Amazon.com 2003 Annual Report Download

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Table of contents

  • Page 1

  • Page 2
    ... one small example, engineering a feature like Instant Order Update for use by 40 million customers costs nowhere near 40 times what it would cost to do the same for 1 million customers. Our pricing strategy does not attempt to maximize margin percentages, but instead seeks to drive maximum value...

  • Page 3
    ... on the customer and focused on the long term. On that time scale, the interests of shareowners and customers are aligned. As always, I attach our 1997 letter and believe it is still worth a read. Here's to not being a tenant! Jeffrey P. Bezos Founder and Chief Executive Officer Amazon.com, Inc...

  • Page 4
    1997 LETTER TO SHAREHOLDERS (Reprinted from the 1997 Annual Report) To our shareholders: Amazon.com passed many milestones in 1997: by year-end, we had served more than 1.5 million customers, yielding 838% revenue growth to $147.8 million, and extended our market leadership despite aggressive ...

  • Page 5
    ... strategic partners, including America Online, Yahoo!, Excite, Netscape, GeoCities, AltaVista, @Home, and Prodigy. Infrastructure During 1997, we worked hard to expand our business infrastructure to support these greatly increased traffic, sales, and service levels: • Amazon.com's employee base...

  • Page 6
    ... what we want to do. 1997 was indeed an incredible year. We at Amazon.com are grateful to our customers for their business and trust, to each other for our hard work, and to our shareholders for their support and encouragement. Jeffrey P. Bezos Founder and Chief Executive Officer Amazon.com, Inc.

  • Page 7
    ... this Form 10-K. Yes ' No È Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes È No ' Aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2003 ...Number of shares of common stock outstanding...

  • Page 8
    ... ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...Certain Relationships and Related Transactions ...Principal Accountant Fees and Services ...PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form...

  • Page 9
    .... 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...

  • Page 10
    ... contents of many of the books we offer with our "Look Inside the Book" and "Search Inside the Book" features. Our community of online users also creates feature-rich content, including online recommendation lists, wish lists, and wedding and baby registries. We endeavor to fulfill customer orders...

  • Page 11
    ... credit card. Marketing and Promotion Our marketing strategy is designed to strengthen and broaden the Amazon.com brand name, increase customer traffic to our websites, encourage customers to shop in many product categories, promote repeat purchases, and develop incremental product and service...

  • Page 12
    ... 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 media companies, Web portals, and Web search engines that are...

  • Page 13
    ...resources to technology development and marketing than we do. 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 positions. As various Internet market...

  • Page 14
    ... agreements. If we fail to implement, maintain, and develop successfully the various components of such commercial relationships, which may include fulfillment, customer service, inventory management, tax collection, payment processing, licensing of third party software, hardware, and content...

  • Page 15
    ... 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...

  • Page 16
    ... terms our commercial agreements and strategic alliances; foreign exchange rate fluctuations; our ability to acquire merchandise, manage inventory, and fulfill orders; the introduction by our competitors of websites, products, services, or improvements; changes in usage of the Internet and online...

  • Page 17
    ... 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...

  • Page 18
    ...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...

  • Page 19
    ...in excess or insufficient inventory, and warehousing, fulfillment, and distribution capacity. A failure to optimize inventory in our fulfillment network will harm our shipping margins by requiring us to make long-zone shipments or partial shipments from one or more locations. Orders from each of our...

  • Page 20
    ... 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...

  • Page 21
    ...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...

  • Page 22
    ... few vendors. However, no vendor accounts for 10% or more of our inventory purchases. 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...

  • Page 23
    ... President, Worldwide Application Software Vice President and Chief Accounting Officer Senior Vice President, Worldwide Retail and Marketing Senior Vice President and Chief Financial Officer Senior Vice President, Worldwide Operations and Customer Service Senior Vice President, General Counsel, and...

  • Page 24
    ... 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...

  • Page 25
    ... operations occupy approximately 77,000 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 from 2006 to 2008. Our data-center facilities have 120,000 combined square feet, including...

  • Page 26
    ... Stock and Related Shareholder 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 intraday sale prices for the common stock for the periods indicated, as reported by the Nasdaq National Market...

  • Page 27
    ...services to customers of our global websites. The products offered on our websites include products we have purchased from distributors and manufacturers and products sold by third parties on our websites. Generally, we recognize revenue as the seller of record from items we offer from our inventory...

  • Page 28
    ... centers, are largely fixed costs. The customer experience costs that remain variable as a percentage of sales include product costs, credit-card processing fees, picking, packaging, and preparing orders for shipment, transportation, customer service support, and certain aspects of our marketing...

  • Page 29
    ... products sold to customers, the mix of net sales derived from products as compared with services, competition, risks of inventory management, the degree to which we enter into commercial agreements and strategic transactions and maintain and develop commercial relationships, foreign exchange risks...

  • Page 30
    ... experience, for losses we incur on our payment guarantee from disputes by customers against third-party sellers. Inventories Inventories, consisting of products available for sale, are accounted for using the first-in first-out ("FIFO") method, and are valued at the lower of cost or market...

  • Page 31
    ...we make to suppliers of products and services, employee compensation, and interest payments on our long-term debt obligations. Cash received from customers and third-party sellers generally corresponds to our net sales. Because our customers primarily use credit cards to buy from us, our receivables...

  • Page 32
    .... Cash used in financing activities was $332 million during 2003 resulting primarily from repayments of long-term debt obligations. Cash provided by financing activities was $107 million during 2002 and 2001. We expect cash proceeds from exercises of employee stock options to decline over time as we...

  • Page 33
    ... restructure our long-term debt for strategic reasons or to further strengthen our financial position (and our Board of Directors has authorized the debt repurchase program discussed above). The sale of additional equity or convertible debt securities would likely be dilutive to our shareholders. In...

  • Page 34
    ...142, Goodwill and Other Intangible Assets, and lower restructuring-related charges. Net Sales and Gross Profit Net sales information is as follows (in thousands): Years Ended December 31, 2003 2002 2001 Net Sales North America Media ...$2,269,472 Electronics and other general merchandise ...878,519...

  • Page 35
    ... year-round free shipping offers and lower prices for customers. Generally, our gross margins fluctuate based on several factors, including our mix of sales during the year, sales volumes by third-party sellers, competitive pricing decisions, changes in vendor pricing, and general efforts to reduce...

  • Page 36
    ... to continue certain promotions or elect to reduce or discontinue them. We direct customers to our websites primarily through a number of online marketing channels, including our Syndicated Stores and Associates programs, which enable associated websites to make our products available to their...

  • Page 37
    ... them. The primary components of our interest expense relate to our debt instruments. During 2003, we redeemed our 10% Senior Discount Notes and we redeemed a portion of our 4.75% Convertible Subordinated Notes. At December 31, 2003, our total long-term indebtedness was $1.95 billion. See Item 8 of...

  • Page 38
    ... and Supplementary Data-Note 6-Long-Term Debt and Other" for additional information on the termination of our Euro Currency Swap. As a result of this termination, any fluctuations in the Euro to U.S. Dollar exchange will have a greater effect on our interest expense. Income Taxes Subject to certain...

  • Page 39
    ... to corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business. Management strongly encourages investors to review our financial statements and publicly-filed reports in their entirety and to not rely on any single financial measure...

  • Page 40
    ... stock units, resulting in the estimated fair value of the award recognized over the service period. • • We record the employer portion of payroll tax expense, a cash expense, resulting from exercises of stockbased awards in "Fulfillment," "Marketing," "Technology and content," and "General...

  • Page 41
    ... 1-Description of Business and Accounting Policies" for presentation of our stockbased compensation expense calculated on a consistent basis for all awards using the fair value method as prescribed under SFAS No. 123, Accounting for Stock-Based Compensation, as well as total outstanding stockbased...

  • Page 42
    ... 6-Long-Term Debt and Other." Free Cash Flow Free cash flow, which we reconcile to "Net cash provided by (used in) operating activities," is cash flow from operations reduced by "Purchases of fixed assets, including internal-use software and website development." We use free cash flow, and ratios...

  • Page 43
    ... segment operating income as a percentage of net sales ...Pro forma basic earnings per share ...Pro forma diluted earnings per share ...Weighted average shares used in computation of pro forma basic earnings per share ...Weighted average shares used in computation of pro forma diluted earnings per...

  • Page 44
    ...$ (157,031) Net sales ...Cost of sales ...Gross profit ...Operating expenses: Fulfillment ...Marketing ...Technology and content ...General and administrative ...Stock-based compensation ...Amortization of goodwill and other intangibles ...Restructuring-related and other ...Total operating expenses...

  • Page 45
    ...10 0.03 $1.13 $ (0.43) - $ Weighted average shares used in computation of earnings (loss) per share: Basic ...Diluted ...Net cash provided by (used in) operating activities ...Purchases of fixed assets, including internal-use software and Website development ...Free cash flow ...Net cash provided...

  • Page 46
    ... 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...

  • Page 47
    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, 2003. Amounts were as follows (in thousands, except percentages): Estimated ...

  • Page 48
    ....co.jp) accounted for 38% of our consolidated revenues. Net sales and related expenses generated from these websites, as well as those relating to www.amazon.ca, are denominated in the functional currencies of the corresponding websites, and include Euros, British Pounds, Yen, and Canadian Dollars...

  • Page 49
    Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Ernst & Young LLP, Independent Auditors ...Consolidated Statements of Cash Flows ...Consolidated Statements of Operations ...Consolidated Balance Sheets ...Consolidated Statements of ...

  • Page 50
    ..., 2003, 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...

  • Page 51
    ...,022 174,291 (119,782) INVESTING ACTIVITIES: Sales and maturities of marketable securities and other investments ...Purchases of marketable securities ...Purchases of fixed assets, including internal-use software and website development ...Proceeds from sale of subsidiary and other ...Investments in...

  • Page 52
    ... ...Cumulative effect of change in accounting principle ...Weighted average shares used in computation of earnings (loss) per share: Basic ...Diluted ...(1) Components of stock-based compensation: Fulfillment ...Marketing ...Technology and content ...General and administrative ...$17,960 4,968...

  • Page 53
    ... SHEETS (in thousands, except per share data) December 31, 2003 ASSETS December 31, 2002 Current assets: Cash and cash equivalents ...Marketable securities ...Inventories ...Accounts receivable, net and other current assets ...Total current assets ...Fixed assets, net ...Goodwill, net ...Other...

  • Page 54
    ...-for-sale securities, net ...Net unrealized gains on Euro-based currency swap ...Comprehensive income ...Exercise of common stock options, net and vesting of restricted stock ...Notes converted ...Income tax benefit on stock awards ...Amortization of deferred stock-based compensation ...Issuance...

  • Page 55
    ... 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...

  • Page 56
    ...accounting principle" on the consolidated statements of operations. We received a letter of preferability for this change in inventory...15 per share, for 2001, related to amortization of other intangibles that was classified as goodwill effective January 1, 2002. Fixed Assets Fixed assets are stated ...

  • Page 57
    ...) Included in fixed assets is the cost of internal-use software and website development, including software used to upgrade and enhance our websites. We expense all costs related to the development of internal-use software other than those incurred during the application development stage. Costs...

  • Page 58
    ... STATEMENTS-(Continued) We generally invest our excess cash in A-rated or higher short- to intermediate-term fixed income securities and money market mutual funds. Such investments are included in "Marketable securities" on the accompanying consolidated balance sheets and are reported at fair value...

  • Page 59
    ...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...

  • Page 60
    ... for Stock Issued to Employees, and related Interpretations. The intrinsic value method of accounting results in compensation expense to the extent option exercise prices are set below market prices on the date of grant. Also, to the extent stock awards have been subject to an exchange offer, other...

  • Page 61
    ... is reversed as an offset to "Stock-based compensation." We record the employer portion of payroll tax expense resulting from exercises of stock options and vesting of restricted stock in "Fulfillment," "Marketing," "Technology and content," and "General and administrative" on our consolidated...

  • Page 62
    ...-related liability and classify future payments to "General and administrative" on the consolidated statements of operations. Foreign Currency We have the following internationally-focused websites: www.amazon.co.uk, www.amazon.de, www.amazon.fr, www.amazon.co.jp, and www.amazon.ca. Net sales...

  • Page 63
    ... 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. Assets and liabilities of these subsidiaries are translated into U.S. Dollars at period-end...

  • Page 64
    ... of weighted average shares, using the treasury stock method, for periods that we have net income. The "if converted" number of shares associated with each of our convertible debt instruments are excluded from diluted shares as their effect is anti-dilutive. See "Note 6-Long-Term Debt and Other...

  • Page 65
    ... of deposit ...Commercial paper and short-term obligations ...Corporate notes and bonds ...Asset-backed and agency securities ...U.S. Treasury notes and bonds ...Equity securities ...Marketable securities ...Total cash, cash equivalents, and marketable Securities (2) ... $ 427,306 669,403 1,096...

  • Page 66
    ...gross losses of $1 million, $1 million and $32 million were realized on sales of available-for-sale marketable securities for the years ended December 31, 2003, 2002, and 2001. We are required to pledge a portion of our marketable securities as collateral for standby letters of credit that guarantee...

  • Page 67
    ...Note 3-FIXED ASSETS Fixed assets, at cost, consist of the following (in thousands): December 31, 2003 2002 Gross Fixed Assets (1): Fulfillment and customer service ...Technology infrastructure ...Internal-use software, content, and website development ...Other corporate assets ...Gross fixed assets...

  • Page 68
    ...-method losses, net ...Sales of investments at fair ...2003 and 2002. (2) At December 31, 2003 and 2002, the fair value of our investments in the common stock of publicly held equity-method investees was $72 million and $31 million, primarily relating to our investment in drugstore.com, inc. Currently...

  • Page 69
    ..., at the holder's option, into our common stock at a conversion price of 84.883 Euros per share. The U.S. Dollar equivalent principal, interest, and conversion price fluctuate based on the Euro/ U.S. Dollar exchange ratio. Interest on the 6.875% PEACS is payable annually in arrears in February...

  • Page 70
    ... an offering of $1.25 billion of 4.75% Convertible Subordinated Notes. The 4.75% Convertible Subordinated Notes are convertible into our common stock at the holders' option at a conversion price of $78.0275 per share. Interest on the 4.75% Convertible Subordinated Notes is payable semi-annually in...

  • Page 71
    ... from time to time repurchase (through open market repurchases or private transactions), redeem or otherwise retire up to an aggregate of $500 million of our outstanding 4.75% Convertible Subordinated Notes and 6.875% PEACS. Note 7-COMMITMENTS AND CONTINGENCIES Commitments We currently lease office...

  • Page 72
    ... ...Present value of net minimum lease payments ...Less current portion ...Total long-term capital lease obligations ...Pledged Securities $ 2,887 (170) 2,717 (1,558) $ 1,159 We are required to pledge a portion of our marketable securities as collateral for standby letters of credit that guarantee...

  • Page 73
    ... state governments under various state False Claims Acts. The complaints allege that we (along with other companies with which we have commercial agreements) wrongfully failed to collect and remit sales and use taxes for sales of personal property to customers in those states and knowingly created...

  • Page 74
    ... stock unit awards ratably over the corresponding service term, generally three to six years. As it relates to stock option awards, our Board of Directors generally sets an exercise price of not less than the fair market value of our common stock at the date of grant. Generally, outstanding options...

  • Page 75
    ... Thereafter Total Outstanding restricted stock units ... 726 1,102 1,353 737 292 200 4,410 The following table summarizes our stock option activity: Number of Shares (In thousands) Weighted Average Exercise Price Balance December 31, 2000 ...Options granted ...Options terminated ...Options...

  • Page 76
    ... gains on available-for-sale securities ...Net unrealized losses on Euro currency swap ...Total accumulated other comprehensive income ... $ 30,450 20,327 (13,038) 37,739 $ 15,744 17,845 (23,927) 9,662 Common Stock Reserved for Future Issuance At December 31, 2003, common stock reserved for future...

  • Page 77
    ... 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...

  • Page 78
    ... in "Accrued expenses and other current liabilities" and "Long-term debt and other," on the accompanying consolidated balance sheets. Restructuring-related lease obligations are as follows (in thousands): 2004 2005 2006 2007 2008 Thereafter Total Gross lease obligations ...Estimated sublease income...

  • Page 79
    ... in foreign exchange rates (See "Note 1-Description of Business and Accounting Policies" ). (2) Includes a $2 million gain on the sale of our mail-order toy catalog business for $5 million in cash recorded in the third quarter of 2003. Note 13-INCOME TAXES We have provided for current and deferred...

  • Page 80
    ... for financial reporting purposes and the amounts used for income tax purposes. Significant components of our net deferred tax assets, which are included in "Accounts receivable, net and other current assets," are as follows (in thousands): December 31, 2003 2002 Deferred tax assets: Net operating...

  • Page 81
    ...from retail sales of consumer products through www.amazon.com and www.amazon.ca (including from third-party sellers), from North America focused Syndicated Stores and mail-order catalogs, and from non-retail activities such as North America focused Merchant.com, marketing, and promotional agreements...

  • Page 82
    ...% and 11% of total net sales in 2003 and 2002, and shipments into Germany represents 11% of total net sales in 2003. Net fixed assets held in locations outside the U.S. were $45 million at December 31, 2003. Depreciation expense, by segment, was as follows (in thousands): North America International...

  • Page 83
    ... of Directors authorized a debt repurchase program pursuant to which we may from time to time repurchase (through open market repurchases or private transactions), redeem or otherwise retire up to an aggregate of $500 million of our outstanding 4.75% Convertible Subordinated Notes and 6.875% PEACS...

  • Page 84
    ...04 $ (0.11) $ (0.03) Shares used in computation of earnings (loss) per share: Basic ...401,422 397,912 393,876 388,541 Diluted ...425,214 422,802 393,876 388,541 Year Ended December 31, 2002 Fourth Quarter Third Quarter Second Quarter First Quarter Net sales ...$1,428,610 $ Gross profit ...335,159...

  • Page 85
    ... to our Code of Conduct and Ethics and to compliance with Section 16(a) of the 1934 Act is set forth in our Proxy Statement relating to our 2004 annual meeting of shareholders and is incorporated herein by reference. Item 11. Executive Compensation Information required by Item 11 of Part III...

  • Page 86
    ... thereto, or is not applicable or required. (3) Index to Exhibits Exhibit Number Description (a) List of Documents Filed as a Part of This Report: 3.1 3.2 4.1 Restated Certificate of Incorporation of the Company (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the...

  • Page 87
    Exhibit Number Description 10.2†1997 Stock Incentive Plan (incorporated by reference to Appendix B to the Company's Proxy Statement on Schedule 14A, filed with the Securities and Exchange Commission on March 29, 2000). 1999 Non-Officer Employee Stock Option Plan (incorporated by reference to ...

  • Page 88
    ...thereunto duly authorized, as of February 24, 2004. AMAZON.COM, INC. By: JEFFREY P. BEZOS Jeffrey P. Bezos President, Chief Executive Officer and Chairman of the Board /s/ Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons...

  • Page 89
    ....COM, INC. SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS Accounts receivable and other current assets -Reserves Balance at Beginning of Period Charged to Costs and Amounts Expenses Written Off (In thousands) Balance at End of Period Year Ended December 31, 2003 ...December 31, 2002 ...December...

  • Page 90