Amazon.com 2005 Annual Report Download - page 24

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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 Have Significant Indebtedness
As of December 31, 2005, we had long-term indebtedness of $1.52 billion. We make annual or semi-annual
interest payments on the indebtedness under our two convertible notes, which are due in 2009 and 2010.
Although we made debt principal reduction payments, we may incur substantial additional debt in the future, and
in any event a significant portion of our future cash flow from operating activities is likely to remain dedicated to
the payment of interest and the repayment of principal on our indebtedness. Our indebtedness could limit our
ability to obtain additional financing for working capital, capital expenditures, debt service requirements,
acquisitions or other purposes in the future, as needed; to plan for, or react to, changes in technology and in our
business and competition; and to 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. In addition, we may not be able to refinance our indebtedness on terms
acceptable to us, or at all.
See Item 8 of Part II, “Financial Statements and Supplementary Data—Note 4—Long-Term Debt and Other.”
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 may be difficult to establish vendor relationships, determine appropriate
product selection, and accurately forecast product demand. A failure to optimize 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 with Toysrus.com, Babiesrus.com, Target, and other
companies, these parties identify, buy, 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 or maintain access to 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.
Any one of the inventory risk factors set forth above may adversely affect our operating results.
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,
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