Amazon.com 2006 Annual Report Download

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Table of contents

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  • Page 3
    ... early days, and we believe it's an excellent business opportunity. Shoes, apparel, groceries: these are big segments where we have the right skills to invent and grow large-scale, high-return businesses that genuinely improve customer experience. Fulfillment by Amazon is a set of web services API...

  • Page 4
    ... experience, if a new business enjoys runaway success, it can only begin to be meaningful to the overall company economics in something like three to seven years. We've seen those time frames with our international businesses, our earlier non-media businesses, and our third party seller businesses...

  • Page 5
    ... 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 competitive entry. But this is Day 1 for the Internet...

  • Page 6
    ... because we believe that scale is central to achieving the potential of our business model. We will continue to focus on hiring and retaining versatile and talented employees, and continue to weight their compensation to stock options rather than cash. We know our success will be largely affected...

  • Page 7
    ..., we worked hard to expand our business infrastructure to support these greatly increased traffic, sales, and service levels Amazon.com's employee base grew from 158 to 614, and we significantly strengthened our management team. Distribution center capacity grew from 50,000 to 285,000 square feet...

  • Page 8
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  • Page 9
    ...2734 (206) 266-1000 (Address and telephone number, including area code, of registrant's principal executive offices) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock, par value $.01 per share Nasdaq Global Select...

  • Page 10
    ... Officers 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...

  • Page 11
    ...new products available on our websites. We also offer fulfillment-related services to third-party sellers through Fulfillment by Amazon. Our retail and third-party seller businesses relentlessly focus on customer experience by offering our retail customers a wide selection of merchandise, low prices...

  • Page 12
    ... and "Search Inside the Book" features. Our community of online customers also creates feature-rich content, including product reviews, online recommendation lists, wish lists, image uploads, buying guides, customer discussions, and wedding and baby registries. We endeavor to fulfill customer orders...

  • Page 13
    ... party e-commerce businesses operating under their own brand name and website address (e.g. www.target.com). In addition, we generate revenue through co-branded credit card agreements and marketing and promotional services, such as online advertising. Developer Services We offer a variety of web...

  • Page 14
    ...of technology, including seller platforms, web services, and digital initiatives. We use a set of applications for accepting and validating customer orders, placing and tracking orders with suppliers, managing inventory and assigning it to customer orders, and ensuring proper shipment of products to...

  • Page 15
    ... that our future success will depend in part on our continued ability to attract, hire, and retain qualified personnel. 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...

  • Page 16
    ..., he was Director, U.S. Books, Music, Video and DVD. Marc Onetto. Mr. Onetto has served as Senior Vice President, Worldwide Operations, since joining Amazon.com in December 2006. Prior to joining Amazon.com, Mr. Onetto was Executive Vice President, Worldwide Operations, at Solectron Corporation, an...

  • Page 17
    ..., whether products, services, technologies or geographic areas, from any first-to-market advantages. We may have limited or no experience in these new activities, and our customers may not adopt them. Our newer service offerings, including merchant services, digital and web services, may present new...

  • Page 18
    ... merchandise, manage inventory, and fulfill orders; the introduction of competitive websites, products, services, price decreases, or improvements; changes in usage of the Internet and e-commerce, including in non-U.S. markets; timing, effectiveness, and costs of upgrades and developments in our...

  • Page 19
    ... restrictions on pricing or discounts; lower levels of use of the Internet; lower levels of consumer spending and fewer opportunities for growth compared to the U.S.; lower levels of credit card usage and increased payment risk; difficulty in staffing, developing and managing foreign operations as...

  • Page 20
    ... shipments. Orders from several of our international websites are fulfilled primarily from a single location, and we have only a limited ability to reroute orders to third parties for drop-shipping. We and our co-sourcers may be unable to adequately staff our fulfillment and customer service centers...

  • Page 21
    ... Amazon program initiatives, as well as other commercial agreements, strategic alliances and business relationships. Under these agreements, we provide technology, fulfillment and other services, enable third parties to offer products or services through our websites, and power third-party websites...

  • Page 22
    ...expenses related to intangible assets, any of which could reduce our profitability and harm our business. We Have Foreign Exchange Risk The results of operations of, and certain of our intercompany balances associated with, our international websites are exposed to foreign exchange rate fluctuations...

  • Page 23
    ... access to our websites and the speed with which a customer navigates and makes purchases on our websites affects our net sales, operating results and the attractiveness of our products and services. We experience occasional system interruptions and delays that make our websites unavailable or slow...

  • Page 24
    ...Volatile We have a rapidly evolving business model. The trading price of our common stock fluctuates significantly in response to, among other risks, the risks described elsewhere in this Item 1A, as well as changes in interest rates; conditions or trends in the Internet and the e-commerce industry...

  • Page 25
    ...transactions in our common stock by major investors and certain analyst reports, news, and speculation. Volatility in our stock price could adversely affect our business and financing opportunities and force us to increase our cash compensation to employees or grant larger stock awards than we have...

  • Page 26
    ... our agreements with our vendors and thirdparty sellers do not indemnify us from product liability. We Are Subject to a Number 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...

  • Page 27
    ...of our payments program depends on certain third-party vendors delivering services. If these vendors are unable or unwilling to provide services, our payments program and our businesses that use it may not be viable. Finally, we may be unable to prevent sellers in our Merchants@, Marketplace, Amazon...

  • Page 28
    We believe our properties are suitable and adequate for our present needs, and we periodically evaluate whether additional facilities are necessary. Item 3. Legal Proceedings See Item 8 ...Security Holders No matters were submitted for a vote of our shareholders during the fourth quarter of 2006. 20

  • Page 29
    ...II Item 5. Market for the Registrant's Common Stock, Related Shareholder Matters and Issuer Purchases of Equity Securities Market Information Our common stock is traded on the Nasdaq Global Select Market under the symbol "AMZN." The following table sets forth the high and low closing prices for our...

  • Page 30
    ... 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. See Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of...

  • Page 31
    ... from vendors and products offered by third parties. 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 also offer services such as Amazon Enterprise Solutions, co-branded credit cards, web services...

  • Page 32
    ... fixed costs. Our customer experience variable costs include product costs, payment processing and related transaction costs, picking, packaging, and preparing orders for shipment, transportation, customer service support, and most aspects of our marketing costs. Our customer experience fixed costs...

  • Page 33
    ...are determined using a percentage, a fixed-payment schedule, or a combination of the two, we generally record the net amounts as commissions earned. Product sales and shipping revenues, net of promotional discounts, rebates, and return allowances, are recorded when the products are shipped and title...

  • Page 34
    ... third parties, the third-party maintains ownership of the related products. As such, these amounts are not included in our consolidated balance sheets. Internal-Use Software Included in fixed assets is the capitalized cost of internal-use software and website development, including software used to...

  • Page 35
    ... 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 valuation model. Since we primarily issue restricted stock units to our employees, the complexity of valuation issues for stock compensation is greatly...

  • Page 36
    ... 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...

  • Page 37
    ...of new features and product offerings on our websites, as well as investments in fulfillment-related assets and technology infrastructure. Capital expenditures included $108 million, $79 million and $44 million for internal-use software and website development during 2006, 2005 and 2004. Stock-based...

  • Page 38
    ... 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 and Trade Letters of Credit (1) Real Estate Debt (2) Leases (3) (in millions) Total Balance...

  • Page 39
    ...in 2006. This revenue growth primarily reflects increased unit sales driven by our continued efforts to reduce prices for our customers, including from our free shipping offers and Amazon Prime, shift in mix of product sales from media to electronics and other general merchandise, increased in-stock...

  • Page 40
    ..., offset by lower prices for customers including from free shipping offers and Amazon Prime. 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 the...

  • Page 41
    ... credit card agreement, improvements in terms with suppliers, and increases in amounts earned from service agreements, offset partially by our efforts to continue reducing prices for customers, including from our free shipping offers and Amazon Prime. International segment gross margins in 2006...

  • Page 42
    ... Growth: Excluding the effect of exchange rates International Media ...Electronics and other general merchandise ...Other ...Total International ...Consolidated Media ...Electronics and other general merchandise ...Other ...Total consolidated ...Consolidated Net Sales Mix: Media ...Electronics and...

  • Page 43
    ...shipment volumes from sales of our own products as well as sales by third parties for which we provide the fulfillment. Marketing We direct customers to our websites primarily through a number of targeted online marketing channels, such as our Associates program, sponsored search, portal advertising...

  • Page 44
    ... variable online marketing channels, such as our Associates program, sponsored search, and other variable marketing initiatives. While costs associated with free shipping are not included in marketing expense, we view free shipping offers and Amazon Prime as effective worldwide marketing tools, and...

  • Page 45
    ... of the application of different methods of accounting as well as the effects of variable accounting treatment in 2004, stock-based compensation for 2006 and 2005 is not comparable to prior periods. As of December 31, 2006, there was $217 million of net unrecognized compensation cost, related to...

  • Page 46
    ...Luxembourg, which we expect will benefit our effective tax rate over time. Associated with the establishment of our European headquarters, we transferred certain of our operating assets in 2005 and 2006 from the U.S. to international locations. These transfers resulted in taxable income and exposure...

  • Page 47
    ... jurisdictions to which it relates. Effect of Exchange Rates The effect on our consolidated statements of operations from changes in exchange rates versus the U.S. Dollar is as follows (in millions, except per share data): Year Ended Year Ended Year Ended December 31, 2006 December 31, 2005 December...

  • Page 48
    ...", "Technology and content", "Marketing", and "General and administrative" line items would be higher. We compensate for this limitation by providing supplemental information about outstanding stock-based awards in the footnotes to our financial statements. Stock-based compensation programs are...

  • Page 49
    ... 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 50
    ...and marketable fixed income securities, including principal cash flows by expected maturity and the related weighted average interest rates at December 31, 2006 (in millions, except percentages): Estimated Fair Value at December 31, 2006 2007 2008 2009 2010 2011 Thereafter Total Money market...

  • Page 51
    ... same as the corresponding local currency. The results of operations of, and certain of our intercompany balances associated with, our internationally-focused websites are exposed to foreign exchange rate fluctuations. Upon consolidation, as exchange rates vary, net sales and other operating results...

  • Page 52
    ... 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 53
    Report of 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, 2006 and 2005, and the related consolidated statements of operations, stockholders' ...

  • Page 54
    ... ...Accounts payable ...Accrued expenses and other liabilities ...Additions to unearned revenue ...Amortization of previously unearned revenue ...Net cash provided by operating activities ...INVESTING ACTIVITIES: Purchases of fixed assets, including internal-use software and website development...

  • Page 55
    ... ...Cumulative effect of change in accounting principle ...Weighted average shares used in computation of earnings per share: Basic ...Diluted ...(1) Includes stock-based compensation as follows: Fulfillment ...Marketing ...Technology and content ...General and administrative ... $10,711 8,255...

  • Page 56
    AMAZON.COM, INC. CONSOLIDATED BALANCE SHEETS (in millions, except per share data) December 31, 2006 2005 ASSETS Current assets: Cash and cash equivalents ...Marketable securities ...Inventories ...Accounts receivable, net and other ...Deferred tax assets ...Total current assets ...Fixed assets, net...

  • Page 57
    ... securities, net of tax ...Amortization of unrealized loss on terminated Euro Currency Swap, net of tax ...Comprehensive income ...Exercise of common stock options ...Repurchase of common stock ...Income tax benefit on stock awards ...Stock-based compensation ...Balance at December 31, 2006 ...403...

  • Page 58
    ... returns, incentive discount offers, inventory valuation, depreciable lives of fixed assets, internally-developed software, valuation of acquired intangibles, income taxes, stock-based compensation, and contingencies. Actual results could differ materially from those estimates. Earnings per Share...

  • Page 59
    ... of purchase price over the fair value of the net assets acquired was $19 million and is classified as "Goodwill" on our consolidated balance sheets. In 2004, we acquired all of the outstanding shares of Joyo.com Limited, a British Virgin Islands company that operates an Internet retail website in...

  • Page 60
    ... capitalized amounts was $86 million, $50 million, and $30 million for 2006, 2005, and 2004. Depreciation of Fixed Assets Fixed assets include assets such as furniture and fixtures, heavy equipment, technology infrastructure, internal-use software and website development, and our DVD rental...

  • Page 61
    .... At December 31, 2006 and December 31, 2005, approximately 60% and 70% of our acquired goodwill was assigned to our International segment, the majority of which relates to our acquisition of Joyo.com in 2004. Other Assets Included in "Other assets" on our consolidated balance sheets are amounts...

  • Page 62
    ... in "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 (loss)." The weighted average method is used to determine the cost of Euro...

  • Page 63
    ... and amounts earned are 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 and shipping revenues, net of promotional discounts, rebates, and return allowances, are recorded when the...

  • Page 64
    ... and customer service centers on behalf of other businesses. Shipping charges to receive products from our suppliers are included in our inventory, and recognized as "Cost of sales" upon sale of products to our customers. Payment processing and related transaction costs, including those associated...

  • Page 65
    ...-related costs that are incurred on behalf of other businesses, such as Target Corporation, are classified as cost of sales rather than fulfillment. Marketing Marketing costs consist primarily of online advertising, including through our Associates program, sponsored search, portal advertising...

  • Page 66
    ... of compensation cost for all stock-based awards at fair value on date of grant and recognition 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...

  • Page 67
    ...amazon.co.uk, www.amazon.de, www.amazon.fr, www.amazon.co.jp, www.amazon.ca, and www.joyo.com is the same as the local currency of the United Kingdom, Germany, France, Japan, Canada, and China. Assets and liabilities of these subsidiaries are translated into U.S. Dollars at period-end exchange rates...

  • Page 68
    ... Cost December 31, 2005 Gross Gross Unrealized Unrealized Gains Losses (1) Estimated Fair Value Cash ...Money market funds ...Bank of certificates of deposits ...Corporate debt securities ...U.S. government and agency securities ...Asset-backed securities ...Equity and other securities ...Total...

  • Page 69
    ... assets ...Gross fixed assets ...Accumulated Depreciation: Fulfillment and customer service ...Technology infrastructure ...Internal-use software, content, and website development ...Other corporate assets ...Total accumulated depreciation ...Total fixed assets, net ...(1) Includes our DVD rental...

  • Page 70
    ... our corporate existence and properties, and paying taxes and other claims in a timely manner. We were in compliance with these covenants through December 31, 2006. In 2006, we redeemed an aggregate principal amount of â,¬250 million ($300 million based on the Euro to U.S. Dollar exchange rate on...

  • Page 71
    ... fixed assets, primarily related to technology, have been acquired under capital leases. Long-term capital lease obligations were as follows: December 31, 2006 (in millions) Gross capital lease obligations ...Less imputed interest ...Present value of net minimum lease payments ...Less current...

  • Page 72
    ...2010 and the annual interest payments fluctuate based on the Euro/U.S. Dollar exchange ratio. At December 31, 2006, the Euro to U.S. Dollar exchange rate was 1.3201. Due to changes in the Euro/U.S. Dollar exchange ratio, our remaining principal debt obligation under this instrument since issuance in...

  • Page 73
    ... District Court for the District of Colorado. The complaint alleges that our website technology, including the method by which Amazon.com enables customers to use Amazon.com account information on websites that Amazon.com operates for third parties, such as Target.com, infringes two patents obtained...

  • Page 74
    ... of credit limits. Note 7-STOCKHOLDERS' EQUITY Preferred Stock We have authorized 500 million shares of $0.01 par value Preferred Stock. No preferred stock was outstanding for any period presented. Stock Repurchase Activity In August 2006, our Board of Directors authorized a 24-month program to...

  • Page 75
    ... CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Stock Award Plans Employees vest in restricted stock unit awards and stock options over the corresponding service term, generally between two and five years. Outstanding stock options generally have a term of 10 years from the date of grant. Stock Award...

  • Page 76
    ...2010 2011 Thereafter Total Scheduled vesting-restricted stock units ... 3.4 5.0 3.1 1.9 0.6 0.5 14.5 The following table summarizes our stock option activity: Number of Options (in millions) Weighted Avg Exercise Price Outstanding at December 31, 2003 ...Options granted ...Options exercised...

  • Page 77
    ... 2006, there was $217 million of net unrecognized compensation cost related to unvested stock-based compensation arrangements. This compensation is recognized on an accelerated basis resulting in approximately half of the compensation expected to be expensed in the next twelve months, and a weighted...

  • Page 78
    ... losses on cross-currency investments. Since interest payments on our 6.875% PEACS are settled in Euros, the balance of interest payable is subject to gains or losses resulting from changes in exchange rates between the U.S. Dollar and Euro between reporting dates and payment. Note 11-REMEASUREMENTS...

  • Page 79
    ... 2006 is higher than the 35% statutory rate resulting from steps we initiated to establish our European headquarters in Luxembourg. Associated with the establishment of our European headquarters, we transferred certain of our operating assets in 2005 and 2006 from the U.S. to international locations...

  • Page 80
    ...105 24 525 (213) 312 (21) $ 291 (1) Presented net of the fully reserved stock-based compensation NOL deferred tax asset of $396 million and $493 million at December 31, 2006 and 2005. The total deferred tax assets relating to our NOLs at December 31, 2006 and 2005 were $526 million and $616 million...

  • Page 81
    ... sales of consumer products (including from third-party sellers) and subscriptions through North America-focused websites such as www.amazon.com, www.amazon.ca, www.shopbop.com, and www.endless.com; from our mail-order tool catalog phone orders; from our Amazon Prime membership program; and from non...

  • Page 82
    ...from www.amazon.co.uk, www.amazon.de, and www.amazon.co.jp each represented 10% or more of consolidated net sales in 2006, 2005 and 2004. Net fixed assets held in locations outside the U.S. were $108 million, $68 million, and $57 million at December 31, 2006, 2005, and 2004. Total assets, by segment...

  • Page 83
    ... STATEMENTS-(Continued) Depreciation expense, by segment, was as follows (in millions): Year Ended December 31, 2006 2005 2004 North America ...International ...Consolidated ...Note 14-FAIR VALUES OF FINANCIAL INSTRUMENTS $166 34 $200 $ 94 19 $113 $63 11 $74 The carrying amount and estimated...

  • Page 84
    ...not equal per share amounts reported for year-to-date periods. This is due to changes in the number of weighted-average shares outstanding and the effects of rounding for each period. (2) Included in the fourth quarter of our 2005 provision and reducing the impact of the international restructure is...

  • Page 85
    ...as of December 31, 2006, our internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Ernst...

  • Page 86
    ..., in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Amazon.com, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three...

  • Page 87
    ...we intend to disclose amendments to our Code of Business Conduct and Ethics, as well as waivers of the provisions thereof, on our investor relations website under the heading "Corporate Governance" at www.amazon.com/ir website. Item 11. Executive Compensation Information required by Item 11 of Part...

  • Page 88
    ... 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 the Company's Registration Statement on Form S-8 (Registration No. 333-74419) filed March 15, 1999). Form of Indemnification Agreement...

  • Page 89
    ... of Ratio 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...

  • Page 90
    .... By: /S/ JEFFREY P. BEZOS Jeffrey P. Bezos President, Chief Executive Officer and Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of...

  • Page 91
    ..., based on closing prices, for the period from December 31, 2001 to December 31, 2006. 500 450 400 350 Dollars 300 250 200 150 100 50 0 2001 2002 2003 2004 2005 2006 Calendar Year Ended December 31 Cumulative Total Return Legend Amazon.com Morgan Stanley Technology Index NASDAQ U.S. Index...

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