
  
(7%
)
Pro forma operating expenses — TTM
  
$
959
 
  
$
912
 
  
$
844
 
  
$
811
 
  
$
795
 
  
(17%
)
Pro forma operating income (loss)
  
$
(28
)
  
$
(27
)
  
$
59
 
  
$
25
 
  
$
26
 
  
N/A
 
Pro forma operating margin — % of net sales
  
 
(4.2
%)
  
 
(4.2
%)
  
 
5.3
%
  
 
2.9
%
  
 
3.2
%
  
N/A
 
Pro forma operating income (loss) — TTM
  
$
(205
)
  
$
(164
)
  
$
(45
)
  
$
28
 
  
$
82
 
  
N/A
 
Pro forma operating income (loss) — TTM % of net sales
  
 
(6.9
%)
  
 
(5.5
%)
  
 
(1.4
%)
  
 
0.9
%
  
 
2.4
%
  
N/A
 
GAAP operating income (loss)
  
$
(140
)
  
$
(70
)
  
$
15
 
  
$
2
 
  
$
1
 
  
N/A
 
GAAP operating income (loss) — % of net sales
  
 
(20.9
%)
  
 
(11.0
%)
  
 
1.3
%
  
 
0.2
%
  
 
0.2
%
  
N/A
 
GAAP operating income (loss) — TTM
  
$
(842
)
  
$
(749
)
  
$
(412
)
  
$
(194
)
  
$
(53
)
  
(94%
)
GAAP operating income (loss) — TTM % of net sales
  
 
(28.3
%)
  
 
(25.1
%)
  
 
(13.2
%)
  
 
(5.9
%)
  
 
(1.5
%)
  
N/A
 
Pro forma net income (loss)
  
$
(58
)
  
$
(58
)
  
$
35
 
  
$
(5
)
  
$
(4
)
  
(92%
)
Pro forma net income (loss) per share
  
$
(0.16
)
  
$
(0.16
)
  
$
0.09
 
  
$
(0.01
)
  
$
(0.01
)
  
N/A
 
Pro forma net income (loss) — TTM
  
$
(314
)
  
$
(282
)
  
$
(157
)
  
$
(86
)
  
$
(32
)
  
(90%
)
GAAP net income (loss)
  
$
(168
)
  
$
(170
)
  
$
5
 
  
$
(23
)
  
$
(94
)
  
(44%
)
GAAP net income (loss) per share
  
$
(0.47
)
  
$
(0.46
)
  
$
0.01
 
  
$
(0.06
)
  
$
(0.25
)
  
N/A
 
GAAP net income (loss) — TTM
  
$
(1,188
)
  
$
(1,118
)
  
$
(567
)
  
$
(356
)
  
$
(281
)
  
(76%
)
North America Books, Music and DVD/Video (BMVD) segment:
                                              
BMVD net sales
  
$
390
 
  
$
351
 
  
$
538
 
  
$
443
 
  
$
412
 
  
6%
 
BMVD net sales — TTM
  
$
1,711
 
  
$
1,662
 
  
$
1,689
 
  
$
1,722
 
  
$
1,744
 
  
2%
 
BMVD gross profit
  
$
111
 
  
$
93
 
  
$
140
 
  
$
123
 
  
$
124
 
  
12%
 
BMVD pro forma operating margin — % of BMVD net sales
  
 
10
%
  
 
7
%
  
 
12
%
  
 
10
%
  
 
12
%
  
N/A
 
North America Electronics, Tools and Kitchen (ETK) segment:
                                              
ETK net sales
  
$
111
 
  
$
103
 
  
$
217
 
  
$
126
 
  
$
128
 
  
16%
 
ETK net sales — TTM
  
$
545
 
  
$
551
 
  
$
547
 
  
$
557
 
  
$
574
 
  
5%
 
ETK gross profit
  
$
13
 
  
$
13
 
  
$
35
 
  
$
19
 
  
$
19
 
  
41%
 
ETK pro forma operating margin — % of ETK net sales
  
 
(37
%)
  
 
(32
%)
  
 
(9
%)
  
 
(16
%)
  
 
(14
%)
  
N/A
 
International segment:
                                              
International net sales
  
$
128
 
  
$
138
 
  
$
262
 
  
$
226
 
  
$
218
 
  
70%
 
International net sales —   TTM
  
$
493
 
  
$
544
 
  
$
661
 
  
$
755
 
  
$
845
 
  
71%
 
International gross profit
  
$
29
 
  
$
28
 
  
$
55
 
  
$
49
 
  
$
47
 
  
61%
 
International pro forma operating margin — % of International net sales
  
 
(23
%)
  
 
(20
%)
  
 
(4
%)
  
 
(5
%)
  
 
(5
%)
  
N/A
 
Services segment:
                                              
Services net sales
  
$
39
 
  
$
46
 
  
$
98
 
  
$
53
 
  
$
47
 
  
22%
 
Services net sales — TTM
  
$
229
 
  
$
223
 
  
$
225
 
  
$
236
 
  
$
244
 
  
7%
 
Services gross profit
  
$
26
 
  
$
27
 
  
$
45
 
  
$
32
 
  
$
29
 
  
9%
 
Services pro forma operating margin — % of Services net sales
  
 
11
%
  
 
17
%
  
 
26
%
  
 
20
%
  
 
12
%
  
N/A
 
 
Note:
 
The attached “Financial and Operational Highlights” are an integral part of this Supplemental Financial Information and Business Metrics

Page 11 of 16

 
AMAZON.COM, INC.
Supplemental Financial Information and Business Metrics
(unaudited)
(in millions, except per active customer account data, inventory turnover, accounts payable days, and employee data)
 
   
Q2 2001
    
Q3 2001
    
Q4 2001
    
Q1 2002
    
Q2 2002
    
Y / Y% Growth
  
Customer Data*
                                              
Active customer accounts — TTM
  
 
21.1
 
  
 
23.0
 
  
 
24.7
 
  
 
26.2
 
  
 
27.3
 
  
30%
 
Net sales (excluding catalog sales) per active customer account —   TTM
  
$
136
 
  
$
126
 
  
$
123
 
  
$
122
 
  
$
122
 
  
(10%
)
Marketing cost per active customer account — TTM
  
$
8
 
  
$
7
 
  
$
6
 
  
$
5
 
  
$
5
 
  
(41%
)
Balance Sheet
                                              
Cash and marketable securities
  
$
609
 
  
$
668
 
  
$
997
 
  
$
745
 
  
$
824
 
  
35%
 
Inventory, net
  
$
129
 
  
$
131
 
  
$
144
 
  
$
139
 
  
$
127
 
  
(2%
)
Inventory — % of net sales
  
 
21
%
  
 
20
%
  
 
12
%
  
 
17
%
  
 
17
%
  
N/A
 
Inventory — % of TTM net sales
  
 
5
%
  
 
5
%
  
 
5
%
  
 
4
%
  
 
4
%
  
N/A
 
Inventory turnover — annualized
  
 
13.7
 
  
 
14.7
 
  
 
24.5
 
  
 
17.7
 
  
 
17.7
 
  
29%
 
Inventory turnover — TTM
  
 
14.0
 
  
 
14.8
 
  
 
15.8
 
  
 
17.4
 
  
 
18.9
 
  
35%
 
Fixed assets, net
  
$
292
 
  
$
288
 
  
$
272
 
  
$
256
 
  
$
249
 
  
(15%
)
Accounts payable days — ending
  
 
48
 
  
 
46
 
  
 
49
 
  
 
45
 
  
 
46
 
  
(5%
)
Cash Flows
                                              
Operating cash flow — TTM
  
$
(161
)
  
$
(221
)
  
$
(120
)
  
$
46
 
  
$
48
 
  
N/A
 
Free cash flow (operating cash flow less purchases of fixed assets) — TTM
  
$
(270
)
  
$
(301
)
  
$
(170
)
  
$
10
 
  
$
16
 
  
N/A
 
Adjusted free cash flow (free cash flow less repayment of capital leaseobligations) — TTM
  
$
(286
)
  
$
(320
)
  
$
(190
)
  
$
(9
)
  
$
(3
)
  
(99%
)
Other
                                              
Common shares outstanding
  
 
362
 
  
 
372
 
  
 
373
 
  
 
375
 
  
 
380
 
  
5%
 
Options outstanding — % of common shares outstanding
  
 
12
%
  
 
18
%
  
 
18
%
  
 
17
%
  
 
13
%
  
N/A
 
Employees (full-time and part-time)
  
 
7,800
 
  
 
7,900
 
  
 
7,800
 
  
 
7,900
 
  
 
7,700
 
  
(1%
)
 
Note:
 
The attached Financial and Operational Highlights are an integral part of this Supplemental Financial Information and Business Metrics
 
*
 
Our customer account and active customer calculation methodology was modified in the third quarter 2001, primarily to include all customers who order new and used products through Amazon Marketplace. Our prior methodology did not capture all such customers. If second quarter 2001 customer metrics were presented under the modified methodology, active customer accounts, TTM net sales per active customer account, and marketing cost per active customer account would have been 21.9 million, $131, and $8, respectively.

Page 12 of 16

 
AMAZON.COM, INC.
Financial and Operational Highlights
Second Quarter Ended June 30, 2002
(unaudited)
 
Results of Operations (all comparisons are with the equivalent period of 2001)
 
Net Sales
 
 
·
 
The benefit to net sales from foreign-currency exchange rate fluctuations was less than $0.1 million.
 
·
 
Shipping revenue, excluding commissions earned from Amazon Marketplace, was approximately $81 million, up from $76 million.
 
·
 
Equity-based services revenues decreased to approximately $5 million from $8 million.
 
Gross Profit
 
 
·
 
Shipping profit was approximately $2 million, improving from a loss of $2 million. We continue to measure our shipping results relative to their impact on our overall financial results, with the viewpoint that shipping promotions are an effective marketing tool. We expect to continue offering shipping promotions to our customers, which reduce shipping revenue as a percentage of sales and will negatively affect gross margins on our retail sales.
 
Fulfillment
 
 
·
 
Fulfillment costs represent those costs incurred in operating and staffing our fulfillment and customer service centers, including costs attributable to receiving, inspecting and warehousing inventories; picking, packaging and preparing customers’ orders for shipment; credit card fees and bad debt costs; and responding to inquiries from customers. Fulfillment costs also include amounts paid to third-party cosourcers, who assist us in fulfillment and customer service operations. Certain fulfillment-related costs incurred on behalf of third-party sellers, excluding those costs associated with Syndicated Stores, are classified as cost of sales rather than fulfillment.
 
Stock-Based Compensation
 
 
·
 
During the first quarter 2001, we offered a limited non-compulsory exchange of employee stock options, which results in variable accounting treatment for approximately 8 million stock options at June 30, 2002, including approximately 7 million options granted under the exchange offer with an exercise price of $13.375, and approximately 1 million options that were subject to the exchange offer but were not exchanged.
 
·
 
Variable accounting treatment will result in unpredictable and potentially significant charges or credits, depending on the fluctuation in quoted prices for our common stock, which we are unable to forecast.
 
·
 
Cumulative compensation expense recorded at June 30, 2002, associated with variable accounting was approximately $31 million—based on exercises to date and a quarter-end closing common stock price of $16.25—of which $11 million is associated with options exercised and no longer subject to future variability.
 
·
 
We have quantified the hypothetical effect on stock-based compensation associated with various quoted prices of our common stock using a sensitivity analysis for our outstanding stock options subject to variable accounting. We have provided this information to give additional insight into the volatility we may experience in the future in our results of operations to the extent that the quoted price for our common stock is above $13.375. This sensitivity analysis is not a prediction of future performance of the quoted prices of our common stock. Using the following hypothetical market prices of our common stock above $13.375, and the actual expense associated with options exercised and no longer subject to future variability,our hypothetical cumulative compensation expense at June 30, 2002, and the difference between hypothetical cumulative compensation expense and actual cumulative compensation expense recorded at June 30, 2002, resulting from variable accounting treatment would have been as follows (in thousands):

Page 13 of 16

 
Hypothetical Increase Over $13.375
     
Hypothetical Market Price per Share
     
Hypothetical Cumulative Compensation Expense
     
Hypothetical vs. June 30, 2002, Cumulative Compensation Expense
  
5%
     
$
14.04
     
$
16,463
     
$
(15,027
)
10%
     
$
14.71
     
$
21,161
     
$
(10,329
)
15%
     
$
15.38
     
$
25,858
     
$
(5,632
)
25%
     
$
16.72
     
$
35,252
     
$
3,762
 
50%
     
$
20.06
     
$
58,738
     
$
27,248
 
 
Amortization of Goodwill and Other Intangibles
 
 
·
 
As a result of our adoption of the full provisions of Statement of Financial Accounting Standards No. 141 and No. 142, during the first quarter we reclassified $25 million of other intangibles (comprising only assembled workforce intangibles) to goodwill and discontinued the amortization of our goodwill assets.
 
Restructuring-Related and Other
 
 
·
 
In 2001, we initiated an operational restructuring plan to reduce our operating costs, streamline our organizational structure, consolidate certain of our fulfillment and customer service operations and migrate a large portion of our technology infrastructure to a new operating platform. As a result, we recorded restructuring and other charges of approximately $114 million in the first quarter 2001, $59 million in the second quarter and $9 million during the second half of 2001. The restructuring plan is complete, although estimates may be adjusted prospectively if necessary.
 
·
 
During the first quarter 2002, we permanently closed our fulfillment center in Seattle and, in connection with our 2001 operational restructuring, we revised our sublease income estimates for our vacated Seattle-area office space. These items resulted in additional restructuring-related expenses of $10 million primarily associated with ongoing lease obligations.
 
·
 
Cash payments resulting from the restructuring were $13 million in the second quarter 2002, compared with $11 million. The restructuring charges are anticipated to result in the following net cash outflows (included within accrued expenses and other current liabilities and long-term debt and other on our balance sheet):
 
(in thousands)
   
Leases (a)
   
Other
   
Total
Six Months Ending December 31,
                     
2002
   
$
12,438
   
$
3,677
   
$
16,115
Year Ending December 31,
                     
2003
   
 
6,410
   
 
3,037
   
 
9,447
2004
   
 
2,761
   
 
—  
   
 
2,761
2005
   
 
2,770
   
 
—  
   
 
2,770
2006
   
 
3,036
   
 
—  
   
 
3,036
Thereafter
   
 
10,909
   
 
—  
   
 
10,909
    
  
  
Total estimated cash outflows
   
$
38,324
   
$
6,714
   
$
45,038
    
  
  
 
 
(a)
 
Net of anticipated sublease income of approximately $59 million on gross lease obligations of $97 million.
 
Other Income (Expense), Net
 
 
·
 
Other income (expense) consists primarily of net realized gains and losses on sales of marketable securities and disposals of fixed assets, miscellaneous state and foreign taxes and certain foreign-currency-related transaction gains and losses.

Page 14 of 16

 
Other Gains (Losses), Net
 
 
·
 
Other losses, net were $63 million for the second quarter 2002, and primarily consist of a $71 million foreign-currency loss on the remeasurement of our 6.875% convertible subordinated notes from Euros to U.S. dollars and a $10 million net gain on sales of equity investments.
 
·
 
We are unable to forecast the gains or losses associated with our 6.875% convertible subordinated notes that will result from fluctuations in foreign exchange rates in future periods.
 
Earnings per Share
 
 
·
 
Basic and diluted earnings per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period; common stock equivalent shares, such as options (outstanding employee stock options were approximately 50 million, compared with 42 million), warrants and convertible securities, were excluded from the computation because their effect is antidilutive.
 
·
 
If the effect of common stock equivalents had been included, the number of shares used in the computation of diluted loss per share would have been approximately 399 million, compared with 376 million.
 
Financial Condition
 
 
·
 
Cash and marketable securities are impacted by the effect of quarterly fluctuations in foreign-currency exchange rates, particularly the Euro. Our Euro investments, classified as available for sale, had a balance of 58 million Euros (approximately $58 million, based on the exchange rate as of June 30, 2002).
 
·
 
Our marketable securities, at estimated fair value, consist of the following, as of June 30, 2002 (in thousands):
 
Asset-backed and agency securities
   
$371,010
Treasury notes and bonds
   
108,051
Commercial paper and short-term obligations
   
29,800
Certificates of deposit
   
20,663
Corporate notes and bonds
   
16,885
Equity securities
   
6,732
    
    
$553,141
    
 
 
·
 
We have pledged approximately $124 million of our marketable securities as collateral for certain contractual obligations, compared with $167 million as of December 31, 2001. Amounts pledged for standby letters of credit that guarantee certain contractual obligations, primarily property leases, were $56 million; $28 million is pledged for a swap agreement that hedges the foreign-exchange-rate risk on a portion of our 6.875% convertible subordinated notes; and $40 million is pledged for certain of our real estate lease agreements. The amount of marketable securities we are required to pledge pursuant to the swap agreement fluctuates with the fair market value of the swap obligation.
 
Certain Definitions and Other
 
 
·
 
Our segment reporting includes four segments: North America Books, Music and DVD/Video (“BMVD”); North America Electronics, Tools and Kitchen (“ETK”); International; and Services.
 
·
 
Allocation of centrally incurred operating costs methodologies have been consistently applied and there are no internal transactions between segments.
 
·
 
The BMVD segment includes revenues, direct costs and cost allocations primarily associated with retail sales from www.amazon.com and www.amazon.ca for books, music, DVDs, video products and magazine subscription commissions. This segment also includes commissions and other amounts earned from sales of these products, new or used, through Amazon Marketplace and revenues from stores offering these products through our Syndicated Stores Program, such as www.borders.com.
 
·
 
The ETK segment includes revenues, direct costs and cost allocations primarily associated with www.amazon.com retail sales of electronics, computers, kitchen products and housewares, camera and photo items, software, cell phones and service, tools and hardware, and outdoor living items, as well as catalog sales of toys and tools and hardware. This segment also includes commissions and other amounts earned from sales of these products, new or used, through Amazon Marketplace and from offerings of these products by third-party sellers under our Merchant@amazon.com Program, such as Target and Circuit City.

Page 15 of 16

·
 
The International segment includes all revenues, direct costs and cost allocations associated with the retail sales of our German, French, Japanese and U.K. Web sites—www.amazon.de, www.amazon.fr, www.amazon.co.jp and www.amazon.co.uk. This segment also includes commissions and other amounts earned from sales of products, new or used, through Amazon Marketplace and revenues from stores offering these products through our Syndicated Stores Program.
·
 
The Services segment includes revenues, direct costs and cost allocations associated with our business-to-business commercial agreements, including the Merchant Program, such as www.target.com beginning third quarter 2002, and, to the extent full product categories are not also offered by our online retail stores, the Merchant@amazon.com Program, such as Toysrus.com. This segment also includes our technology alliance with America Online and miscellaneous marketing, promotional and other agreements.
·
 
All references to customers mean customer accounts, which are unique e-mail addresses, established either when a customer’s initial order is shipped or when a customer orders from certain third-party sellers on our Web sites. Customer accounts include customers of Amazon Marketplace, Auctions and zShops services and from our Merchant@amazon.com and Syndicated Stores Programs, but exclude Merchant Program customers, Amazon.com Payments customers, our catalog customers and the customers of selected companies with whom we have strategic marketing and promotional relationships.
·
 
Trailing twelve-month net sales per active customer account figures include all amounts earned through Internet sales, including net sales earned from new or used products sold through Amazon Marketplace, Auctions and zShops services, and products sold through our Merchant@amazon.com and Syndicated Stores Programs, but excluding products sold through our Merchant Program, catalogs and certain strategic alliances and sales of inventory to Toysrus.com. A customer is considered active upon placing an order.

Page 16 of 16