UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2002 | ||
Or | ||
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to . | ||
Commission File No. 000-22513 |
Amazon.com, Inc.
Delaware
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91-1646860 | |
(State or other jurisdiction
of incorporation or organization) |
(I.R.S. Employer
Identification No.) |
1200 12th Avenue South, Suite 1200, Seattle, Washington 98144-2734
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes o No þ
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o
Aggregate market value of voting stock held by
non-affiliates of the registrant as of June 28, 2002
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$ | 4,311,000,000 | ||
Number of shares of common stock outstanding as
of January 27, 2003
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388,242,957 |
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference from the registrants definitive proxy statement relating to the annual meeting of stockholders to be held in 2003, which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates.
AMAZON.COM, INC.
FORM 10-K
INDEX
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PART I | ||||||
Item 1.
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Business | 1 | ||||
Item 2.
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Properties | 18 | ||||
Item 3.
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Legal Proceedings | 19 | ||||
Item 4.
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Submission of Matters to a Vote of Security Holders | 20 | ||||
PART II | ||||||
Item 5.
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Market for the Registrants Common Stock and Related Stockholder Matters | 20 | ||||
Item 6.
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Selected Consolidated Financial Data | 20 | ||||
Item 7.
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Managements Discussion and Analysis of Financial Condition and Results of Operations | 21 | ||||
Item 7A.
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Quantitative and Qualitative Disclosure About Market Risk | 40 | ||||
Item 8.
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Financial Statements and Supplementary Data | 44 | ||||
Item 9.
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 83 | ||||
PART III | ||||||
Item 10.
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Directors and Executive Officers of the Registrant | 83 | ||||
Item 11.
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Executive Compensation | 83 | ||||
Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 83 | ||||
Item 13.
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Certain Relationships and Related Transactions | 83 | ||||
Item 14.
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Controls and Procedures | 83 | ||||
PART IV | ||||||
Item 15.
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Exhibits, Financial Statement Schedules and Reports on Form 8-K | 84 | ||||
Signatures | 86 |
PART I
Item 1. Business
This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements based on expectations, estimates and projections as of the date of this filing. Actual results may differ materially from those expressed in forward-looking statements. See Item 7 of Part II Managements Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements.
General
Amazon.com, Inc., a Fortune 500 company, commenced operations on the World Wide Web in July 1995. We seek to offer Earths Biggest Selection and to be Earths most customer-centric company, where customers can find and discover anything they may want to buy online. We endeavor to offer our customers the lowest possible prices. We and our sellers list millions of unique new, used and collectible items in categories such as apparel and accessories, electronics, computers, kitchen and housewares, books, music, DVDs, videos, cameras and photo items, office products, 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 our Merchants@ and Amazon Marketplace programs, zShops and Auctions, any business or individual can sell virtually anything to Amazon.coms millions of customers.
We operate six global Web sites: www.amazon.com, www.amazon.co.uk, www.amazon.de, www.amazon.fr, www.amazon.co.jp and www.amazon.ca . We also own and operate the Internet Movie Database at www.imdb.com (IMDb), which is a comprehensive and authoritative source of information on movie and entertainment titles and cast and crew members. IMDb offers IMDb Pro, a subscription service designed for the entertainment industry.
Amazon.com was incorporated in 1994 in the state of Washington and reincorporated in 1996 in the state of Delaware. Our principal corporate offices are located in Seattle, Washington. We completed our initial public offering in May 1997 and our common stock is listed on the Nasdaq National Market under the symbol AMZN.
As used herein, Amazon.com, we, our and similar terms include Amazon.com, Inc. and its subsidiaries, unless the context indicates otherwise.
Business Strategy
We seek to offer Earths Biggest Selection and to be Earths most customer-centric company, where customers can find and discover anything they might want to buy online. We have designed our Web sites to allow millions of new, used and collectible products to be sold by us and by other businesses and individuals worldwide. A product on our Web sites may be listed for sale simultaneously by several different sellers. For instance, a product may be offered by us, by a participant in our Merchants@ program and by a business or individual selling a new, used or collectible version of the product through Amazon Marketplace, zShops or Auctions. We also offer certain e-commerce services to other businesses through our Merchant.com and Syndicated Stores programs.
Lowering Prices |
We endeavor to offer our customers the lowest possible prices. We strive to improve our operating efficiencies and to leverage our fixed costs so that we can afford to pass along these savings to our customers in the form of lower prices. We believe this strategy of lowering prices will, over time, increase unit growth and lead to further efficiencies.
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Amazon.com Retail |
We are the seller of record on our Web sites for a broad range of new products, including electronics, computers, kitchen and housewares, books, music, DVDs, videos, cameras and photo items, software, computer and video games, cell phones, tools and hardware and outdoor living items. We purchase these products from vendors and fulfill them either through our fulfillment centers or through outsourced fulfillment providers.
Merchants@ and Amazon Marketplace Programs |
Our Merchants@ and Amazon Marketplace programs allow other businesses and individuals to offer their new, used and collectible products for sale on our Web sites. Their products are fully integrated on our Web sites and are purchased by customers through a single checkout process. We are not the seller of record in these transactions, but instead earn fixed fees, sales commissions, per-unit activity fees, or some combination thereof. We also sometimes offer fulfillment-related services under this program. Examples of our Merchants@ program include our apparel store at www.amazon.com , which offers more than 500 brands, as well as the Toysrus.com, Babiesrus.com and Target stores at www.amazon.com . Amazon Marketplace is available on www.amazon.com, www.amazon.co.uk, www.amazon.de and www.amazon.co.jp . In addition, other businesses and individuals can auction products through our Auction sites and offer products on individual specialty stores through our zShops sites.
Merchant.com Program |
Through our Merchant.com program we utilize our e-commerce services, features and technologies to operate another businesss Web site and sell its products under its brand name and URL (an example is www.target.com ). We also offer fulfillment-related services through our Merchant.com program. We are not the seller of record, but instead earn fixed fees, sales commissions, per-unit activity fees, or some combination thereof.
Syndicated Stores Program |
Through our Syndicated Stores program, we utilize our e-commerce services, features and technologies to sell our products through another businesss Web site using another businesss name and URL. Under these arrangements, we are the seller of record and are responsible for fulfillment and customer service. The other business earns a sales commission on the products sold. Examples include www.cdnow.com, www.virginmega.com, www.virginmega.co.jp, www.borders.com, www.waldenbooks.com and www.waterstones.co.uk , among others.
Operating Segments
Beginning in 2001, we organized our operations into four principal segments: North America Books, Music and DVD/ Video (BMVD); North America Electronics, Tools and Kitchen (ETK); International; and Services. See Item 8 of Part II, Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note 15 Segment Information for additional information regarding our segments.
BMVD Segment. This segment includes retail sales from www.amazon.com and www.amazon.ca of books, music and DVD/video products and magazine subscription commissions. This segment also includes commissions from sales of these products, new, used or collectible, through Amazon Marketplace and amounts earned from sales of these products by other businesses through our Merchants@ program and product revenues from stores offering these products through our Syndicated Stores program.
Our BMVD segment had net sales of $1.87 billion, $1.69 billion and $1.70 billion in 2002, 2001 and 2000, respectively. In 2002, we launched our Canada-focused Web site at www.amazon.ca and launched Syndicated Stores at www.cdnow.com and www.waldenbooks.com . In addition, we added in-store pickup to
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ETK Segment. This segment includes www.amazon.com retail sales of electronics, home improvement and home and garden products, as well as our mail-order catalog sales. This segment also includes commissions from sales of these products, new, used or collectible, through Amazon Marketplace and amounts earned from sales of these products by other businesses through our Merchants@ program, such as with Office Depot, and will include revenues from stores offering these products, if any, through our Syndicated Stores program.
Our ETK segment had net sales of $645 million, $547 million and $484 million in 2002, 2001 and 2000, respectively. During 2002, we launched our Office Depot store at www.amazon.com .
International Segment. This segment includes all retail sales of the following internationally-focused Web sites: www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp . These international sites share a common Amazon.com experience, but are localized in terms of language, products, customer service and fulfillment. To the extent available on these sites, this segment includes commissions and other amounts earned from sales of products through Amazon Marketplace and product revenues from stores offering products through our Syndicated Stores program, such as www.waterstones.co.uk and www.virginmega.co.jp , and amounts earned from sales of products by other businesses through our Merchants@ program.
Our International segment includes export sales from www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp (including export sales from these sites to customers in the U.S. and Canada), but excludes export sales from www.amazon.com and www.amazon.ca . Our International segment had net sales of $1.17 billion, $661 million and $381 million in 2002, 2001 and 2000, respectively. In 2002, www.amazon.co.uk, www.amazon.de and www.amazon.co.jp each launched Amazon Marketplace. In addition, the Syndicated Store at www.virginmega.co.jp was launched, and www.amazon.de launched a magazine and periodicals store.
Services Segment. This segment consists of commissions, fees and other amounts earned from our services business, including our Merchant.com program (such as www.target.com ), and to the extent full product categories are not also offered by us through our online retail stores, our Merchants@ program, such as our apparel store, the Toysrus.com and Babiesrus.com stores, and portions of the Target store at www.amazon.com , as well as our commercial agreement with America Online, Inc. This segment also includes Auctions, zShops, Amazon Payments and miscellaneous marketing and promotional agreements.
The Services segment had net sales of $246 million, $225 million and $198 million in 2002, 2001 and 2000, respectively. In 2002, we launched our apparel store which now has more than 500 popular brands of clothing, shoes and accessories offered by our Merchants@ program participants. In addition, we launched www.target.com under our Merchant.com program.
Amazon.com Web Sites
Our Web sites promote brand loyalty and repeat purchases by providing feature-rich content, a secure and trusted transaction environment and easy-to-use functionality. Our Web sites offer broad selection, low prices, availability, convenience, discovery and fulfillment. Key features include product reviews and other information, Web pages tailored to individual customers preferences, including recommendations and notifications, 1-Click® technology, secure payment systems, browsing, searching and the ability to view selected interior pages of over 250,000 books with our Look Inside the Book feature. Our community of online users creates feature-rich content, including product reviews and online lists, such as wish lists, wedding registries and baby registries of desired products and services that others can reference for gift-giving purposes and Listmania lists with accompanying commentary regarding favorite products.
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Marketing and Promotion
Our marketing strategy is designed to strengthen and broaden the Amazon.com brand name, increase customer traffic to our Web sites, encourage customers to shop in many product categories, promote repeat purchases and develop incremental product and service revenue opportunities. First and foremost, our best marketing efforts are focused on improving the customer experience, which drives word-of-mouth promotion and repeat customer visits. We also deliver personalized Web pages and services and employ a variety of media, business development activities and promotional methods to achieve these goals. We benefit from public relations activities and from time to time we employ various means of online and traditional advertising, including e-mail, radio, television and print media and direct marketing. We also participate in cooperative advertising arrangements with certain of our vendors. We direct customers to our Web sites through our Associates program, which enables associated Web sites to make our products available to their audiences with fulfillment performed by us. Currently, over 900,000 Web sites have enrolled in our Associates program. In addition, we offer an everyday free shipping option at www.amazon.com for certain orders that exceed a specific amount, and offer similar options for our internationally-focused Web sites. Although marketing expenses do not include our free and reduced shipping offers, we view such offers as an effective marketing tool.
Customer Service
We believe that our ability to establish and maintain long-term relationships with our customers and to encourage repeat visits and purchases depends, in part, on the strength of our customer service operations, and we continually seek to improve the Amazon.com customer service experience. Customers can use the your-account website features to track order and shipment status, review estimated delivery dates, cancel unshipped items, change delivery information and payment options, combine orders, edit gift options and return items. In addition to these and similar online self-service features, users can contact customer service representatives 24 hours a day, seven days a week. We have automated certain tools used by our customer service staff and have plans for further enhancements. We currently have customer service personnel working in six customer service centers located in Tacoma, Washington; Grand Forks, North Dakota; Huntington, West Virginia; Slough, the United Kingdom; Regensburg, Germany; and Sapporo, Japan. In addition, we have customer-service cosourcing arrangements with certain vendors in India, Northern Ireland and the U.S.
Fulfillment
We currently lease and operate U.S. fulfillment facilities in New Castle, Delaware; Coffeyville, Kansas; Campbellsville and Lexington, Kentucky; Fernley, Nevada; and Grand Forks, North Dakota. We also lease and operate three European fulfillment centers that are located in Marston Gate, the United Kingdom; Orleans, France; and Bad Hersfeld, Germany. In Japan, Nippon Express, a leading courier company, provides fulfillment services for orders from www. a mazon.co.jp under a cosourcing arrangement; and in Canada, Assured Logistics, an affiliate of Canada Post, provides outsourced fulfillment services for orders from www.amazon.ca . On an aggregate basis, these fulfillment centers (including the facilities that are leased by Nippon Express and Assured Logistics) comprise approximately 4.2 million square feet of warehouse space. In addition, we currently lease six off-site facilities totaling approximately 1.1 million square feet of space, which support the storage and fulfillment functions of our U.S. fulfillment centers. Our fulfillment centers facilitate our ability to deliver merchandise to customers on a reliable and timely basis. In addition, we fulfill certain orders through outsourced fulfillment providers.
Seasonality
Our business is generally affected by both seasonal fluctuations in Internet usage (which generally declines during summer months) and traditional retail seasonality. Traditional retail sales for most of our products (including books, music, DVDs, videos, toys and electronics, among others) usually increase significantly in the fourth calendar quarter of each year. Of particular note is the fourth quarter seasonal
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Technology
We have implemented numerous Web-site management, search, customer interaction, recommendation, transaction-processing and fulfillment services and systems using a combination of our own proprietary technologies and commercially available, licensed technologies. Our current strategy is to focus our development efforts on creating and enhancing the specialized, proprietary software that is unique to our business and to license or acquire commercially-developed technology for other applications where available and appropriate.
We use a set of applications for accepting and validating customer orders, placing and tracking orders with suppliers, managing and assigning inventory to customer orders and ensuring proper shipment of products to customers. Our transaction-processing systems handle millions of items, a number of different status inquiries, gift-wrapping requests and multiple shipment methods. These systems allow the customer to choose whether to receive single or several shipments based on availability and to track the progress of each order. These applications also manage the process of accepting, authorizing and charging customer credit cards.
Competition
The retail environment for our products is generally intensely competitive. Our current or potential competitors include: (1) physical-world retailers, catalog retailers, publishers, distributors and manufacturers of our products, many of which possess significant brand awareness, sales volume and customer bases, and some of which currently sell, or may sell, products or services through the Internet, mail order or direct marketing; (2) other online e-commerce sites; (3) a number of indirect competitors, including Web portals and Web search engines that are involved in online commerce, either directly or in collaboration with other retailers; and (4) companies that provide e-commerce services, including Web-site developers and third-party fulfillment and customer-service providers. We believe that the principal competitive factors in our market segments include selection, price, availability, convenience, information, discovery, brand recognition, personalized services, accessibility, customer service, reliability, speed of fulfillment, ease of use and ability to adapt to changing conditions. For services we offer to business and individual sellers, additional competitive factors include the quality of our services and tools and speed of performance for our services. As the market segments in which we operate continue to grow, other companies may also enter into business combinations or alliances that strengthen their competitive positions.
Intellectual Property
We regard our trademarks, service marks, copyrights, patents, domain names, trade dress, trade secrets, proprietary technologies and similar intellectual property as critical to our success, and we rely on trademark, copyright and patent law, trade-secret protection and confidentiality and/or license agreements with our employees, customers, partners and others to protect our proprietary rights. We have registered a number of domain names and been issued a number of trademarks, service marks, patents and copyrights by U.S. and foreign governmental authorities. We also have applied for the registration of other trademarks, service marks, domain names and copyrights in the U.S. and internationally, and we have filed U.S. and international patent applications covering certain of our proprietary technology. We have licensed in the past, and expect that we may license in the future, certain of our proprietary rights, such as trademarks, patents, technologies or copyrighted materials, to third parties.
Employees
We employed approximately 7,500 full-time and part-time employees at December 31, 2002. However, employment levels fluctuate due to seasonal factors affecting our business. We also employ independent contractors and temporary personnel on a seasonal basis. None of our employees is
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Available Information
Our investor relations website is www.amazon.com/ir . We make available on this website under Financial Documents and Annual Reports, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the U.S. Securities and Exchange Commission (SEC).
Additional Factors That May Affect Future Results
The following risk factors and other information included in this Annual Report should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks occur, our business, financial condition, operating results and cash flows could be materially adversely affected.
We Have an Accumulated Deficit and May Incur Additional Losses |
We have incurred significant losses since we began doing business. As of December 31, 2002, we had an accumulated deficit of $3.0 billion and our stockholders equity was a deficit of $1.4 billion. We have incurred substantial operating losses since our inception, and we may continue to incur such losses for the foreseeable future.
We Have Significant Indebtedness |
As of December 31, 2002, we had total long-term indebtedness under our 10% Senior Discount Notes due 2008 (Senior Discount Notes), convertible notes, capitalized-lease obligations and other asset financings of $2.3 billion. We make annual or semi-annual interest payments on the indebtedness under our two tranches of convertible notes, which are due in 2009 and 2010, respectively. Beginning in November 2003, we will begin to make semi-annual interest payments on the indebtedness under our Senior Discount Notes. We may incur substantial additional debt in the future. Our indebtedness could limit our ability to obtain necessary additional financing for working capital, capital expenditures, debt service requirements or other purposes in the future; plan for, or react to, changes in technology and in our business and competition; and react in the event of an economic downturn.
There is no guarantee that we will be able to meet our debt service obligations. If we are unable to generate sufficient cash flow or obtain funds for required payments, or if we fail to comply with covenants in our indebtedness, we will be in default.
We Face Intense Competition |
The market segments in which we compete are rapidly evolving and intensely competitive, and we have many competitors in different industries, including both the retail and e-commerce services industries.
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 policies. Competitors in both the retail and e-commerce services industries also may be able to devote more resources to technology development and marketing than us.
Competition in the e-commerce channel may intensify. Other companies in the retail and e-commerce service industries may enter into business combinations or alliances that strengthen their competitive
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Our Business Could Suffer if We Are Unsuccessful in Making, Integrating and Maintaining Commercial Agreements, Strategic Alliances and Other Business Relationships |
We may enter into commercial agreements, strategic alliances and other business relationships with other companies. We have entered into agreements to provide e-commerce services to other businesses and we plan to enter into similar agreements in the future. Under such agreements, we may perform services such as: providing our technology services such as search, browse and personalization; permitting other businesses and individuals to offer products or services through our Web sites; and powering third-party Web sites, either with or without providing accompanying fulfillment services. These arrangements are complex and initially require substantial personnel and resource commitments by us, which may constrain the number of such agreements we are able to enter into and may affect our ability to deliver services under the relevant agreements. If we fail to implement, maintain and develop successfully the various components of such arrangements, which may include fulfillment, customer service, inventory management, tax collection, payment processing and licensing of third party software, hardware and content, these initiatives may not be viable. The amount of compensation we receive under certain of these agreements is dependent on the volume of sales that the other company makes. Therefore, if the other businesss Web site or product or services offering is not successful, we may not receive all of the compensation we are otherwise due under the agreement or may not be able to maintain the agreement. Moreover, we may not be able to succeed in our plans to enter into additional commercial relationships and strategic alliances on favorable terms.
As our commercial agreements expire or otherwise terminate, we may be unable to renew or replace these agreements on comparable terms, or at all. In the past, we amended several of our commercial agreements to reduce future cash proceeds to be received by us, shorten the term of our commercial agreements, or both. Some of our agreements involve high margin services, such as marketing and promotional agreements, and as such agreements expire they may be replaced, if at all, by agreements involving lower margin services. In addition, several past commercial agreements were with companies that experienced business failures and were unable to meet their obligations to us. We may in the future enter into further amendments of these agreements or encounter other parties that have difficulty meeting their contractual obligations to us, which could adversely affect our operating results.
In addition, our present and future third-party services agreements, other commercial agreements, joint ventures, investments and business combinations create risks such as:
| disruption of our ongoing business, including loss of management focus on existing businesses; | |
| impairment of relationships with existing employees, customers and companies with which we have formed strategic alliances; | |
| variability in revenue and income from entering into, amending or terminating such agreements or relationships; | |
| difficulty assimilating the operations, technology and personnel of combined companies; | |
| problems retaining key technical and managerial personnel; and | |
| additional operating losses and expenses of acquired businesses. |
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Our Investments and the Consideration We Receive under Certain Commercial Agreements May Subject Us to a Number of Risks |
In the past, we have entered into commercial agreements with other companies, including strategic alliances where we perform certain e-commerce services, and in exchange for our services we received cash, equity securities of these companies, and/or additional benefits, such as Web site traffic. The amount of compensation we receive under certain of these agreements is dependent on the volume of sales made by the other company. In some cases, we have also made separate investments in the other company by making a cash payment in exchange for equity securities of that company. We may in the future make additional investments in companies with which we already have commercial agreements or companies with which we enter into new commercial agreements or similar arrangements. To the extent we have received equity securities as compensation, fluctuations in the value of such securities will affect our ultimate realization of amounts we have received as compensation for services.
In the past, we amended several of our commercial agreements to reduce future cash proceeds to be received by us, shorten the term of our commercial agreements, or both. We may in the future enter into further amendments of our commercial agreements. Although these amendments did not affect the amount of unearned revenue previously recorded by us (if any), the timing of revenue recognition of these recorded unearned amounts has been changed to correspond with the terms of the amended agreements. To the extent we believe any such amendments cause or may cause the compensation to be received under an agreement to no longer be fixed or determinable, we limit our revenue recognition to amounts received, excluding any future amounts not deemed fixed or determinable. As future amounts are subsequently received, such amounts are incorporated into our revenue recognition over the remaining term of the agreement.
Our investments in equity securities that are not accounted for under the equity method are included in Marketable securities and Other equity investments on our balance sheets. We regularly review all of our investments in public and private companies for other-than-temporary declines in fair value. When we determine that the decline in fair value of an investment below our accounting basis is other-than-temporary, we reduce the carrying value of the securities we hold and record a loss in the amount of any such decline. In recent years, securities of companies in the Internet and e-commerce industries have experienced significant difficulties. We may conclude in future quarters that the fair values of other of these investments have experienced an other-than-temporary decline. As of December 31, 2002, our recorded basis in equity securities was $19 million, including $4 million classified as Marketable securities and $15 million classified as Other equity investments, of which less than $1 million was accounted for under the equity-method.
The Seasonality of Our Business Places Increased Strain on Our Operations |
We expect a disproportionate amount of our net sales to be realized during the fourth quarter of our fiscal year. If we do not stock popular products in sufficient amounts and fail to meet customer demand, it could significantly affect our revenue and our future growth. If we overstock products, we may be required to take significant inventory markdowns or write-offs, which could reduce gross profits. A failure to optimize inventory in our fulfillment network will harm our shipping margins by requiring us to make partial shipments from one or more locations. We may experience a decline in our shipping margins due to complimentary upgrades, split-shipments and additional long-zone shipments necessary to ensure timely delivery, especially for the holiday season. If the other businesses on whose behalf we perform inventory fulfillment services deliver product to our fulfillment centers in excess of forecasts, we may be unable to secure sufficient storage space and may be unable to optimize our fulfillment centers. If too many customers access our Web sites within a short period of time due to increased holiday or other 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. In addition, we may be unable to adequately staff our fulfillment centers during these peak periods and third parties that provide fulfillment services to our customers may be unable to meet the
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We generally have payment terms with our vendors that extend beyond the amount of time necessary to collect proceeds from our customers. As a result of holiday sales, at December 31 of each year, our cash, cash equivalents and marketable securities balances reach their highest level (other than as a result of cash flows provided by investing and financing activities). This operating cycle results in a corresponding increase in accounts payable. Our accounts payable balance will decline during the first three months following year-end, which will result in a decline in the amount of cash, cash equivalents and marketable securities on hand.
We May Experience Significant Fluctuations in Our Operating Results and Rate of Growth |
Due to our limited operating history, our evolving business model and the unpredictability of our industry, we may not be able to accurately forecast our rate of growth. We base our current and future expense levels and our investment plans on estimates of future net sales and rate of growth. Our expenses and investments are to a large extent fixed. We may not be able to adjust our spending quickly enough if our net sales fall short of our expectations.
Our revenue and operating profit growth depends on the continued growth of demand for the products offered by us or our sellers, and our business is affected by general economic and business conditions throughout the world. A softening of demand, whether caused by changes in consumer preferences or a weakening of the U.S. or global economies, may result in decreased revenue or growth. Terrorist attacks and armed hostilities create economic and consumer uncertainty that could adversely affect our revenue or growth. Such attacks and security concerns could create delays in and increase the cost of product shipments to and from us, which may decrease demand. Revenue growth may not be sustainable and our company-wide percentage growth rate may decrease in the future.
Our net sales and operating results will also fluctuate for many other reasons, including:
| our ability to retain and increase sales to existing customers, attract new customers and satisfy our customers demands; | |
| our ability to expand our network of sellers, and to enter into, maintain, renew and amend on favorable terms our strategic alliances; | |
| foreign exchange rate fluctuations; | |
| our ability to acquire merchandise, manage inventory and fulfill orders; | |
| the introduction by our competitors of Web sites, products or services; | |
| changes in usage of the Internet and online services and consumer acceptance of the Internet and e-commerce; | |
| timing and costs of upgrades and developments in our systems and infrastructure; | |
| the effects of strategic alliances, acquisitions and other business combinations, and our ability to successfully integrate them into our business; | |
| technical difficulties, system downtime or interruptions; | |
| variations in the mix of products and services we sell; | |
| variations in our level of merchandise and vendor returns; | |
| disruptions in service by shipping carriers; | |
| the extent to which we offer free shipping promotions; and |
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| an increase in the prices of fuel and gasoline, which are used in the transportation of packages, as well as an increase in the prices of other energy products, primarily natural gas and electricity, which are used in our operating facilities. |
Finally, both seasonal fluctuations in Internet usage and traditional retail seasonality are likely to affect our business. Internet usage generally slows during the summer months, and sales in almost all of our product groups, particularly toys and electronics, usually increase significantly in the fourth calendar quarter of each year.
We Have Foreign Exchange Risk |
The results of operations of our internationally-focused Web sites are exposed to foreign exchange rate fluctuations as the financial results of the applicable subsidiaries are translated from the local currency into U.S. Dollars upon consolidation. As exchange rates vary, net sales and other operating results, when translated, may differ materially from expectations.
In addition, our 6.875% Convertible Subordinated Notes due 2010 (6.875% PEACS) are denominated in Euros, not U.S. Dollars. When we periodically remeasure the principal of the 6.875% PEACS based on fluctuations in the Euro/ U.S. Dollar exchange ratio, we will record non-cash gains or losses in Other gains (losses), net on our statements of operations. Furthermore, we have invested some of the proceeds from the 6.875% PEACS in Euro-denominated cash equivalents and marketable securities. Accordingly, if the U.S. Dollar strengthens compared to the Euro, cash equivalents and marketable securities balances, when translated, may be materially less than expected and vice versa.
Our Past and Planned Future Growth Will Place a Significant Strain on our Management, Operational and Financial Resources |
We have rapidly and significantly expanded our operations and will endeavor to expand further to pursue growth of our product and service offerings and customer base. Such growth will continue to place a significant strain on our management, operational and financial resources. We also need to 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, which may limit our growth.
In addition, we do not expect to benefit in our newer market segments from the first-to-market advantage that we experienced in the online book channel. Our gross profits in our newer business activities may be lower than in our older business activities. In addition, we may have limited or no experience in new product and service activities and our customers may not favorably receive our new businesses. To the extent we pursue strategic alliances to facilitate new product or service activities, the alliances may not be successful. If any of this were to occur, it could damage our reputation and negatively affect revenue growth.
The Loss of Key Senior Management Personnel Could Negatively Affect Our Business |
We depend on the continued services and performance of our senior management and other key personnel, particularly Jeffrey P. Bezos, our President, 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.
System Interruption and the Lack of Integration and Redundancy in Our Systems May Affect Our Sales |
Customer access to our Web sites directly affects the volume of goods we sell and the services we offer and thus affects our net sales. We experience occasional system interruptions that make our Web sites unavailable or prevent us from efficiently fulfilling orders or providing services to third parties, which may reduce our net sales and the attractiveness of our products and services. To prevent system
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Our computer and communications systems and operations could be damaged or interrupted by fire, flood, power loss, telecommunications failure, break-ins, earthquakes, acts of war or terrorism, acts of God, computer viruses, physical or electronic break-ins and similar events or disruptions. Any of these events could cause system interruption, delays and loss of critical data, and could prevent us from accepting and fulfilling customer orders. Should this occur, it would make our product offerings less attractive to our customers and our service offerings less attractive to third parties. While we do have backup systems for certain aspects of our operations, our systems are not fully redundant and our disaster recovery planning may not be sufficient for all eventualities. In addition, we may have inadequate insurance coverage or insurance limits to compensate us for losses from a major interruption. If any of this were to occur, it could damage our reputation and be expensive to remedy.
We May Not Be Successful in Our Efforts to Expand into International Market Segments |
We plan, over time, to continue to expand our reach in international market segments. We have relatively little experience in purchasing, marketing and distributing products or services for these market segments and may not benefit from any first-to-market advantages. It is costly to establish international facilities and operations, promote our brand internationally and develop localized Web sites, stores and other systems. We may not succeed in these efforts. Our net sales from international market segments may not offset the expense of establishing and maintaining the related operations and, therefore, these operations may not be profitable on a sustained basis.
Our international sales and related operations are subject to a number of risks inherent in selling abroad, including, but not limited to, risks with respect to:
| foreign exchange rate fluctuations; | |
| local economic and political conditions; | |
| restrictive governmental actions (such as trade protection measures, including export duties and quotas and custom duties and tariffs); | |
| import or export licensing requirements; | |
| limitations on the repatriation of funds; | |
| difficulty in obtaining distribution and support; | |
| nationalization; | |
| longer receivable cycles; | |
| consumer protection laws and restrictions on pricing or discounts; | |
| lower level of adoption or use of the Internet and other technologies vital to our business and the lack of appropriate infrastructure to support widespread Internet usage; | |
| lower level of credit card usage and increased payment risk; | |
| difficulty in developing and simultaneously managing a larger number of unique foreign operations as a result of distance, language and cultural differences; | |
| laws and policies of the U.S. and other jurisdictions affecting trade, foreign investment and loans; | |
| tax and other laws of the U.S. and other jurisdictions; and | |
| geopolitical events, including war and terrorism. |
As the international e-commerce channel continues to grow, competition will likely intensify. Local companies may have a substantial competitive advantage because of their greater understanding of, and
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We Face Significant Inventory Risk |
We are exposed to significant inventory risks as a result of seasonality, new product launches, rapid changes in product cycles and changes in consumer tastes with respect to our products. In order to be successful, we must accurately predict these trends and avoid overstocking or under-stocking products. Demand for products, however, can change significantly between the time inventory is ordered and the date of sale. In addition, when we begin selling a new product, it is particularly difficult to forecast product demand accurately. A failure to optimize inventory within our fulfillment network will harm our shipping margins by requiring us to make split shipments from one or more locations, complimentary upgrades and additional long-zone shipments necessary to ensure timely delivery. As a result of our Merchants@ program relationships with Toysrus.com, Babiesrus.com, Target and other companies, these parties identify, buy, manage and bear the financial risk of inventory obsolescence for their corresponding stores and merchandise. As a result, if any of these parties fail to forecast product demand or optimize inventory, we would receive reduced service fees under the agreements and our business and reputation could be harmed.
The acquisition of certain types of inventory, or inventory from certain sources, may require significant lead-time and prepayment, and such inventory may not be returnable. We carry a broad selection and significant inventory levels of certain products, such as consumer electronics, and we may be unable to sell products in sufficient quantities or during the relevant selling seasons.
Our ability to receive inbound inventory efficiently or ship completed orders to customers may be negatively affected by a number of factors, including dependence on a limited number of shipping companies, inclement weather, fire, flood, power loss, earthquakes, labor disputes, acts of war or terrorism or acts of God.
Any one of the inventory risk factors set forth above may adversely affect our operating results.
If We Do Not Successfully Optimize and Operate Our Fulfillment Centers, Our Business Could Be Harmed |
If we do not successfully operate our fulfillment centers, it could significantly limit our ability to meet customer demand. Because it is difficult to predict sales volume, we may not manage our facilities in an optimal way, which may result in excess or insufficient inventory, warehousing, fulfillment and distribution capacity. In addition, third parties either drop-ship or otherwise fulfill an increasing portion of our customers orders, and we are increasingly reliant on the reliability, quality and future procurement of their services. Finally, under some of our commercial agreements, we maintain the inventory of other companies in our fulfillment centers, thereby increasing the complexity of tracking inventory in and operating our fulfillment centers. Our failure to properly handle such inventory or the inability or failure of these other companies to accurately forecast product demand would result in unexpected costs and other harm to our business and reputation.
We May Not Be Able to Adequately Protect Our Intellectual Property Rights or May Be Accused of Infringing Intellectual Property Rights of Third Parties |
We regard our trademarks, service marks, copyrights, patents, trade dress, trade secrets, proprietary technology and similar intellectual property as critical to our success, and we rely on trademark, copyright and patent law, trade secret protection, and confidentiality and/or license agreements with our employees, customers, partners and others to protect our proprietary rights. Effective trademark, service mark,
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We also 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.
Policing unauthorized use of our proprietary rights is inherently difficult, and we may not be able to determine the existence or extent of any such unauthorized use. The protection of our intellectual property may require the expenditure of significant financial and managerial resources. Moreover, we cannot be certain that the steps we take to protect our intellectual property will adequately protect our rights or that others will not independently develop or otherwise acquire equivalent or superior technology or other intellectual property rights.
Third parties that license our proprietary rights 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, and expect to continue to be subject to, claims and legal proceedings regarding alleged infringement by us of the patents, 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, injunctions against us or the imposition of damages that we must pay. We may need to obtain licenses from third parties who allege that we have infringed their rights, but such licenses may not be available on terms acceptable to us or at all. In addition, we may not be able to obtain or utilize on terms which are favorable to us, or at all, licenses or other rights with respect to intellectual property we do not own in providing e-commerce services to other businesses and individuals under commercial agreements.
We Have a Limited Operating History and Our Stock Price Is Highly Volatile |
We have a relatively short operating history and, as an e-commerce company, we have a rapidly evolving and unpredictable business model. The trading price of our common stock fluctuates significantly. Trading prices of our common stock may fluctuate in response to a number of events and factors, such as:
| general economic conditions; | |
| changes in interest rates; | |
| conditions or trends in the Internet and the e-commerce industry; | |
| fluctuations in the stock market in general and market prices for Internet-related companies in particular; | |
| quarterly variations in operating results; | |
| new products, services, innovations and strategic developments by our competitors or us, or business combinations and investments by our competitors or us; | |
| changes in financial estimates by us or securities analysts and recommendations by securities analysts; | |
| changes in Internet regulation; | |
| changes in our capital structure, including issuance of additional debt or equity to the public; | |
| additions or departures of key personnel; | |
| corporate restructurings, including layoffs or closures of facilities; | |
| changes in the valuation methodology of, or performance by, other e-commerce companies; and |
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| news and securities analyst reports and speculation relating to new and existing commercial agreements, general business or Internet trends or our existing or future products or services. |
Any of these events may cause our stock price to rise or fall and may adversely affect our business and financing opportunities.
Future volatility in our stock price could force us to increase our cash compensation to employees or grant larger stock awards than we have historically, which could hurt our operating results or reduce the percentage ownership of our existing stockholders, or both. In the first quarter of 2001, we offered a limited non-compulsory exchange of employee stock options. This option exchange offer resulted in variable accounting treatment for certain of our stock options. Variable accounting treatment will result in unpredictable stock-based compensation expense dependent on fluctuations in quoted prices for our common stock. In late 2002, we implemented a restricted stock unit plan, which will be our primary vehicle for employee stock-based compensation going forward. Restricted stock and restricted stock units are measured at fair value on the date of grant based on the number of shares granted and the quoted price of the common stock, which will be recognized as compensation expense ratably over the corresponding employee service term.
Government Regulation of the Internet and E-commerce Is Evolving and Unfavorable Changes Could Harm our Business |
We are subject to general business regulations and laws, as well as regulations and laws specifically governing the Internet and e-commerce. Such existing and future laws and regulations may impede the growth of the Internet or other online services. These regulations and laws may cover taxation, user privacy, pricing, content, copyrights, distribution, electronic contracts, consumer protection, the provision of online payment services, broadband residential Internet access and the characteristics and quality of products and services. 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 e-commerce. Unfavorable resolution of these issues may harm our business. In addition, many jurisdictions currently regulate auctions and auctioneers and may regulate online auction services. Jurisdictions may also regulate consumer-to-consumer fixed price online markets, like zShops and certain aspects of Amazon Marketplace. This could, in turn, diminish the demand for our products and services and increase our cost of doing business.
We May Be Subject to Liability for Past Sales and Our Future Sales May Decrease |
In accordance with current industry practice, we do not collect sales taxes or other taxes with respect to shipments of most of our goods into states other than Washington and North Dakota. Under some of our commercial agreements, the other company is the seller of record of the applicable merchandise and we are obligated to collect sales tax in most states in accordance with that companys instructions. We may enter into additional strategic alliances requiring similar tax collection obligations. We collect Value Added Tax, or VAT, for products that are ordered on www.amazon.co.uk, www.amazon.de and www.amazon.fr and delivered in European Union member countries. We also collect Japanese consumption tax for products that are ordered on www.amazon.co.jp and delivered in Japan. In addition, Canadian consumption taxes are collected on sales of products that are ordered on www.amazon.ca and delivered in Canada. Our fulfillment center and customer service center networks, and any future expansion of those networks, along with other aspects of our evolving business, may result in additional sales and other tax obligations. One or more states or foreign countries may seek to impose sales or other tax collection obligations on out-of-jurisdiction companies which engage in e-commerce. A successful assertion by one or more states or foreign countries that we should collect sales or other taxes on the sale of merchandise could result in substantial tax liabilities for past sales, decrease our ability to compete with traditional retailers and otherwise harm our business.
Currently, decisions of the U.S. Supreme Court restrict the imposition of obligations to collect state and local sales and use taxes with respect to sales made over the Internet. However, a number of states, as well as the U.S. Congress, have been considering various initiatives that could limit or supersede the
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Various countries are currently evaluating their VAT positions on e-commerce transactions. Recently, for example, the European Union (EU) enacted a directive requiring that businesses in non-EU countries selling digital products and services to EU resident consumers collect and remit VAT in the country of the consumers residence. This directive will become effective on July 1, 2003, will result in additional VAT collection obligations and administrative burdens and may decrease our future sales to customers in the EU. Future VAT legislation or changes to our business model may have similar impacts.
We Source a Significant Portion of Our Inventory from a Few Vendors |
Although we continue to increase our direct purchasing from manufacturers, we still source a significant amount of inventory from relatively few vendors. During 2002, we purchased over 10% of all inventory purchases from a single vendor, Ingram Book Group. No other vendors account for over 10%. 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. If our current vendors were to 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 May Be Subject to Product Liability Claims if People or Property Are Harmed by the Products We Sell |
Some of our products, such as toys, tools, hardware, computers, cell phones, and kitchen and houseware products, may expose us to product liability claims relating to personal injury, death or property damage caused by such products, and may require us to take actions such as product recalls. Certain businesses and individuals also may sell products that may indirectly increase our exposure to product liability claims. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. In addition, some of our vendor agreements with our suppliers do not indemnify us from product liability.
We Could Be Liable for Breaches of Security on Our Web Site and Fraudulent Activities of Users of Our Amazon Payments Program |
A fundamental requirement for e-commerce is the secure transmission of confidential information over public networks. Although we have developed systems and processes that are designed to protect consumer information and prevent fraudulent credit card transactions and other security breaches, failure to mitigate such fraud or breaches may adversely affect our operating results.
The law relating to the liability of providers of online payment services is currently unsettled. In addition, we are aware that governmental agencies have investigated the provision of online payment services and could require changes in the way this business is conducted. We guarantee payments made through Amazon Payments up to certain limits for both buyers and sellers, and we may be unable to prevent users of Amazon Payments from fraudulently receiving goods when payment may not be made to a seller or fraudulently collecting payments when goods may not be shipped to a buyer. Our liability risk will increase if a larger fraction of our sellers use Amazon Payments. Any costs we incur as a result of liability because of our guarantee of payments made through Amazon Payments or otherwise could harm our business. In addition, the functionality of Amazon Payments depends on certain third-party vendors delivering services. If these vendors are unable or unwilling to provide services, Amazon Payments will not be viable (and our businesses that use Amazon Payments may not be viable).
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We May Not Be Able to Adapt Quickly Enough to Changing Customer Requirements and Industry Standards |
Technology in the e-commerce industry changes rapidly. We may not be able to adapt quickly enough to changing customer requirements and preferences and industry standards. 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.
The Internet as a Medium for Commerce Is Uncertain |
Consumer use of the Internet as a medium for commerce is a recent phenomenon and is subject to a high level of uncertainty. While the number of Internet users has been rising, the Internet infrastructure may not expand fast enough to meet the increased levels of demand. If use of the Internet as a medium for commerce does not continue to grow or grows at a slower rate than we anticipate, our sales would be lower than expected and our business would be harmed.
We Could Be Liable for Unlawful or Fraudulent Activities by Users of Our Merchants@ program, Merchant.com program, Amazon Marketplace, Auctions and zShops Services |
We may be unable to prevent users of our Merchants@ program, Merchant.com program, Amazon Marketplace, Auctions 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 users under U.S. laws and/or the laws and regulations of other countries. In addition, if we are unsuccessful in preventing our users from providing content that is either illegal or which violates the proprietary rights of others, it may result in liability to us. Any costs we incur as a result of liability relating to the 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 Merchants@ program, Merchant.com program, Amazon Marketplace, Auctions and zShops services, we rely on sellers to make accurate representations and provide reliable delivery, and on buyers to pay the agreed purchase price. We do not take responsibility for delivery of payment or goods and, while we can suspend or terminate the accounts of users who fail to fulfill their delivery obligations, 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. Under our guarantee program, fraudulent activities by our users, such as the fraudulent receipt of goods and the fraudulent collection of payments, may create liability for us.
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Executive Officers and Directors
The following tables set forth certain
information regarding our Executive Officers and Directors as of
January 19, 2003:
Executive Officers
Name
Age
Position
39
President, Chief Executive Officer and Chairman
of the Board
45
Senior Vice President, Worldwide Architecture and
Platform Software and Chief Information Officer
45
Vice President and Chief Accounting Officer
42
Senior Vice President, Worldwide Retail and
Marketing
42
Senior Vice President and Chief Financial Officer
36
Senior Vice President, Worldwide Operations and
Customer Service
39
Senior Vice President, Human Resources, General
Counsel and Secretary
Jeffrey P. Bezos. Mr. Bezos has been Chairman of the Board of Amazon.com since founding it in 1994 and Chief Executive Officer since May 1996. Mr. Bezos served as President from founding until June 1999 and again from October 2000 to the present.
Richard L. Dalzell. Mr. Dalzell has served as Senior Vice President, Worldwide Architecture and Platform Software, and Chief Information Officer since November 2001. From October 2000 until November 2001, Mr. Dalzell was Senior Vice President and Chief Information Officer and prior to that, from joining Amazon.com in August 1997 until October 2000, he was Vice President and Chief Information Officer.
Mark S. Peek. Mr. Peek has served as Vice President and Chief Accounting Officer since July 2002. From November 2000 to July 2002, he served as Vice President, Financial Planning and Analysis, and from April 2000 to November 2000, he served as Vice President, Finance and Chief Accounting Officer. Prior to joining Amazon.com, Mr. Peek was an audit partner with Deloitte & Touche.
Diego Piacentini. Mr. Piacentini has served as Senior Vice President, Worldwide Retail and Marketing, since November 2001. From joining Amazon.com in February 2000 until November 2001, Mr. Piacentini was Senior Vice President and General Manager, International. Prior to joining Amazon.com, Mr. Piacentini was Vice President and General Manager, Europe, of Apple Computer, Inc., with responsibility for Apple Computers operations in Europe, the Middle East and Africa.
Thomas J. Szkutak. Mr. Szkutak has served as Senior Vice President and Chief Financial Officer since November 2002. Previously, Mr. Szkutak held a variety of positions at General Electric Co., including Chief Financial Officer of GE Lighting from September 2001 to September 2002, Finance Director of GE Plastics Europe from March 1999 to September 2001, and Executive Vice President Finance of GE Asset Management (formerly known as GE Investments) from May 1997 to March 1999.
Jeffrey A. Wilke. Mr. Wilke has served as Senior Vice President, Worldwide Operations and Customer Service, since January 2002. From October 2000 until January 2002, Mr. Wilke was Senior Vice President, Operations, and prior to that he had been Vice President and General Manager, Operations, since joining Amazon.com in September 1999. Previously, Mr. Wilke held a variety of positions at AlliedSignal, including Vice President and General Manager of the Pharmaceutical Fine Chemicals unit
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L. Michelle Wilson.
Ms. Wilson has served as Senior
Vice President, Human Resources, General Counsel and Secretary
since March 2001. She served as Vice President, General Counsel
and Secretary from July 1999 until March 2001. Ms. Wilson
joined Amazon.com in March 1999 as Associate General Counsel,
Mergers and Acquisitions and Finance. Prior to joining
Amazon.com, she was a partner in the law firm of Perkins Coie
LLP.
Board of Directors
Name
Age
Position
39
President, Chief Executive Officer and Chairman
of the Board
62
Managing Director of Madrona Venture Group
51
General Partner, Kleiner Perkins Caufield &
Byers
47
Chairman and CEO of Fleming Companies, Inc.
58
Chairman and CEO of Readers Digest
Association, Inc.
46
President and Co-Chair of the Bill & Melinda
Gates Foundation
Item 2. | Properties |
We do not own any real estate. Our principal office facilities in the U.S. are located in several leased facilities in Seattle, Washington under leases that expire at various times through July 2010. Our corporate office facilities (excluding customer service office space) in the U.S. comprise a total of 517,000 square feet. Additionally, we have 333,000 square feet of office space that is subleased or is vacant that we remain obligated under lease agreements that expire at various times through April 2011.
Our U.S. warehousing and fulfillment operations are housed in six fulfillment centers located in New Castle, Delaware; Fernley, Nevada; Coffeyville, Kansas; Lexington and Campbellsville, Kentucky; and Grand Forks, North Dakota. These fulfillment centers comprise a total of approximately 3.1 million square feet. Our fulfillment center leases expire from 2004 through 2015. We also lease six facilities located near our fulfillment centers, comprising approximately 1.1 million square feet, which we use for off-site storage and shipping. These offsite storage and shipping facilities are under relatively short-term lease agreements that expire at various times through May 2003; following expiration, we intend to renew certain of these leases or consolidate into new offsite facilities, or both.
Our U.S. customer service operations occupy approximately 76,000 square feet of office space and are located in Tacoma, Washington; Huntington, West Virginia; and Grand Forks, North Dakota. The lease terms of these facilities expire in January 2006, April 2010 and November 2008, respectively.
Our data-center facilities have 120,000 combined square feet (including approximately 40,000 square feet of vacant space at one facility). These facilities are under leases that expire from 2004 through 2009.
We lease additional properties outside the U.S., including approximately 135,000 square feet of corporate office space (excluding customer service office space) in Germany, France, Japan and the United Kingdom (which excludes approximately 40,000 square feet of vacant office space in Germany); approximately 845,000 combined square feet of available fulfillment center space in Germany, France and the United Kingdom (which excludes approximately 200,000 square feet in our United Kingdom facility that is currently subleased or marketed for sublease); and approximately 66,000 combined square feet of customer service space in Germany, Japan and the United Kingdom. The fulfillment centers in Germany,
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In January 2001, we closed our fulfillment centers in McDonough, Georgia and Seattle, Washington. Our lease for the Seattle facility, which covers approximately 76,000 square feet (a portion of which is currently subleased) will expire in April 2004. We recently negotiated a termination agreement for our McDonough facility lease that accelerated the termination date to December 2002 for a portion of the building and to March 2003 for the remainder of the building (contingent on our payment of the final termination fee). At December 31, 2002, the lease for our McDonough facility covered approximately 520,000 square feet.
We believe our properties are suitable and adequate for our present and anticipated near term needs.
Item 3. | Legal Proceedings |
On April 12, 2001, we received a request from the SEC staff for the voluntary production of documents and information concerning, among other things, previously reported sales of our common stock by our Chairman and Chief Executive Officer, Jeffrey Bezos, on February 2 and 5, 2001. We are cooperating with the SEC staffs continuing inquiry.
A number of purported class action complaints were filed by holders of our equity and debt securities against us, our directors and certain of our senior officers during 2001, in the United States District Court for the Western District of Washington, alleging violations of the Securities Act of 1933 (the 1933 Act) and/or the Securities Exchange Act of 1934 (the 1934 Act). On October 5, 2001, plaintiffs in the 1934 Act cases filed a consolidated amended complaint alleging that we, together with certain of our officers and directors and certain third parties, made false or misleading statements during the period from October 29, 1998 through July 23, 2001 concerning our business, financial condition and results, inventories, future prospects and strategic alliance transactions. The 1933 Act complaint alleges that the defendants made false or misleading statements in connection with our February 2000 offering of the 6.875% PEACS. The complaints seek recissionary and/or compensatory damages and injunctive relief against all defendants. We dispute the allegations of wrongdoing in these complaints and intend to vigorously defend ourselves in these matters.
On August 28, 2002, the Trustee for the Creditors Trust for Living.com instituted an adversary proceeding against a subsidiary of the Company in the United States Bankruptcy Court for the Western District of Texas. The plaintiff alleges that Living.coms creditors are entitled to a contractual recovery of approximately $58 million in fees that Living.com had previously paid in 2000 primarily by issuing Living.com stock to the Company. We dispute the plaintiffs allegations and intend to vigorously defend ourselves in this matter.
On October 29, 2002, Gary Gerlinger, individually and on behalf of all other similarly situated consumers in the United States who, during the period from August 1, 2001 to the present, purchased books online from either Amazon.com or Borders.com, instituted an action against the Company and Borders in the United States District Court for the Northern District of California. The Complaint alleges that the agreement pursuant to which an affiliate of Amazon.com operates Borders.com as a co-branded site violates federal anti-trust laws, California statutory law and the common law of unjust enrichment. The Complaint seeks injunctive relief, damages, including treble damages or statutory damages where applicable, attorneys fees, costs and disbursements, disgorgement of all sums obtained by allegedly wrongful acts, interest and declaratory relief. We dispute the plaintiffs allegations of wrongdoing and intend to vigorously defend ourselves in this matter.
Depending on the amount and the timing, an unfavorable resolution of some or all of these matters could materially affect our business, future results of operations, financial position or cash flows in a particular period.
From time to time, we are subject to other legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks, copyrights, patents and other intellectual
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Item 4. | Submission of Matters to a Vote of Security Holders |
No matters were submitted for a vote of our stockholders during the fourth quarter of 2002.
PART II
Item 5. | Market for the Registrants Common Stock and Related Stockholder Matters |
Market Information |
Our common stock is traded on the Nasdaq National Market under the symbol AMZN. The following table sets forth the high and low sale prices for the common stock for the periods indicated, as reported by the Nasdaq National Market.
High | Low | ||||||||
|
|
||||||||
Year ended December 31, 2001
|
|||||||||
First Quarter
|
$ | 21.88 | $ | 10.00 | |||||
Second Quarter
|
17.56 | 8.37 | |||||||
Third Quarter
|
16.98 | 5.97 | |||||||
Fourth Quarter
|
12.24 | 6.01 | |||||||
Year ended December 31, 2002
|
|||||||||
First Quarter
|
$ | 16.96 | $ | 9.03 | |||||
Second Quarter
|
20.40 | 12.52 | |||||||
Third Quarter
|
17.93 | 12.26 | |||||||
Fourth Quarter
|
25.00 | 16.01 |
Holders |
As of January 27, 2003, there were 4,229 stockholders of record of our common stock, although there is a much larger number of beneficial owners.
Dividends |
We have never declared or paid cash dividends on our common stock. We do not anticipate paying any cash dividends in the foreseeable future. In addition, we are restricted from paying cash dividends under our Senior Discount Notes. See Item 7 of Part II, Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources.
Recent Sales of Unregistered Securities |
None.
Item 6. | Selected Consolidated Financial Data |
The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes thereto in Item 8 of Part II, Financial Statements and Supplementary Data, and the information contained herein in Item 7 of Part II, Managements Discussion and Analysis
20
As of and for the Years Ended December 31, | ||||||||||||||||||||
|
||||||||||||||||||||
2002 | 2001 | 2000 | 1999 | 1998(1) | ||||||||||||||||
|
|
|
|
|
||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||
Net sales
|
$ | 3,932,936 | $ | 3,122,433 | $ | 2,761,983 | $ | 1,639,839 | $ | 609,819 | ||||||||||
Gross profit
|
992,618 | 798,558 | 655,777 | 290,645 | 133,664 | |||||||||||||||
Income (loss) from operations
|
64,124 | (412,257 | ) | (863,880 | ) | (605,755 | ) | (109,055 | ) | |||||||||||
Interest income
|
23,687 | 29,103 | 40,821 | 45,451 | 14,053 | |||||||||||||||
Interest expense
|
(142,925 | ) | (139,232 | ) | (130,921 | ) | (84,566 | ) | (26,639 | ) | ||||||||||
Net loss
|
(149,132 | ) | (567,277 | ) | (1,411,273 | ) | (719,968 | ) | (124,546 | ) | ||||||||||
Basic and diluted net loss per share(2)
|
$ | (0.39 | ) | $ | (1.56 | ) | $ | (4.02 | ) | $ | (2.20 | ) | $ | (0.42 | ) | |||||
Shares used in computation of basic and diluted
net loss per share(2)
|
378,363 | 364,211 | 350,873 | 326,753 | 296,344 | |||||||||||||||
Balance Sheet Data:
|
||||||||||||||||||||
Cash and cash equivalents
|
$ | 738,254 | $ | 540,282 | $ | 822,435 | $ | 133,309 | $ | 71,583 | ||||||||||
Marketable securities
|
562,715 | 456,303 | 278,087 | 572,879 | 301,862 | |||||||||||||||
Total assets
|
1,990,449 | 1,637,547 | 2,135,169 | 2,465,850 | 648,460 | |||||||||||||||
Long-term debt
|
2,277,305 | 2,156,133 | 2,127,464 | 1,466,338 | 348,140 | |||||||||||||||
Stockholders Equity (Deficit)
|
(1,352,814 | ) | (1,440,000 | ) | (967,251 | ) | 266,278 | 138,745 |
(1) | Reflects restatement for a 1998 business acquisition accounted for under the pooling-of-interests method. |
(2) | For further discussion of loss per share, see Item 8 of Part II, Financial Statements and Supplementary Data Note 1 Description of Business and Accounting Policies and Note 9 Earnings (Loss) Per Share. |
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this Annual Report on Form 10-K are forward-looking. We use words such as anticipates, believes, expects, future, intends and similar expressions to identify forward-looking statements. Forward-looking statements reflect managements current expectations and are inherently uncertain. Our actual results may differ significantly from managements expectations. The following discussion includes forward-looking statements regarding expectations of future pro forma profitability, net sales, cash flows from operations and free cash flows, all of which 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, the Internet and online commerce, customer spending patterns, the amount that we invest 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, risks of inventory management, the degree to which we enter into, maintain and develop relationships with other businesses, fluctuations in the value of securities and non-cash payments we receive in connection with such transactions, foreign exchange risks, seasonality, international growth and expansion and risks of fulfillment throughput and productivity. These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ significantly from managements expectations, are described in greater detail in Item 1 of Part I,
21
Results of Operations
Critical Accounting Judgments
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a companys critical accounting policies as the ones that are most important to the portrayal of the companys financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results. For additional information see Item 8 of Part II, Financial Statements and Supplementary Data Note 1 Description of Business and Accounting Policies. Although we believe that our estimates, assumptions and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.
Significant Accounting Policies
Inventories |
Inventories, consisting of products available for sale, are valued at the lower of cost or market value, which requires us to make judgments, based on currently-available information, about the likely method of disposition (whether through sales to individual customers, returns to product vendors or liquidations), and expected recoverable values of each disposition category. Based on this evaluation, which is applied consistently from period to period, we record a valuation allowance to adjust the carrying amount of our inventories to lower of cost or market value.
Revenue Recognition |
We generally recognize revenue from product sales or services rendered when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured.
We evaluate the criteria outlined in Emerging Issues Task Force (EITF) Issue No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent, in determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. Generally, when we are the primary obligor in a transaction, are subject to inventory risk, have latitude in establishing prices and selecting suppliers, or have several but not all of these indicators, revenue is recorded gross. If we are not the primary obligor and amounts earned are determined using a fixed percentage, a fixed-payment schedule, or a combination of the two, we generally record the net amounts as commissions earned.
Product sales, net of promotional discounts, rebates and return allowances, are recorded when the products are shipped and title passes to customers. Retail items sold to customers are made pursuant to a sales contract that provides for transfer of both title and risk of loss upon our delivery to the carrier (commonly referred to as F.O.B. Shipping Point). Return allowances (which reduce product revenue by our best estimate of expected product returns) are estimated using historical experience.
22
We periodically provide incentive offers to our customers to encourage purchases. Such offers include percentage discounts off current purchases (current discount offers), offers for future discounts subject to a minimum current purchase (inducement offers) and other similar offers. Current discount offers, when accepted by our customers, are treated as a reduction to the purchase price of the related transaction and are presented as a net amount in Net sales. Inducement offers, when accepted by our customers, are treated as a reduction to purchase price based on estimated redemption rates. Redemption rates are estimated using our historical experience for similar inducement offers.
Commissions received through our Amazon Marketplace and Merchants@ programs and amounts earned through our Merchant.com program are recorded as net amounts since we are acting as an agent. Amounts earned are recognized as net sales when the item is sold by the third-party seller and our collectibility is reasonably assured. We record an allowance for estimated refunds on such commissions using historical experience.
We earn revenues from services primarily by entering into business-to-business commercial agreements, including providing our technology services such as search, browse and personalization; permitting other businesses and individuals to offer products or services through our Web sites; and powering third-party Web sites, either with or without providing accompanying fulfillment services. These commercial agreements also include miscellaneous marketing and promotional agreements. As compensation for the services we provide under these agreements, we generally receive cash. In the past, we have accepted as compensation under these arrangements equity securities, or a combination of equity securities and cash. Generally, the fair value of the equity consideration received is measured when the agreement is executed, but to the extent that the equity consideration is subject to forfeiture or vesting provisions and no significant performance commitment exists upon execution of the agreement, the fair value of the equity consideration and corresponding revenue is determined as of the date that the forfeiture provision lapses or as the vesting provision lapses. Subsequent to initial measurement of fair value, appreciation or decline in the fair value of such securities will affect our ultimate realization of equity securities received as compensation; however, any such change does not affect the amount of revenue to be recognized over the term of the agreement. We generally recognize revenue from these marketing and promotional services (including revenues associated with non-refundable advance payments) on a straight-line basis over the period during which we perform services under these agreements, commencing at the launch date of the service. If we receive non-refundable advance payments, such amounts are deferred for revenue recognition purposes until service commences.
Included in Services segment revenues are equity-based service revenues of $13 million, $27 million and $79 million for 2002, 2001 and 2000, respectively.
We have in the past, and may in the future, amend our agreements with certain of the companies with which we have commercial agreements to modify future cash proceeds to be received by us, modify the service term of our commercial agreements, or both. Although these amendments generally do not affect the amount of unearned revenue previously recorded by us (if any), the timing of future revenue recognition changes to correspond with the terms of amended agreements. These amendments or future amendments will affect the timing and amount of revenues recognized in connection with these commercial agreements. To the extent we believe any such amendments cause or may cause the compensation to be received under an agreement to no longer be fixed or determinable, we limit our revenue recognition to amounts received, excluding any future amounts not deemed fixed or determinable. As future amounts are subsequently received, such amounts are incorporated into our revenue recognition over the remaining term of the agreement.
Fair Value of Equity Securities Received as Compensation Under Commercial Agreements |
For equity securities of public companies received as compensation under commercial agreements, we generally determine fair value based on the quoted market price at the time we enter into the underlying commercial agreement and adjust such market price appropriately if significant restrictions on marketability exist. Because an observable market price does not exist for equity securities of private companies, our estimates of fair value of such securities are more subjective than for the securities of
23
Accounting for Goodwill and Certain Other Intangibles |
Effective July 1, 2001, we adopted certain provisions of Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and effective January 1, 2002, we adopted the full provisions of SFAS No. 141 and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and broadens the criteria for recording intangible assets apart from goodwill. We evaluated our goodwill and intangibles acquired prior to June 30, 2001 using the criteria of SFAS No. 141, which resulted in $25 million of other intangibles (comprised entirely of assembled workforce intangibles) being subsumed into goodwill at January 1, 2002. SFAS No. 142 requires that purchased goodwill and certain indefinite-lived intangibles no longer be amortized, but instead be tested for impairment at least annually. We evaluated our intangible assets and determined that all such assets have determinable lives.
SFAS No. 142 prescribes a two-phase process for impairment testing of goodwill. The first phase screens for impairment, while the second phase (if necessary) measures the impairment. We completed our first phase impairment analysis and found no instances of impairment of our recorded goodwill; accordingly, the second testing phase was not necessary during 2002. No subsequent indicators of impairment have been noted.
Restructuring Estimates |
Restructuring-related liabilities include estimates for, among other things, anticipated disposition of lease obligations. Key variables in determining such estimates include anticipated commencement timing of sublease rentals, estimates of sublease rental payment amounts and tenant improvement costs and estimates for brokerage and other related costs. We periodically evaluate and, if necessary, adjust our estimates based on currently-available information.
Results of Operations
Net Sales |
Net sales include the selling price of consumer products sold by us, less promotional discounts, rebates and sales returns; outbound shipping charges billed to our customers; commissions and other amounts earned from sales of new and used products on Amazon Marketplace; amounts earned (fixed fees, sales commissions, per-unit activity fees, or some combination thereof) for sales of retail products through our Merchants@ program, such as Toysrus.com and Target stores at www.amazon.com ; the selling price of consumer products sold by us through our Syndicated Stores program, such as www.borders.com ; amounts earned (fixed fees, sales commissions, per-unit activity fees, or some combination thereof) in connection with our Merchant.com program, such as www.target.com ; amounts earned from third parties who utilize our technology services such as search, browse and personalization; and amounts earned for miscellaneous marketing and promotional agreements.
Net sales were $3.93 billion, $3.12 billion and $2.76 billion for 2002, 2001 and 2000, respectively, representing increases of 26% and 13% for 2002 and 2001, respectively. The increases in 2002 net sales were primarily attributable to our International segment and our BMVD segment, which increased $508 million and $185 million in 2002, respectively. The increases in 2001 net sales were primarily
24
Net sales for our BMVD segment were $1.87 billion, $1.69 billion and $1.70 billion for 2002, 2001 and 2000, respectively, representing an increase of 11% for 2002 in comparison with a decline of 1% for 2001. This segment includes retail sales from www.amazon.com and www.amazon.ca of books, music and DVD/ video products and magazine subscription commissions. This segment also includes commissions from Amazon Marketplace sales of these products, new, used or collectible, amounts earned from sales of these products by other businesses through our Merchants@ program and product revenues from stores offering these products through our Syndicated Stores program. The improvement in growth rates for our BMVD segment in 2002 in comparison with 2001 reflects increased unit sales resulting from our continuing efforts to reduce prices for customers, including increases in customer discounts on books and the introduction of everyday free shipping at www.amazon.com for certain orders. Also contributing to the 2002 increase in growth rates for BMVD are increases in unit sales through Amazon Marketplace.
Net sales for our ETK segment were $645 million, $547 million and $484 million for 2002, 2001 and 2000, respectively, representing increases of 18% and 13% for 2002 and 2001, respectively. This segment includes www.amazon.com retail sales of electronics, home improvement and home and garden products, as well as our mail-order catalog sales. This segment also includes commissions from sales of these products, new, used or collectible, through Amazon Marketplace and amounts earned from sales of these products by other businesses through our Merchants@ program, such as with Office Depot, and will include revenues from stores offering these products, if any, through our Syndicated Stores program. The improvement in growth rates for our ETK segment in 2002 in comparison with 2001 reflects increased unit sales resulting from our continuing efforts to reduce prices for customers, including increases in customer discounts through price changes and rebate programs and the introduction of everyday free shipping at www.amazon.com for certain orders. Also contributing to the 2002 increase in growth rates for ETK are increases in unit sales through Amazon Marketplace.
Net sales for our International segment were $1.17 billion, $661 million and $381 million for 2002, 2001 and 2000, respectively, representing increases of 77% and 74% for 2002 and 2001, respectively. We anticipate that as the revenue base of our International segment increases, the percentage growth rates will likely decline over time. During 2002, revenues improved $47 million in comparison to 2001 due to changes in foreign exchange rates (specifically the weakening of the U.S. Dollar in comparison to the Euro and the British Pound). This segment includes all retail sales of the following internationally-focused Web sites: www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp . These international sites share a common Amazon.com experience, but are localized in terms of language, products, customer service and fulfillment. To the extent available on these sites, this segment includes commissions and other amounts earned from sales of products through Amazon Marketplace and revenues from stores offering products through our Syndicated Stores program, such as www.waterstones.co.uk and www.virginmega.co.jp , and amounts earned from sales of products by other businesses through our Merchants@ program. Our International segment includes export sales from www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp (including export sales from these sites to customers in the U.S. and Canada), but excludes export sales from www.amazon.com and www.amazon.ca . The increase in net sales from our International segment results from, in each of the four internationally-focused Web sites, an increase in unit sales (in part due to the introduction of Amazon Marketplace on www.amazon.co.uk, www.amazon.de and www.amazon.co.jp ), and our continuing efforts to reduce prices to customers through increases in customer discounts and free and reduced-rate shipping offers. The future growth of our International segment may fluctuate significantly with changes in foreign exchange rates. See Item 1 of Part I, Business Additional Factors That May Affect Future Results We Have Foreign Exchange Risk.
Net sales for our Services segment were $246 million, $225 million and $198 million for 2002, 2001 and 2000, respectively, representing increases of 9% and 13%, respectively. This segment consists of
25
Shipping revenue (which consists of outbound shipping charges to our customers) across all operating segments was $365 million, $357 million and $339 million for 2002, 2001 and 2000, respectively. Shipping revenue does not include any commissions or other amounts earned from Amazon Marketplace. In January 2002, we introduced a new shipping option at www.amazon.com , offering everyday free shipping for certain orders that exceed a specified amount, and we lowered this threshold several times throughout the year. We offer similar shipping options for our internationally-focused Web sites and may offer other free or reduced-fee shipping options over time. These shipping offers reduce shipping revenue as a percentage of sales and cause our gross margins on retail sales to decline. We view these shipping offers as an effective marketing tool.
First quarter of 2003 net sales are expected to be between $1.025 billion and $1.075 billion, or grow between 21% and 27%. For the full year 2003, net sales are expected to grow over 15%. However, any such projections are subject to substantial uncertainty. See Item 1 of Part 1, Business Additional Factors That May Affect Future Results.
Gross Profit |
Gross profit is net sales less the cost of sales, which consists of the purchase price of consumer products sold by us, inbound and outbound shipping charges to us, packaging supplies and certain costs associated with our service revenues. Costs associated with our Services segment revenues and classified as cost of services generally include fulfillment-related costs to ship products on behalf of third-party sellers, costs to provide customer service, credit card fees and other related costs.
Effective January 1, 2002, we prospectively changed our inventory costing method to the first-in first-out (FIFO) method of accounting. This change resulted in a cumulative increase in product inventory of $0.8 million, with a corresponding amount recorded to Cumulative effect of change in accounting principle on the statements of operations in 2002. We evaluated the effect of the change on each quarter during 2001 and determined such effect to be less than $1.2 million individually and in the aggregate. We determined this change to be preferable under accounting principles generally accepted in the United States since, among other reasons, it facilitates our record keeping process, significantly improves our ability to provide cost-efficient fulfillment services to other companies as part of our services offering and results in increased consistency with others in our industry.
Gross profit was $993 million, $799 million and $656 million for 2002, 2001 and 2000, respectively, representing increases of 24% and 22% for 2002 and 2001, respectively. Gross margin was 25%, 26% and 24% for 2002, 2001 and 2000, respectively. Increases in gross profit in 2002 primarily correspond with increases in units sold (including increased product sales through Amazon Marketplace), improvements in transportation and inventory management and improvements in product sourcing, offset by price reductions on books and electronics, the expiration of certain high-margin marketing and promotional agreements, and our free and reduced-rate shipping offers. Increases in gross profit in 2001 primarily correspond with improvements in inventory management and product sourcing, and to a lesser extent, increased product sales through Amazon Marketplace. Our overall gross margins fluctuate based on several factors, including
26
Gross profit for our BMVD segment was $528 million, $453 million and $417 million for 2002, 2001 and 2000, respectively, representing increases of 16% and 9% for 2002 and 2001, respectively. Gross margin was 28%, 27% and 25% for 2002, 2001 and 2000, respectively. The slight improvement in gross margin corresponds with the increase in higher margin sales through Amazon Marketplace, improvements in transportation costs and inventory management, and continued improvements in product sourcing, offset by price reductions and our everyday free shipping offer.
Gross profit for our ETK segment was $90 million, $78 million and $45 million for 2002, 2001 and 2000, respectively, representing increases of 15% and 76% for 2002 and 2001, respectively. Gross margin was 14% for 2002 and 2001 and 9% for 2000. In 2002, improvements in product sourcing, inventory management and transportation management, along with lower transportation costs, were offset by price reductions and our everyday free shipping offer. In 2001, improvement in gross margin primarily reflects improvements in product sourcing and inventory management.
During 2002, sales of products through Amazon Marketplace increased significantly in comparison to the prior year. If product sales through Amazon Marketplace continue to increase, we anticipate improvement in gross margin, offset to the extent we offer additional or broader price reductions, free shipping offers and other promotions.
Gross profit for our International segment was $249 million, $141 million and $77 million for 2002, 2001 and 2000, respectively, representing increases of 77% and 82% for 2002 and 2001, respectively. Gross margin was 21% for 2002 and 2001, and 20% for 2000. The increase in gross profit in 2002 reflects increases in units sold by each of our four internationally-focused Web sites included in this segment (in part due to the introduction of Amazon Marketplace on www.amazon.co.uk, www.amazon.de and www.amazon.co.jp ), offset by continuing efforts to reduce prices for our customers. During 2002, gross profit improved $10 million in comparison to 2001 due to changes in foreign exchange rates (specifically the weakening of the U.S. Dollar in comparison to the Euro and the British Pound).The increase in gross profit in 2001 reflects increases in units sold by our www.amazon.de and www.amazon.co.uk sites, as well as the launch of our www.amazon.fr and www.amazon.co.jp sites during the second half of 2000.
Gross profit for our Services segment was $126 million for 2002 and 2001 and $116 million for 2000, representing flat gross profit in 2002 and an increase of 9% for 2001. Costs associated with our service revenues generally include fulfillment-related costs to ship products on behalf of other businesses, including costs to provide customer service, credit card fees and other related costs. Gross margin was 51%, 56% and 59% for 2002, 2001 and 2000, respectively. Gross profit from our Services segment largely corresponds with revenues from our commercial agreements, which includes our Merchant.com program and, to the extent product categories are not also offered by us through our online retail stores, the Merchants@ program, as well as amounts earned through miscellaneous marketing and promotional agreements. The decline in gross margin from our Services segment relates to service costs classified in cost of sales resulting from the shift in the mix of our commercial relationships towards agreements that incorporate a broader range of services, including fulfillment. Also contributing to the decline in Services gross margin in 2002 was the expiration of certain high-margin marketing and promotional agreements. We expect Services segment margins will decline again in 2003 since high-margin marketing arrangements are expected to represent a lower percentage of our overall revenue mix for this segment. See Item 1 of Part 1 Business Additional Factors That May Affect Future Results Our Business Could Suffer If We Are Unsuccessful in Making, Integrating and Maintaining Commercial Agreements, Strategic Alliances and Other Business Relationships.
Shipping loss across all operating segments was $40 million, $19 million and $1 million for 2002, 2001 and 2000, respectively. The loss from shipping primarily reflects the free and reduced-rate shipping offers, offset in part by cost reductions from efficiencies in our outbound shipping. We continue to measure our shipping results relative to their effect on our overall financial results, with the viewpoint that shipping
27
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 customer 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 co-sourcers that assist us in fulfillment and customer service operations. Certain Services segment fulfillment-related costs incurred on behalf of other businesses are classified as cost of sales rather than fulfillment. Fulfillment costs were $392 million, $374 million and $415 million for 2002, 2001 and 2000, respectively, representing 10%, 12% and 15% of net sales, respectively. The improvement in fulfillment costs as a percentage of net sales results from improvements in productivity and accuracy, the increase in units fulfilled helping to leverage the fixed-cost portion of our fulfillment network, a decline in customer service contacts per order resulting from improvements in our operations and enhancements to our customer self-service features available on our Web sites. These improvements were offset, in part, by increases in employee wages and benefits and credit card interchange fees associated with Amazon Marketplace, which represent a higher percent of commissions earned relative to amounts earned from retail sales of our inventory. Additionally, the comparisons between 2001 and 2000 (and to a lesser extent the comparisons between 2002 and 2001) were affected by the closures in 2001 of our fulfillment centers in McDonough, Georgia and Seattle, Washington, and customer service centers in The Hague, Netherlands and Seattle, Washington.
Marketing |
Marketing expenses consist of advertising, promotional and public relations expenditures, and payroll and related expenses for personnel engaged in marketing and selling activities. Marketing expenses, net of co-operative marketing reimbursements, were $125 million, $138 million and $180 million for 2002, 2001 and 2000, respectively, representing 3%, 4% and 7% of net sales, respectively. To the extent co-operative marketing reimbursements decline in future periods, we may incur additional expenses to continue certain promotions or elect to reduce or discontinue them. Declines in expense for marketing-related activities reflect management efforts to cut ineffective marketing programs, as well as reduced rates charged to us for some online marketing activities. These decreases are partially offset by increased investment in marketing channels considered most effective in driving incremental net sales, such as targeted online advertising through various Web portals and our Associates program. In January 2002, we introduced a new shipping option at www.amazon.com , offering everyday free shipping for certain orders that exceed a specified amount. We offer similar shipping options for our internationally-focused Web sites. Although marketing expenses do not include our free and reduced shipping offers, we view such offers as an effective marketing tool.
Technology and Content |
Technology and content expenses consist principally of payroll and related expenses for development, editorial, systems and telecommunications operations personnel; systems and telecommunications infrastructure; and costs of acquired content, including freelance reviews. Technology and content expenses were $216 million, $241 million and $269 million for 2002, 2001 and 2000, respectively, representing 5%, 8% and 10% of net sales, respectively. The decline in absolute dollars spent for each comparative period primarily reflects our migration to a technology platform that utilizes a less-costly technology infrastructure, as well as improved expense management and general price reductions in most expense categories. We expect to continue to invest in technology and improvements to our Web sites, which may
28
General and Administrative |
General and administrative expenses consist of payroll and related expenses for executive, finance and administrative personnel, human resources, professional fees and other general corporate expenses. General and administrative expenses were $79 million, $90 million and $109 million for 2002, 2001 and 2000, respectively, representing 2%, 3% and 4% of net sales, respectively. The decline in 2002 in general and administrative costs is primarily attributable to a decline in facility and depreciation costs resulting from our 2001 operational restructuring plan that consolidated our corporate office locations, and through continued efforts to improve efficiency. The decline in 2001 in general and administrative costs is attributable to reductions in most administrative expense categories, including employee-related, facility and depreciation costs, supplies and other miscellaneous charges, as well as decreased costs as a result of our 2001 operational restructuring.
Stock-Based Compensation |
Stock-based compensation was $69 million, $5 million and $25 million for 2002, 2001 and 2000, respectively. Stock-based compensation includes stock-based charges resulting from variable accounting treatment of certain stock options and restricted stock issued to certain key employees, as well as amounts associated with our newly-implemented restricted stock unit program. Stock-based compensation also includes, to a lesser extent, a portion of acquisition-related consideration conditioned on the continued tenure of certain key employees of acquired businesses. Under our restricted stock unit program, which commenced in the fourth quarter of 2002, we award restricted stock units as our primary vehicle for employee equity compensation. Restricted stock units are measured at fair value on the date of grant based on the number of shares granted and the quoted price of our common stock. Such value is recognized as an expense ratably over the corresponding employee service period. To the extent restricted stock units are forfeited prior to vesting, the corresponding previously recognized expense is reversed as an offset to Stock-based compensation. Stock-based compensation associated with our restricted stock unit program was $4 million in 2002.
The number of shares of common stock subject to outstanding vested and unvested employee stock awards (including restricted stock units) was approximately 45 million and 66 million, or 12% and 18% of our outstanding common stock, at December 31, 2002 and 2001, respectively.
During the first quarter of 2001, we offered a limited non-compulsory exchange of employee stock options, which resulted in variable accounting treatment for approximately 5 million stock options at December 31, 2002, including approximately 4 million options granted under the exchange offer that have exercise prices of $13.375 and expire in the third quarter of 2003. Variable accounting treatment results in unpredictable and potentially significant charges or credits recorded to Stock-based compensation, dependent on fluctuations in quoted prices for our common stock. We have quantified the hypothetical effect on Stock-based compensation associated with various quoted prices of our common stock, which we are unable to forecast accurately, using a sensitivity analysis for our outstanding stock options subject to variable accounting at December 31, 2002. We have provided this information to give additional insight into the volatility we will experience in our future 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 (including the actual expense associated with options exercised), our hypothetical cumulative compensation expense at
29
Hypothetical vs. | ||||||||||||||
Actual Cumulative | ||||||||||||||
Hypothetical Increase | Hypothetical Market | Hypothetical Cumulative | Compensation Expense | |||||||||||
Over $13.375 | Price per Share | Compensation Expense | December 31, 2002 | |||||||||||
|
|
|
|
|||||||||||
15 | % | $ | 15.38 | $ | 47,471 | $ | (13,017 | ) | ||||||
25 | % | 16.72 | 52,423 | (8,065 | ) | |||||||||
50 | % | 20.06 | 64,802 | 4,314 | ||||||||||
75 | % | 23.41 | 77,181 | 16,693 | ||||||||||
100 | % | 26.75 | 89,561 | 29,073 |
Actual variable-accounting related compensation could differ significantly from the above illustration in instances where options are exercised during a period at prices that differ from the closing stock price for the reporting period. As of December 31, 2002, the Companys common stock closed at $18.89, representing an increase of 41% over $13.375. Cumulative compensation expense associated with variable accounting treatment was $60 million, of which $40 million is associated with options exercised and therefore no longer subject to future variability.
If at the end of any fiscal quarter the quoted price of our common stock is lower than the quoted price at the end of the previous fiscal quarter, or to the extent previously-recorded amounts relate to unvested portions of options that were cancelled, compensation expense associated with variable accounting will be recalculated using the cumulative expense method and may result in a net benefit to our results of operations.
Amortization of Goodwill and Other Intangibles |
Amortization of goodwill and other intangibles was $5 million, $181 million and $322 million for 2002, 2001 and 2000, respectively. The decline in amortization of goodwill and intangibles in 2002 primarily results from our adoption of SFAS No. 141, which resulted in $25 million of intangible assets, comprised of assembled workforce intangibles, being subsumed into goodwill, and our adoption of SFAS No. 142, which requires that goodwill no longer be amortized. The decline in amortization of goodwill and intangibles in 2001 results from an impairment loss of $184 million recorded in the fourth quarter of 2000 associated with certain of our 1999 business acquisitions. This impairment loss reduced our recorded basis in goodwill and other intangibles and had the effect of reducing amortization expense during 2001.
Restructuring-Related and Other |
Restructuring-related and other expenses were $42 million, $182 million and $200 million for 2002, 2001 and 2000, respectively. In the first quarter of 2001, we announced and began implementation of our operational restructuring plan to reduce 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. This initiative involved the reduction of employee staff by 1,327 positions throughout the Company in managerial, professional, clerical, technical and fulfillment roles; consolidation of our Seattle, Washington corporate office locations; closure of our McDonough, Georgia fulfillment center; seasonal operation of our Seattle, Washington fulfillment center; closure of our customer service centers in Seattle, Washington and The Hague, Netherlands; and migration of a large portion of our technology infrastructure to a new operating platform, which entails ongoing lease obligations for technology infrastructure no longer being utilized. Actual employee termination benefits paid were $12 million. The restructuring is complete; however we may adjust our restructuring-related estimates in the future, if necessary.
During 2002, we revised our estimates of ongoing net lease obligations for our facilities in Seattle, Washington and McDonough, Georgia, primarily due to weakness in these real estate markets; we reached a termination agreement with the landlord of our leased fulfillment center facility in McDonough, Georgia,
30
Restructuring-related charges were as follows (in
thousands):
Years Ended
December 31,
2002
2001
$
1,182
$
68,528
39,563
87,049
14,970
828
11,038
$
41,573
$
181,585
At December 31, 2002, the accrued liability
associated with restructuring-related and other charges was
$57 million and consisted of the following (in thousands):
Balance at
Balance at
December 31,
Subsequent
December 31,
Due Within
Due After
2001
Accruals, Net
Payments
2002
12 Months(1)
12 Months(1)
$
53,187
$
39,563
$
(41,534
)
$
51,216
$
20,903
$
30,313
61
(61
)
8,190
828
(3,393
)
5,625
4,324
1,301
$
61,438
$
40,391
$
(44,988
)
$
56,841
$
25,227
$
31,614
(1) | Restructuring-related liabilities due within 12 months and due after 12 months are classified in Accrued expenses and other current liabilities and Long-term debt and other, respectively, on our consolidated balance sheets. |
Cash payments resulting from our operational
restructuring were $45 million and $49 million for
2002 and 2001, respectively. We estimate, based on currently
available information, the remaining net cash outflows
associated with our restructuring-related commitments will be as
follows (in thousands):
Leases
Other
Total
$
20,903
$
4,324
$
25,227
11,681
1,000
12,681
4,508
301
4,809
3,013
3,013
3,092
3,092
8,019
8,019
$
51,216
$
5,625
$
56,841
31
Restructuring-related lease obligations are as
follows (in thousands):
2003
2004
2005
2006
2007
Thereafter
Total
$
22,550
$
15,150
$
11,164
$
10,021
$
10,078
$
29,663
$
98,626
(1,647
)
(3,469
)
(6,656
)
(7,008
)
(6,986
)
(21,644
)
(47,410
)
$
20,903
$
11,681
$
4,508
$
3,013
$
3,092
$
8,019
$
51,216
(1) | At December 31, 2002, the Company had signed contractual sublease agreements covering $10 million in future payments. |
Restructuring-related and other expenses in 2000 primarily relate to impairments of goodwill and other intangibles recorded in connection with certain of our business acquisitions.
Income (Loss) from Operations |
Our results from operations were income of $64 million and losses of $412 million and $864 million for 2002, 2001 and 2000, respectively. The improvement in operating results in comparison with the prior year was attributable to an increase in gross profit; a reduction in certain operating costs including marketing, technology and content and general and administrative; a decline in restructuring-related charges; as well as a decline in amortization of goodwill and other intangibles primarily due to the adoption of SFAS No. 142; offset by stock-based compensation charges associated primarily with certain of our employee stock options under variable accounting treatment. We are unable to forecast accurately the effect on our future reported results associated with variable accounting treatment on certain of our employee stock options.
Net Interest Expense |
Net interest expense was $119 million, $110 million and $90 million for 2002, 2001 and 2000, respectively. Interest income was $24 million, $29 million and $41 million for 2002, 2001 and 2000, respectively, and interest expense was $143 million, $139 million and $131 million for 2002, 2001 and 2000, respectively. Interest income declined in 2002 in comparison with 2001 primarily as a result of declining interest rates, offset in part by increases in the average balance of cash, cash equivalents and marketable securities. Interest income declined in 2001 in comparison with 2000 due primarily to decreases in the average balance of cash, cash equivalents and marketable securities. Interest expense is primarily related to our 6.875% PEACS, 4.75% Convertible Subordinated Notes due 2009 (4.75% Convertible Subordinated Notes), and our Senior Discount Notes. The increase in interest expense for 2001 in comparison with 2000 is primarily associated with our February 2000 issuance of the 6.875% PEACS. At December 31, 2002, our total long-term indebtedness was $2.28 billion. Beginning in November 2003, we will begin to make semi-annual interest payments on the indebtedness under our Senior Discount Notes.
Other Income (Expense), Net |
Other income (expense), net consisted of the following (in thousands):
Years Ended December 31, | ||||||||||||
|
||||||||||||
2002 | 2001 | 2000 | ||||||||||
|
|
|
||||||||||
Gains on sales of marketable securities, net
|
$ | 5,700 | $ | 1,335 | $ | 280 | ||||||
Foreign-currency transaction losses, net
|
(1,086 | ) | (2,019 | ) | (3,250 | ) | ||||||
Miscellaneous state, foreign and other taxes
|
700 | (1,222 | ) | (3,123 | ) | |||||||
Other miscellaneous gains (losses), net
|
309 | 6 | (3,965 | ) | ||||||||
|
|
|
||||||||||
$ | 5,623 | $ | (1,900 | ) | $ | (10,058 | ) | |||||
|
|
|
32
Other Gains (Losses), Net |
Other gains (losses), net consisted of the following (in thousands):
Years Ended December 31, | ||||||||||||
|
||||||||||||
2002 | 2001 | 2000 | ||||||||||
|
|
|
||||||||||
Foreign-currency gains (losses) on 6.875%
PEACS
|
$ | (103,136 | ) | $ | 46,613 | $ | | |||||
Gains (losses) on sales of Euro-denominated
investments, net
|
2,227 | (22,548 | ) | | ||||||||
Other-than-temporary impairment losses on equity
investments
|
(8,101 | ) | (43,588 | ) | (188,832 | ) | ||||||
Gains on sales of equity investments, net
|
13,044 | | | |||||||||
Gains from terminations of commercial contracts
|
| 22,400 | 6,033 | |||||||||
Net gains from acquisition of investments by
third parties
|
| 784 | 40,160 | |||||||||
Warrant remeasurements and other
|
(307 | ) | (5,802 | ) | | |||||||
|
|
|
||||||||||
$ | (96,273 | ) | $ | (2,141 | ) | $ | (142,639 | ) | ||||
|
|
|
Equity in Losses of Equity-Method Investees |
Equity in losses of equity-method investees represents our share of losses of companies in which we have investments that give us the ability to exercise significant influence, but not control, over an investee. This influence is generally defined as an ownership interest of the voting stock of the investee of between 20% and 50%, although other factors, such as representation on our investees Board of Directors and the effect of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate. Equity-method losses were $4 million, $30 million and $305 million for 2002, 2001 and 2000, respectively. Our basis in equity-method investments was less than $1 million, and $10 million at December 31, 2002 and 2001, respectively. As equity-method losses are only recorded until the underlying investments are reduced to zero, we expect, absent additional investments, equity-method losses in future periods to be insignificant.
Income Taxes |
We have provided for current and deferred U.S. federal, state and foreign income taxes for the current and all prior periods presented. Current and deferred income taxes were provided with respect to jurisdictions where certain of our subsidiaries produce taxable income. As of December 31, 2002, we have recorded a net deferred tax asset of $3 million, which consists primarily of certain state jurisdiction net operating loss carryforwards. We have provided a valuation allowance for the remainder of our deferred tax asset, consisting primarily of net operating loss carryforwards, because of uncertainty regarding its realization. The increase in the valuation allowance on the deferred tax asset was $196 million and $492 million for 2002 and 2001, respectively.
At December 31, 2002, we had net operating loss carryforwards of approximately $2.5 billion related to U.S. federal, state and foreign jurisdictions. Utilization of net operating losses, which begin to expire at various times starting in 2010, may be subject to certain limitations under Sections 382 and 1502 of the Internal Revenue Code of 1986, as amended, and other limitations under state and foreign tax laws. Additionally, approximately $180 million of capital loss carryforwards begins to expire in 2005. Approximately $1.2 billion of our net operating loss carryforwards relates to tax deductible stock-based compensation in excess of amounts recognized for financial reporting purposes. To the extent that net operating loss carryforwards, if realized, relate to stock-based compensation, the resulting tax benefits will be recorded to stockholders equity, rather than to results of operations.
Net Loss |
Net loss was $149 million, $567 million and $1.41 billion for 2002, 2001 and 2000, respectively. Year over year improvements during 2002 and 2001 result from a variety of factors, including growth in net
33
Although we reported fourth quarter of 2002 net income of $3 million, we believe that this positive net income result should not be viewed as a material positive event and is not predictive of future results for a variety of reasons. For example, excluding the $5 million restructuring-related gain associated with our McDonough, Georgia, fulfillment center lease-termination agreement, we would have reported a net loss in the fourth quarter of 2002. Alternatively, excluding the $31 million stock-based compensation charge associated with variable accounting treatment on certain of our employee stock options that resulted from an increase in our stock price during the fourth quarter, or excluding the $38 million foreign exchange loss on the remeasurement of our PEACS from Euros to U.S. Dollars, we would have reported more net income in the fourth quarter of 2002. We are unable to forecast the effect on our future reported results of certain items, including the stock-based compensation charges or credits associated with variable accounting treatment on certain of our employee stock options that will result from fluctuations in our stock price, and the gain or loss associated with our 6.875% PEACS that will result from fluctuations in foreign exchange rates.
Unearned Revenue |
During 2002 and 2001, activity in unearned revenue was as follows (in thousands):
Balance, December 31, 2000
|
$ | 131,117 | |||
Cash received or accounts receivable
|
114,738 | ||||
Fair value of equity securities received
|
331 | ||||
Amortization to revenue
|
(135,808 | ) | |||
Contract termination
|
(22,400 | ) | |||
|
|||||
Balance, December 31, 2001
|
87,978 | ||||
Cash received or accounts receivable
|
95,404 | ||||
Amortization to revenue
|
(135,466 | ) | |||
|
|||||
Balance, December 31, 2002
|
$ | 47,916 | |||
|
During 2001, we recorded previously unearned revenue associated with the termination of our commercial agreement with Kozmo.com, which was included in Other gains (losses), net. Since services had not yet been performed under the contract, no amounts associated with the Kozmo.com commercial agreement were previously recognized in Net sales during any period.
Pro Forma Results of Operations |
We provide certain pro forma information regarding our results from operations, which excludes the following line items on our consolidated statements of operations:
| stock-based compensation, | |
| amortization of goodwill and other intangibles, and | |
| restructuring-related and other. |
34
We also provide certain pro forma information regarding our net loss, which excludes, in addition to the line items described above, the following line items on our consolidated statements of operations:
| other gains (losses), net, | |
| equity in losses of equity-method investees, net, and | |
| cumulative effect of change in accounting principle. |
This pro forma information is not presented in accordance with accounting principles generally accepted in the United States. Pro forma results are provided as a complement to results provided in accordance with accounting principles generally accepted in the United States. Our management uses such pro forma measures internally to evaluate our performance, prepare and measure our operating plan and manage our operations. Our management believes pro forma measures provide useful information to investors regarding our financial condition and results of operations because pro forma results exclude certain items that are unpredictable and outside of our control, not settled in cash, or both, such as the effects of foreign exchange rates on Other gains (losses), net, and the effect of the changes in the price of the Companys common stock on Stock-based compensation. Other amounts, such as charges associated with our 2001 operational restructuring, are excluded to provide our management and investors information relating to ongoing operations. All pro forma results are derived from information presented in our financial statements. For information about our financial results, as reported in accordance with accounting principles generally accepted in the United States, see Item 8 of Part II, Financial Statements and Supplementary Data.
35
Full year and corresponding quarterly pro forma
results of operations, and certain cash flow information for
2002, 2001 and 2000, were as follows (in thousands):
Year Ended December 31, 2002
Fourth
Third
Second
First
Full Year
Quarter
Quarter
Quarter
Quarter
$
180,102
$
101,958
$
27,492
$
25,994
$
24,658
$
66,487
$
75,382
$
353
$
(4,409
)
$
(4,839
)
5
%
7
%
3
%
3
%
3
%
$
0.18
$
0.20
$
0.00
$
(0.01
)
$
(0.01
)
$
0.17
$
0.19
$
0.00
$
(0.01
)
$
(0.01
)
378,363
383,702
379,650
376,937
373,031
399,656
407,056
398,361
376,937
373,031
$
174,291
$
372,579
$
38,108
$
4,637
$
(241,033
)
Year Ended December 31, 2001
Fourth
Third
Second
First
Full Year
Quarter
Quarter
Quarter
Quarter
$
(45,002
)
$
58,680
$
(27,072
)
$
(28,009
)
$
(48,601
)
$
(157,031
)
$
34,785
$
(58,005
)
$
(57,528
)
$
(76,283
)
(1
)%
5
%
(4
)%
(4
)%
(7
)%
$
(0.43
)
$
0.09
$
(0.16
)
$
(0.16
)
$
(0.21
)
$
(0.43
)
$
0.09
$
(0.16
)
$
(0.16
)
$
(0.21
)
364,211
371,420
368,052
359,752
357,424
364,211
384,045
368,052
359,752
357,424
$
(119,782
)
$
349,120
$
(64,403
)
$
2,485
$
(406,984
)
Year Ended December 31, 2000
Fourth
Third
Second
First
Full Year
Quarter
Quarter
Quarter
Quarter
$
(317,000
)
$
(59,946
)
$
(68,439
)
$
(89,349
)
$
(99,266
)
$
(417,158
)
$
(90,426
)
$
(89,493
)
$
(115,704
)
$
(121,535
)
(11
)%
(6
)%
(11
)%
(15
)%
(17
)%
$
(1.19
)
$
(0.25
)
$
(0.25
)
$
(0.33
)
$
(0.35
)
350,873
355,681
353,954
349,886
343,884
$
(130,442
)
$
247,653
$
(3,688
)
$
(54,029
)
$
(320,378
)
36
The following is a reconciliation of our pro
forma results for 2002, 2001 and 2000. Quarterly reconciliations
are consistent with full-year presentation.
Year Ended December 31, 2002
Year Ended December 31, 2001
Year Ended December 31, 2000
Pro Forma
Pro Forma
Pro Forma
As Reported(1)
Adjustments
Pro Forma
As Reported(1)
Adjustments
Pro Forma
As Reported(1)
Adjustments
Pro Forma
(in
(in
(in
thousands)
thousands)
thousands)
$
3,932,936
$
$
3,932,936
$
3,122,433
$
$
3,122,433
$
2,761,983
$
$
2,761,983
2,940,318
2,940,318
2,323,875
2,323,875
2,106,206
2,106,206
992,618
992,618
798,558
798,558
655,777
655,777
392,467
392,467
374,250
374,250
414,509
414,509
125,383
125,383
138,283
138,283
179,980
179,980
215,617
215,617
241,165
241,165
269,326
269,326
79,049
79,049
89,862
89,862
108,962
108,962
68,927
(68,927
)
4,637
(4,637
)
24,797
(24,797
)
5,478
(5,478
)
181,033
(181,033
)
321,772
(321,772
)
41,573
(41,573
)
181,585
(181,585
)
200,311
(200,311
)
928,494
(115,978
)
812,516
1,210,815
(367,255
)
843,560
1,519,657
(546,880
)
972,777
64,124
115,978
180,102
(412,257
)
367,255
(45,002
)
(863,880
)
546,880
(317,000
)
23,687
23,687
29,103
29,103
40,821
40,821
(142,925
)
(142,925
)
(139,232
)
(139,232
)
(130,921
)
(130,921
)
5,623
5,623
(1,900
)
(1,900
)
(10,058
)
(10,058
)
(96,273
)
96,273
(2,141
)
2,141
(142,639
)
142,639
(209,888
)
96,273
(113,615
)
(114,170
)
2,141
(112,029
)
(242,797
)
142,639
(100,158
)
(145,764
)
212,251
66,487
(526,427
)
369,396
(157,031
)
(1,106,677
)
689,519
(417,158
)
(4,169
)
4,169
(30,327
)
30,327
(304,596
)
304,596
(149,933
)
216,420
66,487
(556,754
)
399,723
(157,031
)
(1,411,273
)
994,115
(417,158
)
801
(801
)
(10,523
)
10,523
$
(149,132
)
$
215,619
$
66,487
$
(567,277
)
$
410,246
$
(157,031
)
$
(1,411,273
)
$
994,115
$
(417,158
)
$
174,291
$
174,291
$
(119,782
)
$
(119,782
)
$
(130,442
)
$
(130,442
)
$
(0.40
)
$
0.58
$
0.18
$
(1.53
)
$
1.10
$
(0.43
)
$
(4.02
)
$
2.83
$
(1.19
)
0.01
(0.01
)
(0.03
)
0.03
$
(0.39
)
$
0.57
$
0.18
$
(1.56
)
$
1.13
$
(0.43
)
$
(4.02
)
$
2.83
$
(1.19
)
$
(0.40
)
$
0.57
$
0.17
$
(1.53
)
$
1.10
$
(0.43
)
$
(4.02
)
$
2.83
$
(1.19
)
0.01
(0.01
)
(0.03
)
0.03
$
(0.39
)
$
0.56
$
0.17
$
(1.56
)
$
1.13
$
(0.43
)
$
(4.02
)
$
2.83
$
(1.19
)
378,363
378,363
364,211
364,211
350,873
350,873
378,363
399,656
364,211
364,211
350,873
350,873
(1) | In accordance with accounting principles generally accepted in the United States. |
37
First quarter of 2003 pro forma net profit is expected to be between $5 million and $20 million, or between $0.01 per share and $0.05 per share. Pro forma net profit for full year 2003 is expected to be over $115 million, or over $0.27 per share. However, any such projections are subject to substantial uncertainty. See Item 1 of Part I, Business Additional Factors That May Affect Future Results.
Liquidity and Capital Resources
Our principal sources of liquidity are our cash, cash equivalents and marketable securities. Our cash and cash equivalents balance was $738 million, $540 million and $822 million, and our marketable securities balance was $563 million, $456 million and $278 million at December 31, 2002, 2001 and 2000, respectively.
Combined cash, cash equivalents and marketable securities were $1.30 billion, $997 million and $1.10 billion at December 31, 2002, 2001 and 2000, respectively. Equity securities of $4 million are included in Marketable securities at December 31, 2002, the value of which may fluctuate significantly. Equity securities of $13 million and $36 million were included in Marketable securities at December 31, 2001 and 2000, respectively.
We have pledged a portion of our marketable
securities as collateral for standby letters of credit that
guarantee certain of our contractual obligations, a majority of
which relates to property leases; the swap agreement that hedges
the foreign-exchange rate risk on a portion of our 6.875% PEACS;
and some 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. The change in the total amount of collateral pledged
under these agreements was as follows (in thousands):
Standby
Letters of
Swap
Real Estate
Credit
Agreement
Leases
Total
$
77,635
$
48,498
$
40,657
$
166,790
(19,741
)
(25,403
)
(578
)
(45,722
)
$
57,894
$
23,095
$
40,079
$
121,068
As of December 31, 2002, our principal commitments consisted of long-term indebtedness totaling $2.28 billion related primarily to our 6.875% PEACS, 4.75% Convertible Subordinated Notes and Senior Discount Notes; trade payables of $618 million; and accrued expenses and other liabilities of $315 million, which includes current restructuring-related obligations of $25 million. Additionally, we are scheduled under certain of our long-term debt obligations to make periodic interest payments through 2010 in the aggregate of $947 million, and are obligated under operating leases and commitments for advertising and promotional arrangements in the aggregate of $355 million and $8 million, respectively.
The following are our contractual commitments
associated with our operational restructuring, indebtedness,
lease obligations and marketing agreements (in thousands):
2003
2004
2005
2006
2007
Thereafter
Total
$
20,903
$
11,681
$
4,508
$
3,013
$
3,092
$
8,019
$
51,216
4,324
1,000
301
5,625
25,227
12,681
4,809
3,013
3,092
8,019
56,841
38
2003
2004
2005
2006
2007
Thereafter
Total
4,962
2,004
74
2,238,353
2,245,393
126,162
139,365
139,365
139,365
139,365
263,034
946,656
7,950
898
235
9,083
48,349
45,749
39,426
39,674
38,993
143,084
355,275
7,569
7,569
194,992
188,016
179,100
179,039
178,358
2,644,471
3,563,976
$
220,219
$
200,697
$
183,909
$
182,052
$
181,450
$
2,652,490
$
3,620,817
(1) | Principal and interest payments due under the Companys 6.875% PEACS, excluding those payments with a fixed exchange ratio under the currency swap hedge arrangement, will fluctuate based on the Euro/ U.S. Dollar exchange ratio. |
Restructuring-related lease obligations are as
follows (in thousands):
2003
2004
2005
2006
2007
Thereafter
Total
$
22,550
$
15,150
$
11,164
$
10,021
$
10,078
$
29,663
$
98,626
(1,647
)
(3,469
)
(6,656
)
(7,008
)
(6,986
)
(21,644
)
(47,410
)
$
20,903
$
11,681
$
4,508
$
3,013
$
3,092
$
8,019
$
51,216
(1) | At December 31, 2002, the Company had signed contractual sublease agreements covering $10 million in future payments. |
Long-term capital lease obligations are as
follows (in thousands):
December 31,
2002
$
9,083
(592
)
8,491
(7,506
)
$
985
Net cash provided by or used in operating activities consists of net loss offset by certain adjustments not affecting current-period cash flows, and the effect of changes in working capital. Adjustments to net loss to determine cash flows from operations include depreciation and amortization, equity in losses of investees and other items not affecting cash flows in the current period. Net cash provided by operating activities during 2002 was $174 million, resulting from our net loss of $149 million that was offset by adjustments not affecting 2002 cash flows of $284 million, and changes in working capital of $40 million. Adjustments not affecting 2002 cash flows were primarily associated with losses resulting from the remeasurement of our 6.875% PEACS from Euros to U.S. Dollars, depreciation of fixed assets, stock-based compensation and non-cash interest expense. Net cash used by operating activities during 2001 was $120 million, resulting from our net loss of $567 million, offset by adjustments not affecting 2001 cash flows of $412 million and changes in working capital of $36 million. Net cash used by operating activities during 2000 was $130 million, resulting from our net loss of $1.41 billion, offset by adjustments not affecting 2000 cash flows of $1.10 billion and changes in working capital of $178 million.
Cash used in investing activities during 2002 was $122 million, consisting of net purchases of marketable securities of $83 million and purchases of fixed assets of $39 million. Cash used in investing activities during 2001 was $253 million, consisting of net purchases of marketable securities of
39
Net cash provided by financing activities during 2002 was $107 million, consisting primarily of proceeds from exercises of stock options, offset by repayments of long-term capital lease obligations. Net cash provided by financing activities during 2001 was $107 million, consisting primarily of proceeds from the issuance of common stock to America Online as well as exercises of stock options, offset by repayments of long-term capital lease obligations. Net cash provided by financing activities during 2000 was $693 million consisting primarily of net proceeds from issuance of 690 million Euros of 6.875% PEACS. We expect cash proceeds from exercises of employee stock options to decline over time as we plan to issue restricted stock units as our primary vehicle for employee stock-based awards.
We believe that current cash, cash equivalents and marketable securities balances will be sufficient to meet our anticipated operating cash needs for at least the next 12 months. In addition, we expect to have positive free cash flow (operating cash flow less purchases of fixed assets) for fiscal year 2003. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. See Item 1 of Part I, Business Additional Factors that May Affect Future Results. We continually evaluate opportunities to sell additional equity or debt securities, obtain credit facilities from lenders, or restructure our long-term debt for strategic reasons or to further strengthen our financial position. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders. In addition, we will, from time to time, consider the acquisition of or investment in complementary businesses, products, services and technologies, and the repurchase and retirement of debt, which might affect our liquidity requirements or cause us to issue additional equity or debt securities. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all.
Item 7A. | Quantitative and Qualitative Disclosure About Market Risk |
We are exposed to market risk for the effect of interest rate changes, foreign currency fluctuations and changes in the market values of our investments.
Information relating to quantitative and qualitative disclosure about market risk is set forth below and in Item 7 of Part II, Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and our long-term debt. All of our cash equivalent and marketable fixed income securities are designated as available-for-sale and, accordingly, are presented at fair value on our balance sheets. We generally invest our excess cash in A-rated or higher short- to intermediate-term fixed income securities and money market mutual funds. Fixed rate securities may have their fair market value adversely affected due to a rise in interest rates, and we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates.
40
The following table provides information about
our cash equivalent and marketable fixed income securities,
including principal cash flows by expected maturity and the
related weighted average interest rates at December 31,
2002. Amounts were as follows (in thousands, except percentages):
Estimated
Fair Value at
December 31,
2003
2004
2005
2006
2007
Thereafter
Total
2002
$
437,363
$
$
$
$
$
$
437,363
$
437,363
2.10
%
2.10
%
22,326
22,326
22,326
3.16
%
3.16
%
2,745
26,618
13,493
42,856
42,941
2.06
%
1.75
%
2.24
%
1.93
%
20,572
175,330
115,605
4,953
316,460
316,715
2.09
%
1.48
%
2.13
%
6.71
%
1.89
%
9,320
105,385
37,831
22,142
174,678
174,726
1.42
%
1.48
%
1.91
%
2.10
%
1.62
%
$
492,326
$
307,333
$
166,929
$
22,142
$
$
4,953
$
993,683
$
994,071
The following table provides information about
our cash equivalent and marketable fixed income securities,
including principal cash flows by expected maturity and the
related weighted average interest rates at December 31,
2001. Amounts are as follows (in thousands, except percentages):
Estimated
Fair Value at
December 31,
2002
2003
2004
2005
2006
Thereafter
Total
2001
$
419,098
$
$
$
$
$
$
419,098
$
418,936
interest rate
2.33
%
2.33
%
18,159
18,159
18,159
interest rate
3.48
%
3.48
%
26,520
7,800
34,320
37,602
interest rate
2.98
%
4.00
%
3.21
%
6,209
73,070
149,765
1,767
230,811
232,821
interest rate
2.55
%
3.42
%
3.63
%
7.64
%
3.56
%
41
Estimated
Fair Value at
December 31,
2002
2003
2004
2005
2006
Thereafter
Total
2001
11,900
72,100
36,700
120,700
125,947
interest rate
2.05
%
2.44
%
3.42
%
2.70
%
income securities
$
455,366
$
171,690
$
194,265
$
$
$
1,767
$
823,088
$
833,465
At December 31, 2002, we have long-term debt of $2.28 billion primarily associated with our 6.875% PEACS, 4.75% Convertible Subordinated Notes and Senior Discount Notes, which are due in 2010, 2009 and 2008, respectively. Our payment commitments associated with these debt instruments are fixed during the corresponding terms and are comprised of interest payments, principal payments, or a combination thereof. The market value of our long-term debt will fluctuate with movements of interest rates, increasing in periods of declining rates of interest and declining in periods of increasing rates of interest. Based upon quoted market prices, the fair value of the 6.875% PEACS was $531 million and $310 million at December 31, 2002 and 2001, respectively, the fair value of the 4.75% Convertible Subordinated Notes was $925 million and $625 million at December 31, 2002 and 2001, respectively, and the fair value of the outstanding Senior Discount Notes was $263 million and $194 million as of December 31, 2002 and December 31, 2001, respectively.
Foreign Exchange Risk |
During 2002, net sales from five of our internationally-focused Web sites ( www.amazon.co.uk, www.amazon.de, www.amazon.fr, www.amazon.co.jp and www.amazon.ca ) accounted for 30% of our consolidated revenues. Net sales generated from these Web sites, as well as most of the related expenses incurred, are denominated in the functional currencies of the corresponding Web sites. The functional currency of our subsidiaries that either operate or support www.amazon.co.uk, www.amazon.de, www.amazon.fr, www.amazon.co.jp and www.amazon.ca is the same as the local currency of the United Kingdom, Germany, France, Japan and Canada, respectively. Results of operations from our foreign subsidiaries and our subsidiaries that operate our internationally-focused Web sites are exposed to foreign exchange fluctuations as the financial results of these subsidiaries are translated into U.S. Dollars at average rates prevailing during the year upon consolidation. As exchange rates vary, net sales and other operating results, when translated, may differ materially from expectations. The effect of foreign exchange fluctuations for 2002 on our internationally-focused Web sites increased net sales by $47 million and increased results from operations by $4 million.
At December 31, 2002, we were also exposed to foreign exchange risk related to Euro-denominated cash equivalents and marketable securities (Euro Investments), as well as our 6.875% PEACS. As of December 31, 2002 the Euro Investments, classified as available-for-sale, had a balance of 60 million Euros ($63 million, based on the exchange rate as of December 31, 2002). Our 6.875% PEACS have an outstanding principal balance of 690 million Euros ($725 million, based on the exchange rate as of December 31, 2002), of which 75 million Euros principal is hedged. Based on the outstanding Euro Investment balance at December 31, 2002, an assumed 5%, 10% and 20% strengthening of the U.S. Dollar in relation to the Euro would result in a corresponding decline in the total fair value of such investments of approximately $3 million, $6 million and $13 million, respectively. Based on the outstanding (unhedged) 6.875% PEACS principal balance of 615 million Euros at December 31, 2002, an assumed 5%, 10% and 20% weakening of the U.S. Dollar in relation to the Euro would result in corresponding currency losses of approximately $32 million, $65 million and $129 million, respectively, recorded to Other gains (losses), net.
We hedge the foreign exchange risk on our 6.875% PEACS principal of 75 million Euros and a portion of the interest payments using a cross-currency swap agreement. Under the swap agreement, we
42
Investment Risk |
As of December 31, 2002, our recorded basis in equity securities was $19 million, including $4 million classified as Marketable securities and $15 million classified as Other equity investments. We invest in the stock and/or warrants of both private and public companies, including companies with which we have formed commercial relationships, primarily for strategic purposes. At December 31, 2002, we held investments in publicly-traded and privately held companies with a recorded basis of $11 million and $8 million, respectively. We regularly review the carrying value of our investments and identify and record losses when events and circumstances indicate that such declines in the fair value of such assets below our accounting basis are other-than-temporary. During 2002, we recorded impairment losses totaling $8 million to write-down several of our equity securities to fair value. The fair values of our investments are subject to significant fluctuations due to volatility of the stock market and changes in general economic conditions. Based on the fair value of the publicly-traded equity securities we held at December 31, 2002 of $42 million (recorded basis of $11 million), an assumed 15%, 30% and 50% adverse change to market prices of these securities would result in a corresponding decline in total fair value of approximately $6 million, $13 million and $21 million, respectively.
43
Item 8. | Financial Statements and Supplementary Data |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||||
|
||||
Report of Ernst & Young LLP, Independent
Auditors
|
45 | |||
Consolidated Balance Sheets
|
46 | |||
Consolidated Statements of Operations
|
47 | |||
Consolidated Statements of Cash Flows
|
48 | |||
Consolidated Statements of Stockholders
Equity (Deficit)
|
49 | |||
Notes to Consolidated Financial Statements
|
50 |
44
REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS
The Board of Directors and Stockholders
We have audited the accompanying consolidated
balance sheets of Amazon.com, Inc. as of December 31, 2002
and 2001, and the related consolidated statements of operations,
stockholders equity (deficit) and cash flows for each of
the three years in the period ended December 31, 2002. Our
audits also included the financial statement schedule listed at
Item 15(a)(2). These financial statements and schedule are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Amazon.com, Inc. at
December 31, 2002 and 2001, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the consolidated
financial statements, the Company adopted the full provisions of
Statement of Financial Accounting Standards No. 141,
Business Combinations, and No. 142, Goodwill and Other
Intangible Assets, effective January 1, 2002. The Company
also adopted Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging
Activities, effective January 1, 2001. In addition, as
discussed in Note 1 to the consolidated financial
statements, effective January 1, 2002, the Company
prospectively changed its inventory costing method to the
first-in first-out method of accounting.
Seattle, Washington
45
/s/ ERNST & YOUNG LLP
Table of Contents
AMAZON.COM, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
December 31,
2002
2001
(In thousands, except per share data)
ASSETS
$
738,254
$
540,282
562,715
456,303
202,425
143,722
112,282
67,613
1,615,676
1,207,920
239,398
271,751
70,811
45,367
3,460
34,382
15,442
28,359
45,662
49,768
$
1,990,449
$
1,637,547
LIABILITIES AND STOCKHOLDERS
DEFICIT
$
618,128
$
444,748
314,935
305,064
47,916
87,978
71,661
68,632
13,318
14,992
1,065,958
921,414
2,277,305
2,156,133
3,879
3,732
1,649,946
1,462,769
(6,591
)
(9,853
)
9,662
(36,070
)
(3,009,710
)
(2,860,578
)
(1,352,814
)
(1,440,000
)
$
1,990,449
$
1,637,547
See accompanying notes to consolidated financial statements.
46
AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS
Years Ended December 31,
2002
2001
2000
(In thousands, except per share data)
$
3,932,936
$
3,122,433
$
2,761,983
2,940,318
2,323,875
2,106,206
992,618
798,558
655,777
392,467
374,250
414,509
125,383
138,283
179,980
215,617
241,165
269,326
79,049
89,862
108,962
68,927
4,637
24,797
5,478
181,033
321,772
41,573
181,585
200,311
928,494
1,210,815
1,519,657
64,124
(412,257
)
(863,880
)
23,687
29,103
40,821
(142,925
)
(139,232
)
(130,921
)
5,623
(1,900
)
(10,058
)
(96,273
)
(2,141
)
(142,639
)
(209,888
)
(114,170
)
(242,797
)
(145,764
)
(526,427
)
(1,106,677
)
(4,169
)
(30,327
)
(304,596
)
(149,933
)
(556,754
)
(1,411,273
)
801
(10,523
)
$
(149,132
)
$
(567,277
)
$
(1,411,273
)
$
(0.40
)
$
(1.53
)
$
(4.02
)
0.01
(0.03
)
$
(0.39
)
$
(1.56
)
$
(4.02
)
378,363
364,211
350,873
$
12,126
$
481
$
(1,606
)
4,239
690
(858
)
35,926
2,723
28,253
16,636
743
(992
)
$
68,927
$
4,637
$
24,797
See accompanying notes to consolidated financial statements.
47
AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
Years Ended December 31,
2002
2001
2000
(In thousands)
$
540,282
$
822,435
$
133,309
(149,132
)
(567,277
)
(1,411,273
)
82,274
84,709
84,460
68,927
4,637
24,797
4,169
30,327
304,596
5,478
181,033
321,772
3,470
73,293
200,311
(5,700
)
(1,335
)
(280
)
96,273
2,141
142,639
29,586
26,629
24,766
(801
)
10,523
(51,303
)
30,628
46,083
(32,948
)
20,732
(8,585
)
156,542
(44,438
)
22,357
4,491
50,031
93,967
95,404
114,738
97,818
(135,466
)
(135,808
)
(108,211
)
3,027
(345
)
34,341
174,291
(119,782
)
(130,442
)
553,289
370,377
545,724
(635,810
)
(567,152
)
(184,455
)
(39,163
)
(50,321
)
(134,758
)
(6,198
)
(62,533
)
(121,684
)
(253,294
)
163,978
121,689
16,625
44,697
99,831
10,000
681,499
(14,795
)
(19,575
)
(16,927
)
(16,122
)
106,894
106,881
693,147
38,471
(15,958
)
(37,557
)
197,972
(282,153
)
689,126
$
738,254
$
540,282
$
822,435
$
3,023
$
5,597
$
9,303
331
106,848
5,000
32,130
111,589
112,184
67,252
See accompanying notes to consolidated financial statements.
48
AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY (DEFICIT)
Accumulated
Total
Common Stock
Additional
Deferred
Other
Stockholders
Paid-In
Stock-Based
Comprehensive
Accumulated
Equity
Shares
Amount
Capital
Compensation
Income (Loss)
Deficit
(Deficit)
(In thousands)
345,155
$
3,452
$
1,194,369
$
(47,806
)
$
(1,709
)
$
(882,028
)
$
266,278
(1,411,273
)
(1,411,273
)
(364
)
(364
)
(303
)
(303
)
(1,411,940
)
866
8
30,977
30,985
11,119
111
41,995
42,106
76,898
76,898
27
27
(5,963
)
2,528
(3,435
)
31,830
31,830
357,140
3,571
1,338,303
(13,448
)
(2,376
)
(2,293,301
)
(967,251
)
(567,277
)
(567,277
)
(1,257
)
(1,257
)
7,005
7,005
(17,337
)
(17,337
)
(9,811
)
(9,811
)
(12,294
)
(12,294
)
(600,971
)
8,989
90
98,716
98,806
6,089
61
14,989
15,050
1,130
1,130
1,000
10
9,631
(4,797
)
4,844
8,392
8,392
373,218
3,732
1,462,769
(9,853
)
(36,070
)
(2,860,578
)
(1,440,000
)
(149,132
)
(149,132
)
16,910
16,910
20,294
20,294
8,528
8,528
(103,400
)
14,728
147
121,542
121,689
(40
)
1,592
(2,828
)
(1,236
)
6,090
6,090
64,043
64,043
387,906
$
3,879
$
1,649,946
$
(6,591
)
$
9,662
$
(3,009,710
)
$
(1,352,814
)
See accompanying notes to consolidated financial statements.
49
AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Note 1 Description of
Business and Accounting Policies
Description
of Business
Amazon.com, Inc., a Fortune 500 company,
commenced operations on the World Wide Web in July 1995.
The Company seeks to offer Earths Biggest Selection and to
be Earths most customer-centric company, where customers
can find and discover anything they may want to buy online. The
Company and its sellers list new, used and collectible items in
categories such as apparel and accessories, electronics,
computers, kitchen and housewares, books, music, DVDs, videos,
cameras and photo items, office products, 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, the Merchants@ program, zShops and Auctions,
participating businesses or individuals can sell their products
to Amazon.coms customers.
The Company operates six global Web sites:
www.amazon.com, www.amazon.co.uk, www.amazon.de,
www.amazon.fr, www.amazon.co.jp
and
www.amazon.ca
.
The Company also owns and operates the Internet Movie Database
at
www.imdb.com
(IMDb), which is a source of
information on movie and entertainment titles and cast and crew
members. IMDb offers IMDb Pro, a subscription service designed
for the entertainment industry.
Principles of
Consolidation
The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
intercompany balances and transactions have been eliminated.
Use of
Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires estimates and assumptions that affect the
reported amounts of assets and liabilities, revenues and
expenses, and related disclosures of contingent assets and
liabilities in the consolidated financial statements and
accompanying notes. Estimates are used for, but not limited to,
inventory valuation, depreciable lives, sales returns,
receivables valuation, restructuring-related liabilities,
incentive discount offers, valuation of investments, taxes and
contingencies. Actual results could differ materially from those
estimates.
Business
Combinations
For business combinations that have been
accounted for under the purchase method of accounting, the
Company includes the results of operations of the acquired
business from the date of acquisition. Net assets of the
companies acquired are recorded at their fair value at the date
of acquisition. The excess of the purchase price over the fair
value of tangible and identifiable intangible net assets
acquired is included in goodwill on the accompanying
consolidated balance sheets.
Cash and Cash
Equivalents
The Company classifies all highly liquid
instruments with an original maturity of three months or less at
the time of purchase as cash equivalents.
Inventories
Inventories, consisting of products available for
sale, are valued at the lower of cost or market value. The
Company makes judgments, based on currently-available
information, about the likely method of disposition (whether
through sales to individual customers, returns to product
vendors or liquidations), and
50
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expected recoverable values of each disposition
category. Based on this evaluation, which is applied
consistently from period to period, the Company records a
valuation allowance to adjust the carrying amount of its
inventories to lower of cost or market value.
Accounting
Changes
Inventories
Effective January 1, 2002, the Company
prospectively changed its inventory costing method to the
first-in first-out (FIFO) method of accounting. This
change resulted in a cumulative increase in inventory of
$0.8 million, with a corresponding amount recorded to
Cumulative effect of change in accounting principle
on the consolidated statements of operations. The Company
evaluated the effect of the change on each quarter of 2001 and
determined such effect to be less than $1.2 million
individually and in the aggregate. The Company determined this
change to be preferable under accounting principles generally
accepted in the United States since, among other reasons, it
facilitates the Companys record keeping process,
significantly improves its ability to provide cost-efficient
fulfillment services to third-party companies as part of its
services offering and results in increased consistency with
others in the industry. The Company received a letter of
preferability for this change in inventory costing from its
independent auditors.
Goodwill and Other Intangibles
Effective July 1, 2001, the Company adopted
certain provisions of Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards
(SFAS) No. 141, Business
Combinations, and effective January 1, 2002, the
Company adopted the full provisions of SFAS No. 141 and
SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires business combinations
initiated after June 30, 2001 to be accounted for using the
purchase method of accounting, and broadens the criteria for
recording intangible assets apart from goodwill. The Company
evaluated its goodwill and intangibles acquired prior to
June 30, 2001 using the criteria of SFAS No. 141,
which resulted in $25 million of other intangibles
(comprised entirely of assembled workforce intangibles) being
subsumed into goodwill at January 1, 2002. SFAS
No. 142 requires that purchased goodwill and certain
indefinite-lived intangibles no longer be amortized, but instead
be tested for impairment at least annually. The Company
evaluated its intangible assets and determined that all such
assets have determinable lives.
SFAS No. 142 prescribes a two-phase process
for impairment testing of goodwill. The first phase screens for
impairment; while the second phase (if necessary) measures the
impairment. The Company completed its first phase impairment
analysis during the first quarter of 2002 and found no instances
of impairment of its recorded goodwill; accordingly, the second
testing phase was not necessary. No subsequent indicators of
impairment have been noted by the Company.
In accordance with Accounting Principles Board
(APB) Opinion No. 20, Accounting
Changes, the effect of these accounting changes is
reflected prospectively. Supplemental comparative disclosure, as
if the change had been retroactively applied, is as follows (in
thousands, except per share data):
51
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fixed
Assets
Fixed assets are stated at cost less accumulated
depreciation, which includes the amortization of assets recorded
under capital leases. Fixed assets, including assets purchased
under capital leases, are depreciated on a straight-line basis
over the estimated useful lives of the assets (generally two to
ten years).
Included in fixed assets is the cost of
internal-use software, including software used to upgrade and
enhance the Companys Web sites. The Company expenses all
costs related to the development of internal-use software other
than those incurred during the application development stage.
Costs incurred during the application development stage are
capitalized and amortized over the estimated useful life of the
software (generally two years).
Goodwill and
Other Intangibles
Other intangibles consist of the following (in
thousands):
At December 31, 2002 and 2001, goodwill was
$71 million and $45 million, respectively, stated net
of accumulated amortization of $740 million (of which
$168 million of accumulated amortization was reclassified
with the adoption of SFAS No. 141 on January 1, 2002)
and $572 million, respectively. During 2002, no goodwill or
other intangibles were acquired, impaired, or disposed, and
consistent with SFAS No. 142, no goodwill amortization was
recorded.
52
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The net carrying amount of intangible assets at
December 31, 2002 is scheduled to be fully amortized by the
end of 2004. Amortization expense for the net carrying amount of
intangible assets at December 31, 2002 is estimated to be
$3 million in 2003, and less than $1 million in 2004.
Investments
Investments are accounted for using the equity
method of accounting if the investment gives the Company the
ability to exercise significant influence, but not control, over
an investee. Significant influence is generally deemed to exist
if the Company has an ownership interest in the voting stock of
the investee of between 20% and 50%, although other factors,
such as representation on the investees Board of Directors
and the effect of commercial arrangements, are considered in
determining whether the equity method of accounting is
appropriate. The Company records its equity in the income or
losses of these investees generally one month in arrears for
private companies and three months in arrears for public
companies. The Company records its investments in equity-method
investees on the consolidated balance sheets as Other
equity investments and its share of the investees
earnings or losses as Equity in losses of equity-method
investees, net on the consolidated statements of
operations.
All other equity investments, which consist of
investments for which the Company does not have the ability to
exercise significant influence, are accounted for under the cost
method. Under the cost method of accounting, investments in
private companies are carried at cost and are adjusted only for
other-than-temporary declines in fair value, distributions of
earnings and additional investments. For public companies that
have readily determinable fair values, the Company classifies
its equity investments as available-for-sale and, accordingly,
records these investments at their fair values with unrealized
gains and losses included in Accumulated other
comprehensive income (loss). Such investments are included
in Marketable securities on the accompanying
consolidated balance sheets if the Company does not have the
intent to hold the investment for over one year from the balance
sheet date. In cases where the Company has the intent to hold
such investments for over one year from the balance sheet date,
such investments are included in Other equity
investments.
The Company also invests in certain marketable
debt securities, which consist primarily of high-quality short-
to intermediate-term fixed income securities that are classified
as available-for-sale securities. Such investments are included
in Marketable securities on the accompanying
consolidated balance sheets and are reported at fair value with
unrealized gains and losses included in Accumulated other
comprehensive income (loss). The weighted average method
is used to determine the cost of Euro-denominated securities
sold and the specific identification method is used to determine
the cost of all other securities.
The initial cost of the Companys
investments is determined based on the fair value of the
investment at the time of its acquisition. The Company has
received equity securities as consideration for services to be
performed for the issuer under commercial agreements. In such
cases, the Company has estimated the fair value of the equity
securities received. For securities of public companies, the
Company generally determines fair value based on the quoted
market price at the time the Company enters into the underlying
agreement, and adjusts such market price appropriately if
significant restrictions on marketability exist. As an
observable market price does not exist for equity securities of
private companies, estimates of fair value of such securities
are more subjective than for securities of public companies. For
significant transactions involving equity securities in private
companies, the Company obtains and considers independent, third
party valuations where appropriate. Such valuations use a
variety of methodologies to estimate fair value, including
comparing the security with securities of publicly traded
companies in similar lines of business, applying price multiples
to estimated future operating results for the private company,
and estimating discounted cash flows for that company. These
valuations also reduce the fair value to account for
restrictions on control and marketability where appropriate.
Using these valuations and other
53
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
information available to the Company, such as the
Companys knowledge of the industry and knowledge of
specific information about the investee, the Company determines
the estimated fair value of the securities received. To the
extent that equity securities are subject to forfeiture or
vesting provisions and no significant performance commitment
exists upon signing of the agreements, the fair value of the
securities is determined as of the date of the respective
forfeiture or as vesting provisions lapse.
The Company periodically evaluates whether the
declines in fair value of its investments are
other-than-temporary. This evaluation consists of a review of
qualitative and quantitative factors by members of senior
management. For investments with publicly quoted market prices,
the Company generally considers a decline to be an
other-than-temporary impairment if the quoted market price is
less than its accounting basis for two consecutive quarters,
absent evidence to the contrary. The Company considers
additional factors to determine whether declines in fair value
are other-than-temporary, such as the investees financial
condition, results of operations, operating trends and other
financial ratios. The evaluation also considers publicly
available information regarding the investee companies,
including reports from investment analysts and other publicly
available investee-specific news or general market conditions.
For investments in private companies with no quoted market
price, the Company considers similar qualitative and
quantitative factors and also considers the implied value from
any recent rounds of financing completed by the investee, as
well as market prices of comparable public companies. The
Company generally requires its private investees to deliver
monthly, quarterly and annual financial statements to assist in
reviewing relevant financial data and to assist in determining
whether such data may indicate other-than-temporary declines in
fair value below the Companys accounting basis.
Long-Lived
Assets
Long-lived assets, other than goodwill, are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets
might not be recoverable. The Company does not perform a
periodic assessment of assets for impairment in the absence of
such information or indicators. Conditions that would
necessitate an impairment assessment include a significant
decline in the observable market value of an asset, a
significant change in the extent or manner in which an asset is
used, or a significant adverse change that would indicate that
the carrying amount of an asset or group of assets is not
recoverable. For long-lived assets to be held and used, the
Company recognizes an impairment loss only if its carrying
amount is not recoverable through its undiscounted cash flows
and measures the impairment loss based on the difference between
the carrying amount and fair value. Long-lived assets held for
sale are reported at the lower of cost or fair value less costs
to sell.
Other
Assets
Other assets consist primarily of fees incurred
in connection with the issuance of the Companys debt.
These fees are amortized ratably as a component of interest
expense over the life of the underlying debt.
Unearned
Revenue
Unearned revenue is recorded when payments,
whether received in cash or equity securities, are received in
advance of the Companys performance in the underlying
agreement. Unearned revenue is amortized ratably over the period
in which services are provided.
In instances where the Company receives equity
securities as compensation for services to be provided under
commercial arrangements, the fair value of these securities,
less the net amount of cash paid for them, is then recorded as
unearned revenue. Pursuant to Emerging Issues Task Force Issue
No. 00-8, Accounting by a Grantee for an Equity
Instrument to Be Received in Conjunction with Providing Goods or
Services, the Company does not adjust unearned revenue to
give effect to either increases or decreases
54
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
in value of the equity securities subsequent to
their initial measurement (to the extent that such securities
are not subject to vesting or forfeiture).
The Company recognizes deferred tax assets and
liabilities based on differences between the financial reporting
basis and tax basis of assets and liabilities using the enacted
tax rates and laws that are expected to be in effect when the
differences are expected to be recovered. The Company provides a
valuation allowance against its deferred tax assets to the
extent such assets are not expected to be realized.
The Company generally recognizes revenue from
product sales or services rendered when the following four
revenue recognition criteria are met: persuasive evidence of an
arrangement exists, delivery has occurred or services have been
rendered, the selling price is fixed or determinable, and
collectibility is reasonably assured.
The Company evaluates the criteria outlined in
Emerging Issues Task Force (EITF) Issue
No. 99-19, Reporting Revenue Gross as a Principal
Versus Net as an Agent, in determining whether it is
appropriate to record the gross amount of product sales and
related costs or the net amount earned as commissions.
Generally, when the Company is the primary obligor in a
transaction, is subject to inventory risk, has latitude in
establishing prices and selecting suppliers, or has several but
not all of these indicators, revenue is recorded gross. If the
Company is not the primary obligor and amounts earned are
determined using a fixed percentage, a fixed-payment schedule,
or a combination of the two, the Company generally records the
net amounts as commissions earned.
Product sales, net of promotional discounts,
rebates and return allowances, are recorded when the products
are shipped and title passes to customers. Retail items sold to
customers are made pursuant to a sales contract that provides
for transfer of both title and risk of loss upon the
Companys delivery to the carrier (commonly referred to as
F.O.B. Shipping Point). Return allowances (which
reduce product revenue by managements best estimate of
expected product returns) are estimated using historical
experience.
The Company periodically provides incentive
offers to its customers to encourage purchases. Such offers
include percentage discounts off current purchases
(current discount offers), offers for future
discounts subject to a minimum current purchase
(inducement offers) and other similar offers.
Current discount offers, when accepted by customers, are treated
as a reduction to the purchase price of the related transaction
and are presented as a net amount in Net sales.
Inducement offers, when accepted by customers, are treated as a
reduction to purchase price based on estimated redemption rates.
Redemption rates are estimated using the Companys
historical experience for similar inducement offers.
Commissions received on sales of products through
Amazon Marketplace, as well as commissions earned through the
Companys Merchants@ program (see
Note 15 Segment Information), are
recorded as a net amount since the Company is acting as an agent
in such transactions. In addition, the Company recognizes
amounts earned through its Merchant program (see
Note 15 Segment Information) as a
net amount. Amounts earned are recognized as net sales when the
item is sold by the third-party seller and collectibility is
reasonably assured. The Company records an allowance for refunds
on such commissions using historical experience.
The Company earns revenues from services
primarily by entering into commercial agreements, including
providing its technology services such as search, browse, and
personalization; permitting third parties to offer products or
services through its Web sites; and powering third-party Web
sites, either with our without providing accompanying
fulfillment services. These commercial agreements also include
55
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
miscellaneous marketing and promotional
agreements. As compensation for the services the Company
provides under these agreements, the Company receives cash,
equity securities, or a combination thereof. Generally, the fair
value of the equity consideration received is measured when the
agreement is executed, but to the extent that the equity
consideration is subject to forfeiture or vesting provisions and
no significant performance commitment exists upon execution of
the agreement, the fair value of the equity consideration and
corresponding revenue is determined as of the date that the
forfeiture provision lapses or as the vesting provision lapses.
Subsequent to initial measurement of fair value, appreciation or
decline in the fair value of such securities will affect the
Companys ultimate realization of equity securities
received as compensation; however, any such change does not
affect the amount of revenue to be recognized over the term of
the agreement. The Company generally recognizes revenue from
these marketing and promotional services (including revenue
associated with non-refundable advance payments) on a
straight-line basis over the period during which the Company
performs services under these agreements, commencing at the
launch date of the service. If the Company receives
non-refundable advance payments, such amounts are deferred for
revenue recognition purposes until service commences.
Included in Services segment revenues are
equity-based service revenues of $13 million,
$27 million and $79 million for 2002, 2001 and 2000,
respectively.
The Company has in the past, and may in the
future, amend its agreements with certain of the companies with
which it has commercial agreements to modify future cash
proceeds to be received by the Company, modify the service term
of its commercial agreements, or both. Although these amendments
generally do not affect the amount of unearned revenue
previously recorded by the Company (if any), the timing of
future revenue recognition changes to correspond with the terms
of amended agreements. These amendments or future amendments
will affect the timing and amount of revenues recognized in
connection with these commercial agreements. To the extent the
Company believes any such amendments cause or may cause the
compensation to be received under an agreement to no longer be
fixed or determinable, the Company limits its revenue
recognition to amounts received, excluding any future amounts
not deemed fixed or determinable. As future amounts are
subsequently received, such amounts are incorporated into
revenue recognition over the remaining term of the agreement.
Outbound shipping charges to customers are
included in net sales and amounted to $365 million,
$357 million and $339 million in 2002, 2001 and 2000,
respectively.
Cost of sales consists of the purchase price of
consumer products sold by the Company, inbound and outbound
shipping charges, packaging supplies and certain costs
associated with service revenues. Costs associated with service
revenues classified as cost of services generally include direct
and allocated indirect fulfillment-related costs to ship
products on behalf of third-party sellers, costs to provide
customer service, credit card fees and other related costs.
Outbound shipping charges and the cost of
tangible supplies used to package products for shipment to
customers totaled $404 million, $376 million, and
$340 million in 2002, 2001 and 2000, respectively.
Fulfillment costs represent those costs incurred
in operating and staffing the Companys 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 co-sourcers that assist the Company in fulfillment
and customer service operations. Certain Services
56
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
segment fulfillment-related costs incurred on
behalf of other businesses are classified as cost of sales
rather than fulfillment.
Marketing expenses consist of advertising,
promotional, and public relations expenditures, and payroll and
related expenses for personnel engaged in marketing and selling
activities. The Company expenses general media advertising costs
as incurred. The Company enters into certain online promotional
agreements with third parties to increase traffic to its Web
sites. Costs associated with these promotional agreements
consist of fixed payments, variable activity-based payments, or
a combination of the two. Fixed payments are amortized ratably
over the corresponding agreement term and variable payments are
expensed in the period incurred. The Company receives
reimbursements from vendors for certain general media and other
advertising costs. Such reimbursements are recorded as a
reduction of expense. Advertising expense and other promotional
costs were $114 million, $125 million and
$172 million in 2002, 2001 and 2000, respectively. Prepaid
advertising costs were $1 million and $2 million at
December 31, 2002 and 2001, respectively.
Technology and content expenses consist
principally of payroll and related expenses for development,
editorial, systems, and telecommunications operations personnel;
and systems and telecommunications infrastructure.
Technology and content costs are expensed as
incurred, except for certain costs relating to the development
of internal-use software, including upgrades and enhancements to
the Companys Web sites, that are capitalized and
depreciated over two years. Fixed assets associated with
capitalized internal-use software, net of accumulated
depreciation, was $23 million and $24 million at
December 31, 2002 and 2001, respectively. Costs capitalized
during the application development stage for internal-use
software, offset by corresponding amortization, was a net
expense of $1 million in 2002, and net deferrals of
$3 million and $14 million in 2001 and 2000,
respectively.
Stock-based compensation includes stock-based
charges resulting from variable accounting treatment of certain
stock options, restricted stock issued to certain key employees
and amounts associated with the Companys restricted stock
unit program, which commenced in the fourth quarter of 2002.
Stock-based compensation also includes, to a lesser extent, a
portion of acquisition-related consideration conditioned on the
continued tenure of certain key employees of acquired businesses.
The Company generally has four categories of
employee stock-based awards: restricted stock units, restricted
stock, fixed-award stock options and options subject to variable
accounting treatment. At December 31, 2002, the Company has
three stock-based employee compensation plans, which are more
fully described in Note 8
Stockholders Equity (Deficit). The Company accounts
for those plans under the intrinsic value method, which follows
the recognition and measurement principles of APB Opinion
No. 25,
Accounting for Stock Issued to Employees
,
and related Interpretations. The intrinsic value method of
accounting results in stock compensation expense to the extent
option exercise prices are set below market prices on the date
of grant. Also, to the extent employee stock awards have been
subject to an exchange offer or other modifications, such awards
are subject to variable accounting treatment. Variable
accounting treatment results in expense or contra-expense
recognition using the cumulative expense method, calculated
based on quoted prices of the Companys common stock and
vesting schedules of underlying awards.
57
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restricted stock and restricted stock units are
measured at fair value on the date of grant based on the number
of shares granted and the quoted price of the Companys
common stock. Such value is recognized as an expense ratably
over the corresponding employee service period. To the extent
restricted stock or restricted stock units are forfeited prior
to vesting, the corresponding previously recognized expense is
reversed as an offset to Stock-based compensation.
Stock-based compensation associated with restricted stock units
was $4 million during 2002.
During the first quarter of 2001, the Company
offered a limited non-compulsory exchange of employee stock
options. The exchange resulted in the voluntary cancellation of
employee stock options to purchase 31 million shares of
common stock with varying exercise prices in exchange for
employee stock options to purchase 12 million shares of
common stock with an exercise price of $13.375. The option
exchange offer resulted in variable accounting treatment for, at
the time of the exchange, approximately 15 million stock
options, which includes options granted under the exchange offer
and 3 million options, with a weighted average exercise
price of $52.41, that were subject to the exchange offer but
were not exchanged. Variable accounting will continue until all
options subject to variable accounting treatment are exercised,
cancelled or expired. At December 31, 2002, approximately
5 million options remain under variable accounting
treatment, which includes 4 million options granted under
the exchange offer and 1 million options, with a weighted
average exercise price of $43.49, that were subject to the
exchange offer but were not exchanged.
The following table summarizes relevant
information as to reported results under the Companys
intrinsic value method of accounting for stock awards, with
supplemental information as if the fair value recognition
provisions of SFAS No. 123, Accounting for Stock
Based Compensation, had been applied (in thousands, except
per share data):
The fair value for each option granted was
estimated at the date of grant using a Black-Scholes
option-pricing model, assuming no expected dividends and the
following weighted average assumptions:
The weighted average fair value of stock awards
(including restricted stock units granted in 2002) granted
during 2002, 2001 and 2000 was $14.99, $5.98 and $22.12,
respectively.
58
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has the following
internationally-focused Web sites:
www.amazon.co.uk,
www.amazon.de, www.amazon.fr, www.amazon.co.jp
and
www.amazon.ca.
Net sales generated from these Web sites,
as well as most of the related expenses incurred, are
denominated in the functional currencies of the Web sites.
Additionally, the functional currency of the Companys
subsidiaries that either operate or support
www.amazon.co.uk,
www.amazon.de, www.amazon.fr, www.amazon.co.jp
and
www.amazon.ca
is the same as the local currency of the
United Kingdom, Germany, France, Japan and Canada, respectively.
Assets and liabilities of these subsidiaries are translated into
U.S. Dollars at year-end exchange rates, and revenues and
expenses are translated at average rates prevailing during the
year. Translation adjustments are included in Accumulated
other comprehensive income (loss), a separate component of
stockholders deficit. Transaction gains and losses arising
from transactions denominated in a currency other than the
functional currency of the entity involved, are included in
Other income (expense), net on the consolidated
statements of operations. See Note 11
Other Income (Expense), Net.
Effective January 1, 2001, the Company
adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which requires that
all derivative instruments be recorded on the balance sheet at
fair value. Changes in the fair value of derivatives are
recorded each period in current results of operations or other
comprehensive income (loss) depending on whether a
derivative is designated as part of a hedge transaction and, if
it is, the type of hedge transaction. For a derivative
designated as a fair value hedge, the gain or loss of the
derivative in the period of change and the offsetting loss or
gain of the hedged item attributed to the hedged risk are
recognized in results of operations. For a derivative designated
as a cash flow hedge, the effective portion of the
derivatives gain or loss is initially reported as a
component of other comprehensive income (loss) and
subsequently reclassified into results of operations when the
hedged exposure affects results of operations. The ineffective
portion of the gain or loss of a cash flow hedge is recognized
currently in results of operations. For a derivative not
designated as a hedging instrument, the gain or loss is
recognized currently in results of operations.
The Company is exposed to the risk of
fluctuations in foreign exchange rates between the
U.S. Dollar and the Euro associated with its 6.875%
Convertible Subordinated Notes due 2010 (6.875%
PEACS) (See Note 6 Long-Term Debt
and Other). To minimize a portion of the risk from this
exposure, the Company has designated a swap agreement as a cash
flow hedge of a portion of the 6.875% PEACS principal and
interest based upon the criteria established by SFAS
No. 133. The terms of the hedge instrument have been
structured to match the related terms of the hedged portion of
the 6.875% PEACS. No net gains or losses resulting from hedge
ineffectiveness were recognized in results of operations during
the years ended December 31, 2002 and 2001, respectively.
The Company holds warrants to purchase equity
securities of other companies. Warrants that can be exercised
and settled by delivery of net shares such that the Company pays
no cash upon exercise are deemed derivative financial
instruments. Net share warrants are not designated as hedging
instruments; accordingly, gains or losses resulting from changes
in fair value are recognized on the consolidated statements of
operations, Other gains (losses), net, in the period
of change. The Company determines the fair value of its warrants
through option-pricing models using current market price and
volatility assumptions, including public-company market
comparables for its private-company warrants.
The adoption of SFAS No. 133 on
January 1, 2001 resulted in cumulative transition losses of
$11 million included in the results of operations and a
stockholders deficit adjustment of $12 million.
Transition losses included in Cumulative effect of change
in accounting principle are attributable to approximately
$3 million in losses reclassified from Accumulated
other comprehensive income (loss) on warrants previously
reported at fair value and classified as available-for-sale, and
approximately $8 million
59
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
in losses on warrants previously reported at
cost. No warrant investments are designated as hedging
instruments. Transition losses in Accumulated other
comprehensive income (loss) are attributable to
approximately $15 million in losses on the swap agreement
designated as a cash flow hedge of a portion of the 6.875% PEACS
offset by the approximately $3 million in losses
reclassified to results of operations on derivative instruments
not designated as hedging instruments.
Effective January 1, 2001, currency gains
and losses arising from the remeasurement of the 6.875%
PEACS principal from Euros to U.S. Dollars each
period are recorded to Other gains (losses), net.
Prior to January 1, 2001, 6.875% PEACS principal of
615 million Euros was designated as a hedge of an
equivalent amount of Euro-denominated investments classified as
available-for-sale; accordingly, currency gains and losses on
the 6.875% PEACS were recorded to Accumulated other
comprehensive income (loss) on the consolidated balance
sheets as hedging offsets to currency gains and losses on the
Euro-denominated investments. As this hedge does not qualify for
hedge accounting under the provisions of SFAS No. 133,
commencing January 1, 2001, the foreign currency change
resulting from the portion of the 6.875% PEACS previously
hedging the available-for-sale securities is now being recorded
to Other gains (losses), net on the consolidated
statements of operations.
Basic earnings per share is computed using the
weighted average number of common shares outstanding during the
period, net of shares subject to restrictions, and excludes any
dilutive effects of options or warrants, restricted stock units
and convertible securities. Diluted earnings per share is
computed using the weighted average number of common and common
stock equivalent shares outstanding (including the effect of
restricted stock units) during the period; common stock
equivalent shares are excluded from the computation if their
effect is antidilutive.
In August 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, that is applicable to financial
statements issued for fiscal years beginning after
December 15, 2001. The FASBs new rules on asset
impairment supersede SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, and portions of Accounting Principles
Bulletin Opinion 30, Reporting the Results of
Operations. This Standard provides a single accounting
model for long-lived assets to be disposed of and significantly
changes the criteria that would have to be met to classify an
asset as held-for-sale. Classification as held-for-sale is an
important distinction since such assets are not depreciated and
are stated at the lower of fair value and carrying amount. This
Standard also requires expected future operating losses from
discontinued operations to be displayed in the period(s) in
which the losses are incurred, rather than as of the measurement
date as presently required. The provisions of this Standard are
not expected to have a significant effect on the Companys
financial position or operating results.
In November 2002, the EITF reached a consensus on
Issue 02-16, addressing the accounting of cash consideration
received by a customer from a vendor, including vendor rebates
and refunds. The consensus reached states that consideration
received should be presumed to be a reduction of the prices of
the vendors products or services and should therefore be
shown as a reduction of cost of sales in the income statement of
the customer. The presumption could be overcome if the vendor
receives an identifiable benefit in exchange for the
consideration or the consideration represents a reimbursement of
a specific incremental identifiable cost incurred by the
customer in selling the vendors product or service. If one
of these conditions is met, the cash consideration should be
characterized as a reduction of those costs in the income
statement of the customer. The consensus reached also concludes
that if rebates or refunds can be reasonably estimated, such
rebates or refunds should be recognized as a reduction of the
cost of sales
60
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
based on a systematic and rational allocation of
the consideration to be received relative to the transactions
that mark the progress of the customer toward earning the rebate
or refund. The provisions of this consensus are applied
prospectively and are consistent with the Companys
existing accounting policy.
In November 2002, the EITF reached a consensus on
Issue 00-21, addressing how to account for arrangements that
involve the delivery or performance of multiple products,
services, and/or rights to use assets. Revenue arrangements with
multiple deliverables are divided into separate units of
accounting if the deliverables in the arrangement meet the
following criteria: (1) the delivered item has value to the
customer on a standalone basis; (2) there is objective and
reliable evidence of the fair value of undelivered items; and
(3) delivery of any undelivered item is probable.
Arrangement consideration should be allocated among the separate
units of accounting based on their relative fair values, with
the amount allocated to the delivered item being limited to the
amount that is not contingent on the delivery of additional
items or meeting other specified performance conditions. The
final consensus will be applicable to agreements entered into in
fiscal periods beginning after June 15, 2003 with early
adoption permitted. The provisions of this Consensus are not
expected to have a significant effect on the Companys
financial position or operating results.
In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure. This
Statement amends SFAS No. 123, Stock-Based
Compensation, to provide alternative methods of transition
for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition,
this Statement amends the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method
used on reported results. The disclosure provisions of this
Standard are effective for fiscal years ending after
December 15, 2002 and have been incorporated into these
financial statements and accompanying footnotes.
Certain prior year amounts have been reclassified
to conform to the current year presentation.
Note 2 Cash, Cash Equivalents and
Marketable Securities
The following tables summarize, by major security
type, the Companys cash and marketable securities (in
thousands):
61
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes contractual
maturities of the Companys cash equivalent and marketable
fixed-income securities as of December 31, 2002 (in
thousands):
Gross gains of $9 million, $9 million,
and $7 million and gross losses of $1 million,
$32 million and $11 million were realized on sales of
available-for-sale marketable securities for the years ended
December 31, 2002, 2001, and 2000 respectively.
The Company has pledged a portion of its
marketable securities as collateral for stand-by letters of
credit that guarantee certain of its contractual obligations, a
majority of which relates to property leases; the swap agreement
that hedges foreign exchange rate risk on a portion of its
6.875% PEACS; and some of its real estate lease agreements. See
Note 6 Long-Term Debt and Other and
Note 7 Commitments and
Contingencies.
62
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fixed assets, at cost, consist of the following
(in thousands):
Depreciation expense on fixed assets was
$77 million, $83 million and $83 million, which
includes amortization of fixed assets acquired under capital
lease obligations of $7 million, $9 million and
$11 million for 2002, 2001 and 2000, respectively.
Activity in the Companys equity-method and
cost-method investments for the years ended December 31,
2002 and 2001, is as follows (in thousands):
63
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Effective January 1, 2001, the
Companys adoption of SFAS No. 133 resulted in the
recording of a loss totaling $8 million to report certain
warrants at fair value. Prior to adoption, such warrants were
carried at cost.
At December 31, 2002 and 2001, cost-method
investments recorded in Other equity investments
included $5 million and $3 million, respectively, of
investments recorded at fair value and $10 million and
$15 million, respectively, of investments carried at cost.
Gross unrealized gains and losses were not significant at
December 31, 2002 and 2001.
At December 31, 2002 and 2001, the fair
value of the Companys investments in the common stock of
publicly held equity-method investees was $31 million and
$25 million, respectively.
Activity in unearned revenue was as follows (in
thousands):
All amounts recorded as accounts receivable,
including amounts associated with unearned revenue, are legally
due and contractually enforceable. At December 31, 2002
accounts receivable, net associated with unearned revenue was
$2 million.
During 2001, the Company recognized previously
unearned revenue associated with the termination of its
commercial agreement with Kozmo.com, which was included in
Other gains (losses), net on the accompanying
consolidated statements of operations. Since services had not
yet been performed under the contract, no amounts associated
with the Kozmo.com commercial agreement were previously
recognized in Net sales on the accompanying
consolidated statements of operations during any period.
64
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys long-term debt and other
long-term liabilities are summarized as follows (in thousands):
On February 16, 2000, the Company completed
an offering of 690 million Euros of 6.875% PEACS due 2010.
The 6.875% PEACS are convertible into the Companys common
stock at a conversion price of 84.883 Euros per share. The
initial conversion price of 104.947 Euros per share was adjusted
down due to reset provisions in the note. Interest on the 6.875%
PEACS is payable annually in arrears in February of each year.
The 6.875% PEACS are unsecured and are subordinated to all of
the Companys existing and future senior indebtedness. The
6.875% PEACS rank equally with the Companys outstanding
4.75% Convertible Subordinated Notes. Subject to certain
conditions, the 6.875% PEACS may be redeemed at the
Companys option on or after February 20, 2003, in
whole or in part, at the redemption price of 1,000 Euros per
note, plus accrued and unpaid interest.
Upon the occurrence of a fundamental
change prior to the maturity of the 6.875% PEACS, each
holder thereof has the right to require the Company to redeem
all or any part of such holders 6.875% PEACS at a price
equal to 100% of the principal amount of the notes being
redeemed, together with accrued interest. As defined in the
indenture, a fundamental change is the occurrence of
certain types of transactions in which the stockholders do not
receive publicly-traded securities.
The indenture governing the 6.875% PEACS contains
certain affirmative covenants of the Company, including making
principal and interest payments when due, maintaining its
corporate existence and properties and paying taxes and other
claims in a timely manner. The Company was in compliance with
these covenants at December 31, 2002.
In order to hedge a portion of the risk of
foreign exchange fluctuations between the U.S. Dollar and
the Euro, the Company entered into a cross-currency swap
agreement. Under the swap agreement, the Company agreed to pay
at inception and receive upon maturity 75 million Euros in
exchange for receiving at inception and paying at maturity
$67 million. In addition, the Company agreed to receive in
February of each year 27 million Euros for interest
payments on 390 million Euros of the 6.875% PEACS and,
simultaneously, to pay $32 million. The agreement expires
February 16, 2010 and is cancelable, in whole or in part,
at the Companys option at no cost on or after
February 20, 2003 if the Companys underlying
65
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
stock price (converted into Euros) is greater
than or equal to the minimum conversion price of the 6.875%
PEACS. The Company has designated the swap agreement as a cash
flow hedge of the foreign exchange rate risk on a portion of the
6.875% PEACS principal and interest in accordance with the
provisions of SFAS No. 133. Each period, gains or losses
resulting from changes in the fair value of the swap contract
are recorded to Accumulated other comprehensive income
(loss) and a portion of such gain or loss is immediately
reclassified to the statement of operations, Other gains
(losses), net, to offset the foreign currency loss or gain
attributable to remeasurement of the hedged portion of the
6.875% PEACS. For the year ended December 31, 2002, a
currency swap gain of $13 million was reclassified to
offset a $13 million currency loss on the 6.875% PEACS. The
terms of the swap contract have been structured to match the
terms of the hedged portion of the 6.875% PEACS. No net gains or
losses, resulting from hedge ineffectiveness, were recognized in
results of operations during the year ended December 31,
2002 and 2001.
Effective January 1, 2001, currency gains
and losses arising from the remeasurement of the 6.875%
PEACSs principal from Euros to U.S. Dollars each
period are recorded to Other gains (losses), net.
Prior to January 1, 2001, 6.875% PEACSs principal of
615 million Euros was designated as a hedge of an
equivalent amount of Euro-denominated investments classified as
available-for-sale; accordingly, currency gains and losses on
the 6.875% PEACS were recorded to Accumulated other
comprehensive income (loss) on the consolidated balance
sheets as hedging offsets to currency gains and losses on the
Euro-denominated investments. As the hedge does not qualify for
hedge accounting under the provisions of SFAS No. 133,
commencing January 1, 2001, the foreign currency change
resulting from the portion of the 6.875% PEACS previously
hedging the available-for-sale securities is now being recorded
to Other gains (losses), net on the consolidated
statements of operations. The change resulted in a gain of
$47 million for the year ended December 31, 2001,
consisting of a $10 million gain reclassified from
Accumulated other comprehensive income (loss) and a
$37 million gain attributable to remeasurement of the
6.875% PEACS during the period.
The fair value of the swap is determined as the
present value of net future cash payments and receipts, adjusted
for the Companys ability to cancel the agreement and the
likelihood of such cancellation. The fair value takes into
consideration current foreign exchange rates, market interest
rates, the current market price of the Companys common
stock and other variables. The fair value of the swap obligation
was $12 million and $33 million at December 31,
2002 and December 31, 2001, respectively. Based upon quoted
market prices, the fair value of the 6.875% PEACS was
$531 million and $310 million, as of December 31,
2002 and December 31, 2001, respectively.
On February 3, 1999, the Company completed
an offering of $1.25 billion of 4.75% Convertible
Subordinated Notes due 2009. The 4.75% Convertible Subordinated
Notes are convertible into the Companys common stock at
the holders option at a conversion price of $78.0275 per
share, subject to adjustment in certain events. Interest on the
4.75% Convertible Subordinated Notes is payable semi-annually in
arrears on February 1 and August 1 of each year, and
commenced August 1, 1999. The 4.75% Convertible
Subordinated Notes are unsecured and are subordinated to all
existing and future Senior Indebtedness as defined in the
indenture governing the 4.75% Convertible Subordinated Notes. At
any time on or after February 6, 2002, on at least
30 days notice the Company may redeem the notes, in
whole or in part, at a premium of 3.325% over its principal
balance, together with accrued interest. The redemption premium
is thereafter reduced by 0.475% on each February 1 between
2003 and 2009.
Upon the occurrence of a fundamental
change prior to the maturity of the 4.75% Convertible
Subordinated Notes, each holder thereof has the right to require
the Company to redeem all or any part of such holders
4.75% Convertible Subordinated Notes at a price equal to 100% of
the principal amount of
66
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the notes being redeemed, together with accrued
interest. As defined in the indenture, a fundamental
change is the occurrence of certain types of transactions
in which the stockholders do not receive publicly-traded
securities.
The indenture governing the 4.75% Convertible
Subordinated Notes contains certain affirmative covenants of the
Company, including making principal and interest payments when
due, maintaining its corporate existence and properties, paying
taxes and other claims in a timely manner and the provision of
information required under Rule 144A of the Securities Act
of 1933 to enable holders to sell without registration. The
Company was in compliance with these covenants at
December 31, 2002.
Based upon quoted market prices, the fair value
of the 4.75% Convertible Subordinated Notes as of
December 31, 2002 and December 31, 2001 was
$925 million and $625 million, respectively.
In 1998, the Company completed the offering of
approximately $326 million of 10% Senior Discount Notes due
May 1, 2008 (Original Senior Discount Notes).
Pursuant to a registration statement on Form S-4 in
September 1998, the Company completed an exchange offer of 10%
Senior Discount Notes due 2008 (Exchange Notes or
Senior Discount Notes), which are registered under
the Securities Act of 1933, as amended, for all outstanding
Original Senior Discount Notes. The Exchange Notes have
identical terms in all material respects to the terms of the
Original Senior Discount Notes, except that the Exchange Notes
generally are freely transferable (the Exchange Notes are
referred to throughout these notes to consolidated financial
statements interchangeably with the Original Senior Discount
Notes). The Exchange Notes were issued under the indenture
governing the Original Senior Discount Notes
(Indenture). The Original Senior Discount Notes were
sold at a substantial discount from their original 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
aggregate principal amount at maturity. From and after
May 1, 2003, the Senior Discount Notes will bear interest
at a rate of 10% per annum payable in cash on each May 1
and November 1. The Senior Discount Notes are redeemable,
at the option of the Company, in whole or in part, at any time
on or after May 1, 2003, at the redemption prices set forth
in the Indenture, plus accrued interest, if any, to the date of
redemption.
During 1999, the Company repurchased
$266 million (principal amount) of the Senior Discount
Notes, representing accreted value of $178 million,
resulting in a remaining outstanding principal amount of
$264 million. The Company recorded an immaterial loss on
extinguishment of this debt. No repurchases of Senior Discount
Notes occurred in 2002, 2001 or 2000.
The Senior Discount Notes are senior unsecured
indebtedness of the Company ranking equally with the
Companys existing and future unsubordinated, unsecured
indebtedness and senior in right of payment to all subordinated
indebtedness of the Company. The Senior Discount Notes are
effectively subordinated to all secured indebtedness and to all
existing and future liabilities of the Companys
subsidiaries.
The Indenture contains certain covenants that,
among other things, limit the ability of the Company and its
Restricted Subsidiaries (as defined in the
Indenture) to incur indebtedness, pay dividends, prepay
subordinated indebtedness, repurchase capital stock, make
investments, create liens, engage in transactions with
stockholders and affiliates, sell assets and engage in mergers
and consolidations. However, these limitations are subject to a
number of important qualifications and exceptions. The Company
was in compliance with all covenants at December 31, 2002.
Based upon quoted market prices, the fair value
of the outstanding Senior Discount Notes was $263 million
and $194 million as of December 31, 2002 and
December 31, 2001, respectively.
67
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 7 Commitments and
Contingencies
Commitments
The Company currently leases office and
fulfillment center facilities and fixed assets under
non-cancelable operating and capital leases. Rental expense
under operating lease agreements for 2002, 2001 and 2000 was
$56 million, $81 million and $98 million,
respectively.
The following are the Companys contractual
commitments associated with its operational restructuring,
indebtedness, lease obligations and marketing agreements (in
thousands):
Restructuring-related lease obligations are as
follows (in thousands):
68
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-term capital lease obligations are as
follows (in thousands):
The Company has pledged a portion of its
marketable securities as collateral for stand-by letters of
credit that guarantee certain of its contractual obligations, a
majority of which relates to property leases; the swap agreement
that hedges the foreign exchange risk on a portion of its 6.875%
PEACS; and some of its real estate lease agreements. The amount
of marketable securities the Company is required to pledge
pursuant to the swap agreement fluctuates with the fair market
value of the swap obligation. The change in the total amount of
collateral pledged under these agreements is as follows (in
thousands):
On April 12, 2001, the Company received a
request from the Securities and Exchange Commission
(SEC) staff for the voluntary production of
documents and information concerning, among other things,
previously reported sales of the Companys common stock by
our Chairman and Chief Executive Officer, Jeffrey Bezos, on
February 2 and 5, 2001. The Company is cooperating with the
SEC staffs continuing inquiry.
A number of purported class action complaints
were filed by holders of the Companys equity and debt
securities against the Company, its directors and certain of its
senior officers during 2001, in the United States District Court
for the Western District of Washington, alleging violations of
the Securities Act of 1933 (the 1933 Act) and/or the
Securities Exchange Act of 1934 (the 1934 Act). On
October 5, 2001, plaintiffs in the 1934 Act cases filed a
consolidated amended complaint alleging that the Company,
together with certain of its officers and directors and certain
third-parties, made false or misleading statements during the
period from October 29, 1998 through July 23, 2001
concerning the Companys business, financial condition and
results, inventories, future prospects and strategic alliance
transactions. The 1933 Act complaint alleges that the defendants
made false or misleading statements in connection with our
February 2000 offering of the 6.875% PEACS. The complaints seek
recissionary and/or compensatory damages and injunctive relief
against all defendants. The Company disputes the allegations of
wrongdoing in these complaints and intends to vigorously defend
itself in these matters.
On August 28, 2002, the Trustee for the
Creditors Trust for Living.com instituted an adversary
proceeding against a subsidiary of the Company in the United
States Bankruptcy Court for the Western District of Texas. The
plaintiff alleges that Living.coms creditors are entitled
to a contractual recovery of
69
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
approximately $58 million in fees that
Living.com had previously paid in 2000 primarily by issuing
Living.com stock to the Company. The Company disputes the
plaintiffs allegations and intends to vigorously defend
itself in this matter.
On October 29, 2002, Gary Gerlinger,
individually and on behalf of all other similarly situated
consumers in the United States who, during the period from
August 1, 2001 to the present, purchased books online from
either Amazon.com or Borders.com, instituted an action against
the Company and Borders in the United States District Court for
the Northern District of California. The complaint alleges that
the agreement pursuant to which an affiliate of Amazon.com
operates Borders.com as a co-branded site violates federal
anti-trust laws, California statutory law and the common law of
unjust enrichment. The complaint seeks injunctive relief,
damages, including treble damages or statutory damages where
applicable, attorneys fees, costs and disbursements,
disgorgement of all sums obtained by allegedly wrongful acts,
interest and declaratory relief. The Company disputes the
plaintiffs allegations of wrongdoing and intends to
vigorously defend itself in this matter.
Depending on the amount and the timing, an
unfavorable resolution of some or all of these matters could
materially affect the Companys business, future results of
operations, financial position or cash flows in a particular
period.
From time to time, the Company is subject to
other legal proceedings and claims in the ordinary course of
business, including claims of alleged infringement of
trademarks, copyrights, patents, and other intellectual property
rights. 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,
financial condition, or operating results.
During 2002, the Company purchased over 10% of
all inventory purchases from a single vendor, Ingram Book Group.
No other vendors account for over 10%. The Company does not have
long-term contracts or arrangements with most of its vendors to
guarantee the availability of merchandise, particular payment
terms or the extension of credit limits.
The Company has authorized
500,000,000 shares of $0.01 par value Preferred Stock. No
preferred stock shares were outstanding during 2002, 2001 or
2000.
Three of the Companys equity-method
investees, HomeGrocer.com, Inc., Pets.com, Inc. and
drugstore.com, inc., completed public offerings of their common
stock during 2000. As a result of those public offerings, the
Companys ownership percentage in each investee was
diluted, creating an implied sale of a portion of
its investments. In accordance with SEC Staff Accounting
Bulletin No. 51, Accounting for Sales of Stock by a
Subsidiary, the Company recorded unrealized gains, net of
unrealized losses, as additional paid-in capital totaling
$77 million in 2000. The unrealized gains, net, represent
the difference between the Companys carrying basis and the
fair value of the portion of each
70
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
investment deemed to have been sold by the
investees. Details of these offerings and the effect on the
Companys ownership and cost basis in the investees are as
follows:
The Companys stock award plans consist of
the 1999 Nonofficer Employee Stock Option Plan, the 1997 Stock
Incentive Plan and the Amended and Restated 1994 Stock Option
Plan. Shares reserved under these plans consist of
40 million shares in the 1999 Nonofficer Employee Stock
Option Plan, 109 million shares in the 1997 Stock Incentive
Plan and 58 million shares in the 1994 Stock Option Plan,
of which up to a maximum of 21,025,075 shares that are not
issued under that plan may be added to the aggregate number of
shares available for issuance under the 1997 Stock Incentive
Plan. In connection with certain acquisitions in 1999, the
Company assumed outstanding options to purchase common stock
originally issued under the acquired companies stock
option plans. The Companys stock award plans as well as
the assumed stock award plans are hereby collectively referred
to as the Plans.
In 2002, the Company transitioned to using
restricted stock units, awarded under the 1997 Stock Incentive
Plan, as its primary vehicle for employee equity compensation.
Employees vest in restricted stock unit awards ratably over the
corresponding service term, generally three to six years. As it
relates to stock option awards, the Companys Board of
Directors generally sets an exercise price of not less than the
fair market value of the Companys common stock at the date
of grant. Each outstanding option granted prior to
December 20, 1996 has a term of five years from the date of
vesting. Generally, outstanding options granted on or subsequent
to December 20, 1996 have a term of 10 years from the
date of grant. Subject to Internal Revenue Service limitations,
options granted under the Companys plans prior to April
1999 and granted under certain assumed plans generally became
exercisable immediately but are subject to a restriction on
transfer that vests over a period of time. Options granted under
the Plans since April 1999 generally vest and become exercisable
in accordance with the following vesting schedule: 20% after
year one, 20% after year two and 5% at the end of each quarter
for years three through five. Certain outstanding options that
were granted during 2000 and 2001 vest and become exercisable at
the rate of 50% after year one and 50% after year two. During
the first quarter of 2001, the Company offered a limited
non-compulsory exchange of employee stock options to employees
meeting certain eligibility criteria. Options granted pursuant
to this stock option exchange vest and become exercisable at the
rate of 25% after 6 months from the date of grant and
4.166% per month for the succeeding 18 months. Certain
options granted in the third quarter of 2001 generally vest and
become exercisable as follows: (i) the option vests
quarterly in equal installments over a 36, 48 or 60 month
period commencing on dates ranging from grant date to
October 1, 2003, (ii) the option vests 5% to 12.5% on
a date approximately 12 to 16 months from date of grant
with the balance vesting quarterly in equal installments over a
48 to 60 month period or (iii) the option vests 4% to
12.5% on dates approximately 6 months and 18 months
71
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
from the date of grant with the balance vesting
quarterly in equal installments over a 24 or 60 month
period. Shares issued upon exercise of options that are unvested
are restricted and subject to repurchase by the Company at the
exercise price upon termination of employment or services and
such restrictions lapse over the vesting schedule. At
December 31, 2002, approximately 1 million shares of
restricted common stock, which includes restricted shares issued
in connection with acquisitions as well as shares issued to
certain key employees in 2001 and 2002, were subject to
repurchase or forfeiture.
At December 31, 2002, outstanding stock
awards totaled 45 million, which includes 42 million
stock options and 3 million restricted stock units.
The following table summarizes the Companys
stock option activity:
At December 31, 2002, 84 million shares
of common stock were available for future grant under the Plans.
The following table summarizes information about
stock options outstanding at December 31, 2002:
72
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company recorded aggregate deferred
stock-based compensation of $5 million and $9 million
in 2002 and 2001 respectively. No similar amounts were recorded
in 2000. Deferred stock-based compensation was recorded in
connection with the Companys restricted common stock
issued to key employees for future services. The amounts
recorded represent the fair value of the Companys common
stock issued on the date of grant. Such value is recognized as
an expense ratably over the corresponding service period, which
is generally five years. Additionally, in 2002, 2001 and 2000,
the Company recorded adjustments to reduce previously recorded
deferred stock-based compensation of $2 million,
$4 million and $3 million, respectively, representing
the remaining unvested portion of restricted stock awards upon
termination of certain key employees prior to vesting.
The changes in the components of comprehensive
loss were as follows (in thousands):
73
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company is not able to predict future gains
or losses due to the remeasurement of the hedged portion of the
6.875% PEACS and equivalent reclassifications of losses or gains
on the swap contract from accumulated other comprehensive loss
to earnings.
At December 31, 2002, common stock reserved
for future issuance is as follows (in thousands):
The following represents the calculations for net
loss per share (in thousands, except per share data):
All of the Companys stock awards (see
Note 8 Stockholders Equity
(Deficit)) are excluded from diluted loss per share since
their effect is antidilutive.
Restructuring-related and other expenses were
$42 million, $182 million and $200 million for
2002, 2001 and 2000, respectively. In the first quarter of 2001,
the Company announced and began implementation of its
operational restructuring plan to reduce operating costs,
streamline its organizational structure, consolidate certain of
its fulfillment and customer service operations and migrate a
large portion of its technology infrastructure to a new
operating platform. This initiative involved the reduction of
employee staff by 1,327 positions throughout the Company in
managerial, professional, clerical, technical and fulfillment
roles; consolidation of its Seattle, Washington corporate office
locations; closure of its McDonough, Georgia fulfillment center;
seasonal operation of its Seattle, Washington fulfillment
center; closure of its customer service centers in Seattle,
Washington and The Hague, Netherlands; and migration
74
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of a large portion of its technology
infrastructure to a new operating platform, which entails
ongoing lease obligations for technology infrastructure no
longer being utilized. Actual employee termination benefits paid
were $12 million. The restructuring is complete; however,
the Company may adjust its restructuring-related estimates in
the future, if necessary.
During 2002, the Company revised its estimates of
ongoing net lease obligations for its facilities in Seattle,
Washington and McDonough, Georgia, primarily due to weakness in
these real estate markets; reached a termination agreement with
the landlord of its leased fulfillment center facility in
McDonough, Georgia; and permanently closed its fulfillment
center in Seattle, Washington.
Restructuring-related charges were as follows (in
thousands):
At December 31, 2002, the accrued liability
associated with restructuring-related and other charges was
$57 million and consisted of the following (in thousands):
75
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restructuring-related lease obligations are as
follows (in thousands):
Restructuring-related and other expenses in 2000
primarily relate to impairments of goodwill and other
intangibles recorded in connection with certain of the
Companys business acquisitions.
Note 11 Other Income (Expense),
Net
Other income (expense), net consisted of the
following (in thousands):
Note 12 Other Gains (Losses),
Net
Other gains (losses), net consisted of the
following (in thousands):
Note 13 Income
Taxes
The Company has provided for current and deferred
U.S. federal, state and foreign income taxes for the
current and all prior periods presented. Current and deferred
income taxes were provided with respect to jurisdictions where
subsidiaries of the Company produce taxable income. As of
December 31, 2002, the Company has recorded a net deferred
tax asset of $3 million, which consists primarily of
certain state jurisdiction net operating loss carryforwards. The
Company has provided a valuation allowance for the
76
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
remainder of its deferred tax asset, consisting
primarily of net operating loss carryforwards, because of
uncertainty regarding its realization. The increase in the
valuation allowance on the deferred tax asset was
$196 million and $492 million for 2002 and 2001,
respectively.
Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys net deferred tax assets, which are included in
Accounts receivable, net and other current assets,
are as follows (in thousands):
At December 31, 2002, the Company had net
operating loss carryforwards of approximately $2.5 billion
related to U.S. federal, state and foreign jurisdictions.
Utilization of net operating losses, which begin to expire at
various times starting in 2010, may be subject to certain
limitations under Sections 382 and 1502 of the Internal
Revenue Code of 1986, as amended, and other limitations under
state and foreign tax laws. Additionally, approximately
$180 million of capital loss carryforwards begins to expire
in 2005. Approximately $1.2 billion of the Companys
net operating loss carryforwards relates to tax deductible
stock-based compensation in excess of amounts recognized for
financial reporting purposes. To the extent that net operating
loss carryforwards, if realized, relate to stock-based
compensation, the resulting tax benefits will be recorded to
stockholders equity, rather than to results of operations.
Note 14 Employee Benefit
Plan
The Company has a 401(k) savings plan covering
substantially all of its employees. Eligible employees may
contribute through payroll deductions. The Company matches
employees contributions at the discretion of the
Companys Board of Directors. Through December 31,
2002, the Company has not matched employee contributions to the
401(k) savings plan; however it has announced its intentions to
make employer matching contributions in 2003 using its common
stock.
Note 15 Segment
Information
The Company presents information to its chief
operating decision maker in four segments: North America Books,
Music, and DVD/ Video (BMVD); North America
Electronics, Tools, and Kitchen (ETK);
International; and Services. Accordingly, the Company discloses
its segment financial information along these lines.
77
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The BMVD segment includes retail sales from
www.amazon.com
and
www.amazon.ca
of books, music
and DVD/ video products and magazine subscription commissions.
This segment also includes commissions from sales of these
products, new, used or collectible, through Amazon Marketplace,
amounts earned from sales of these products by other businesses
through the Merchants@ program and product revenues from stores
offering these products through the Syndicated Stores program.
The ETK segment includes
www.amazon.com
retail sales of electronics, home improvement and home and
garden products, as well as our mail-order catalog sales. This
segment also includes commissions from sales of these products,
new, used or collectible, through Amazon Marketplace and amounts
earned from sales of these products by other businesses through
the Merchants@ program, such as with Office Depot, and will
include revenues from stores offering these products, if any,
through the Syndicated Stores program.
The International segment includes all retail
sales of the following internationally-focused Web sites:
www.amazon.co.uk, www.amazon.de, www.amazon.fr
and
www.amazon.co.jp
. These international sites share a
common Amazon.com experience, but are localized in terms of
language, products, customer service and fulfillment. To the
extent available on these sites, this segment includes
commissions and other amounts earned from sales of products
through Amazon Marketplace and revenues from stores offering
products through the Syndicated Stores program, such as
www.waterstones.co.uk
and
www.virginmega.co.jp,
and amounts earned from sales of products by other
businesses through the Merchants@ program. The International
segment includes export sales from
www.amazon.co.uk,
www.amazon.de, www.amazon.fr
and
www.amazon.co.jp
(including export sales from these sites to customers in the
U.S. and Canada), but excludes export sales from
www.amazon.com
and
www.amazon.ca
. Operating
results for the International segment are affected by movements
in foreign exchange rates. During 2002, International segment
revenues improved $47 million, and operating results
improved $4 million in comparison to the prior year due to
changes in foreign exchange rates.
The Services segment consists of commissions,
fees and other amounts earned from the services business,
including the Merchant.com program (such as
www.target.com
), and to the extent full product
categories are not also offered by the Company through its
online retail stores, the Merchants@ program, such as the
apparel store, Toysrus.com and Babiesrus.com stores, and
portions of the Target store at
www.amazon.com,
as well
as the commercial agreement with America Online, Inc. This
segment also includes Auctions, zShops, Amazon Payments and
miscellaneous marketing and promotional agreements.
Included in Services segment revenues are
equity-based service revenues of $13 million,
$27 million and $79 million for 2002, 2001 and 2000,
respectively.
The Company measures the results of operations of
its reportable segments using a pro forma measure. Pro forma
results from operations, which exclude stock-based compensation,
amortization of goodwill and other intangibles, and
restructuring-related and other charges, are not in conformity
with accounting principles generally accepted in the United
States. Stock-based compensation, amortization of goodwill and
other intangibles, and restructuring-related and other costs are
not allocated to segment results. All other centrally-incurred
operating costs are fully allocated to segment results. There
are no internal transactions between the Companys
reporting segments.
78
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Information on reportable segments and
reconciliation to consolidated net loss is as follows (in
thousands):
Year Ended 2002:
Year Ended 2001:
79
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Year Ended 2000:
Net sales to customers outside of the U.S.
represented approximately 35%, 29% and 22% of net sales for
2002, 2001 and 2000, respectively. Other than sales into the
United Kingdom, which represents approximately 11% of total net
sales in 2002, no individual foreign country, geographical area
or customer accounted for more than 10% of net sales in any of
the periods presented.
Depreciation expense, by segment, was as follows
(in thousands):
At December 31, 2002 and 2001, fixed assets,
net totaled $196 million and $228 million in the
United States, respectively, and $43 million and
$44 million in other countries, respectively.
80
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 16 Quarterly Results
(Unaudited)
The following tables contain selected unaudited
statement of operations information for each quarter of 2002,
2001 and 2000. The Company believes that the following
information reflects all normal recurring adjustments necessary
for a fair presentation of the information for the periods
presented. The operating results for any quarter are not
necessarily indicative of results for any future period.
Unaudited quarterly results were as follows (in thousands,
except per share data):
81
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
82
Table of Contents
For the Years Ended December 31,
2002
2001
2000
$
(149,132
)
$
(567,277
)
$
(1,411,273
)
172,159
310,679
(801
)
380
421
$
(149,933
)
$
(394,738
)
$
(1,100,173
)
Table of Contents
For the Years Ended December 31,
2002
2001
2000
$
(0.39
)
$
(1.56
)
$
(4.02
)
0.48
0.88
(0.01
)
$
(0.40
)
$
(1.08
)
$
(3.14
)
(1)
Includes $54 million and $69 million,
or $0.15 and $0.20 per share, for 2001 and 2000, respectively,
related to amortization of other intangibles that are classified
as goodwill effective January 1, 2002.
(2)
The inventory costing change in 2000 reflects the
cumulative adjustment through that date.
December 31, 2002
December 31, 2001
Gross
Other
Gross
Other
Carrying
Accumulated
Intangibles,
Carrying
Accumulated
Intangibles,
Amount
Amortization
Net
Amount
Amortization
Net
$
16,584
$
(14,414
)
$
2,170
$
16,584
$
(11,170
)
$
5,414
5,617
(5,010
)
607
5,617
(3,793
)
1,824
4,386
(4,331
)
55
4,386
(3,808
)
578
2,021
(1,393
)
628
2,021
(899
)
1,122
193,271
(167,827
)
25,444
$
28,608
$
(25,148
)
$
3,460
$
221,879
$
(187,497
)
$
34,382
(1)
As of January 1, 2002, in accordance with
SFAS No. 142, the Company reclassified its assembled
workforce intangibles into goodwill.
Table of Contents
Table of Contents
Table of Contents
Income Taxes
Revenue Recognition
Table of Contents
Cost of Sales
Fulfillment
Table of Contents
Marketing
Technology and Content
Stock-Based Compensation
Table of Contents
For the Years Ended December 31,
2002
2001
2000
$
(149,132
)
$
(567,277
)
$
(1,411,273
)
68,927
4,637
24,797
(148,083
)
(400,445
)
(333,836
)
$
(228,288
)
$
(963,085
)
$
(1,720,312
)
$
(0.39
)
$
(1.56
)
$
(4.02
)
$
(0.60
)
$
(2.64
)
$
(4.90
)
For the Years Ended
December 31,
2002
2001
2000
3.1
%
4.1
%
6.2
%
3.3
3.3
3.0
81.8
%
98.0
%
89.6
%
Table of Contents
Foreign Currency
Derivative Financial
Instruments
Table of Contents
Earnings Per Share
Recent Accounting
Pronouncements
Table of Contents
Reclassifications
December 31, 2002
Cost or
Gross
Gross
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
$
302,964
$
$
$
302,964
429,943
5,347
435,290
732,907
5,347
738,254
19,494
2,832
22,326
2,073
2,073
42,586
355
42,941
309,549
7,166
316,715
Table of Contents
December 31, 2002
Cost or
Gross
Gross
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
172,145
2,616
(35
)
174,726
3,934
3,934
549,781
12,969
(35
)
562,715
$
1,282,688
$
18,316
$
(35
)
$
1,300,969
December 31, 2001
Cost or
Gross
Gross
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
$
149,968
$
$
$
149,968
394,613
(4,299
)
390,314
544,581
(4,299
)
540,282
18,692
(533
)
18,159
28,614
8
28,622
37,370
240
(8
)
37,602
231,912
909
232,821
125,687
260
125,947
12,395
832
(75
)
13,152
454,670
2,249
(616
)
456,303
$
999,251
$
2,249
$
(4,915
)
$
996,585
Amortized
Estimated
Cost
Fair Value
$
463,544
$
471,886
202,697
205,470
309,549
316,715
$
975,790
$
994,071
Table of Contents
Note 3
Fixed Assets
December 31,
2002
2001
$
112,943
$
109,227
57,086
58,140
94,561
70,944
218,146
199,832
482,736
438,143
(222,731
)
(152,443
)
(20,607
)
(13,949
)
$
239,398
$
271,751
Note 4
Other Equity Investments
Equity-
Method
Cost-Method
Total
$
52,073
$
40,177
$
92,250
5,000
5,000
331
331
(30,327
)
(30,327
)
(800
)
(28
)
(828
)
800
800
1,242
(458
)
784
(16,696
)
(10,189
)
(26,885
)
227
227
(5,293
)
(5,293
)
(7,700
)
(7,700
)
(1,236
)
1,236
10,387
17,972
28,359
(4,169
)
(4,169
)
(2,940
)
(12,941
)
(15,881
)
2,326
10,844
13,170
Table of Contents
Equity-
Method
Cost-Method
Total
(4,288
)
(794
)
(5,082
)
(652
)
(652
)
(303
)
(303
)
(880
)
880
$
436
$
15,006
$
15,442
Note 5
Unearned Revenue
$
131,117
114,738
331
(135,808
)
(22,400
)
87,978
95,404
(135,466
)
$
47,916
Table of Contents
Note 6
Long-Term Debt and Other
December 31,
2002
2001
$
1,249,807
$
1,249,807
724,500
608,787
255,597
231,830
31,614
20,640
12,159
33,265
8,491
16,415
8,456
10,381
2,290,624
2,171,125
(7,506
)
(9,922
)
(5,813
)
(5,070
)
$
2,277,305
$
2,156,133
6.875% PEACS
Table of Contents
4.75% Convertible Subordinated
Notes
Table of Contents
Senior Discount Notes
Table of Contents
2003
2004
2005
2006
2007
Thereafter
Total
$
20,903
$
11,681
$
4,508
$
3,013
$
3,092
$
8,019
$
51,216
4,324
1,000
301
5,625
25,227
12,681
4,809
3,013
3,092
8,019
56,841
4,962
2,004
74
2,238,353
2,245,393
126,162
139,365
139,365
139,365
139,365
263,034
946,656
7,950
898
235
9,083
48,349
45,749
39,426
39,674
38,993
143,084
355,275
7,569
7,569
194,992
188,016
179,100
179,039
178,358
2,644,471
3,563,976
$
220,219
$
200,697
$
183,909
$
182,052
$
181,450
$
2,652,490
$
3,620,817
(1)
Principal and interest payments due under the
Companys 6.875% PEACS, excluding those payments with a
fixed exchange ratio under the currency swap hedge arrangement,
will fluctuate based on the Euro/U.S. Dollar exchange ratio.
2003
2004
2005
2006
2007
Thereafter
Total
$
22,550
$
15,150
$
11,164
$
10,021
$
10,078
$
29,663
$
98,626
(1,647
)
(3,469
)
(6,656
)
(7,008
)
(6,986
)
(21,644
)
(47,410
)
$
20,903
$
11,681
$
4,508
$
3,013
$
3,092
$
8,019
$
51,216
(1)
At December 31, 2002, the Company had signed
contractual sublease agreements covering $10 million in
future payments.
Table of Contents
December 31,
2002
$
9,083
(592
)
8,491
(7,506
)
$
985
Pledged Securities
Standby
Letters of
Swap
Real Estate
Credit
Agreement
Leases
Total
$
77,635
$
48,498
$
40,657
$
166,790
(19,741
)
(25,403
)
(578
)
(45,722
)
$
57,894
$
23,095
$
40,079
$
121,068
Legal Proceedings
Table of Contents
Inventory Suppliers
Note 8
Stockholders Equity (Deficit)
Preferred Stock
Basis Adjustments Public
Offerings of Investees
Table of Contents
Ownership
Shares
Price
Offering
Basis
Issued
per
Amount
Prior to
After
Adjustment
Offering
(In thousands)
Share
(In thousands)
Offering
Offering
(In thousands)
22,000
$
12.00
$
264,000
27
%
22
%
$
47,646
7,500
11.00
82,500
48
%
34
%
11,614
6,000
18.00
108,000
27
%
24
%
18,539
8,101
4.94
40,019
23
%
21
%
(901
)
$
76,898
Stock Award Plans
Table of Contents
Stock Award Activity
Number of
Shares
Weighted Average
(In thousands)
Exercise Price
80,342
$
27.76
20,717
38.13
(19,502
)
37.19
(11,119
)
4.02
70,438
32.17
46,209
9.53
(44,608
)
43.91
(6,089
)
2.73
65,950
10.65
3,045
16.46
(12,262
)
10.36
(14,728
)
8.26
42,005
11.91
Stock Awards Outstanding
Awards Vested
Weighted
Weighted
Number of
Average
Number of
Average
Range of
Awards
Remaining
Exercise
Awards
Exercise
Exercise Prices
(In thousands)
Life (yrs)
Price
(In thousands)
Price
$ 0.03 - $ 4.65
2,793
4.20
$
1.44
2,137
$
1.49
4.66 - 7.29
2,988
5.48
6.46
2,175
6.46
7.33 - 7.93
20,029
8.57
7.91
1,335
7.80
7.95 - 11.90
2,716
7.77
9.17
561
9.34
12.02 - 13.38
4,321
1.79
13.26
2,623
13.31
13.57 - 16.55
1,845
7.99
14.90
440
15.04
16.58 - 18.54
2,079
8.19
17.81
583
17.65
Table of Contents
Stock Awards Outstanding
Awards Vested
Weighted
Weighted
Number of
Average
Number of
Average
Range of
Awards
Remaining
Exercise
Awards
Exercise
Exercise Prices
(In thousands)
Life (yrs)
Price
(In thousands)
Price
18.55 - 21.30
2,004
6.62
20.01
1,243
20.30
21.33 - 104.97
3,230
6.93
40.83
1,549
36.01
0.03 - 104.97
42,005
7.05
11.91
12,646
13.10
Deferred Stock-Based
Compensation
Comprehensive Income (Loss)
Year Ended December 31,
2002
2001
2000
$
(149,132
)
$
(567,277
)
$
(1,411,273
)
16,910
(1,257
)
(364
)
23,459
(33,479
)
(178,815
)
(3,165
)
40,484
178,512
20,294
7,005
(303
)
21,106
(21,867
)
(12,578
)
4,530
8,528
(17,337
)
(9,811
)
(12,294
)
45,732
(33,694
)
(667
)
$
(103,400
)
$
(600,971
)
$
(1,411,940
)
Table of Contents
Common Stock Reserved for Future
Issuance
128,636
16,017
8,129
152,782
Note 9
Earnings (Loss) Per Share
For the Years Ended December 31,
2002
2001
2000
$
(149,933
)
$
(556,754
)
$
(1,411,273
)
801
(10,523
)
$
(149,132
)
$
(567,277
)
$
(1,411,273
)
379,494
365,180
353,394
(1,131
)
(969
)
(2,521
)
378,363
364,211
350,873
$
(0.40
)
$
(1.53
)
$
(4.02
)
0.01
(0.03
)
$
(0.39
)
$
(1.56
)
$
(4.02
)
Note 10
Restructuring-Related and Other
Table of Contents
Years Ended December 31,
2002
2001
$
1,182
$
68,528
39,563
87,049
14,970
828
11,038
$
41,573
$
181,585
Balance at
Balance at
December 31,
Subsequent
December 31,
Due Within
Due After
2001
Accruals, Net
Payments
2002
12 Months(1)
12 Months(1)
$
53,187
$
39,563
$
(41,534
)
$
51,216
$
20,903
$
30,313
61
(61
)
8,190
828
(3,393
)
5,625
4,324
1,301
$
61,438
$
40,391
$
(44,988
)
$
56,841
$
25,227
$
31,614
(1)
Restructuring-related liabilities due within
12 months and due after 12 months are classified in
Accrued expenses and other current liabilities and
Long-term debt and other, respectively, on the
accompanying consolidated balance sheets.
Table of Contents
2003
2004
2005
2006
2007
Thereafter
Total
$
22,550
$
15,150
$
11,164
$
10,021
$
10,078
$
29,663
$
98,626
(1,647
)
(3,469
)
(6,656
)
(7,008
)
(6,986
)
(21,644
)
(47,410
)
$
20,903
$
11,681
$
4,508
$
3,013
$
3,092
$
8,019
$
51,216
(1)
At December 31, 2002, the Company had signed
contractual sublease agreements covering $10 million in
future payments.
Years Ended December 31,
2002
2001
2000
$
5,700
$
1,335
$
280
(1,086
)
(2,019
)
(3,250
)
700
(1,222
)
(3,123
)
309
6
(3,965
)
$
5,623
$
(1,900
)
$
(10,058
)
Years Ended December 31,
2002
2001
2000
$
(103,136
)
$
46,613
$
2,227
(22,548
)
(8,101
)
(43,588
)
(188,832
)
13,044
22,400
6,033
784
40,160
(307
)
(5,802
)
$
(96,273
)
$
(2,141
)
$
(142,639
)
Table of Contents
December 31,
2002
2001
$
792,014
$
769,632
308,403
152,502
22,124
37,834
246,147
211,310
1,368,688
1,171,278
(1,365,386
)
(1,169,130
)
3,302
2,148
(620
)
$
2,682
$
2,148
Table of Contents
BMVD Segment
ETK Segment
International Segment
Services Segment
Table of Contents
North America
Books, Music
Electronics,
and
Tools and
DVD/Video
Kitchen
Total
International
Services
Consolidated
$
1,873,291
$
645,031
$
2,518,322
$
1,168,935
$
245,679
$
3,932,936
527,542
89,863
617,405
249,089
126,124
992,618
211,363
(73,220
)
138,143
(640
)
42,599
180,102
(68,927
)
(5,478
)
(41,573
)
(209,888
)
(4,169
)
801
$
(149,132
)
North America
Books. Music
Electronics,
and
Tools and
DVD/Video
Kitchen
Total
International
Services
Consolidated
$
1,688,752
$
547,190
$
2,235,942
$
661,374
$
225,117
$
3,122,433
453,129
78,384
531,513
140,606
126,439
798,558
156,753
(140,685
)
16,068
(103,112
)
42,042
(45,002
)
(4,637
)
(181,033
)
(181,585
)
(114,170
)
(30,327
)
(10,523
)
$
(567,277
)
Table of Contents
North America
Books, Music
Electronics,
and
Tools and
DVD/Video
Kitchen
Total
International
Services
Consolidated
$
1,698,266
$
484,151
$
2,182,417
$
381,075
$
198,491
$
2,761,983
417,452
44,655
462,107
77,436
116,234
655,777
71,441
(269,890
)
(198,449
)
(145,070
)
26,519
(317,000
)
(24,797
)
(321,772
)
(200,311
)
(242,797
)
(304,596
)
$
(1,411,273
)
North America
Books, Music
Electronics,
and
Tools and
Year Ended December 31,
DVD/Video
Kitchen
Total
Services
International
Consolidated
$
25,774
$
19,051
$
44,825
$
7,339
$
21,194
$
73,358
29,317
21,670
50,987
8,349
24,108
83,444
29,501
26,818
56,319
7,649
18,970
82,938
Table of Contents
Year Ended December 31, 2002
Fourth
Third
Second
First
Quarter
Quarter
Quarter
Quarter
$
1,428,610
$
851,299
$
805,605
$
847,422
335,159
216,167
218,167
223,125
2,651
(35,080
)
(93,553
)
(23,951
)
801
2,651
(35,080
)
(93,553
)
(23,150
)
$
0.01
$
(0.09
)
$
(0.25
)
$
(0.06
)
$
0.01
$
(0.09
)
$
(0.25
)
$
(0.06
)
$
0.01
$
(0.09
)
$
(0.25
)
$
(0.06
)
$
0.01
$
(0.09
)
$
(0.25
)
$
(0.06
)
383,702
379,650
376,937
373,031
407,056
379,650
376,937
373,031
Year Ended December 31, 2001
Fourth
Third
Second
First
Quarter
Quarter
Quarter
Quarter
$
1,115,171
$
639,281
$
667,625
$
700,356
274,049
162,192
179,720
182,597
5,087
(169,874
)
(168,359
)
(223,608
)
(10,523
)
5,087
(169,874
)
(168,359
)
(234,131
)
Table of Contents
Year Ended December 31, 2001
Fourth
Third
Second
First
Quarter
Quarter
Quarter
Quarter
$
0.01
$
(0.46
)
$
(0.47
)
$
(0.63
)
(0.03
)
$
0.01
$
(0.46
)
$
(0.47
)
$
(0.66
)
371,420
368,052
359,752
357,424
384,045
368,052
359,752
357,424
Year Ended December 31, 2000
Fourth
Third
Second
First
Quarter
Quarter
Quarter
Quarter
$
972,360
$
637,858
$
577,876
$
573,889
224,300
167,279
136,064
128,134
(545,140
)
(240,524
)
(317,184
)
(308,425
)
$
(1.53
)
$
(0.68
)
$
(0.91
)
$
(0.90
)
355,681
353,954
349,886
343,884
(1)
The sum of quarterly per share amounts may not
equal per share amounts reported for year-to-date periods. This
is due to changes in the number of weighted-average shares
outstanding and the effects of rounding for each period.
Table of Contents
Item 9. | Changes in and Disagreements with Accountants On Accounting and Financial Disclosure |
None.
PART III
Item 10. | Directors and Executive Officers of the Registrant |
Information regarding our Executive Officers required by Item 10 of Part III is set forth in Item 1 of Part I Business Executive Officers and Directors. Information required by Item 10 of Part III regarding our Directors is included in our Proxy Statement relating to our 2003 annual meeting of stockholders, and is incorporated herein by reference. Information relating to compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth in the Proxy Statement relating to our 2003 annual meeting of stockholders and is incorporated herein by reference.
Item 11. | Executive Compensation |
Information required by Item 11 of Part III is included in our Proxy Statement relating to our 2003 annual meeting of stockholders and is incorporated herein by reference.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Information required by Item 12 of Part III is included in our Proxy Statement relating to our 2003 annual meeting of stockholders and is incorporated herein by reference.
Item 13. | Certain Relationships and Related Transactions |
Information required by Item 13 of Part III is included in our Proxy Statement relating to our 2003 annual meeting of stockholders and is incorporated herein by reference.
Item 14. | Controls and Procedures |
Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. It should be noted that the design of any system of controls is based in part upon certain assumptions, and there can be no assurance that any design will succeed in achieving its stated goals.
In addition, we reviewed our internal controls, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation.
83
PART IV
Item 15. | Exhibits, Financial Statement Schedules and Reports on Form 8-K |
(a) List of Documents Filed as a Part of This Report:
(1) Index to Consolidated Financial Statements:
(2)
Index to Financial Statement
Schedules:
Schedule II Valuation and
Qualifying Accounts
All other schedules have been omitted because the
required information is included in the consolidated financial
statements or the notes thereto, or is not applicable or
required.
(3)
Index to Exhibits
84
Executive Compensation Plan or
Agreement
(b)
Reports on Form 8-K:
On November 7, 2002 the Company filed a
Form 8-K under Item 9 announcing that Thomas O. Ryder,
Chairman and CEO of the Readers Digest Association, was
elected to the Amazon.com Board of Directors.
85
Report of Ernst & Young LLP, Independent
Auditors
Consolidated Balance Sheets as of
December 31, 2002 and 2001
Consolidated Statements of Operations for each of
the three years ended December 31, 2002
Consolidated Statements of Cash Flows for each of
the three years ended December 31, 2002
Consolidated Statements of Stockholders
Equity (Deficit) for each of the three years ended
December 31, 2002
Notes to Consolidated Financial Statements
Exhibit
Number
Description
3
.1
Restated Certificate of Incorporation of the
Company (incorporated by reference to the Companys
Quarterly Report on Form 10-Q for the Quarter ended
March 31, 2000).
3
.2
Restated Bylaws of the Company (incorporated by
reference to the Companys Quarterly Report on
Form 10-Q for the Quarter Ended March 31, 2002).
4
.1
Indenture, dated as of May 8, 1998, between
Amazon.com, Inc. and the Bank of New York, as trustee
(incorporated by reference to the Companys Quarterly
Report on Form 10-Q for the Quarter Ended March 31,
1998).
4
.2
Form of 10% Senior Discount Notes Due 2008
(incorporated by reference to the Companys Registration
Statement on Form S-4 (Registration No. 333-56723)
filed June 12, 1998).
4
.3
Indenture, dated as of February 3, 1999,
between Amazon.com, Inc. and The Bank of New York, as trustee,
including the form of 4 3/4% Convertible Subordinated Notes
Due 2009 attached as Exhibit A thereto (incorporated by
reference to the Companys Current Report on Form 8-K
dated February 3, 1999).
4
.4
Registration Rights Agreement, dated
February 3, 1999, by and among Amazon.com, Inc. and the
Initial Purchasers (incorporated by reference to the
Companys Current Report on Form 8-K dated
February 3, 1999).
4
.5
Indenture, dated as of February 16, 2000,
between Amazon.com, Inc. and the Bank of New York, as trustee
(incorporated by Reference to the Companys Current Report
on Form 8-K dated February 16, 2000).
4
.6
Form of 6 7/8% Convertible Subordinated
Notes due 2010 (incorporated by reference to the Companys
Current Report on Form 8-K dated February 28, 2000).
10
.1
Amended and Restated 1994 Stock Option Plan
(version as of December 20, 1996 for Amended and Restated
Grants and version as of December 20, 1996 for New Grants)
(incorporated by reference to the Companys Registration
Statement on Form S-1 (Registration No. 333-23795)
filed March 24, 1997).
Table of Contents
Exhibit
Number
Description
10
.2
1997 Stock Incentive Plan (incorporated by
reference to Appendix B to the Companys Proxy
Statement on Schedule 14A, filed with the Securities and
Exchange Commission on March 29, 2000).
10
.3
1999 Non-Officer Employee Stock Option Plan
(incorporated by reference to the Companys Registration
Statement on Form S-8 (Registration No. 333-74419)
filed March 15, 1999).
10
.4
Common Stock Purchase Agreement, dated
July 23, 2001, between Amazon.com, Inc. and America Online,
Inc. (incorporated by reference to the Companys Quarterly
Report on Form 10-Q for the Quarter Ended June 30,
2001).
10
.5
Form of Indemnification Agreement between the
Company and each of its Directors (incorporated by reference to
the Companys Registration Statement on Form S-1
(Registration No. 333-23795) filed March 24, 1997).
10
.6
Offer Letter of Employment to Rick Dalzell, dated
August 13, 1997 (incorporated by reference to the
Companys Annual Report on Form 10-K for the Year
Ended December 31, 1999).
10
.7
Offer Letter of Employment to Jeff Wilke, dated
September 2, 1999 (incorporated by reference to the
Companys Annual Report on Form 10-K for the Year
Ended December 31, 1999).
10
.8
Executive Compensation Letter to Jeff Wilke,
dated May 16, 2000 (incorporated by reference to the
Companys Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 2000).
10
.9
Offer Letter of Employment to Thomas J. Szkutak,
dated August 26, 2002.
10
.10
Offer Letter of Employment to Mark Peek, dated
February 28, 2000.
10
.11
Executive Compensation Letter to Mark Peek, dated
April 19, 2002.
10
.12
Form of Restricted Stock Unit Agreement for
Officers and Employees.
10
.13
Form of Restricted Stock Unit Agreement for
Directors.
10
.14
Form of Restricted Stock Agreement (incorporated
by reference to the Companys Annual Report on
Form 10-K for the Year Ended December 31, 2001).
12
.1
Computation of Ratio of Earnings to Fixed Charges.
18
.1
Preferability Letter of Ernst & Young
LLP, Independent Auditors, regarding change in accounting
principle (incorporated by reference to the Companys
Annual Report on Form 10-Q for the Quarter Ended
March 31, 2002).
21
.1
List of Significant Subsidiaries.
23
.1
Consent of Ernst & Young LLP,
Independent Auditors.
99
.1
Certification of Jeffrey P. Bezos, Chairman and
Chief Executive Officer of Amazon.com, Inc., Pursuant to 19
U.S.C. Section 1350.
99
.2
Certification of Thomas J. Szkutak, Senior Vice
President and Chief Financial Officer of Amazon.com, Inc.,
Pursuant to 19 U.S.C. Section 1350.
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, as of February 17, 2003.
AMAZON.COM, INC. |
By: | /s/ JEFFREY P. BEZOS |
|
|
Jeffrey P. Bezos | |
President, Chief Executive Officer | |
and Chairman of the Board |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of February 17, 2003.
Signature | Title | |||
|
|
|||
/s/ JEFFREY P. BEZOS
Jeffrey P. Bezos |
Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) | |||
/s/ THOMAS J. SZKUTAK
Thomas J. Szkutak |
Senior Vice President and Chief Financial Officer (Principal Financial Officer) | |||
/s/ MARK S. PEEK
Mark S. Peek |
Vice President and Chief Accounting Officer
(Principal Accounting Officer) |
|||
/s/ TOM A. ALBERG
Tom A. Alberg |
Director | |||
/s/ L. JOHN DOERR
L. John Doerr |
Director | |||
/s/ MARK S. HANSEN
Mark S. Hansen |
Director | |||
/s/ THOMAS O. RYDER
Thomas O. Ryder |
Director | |||
/s/ PATRICIA Q. STONESIFER
Patricia Q. Stonesifer |
Director |
86
CERTIFICATION
I, Jeffrey P. Bezos, certify that:
Date: February 17, 2003
87
1. I have reviewed
this annual report on Form 10-K of Amazon.com, Inc.;
2. Based on my
knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my
knowledge, the financial statements, and other financial
information included in this annual report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The
registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and have:
a) designed such disclosure controls and
procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this annual report is being prepared;
b) evaluated the effectiveness of the
registrants disclosure controls and procedures as of a
date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and
c) presented in this annual report our
conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;
5. The
registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrants auditors and the audit committee of
registrants board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the
design or operation of internal controls which could adversely
affect the registrants ability to record, process,
summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrants internal controls; and
6. The
registrants other certifying officers and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
/s/ JEFFREY P. BEZOS
Jeffrey P. Bezos
Chairman and Chief Executive Officer
(Principal Executive Officer)
Table of Contents
CERTIFICATION
I, Thomas J. Szkutak, certify that:
Date: February 17, 2003
1. I have reviewed
this annual report on Form 10-K of Amazon.com, Inc.;
2. Based on my
knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my
knowledge, the financial statements, and other financial
information included in this annual report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The
registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and have:
a) designed such disclosure controls and
procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this annual report is being prepared;
b) evaluated the effectiveness of the
registrants disclosure controls and procedures as of a
date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and
c) presented in this annual report our
conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;
5. The
registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrants auditors and the audit committee of
registrants board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the
design or operation of internal controls which could adversely
affect the registrants ability to record, process,
summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrants internal controls; and
6. The
registrants other certifying officers and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
/s/ THOMAS J. SZKUTAK
Thomas J. Szkutak
Senior Vice President and Chief Financial
Officer
(Principal Financial Officer)
Table of Contents
AMAZON.COM, INC.
SCHEDULE II VALUATION AND
QUALIFYING ACCOUNTS
Inventory Valuation Allowance
Accounts Receivable
Allowance Customers
Accounts Receivable
Allowance Vendors
Charged/
Balance at
(Credited)
Inventory
Balance
Beginning
to Costs and
Disposed or
at End of
Year Ended
of Period
Expenses
Written Off
Period
(In thousands)
$
19,808
$
23,456
$
(20,825
)
$
22,439
$
20,453
$
17,160
$
(17,805
)
$
19,808
$
29,583
$
31,095
$
(40,225
)
$
20,453
Charged/
Balance at
(Credited)
Balance
Beginning
to Costs and
Amounts
at End of
Year Ended
of Period
Expenses
Written Off
Period
(In thousands)
$
11,665
$
12,805
$
(7,368
)
$
17,102
$
15,493
$
4,477
$
(8,305
)
$
11,665
$
3,503
$
14,585
$
(2,595
)
$
15,493
Charged/
Balance at
(Credited)
Balance
Beginning
to Costs and
Amounts
at End of
Year Ended
of Period
Expenses
Written Off
Period
(In thousands)
$
19,380
$
7,759
$
(10,346
)
$
16,793
$
14,133
$
19,322
$
(14,075
)
$
19,380
$
10,337
$
12,499
$
(8,703
)
$
14,133
89
EXHIBIT INDEX
Exhibit
Number
Description
3
.1
Restated Certificate of Incorporation of the
Company (incorporated by reference to the Companys
Quarterly Report on Form 10-Q for the Quarter ended
March 31, 2000).
3
.2
Restated Bylaws of the Company (incorporated by
reference to the Companys Quarterly Report on
Form 10-Q for the Quarter Ended March 31, 2002).
4
.1
Indenture, dated as of May 8, 1998, between
Amazon.com, Inc. and the Bank of New York, as trustee
(incorporated by reference to the Companys Quarterly
Report on Form 10-Q for the Quarter Ended March 31,
1998).
4
.2
Form of 10% Senior Discount Notes Due 2008
(incorporated by reference to the Companys Registration
Statement on Form S-4 (Registration No. 333-56723)
filed June 12, 1998).
4
.3
Indenture, dated as of February 3, 1999,
between Amazon.com, Inc. and The Bank of New York, as trustee,
including the form of 4 3/4% Convertible Subordinated Notes
Due 2009 attached as Exhibit A thereto (incorporated by
reference to the Companys Current Report on Form 8-K
dated February 3, 1999).
4
.4
Registration Rights Agreement, dated
February 3, 1999, by and among Amazon.com, Inc. and the
Initial Purchasers (incorporated by reference to the
Companys Current Report on Form 8-K dated
February 3, 1999).
4
.5
Indenture, dated as of February 16, 2000,
between Amazon.com, Inc. and the Bank of New York, as trustee
(incorporated by Reference to the Companys Current Report
on Form 8-K dated February 16, 2000).
4
.6
Form of 6 7/8% Convertible Subordinated
Notes due 2010 (incorporated by reference to the Companys
Current Report on Form 8-K dated February 28, 2000).
10
.1
Amended and Restated 1994 Stock Option Plan
(version as of December 20, 1996 for Amended and Restated
Grants and version as of December 20, 1996 for New Grants)
(incorporated by reference to the Companys Registration
Statement on Form S-1 (Registration No. 333-23795)
filed March 24, 1997).
10
.2
1997 Stock Incentive Plan (incorporated by
reference to Appendix B to the Companys Proxy
Statement on Schedule 14A, filed with the Securities and
Exchange Commission on March 29, 2000).
10
.3
1999 Non-Officer Employee Stock Option Plan
(incorporated by reference to the Companys Registration
Statement on Form S-8 (Registration No. 333-74419)
filed March 15, 1999).
10
.4
Common Stock Purchase Agreement, dated
July 23, 2001, between Amazon.com, Inc. and America Online,
Inc. (incorporated by reference to the Companys Quarterly
Report on Form 10-Q for the Quarter Ended June 30,
2001).
10
.5
Form of Indemnification Agreement between the
Company and each of its Directors (incorporated by reference to
the Companys Registration Statement on Form S-1
(Registration No. 333-23795) filed March 24, 1997).
10
.6
Offer Letter of Employment to Rick Dalzell, dated
August 13, 1997 (incorporated by reference to the
Companys Annual Report on Form 10-K for the Year
Ended December 31, 1999).
10
.7
Offer Letter of Employment to Jeff Wilke, dated
September 2, 1999 (incorporated by reference to the
Companys Annual Report on Form 10-K for the Year
Ended December 31, 1999).
10
.8
Executive Compensation Letter to Jeff Wilke,
dated May 16, 2000 (incorporated by reference to the
Companys Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 2000).
10
.9
Offer Letter of Employment to Thomas J. Szkutak,
dated August 26, 2002.
10
.10
Offer Letter of Employment to Mark Peek, dated
February 28, 2000.
10
.11
Executive Compensation Letter to Mark Peek, dated
April 19, 2002.
10
.12
Form of Restricted Stock Unit Agreement for
Officers and Employees.
10
.13
Form of Restricted Stock Unit Agreement for
Directors.
10
.14
Form of Restricted Stock Agreement (incorporated
by reference to the Companys Annual Report on
Form 10-K for the Year Ended December 31, 2001).
12
.1
Computation of Ratio of Earnings to Fixed Charges.
18
.1
Preferability Letter of Ernst & Young
LLP, Independent Auditors, regarding change in accounting
principle (incorporated by reference to the Companys
Annual Report on Form 10-Q for the Quarter Ended
March 31, 2002).
Table of Contents
Exhibit
Number
Description
21
.1
List of Significant Subsidiaries.
23
.1
Consent of Ernst & Young LLP,
Independent Auditors.
99
.1
Certification of Jeffrey P. Bezos, Chairman and
Chief Executive Officer of Amazon.com, Inc., Pursuant to 19
U.S.C. Section 1350.
99
.2
Certification of Thomas J. Szkutak, Senior Vice
President and Chief Financial Officer of Amazon.com, Inc.,
Pursuant to 19 U.S.C. Section 1350.
Executive Compensation Plan or Agreement
Exhibit 10.9
August 26, 2002
Mr. Thomas J. Szkutak
[Address deleted]
Dear Tom:
On behalf of Amazon.com Holdings (the Company), I am very pleased to offer you the position of Senior Vice President and Chief Financial Officer of Amazon.com. This letter clarifies and confirms the terms of your employment with the Company.
Start Date and Salary
Unless we mutually agree otherwise in writing, you will commence employment on October 1, 2002 (Start Date). Your starting salary will be $150,000 annualized, payable in accordance with the Companys standard payroll practice and subject to applicable withholding taxes. Because your position is exempt from overtime pay, your salary will compensate you for all hours worked.
Signing Bonus
In appreciation for your decision to join us, along with your first regular paycheck the Company will pay you a lump sum bonus in the amount of $500,000. This bonus will be payable in accordance with the Companys standard payroll practice and subject to applicable withholding taxes.
In addition, over the first four years of active employment, the Company will pay you a signing bonus of $2,400,000, payable in equal monthly installments in the amount of $50,000 commencing in October 2002 through September 2006. All payments will be payable in accordance with the Companys standard payroll practice and subject to applicable withholding taxes. If your employment with the Company is terminated for any reason prior to September 30, 2006, any monthly payments will cease after the date of termination.
Relocation
For information about your relocation benefits, please review the attached document.
Benefits
You will also be entitled, during the term of your employment, to such vacation, medical and other employee benefits as the Company may offer from time to time, subject to applicable eligibility requirements. The Company does reserve the right to make any modifications in this benefits package that it deems appropriate. All employees receive pro-rated vacation and personal time. Please refer to the enclosed benefits documents for more information. You are eligible to participate in Amazon.coms 401(k) retirement plan on the first entry date following the commencement of your employment. You are also eligible to enroll in our major medical plan on the first entry date following the commencement of your employment.
Restricted Stock Grant
Subject to Board of Directors approval, you will be awarded 500,000 shares of restricted stock of Amazon.com, Inc. (the Stock Award). The Stock Award will vest according to the following schedule, subject to your continued employment with the Company: 2/7ths of the Stock Award will vest on your second anniversary of employment and an additional 1/7th of the Stock Award will vest on each subsequent anniversary of your employment. The unvested portion of the Stock Award will be subject to forfeiture upon termination of your employment with the Company. The Stock Award will be documented by delivery to you of a Restricted Stock Award Agreement specifying the terms and conditions of the award.
Employment At Will
If you accept our offer of employment, you will be an employee-at-will, meaning that either you or the Company may terminate our relationship at any time for any reason, with or without cause. Any statements to the contrary that may have been made to you, or that may be made to you, by the Company, its agents, or representatives are superseded by this offer letter.
Confidentiality, Noncompetition and Invention Assignment Agreement
As a condition of your employment pursuant to this offer letter, we require that you sign the enclosed Confidentiality, Noncompetition and Invention Assignment Agreement. The Companys willingness to award you the compensation referred to above is based in significant part on your commitment to fulfill the obligations specified in that agreement.
You should know that the agreement will significantly restrict your future flexibility in many ways. For example, you will be unable to seek or accept certain employment opportunities for a period of 18 months after you leave the Company. Please review the agreement carefully and, if appropriate, have your attorney review it as well.
Employment Eligibility
To comply with immigration laws, you must provide Amazon.com with evidence of your identity and eligibility for employment in the United States no later than three (3) business days of your date of hire. Please bring this documentation to your new hire orientation.
Additional Provisions
If you accept this offer, the terms described in this letter will be the terms of your employment, and this letter supersedes any previous discussions or offers. Any further additions or modifications of these terms would have to be in writing and signed by you and an officer of the Company.
If you wish to accept employment with the Company, please indicate so by signing both copies of this letter and both copies of the enclosed Confidentiality, Noncompetition and Invention Assignment Agreement, retaining one of each for your files.
We are very excited about the possibility of you joining us.
Sincerely,
/s/ JEFF BEZOS
Jeff Bezos
CEO
ACCEPTANCE
I accept employment with Amazon.com Holdings, Inc. under the terms set forth in this letter, including the Start Date indicated above:
/s/ THOMAS J. SZKUTAK
Thomas J. Szkutak |
8-28-02
Date |
February 28, 2000
[Address deleted]
Dear Mark:
On behalf of Amazon.com Holdings, Inc. (the Company), I am very pleased to offer you the position VP/CAO. This letter clarifies and confirms the terms of your employment with the Company.
Start Date and Salary
Unless we mutually agree otherwise, you will commence employment on March 13, 2000 (Start Date). Your starting salary will be $125,000 annualized, payable in accordance with the Companys standard payroll practice and subject to applicable withholding taxes. Because your position is exempt from overtime pay, your salary will compensate you for all hours worked. Your base salary will be reviewed annually by the Board of Directors or its Compensation Committee, and any increases will be effective as of the date determined by the Board or its Compensation Committee.
Signing Bonus
In appreciation for your decision to join us, the Company will pay you a signing bonus in the amount of $675,000, payable in two installments ($450,000 payable on the date of your first regular paycheck and $225,000 payable on the date of your paycheck following the anniversary of your start date) and in accordance with the Companys standard payroll practice and subject to applicable withholding taxes. If your employment with the Company is terminated for any reason prior to the first anniversary of your start date, you will be responsible for reimbursing the Company for the first $450,000 bonus, on a pro-rated monthly basis. If your employment with the Company is terminated for any reason after the first anniversary of your start date but before the second anniversary, you will be responsible for reimbursing the Company for the second $225,000 bonus, on a pro-rated monthly basis. The foregoing repayment obligation will not apply if your employment terminates due to the organizational change that results in the elimination of your position.
Benefits
You will also be entitled, during the term of your employment, to such vacation, medical and other employee benefits as the Company may offer from time to time, subject to applicable eligibility requirements. The Company does reserve the right to make any modifications in this benefits package that it deems appropriate. All employees receive pro-rated vacation and personal time. Please refer to the enclosed benefits documents for more information. You are also eligible to participate in Amazon.coms 401(k) retirement plan the first quarter after 90 days of employment and to enroll in our major medical plan on the first entry date following the commencement of your employment.
Stock Grant
Subject to Board of Directors approval, you will be granted an option to purchase 200,000 shares of Amazon.com common stock. The strike price on your stock option grant will be the fair market value per share of such stock on the Monday on or following your Start Date. The option will begin to vest on your Start Date and will vest 20% after one year of employment, an additional 20% after two years of employment, and an additional 5% per quarter thereafter. Your option will be documented by delivery to you of a Stock Option Letter Agreement specifying the terms and conditions of the option.
Employment At Will
If you accept our offer of employment, you will be an employee-at-will, meaning that either you or the Company may terminate our relationship at any time for any reason, with or without cause. Any statements to the contrary that may have been made to you, or that may be made to you, by the Company, its agents, or representatives are superseded by this offer letter.
Confidentiality, Noncompetition and Invention Assignment Agreement
As a condition of your employment pursuant to this offer letter, we do require that you sign the enclosed Confidentiality, Noncompetition and Invention Assignment Agreement. The Companys willingness to grant you the stock options referred to above is based in significant part on your commitment to fulfill the obligations specified in that agreement.
You should know that the agreement will significantly restrict your future flexibility in many ways. For example, you will be unable to seek or accept certain employment opportunities for a period of 18 months after you leave the Company. Please review the agreement carefully and, if appropriate, have your attorney review it as well.
Additional Provisions
Your employment pursuant to this letter is also contingent upon your submitting the legally required proof of your identity and authorization to work in the United States. On your first day of employment you must provide the required identification.
If you accept this offer, the terms described in this letter will be the terms of your employment, and this letter supersedes any previous discussions or offer. Any further additions or modifications of these terms would have to be in writing and signed by you and an officer of the Company.
If you wish to accept employment with the Company, please indicate so by signing both copies of this letter and both copies of the enclosed Confidentiality, Noncompetition and Invention Assignment Agreement, retaining one of each for your files. This offer and all terms of employment stated in this letter will expire if you have not returned a signed copy of this letter in the pre-addressed enclosed envelope by the sooner of three weeks from the date of this letter or five days prior to the above Start Date. If you intend to start your employment within five days of receiving this offer, please contact me immediately.
We are very excited about the possibility of your joining us. I hope that you will accept this offer and look forward to a productive and mutually beneficial working relationship. Please let me know if I can answer any questions for you about any of the matters outlined in this letter.
Sincerely,
/s/ WARREN JENSON
Warren Jenson
CFO
ACCEPTANCE
I accept employment with Amazon.com Holdings, Inc. under the terms
set forth in this letter; including the Start Date indicated above.
/s/ MARK S. PEEK | 3/6/2000 | |
Signature Mark Peek |
Date |
Exhibit 10.11
M E M O R A N D U M
TO:
Mark Peek
FROM:
Jeff Bezos
DATE:
April 19, 2002
SUBJECT:
Early Payment on Bonuses
This is to confirm and memorialize our agreement as to the specific terms governing your receipt of an early payment on your expected future bonuses in the amount of $2,000,000 (Two Million Dollars) (the Early Bonus) from Amazon.com Holdings, Inc (Amazon.com). As we have discussed, you will receive the Early Bonus under the following terms (the Agreement):
1. | Partial Payment Received : You have already received a bonus of $225,000, less applicable federal and state tax withholdings, on March 1, 2002. Applying prorated credit for time worked between March 1 and April 1, the amount of $206,250 will be treated as a partial payment of the Early Bonus. The terms of this Agreement supercede the terms set forth in your Bonus Letter dated March 1, 2002. | ||
2. | Remaining Unpaid Portion : You will receive the remaining unpaid portion of the Early Bonus ($1,793,750), less applicable federal and state tax withholdings, on or about April 22, 2002. | ||
3. | Term : The term of this agreement is five years, April 1, 2002, through April 1, 2007. | ||
4. | Bonus Earning Schedule : Although you will receive the full amount of the Early Bonus on or about April 22, 2002, you will not earn the entire amount of the Early Bonus for purposes of this Agreement unless you remain actively employed with Amazon.com for the term of this Agreement in your current position, any similar position of like rank, status and pay, or any position to which you may be promoted. During the term of this Agreement, you will earn the Early Bonus at a rate of Thirty-Three Thousand, Three Hundred Thirty-Three Dollars and Thirty-Three Cents ($33,333.33 ) each month, on the anniversary date of this Agreement. |
Earning Schedule :
Provided that you remain actively employed with Amazon.com in your current position, any similar position of like rank, status and pay, or any position to which you may be promoted, the following Earning Schedule |
applies: |
| On April 1, 2003 you will have earned twelve months at $33,333.33 ($400,000) of the Early Bonus. $1,600,000 remains unearned. | ||
| On April 1, 2004, you will have earned twenty-four months at $33,333.33 ($800,000). $1,200,000 remains unearned. | ||
| On April 1, 2005, you will have earned thirty-six months at $33,333.33 ($1,200,000). $800,000 remains unearned. | ||
| On April 1, 2006, you will have earned forty-eight months at $33,333.33 ($1,600,000). $400,000 remains unearned. | ||
| On April 1, 2007, you will have earned the entire Early Bonus. |
5. | Repayment Obligation: Should your employment with Amazon.com terminate for any reason before you have earned the entire Early Bonus as set forth in paragraph 4 above, you agree to repay any remaining unearned amount in full. For purposes of this paragraph, terminate for any reason specifically includes a) all forms of voluntary and involuntary employment terminations, with or without cause, with or without notice, and b) death or total disability, as defined in paragraph 6 . Repayment in full will be required within sixty (60) days of the effective date of your employment termination. | ||
If you fail to repay any unearned portion of the Early Bonus within sixty (60) days of the effective date of your termination, interest will accrue on any unpaid amount at the rate of the then prevailing Applicable Federal Rate (AFR) as published monthly by the Internal Revenue Service, per annum, compounded annually. Amazon.com may bring an action in court to recover the full amount of the unearned portion, plus interest. If Amazon.com is the prevailing party in such an action, it will be entitled to recover its reasonable attorneys fees and other costs incurred. | |||
If you exercise stock options while you are subject to a repayment obligation under this paragraph, you agree to instruct your broker to withhold from the proceeds, and remit to Amazon.com, a dollar amount sufficient to satisfy your repayment obligation in full. | |||
6. | Death or Total Disability: This Agreement, specifically including the Repayment Obligations set forth in paragraph 5, survives your death or total disability For purposes of this Agreement, total disability means your inability (with such accommodation as may be required by law and which places no undue burden on Amazon.com), as determined by a physician selected by the Company and acceptable to you, to perform any one or more |
of the essential duties of your current position, any similar position of like rank, status and pay, or any position to which you may be promoted, for a period or periods aggregating more than twelve (12) weeks in any 365-day period as a result of physical or mental illness or injury, loss of legal capacity or any other cause beyond your control, unless you are granted a leave of absence. Whether you are granted a leave of absence of more than twelve (12) weeks will be determined in the sole discretion of the Board of Directors. The Repayment Obligation set forth in paragraph 5 will be tolled during any such approved leave. | |||
7. | Insurance: You agree to procure an insurance policy within 30 days from the date you sign this Agreement covering your death, for the full amount of any unearned Early Bonus as that term is used in paragraph 4 above. | ||
8. | Assignment: This Agreement is personal to you and shall not be assigned by you. Amazon.com may assign its rights and obligations hereunder to (a) any entity controlling, controlled by or under common control with Amazon.com, (b) any corporation resulting from any merger, consolidation or other reorganization to which Amazon.com or any of its direct or indirect subsidiaries is a party, or (c) any corporation, partnership, association or other person to which Amazon.com or any of its direct or indirect subsidiaries may transfer all or substantially all its assets. | ||
9. | Entire Agreement: This Agreement constitutes the entire agreement between you and Amazon.com with respect to the receipt and payback obligations relating to monetary bonuses from Amazon.com; all prior or contemporaneous oral or written communications, understandings or agreements with respect to such subject matter, including but not limited to those set forth in your Bonus Letter dated March 1, 2002, are hereby superseded and nullified in their entireties. | ||
10. | Severability: If any provision of this Agreement shall be held invalid, illegal or unenforceable in any jurisdiction, for any reason, then, to the full extent permitted by law, a) all other provisions shall remain in full force and effect, b) such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of any other provisions, and c) any court or arbitrator having jurisdiction thereover shall have the power to reform such provision to the extent necessary for such provision to be enforceable under applicable law. | ||
11. | Applicable Law: This Agreement shall in all respects, including all matters of construction, validity and performance, be governed by, and construed and enforced in accordance with the laws of the State of Washington, without regard to any rules governing conflicts of laws. |
12. | Modification of Agreement: Any modification of this Agreement shall be binding only if evidenced in a writing signed by each party or an authorized representative of each party. | ||
13. | At Will Employment: Nothing in this Agreement modifies your employment at-will status. Either you or the Company can terminate your employment at any time, and for any reason, with or without notice. |
ACCEPTANCE
I have read and fully understand the contents of the Agreement. I knowingly and voluntarily agree to and accept the Early Bonus and the repayment terms set forth above.
/s/ MARK S. PEEK
Mark Peek |
4-23-02
Date |
Exhibit 10.12
THE SHARES ISSUABLE UPON VESTING OF THIS AWARD WILL NOT BE RELEASED TO YOU
UNTIL ALL APPLICABLE WITHHOLDING TAXES HAVE BEEN COLLECTED FROM YOU OR
HAVE OTHERWISE BEEN PROVIDED FOR.
AMAZON.COM, INC.
RESTRICTED STOCK UNIT AWARD AGREEMENT
TO: <<Participant>>
To encourage your continued employment with Amazon.com, Inc. (the Company) or its Subsidiaries, you have been granted this restricted stock unit award (the Award) pursuant to the Companys 1997 Stock Incentive Plan (the Plan). The Award represents the right to receive shares of Common Stock of the Company subject to the fulfillment of the vesting conditions set forth in this agreement (this Agreement).
The terms of the Award are as set forth in this Agreement and in the Plan. The Plan is incorporated into this Agreement by reference, which means that this Agreement is limited by and subject to the express terms and provisions of the Plan. In the event of a conflict between the terms of this Agreement and the terms of the Plan, the terms of the Plan shall control. Capitalized terms that are not defined in this Agreement have the meanings given to them in the Plan. The most important terms of the Award are summarized as follows:
1. | Award Date: | ||
2. | Number of Restricted Stock Units Subject to this Award: | ||
3. | Vesting Base Date: | ||
4. | Vesting Schedule: The Award will vest according to the following schedule: |
Period of
Participants Continuous
Employment From the
Vesting Base Date
Percent of Total Award That is Vested
[Optional: Notwithstanding the foregoing, if at any time you become an officer required to file reports pursuant to Section 16 of the Securities Exchange Act of 1934, as amended, then with respect to any part of this Award that is then unvested, vesting shall in addition be contingent on and subject to satisfaction of such performance criteria for such performance period as the Plan Administrator shall establish with specific reference to this Award, and this Award shall be cancelled without the issuance of Common Stock if and to the extent any such performance criteria are not satisfied.]
5. Conversion of Restricted Stock Units and Issuance of Shares. Upon each vesting of the Award (each, a Vest Date), one share of Common Stock shall be issuable for each restricted stock unit that vests on such Vest Date (the Shares), subject to the terms and provisions of the Plan and this Agreement. Thereafter, the Company will transfer such Shares to you upon satisfaction of any required tax withholding obligations. No fractional shares shall be issued under this Agreement.
6. Termination of Employment. The unvested portion of the Award will terminate automatically and be forfeited to the Company immediately and without further notice upon the voluntary or involuntary termination of your employment for any reason with the Company or any Subsidiary (including as a result of death or disability). A transfer of employment or services between or among the Company and its Subsidiaries shall not be considered a termination of employment. Unless the Plan Administrator determines otherwise, and except as otherwise required by local law, for purposes of this Award only, any reduction in your regular hours of employment to less than 30 hours per week is deemed a termination of your employment with the Company or any Subsidiary. In case of termination of your employment for Cause, the Award shall automatically terminate upon first notification to you of such termination, unless the Plan Administrator determines otherwise. If your employment is suspended pending an investigation of whether you should be terminated for Cause, all of your rights under the Award likewise shall be suspended during the period of investigation. No Shares shall be issued or issuable with respect to any portion of the Award that terminates unvested and is forfeited.
7. Leave of Absence and Change in Work Schedule. Your rights under the Award in the event of a leave of absence or a change in your regularly scheduled hours of employment (other than a change addressed in Section 6 of this Agreement) will be affected in accordance with the Companys applicable employment policies or the terms of any agreement between you and your employer with respect thereto.
8. Right to Shares. You shall not have any right in, to or with respect to any of the Shares (including any voting rights or rights with respect to dividends paid on the Common Stock) issuable under the Award until the Award is settled by the issuance of such Shares to you.
9. Taxes.
(a) Generally . You are ultimately liable and responsible for all taxes owed in connection with the Award, regardless of any action the Company or any of its Subsidiaries takes with respect to any tax withholding obligations that arise in connection with the Award. Neither the Company nor any of its Subsidiaries makes any representation or undertaking regarding the treatment of any tax withholding in connection with the grant or vesting of the Award or the subsequent sale of Shares issuable pursuant to the Award. The Company and its Subsidiaries do not commit and are under no obligation to structure the Award to reduce or eliminate your tax liability. As a condition and term of this Award, no election under Section 83(b) of the United States Internal Revenue Code may be made by you or any other person with respect to all or any portion of the Award.
(b) Payment of Withholding Taxes . Prior to any event in connection with the Award (e.g., vesting) that the Company determines may result in any domestic or foreign tax withholding obligation, whether national, federal, state or local, including any social tax obligation (the Tax Withholding Obligation), you must arrange for the satisfaction of the minimum amount of such Tax Withholding Obligation in a manner acceptable to the Company.
(i) By Sale of Shares . Unless you choose to satisfy the Tax Withholding Obligation by some other means in accordance with clause (ii) below, y our acceptance of this Award constitutes your instruction and authorization to the Company and any brokerage firm determined acceptable to the Company for such purpose to sell on your behalf a whole number of Shares from those Shares issuable to you as the Company determines to be appropriate to generate cash proceeds sufficient to satisfy the Tax Withholding Obligation. Such Shares will be sold on the day the Tax Withholding Obligation arises (e.g., a Vest Date) or as soon thereafter as practicable. You will be responsible for all brokers fees and other costs of sale, and you agree to indemnify and hold the Company harmless from any losses, costs, damages, or expenses relating to any such sale. To the extent the proceeds of such sale exceed your Tax Withholding Obligation, the Company agrees to pay such excess in cash to you through payroll as soon as practicable. You acknowledge that the Company or its designee is under no obligation to arrange for such sale at any particular price, and that the proceeds of any such sale may not be sufficient to satisfy your Tax Withholding Obligation. Accordingly, you agree to pay to the Company or any of its Subsidiaries as soon as practicable, including through additional payroll withholding, any amount of the Tax Withholding Obligation that is not satisfied by the sale of Shares described above.
(ii) By Check, Wire Transfer or Other Means . At any time not less than five (5) business days before any Tax Withholding Obligation arises (e.g., a Vest Date), you may elect to satisfy your Tax Withholding Obligation by delivering to the Company an amount that the Company determines is sufficient to satisfy the Tax Withholding Obligation by (i) wire transfer to such account as the Company may direct, (ii) delivery of a certified check payable to the Company, c/o Stock Administration, P.O. Box 81226, Seattle, WA 98108-1226, or such other address as the Company may from time to time direct, or (iii) such other means as the Company may establish or permit.
(c) Right to Retain Shares . The Company may refuse to issue any Shares to you until you satisfy the Tax Withholding Obligation. To the maximum extent permitted by law, the Company has the right to retain without notice from Shares issuable under the Award or from salary or other amounts payable to you, Shares or cash having a value sufficient to satisfy the Tax Withholding Obligation.
10. Registration. The Company currently has an effective registration statement on file with the Securities and Exchange Commission with respect to the shares of Common Stock subject to the Award. The Company intends to maintain this registration but has no obligation to do so. If the registration ceases to be effective, you will not be able to transfer or sell Shares issued to you pursuant to the Award unless exemptions from registration under applicable securities laws are available. Such exemptions from registration are very limited and might be
unavailable. You agree that any resale by you of the shares of Common Stock issued pursuant to the Award shall comply in all respects with the requirements of all applicable securities laws, rules and regulations (including, without limitation, the provisions of the Securities Act, the Exchange Act and the respective rules and regulations promulgated thereunder) and any other law, rule or regulation applicable thereto, as such laws, rules, and regulations may be amended from time to time. The Company shall not be obligated to either issue the Shares or permit the resale of any Shares if such issuance or resale would violate any such requirements.
11. Limitation on Rights; No Right to Future Grants; Extraordinary Item. By entering into this Agreement and accepting the Award, you acknowledge that: (a) the Plan is discretionary and may be modified, suspended or terminated by the Company at any time as provided in the Plan; (b) the grant of the Award is a one-time benefit and does not create any contractual or other right to receive future grants of awards or benefits in lieu of awards; (c) all determinations with respect to any such future grants, including, but not limited to, the times when awards will be granted, the number of shares subject to each award, the award price, if any, and the time or times when each award will be settled, will be at the sole discretion of the Company; (d) your participation in the Plan is voluntary; (e) the value of the Award is an extraordinary item which is outside the scope of your employment contract, if any; (f) the Award is not part of normal or expected compensation for any purpose, including without limitation for calculating any benefits, severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments; (g) the future value of the Common Stock subject to the Award is unknown and cannot be predicted with certainty, (h) neither the Plan, the Award nor the issuance of the Shares confers upon you any right to continue in the employ of (or any other relationship with) the Company or any Subsidiary, nor do they limit in any respect the right of the Company or any Subsidiary to terminate your employment or other relationship with the Company or any Subsidiary, as the case may be, at any time and (i) in the event that you are not a direct employee of Company, the grant of the Award will not be interpreted to form an employment relationship with the Company; and furthermore, the grant of the Award will not be interpreted to form an employment contract with your employer, the Company or any Subsidiary.
12. Execution of Award Agreement. Please acknowledge your acceptance of the terms and conditions of the Award by signing the original of this Agreement and returning it to your local HR Generalist. If you do not sign and return this Agreement, the Company is not obligated to provide you any benefit hereunder and may refuse to issue shares to you under this Award.
Very truly yours, | ||
AMAZON.COM, INC. | ||
By:
Name: Title: |
ACCEPTANCE AND ACKNOWLEDGMENT
I, a resident of (state, or country if other than U.S.), accept and agree to the terms of the Restricted Stock Unit Award described in this Agreement and in the Plan, acknowledge receipt of a copy of this Agreement, the Plan and the applicable Plan Summary, and acknowledge that I have read them carefully and that I fully understand their contents.
Dated:
|
||
Taxpayer I.D. Number |
<<Participant>> |
|
Address:
|
||
|
||
|
||
|
EXHIBIT 10.13
AMAZON.COM, INC.
RESTRICTED STOCK UNIT AWARD AGREEMENT
TO: <<Participant>>
To encourage your continued service as a member of the Board of Directors of Amazon.com, Inc. (the Company), you have been granted this restricted stock unit award (the Award) pursuant to the Companys 1997 Stock Incentive Plan (the Plan). The Award represents the right to receive shares of Common Stock of the Company subject to the fulfillment of the vesting conditions set forth in this agreement (this Agreement).
The terms of the Award are as set forth in this Agreement and in the Plan. The Plan is incorporated into this Agreement by reference, which means that this Agreement is limited by and subject to the express terms and provisions of the Plan. In the event of a conflict between the terms of this Agreement and the terms of the Plan, the terms of the Plan shall control. Capitalized terms that are not defined in this Agreement have the meanings given to them in the Plan. The most important terms of the Award are summarized as follows:
1. Award Date:
2. Number of Restricted Stock Units Subject to this Award:
3. Vesting Base Date:
4. Vesting Schedule:
The Award will vest according to the following schedule:
Period of Participant's Continuous
Service From the
Percent of Total Award That is
Vesting Base Date
Vested
5. Conversion of Restricted Stock Units and Issuance of Shares. Upon each vesting of the Award (each, a Vest Date), one share of Common Stock shall be issuable for each restricted stock unit that vests on such Vest Date (the Shares), subject to the terms and provisions of the Plan and this Agreement. Thereafter, the Company will transfer such Shares to you upon satisfaction of any required tax withholding obligations. No fractional shares shall be issued under this Agreement.
6. Termination of Service. The unvested portion of the Award will terminate automatically and be forfeited to the Company immediately and without further notice upon termination of your service as a member of the Board of Directors of the Company for any reason (including as a result of death or disability). No Shares shall be issued or issuable with respect to any portion of the Award that terminates unvested and is forfeited.
7. Right to Shares. You shall not have any right in, to or with respect to any of the Shares (including any voting rights or rights with respect to dividends paid on the Common Stock) issuable under the Award until the Award is settled by the issuance of such Shares to you.
8. Taxes.
(a) Generally . You are ultimately liable and responsible for all taxes owed in connection with the Award. The Company does not commit and is under no obligation to structure the Award to reduce or eliminate your tax liability.
(b) Payment of Withholding Taxes . Prior to any event in connection with the Award (e.g., vesting) that the Company determines may result in any domestic or foreign tax withholding obligation, whether national, federal, state or local, including any social tax obligation (the Tax Withholding Obligation), you must arrange for the satisfaction of the minimum amount of such Tax Withholding Obligation in a manner acceptable to the Company.
(i) By Sale of Shares . Unless you choose to satisfy the Tax Withholding Obligation by some other means in accordance with clause (ii) below, y our acceptance of this Award constitutes your instruction and authorization to the Company and any brokerage firm determined acceptable to the Company for such purpose to sell on your behalf a whole number of Shares from those Shares issuable to you as the Company determines to be appropriate to generate cash proceeds sufficient to satisfy the Tax Withholding Obligation. Such Shares will be sold on the day the Tax Withholding Obligation arises (e.g., a Vest Date) or as soon thereafter as practicable. You will be responsible for all brokers fees and other costs of sale, and you agree to indemnify and hold the Company harmless from any losses, costs, damages, or expenses relating to any such sale. To the extent the proceeds of such sale exceed your Tax Withholding Obligation, the Company agrees to pay such excess in cash to you as soon as practicable. You acknowledge that the Company or its designee is under no obligation to arrange for such sale at any particular price, and that the proceeds of any such sale may not be sufficient to satisfy your Tax Withholding Obligation. Accordingly, you agree to pay to the Company as soon as practicable any amount of the Tax Withholding Obligation that is not satisfied by the sale of Shares described above.
(ii) By Check, Wire Transfer or Other Means . At any time not less than five (5) business days before any Tax Withholding Obligation arises (e.g., a Vest Date), you may elect to satisfy your Tax Withholding Obligation by delivering to the Company an amount that the Company determines is sufficient to satisfy your Tax Withholding Obligation by (i) wire transfer
Page 2
to such account as the Company may direct, (ii) delivery of a certified check payable to the Company, c/o Stock Administration, P.O. Box 81226, Seattle, WA 98108-1226, or such other address as the Company may from time to time direct, or (iii) such other means as the Company may establish or permit.
(c) Right to Retain Shares . The Company may refuse to issue any Shares to you until you satisfy the Tax Withholding Obligation. To the maximum extent permitted by law, the Company has the right to retain without notice from Shares issuable under the Award or from salary payable to you, Shares or cash having a value sufficient to satisfy the Tax Withholding Obligation.
9. Registration. The Company currently has an effective registration statement on file with the Securities and Exchange Commission with respect to the shares of Common Stock subject to the Award. The Company intends to maintain this registration but has no obligation to do so. If the registration ceases to be effective, you will not be able to transfer or sell Shares issued to you pursuant to the Award unless exemptions from registration under applicable securities laws are available. Such exemptions from registration are very limited and might be unavailable. You agree that any resale by you of the shares of Common Stock issued pursuant to the Award shall comply in all respects with the requirements of all applicable securities laws, rules and regulations (including, without limitation, the provisions of the Securities Act, the Exchange Act and the respective rules and regulations promulgated thereunder) and any other law, rule or regulation applicable thereto, as such laws, rules, and regulations may be amended from time to time. The Company shall not be obligated to either issue the Shares or permit the resale of any Shares if such issuance or resale would violate any such requirements.
10. Limitation on Rights; No Right to Future Grants; Extraordinary Item. By entering into this Agreement and accepting the Award, you acknowledge that: (a) the Plan is discretionary and may be modified, suspended or terminated by the Company at any time as provided in the Plan; (b) the grant of the Award is a one-time benefit and does not create any contractual or other right to receive future grants of awards or benefits in lieu of awards; (c) all determinations with respect to any such future grants, including, but not limited to, the times when awards will be granted, the number of shares subject to each award, the award price, if any, and the time or times when each award will be settled, will be at the sole discretion of the Company; (d) your participation in the Plan is voluntary; (e) the value of the Award is an extraordinary item which is outside the scope of your service contract, if any; (f) the Award is not part of normal or expected compensation for any purpose, including without limitation for calculating any benefits, severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments; (g) the future value of the Common Stock subject to the Award is unknown and cannot be predicted with certainty, (h) neither the Plan, the Award nor the issuance of the Shares confers upon you any right to continue in the service of (or any other relationship with) the Company or any Subsidiary, and (i) the grant of the Award will not be interpreted to form an employment relationship with the Company or any Subsidiary.
Page 3
11. Execution of Award Agreement. Please acknowledge your acceptance of the terms and conditions of the Award by signing the original of this Agreement and returning it to the Company.
Very truly yours, | ||
AMAZON.COM, INC. | ||
By: | ||
|
||
Name: | ||
|
||
Title: | ||
|
Page 4
ACCEPTANCE AND ACKNOWLEDGMENT
I, a resident of (state, or country if other than U.S.), accept the Restricted Stock Unit Award described in this Agreement and in the Plan, and acknowledge receipt of a copy of this Agreement, the Plan and the applicable Plan Summary, and acknowledge that I have read them carefully and that I fully understand their contents.
Dated: | ||||
|
||||
Taxpayer I.D. Number |
<<Participant>> |
|||
Address: | ||||
|
||||
|
||||
|
||||
|
Page 5
Exhibit 12.1 Ratio of Earnings To Fixed Charges
Year Ended December 31,
2002
2001
2000
1999
1998
(amounts in thousands)
$
(149,132
)
$
(567,277
)
$
(1,411,273
)
$
(719,968
)
$
(124,546
)
4,169
30,327
304,596
76,769
2,905
(144,963
)
(536,950
)
(1,106,677
)
(643,199
)
(121,641
)
142,925
139,232
130,921
84,566
26,639
6,205
8,880
10,773
4,732
2,833
149,130
148,112
141,694
89,298
29,472
4,167
(388,838
)
(964,983
)
(553,901
)
(92,169
)
(149,130
)
(148,112
)
(141,694
)
(89,298
)
(29,472
)
$
(144,963
)
$
(536,950
)
$
(1,106,677
)
$
(643,199
)
$
(121,641
)
Exhibit 21.1
AMAZON.COM, INC.
LIST OF SIGNIFICANT SUBSIDIARIES
Name
Jurisdiction of Incorporation
Percent Owned
Borders Teamed with Amazon.com, Inc.
Delaware
100
%
Amazon Global Resources, Inc.
Delaware
100
%
Amazon.com.dedc, LLC
Delaware
100
%
Fulfillco.ksdc, Inc.
Delaware
100
%
Amazon.com.kydc, Inc.
Delaware
100
%
Amazon.com Commerce Services, Inc.
Delaware
100
%
Amazon.com Holdings, Inc.
Delaware
100
%
Amazon.com Intl Sales, Inc.
Delaware
100
%
Amazon.com LLC
Delaware
100
%
Amazon.com Payments, Inc.
Delaware
100
%
NV Services, Inc.
Nevada
100
%
Amazon Fulfillment Services, Inc.
Delaware
100
%
Amazon.com @ Target.com, Inc.
Delaware
100
%
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the (a) Registration Statement
(Form S-4 No. 333-56723), as amended, pertaining to the registration of the 10%
Senior Discount Notes, (b) Registration Statement (Form S-4 No. 333-55943), as
amended, pertaining to the acquisition shelf-registration of up to 30 million
shares of common stock, (c) Registration Statement (Form S-8 No. 333-28763)
pertaining to the 1997 Stock Option Plan of Amazon.com, Inc. and the Amended
and Restated 1994 Stock Option Plan of Amazon.com, Inc., (d) Registration
Statement (Form S-8 No. 333-88825) pertaining to the Convergence Corporation
Stock Option Plan, (e) Registration Statement (Form S-8 No. 333-80491)
pertaining to the Alexa Internet Amended and Restated 1997 Stock Option Plan,
(f) Registration Statement (Form S-8 No. 333-80495) pertaining to the
Accept.com Financial Services Corporation 1998 Stock Option Plan, (g)
Registration Statement (Form S-3 No. 333-78797), as amended, pertaining to
the shelf registration of up to $2,000,000,000 of certain securities, (h)
Registration Statement (Form S-8 No. 333-78651) pertaining to the LiveBid.com
1997 Stock Option Plan and Innerlinx Technologies, Incorporated 1997 Stock
Option Plan, (i) Registration Statement (Form S-8 No. 333-78653) pertaining to
the eNiche Incorporated Amended and Restated 1998 Stock Option and Grant Plan,
(j) Registration Statement (Form S-8 No. 333-74419) pertaining to the
Amazon.com, Inc. 1999 Non-officer Employee Stock Option Plan,
(k) Registration Statement (Form S-8 No. 333-63311) pertaining to the Junglee Corp.
1996 Stock Plan, the Junglee Corp. 1998 Equity Incentive Plan, the Sage
Enterprises, Inc. 1997 Amended Stock Option Plan, and the Sage Enterprises, Inc.
MVP Stock Option Plan, and (1) Registration Statement
(Form S-8 No. 333-59958) pertaining to the Amazon.com Inc.
2001 Stakeholder Trust Plan, of our report dated January 17,
2003, with respect to the consolidated financial
statements and schedule of Amazon.com, Inc. included in this Annual Report
(Form 10-K) of Amazon.com, Inc. for the year ended December 31, 2002.
Seattle, Washington
/s/ Ernst & Young LLP
February 17, 2003
Exhibit 99.1
Certification Pursuant to 18 U.S.C. Section 1350
In connection with the Annual Report of Amazon.com, Inc. (the Company) on Form 10-K for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Jeffrey P. Bezos, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | ||
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: February 17, 2003 | /s/ JEFFREY P. BEZOS | |||
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Jeffrey P. Bezos
Chairman and Chief Executive Officer (Principal Executive Officer) |
Exhibit 99.2
Certification Pursuant to 18 U.S.C. Section 1350
In connection with the Annual Report of Amazon.com, Inc. (the Company) on Form 10-K for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Thomas J. Szkutak, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | ||
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: February 17, 2003 | /s/ THOMAS J. SZKUTAK | |||
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Thomas J. Szkutak
Senior Vice President and Chief Financial Officer (Principal Financial Officer) |