Amazon.com 2005 Annual Report Download

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Table of contents

  • Page 1

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  • Page 3
    ... analysis improves the customer's experience and our cost structure. Similarly, most of our inventory purchase decisions can be numerically modeled and analyzed. We want products in stock and immediately available to customers, and we want minimal total inventory in order to keep associated...

  • Page 4
    ... our customer to get easy access to that offer. Over time, thirdparty sales have become a successful and significant part of our business. Third-party units have grown from 6% of total units sold in 2000 to 28% in 2005, even as retail revenues have grown three-fold. Math-based decisions command wide...

  • Page 5
    ....8 million, and extended our market leadership despite aggressive competitive entry. But this is Day 1 for the Internet and, if we execute well, for Amazon.com. Today, online commerce saves customers money and precious time. Tomorrow, through personalization, online commerce will accelerate the very...

  • Page 6
    ... improving the shopping experience, and in 1997 substantially enhanced our store. We now offer customers gift certificates, 1-ClickSM shopping, and vastly more reviews, content, browsing options, and recommendation features. We dramatically lowered prices, further increasing customer value. Word of...

  • Page 7
    ... our customers. Our cash and investment balances at year-end were $125 million, thanks to our initial public offering in May 1997 and our $75 million loan, affording us substantial strategic flexibility. Our Employees The past year's success is the product of a talented, smart, hard-working group...

  • Page 8
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  • Page 9
    ...No È Aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2005 ...$10,154,704,004 Number of shares of common stock outstanding as of February 13, 2006 ...416,922,786 DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III of this Report, to...

  • Page 10
    ... of the Registrant ...Item 11. Executive Compensation ...Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters ...Item 13. Certain Relationships and Related Transactions ...Item 14. Principal Accountant Fees and Services ...PART IV Item 15. Exhibits...

  • Page 11
    ...Business Strategy Our business strategy is to relentlessly focus on customer experience by offering our customers low prices, convenience, and a wide selection of merchandise, to provide e-commerce solutions and services to other businesses and to offer web services applications to developers. Price...

  • Page 12
    ...of many of the books we offer with our "Look Inside the Book" and "Search Inside the Book" features. Our community of online customers also creates feature-rich content, including product reviews, online recommendation lists, wish lists, buying guides, and wedding and baby registries. We endeavor to...

  • Page 13
    ... solutions to enable third party e-commerce businesses operating under their own brand name and website address (e.g. www.target.com). We also offer web services applications to developers. In addition, we have co-branded credit card agreements and marketing and promotional services, such as online...

  • Page 14
    ... and to track the progress of each order. These applications also manage the process of accepting, authorizing, and completing customer payment transactions, which vary by geography, but include credit cards and electronic fund transfers, among other payment mechanisms. Competition The environment...

  • Page 15
    Available Information Our investor relations website is www.amazon.com/ir. We make available on this website under "Financial Documents," 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 ...

  • Page 16
    ... to technology development, fulfillment, 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...

  • Page 17
    ..., 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 commercial agreements and strategic alliances; foreign exchange rate fluctuations, particularly as international sales become an increasingly...

  • Page 18
    ... and our websites successfully charge fees to grant our customers unimpaired and unconstrained access to our online services; and the extent to which overall Internet use is affected by spyware, viruses, and "phishing," spoofing and other spam emails directed at Internet users, viruses and "denial...

  • Page 19
    ... on foreign ownership; shorter payable and longer receivable cycles and the resultant negative impact on cash flow; consumer and data protection laws and restrictions on pricing or discounts; lower levels of adoption or use of the Internet and other technologies vital to our business and the...

  • Page 20
    ...experience an increase in our net shipping cost 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...

  • Page 21
    ... Stores, and Amazon Enterprise Solutions program initiatives. 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 websites; and...

  • Page 22
    ... profitability and harm our business. We Have Foreign Exchange Risk The results of operations of, and certain of our intercompany balances associated with, our internationallyfocused websites are exposed to foreign exchange rate fluctuations. Upon translation, net sales and other operating results...

  • Page 23
    ...Systems May Affect Our Sales Customer access to our websites and the speed with which a customer is able to navigate and make purchases on our websites directly affects the volume of goods we sell and the services we offer and thus affects our net sales. We experience occasional system interruptions...

  • Page 24
    ... inventory within our fulfillment network will increase our net shipping cost 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 third-party services relationships...

  • Page 25
    ... We have a relatively short operating history and 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...

  • Page 26
    ... 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...

  • Page 27
    ... of Risks Related to Payments We Accept We accept payments by a variety of methods, including credit card, debit card, gift certificates, direct debit from a customer's bank account, physical bank check and payment upon delivery. As we offer new payment options to our customers, like direct debit in...

  • Page 28
    ... 31, 2005, we operated the following facilities throughout the world: Description of Use Primary Locations Square Footage (i) (in thousands) Operating Segments Lease Expirations (ii) Corporate office facilities Other corporate office facilities, including development centers California; Washington...

  • Page 29
    ...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 us and Borders in the United States District Court for the Northern District of California. The complaint alleges that the agreement pursuant to which...

  • Page 30
    ... our website technology, including our Associates program, infringes two patents obtained by BTG purporting to cover methods and apparatuses for "Attaching Navigational History Information to Universal Resource Locator Links on a World Wide Web Page" (U.S. Patent No. 5,712,979) and for "Tracking the...

  • Page 31
    ...Shareholder Matters and Issuer Purchases of Equity Securities 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 closing prices for our common stock for the periods indicated, as reported by the Nasdaq...

  • Page 32
    ... Internet and online commerce, the amount that Amazon.com invests in new business opportunities and the timing of those investments, the mix of products sold to customers, the mix of net sales derived from products as compared with services, competition, management of growth, potential fluctuations...

  • Page 33
    ... manufacturers and products offered by third parties on our websites. Generally, we recognize gross revenue from items we sell from our inventory and recognize our net share of revenue of items sold by third parties. We offer services such as Amazon Enterprise Solutions, co-branded credit cards, and...

  • Page 34
    ... including seller platforms, search, web services, and digital initiatives. We believe that advances in technology, specifically the speed and reduced cost of processing power, the improved consumer experience of the Internet outside of the workplace through lowercost broadband service to the home...

  • Page 35
    ...expected product returns, are estimated using historical experience. Amounts paid in advance for subscription services, including amounts received for online DVD rentals, Amazon Prime, and other membership programs, are deferred and classified in "Unearned revenue" on our consolidated balance sheets...

  • Page 36
    ...the related products. Internal-Use Software Included in fixed assets is the capitalized cost of internal-use software and website development, including software used to upgrade and enhance our websites and processes supporting our business. As required by Statement of Position 98-1, "Accounting for...

  • Page 37
    ... of $100 million, although the actual amount 1 Free cash flow is defined as net cash provided by operating activities less purchases of fixed assets, including capitalized internal-use software and website development, both of which are presented on our consolidated statements of cash flows. 29

  • Page 38
    ... payments on our long-term debt obligations. Cash received from customers, third-party sellers and non-retail activities generally corresponds to our net sales. Because our customers primarily use credit cards to buy from us, our receivables from customers settle quickly. Cash paid to inventory...

  • Page 39
    ...payable are classified as "Other income, net" on our consolidated statements of operations. Our inventory turnover was 14 and 16 for 2005 and 2004. We expect some variability in inventory turnover over time as it is affected by several factors, including our product mix, our mix of third-party sales...

  • Page 40
    ...; with fluctuations in our market capitalization, which is common shares outstanding multiplied by the closing price of our common stock; and based on our credit-rating. Information about collateral required to be pledged under these agreements is as follows: Standby Letters of Credit (1) Line of...

  • Page 41
    ... through additions to our product categories, as well as increases in our service-related revenues, particularly from Amazon Enterprise Solutions and from our co-branded credit card agreement. Changes in currency exchange rates positively affected 2005, 2004, and 2003 net sales for our North America...

  • Page 42
    ... Amazon Enterprise Solutions, offset by our free shipping offers and lower prices for customers. Generally, our gross margins fluctuate based on several factors, including our product, service, and geographic mix of sales; sales volumes by third-party sellers; changes in vendor pricing, including...

  • Page 43
    ...margin product categories and price reductions for our customers, including from our yearround free shipping offers, were offset partially by increased sales volume by third-party sellers and volume discounts we receive from our product suppliers. International segment gross margins in 2005 improved...

  • Page 44
    ... December 31, 2005 2004 2003 (in millions) Net Sales: North America Media ...Electronics and other general merchandise ...Other (1) ...Total North America ...International Media ...Electronics and other general merchandise ...Other (1) ...Total International ...Consolidated Media ...Electronics...

  • Page 45
    ... fulfillment and fulfillment-related cost of sales to increase over time. Marketing We direct customers to our websites primarily through a number of targeted online marketing channels, such as our Associates and Syndicated Stores programs, sponsored search, portal advertising, e-mail campaigns, 37

  • Page 46
    ... of costs associated with internal-use software and website development, which are partially offset by amortization of previously capitalized amounts of $50 million, $30 million, and $24 million. Fixed assets associated with capitalized internal-use software, content, and website development, net of...

  • Page 47
    ... of compensation over the service period for awards expected to vest. The fair value of restricted stock and restricted stock units is determined based on the number of shares granted and the quoted price of our common stock, and the fair value of stock options is determined using the Black-Scholes...

  • Page 48
    ...at the Euro to U.S. dollar exchange rate on January 31, 2006), which includes $1 million of interest. See Item 8 of Part II, "Financial Statements and Supplementary Data-Note 4-Long-Term Debt and Other." We generally invest our excess cash in investment grade short- to intermediate-term fixed income...

  • Page 49
    ... tax rate over time. Associated with the establishment of our European headquarters, we transferred certain of our operating assets in 2005 from the U.S. to international locations which resulted in taxable income and an increase in our effective tax rate. We will initiate similar asset transfers...

  • Page 50
    ... realizable. Additionally, the remeasurement of our 6.875% PEACS and intercompany balances resulted in net gains in 2005 and net charges in 2004 and 2003 associated with the effect of movements in currency exchange rates. Accordingly, we encourage readers of our financial statements to evaluate the...

  • Page 51
    ...which we reconcile to "Net cash provided by 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 based on it, to conduct and evaluate our business because, although it is...

  • Page 52
    ... 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 53
    ...and marketable fixed income securities, including principal cash flows by expected maturity and the related weighted average interest rates at December 31, 2005 (in millions, except percentages): Estimated Fair Value at December 31, 2005 2006 2007 2008 2009 2010 Thereafter Total Money market...

  • Page 54
    ... 2005, net sales from our International segment (consisting of www.amazon.co.uk, www.amazon.de, www.amazon.fr, www.amazon.co.jp, and www.joyo.com) accounted for 45% of our consolidated revenues. Net sales and related expenses generated from these websites, as well as those relating to www.amazon.ca...

  • Page 55
    ... Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Ernst & Young LLP, Independent Registered Public Accounting Firm ...Consolidated Statements of Cash Flows ...Consolidated Statements of Operations ...Consolidated Balance Sheets ...Consolidated Statements of Stockholders...

  • Page 56
    REPORT OF ERNST & YOUNG LLP INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Amazon.com, Inc. We have audited the accompanying consolidated balance sheets of Amazon.com, Inc. as of December 31, 2005 and 2004, and the related consolidated statements of operations,...

  • Page 57
    ... ACTIVITIES: Purchases of fixed assets, including internal-use software and website development ...Acquisitions, net of cash acquired ...Sales and maturities of marketable securities and other investments ...Purchases of marketable securities ...Proceeds from sale of subsidiary ...Net cash (used in...

  • Page 58
    AMAZON.COM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in millions, except per share data) Year Ended December 31, 2005 2004 2003 Net sales ...Cost of sales ...Gross profit ...Operating expenses (1): Fulfillment ...Marketing ...Technology and content ...General and administrative ...Other ...

  • Page 59
    AMAZON.COM, INC. CONSOLIDATED BALANCE SHEETS (in millions, except per share data) December 31, 2005 2004 ASSETS Current assets: Cash and cash equivalents ...Marketable securities ...Cash, cash equivalents, and marketable securities ...Inventories ...Deferred tax assets, current portion ...Accounts ...

  • Page 60
    ...-sale securities, net of tax effect ...Amortization of unrealized loss on terminated Euro Currency Swap, net of tax ... Comprehensive income ... Exercise of common stock options, net and vesting of restricted stock ...Change in accounting principle ...Income tax benefit on stock awards ...Issuance...

  • Page 61
    ... in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, valuation of investments, receivables valuation, sales returns, incentive discount offers, inventory valuation, depreciable lives of fixed assets, internally-developed software, valuation of...

  • Page 62
    ...of cost or market value. We provide fulfillment-related services in connection with certain of our third parties and Amazon Enterprise Solutions programs. In those arrangements, as well as all other product sales by third parties, the third party maintains ownership of the related products. Accounts...

  • Page 63
    ...of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Costs related to design or maintenance of internal-use software are expensed as incurred. For the years ended 2005, 2004, and 2003, we capitalized $90 million (including $11 million of stock...

  • Page 64
    ... "Cash and cash equivalents," or "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." The weighted average method is used to determine the cost of Euro-denominated...

  • Page 65
    ...over the service period. Unearned revenue was $48 million and $41 million at December 31, 2005 and 2004. These amounts are included in "Accrued expenses and other current liabilities" on the consolidated balance sheets. Income Taxes Income tax expense includes U.S. and international income taxes. We...

  • Page 66
    ...for subscription services, including amounts received for online DVD rentals and other membership programs, are deferred and recognized as revenue over the subscription term. We periodically provide incentive offers to our customers to encourage purchases. Such offers include current discount offers...

  • Page 67
    ...2005, 2004 and 2003. Cost of Sales Cost of sales consists of the purchase price of consumer products sold by us, inbound and outbound shipping charges, packaging supplies, amortization of our DVD rental library and costs incurred in operating and staffing our fulfillment and customer service centers...

  • Page 68
    ... our Associates and Syndicated Stores programs, sponsored search, portal advertising, e-mail campaigns, and other initiatives. We pay commissions to participants in our Associates program when their customer referrals result in product sales and classify such costs as "Marketing" on our consolidated...

  • Page 69
    ... grant based on the number of shares granted and the quoted price of our common stock, and for stock options to the extent option exercise prices were set below market prices on the date of grant. Also, to the extent stock awards were subject to an exchange offer, other modifications, or performance...

  • Page 70
    ... under SFAS 123 (in millions, except per share data): Year Ended December 31, 2004 2003 Net income-as reported ...Add: Stock-based compensation, as reported ...Deduct: Total stock-based compensation determined using a fair value-based method for all awards ...Net income-SFAS 123 fair value adjusted...

  • Page 71
    ... (Income)." Foreign Currency We have the following internationally-focused websites: www.amazon.co.uk, www.amazon.de, www.amazon.fr, www.amazon.co.jp, www.amazon.ca, and www.joyo.com. Net sales generated from internationally-focused websites, as well as most of the related expenses directly incurred...

  • Page 72
    ... "Note 4-Long-Term Debt and Other." The following table shows the calculation of diluted shares (in millions): Year Ended December 31, 2005 2004 2003 Weighted average shares outstanding ...Weighted average shares of restricted stock ...Shares used in computation of basic earnings per share ...Total...

  • Page 73
    ...major security type, our cash and marketable securities (in millions): Cost or Amortized Cost December 31, 2005 Gross Gross Unrealized Unrealized Gains Losses (1) Estimated Fair Value Cash ...Cash equivalents pledged as collateral ...Money market funds ...Bank certificates of deposits ...Corporate...

  • Page 74
    ...-for-sale marketable securities, including Euro-denominated securities, for 2005, 2004, and 2003. We are required to pledge a portion of our cash equivalents or marketable securities as collateral for standby letters of credit that guarantee certain of our contractual obligations, a line of credit...

  • Page 75
    ... is excluded from our calculation of earnings per share as its effect is anti-dilutive. 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 of each year...

  • Page 76
    ... loss associated with the Euro Currency Swap will be recorded as a charge to "Remeasurements and other." Based upon quoted market prices, the fair value of the 6.875% PEACS was $586 million and $936 million (outstanding principal of â,¬490 million and â,¬690 million) as of December 31, 2005 and...

  • Page 77
    ...2010 and the annual interest payments fluctuate based on the Euro/U.S. Dollar exchange ratio. At December 31, 2005, the Euro to U.S. Dollar exchange rate was 1.1843. Due to changes in the Euro/U.S. Dollar exchange ratio, our remaining principal debt obligation under this instrument since issuance in...

  • Page 78
    ...; with fluctuations in our market capitalization, which is common shares outstanding multiplied by the closing price of our common stock; and based on our credit-rating. Information about collateral required to be pledged under these agreements is as follows: Standby Letters of Credit (1) Line of...

  • Page 79
    ... our website technology, including our Associates program, infringes two patents obtained by BTG purporting to cover methods and apparatuses for "Attaching Navigational History Information to Universal Resource Locator Links on a World Wide Web Page" (U.S. Patent No. 5,712,979) and for "Tracking the...

  • Page 80
    ... and the timing, an unfavorable resolution of some or all of these matters could materially affect our business, results of operations, financial position, or cash flows in a particular period. Inventory Suppliers During 2005, no vendor accounted for 10% or more of our inventory purchases. We do...

  • Page 81
    ... The weighted average per share exercise price was $14.28, $12.98, and $12.46 in 2005, 2004, and 2003. (2) Included in issued and outstanding common stock. Common shares outstanding (which includes restricted stock), plus shares underlying outstanding stock options and restricted stock units totaled...

  • Page 82
    ... our 401(k) plan and shares of restricted stock are included in outstanding common stock when issued. As of December 31, 2005, there was $169 million of total unrecognized compensation cost, net of estimated forfeitures of $106 million, related to unvested stock-based compensation arrangements. This...

  • Page 83
    ...in millions): December 31, 2005 2004 (in millions) Net unrealized gains on foreign currency translation ...Net unrealized gains (losses) on available-for-sale securities, net of tax ...Net unrealized losses on terminated Euro Currency Swap, net of tax ...Total accumulated other comprehensive income...

  • Page 84
    ... balances due to changes in foreign exchange rates. See "Note 1-Description of Business and Accounting Policies." (3) During 2005 and 2004, primarily includes gains associated with the sale of certain equity investments. During 2003, primarily includes the loss on termination of the Euro currency...

  • Page 85
    ... TAXES Cash taxes paid were $12 million, $4 million, and $2 million for 2005, 2004, and 2003. The components of the provision for income taxes, net are as follows: Year Ended December 31, 2005 2004 2003 (in millions) Current taxes: U.S. and state ...International ...Current taxes ...Deferred taxes...

  • Page 86
    ...ended December 31, 2005 2004 2003 (in millions) Deferred tax expense/(benefit) exclusive of the effect of the items listed below ...Decrease in beginning-of-year balance of the valuation allowance ...Tax benefit of net operating loss carryforwards ...Total deferred tax expense/(benefit) ...Deferred...

  • Page 87
    ... sales of consumer products (including from third-party sellers) and subscriptions through internationally focused websites such as www.amazon.co.uk, www.amazon.de, www.amazon.co.jp, www.amazon.fr, and since September 2004, www.joyo.com; from internationally focused Syndicated Stores; from our DVD...

  • Page 88
    ... sales shipped to customers outside of the U.S. represented approximately 49%, 49%, and 43% of net sales for 2005, 2004, and 2003. Net sales from www.amazon.co.uk, www.amazon.de, and www.amazon.co.jp each represented 10% or more of consolidated net sales in 2005 and 2004; net sales from www.amazon...

  • Page 89
    ... (in millions, except per share data): Year Ended December 31, 2005 Fourth Third Second First Quarter Quarter Quarter Quarter Net sales ...Gross profit ...Income before income taxes ...Provision (benefit) for income taxes ...Income before change in accounting principle ...Cumulative effect of...

  • Page 90
    AMAZON.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Year Ended December 31, 2003 Fourth Third Second First Quarter Quarter Quarter Quarter Net sales ...Gross profit ...Net income (loss) ...Basic earnings (loss) per share (1) ...Diluted earnings (loss) per share ...Shares used in...

  • Page 91
    ... our principal executive officer and principal financial officer concluded that, as of December 31, 2005, our disclosure controls and procedures were effective in timely alerting them to material information required to be included in our periodic SEC reports. Management's Report on Internal Control...

  • Page 92
    ... the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Amazon.com, Inc. as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for each of the three years in the period ended...

  • Page 93
    ... Statements: Report of Ernst & Young LLP, Independent Registered Public Accounting Firm Consolidated Statements of Cash Flows for each of the three years ended December 31, 2005 Consolidated Statements of Operations for each of the three years ended December 31, 2005 Consolidated Balance Sheets as...

  • Page 94
    ...). Registration Rights Agreement, dated February 3, 1999, by and among Amazon.com, Inc. and the Initial Purchasers (incorporated by reference to the Company's Current Report on Form 8-K dated February 3, 1999). Indenture, dated as of February 16, 2000, between Amazon.com, Inc. and the Bank of New...

  • Page 95
    ... of Earnings to Fixed Charges. List of Significant Subsidiaries. Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm. Certification of Jeffrey P. Bezos, Chairman and Chief Executive Officer of Amazon.com, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of...

  • Page 96
    ...duly authorized, as of February 16, 2006. 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 on behalf...

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