Amazon.com 2005 Annual Report Download - page 38

is subject to considerable variability. Accordingly, amounts presented for operating cash flows and free cash
flows for 2006 will be negatively effected in comparison to prior results; however, the underlying economic
substance is not effected by this change in reporting classification.
Cash provided by operating activities was $733 million, $566 million, and $393 million in 2005, 2004, and
2003. Our operating cash flows result primarily from cash received from our customers, from third-party sellers,
and from non-retail activities such as through our co-branded credit card agreements, Amazon Enterprise
Solutions, and miscellaneous marketing and promotional agreements, offset by cash payments we make for
products and services, employee compensation (less amounts capitalized pursuant to SOP 98-1 that are reflected
in cash used in investing activities), payment processing and related transaction costs, operating leases, and
interest 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 and transportation suppliers
generally corresponds with cost of sales, adjusted for increases or decreases in inventory and payable levels as
well as increases or decreases in vendor-related receivables for co-operative marketing, volume rebates, and
other incentives. During 2005, cash paid to inventory suppliers, totaled $5.5 billion, compared to $4.6 billion and
$3.4 billion in 2004 and 2003. Cash paid to inventory suppliers is also affected by our efforts to add product
categories, increase selection of products we offer for sale, improve availability in both existing and new product
categories, and take advantage of additional discounts offered to us by suppliers. Cash provided by operating
activities was negatively affected by the $40 million patent litigation settlement in third quarter 2005. See Item 8
of Part II, “Financial Statements and Supplementary Data—Note 8—Other Operating Expense (Income).”
Cash provided by (used in) investing activities corresponds with purchases, sales, and maturities of
marketable securities, net cash flows from acquisitions, and purchases of fixed assets, including internal-use
software and website development costs. Net cash used in investing activities was $778 million and $317 million
in 2005 and 2004, while cash provided by investing activities was $236 million in 2003 with the variability
caused primarily by purchases, maturities, and sales of marketable securities. Capital expenditures were $204
million, $89 million and $46 million in 2005, 2004 and 2003, with the sequential increases primarily reflecting
additional investment in development of new features and product offerings on our websites, as well as
investments in fulfillment-related assets and technology infrastructure. Capital expenditures included $79
million, $44 million and $30 million for internal-use software and website development during 2005, 2004 and
2003. Stock-based compensation capitalized for internal-use software and website development costs does not
affect cash flows. We believe our expenditures for repairs and improvements are sufficient to keep our facilities
and equipment in suitable operating condition. We also purchased certain companies in 2005 and 2004 resulting
in cash payments, net of acquired cash, of $24 million and $71 million.
Net cash used in financing activities was $193 million, $97 million, and $332 million in 2005, 2004, and
2003. Cash outflows from financing activities result from repayments of long-term debt and payments on capital
lease obligations, which were $270 million in 2005, $157 million in 2004, and $495 million in 2003. During
2005, we repaid €200 million of our 6.875% PEACS for $265 million. During 2004, we repaid $154 million to
redeem a portion of our 4.75% Convertible Subordinated Notes. See Item 8 of Part II, “Financial Statements and
Supplementary Data—Note 4—Long-Term Debt and Other.” Cash inflows from financing activities primarily
result from proceeds from exercises of employee stock options, which were $66 million, $60 million, and $163
million for 2005, 2004, and 2003. We expect cash proceeds from exercises of stock options will continue to
decline over time as we continue issuing restricted stock units as our primary vehicle for stock-based awards.
In 2005 we recorded a net tax provision of $95 million, and in 2004 we recorded a net tax benefit of $233
million. A majority of this provision and benefit is non-cash as we have deferred tax assets resulting from our
history of net operating losses.
In February 2006, we announced plans to redeem €250 million principal of our 6.875% PEACS, which is
expected to close March 7, 2006, for a cash payment of approximately $305 million (at the Euro to U.S. dollar
exchange rate on January 31, 2006), which includes $1 million of interest. Under the indenture governing the
6.875% PEACS, no premium is required.
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