UNITED STATES SECURITIES AND EXCHANGE COMMISSION
| (Mark One) | ||
| x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended March 31, 2003 | ||
| or | ||
| o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from to . | ||
Commission File No. 000-22513
Amazon.com, Inc.
| Delaware | 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
(206) 266-1000
(Address and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
391,719,201 shares of common stock,
par value $0.01 per share outstanding, as of April 17, 2003
AMAZON.COM, INC.
FORM 10-Q
For the Three Months Ended March 31, 2003
INDEX
| Page | ||||||
| PART I. FINANCIAL INFORMATION | ||||||
| Item 1. | Financial Statements | |||||
| Consolidated Balance Sheets — March 31, 2003 and December 31, 2002 | 3 | |||||
| Consolidated Statements of Operations — Three months ended March 31, 2003 and 2002 | 4 | |||||
| Consolidated Statements of Cash Flows — Three months ended March 31, 2003 and 2002 | 5 | |||||
| Notes to Consolidated Financial Statements — March 31, 2003 | 6 | |||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 | ||||
| Item 3. | Quantitative and Qualitative Disclosure About Market Risk | 32 | ||||
| Item 4. | Controls and Procedures | 34 | ||||
| PART II. OTHER INFORMATION | ||||||
| Item 1. | Legal Proceedings | 34 | ||||
| Item 2. | Changes in Securities and Use of Proceeds | 35 | ||||
| Item 3. | Defaults Upon Senior Securities | 35 | ||||
| Item 4. | Submission of Matters to a Vote of Security Holders | 35 | ||||
| Item 5. | Other Information | 35 | ||||
| Item 6. | Exhibits and Reports on Form 8-K | 35 | ||||
| Signatures | 36 | |||||
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMAZON.COM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(Unaudited)
| March 31, | December 31, | |||||||||||
| 2003 | 2002 | |||||||||||
ASSETS |
||||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
$ | 495,773 | $ | 738,254 | ||||||||
Marketable securities |
586,779 | 562,715 | ||||||||||
Inventories |
173,030 | 202,425 | ||||||||||
Accounts receivable, net and other current assets |
88,914 | 112,282 | ||||||||||
Total current assets |
1,344,496 | 1,615,676 | ||||||||||
Fixed assets, net |
228,279 | 239,398 | ||||||||||
Goodwill, net |
70,811 | 70,811 | ||||||||||
Other intangibles, net |
2,548 | 3,460 | ||||||||||
Other equity investments |
13,453 | 15,442 | ||||||||||
Other assets |
46,346 | 45,662 | ||||||||||
Total assets |
$ | 1,705,933 | $ | 1,990,449 | ||||||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
||||||||||||
Current liabilities: |
||||||||||||
Accounts payable |
$ | 393,696 | $ | 618,128 | ||||||||
Accrued expenses and other current liabilities |
234,194 | 314,935 | ||||||||||
Unearned revenue |
42,979 | 47,916 | ||||||||||
Interest payable |
16,632 | 71,661 | ||||||||||
Current portion of long-term debt and other |
11,078 | 13,318 | ||||||||||
Total current liabilities |
698,579 | 1,065,958 | ||||||||||
Long-term debt and other |
2,296,418 | 2,277,305 | ||||||||||
Commitments and contingencies |
||||||||||||
Stockholders’ deficit: |
||||||||||||
Preferred stock, $0.01 par value: |
||||||||||||
Authorized shares — 500,000 |
||||||||||||
Issued and outstanding shares — none |
— | — | ||||||||||
Common stock, $0.01 par value: |
||||||||||||
Authorized shares — 5,000,000 |
||||||||||||
Issued and outstanding shares — 391,609 and 387,906
shares, respectively |
3,916 | 3,879 | ||||||||||
Additional paid-in capital |
1,714,616 | 1,649,946 | ||||||||||
Deferred stock-based compensation |
(5,420 | ) | (6,591 | ) | ||||||||
Accumulated other comprehensive income |
17,655 | 9,662 | ||||||||||
Accumulated deficit |
(3,019,831 | ) | (3,009,710 | ) | ||||||||
Total stockholders’ deficit |
(1,289,064 | ) | (1,352,814 | ) | ||||||||
Total liabilities and stockholders’ deficit |
$ | 1,705,933 | $ | 1,990,449 | ||||||||
See accompanying notes to consolidated financial statements.
3
AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
| Three Months Ended | ||||||||||
| March 31, | ||||||||||
| 2003 | 2002 | |||||||||
Net sales |
$ | 1,083,559 | $ | 847,422 | ||||||
Cost of sales |
812,977 | 624,297 | ||||||||
Gross profit |
270,582 | 223,125 | ||||||||
Operating expenses: |
||||||||||
Fulfillment |
103,705 | 89,815 | ||||||||
Marketing |
28,227 | 32,244 | ||||||||
Technology and content |
50,088 | 55,497 | ||||||||
General and administrative |
21,102 | 20,911 | ||||||||
Stock-based compensation(1) |
27,323 | 10,931 | ||||||||
Amortization of other intangibles |
912 | 1,979 | ||||||||
Restructuring-related and other |
— | 9,974 | ||||||||
Total operating expenses |
231,357 | 221,351 | ||||||||
Income from operations |
39,225 | 1,774 | ||||||||
Interest income |
6,540 | 5,652 | ||||||||
Interest expense |
(36,511 | ) | (35,244 | ) | ||||||
Other income, net |
2,859 | 95 | ||||||||
Remeasurement of 6.875% PEACS and other |
(21,798 | ) | 5,516 | |||||||
Total non-operating expenses, net |
(48,910 | ) | (23,981 | ) | ||||||
Loss before equity in losses of equity-method
investees |
(9,685 | ) | (22,207 | ) | ||||||
Equity in losses of equity-method investees, net |
(436 | ) | (1,744 | ) | ||||||
Loss before change in accounting principle |
(10,121 | ) | (23,951 | ) | ||||||
Cumulative effect of change in accounting principle |
— | 801 | ||||||||
Net loss |
$ | (10,121 | ) | $ | (23,150 | ) | ||||
Basic and diluted loss per share: |
||||||||||
Prior to cumulative effect of change in accounting
principle |
$ | (0.03 | ) | $ | (0.06 | ) | ||||
Cumulative effect of change in accounting principle |
0.00 | 0.00 | ||||||||
| $ | (0.03 | ) | $ | (0.06 | ) | |||||
Shares used in computation of loss per share: |
||||||||||
Basic and diluted |
388,541 | 373,031 | ||||||||
| (1) | Components of stock-based compensation: |
Fulfillment |
$ | 6,985 | $ | 1,771 | ||||
Marketing |
979 | 874 | ||||||
Technology and content |
14,216 | 5,825 | ||||||
General and administrative |
5,143 | 2,461 | ||||||
| $ | 27,323 | $ | 10,931 | |||||
See accompanying notes to consolidated financial statements.
4
AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| Three Months Ended | ||||||||||
| March 31, | ||||||||||
| 2003 | 2002 | |||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
$ | 738,254 | $ | 540,282 | ||||||
OPERATING ACTIVITIES: |
||||||||||
Net loss |
(10,121 | ) | (23,150 | ) | ||||||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||||
Depreciation of fixed assets and other amortization |
19,750 | 20,940 | ||||||||
Stock-based compensation |
27,323 | 10,931 | ||||||||
Equity in losses of equity-method investees, net |
436 | 1,744 | ||||||||
Amortization of other intangibles |
912 | 1,979 | ||||||||
Gain on sale of marketable securities, net |
(3,980 | ) | (376 | ) | ||||||
Remeasurement of 6.875% PEACS and other |
21,798 | (5,516 | ) | |||||||
Non-cash interest expense and other |
7,877 | 7,061 | ||||||||
Cumulative effect of change in accounting principle |
— | (801 | ) | |||||||
Changes in operating assets and liabilities: |
||||||||||
Inventories |
30,625 | 4,674 | ||||||||
Accounts receivable, net and other current assets |
27,233 | (3,320 | ) | |||||||
Accounts payable |
(226,605 | ) | (128,286 | ) | ||||||
Accrued expenses and other current liabilities |
(87,065 | ) | (65,861 | ) | ||||||
Increases to unearned revenue |
22,968 | 28,716 | ||||||||
Amortization of previously unearned revenue |
(27,905 | ) | (37,333 | ) | ||||||
Interest payable |
(55,028 | ) | (52,435 | ) | ||||||
Net cash used in operating activities |
(251,782 | ) | (241,033 | ) | ||||||
INVESTING ACTIVITIES: |
||||||||||
Sales and maturities of marketable securities and other investments |
208,955 | 136,575 | ||||||||
Purchases of marketable securities |
(233,055 | ) | (134,227 | ) | ||||||
Purchases of fixed assets, including internal-use software and Web site
development |
(6,394 | ) | (4,854 | ) | ||||||
Net cash used in investing activities |
(30,494 | ) | (2,506 | ) | ||||||
FINANCING ACTIVITIES: |
||||||||||
Proceeds from exercise of stock options and other |
38,555 | 7,409 | ||||||||
Repayment of capital lease obligations and other |
(3,221 | ) | (4,563 | ) | ||||||
Net cash provided by financing activities |
35,334 | 2,846 | ||||||||
Effect of exchange-rate changes on cash and cash equivalents |
4,461 | (2,900 | ) | |||||||
Net decrease in cash and cash equivalents |
(242,481 | ) | (243,593 | ) | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 495,773 | $ | 296,689 | ||||||
SUPPLEMENTAL CASH FLOW INFORMATION: |
||||||||||
Fixed assets acquired under capital leases and other financing arrangements |
$ | 661 | $ | 924 | ||||||
Cash paid for interest |
84,215 | 80,483 | ||||||||
See accompanying notes to consolidated financial statements.
5
AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Note 1 — Accounting Policies
Unaudited Interim Financial Information
We have prepared the accompanying consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. As used herein, “Amazon.com,” the “Company,” “we,” “our” and similar terms include Amazon.com, Inc. and its wholly-owned subsidiaries, unless the context indicates otherwise. These consolidated financial statements are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of the consolidated balance sheets, operating results, and cash flows for the periods presented. Operating results for the three months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003 due to seasonal and other factors. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted in accordance with the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2002. Certain prior period amounts have been reclassified to conform to the current period presentation.
Principles of Consolidation
The consolidated financial statements include the accounts of Amazon.com 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.
Loss per Share
The number of shares used to calculate loss per share for the three months ended March 31, 2003 and 2002 was reduced by 1 million shares in each period. Such reductions reflect the weighted average number of outstanding shares subject to repurchase or forfeiture for the corresponding periods. The effect of outstanding stock awards is antidilutive and, accordingly, is excluded from diluted loss per share.
Accounting Changes — Inventory Costing
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 inventory of $0.8 million, with a corresponding amount recorded to “Cumulative effect of change in accounting principle” on the consolidated statements of operations. We 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. 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 third-party companies as part of our services offering and results in increased consistency with others in our industry. We received a letter of preferability for this change in inventory costing from our independent auditors.
Vendor Agreements
We have agreements to receive cash consideration from certain of our vendors, including rebates and cooperative marketing reimbursements. We generally presume amounts received from our vendors are a reduction of the prices we pay for their products and therefore we reflect such amounts as either a reduction of “Cost of sales” on our consolidated statements of operations, or if the
6
product inventory is still on hand at the reporting date, it is reflected as a reduction of “Inventories” on our consolidated balance sheets. When we receive direct reimbursements for costs incurred by us in selling the vendor’s product or service, the amount we receive is recorded as a cost offset to “Marketing” on our statements of operations.
Vendor rebates are typically dependent upon reaching minimum purchase thresholds. We evaluate the likelihood of reaching purchase thresholds using past experience and current year forecasts. When rebates can be reasonably estimated, we record a portion of the rebate as we make progress towards the purchase threshold. Our accounting treatment is consistent with the conclusions reached in Emerging Issues Task Force (“EITF”) 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.”
Goodwill and Other Intangibles
Statements of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” prescribes a two-phase process for impairment testing of goodwill, which is performed once annually, absent indicators of impairment. The first phase screens for impairment, while the second phase (if necessary) measures the impairment. We have elected to perform our annual analysis during the fourth calendar quarter of each year. No indicators of impairment were identified during the first quarter of 2003.
Other intangibles consist of the following (in thousands):
| March 31, 2003 | December 31, 2002 | |||||||||||||||||||||||||
| Gross | Other | Gross | Other | |||||||||||||||||||||||
| Carrying | Accumulated | Intangibles, | Carrying | Accumulated | Intangibles, | |||||||||||||||||||||
| Amount | Amortization | Net | Amount | Amortization | Net | |||||||||||||||||||||
Contract-based |
$ | 16,584 | $ | (15,116 | ) | $ | 1,468 | $ | 16,584 | $ | (14,414 | ) | $ | 2,170 | ||||||||||||
Marketing-related |
5,617 | (5,089 | ) | 528 | 5,617 | (5,010 | ) | 607 | ||||||||||||||||||
Technology-based |
4,386 | (4,338 | ) | 48 | 4,386 | (4,331 | ) | 55 | ||||||||||||||||||
Customer-related |
2,021 | (1,517 | ) | 504 | 2,021 | (1,393 | ) | 628 | ||||||||||||||||||
Total |
$ | 28,608 | $ | (26,060 | ) | $ | 2,548 | $ | 28,608 | $ | (25,148 | ) | $ | 3,460 | ||||||||||||
The net carrying amount of intangible assets at March 31, 2003 is scheduled to be fully amortized by the end of 2004. Amortization expense for the net carrying amount of intangible assets at March 31, 2003 is estimated to be $2 million for the remainder of 2003, and less than $1 million in 2004.
Revenue
Product sales, net of promotional gift certificates 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 the Company’s best estimate of expected product returns) are estimated using historical experience.
Amounts billed to customers for outbound shipping charges are included in net sales and were $78 million and $89 million for the three months ended March 31, 2003 and 2002, respectively.
Stock-Based Compensation
Stock-based compensation consisted of the following (in thousands):
| Three Months Ended | ||||||||||
| March 31, | ||||||||||
| 2003 | 2002 | |||||||||
Stock awards — variable accounting |
$ | 20,975 | $ | 9,499 | ||||||
Fixed accounting (1): |
||||||||||
Restricted stock units |
5,176 | — | ||||||||
Restricted stock |
1,172 | 1,432 | ||||||||