Amazon.com 2003 Annual Report Download - page 15

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 make similar investments in the future. 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 are included in “Marketable securities” and “Other equity investments”
on our consolidated 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 our investments have experienced additional other-than-temporary declines. As of December 31, 2003,
our recorded basis in equity securities was $23 million, including $9 million classified as “Marketable securities”
and $15 million classified as “Other equity investments.”
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 or fail to have sources to timely restock popular
products, such that we 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 U.S. 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 internationally focused websites are fulfilled primarily from a single fulfillment center,
and we have only a limited ability to reroute orders to third parties for drop-shipping. 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 websites within a short period of time due to increased holiday or other demand, we
may experience system interruptions that make our websites 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 seasonal demand. Finally, we, along
with our customer service co-sourcers, may be unable to adequately staff customer service centers.
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 or used in 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.
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