BULKY DOCUMENTS
`
`Filed:
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`7[19[2011
`
`Title: DECLARATION OF STEPHENIE H. BALD AND
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`EXHIBITS.
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`Part
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`4 of
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`81
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`Table of Contents
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`carrier. Return allowances, which reduce product revenue by our best estimate of expected product returns, are estimated using historical experience.
`Revenue from product sales and services rendered is recorded net of sales taxes. Amounts paid in advance for subscription services, including amounts
`received for Amazon Prime and other membership programs, are deferred and recognized as revenue over the subscription term. For our products with
`multiple elements, where a standalone value for each element cannot be established, we recognize the revenue and related cost over the estimated economic
`life of the product.
`
`We periodically provide incentive offers to our customers to encourage purchases. Such offers include current discount offers, such as percentage
`discounts off current purchases, inducement offers, such as offers for future discounts subject to a minimum current purchase, and other similar offers.
`Current discount offers, when accepted by our customers, are treated as a reduction to the purchase price of the related transaction, while inducement offers,
`when accepted by our customers, are treated as a reduction to purchase price based on estimated future redemption rates. Redemption rates are estimated
`using our historical experience for similar inducement offers. Current discount offers and inducement offers are classified as an offsetting amount in_“Net
`sales.”
`
`Commissions and per-unit fees received from sellers and similar amounts earned through Amazon Enterprise Solutions are recognized when the item
`is sold by the seller and our collectibility is reasonably assured. When we are responsible for fulfillment-related services, commissions are recognized when
`risk of loss and title transfer to the customer. We record an allowance for estimated refunds on such commissions using historical experience.
`
`Inventories
`
`Inventories, consisting of products available for sale, are accounted for using the first-in first—out (“FIFO") method, and are valued at the lower of cost
`or market value. This valuation requires us to make judgments, based on currently-available information, about the likely method of disposition, such as
`through sales to individual customers, returns to product vendors, or liquidations, and expected recoverable values of each disposition category. Based on
`this evaluation, we adjust the carrying amount of our inventories to lower of cost or market value.
`
`We provide fulfillment-related services in connection with certain of our agreements. In those arrangements, as well as other product sales by other
`_
`sellers, the seller maintains ownership of the related products. As such, these amounts are not included in our consolidated balance sheets.
`
`lnternal- Use Software and Website Development
`
`Included in fixed assets is the capitalized cost of intemal-use sofiware and website development, including software used to upgrade and enhance our
`websites and processes supporting our business. As required by Statement of Position (SOP) 98-1, "Accountingfor the Costs ofComputer Software
`Developed or Obtainedfor Internal Use, " we capitalize costs incurred during the application development stage of intemal-use software and amortize these
`costs over the estimated useful life of two years. Costs incurred related to design or maintenance of intemal-use sofiware are expensed as incurred.
`
`Currency Eflect on Intercompany Balances
`Gains and losses arising from intercompany foreign currency transactions are included in net income.
`
`Stock-Based Compensation
`
`We measure compensation cost for stock awards at fair value and recognize compensation over the service periodafor awards expected to vest. The fair
`value of restricted stock and restricted stock units is determined
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`based on the number of shares granted and the quoted price of our common stock. Since we primarily issue restricted stock units to our employees, the
`complexity of valuation issues for stock compensation is greatly reduced. The estimation of stock awards that will ultimately vest requires judgment, and to
`the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period
`estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.
`Actual results and future estimates may differ substantially from our current estimates.
`
`We utilize the accelerated method, rather than a straight-line method, for recognizing compensation expense. Under this method, over 50% of the
`compensation cost would be expensed in the first year of a four year vesting term. .The accelerated method also adds a level of complexity in estimating
`forfeitures. If forfeited early in the life of an award, the forfeited amount is much greater under an accelerated method than under a straight—line method.
`
`Income Taxes
`
`We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions
`and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate
`tax determination is uncertain. _We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes
`will be due. These reserves for tax contingencies are established when we believe that certain positions might be challenged despite our belief that our tax
`return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of tax audit. The provision
`for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.
`
`Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and
`are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. The majority of our gross deferred tax assets relate to net
`operating loss carryforwards that related to differences in stock-based compensation between the financial statements and our tax returns.
`
`Statement of Financial Accounting Standards (SFAS) No. 109, Accountingfor Income Taxes, requires that deferred tax assets be evaluated for future
`realization and reduced by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the
`likelihood of future realization of our deferred tax assets, including our recent cumulative eamings experience and expectations of future taxable income by
`taxing jurisdiction, the carry-forward periods available to us for tax reporting purposes, and other relevant factors. In accordance with the provisions of
`SFAS No. 109, we allocate our valuation allowance to current and long-tenn deferred tax assets on a pro—rata basis.
`
`If we determine that additional portions of our deferred tax assets are realizable the majority of the benefit will come from the assets associated with
`the stock-based compensation that was not recognized in the financial statements but was claimed on the tax return. Since this compensation did not
`originally run through our consolidated statements of operations, the benefit generated will be recorded to stockholders’ equity.
`
`Effective January 1, 2007, we adopted the provisions of FASB Interpretation (FIN) No. 48, Accountingfor Uncertainty in Income Taxes-an
`interpretation ofFASB Statement No. /09. FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in
`accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is
`more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to
`measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when
`evaluating and estimating our tax positions and taxbenefits, which may require periodic adjustments and which may not accurately anticipate actual
`outcomes.
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`Table ofgiontents
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`Recent Accounting Pronouncements
`
`In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements, which defines fair value,
`establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value
`measurements. SFAS No. 157 is effective for fiscal years beginning afier November 15, 2007, and interim periods within those fiscal years. We do not
`expect the adoption of SFAS No. 157 to have a material impact on our consolidated financial statements. The FASB may delay a portion of this standard.
`
`In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits
`companies to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for financial statements issued
`for fiscal years beginning after November 15, 2007. We do not expect the adoption of SFAS No. 159 to have a material impact on our consolidated financial
`statements.
`
`In December 2007, the FASB issued SFAS No. 141 (R), Business Combinations, and SFAS No. 160, Noncontrolling Interests in Consolidated
`Financial Statements. SFAS No. 141 (R) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling
`interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS
`No. 160 clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. The calculation of
`earnings per share will continue to be based on income amounts attributable to the parent. SFAS No. 141 (R) and SFAS No. 160 are effective for financial
`statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. We have not yet determined the effect on our
`consolidated financial statements, if any, upon adoption of SFAS No. 141 (R) or SFAS No. 160.
`
`Liquidity and Capital Resources
`Cash flow infonnation is as follows:
`
`‘
`Cash provided by (used in):
`Operating activities
`Investing activities
`Financing activities
`
`Year Ended December 31.
`zoos
`
`2oo7
`
`zoos
`
`(in millions)
`'
`$ 702
`(333)
`(400)
`
`$1,405
`42
`50
`
`$ 733
`(778)
`(193)
`
`'
`
`Free cash flow, a non-GAAP financial measure, was $1.18 billion for 2007, compared to $486 million and $529 million for 2006 and 2005. See
`“Results of Operations—Non-GAAP Financial Measures” below for a reconciliation of free cash flow to cash provided by operating activities. The increase
`in free cash flow in 2007 primarily resulted from the increased growth rate of our revenue and gross profit relative to operating expenses. The decrease in
`free cash flow in 2006 was primarily driven by our increased expenditure in technology and content and excess tax benefits from stock-based compensation
`deductions now classified as financing cash flows. Free cash flow for 2005 included the effect of our payment of a $40 million patent litigation settlement.
`Operating cash flows and free cash flows can be volatile and are sensitive to many factors, including changes in working capital, and the timing and
`magnitude of capital expenditures. Working capital at any specific point in time is subject to many variables, including seasonality, inventory management
`and category expansion, the timing of cash receipts and payments, vendor payment terms, and fluctuations in foreign exchange rates.
`
`Our principal sources of liquidity are cash flows generated from operations and our cash, cash equivalents, and marketable securities balances, which,
`at fair value, were $3.1 billion, $2.0 billion, and $2.0 billion at December 31, 2007, 2006 and 2005. Amounts held in foreign currencies were $1.2 billion,
`$623 million, and
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`$905 million at December 31, 2007, 2006, and 2005 and were primarily Euros, British Pounds, and Japanese Yen.
`
`Cash provided by operating activities was $1.4 billion, $702 million, and $733 million in 2007, 2006, and 2005. Our operating cash flows result
`primarily from cash received from our customers, from sellers, and from non-retail activities such as our co-branded credit card agreements, Amazon
`Enterprise Solutions, and miscellaneous marketing and promotional agreements, ofi”set by cash payments we make for products and services, employee
`compensation (less amounts capitalized pursuant to SOP 98-1 that are reflected as 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, sellers, developers, and other
`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 provided by (used in) investing activities corresponds with purchases, sales, and maturities of marketable securities, cash outlays for acquisitions
`and intellectual property rights, and purchases of fixed assets, including internal-use software and website development costs. Cash provided by (used in)
`investing activities was $42 million, $(333) million, and $(778) million in 2007, 2006, and 2005, with the variability caused primarily by purchases,
`maturities, and sales of marketable securities. Capital expenditures were $224 million, $216 million and $204 million in 2007, 2006 and 2005, with the
`sequential increases primarily reflecting additional investments in technology infrastructure, fulfillment-related assets and the development of new features
`and product offerings on our websites. Capital expenditures included $108 million, $108 million and $79 million for intemal-use software and website
`development during 2007, 2006 and 2005. Stock-based compensation capitalized for intemal-use software and website development costs does not affect
`cash flows. We made payments for the acquisition of certain companies and intellectual property rights, resulting in cash payments, net of acquired cash, of
`$75 million, $32 million, and $24 million in 2007, 2006 and 2005 attributable to cash provided by investing activities.
`
`Cash provided by (used in) financing activities was $50 million, $(400) million, and $(193) million in 2007, 2006, and 2005. Cash outflows from
`financing activities result from repurchases of common stock, repayments of long-tem1 debt, and payments on capital lease obligations. We repurchased
`6 million shares of common stock for $248 million in 2007, and 8 million shares of common stock for $252 million in 2006, under a $500 million repurchase
`program authorized by our Board of Directors in 2006. Repayments on long-tenn debt and payments on capital lease obligations were $74 million, $383
`million, and $270 million in 2007, 2006, and 2005. Repayments on long-term debt include €250 million and €200 million of our 6.875% PEACS for $300
`million and $265 million in 2006 and 2005. See Item 8 of Part ll, “Financial Statements and Supplementary Data——Note 4—Long-Tenn Debt.” Cash inflows
`from financing activities primarily result from proceeds from tax benefits relating to excess stock-based compensation deductions and exercises of employee
`stock options. S1-‘AS No. l23(R), Accountingfor Stock Based Compensation, requires tax benefits relating to excess stock-based compensation deductions be
`presented as financing cash flows. Cash inflows from tax benefits related to stock-based compensation deductions were $257 million, $102 million and $7
`million in 2007,2006, and 2005. Cash inflows from proceeds from exercise of employee stock options were $91 million, $35 million, and $59 million in
`2007, 2006, and 2005. We expect cash proceeds from exercises of stock options will decline over time as we continue issuing restricted stock units as our
`primary vehicle for stock-based awards.
`
`in 2007, 2006 and 2005 we recorded net tax provisions of $184 million, $187 million, and $95 million. A majority of this provision is non-cash. We
`have current tax benefits and net operating losses relating to excess stock-based compensation deductions that are being utilized to reduce our US. taxable
`income. As such, cash taxes paid were $24 million, $15 million, and $12 million for 2007, 2006, and 2005. We endeavor to optimize our global taxes on a
`cash basis, rather than on a financial reporting basis.
`
`in February 2008, our Board of Directors authorized a debt repurchase program, replacing our previous debt repurchase authorization in its entirety,
`pursuant to which we may from time to time repurchase (through open
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`market repurchases or private transactions), redeem, or otherwise retire up to all of our outstanding 4.75% Convertible Subordinated Notes due 2009
`(“4.75% Convertible Subordinated Notes”) and 6.875% PEACS. The outstanding principal of our 4.75% Convertible Subordinated Notes as of this
`authorization was $899 million, and the outstanding principal amount of our 6.875% PEACS was €240 million. In August 2006, our Board of Directors
`authorized a 24-month program to repurchase up to $500 million of our common stock, pursuant to which we repurchased $252 million and $248 million of
`our common stock in 2006 and 2007, respectively. In April 2007, our Board authorized a new 24-monthprogram to repurchase up to $500 million of our
`common stock, which was replaced in February 2008 by a 24-month program to repurchase up to $1 billion of our common stock.
`
`Since our 6.875% PEACS, which are due in 2010, are denominated in Euros, our U.S. Dollar equivalent interest payments and principal obligations
`fluctuate with the Euro to US. Dollar exchange rate. As a result, any fluctuations in the exchange rate will have an effect on our interest expense and, to the
`extent we make principal payments, the amount of US. Dollar equivalents necessary for principal settlement. Additionally, since our interest payable on our
`6.875% PEACS is due in Euros, the balance of interest payable is subject to gains or losses on currency movements until the date of the interest payment.
`Gains or losses on the remeasurement of our Euro-denominated interest payable are classified as “Other income (expense), net" on our consolidated
`statements of operations.
`
`On average, our high inventory velocity means we collect from our customers before our payments to suppliers come due. Inventory turnover was 13,
`13, and 14 for 2007, 2006, and 2005. Inventory turnover has declined slightly over the last several years, primarily due to category expansion and changes in
`product mix, and our continuing focus on in-stock inventory availability, which enables faster delivery of products to our customers. We expect some
`variability in inventory turnover over time as it is affected by several factors, including our product mix, the mix of sales by us and by other sellers, our
`continuing focus on in-stock inventory availability, our investment in new geographies and product lines, and the extent to which we choose to utilize
`outsource fulfillment providers.
`
`The following summarizes our principal contractual commitments as of December 31, 2007:
`zoos
`
`2.009
`
`2010
`
`2011
`(in millions)
`
`2012
`
`Thereafter
`
`Total
`
`Operating and capital commitments:
`Debt principal (1)
`Debt interest (1)
`Capital leases, including interest
`Operating leases
`Other commitments (2)(3)
`Purchase obligations (4)
`Total commitments
`
`'
`
`'
`
`,
`
`-
`
`$
`
`17
`69
`32
`132
`60
`485
`$ 795
`
`$
`
`932
`46
`29
`107
`64
`—
`$ 1,178
`
`$ 350
`24
`23
`89
`80
`—
`$ 566
`
`$ ——
`——
`'6
`69
`60
`——
`$ 135
`
`$ — $ — $ 1,299
`—
`—
`139
`101
`650
`886
`485
`$ 3,560
`
`5
`201
`579
`—
`785
`
`6
`52
`43
`—
`$ 101
`
`$
`
`(2)
`
`- (1) At December 31, 2007, the Euro to U.S. Dollar exchange rate was 1.459. Due to changes in the Euro/U.S. Dollar exchange ratio, our remaining
`principal debt obligation under the 6.875% PEACS since issuance in February 2000 has increased by $114 million as of December 31, 2007. The
`principal and interest commitments reflect the partial redemptions of the 6.875% PEACS and 4.75% Convertible Subordinated Notes.
`Includes the estimated timing and amounts of payments for rent, operating expenses, and tenant improvements associated with approximately 800,000
`square feet of corporate office space in Seattle, Washington. We also have the right to occupy up to an additional approximately 800,000 square feet
`subject to a termination fee, estimated to be up to approximately $40 million, if we do not elect to occupy this additional space. The amount of space
`available and our financial and other obligations under the lease agreements are affected by various factors, including government approvals and
`pennits, interest rates, development costs and other expenses and our exercise of certain rights under the lease agreements. See
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`Item 8 of Part 11, “Financial Statements and Supplementary Data—-Note 6-Commitments and Contingencies—Commitrnents.”
`Includes commitments to acquire intellectual property and unrecognized tax benefits under FIN 48, but excludes $105 million of such unrecognized
`tax benefits for which we cannot make a reasonably reliable estimate of the amount and period of payment. See Item 8 of Part 11, ‘‘Financial
`Statements and Supplementary Data—Note l2—lncome Taxes.”
`Consists of legally-binding commitments to purchase inventory and significant non-inventory commitments.
`
`(3)
`
`(4)
`
`In January 2008 we closed or entered into agreements, subject to regulatory approvals and other conditions, to acquire or invest in certain companies.
`These acquisitions and investments result in aggregate cash payments of approximately $400 million, net of cash acquired.
`
`Pledged Securities
`
`We are required to pledge or otherwise restrict a portion of our cash and marketable securities as collateral for standby letters of credit, guarantees,
`debt, and real estate leases. We classify cash and marketable securities with use restrictions of twelve months or longer as non-current “Other assets” on our
`consolidated balance sheets. The balance of pledged securities at December 31, 2007 consisted of $14 million in “Cash and cash equivalents” and
`“Marketable securities," and $197 million in “Other assets.” The amount required to be pledged for certain real estate lease agreements changes over the life
`of our leases based on our credit rating and changes in our market capitalization (common shares outstanding multiplied by the closing price of our common
`stock). lnfonnation about collateral required to be pledged under these agreements is as follows:
`'
`Standby and Trade
`Letters of Credit
`and Guarantees
`
`Debt 511
`(in millions)
`
`Real Estate
`Leases (2!
`
`Total
`
`Balance at December 31, 2006
`Net change in collateral pledged
`Balance at December 31, 2007
`
`60
`$
`
`78
`
`138
`$
`
`$
`
`$
`
`56
`4
`60
`
`$
`
`$
`
`20
`g7)
`l3
`
`$136
`75
`$21]
`
`(1)
`(2)
`
`Represents collateral for certain debt related to our international operations.
`At December 31, 2006, our market capitalization was $38.6 billion. The required amount of collateral to be pledged will increase by $5 million if our
`market capitalization is equal to or below $18 billion and by an additional $6 million if our market capitalization is equal to or below $13 billion.
`
`We believe that current cash, cash equivalents, and marketable securities balances will be sufficient to meet our anticipated operating cash needs for at
`least the next 12 months. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. See Item 1A of Part 1, “Risk
`Factors.” We continually evaluate opportunities to sell additional equity or debt securities, obtain credit facilities, repurchase common stock, pay dividends,
`or repurchase, refinance, or otherwise restructure our long-tenn debt for strategic reasons or to further strengthen our financial position. The sale of
`additional equity or convertible debt securities would likely be dilutive to our shareholders. In addition, we will, from time to time, consider the acquisition
`of, or investment in, complementary businesses, products, services, and technologies, which might affect our liquidity requirements or cause us to issue
`additional equity or debt securities. There can be no assurance that additional lines-of-credit or financing instruments will be available in amounts or on
`tenns acceptable to us, if at all.
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`Results of Operations
`
`We have organized our operations into two principal segments: North America and International. We present our segment information along the same
`lines that our chief executive reviews our operating results in assessing performance and allocating resources.
`
`Net Sales and Gross Profit
`Net sales information is as follows:
`
`Net Sales:
`
`North America
`International
`Consolidated
`
`Year-over-year Percentage Growth:
`North America
`International
`Consolidated
`
`-
`
`.
`
`’
`
`Year-over-year Percentage Growth, excluding effect of exchange rates:
`North America
`International
`Consolidated
`
`Net Sales Mix:
`North America
`International
`Consolidated
`
`I
`
`2007
`
`Year Ended December 31,
`2006
`(in millions)
`
`S 8,095
`-6,740
`$14,835
`
`$ 5,869
`4,842
`$10,711
`
`zoos
`
`$4,711
`3,779
`$8,490
`
`38%
`39
`39
`
`38%
`31
`35
`
`'
`55%
`45
`100%
`
`I
`
`25%
`28
`26
`
`24%
`28
`26
`
`55%
`45
`100%
`
`22%
`23
`23
`
`22%
`25
`24
`
`55%
`45
`100%
`
`Revenue increased 39% in 2007, reflecting revenue growth in both our North America and International segments. Additionally, changes in currency
`exchange rates positively affected net sales by $399 million for 2007. For a discussion of the effect on revenue growth of exchange rates, see “Effect of
`Exchange Rates” below.
`
`The North America revenue growth rate was 38% in 2007. This revenue growth primarily reflects increased unit sales driven largely by our continued
`efforts to reduce prices for our customers, including from our free shipping offers and Amazon Prime, a larger base of sales in faster growing categories such
`-as electronics and other general merchandise, increased in-stock inventory availability, and increased selection of product offerings.
`
`The International revenue growth rate was 39% in 2007. This revenue growth reflects increased unit sales driven largely by our continued efforts to
`reduce prices for our customers, including fi'om our free shipping offers, a larger base of sales in faster growing categories such as electronics and other
`general merchandise, increased in-stock inventory availability, and increased selection of product offerings. Additionally, changes in currency exchange
`rates positively affected International net sales by $390 million in 2007.
`'
`
`We expect that, over time, our International segment will represent 50% or more of our consolidated net sales. Additionally, as we continue to offer
`increased selection, lower prices, and additional product lines within our electronics and other general merchandise category, we expect to see the relative
`mix of sales from this category increase. See “Supplemental Information” below.
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`Gross profit infomtation is as follows:'
`
`Gross Profit:
`North America
`International
`Consolidated
`Gross Profit Growth Rate:
`North America
`lntemational
`Consolidated
`Gross Margin:
`North America
`lntemational
`Consolidated
`
`‘
`
`'
`
`Year Ended December 31.
`7Fun?"'
`(in millions)
`
`$2,031
`1,3 22
`$3,353
`
`$1,525
`93 l
`$2,456
`
`33%
`42
`37
`
`25.1%
`19.6
`22.6
`
`20%
`21
`20
`
`26.0%
`19.2
`22.9
`
`$1,267
`772
`$2,039
`
`24%
`33
`27
`
`-
`
`26.9%
`20.4
`24.0
`
`The increase in gross profit in absolute terms during 2007, compared to 2006 and 2005, corresponds with increases in sales, oflfset 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 marketplace sellers; changes in vendor pricing, including the extent to which we receive discounts
`and allowances; lowering prices for customers, including from competitive pricing decisions; improvements in product sourcing and inventory management;
`and the extent to which our customers accept our free shipping and Amazon Prime offers. Such free shipping and Amazon Prime offers reduce shipping
`revenue and reduce our gross margins on retail sales. We view our shipping offers as an effective worldwide marketing tool and intend to continue offering
`them indefinitely.
`
`Sales of products by marketplace sellers on our websites represented 28% of unit sales in 2007, 2006, and 2005. Since revenues from these sales are
`recorded as a net amount, they generally result in lower revenues but higher gross margin per unit. Since we focus on profit dollars rather than margins, we
`are largely neutral on ‘whether an item is sold by us or by another seller .
`
`Gross profit growth is also affected by changes in exchange rates—see “Effect of Exchange Rates” below.
`
`North America segment gross margins in 2007 decreased by 90 basis points compared to 2006 resulting primarily from our efforts to continue
`reducing prices for our customers, including from our free shipping offers and Amazon Prime, and a larger percent of overall sales in lower margin
`categories such as electronics.
`
`North America segment gross margins in 2006 decreased by 92 basis points compared to 2005 resulting primarily from changes in our revenue mix, as
`"revenue in our retail business grew faster than revenue from marketplace sellers. In addition, sales from electronics and other general merchandise grew
`faster than sales from media and we continued our efforts to reduce prices for our customers, including from our free shipping ofl°ers and Amazon Prime.
`
`lntemational segment gross margins in'2007 increased by 38 basis points compared to 2006 resulting primarily from increases in sales of products by
`marketplace sellers, offset partially by our efforts to continue reducing prices for our customers, including from our free shipping offers and Amazon Prime,
`and a larger percent of overall sales in lower margin categories such as electronics.
`
`lntemational segment gross margins in 2006 decreased by 120 basis points compared to 2005 resulting primarily from changes in our revenue mix as
`sales from electronics and other general merchandise grew faster than sales from media.
`32
`
`

`
`
`
`Table of Contents‘
`
`Supplemental Information
`
`Supplemental infomiation about shipping results is as follows:
`
`,
`
`Shipping Activity:
`Shipping revenue (l)(2)
`Outbound shipping costs
`Net shipping cost
`Year-over-year Percentage Growth:
`Shipping revenue
`_
`Outbound shipping costs
`Net shipping cost
`Percent of Net Sales:
`
`.
`
`Shipping revenue
`Outbound shipping costs
`Net shipping cost
`
`_
`
`2007
`
`December 31.
`-
`2006
`(in millions)
`
`$
`
`5
`
`740
`g 1,174)
`(434)
`
`.
`
`31%
`33
`37
`
`5.0%
`§7.9)
`§2.9)%
`
`$ 567
`$884)
`$317)
`
`11%
`18
`32
`
`5.3%
`Q83)
`§3.0)%
`
`2005
`
`S 511
`£750)
`$g239)
`
`22%
`22
`22
`-
`
`6.0%
`5 8.8)
`§2.8)%
`
`(1)
`(2)
`
`Excludes amounts earned on shipping activities by sellers where we do not provide the fulfillment service.
`Includes amounts earned from Amazon Prime membership and Fulfillment by Amazon programs.
`
`We believe that offering low prices to our customers is fundamental to our future success. One way we offer lower prices is through free-shipping
`offers that result in a net cost to us in delivering products, as well as through membership in Amazon Prime. To the extent our customers accept and use our
`free shipping offers at an increasing rate, including memberships in Amazon Prime, our net cost of shipping will increase. We seek to partially mitigate the
`costs of lowering prices over time through achieving higher sales volumes, negotiating better terms with our suppliers, and achieving better operating
`4
`efficiencies.
`
`33
`
`

`
`
`
`Table ofgontents
`
`Supplemental infomtation about our net sales is as follows:
`
`.
`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 and other general merchandise
`Other (1)
`Total consolidated
`
`Year-over-year Percentage Growth:
`North America
`Media
`Electronics and other general merchandise
`Other
`Total North America
`lntemation