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`(Exceeds 100 pages)
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`Filed:
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`7[19[2011
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`Title: DECLARATION OF STEPHENIE H. BALD AND
`
`EXHIBITS.
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`Part
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`5 of
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`31
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`Table of Contents
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`Outbound shipping charges to customers are included in.\“Net sales” and, excluding amounts earned from third-party sellers where we don’t provide
`fulfillment services, amounted to $420 million, $372 million, and.$365 million for 2004, 2003, and 2002.
`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 Merchants@ and Merchantcom programs. In those arrangements, as well as
`other product sales by third parties, the third-party maintains ownership of the related products.
`
`Internal-Use Software
`‘Included in fixed assets is the capitalized cost of internal-use sofiware and website development, including software used to upgrade and enhance our
`websites-and processes supporting our business. In accordance with Statement of Position (“SOP”) 98-1, “Accountingfor the Costs ofCompu1er Software
`Developed or Obtainedfor Internal Use, " we capitalize costs incurred during the application development stage related to the development 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 software are
`expensed as incurred.
`
`During 2004, 2003, and 2002 we capitalized $44 million, $30 million, and $25 million of costs associated with development of intemal-use software,
`which is offset by amortization of previously capitalized amounts of $30 million, $24 million, and $26 million.
`
`Restructuring Estimates
`Restructuring-related liabilities include estimates for, among other things, anticipated disposition of lease obligations. Key variables in determining
`such estimates include anticipated timing of sublease rentals, estimates of sublease rental payment amounts and tenant improvement costs, and estimates for
`brokerage and other related costs. We periodically evaluate and, if necessary, adjust our estimates based on currently-available information. Additionally, we
`may determine, as we did in 2004, that certain of the office space vacated as part of our 2001 restructuring, which we have been unable to sublease due to
`poor real estate market conditions, may be necessary for our future needs. To the extent we elect to utilize this office space, we adjust our restructuring-
`related liability and classify future payments to the corresponding operating expense categories on the consolidated statements of operations.
`
`Currency Eflect on Intercompany Balances
`A provision of Statement of Financial Accounting Standard (“SFAS”) No. 52, Foreign Currency Translation, requires that gains and losses arising
`from intercompany foreign currency transactions considered long-terrn investments, in which settlement is not planned or anticipated in the foreseeable
`future, be excluded in the determination of net income. Our international operations are financed, in part, by the U.S. parent company. Prior to the fourth
`quarter of 2003, currency adjustments for these intercompany balances were recorded to stockholders’ deficit as translation adjustments and not included in
`the detennination of net income because we intended to permanently invest such amounts. During the fourth quarter of 2003, we made the decision that
`these amounts would be repaid among the entities and, accordingly, upon consolidation, any exchange gain or loss arising from remeasurements of
`intercompany balances is required to be recorded in the determination of net
`
`29
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`Table ofgggntents
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`5”‘
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`income. In accordance with SFAS No. 52, currency adjustments arising before the fourth quarter of 2003 continue to be included as a component of
`“Accumulated other comprehensive income” on our consolidatedbalance sheets. Resulting from the remeasurement of intercompany balances using
`exchange rates at the reporting dates, we recorded gains of $41 million and $36 million for 2004 and 2003. Repayments among the entities during 2004 were
`$210 million.
`-
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`Valuation ofDeferred Tax Assets
`SFAS 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 earnings experience by taxing jurisdiction, expectations of future taxable income, the carry-forward periods available to us
`for tax reporting purposes, and other relevant factors. At December 31, 2004, our net deferred tax assets are $363 million, comprised of approximately $270
`million relating to our net operating loss carryforwards (“NOLS”), with the remaining portion related to temporary timing differences between tax and
`financial reporting. Classification of deferred tax assets between current and long-tenn categories is based on the expected timing of realization, and the
`valuation allowance is allocated on a pro-rata basis.
`
`We had a net tax benefit in 2004 of $233 million resulting primarily from the effect of changes in our valuation assessment of deferred tax assets
`during 2004. In connection with this assessment, we also recorded a net credit to “Stockholders’ Deficit” of $106 million on our consolidated balance sheet
`in 2004. The range of possible judgments relating to the valuation of our deferred tax assets is very wide. For example, had we detennined that the weight of
`available evidence did not support a decision that a portion of our deferred tax asset will be realized, the amount recorded to “Provision (benefit) for income
`taxes” would have been an expense of $12 million (rather than a benefit of $233 million) for 2004. Alternatively, if we had concluded that the weight of
`available evidence supported a decision that substantially all of our deferred tax assets may be realized, we would have recorded a substantially larger credit
`to “Stockholders‘ Deficit.”
`
`Significant judgment is required in making this assessment, and it is very difficult to predict when, if ever, our assessment may conclude that the
`remaining portion of.our deferred tax assets are realizable.
`
`Liquidity and Capital Resources
`
`Our financial focus is on long-tenn, sustainable growth in free cash flow-. Free cash flow was $477 million for 2004 compared to $346 million for
`2003, an increase of 38%. Operating_ cash flows and free cash flows can be volatile and are sensitive to many factors, including changes in working capital.
`Working capital at any specific point in time is subject to many variables, including seasonality, the timing of expense payments, discounts offered by
`vendors, vendor payment tenns, and fluctuations in foreign exchange rates.
`
`Our principal sources of liquidity are cash flows generated from operations and our cash, cash equivalents, and marketablelsecurities balances, which
`were $1.8 billion and $1.4 billion at the end of 2004 and 2003. Amounts held in foreign currencies were $970 million and $764 million at the end of 2004
`and 2003, and were primarily Euros, British Pounds, and Yen.
`-
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`Cash provided by operating activities was $567 million, $392 million, and $174 million in 2004, 2003, and 2002. Our operating cash flows result
`primarily from cash received from our customers and third-party sellers, offset by cash payments we make to suppliers of products and services, employee
`compensation, credit card transaction fees, bad debt, and interest payments on our long-terrn debt obligations. Cash received from
`
`1
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`Free cash flow is defined as net cash provided by operating activities less purchases of fixed assets, including capitalized intemal-use software and
`website development, both of which are presented on our statements of cash flows.
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`Table of Contents
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`customers and third-party sellers generally corresponds to ournet 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. During 2004, payments to product merchandise suppliers, which do not include payments to transportation
`suppliers, totaled $4.6 billion, an increase of $1.2 billion over the prior year. The increase in payments to product merchandise suppliers corresponds with
`cost of sales, and with 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, and is also affected by foreign exchange rates.
`
`Cash provided by (used in) investing activities corresponds with purchases, sales, and maturities of marketable securities and purchases of fixed assets,
`including intemal-use software and website development costs. Cash used in investing activities was $318 million in 2004 and $122 in 2002, while cash
`provided by investing activities was $237 million in 2003 with the variability caused primarily by maturities of marketable securities. Our capital
`expenditures, including intemal-use software and website development, were $89 million, $46 million, and $39 million in 2004, 2003, and 2002, with the
`sequential increases primarily reflecting additional investment in development of new features and product offerings on our websites over time. We believe
`our expenditures for repairs and improvements are sufficient to keep our facilities and equipment in suitable operating condition.
`
`In September 2004, we acquired all of the outstanding shares of Joyo.com at a purchase price of $75 million, including a cash payment (net of cash
`acquired) of $71 million, the assumption of employee stock options, and transaction-related costs. Cash paid in connection with this acquisition is classified
`as cash provided by (used in) investing activities on our consolidated statements of cash flows. The operating results of Joyo.com did not have a significant
`effect on consolidated results for 2004. See Item 8 of Part II, “Financial Statements and Supplementary Data—Note 1—Description of Business and
`Accounting Policies——Business Acquisition.”
`'
`
`Cash used in financing activities was $97 million in 2004 and $332 million in 2003. This compares to cash provided by financing activities of $107
`million in 2002. Cash inflows from financing activities primarily result from proceeds from exercises of employee stock options, which were $60 million in
`2004, $163 million in 2003, and $122 million for 2002. 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. Cash outflows from financing activities result from repayments of long-terrn
`debt and payments on capital lease obligations, which were $157 million in 2004, $495 million in 2003, and $15 million in 2002. During 2004, we paid $154
`million, which includes a redemption premium of $4 million, to redeem a portion of our 4.75% Convertible Subordinated Notes due 2009 (“4.75%
`Convertible Subordinated Notes’_’). See Item 8 of Part 11, “Financial Statements and Supplementary Data—Note 4—Long-Tenn Debt and Other.”
`
`In 2004 we recorded a primarily non-cash net benefit of $233 million to “Provision (benefit) for income taxes” relating primarily to our valuation of
`deferred tax assets. We expect our cash taxes paid in 2005 to be approximately $25 million, compared with $4 million in 2004.
`
`On March 7, 2005, we redeemed 200 million Euros principal of our 6.875% PEACS for a cash payment of $266 million, which includes $1 million of
`interest from and including February 16 through March 6, 2005. Under the lndenture, no premium was required. As of March 7, 2005, the outstanding
`principal amount of our 6.875% PEACS was 490 million Euros ($649 million using the Euro to U.S. Dollar exchange rate on that date).
`
`Additionally, in March 2005, our Board of Directors authorized a newdebt repurchase program, replacing our previous debt repurchase authorization
`in its entirety, pursuant to which we may from time to time repurchase (through open market repurchases or private transactions), redeem, or otherwise retire
`up to an aggregate of $500 million of our outstanding 4.75% Convertible Subordinated Notes and 6.875% PEACS.
`31
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`Since our 6.875% PEACS, which are due in 2010, are denominated in Euros, our U.S. Dollar equivalent interest payments and principal obligations
`fluctuate with the Euro to U.S. Dollar exchange rate. We currently do not hedge our exposure to foreign currency effects on our interest or principal
`obligations relating to the 6.875% PEACS, and, as a result, any fluctuations in the exchange rate will have an effect on our interest expense and, to the extent
`we make principal payments, the amount of U.S. Dollar equivalents necessary for principal settlement. Additionally, since our interest payable on our
`6.875% PEACS is due in Euros, the balance of interest payable is subject to gains or losses on currency movements until the date of the interest payment.
`Gains or losses on the remeasurement of our Euro-denominated interest payable are classified as “Other expense (income), net” on our consolidated
`statements of operations.
`
`The following summarizes our principal contractual commitments as of December 31, 2004:
`2005
`2006
`2007
`
`2008
`
`2009
`
`Thereafter
`
`Total
`
`Operating and capital commitments:
`Debt principal and other (1)
`Debt interest (1)
`Capital leases
`Operating leases’(2)
`Purchase obligations (3)
`
`(in thousands)
`
`$
`
`128
`107,026
`1,298
`61_,222
`227,950
`
`$
`
`1,250
`107,026
`510
`64,390
`—
`
`$
`
`340
`107,026
`22
`55,678
`—
`
`$
`
`373
`107,026
`' —
`51,990
`—
`
`$ 899,760
`85,656
`-—
`43,184
`—
`
`$ 951,089
`64,287
`—
`186,737
`——
`
`$1,852,940
`578,047
`1,830
`463,201
`227,950
`
`Total operating and capital commitments
`
`397,624
`
`173,176
`
`163,066
`
`159,389
`
`1,028,600
`
`1,202,l 13
`
`3,123,968
`
`Restructuring-related commitments:
`Operating leases, net of estimated sublease income (4)
`Other
`V
`
`-
`
`Totalrestructuring-related commitments
`
`Total commitments
`
`3,057 _
`1,910
`
`4,967
`
`1,903
`——
`
`1,903
`
`1,843
`—
`
`1,843
`
`1,497
`—
`
`1,497
`
`1,374
`—
`
`1,374
`
`_
`
`1,305
`——
`
`1,305
`
`10,979
`1,910.
`
`12,889
`
`$3,136,857
`$1,203,418
`$1,029,974
`$160,886
`$164,909
`$175,079
`$402,591
`— — — — — — _
`
`(1) The principal payment due in 2010 and the annual interest payments due under our 6.875% PEACS fluctuate based on the Euro/U.S. Dollar exchange
`ratio, which, at December 31, 2004, was 1.3552. As of December 31, 2004, our principal debt obligation for the 6.875% PEACS has increased by $255
`million since its issuance in February 2000 due to fluctuations in the Euro/U.S. Dollar exchange ratio. Additionally, on March 7, 2005, we redeemed
`200 million Euros of our outstanding 6.875% PEACS, which is not reflected in the table above.
`(2) Pursuant to SFAS No. 13, “Accountingfor Leases," lease agreements are categorized at their inception as either operating or capital leases depending
`on certain defined criteria. Although operating leases represent obligations for us, pursuant to SFAS No. 13 they are not reflected on the balance sheet.
`As of December 31, 2004, we have remaining obligations under operating leases for equipment and real estate of $463 million. If we had applied to our
`operating leases the same convention used for capital leases, which, however, would not be in accordance with GAAP, we would have recorded
`approximately $335 million of additional obligations on our balance sheet at December 31, 2004.
`(3) Consists primarily of legally-binding commitments to purchase inventory. Legally-binding commitments associated with non-inventory purchases are
`not significant.
`(4) Net of an estimated $20 million in sublease rentals. At December 31, 2004, we had signed sublease agreements totaling $13 million.
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`Pledged Securities
`We are required to pledge a portion of our marketable securities as collateral for standby letters of credit that guarantee certain of our contractual
`obligations and for real estate lease agreements. The amount required to be pledged for real estate lease agreements changes over the life of our leases; with
`fluctuations in our market capitalization, which is common shares’ outstanding multiplied by the closing price of our common stock; and based on our credit-
`rating. The change in the total amount of collateral required to be pledged under these agreements is as follows:
`Standby
`Letters of
`Credit (1)
`
`Total
`
`Line of
`Credit (2)
`
`Real Estate
`Lenses (3)
`
`Balance at December 31,2003
`Net change in collateral pledged
`
`Balance at December 31, 2004 (4)
`
`$ 60,799
`(10,383)
`
`(in thousands)
`$ —
`$ 25,936
`1,933
`(4,412)
`
`$ 86,735
`(12,862)
`
`$ 73,873
`$ 21,524
`$ 1,933
`$ 50,416
`T _ — W
`
`(1)
`(2)
`(3)
`
`(4)
`
`Pursuant to available standby letter-of-credit facilities totaling $151 million.
`Pursuant to an available line of credit totaling $10 million.
`The required amount of collateral to be pledged on certain of our real estate leases fluctuates based on our market capitalization. At December 31,
`2004, our market capitalization was $18.1 billion. If our market capitalization decreases, the required amount of collateral to be pledged will increase
`$5 million (if market capitalization is less than $18 billion but more than $13 billion) or $11 million (if our market capitalization is less than $13
`billion).
`.
`Includes $10 million of cash equivalents pledged as collateral. See “Note 2—Cash, Cash Equivalents, and Marketable Securities.”
`
`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 1 of Part I
`“Business—Additional Factors That May Affect Future Results.” We continually evaluate opportunities to sell additional equity or debt securities, obtain
`credit facilities from lenders, repurchase common stock, pay dividends, or repurchase, refinance, or otherwise restructure our long-terrn 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 lines-of-
`credit or financing instruments will be available in amounts or on terms 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 lntemational. We present our segment infomiation along the same
`lines that our chief operating decision maker reviews our operating results in assessing perfonnance and allocating resources.
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`Net Sales and Gross Profit
`Net sales information is as follows:
`
`v—
`
`Net Sales:
`
`North America
`lntemational
`
`Year Ended December 31,
`
`2004
`
`2003
`
`A
`
`2002
`
`<
`
`$3,847,344
`3,073,780
`
`(in thousands)
`
`$3,258,413
`2,005,286
`
`$2,761,457
`1,171,479
`
`Consolidated
`
`V
`
`$3,932,936
`$5,263,699
`$6,921,124
`— — —
`
`Net Sales Growth_ Rate:
`North America
`lntemational
`Consolidated
`
`Net Sales Mix:
`North America
`lntemational
`
`Consolidated
`
`'
`
`'
`
`'
`
`18.1%
`53.3
`31.5
`
`55.6%
`44.4
`
`18.0%
`71.2
`33.8
`
`'
`
`61.9%
`38.1
`
`_
`
`12.2%
`76.9
`26.0
`
`70.2%
`29.8
`
`100.0%
`100.0%
`100.0%
`_
`' g — —
`
`Revenue growth is due primarily to increased demand driven by increased selection, lower prices, including from our free shipping offers, and
`improved features and services available on our websites. Revenue growth is also affected by changes in exchange rates. See “Effect of Exchange Rates”
`below for additional infonnation on the effect on reported revenue of changes in exchange rates. Net sales fi'om “Other” consist of non-retail activities, such
`as our Merchantcom program, miscellaneous marketing and promotional activities, and our co-branded credit card program.
`
`North America revenue growth rate in 2004 was consistent with 2003 at 18%, up from our 2002 growth rate of 12%. The increase in growth rates from
`2002 reflects our efforts to increase product categories and selection available on our websites, and to continue reducing prices for our customers, including
`from our free shipping offers.
`
`lntemational revenue growth rate declined in 2004 and 2003 compared to the prior year periods, which reflects several factors. These factors include
`the increasing size of our business, which naturally causes growth rates to decline over time, offset by our customer experience initiatives including new
`category introductions; increased selection; the introduction of our third-party offerings in the UK, Germany, Japan, and France; and our efforts to reduce
`prices for our customers, including from our free shipping offers. lntemational segment revenue growth rates are also affected by changes in exchange rates.
`
`The relative mix of worldwide net sales attributed to our lntemational segment continues to increase, and we expect that, over time, our lntemational
`segment will represent 50% or more of our consolidated total. Additionally, as we continue to offer increased selection, lower prices, and additional product
`lines in our Electronics and other general merchandise category, we expect to see the relative mix of sales from this category increase. -
`34
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`Table of Cgntents
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`
`
`Gross profit infonnation is as follows:
`
`Gross Profit:
`North America
`lntemational
`
`Consolidated
`
`Gross Profit Growth Rate:
`North America
`International
`Consolidated
`
`Gross Margin:
`North America
`lntemational
`Consolidated
`
`Year Ended December 31,
`
`2004
`
`2003
`
`2002
`
`(in thousands)
`
`$1,023,552
`578,445
`
`$ 866,664
`390,504
`
`$740,985
`251,633
`
`$992,618
`$1,257,168
`$1,601,997
`— ‘ —
`
`18.1%
`48.1
`27.4
`
`26.6%
`18.8
`23.1
`
`17.0%
`55.2
`26.7
`
`26.6%
`19.5
`23.9
`
`12.7%
`78.0
`24.3
`
`26.8%
`21.5
`25.2
`
`The increases in gross profit in absolute temis during 2004 and 2003 compared to prior year periods correspond with increased revenue, including
`from increased sales volume by third-party sellers, offset by our year-round free shipping offers and lower prices for customers. Generally, our gross margins
`fluctuate based on several factors, including our product and geographic mix of sales during the year; sales volumes by third-party sellers; changes in vendor
`pricing; lowering prices for customers, including from competitive pricing decisions; and the extent to which our customers accept our free shipping oifers.
`Free shipping offers reduce shipping revenue and reduce our gross margins on retail sales. We view our shipping offers as an effective marketing tool and
`intend to continue offering them indefinitely. Additionally, in 2005, we introduced a new shipping membership program, Amazon Prime, in which members
`receive free two-day shipping and discounted overnight shipping.
`
`North America segment gross margin in 2004 was consistent with 2003, with each of these years down slightly from 2002. Changes in mix of product
`sales towards lower gross margin product categories and price reductions for our customers, including from our year-round 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 declined during 2004 and 2003 compared to prior periods resulting from our efforts to continue reducing prices
`for customers, including from our free shipping offers, and from a shift in mix of product sales towards lower gross margin product categories, offset
`partially by increases in sales volume by third-party sellers.
`'
`
`Sales of products by third-party sellers on our websites continue to increase, representing 26%, 22%, and 17% of unit sales in 2004,2003, and 2002.
`Since revenues from these sales are recorded as a net amount, they generally result in lower revenues but higher gross margin per unit. If product sales by
`third-party sellers continue to increase, we anticipate the higher gross margin attributes of these sales will partially offset the effect on our gross margins of
`our strategy to lower prices for customers over time by ofiering additional or broader price reductions, free shipping offers, and other promotions.
`
`Gross profit growth is also affected by changes in exchange rates. See “Effect of Exchange Rates” below for additional infonnation on the effect on
`reported gross profit of changes in exchange rates.
`
`35
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`Table of Contents
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`Supplemental Information
`Supplemental information about shipping results is as follows:
`
`Shipping Activity:
`Shipping revenue
`Outbound shipping costs
`
`Year Ended December 31,
` —j::
`2004
`2003
`2002
`
`(in thousands)
`
`$ 420,053
`(616,572)
`
`$ 372,000
`(508,468)
`
`$ 364,749
`(404,303)
`
`Net shipping cost
`
`'
`
`'
`
`'
`
`$ (39,554)
`$(136,468)
`S(l96,519)
`j T m
`
`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. Additionally, in 2005, we continued to lower prices, including by introducing a new shipping
`membership program, Amazon Prime, in which members receive free two-day shipping and discounted overnight shipping. We seek to partially offset these
`costs over time through achieving higher sales volumes, negotiating better tenns with our suppliers, and achieving better operating efficiencies, including by
`reducing split-shipments.
`-
`'
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`Table ofContents
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`Supplemental information about our net sales is as follows:
`
`Net Sales:
`North America
`Media
`Electronics and other general merchandise
`' Other
`
`Total North America
`
`International
`Media
`Electronics and other general merchandise
`Other
`
`Total International
`
`Consolidated
`Media
`Electronics and other general merchandise
`Other
`
`Total consolidated
`
`Net Sales Growth Rate:
`North America
`Media
`Electronics and other general merchandise
`Other
`Total North America
`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 other general merchandise
`Other
`
`Total consolidated
`
`North America
`Intemational
`
`Total consolidated
`
`Year Ended December 31,
`
`2004
`
`2003
`
`2002
`
`(in thousands)
`
`$2,589,438
`1,127,754
`130,152
`
`$2,269,472
`878,519
`1 10,422
`
`$1,994,949
`681,041
`85,467
`
`$3,847,344
`
`$3,258,413
`
`$2,761,457
`
`$2,5 12,91 1
`558,490
`2,379
`
`$1,779,476
`224,606
`1,204
`
`$1,103,665
`65,877
`1,937
`
`$3,073,780
`
`$2,005,286
`
`$1,171,479
`
`55,102,349
`1,686,244
`132,531
`
`$4,048,948
`1,103,125
`111,626
`
`$3,098,614
`746,918
`87,404
`
`$6,921,124
`
`$5,263,699
`
`$3,932,936
`
`13.8%
`29.0
`29.2
`18.0
`
`61.2%
`240.9
`(37.8)
`71.2
`
`30.7%
`47.7
`27.7
`33.8
`
`76.9%
`21.0
`2.1
`
`100.0%
`
`100.0%
`
`55.6%
`.4‘4:-
`|-A
`100.0%
`
`61.9%
`38.1 A
`
`100.0%"
`
`37
`
`10.2%
`17.9
`17.7
`12.2
`
`71.0%
`308.3
`279.8
`76.9
`
`26.2%
`25.8
`19.5
`26.0
`
`78.8%
`19.0
`2.2
`
`100.0%
`
`70.2%
`29.8
`
`100.0%
`
`
`
`._._,___,..._.
`
`
`
`
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`Table of Contents
`
`
`
`Direct Segment Operating Expenses
`lnfonnation about the operating expense categories that we-allocate to our segment results is as follows:
`
`'
`
`_
`
`.
`
`'
`
`,
`
`Segment Operating Expenses:
`North America
`lntemational
`Percent of Net Sales:
`North America
`lntemational
`Segment Operating Expenses:
`Fulfillment (1)
`Marketing (2)
`Technology and content (3)
`General and administrative (4)
`Percent of Net Sales:
`Fulfillment (1)
`Marketing (2)
`Technology and content (3)
`General and administrative (4)
`Year-over-year Percentage Change:
`Fulfillment (1)
`Marketing (2)
`Technology and content (3)
`General and administrative (4)
`
`Year Ended December 31,
`
`
`2oo4
`
`zoos
`
`2002
`
`(in thousands)
`
`$702,676
`409,158
`
`$583,619
`312,311
`
`$561,318
`251,198
`
`18.3%
`_ 13.3
`
`‘
`
`17.9%
`15.6
`
`20.3%
`21.4
`
`$590,397
`158,022
`251,195
`112,220
`
`$477,032
`122,787
`207,809
`88,302
`
`$392,467
`125,383 ’
`215,617
`79,049
`
`8.5%
`2.3
`3.6
`1.6
`
`24%
`29
`21
`27
`
`_
`
`9.1%
`2.3
`3.9
`1.7
`
`22%
`(2)
`(4)
`12
`
`10.0%
`3.2
`5.5
`2.0
`
`5%
`(9)
`(1 I)
`(12)
`
`V
`
`(I) Fulfillment
`The increase in fulfillment costs in absolute dollars in comparison with the prior year relates to variable costs corresponding with sales volume; our
`mix of product sales; costs associated with credit card fees; and bad debt costs, including costs of our guarantee for certain third-party seller transactions.
`The mix of product sales affects fulfillment costs per shipment based on variations in shape and weight of products we sell. Additionally, since credit card
`fees associated with third-party seller transactions are based on the gross purchase price of underlying transactions, and bad debt costs are higher as a
`percentage of revenue versus our retail sales, our increasing third-party sales result in increasing fulfillment costs as a percent of net sales. Also, during the
`third quarter of 2004 we began operation of a new European fulfillment center in Scotland and plan to expand our fulfillment capacity in Japan in 2005.
`Fulfillment costs as a percentage of net sales decreased due to improvements in productivity and accuracy, the increase in units fulfilled, which leverages the
`fixed-cost portion of our fulfillment network, efficiencies gained through utilization of fulfillment services provided by third parties, a decline in customer
`service contacts per unit resulting from improvements in our operations, and enhancements to our customer self-service features, offset partially by increases
`in credit card fees and bad debt, including costs of our guarantee for certain third-party seller transactions. We expect absolute amounts spent in fulfillment
`to increase over time.
`
`(2) 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, and other initiatives. Since our marketing expenses are largely variable, we expect
`absolute amounts spent in marketing to increase over time. To the extent there is increased or decreased competition for these traffic sources, or to the extent
`our mix of these channels shifis, we would expect to see a corresponding change in our marketing
`»
`38
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`Table of Contents
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`" q
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`expense. Marketing costs increased in absolute temis in 2004 corresponding with revenue growth as we utilized variable online marketing channels such as
`our Associates and Syndicated Stores programs, sponsored search, and other variable marketing initiatives. While costs associated with free shipping are not
`included in marketing expense, we view free shipping as an effective worldwide marketing tool, and intend to continue offering it indefinitely.
`
`(3) Technology and Content
`Our spending in technology and content has increased as we are adding computer scientists and software engineers to continue to enhance the
`customer experience on our websites and those websites powered by us and to improve our process efficiency. Additionally, we continue to invest in several
`areas of technology, including seller platform; A9.com, our wholly-owned subsidiary focused on search technology on www.A9.com, www.ama:on.com, and
`other Amazon sites; web services; and digital initiatives. During 2004, 2003, and 2002 we capitalized $44 million, $30 million, and $25 million of costs
`associated with development of internal-use software, which is offset by amortization of previously capitalized amounts of $30 million, $24 million, and $26
`million. We intend to continue investing in these and other initiatives and expect absolute dollars spent in technology and content to increase over time as we
`continue to add computer scientists and sofiware engineers to our staff. A si