Is there-hope-for-amazon-paper1993

Is There Hope For Amazon?
A Strategic and Financial Audit
Prepared for
Professor Hugh Sherman
Associate Professor of Strategy
Copeland Hall 536
Athens, Ohio 45701
and
Scott Wright
Professor of Finance
Copeland Hall 636
Athens, Ohio 45701
and
Dr. Christine Yost
Professor of Professional Communication
Copeland Hall 540
Athens, Ohio 45701
Prepared by
Beth Christensen
Ayla Kirk
Janae Sickmeier
JBA Consulting
One Nationwide Plaza
Columbus, Ohio 43235
February 26, 2001

JBA Consulting
One Nationwide Plaza
Columbus, Ohio 43235
February 26, 2001
Professor Sherman
Ohio University
Athens, Ohio 45701
Dear Professor Sherman,
Here is the report you requested February 2, 2001 containing an analysis of a
struggling company in relation to its industry, along with our recommendations for how
this company can improve their financial situation. The primary objective of this
consultation focused on Amazon’s weaknesses and the industry threats that affect
Amazon.
After assessing Amazon, it has been determined that some of the most pressing
areas are high marketing costs, over expansion of product base, vulnerabilities within the
computer system, and poorly managed operational processes.
The short-term recommendations that should be implemented immediately are to
lower marketing costs and reduce product base. The long-term recommendations are to
improve their computer system and hire and train workers who can adjust quickly to the
newly automated systems.
During the research period there was one restraint that caused problems. Due to
the recent emergence of the online-industry, there was difficulty in finding financial
information prior to 1998 for other competitors in the industry. Therefore, it was a little
harder to get an accurate average of the industry for the financial ratios.
We are grateful to Dr. Yost, Professor Wright, and Professor Sherman for giving
us this opportunity to learn more about Amazon and how to perform a strategic and
financial audit. Without this opportunity, we never would have known the extent
involved in performing these audits, the strategy behind making such recommendations
and the layout of a consulting paper.
Please call, Professor Sherman, if you need additional information pertaining to
this topic or have any questions for us. We would be more than happy to go over our
findings in more detail or discuss our recommendations that we have mentioned.
Sincerely,
Beth Christensen
Team Leader
i

Table of Contents
Executive Summary..........................................................................................................iii
Introduction........................................................................................................................1
Online-Retailing Industry Analysis....................................................................................1
Power of Rivalry and Barriers to Entry..................................................................1
Weaknesses of Amazon......................................................................................................2
Recommendations for Amazon..........................................................................................3
Short-Term Recommendations...............................................................................3
Lowering Marketing Costs.........................................................................3
Reduction of Product Base.........................................................................4
Long-Term Recommendations...............................................................................4
Improve Amazon’s Operating System......................................................4
Conclusion..........................................................................................................................5
References..........................................................................................................................7
Appendices
Appendix A: Interim Deliverable: Analysis of Online-Retailing Industry and Amazon...8
Appendix B: Trend and Industry Ratios For Years 1997, 1998, and 1999.....................16
Appendix C: Trend and Industry Analysis.......................................................................17
Appendix D: Pro Forma Income Statements and Year 2000 Income Statement.............18
Appendix E: Analysis of Pro Forma Income Statement..................................................19
Appendix F: Pro Forma Balance Sheet and Year 2000 Balance Sheet............................21
Appendix G: Analysis of Pro Forma Balance Sheet........................................................22
ii

Is There Hope For Amazon?
Executive Summary
The purpose of this report was to select a company whose performance was poor in
relation to other companies within the same industry. The primary objective of this
consultation was to focus on Amazon’s weaknesses and identify any threats to the
industry that affect Amazon. JBA Consultants were hired to improve Amazon’s
performance by providing recommendations.
Amazon’s major weaknesses of high marketing costs, over expansion of product base,
and poorly managed operational processes were addressed and recommendations given.
Financial ratios were calculated to compare Amazon’s performance to the industry. Pro
forma financial statements for the next three years were prepared to demonstrate how the
recommendations would affect Amazon financially.
Short-term recommendations consist of lowering marketing expenditures to six to eight
percent of net sales and concentrating on keeping the repeat customers. Amazon should
drop Cars and Lawn and Patio to reduce the product base.
Long-term recommendations can be considered once financial stability has been
achieved. These recommendations are to improve operational processes by distributing
the computer system to several locations and creating a backup system. Amazon’s
operational processes will also benefit from hiring and training new employees who can
adjust quickly to the newly automated systems.
JBA Consultants’ main goal was to enable Amazon to turn a profit. Lowering marketing
expenditures to six to eight percent of net sales and focusing on repeat customers will
save money. Dropping the Cars and Lawn and Patio segments will enable Amazon to
reduce spending and specialize in more areas. Expanding computer system locations will
decrease vulnerability to natural or purposeful disasters. Proper training sessions and
hiring will improve operations.
Ayla Kirk
Beth Christensen
Janae Sickmeier
Is There Hope For Amazon? iii

Is There Hope For Amazon? 1
Introduction
The following report reflects the current condition of Amazon and the online-
retailing industry. Performing a SWOT analysis on Amazon has revealed the strengths
that need to be capitalized upon and the weaknesses that require immediate improvement.
Based on the weaknesses of Amazon and the industry analysis, it has been determined
that Amazon’s current situation is in dire need of immediate change to prevent them from
going bankrupt.
Online-Retailing Industry Analysis
After performing an industry analysis on the online-retailing industry, it has been
determined that the most critical aspects to adversely affect Amazon are the power of
rivalry and the low barriers to entry.
Power of Rivalry and Barriers to Entry
Expanded Web technologies have intensified competition for online-retailers.
Ideas and designs that were once innovative are now easy to imitate. Differentiation in
areas besides technology, such as customer service, advertising, and reliability will be
crucial to succeed in the future. The rivalry is further intensified because of low barriers
to entry in this industry. Low barriers to entry make it easy to enter the industry. The 17
percent growth rate of the online-retailing industry reflects the high growth rate caused
by low barriers to entry. This trend makes the industry unattractive as compared to the
average industry growth of two percent per year (Market Share Reporter, 2000). There

are few barriers to enter the eCommerce industry, other than advertising costs. Virtually
anyone can start a site, which increases competition in this industry. Limited government
regulations also encourage entrepreneurship in the eCommerce industry, which creates an
abundance of companies, making it difficult to differentiate.
Weaknesses of Amazon
Although Amazon sells to an impressive amount of domestic customers, as well as
international, Amazon has yet to turn a profit. An interim deliverable was completed on
February 19, 2001 that contains more detail of Amazon’s weaknesses located in
Appendix A. Also, using information found in the Securities and Exchange
Commission, a comprehensive ratio analysis on Amazon has been completed. This
includes examinations of Amazon’s profitability, liquidity, debt management, and asset
activity to assist in determining Amazon’s weaknesses located in Appendix B and C.
Weaknesses that are most detrimental to Amazon, strategically listed in order of severity,
include the following:
• High marketing costs – 25 and 22 percent of net sales was spent on marketing in
1999 and 2000, respectively, thus revealing roughly $24.77 is spent per customer
each year (Securities and Exchange Commission, 2001).
• Expanding product base too quickly – Amazon reinvested nearly all profits back
into the company by launching 18 new segments in 6 years (Amazon.com
website, 2001).
• Poorly managed operational processes
o all computer systems are maintained at one location without backup
systems, formal disaster recovery plans, or sufficient business interruption
insurance and current employees, systems, procedures
o controls may not be adequate to support and effectively manage future
operations (Securities and Exchange Commission, 2001).

Recommendations for Amazon
The following recommendations have been divided into two categories of short-
term and long-term actions. Short-term recommendations should be executed
immediately in order to reduce the net loss, beginning this year. Long-term
recommendations can be considered once financial stability has been achieved, defined as
positive net profits, the ability to pay debts, and have remaining cash to reinvest.
Short-Term Recommendations
High marketing costs and over expansion of product base are the two most
significant weaknesses to Amazon, and call for immediate action.
Lower Marketing Costs. The average company spends five to seven percent of net
sales on marketing expenditures each year (Standard & Poor’s Industry Surveys, 2000).
Amazon spends nearly four times that amount each year (Securities and Exchange
Commission, 2001). Since Amazon is a virtual company, Amazon relies solely on
marketing to maintain and increase customer base. However, Amazon has attained the
goal of strong brand awareness, proven by repeat customers making up 72 percent of
Amazon’s 24 million-customer base (Securities and Exchange Commission, 2001).
Therefore, Amazon should alter the corporate strategy by reducing marketing expenses to
six to eight percent of net sales, simply to maintain the current customer base. This
would allow Amazon to reduce marketing expenditures from $24.77 to $9.94 per
customer per year. These marketing costs will mostly be used to encourage more

purchasing from existing customers, and only a small percentage of the funds to attract
new customers.
Reduction of Product Base. Due to Amazon’s current situation, Amazon can no longer
maintain all current product segments. The corporate strategy of Amazon to allow
“customers to discover anything they may want to buy online” was expanded upon
too quickly. Two segments that are advised that Amazon eliminate are Cars and
Lawn and Patio. The Car line is not showing high online demand. Consumers
prefer a hands-on experience when purchasing cars and usually benefit from
negotiating price with a salesman. Lawn and Patio equipment generates high
inventory and shipping costs. Amazon does not have the competitive advantage of
being first-to-market in either of these segments nor does Amazon have widely
known allies such as the alliance with Toys R Us (See Appendix A).
Long-Term Recommendations
Poorly managed operational processes is a secondary weakness that needs to be
addressed only after the short-term recommendations have been implemented and
finances are accessible. The means to finance these recommendations are predicted to be
available in 2006 if trends continue as shown on the pro forma income statements in
Appendix D and E.
Improve Amazon’s Operating System. Operational costs for Amazon were roughly
$896 million and $1.5 billion for 1999 and 2000, respectively. High operational costs

imply that Amazon needs to improve the operational processes and utilize each worker to
his or her fullest potential. Thus, “Amazon needs to expand, train, and manage their
employee base” (Securities and Exchange Commission, 2001). Proper training will allow
Amazon to fully capitalize on the newly automated system. This process will require
large expenditures that are not available now. Therefore, money must be accumulated
before this process can be considered. However, after an investment has been made to
improve operations, and the system has been acclimated, long-term benefits will be
experienced through diminished operational costs.
A second major factor that needs to be addressed within Amazon’s operating
system is that Amazon has only one location in which the entire computer system is
contained. Amazon needs to distribute the computer systems to several locations, thus
making Amazon less vulnerable to natural or purposeful disasters.
In addition to distributing the computer system, a backup system must be created
to prevent delays or interruptions that can cause the loss of critical data and customer
orders. Customer loyalty will diminish if technical difficulties hinder the availability of
the Website and ease to purchase orders.
Conclusion
After assessing the current condition of Amazon, it has been determined that
Amazon’s future existence relies on the immediate implementation of lowering
marketing costs and eliminating two product segments to turn a profit. Once financial
stability has been achieved in approximately 2006, the long-term recommendations to
improve the operations process can be addressed. If these recommendations are
followed, Amazon will not go bankrupt as analysts have predicted, and they will be

highly profitable within ten years. Refer to Appendix D, E, F and G for projected figures
for years 2001, 2002, and 2003, taking into account all the previous recommendations for
Amazon.

References
Amazon (2001). Mission Statement. Amazon.com. Retrieved February 18, 2001 from
the World Wide Web: http://www.amazon.com/exec/obidos/subst/misc/company-
info.html/ref=gw_m_b_aa/107-8232817-5101368.
Bossong-Martines, Eileen M. (Ed.) (2000). Standard & Poor’s Industry Survey (Vol. 1).
The Gale Group.
Christensen, B., Kirk, A., & Sickmeier, J. (2001). “Analysis of Online-Retailing
Industry and Amazon.” Athens, OH: Integrated Business Cluster.
Lazich, Robert S. (Ed.) (2001). Market Share Reporter: An Annual Compilation of
Reported Market Share Data on Companies, Products, and Services. The Gale
Group.
Securities and Exchange Commission: Amazon 10-Q Annual Report 2000 & 1999.
Retrieved February 10, 2001 from the World Wide Web:
http://www.freeedgar.com/oem/merri…
Frame=0&CompanyName=Amazon+Com+Inc.
Securities and Exchange Commission: Wal Mart 10-Q Annual Report 1999. Retrieved
February 10, 2001 from the World Wide Web:
http://www.freeedgar.com/search/FilingsResults.asp?
SourcePage=CompanyList&CIK=104169&UseFrame=1&FormType=&DateFile
d=&CompanyName=WAL+MART+STORES+INC.
Securities and Exchange Commission: Priceline Com 8-K Annual Report 1999.
SourcePage=CompanyList&CIK=1075531&UseFrame=1&FormType=&DateFil
ed=&CompanyName=PRICELINE+COM+INC.
Securities and Exchange Commission: Priceline Com 8-K Annual Report 1999.
SourcePage=CompanyList&CIK=1065088&UseFrame=1&FormType=&DateFil
ed=&CompanyName=EBAY+INC.

Appendix A: Interim Deliverable: Analysis of
Online-Retailing Industry and Amazon
Online-Retailing Industry
The following report contains an industry analysis on the online-retailing industry
and an in-depth look at Amazon. The purpose of this report is to select a company that
has been unsuccessful and then to determine whether the industry is adversely affecting
the company, whether it is solely the company’s fault, or a combination of both. After
analyzing the industry, the competitive advantages of Amazon and the company’s
weaknesses, it will be determined where changes need to be made to place the company
on the track to success.
Market Analysis
Based on the following research, it has been determined that entering the online-
retailing industry would be a risky venture due to the unattractive nature in comparison to
other industries. Low barriers to entry and high power of rivalry are factors that indicate
that this industry is unattractive.
Demand Analysis
The DotCom phenomenon is unlike any other. Many Internet companies have
caught on to the trend in the past five years. Ecommerce, or retailing via the Internet, has
experienced exponential growth in the past few years. Unlike the average industry that is
growing at two percent each year, eCommerce is currently growing at about 17 percent
per year, indicating this industry is in a growth stage. This fact is one of the few that
presents this as an attractive industry (Market Share Reporter, 2000).

Power of Rivalry
Expanded Web technologies are increasing competition for online retailers. Ideas
and designs that were once innovative are now easy to imitate. Differentiation in areas
besides technology, such as customer service, advertising, and reliability will be crucial
to succeed in the future.
Barriers to Entry
In the eCommerce industry, the barriers to entry are low. This makes the industry
unattractive compared to other industries. There are very few barriers to enter the
eCommerce industry. The only significant barrier is the advertising costs. Almost
anyone can start a site, which increases competition in this industry. Limited government
regulations also encourage entrepreneurship in the eCommerce industry. This creates an
abundance of companies, making it more difficult to differentiate.
Trend Analysis
There are several trends that are affecting online-retailing today. One such trend
is the shifting demands of the target audience based on the changing demographics.
Another trend that will be addressed is the alliances that are taking place to remain
competitive.
Demographics. The demographics in the United States are shifting, thus affecting the
eCommerce market. With the Baby Boomer generation aging, 41 percent of the U.S.
population will be 45 or older by 2003 (Bossong-Martines, 2000). This will have a
significant impact on purchasing trends. The Baby Boomers are now more concerned
with paying for college tuition, retirement funds, and health care, drawing emphasis away
from fashion (Bossong-Martines, 2000).

Generation X consists of people born between 1965 and 1977. This generation
has generally moved out on their own and started their adult lives. Now, the number of
people in their early twenties has dwindles, resulting in less demand for products for
homes. Sales of household appliances, furniture, and house ware have recently declined
(Bossong-Martines, 2000).
Alliances. Another current trend in the eCommerce business is the forming alliances
between online companies with other online companies and with traditional brick and
mortar companies. These alliances are necessary to maintain a competitive advantage.
Forming alliances with well-known companies increases customer base and awareness,
and reduces marketing and advertising costs.
Threats
There are several threats that could adversely affect the online-retailing industry.
The government has mentioned the implementation of a sales tax on purchasing products
online, and many brick and mortar stores are creating websites.
Tax Implementation. One possible threat is the implication of a new sales tax on all
products or services purchased online. In the past, it has been a benefit that the
eCommerce industry has been exempt from sales tax. Although this will not have a fatal
effect on the online-retailing industry, it could discourage some people from purchasing
items online.
Brick and Mortars Creating Websites. An additional problem for online-retailers is
that Wal-Mart, Target, and other traditional retailers have been establishing websites.
“Many analysts believe that as the brick and mortar retail stores get their feet wet in the
online retailing sector, Amazon will soon see a large decrease in its stronghold on the

online-retailing market,” (Muhlhauser, 2000). Amazon’s brick and mortar competitors
have longer operating histories, larger customer bases, greater brand recognition, and
significantly greater resources. These competitors are able to secure long-term contracts
with suppliers and adopt more aggressive pricing and inventory policies. Also,
competitors are able to invest more money into technology development and marketing.
Symptoms of Trends
Based on the following threats and problems in the industry, there are several
symptoms that indicate the unattractive nature of this industry. These symptoms include
the folling: online-retailers reporting negative net profits on their income statements;
stock prices plummeting over the past year; many companies filing for bankruptcy; and
P/E ratios not being applicable. These symptoms indicate that investors have virtually no
confidence in the future stability of the company.
Amazon
Amazon is a broad-based online retailer. Founded in 1994, Amazon now has the
largest pool of transacting consumers, which consists of a 24 million-customer base (The
Business Journal, 2000). Amazon’s competitive advantage is their brand name
recognition and strong customer loyalty. Sixty percent of all Amazon purchases are
made by repeat customers (The Business Journal, 2000). “Amazon’s mission is to
maintain the founding commitment to customer satisfaction and the delivery of an
educational and inspiring shopping experience,” (Amazon.com). Amazon’s target
audience who is in their late teens to late fifties, consists of middle- to upper-class people
of a high educational level, defined as primarily college graduates, and who have caught
on to the technology trend.

Competitive Advantages
Amazon’s competitive advantage is their first-to-market advantage, which has
established customer loyalty and helped form alliances with reputable companies.
Amazon has also strengthened ties with their customers through high levels of customer
satisfaction.
First-to-Market Advantage. “Amazon pioneered online shopping, eCommerce, and
delivery that’s commonplace today,” (The Business Journal, 2000). Strong brand
recognition stemmed from being first in this industry, thus establishing customer
loyalty and causing both brick-and-mortar retailers as well as online-retailers to
take notice of this company. Alliances with companies such as Toys R Us and
DrugStore.com have led to increased customer and product bases. These alliances
allow Amazon to avoid the learning curve in entering new categories and help
avoid inventory risks.
Customer Service. Amazon has targeted three areas to enhance customer service.
These aspects are convenience, low prices, and an enjoyable shopping experience.
Convenience is accomplished through Amazon’s technological advancements making
their site easy to use and giving them a competitive advantage. These advancements
include personalized shopping services, secure payment protection, wireless access to the
website, and their new 1-Click program. The 1-Click program offers customers the
convenience of not having to re-enter their shipping and billing information, allowing
them to click once and buy.
Low Prices are key to attracting and maintaining Amazon’s customers. The website
offers a price comparison next to each product as compared to the list price. This

technique reinforces to the customer the idea of saving money by purchasing from
Amazon.
Enjoyable shopping experiences encourage repeat visits, extended shopping time, and
referrals to friends. Amazon attempts to make their website enjoyable by providing a
buyer recommendation program that gives customer a list of other items that may interest
them, based on their purchasing habits. Amazon allows users who are browsing the
music store to listen to sample audio files. Amazon also has an auction site where people
can buy or sell used goods online.
Weaknesses
Although Amazon sells to an impressive amount of domestic customers, as well
as international, Amazon has yet to turn a profit. After assessing Amazon, it has been
determined that the following weaknesses are contributing to the detriment of this
company.
Over Abundance of Product Segments. Amazon offers a wide variety of products on
their website. By offering a wide array of items to online shoppers, Amazon is diluting
its ability to maintain their customer service standards and their brand recognition.
Analyst Ken Kassar reported, “I would’ve assumed a year ago, and I still believe, that as
Amazon goes after more and more markets they are going to be less effective as a
bookseller,” (Muhlhauser, 2000).
Inadequate Technology. Increased traffic on Amazon’s website and increased sales
volume have pushed Amazon to realize they have to upgrade their systems and network
infrastructure. Without these upgrades, Amazon could face additional system
interruptions, slower response times, and diminished customer service. Another

weakness is that Amazon does not have a backup system. If a disaster were to occur,
such as a computer virus or fire, it could be potentially fatal for Amazon.
Short-term Contracts with Suppliers. Amazon currently has few suppliers; the three
main suppliers to their entertainment market are Ingram Book Group, Baker Taylor Inc,
and Valley Media Inc. Amazon does not have long-term contracts with their suppliers,
creating less stability for the future. Amazon’s suppliers have the right to not renew
contracts, forcing Amazon to form new alliances with short notice (SEC, 2000).
Conclusion
After assessing the online-retailing industry as well as Amazon, it can be
determined that the company is suffering from both internal and external forces. The
industry in which Amazon operates is unattractive at this time. Amazon benefits from
two main competitive advantages. These advantages are being first-to-market in the
online-retail industry and maintaining a strong customer loyalty, however, if these
advantages are not capitalized on in the near future, or new ones created, it could be fatal
to their success.

References
Amazon (2001). Mission Statement. Amazon.com. Retrieved February 18, 2001 from
the World Wide Web: http://www.amazon.com/exec/obidos/subst/misc/company-
info.html/ref=gw_m_b_aa/107-8232817-5101368.
Bossong-Martines, Eileen M. (Ed.) (2000). Standard & Poor’s Industry Survey (Vol. 1).
The Gale Group.
Lazich, Robert S. (Ed.) (2001). Market Share Reporter: An Annual Compilation of
Reported Market Share Data on Companies, Products, and Services. The Gale
Group.
Muhlhauser, M., Narayan, S., Norman, A., Paulos, A., & Sostarich, R. (2000).
Amazon.com: An Analytical View of Future Stock Performance. Athens, OH:
Ohio University MBA Program.
Ogden, Mike. (2000, December). Here’s the Book on Amazon.com’s Future: Don’t Bet
Against Online Giant. Business Journal. Retrieved from the World Wide Web
February 16, 2001:
http://kansascity.bcentral.com/kansascity/stories/2000/12/11/smallb2.html.
SEC 10-Q Report. Retrieved February 10, 2001 from the World Wide Web:
http://www.freeedgar.com/oem/merri…
Frame=0&CompanyName=Amazon+Com+Inc.

Appendix B: Trend and Industry Analysis
For Years 1997, 1998, and 1999
1997 1998 1999
Gross Profit Margin AMAZON 19% 22% 18%
IND 62% 46% 32%
Operating Profit Margin AMAZON -22% -18% -37%
IND 9% -53% -88%
Net Profit Margin AMAZON -21% -20% -44%
IND 4% -82% 64%
Return on Assets AMAZON 8% 19% 29%
IND 2% 5% 13%
Return on Equity AMAZON -108% 19% 29%
IND 17% -44% -17%
Current Ratio AMAZON 3.09 2.63 1.37
IND 1.88 3.45 3.3
Quick Ratio AMAZON 2.89 2.44 1.07
IND 1.32 3.11 2.96
Debt To Total Assets AMAZON 81% 79% 89%
IND 68% 46% 41%
Debt To Equity AMAZON 424% 367% 828%
IND 144% 185% 244%
Times Interest Earned AMAZON 99.98 4.09 7.16
IND 35.05 7.44 2.24
Inventory Turnover AMAZON 16.47 20.67 7.43
IND 11.48 13.84 7.64
Total Asset Turnover AMAZON 0.97 0.94 0.66
IND 1.43 1.37 1.21
Liquidity Ratios
Debt Ratios
Profitability Ratios
Asset Activity Ratios

Appendix C: Trend and Industry Analysis
Trend and Industry Analysis
The ratios in Appendix A are used to compare Amazon’s past and present performance
and the online-retailing industry performance. The profitability ratios measure how
Amazon’s returns compare to its sales, asset investment, and equity. The liquidity ratios
measure the ability of Amazon to meet its short-term obligations. Debt ratios are used to
assess the relative size of Amazon’s debt load and Amazon’s ability to pay off the debt.
Asset Activity Ratios measure how efficiently Amazon uses its assets.
Profitability Ratios. Amazon had negative net income for 1997, 1998, and 1999. This
resulted in a negative value for net profit margin, return on assets, and return on equity
for each of these years.
Amazon had lower gross profit, operating profit, and net profit margins than the online-
retailing industry norm for that three-year time period except for the 1998 operating
profit and net profit margins.
Debt Ratios. The return on equity was a lot lower than the industry norm in 1997, then
in 1998 and 1999, Amazon’s return on equity was much higher then the industry.
Amazon had a high debt load throughout the three-year period. The debt to total asset
ratio is consistently above 79 percent, whereas the industry norm for this ratio is 68
percent or lower. A high debt load magnifies the changes in the return on equity ratio
values.
The times interest earned ratio shows that Amazon covered its interest expense with its
operating income. The value of this ratio was much greater in 1997 with 99.98 and then
fell in 1998 and 1999 to 4.09 and 7.16.
Liquidity Ratios. The current ratio has been steadily decreasing over the past three
years, 1999 having the lowest value of 1.37. Having two times or more the amount of
current assets as current liabilities is a good target for most companies. Amazon does not
have a good liquidity position compared with the industry norm of 3.3 in 1999.
The quick ratio has jumped every year. In 1997, Amazon’s quick ratio was way above
the industry norm. In 1999, it plummeted to 1.07 compared with the industry norm of
2.96. This means that when inventory is subtracted from total current assets, Amazon’s
liquidity was not steady.
Asset Activity Ratio. The inventory turnover ratios suggest that Amazon was consistent
in years 1997 and 1998, but in 1999 Amazon’s inventory turnover ratio fell to 7.43 from
20.67 in 1998. This suggests that Amazon did not match its inventory to its demand for
products. The total asset turnover was consistently lower than the industry norm.
Conclusion. A complete ratio analysis on Amazon has been completed, including
examinations of the Amazon’s profitability, liquidity, debt management, and asset

activity. The trend and industry analysis was combined to show how Amazon performed
relative to the online-retail industry.

Appendix D: Pro Forma Income Statements and
Year 2000 Income Statement
Net Sales 2000% Net Sales PF 2001 %Net Sales PF 2002 %Net Sales PF 2003 %Net Sales
Net Sales $2,761,983 100% $2,982,942 100% $3,221,577 100% $3,479,303 100%
COGS 2,106,206 76% 2,267,036 76% 2,448,398 76% 2,644,270 76%
Gross profit 655,777 24% 715,906 24% 773,178 24% 835,033 24%
Operating expenses
Marketing and sales 594,489 22% 238,635 8% 193,295 6% 208,758 6%
Tech and content 269,026 10% 269,026 9% 269,026 8% 269,026 8%
General and Admin 108,962 4% 87,170 3% 87,170 3% 87,170 3%
Stock-based compensation 24,797 1% 20,000 1% 15,000 0% 12,500 0%
Amortization of goodwill 321,772 12% 119,318 4% 119,318 4% 119,318 3%
Impairment related and other 200,311 7% 75,000 3% 75,000 2% 75,000 2%
Total operating expenses 1,519,357 55% 809,149 27% 758,809 24% 771,772 22%
Loss from operations (863,580) -31% (93,243) -3% 14,370 0% 63,261 2%
Interest Expense (242,797) -9% (350,000) -12% (500,000) -16% (350,000) -10%
Loss before equity (1,106,377) -40% (443,243) -15% (485,630) -15% (286,739) -8%
Net Equity in losses (304,596) -11% (325,000) -11% (350,000) -11% (300,000) -9%
Net loss (1,410,973) -51% (768,243) -26% (835,630) -26% (600,000) -17%
In Thousands

Appendix E: Analysis of Pro Forma Income Statement
Analysis of Pro forma Income Statements
The analysis is an explanation for the projected figures that will result from following the
proposed changes by JBA Consultants.
Net Sales – JBA Consultants predict that Amazon’s net sales will continue to grow at
about 108 percent for the next three years. At one point, between 1997 and 1998,
Amazon experienced a growth rate for net sales of about 400 percent. Each subsequent
year, the net sales have increased, but at a significantly less rate of growth. A 108
percent growth rate holds with the predicted trend for 2001. With a shifting strategy
leaning towards maintaining customer base, assumptions for the future are that the
growth rate for sales will remain a constant 108 percent.
Cost of Goods Sold (COGS) – Amazon’s cost of goods sold cannot easily be changed.
Therefore, the COGS will remain as a constant percentage of net sales.
Gross Profit – Gross Profit will increase each year, but it will remain at a constant 24
percent of net sales.
Marketing and sales expense – High marketing and sales expenses have been
pinpointed as the most problematic expense for Amazon. Expenses have accounted for
22 percent of net sales. Amazon has successfully achieved its goal of ascertaining brand
recognition. Therefore, it is no longer necessary to invest so much money into marketing
and sales. It is recommended that Amazon spend six to eight percent of net sales for
marketing and sales expenses, which is comparable to the average company that spends
five to seven percent. For the year 2001, marketing expenses have been set at eight
percent of net sales and in the following years, it has been lowered to six percent. This
will significantly reduce operating expenses.
Technology and content – Expenses for technology and content will remain constant
over the next three years. Expenses will not increase until Amazon has reached financial
stability, which is predicted to be in 2006. At that point, Amazon will address its long-
term recommendations of improving operational systems, which will raise technology
and content expenses.
General and Administrative – General and Administrative expenses will go down in
2001 due to a 10 percent cut in the workforce and a reduction in rent expenses from
cutting two product segments. Expenses will remain constant in the following years
because there is no anticipation of hiring new workers or adding new product lines in the
short future.
Stock-based compensation – Stock-based compensation is anticipated to go down in the
next three years. This assumption is based on past trends and on projections that the
stock will not be going up in the near future.

Amortization of goodwill– This expense will go down significantly in the future. One
reason for the decline is that Amazon will be cutting two product lines: Cars and Lawn
and Patio. Amazon has an alliance with CarsDirect so they are paying them large
amounts to maintain this alliance. When cars are dropped, they will no longer have to
pay this expense. Another reason for the decline was based on Amazon’s pro formas for
2000. The income statement indicated that this was an atypical year for Amazon, which
made the operating costs extremely high. Therefore, in a typical year the operating costs,
which include amortization of goodwill, will be significantly reduced.
Impairment related and other – This expense is correlated with the amortization of
goodwill. Therefore, because amortization is projected to decline, impairment will
decline as well in relation to the amount amortization declines.
Interest Expense – Interest expense is predicted to go up at an increasing amount as the
debt goes up. In 2003, Amazon will begin to pay off long-term debt. This will lower the
interest expense.
Net Equity losses– The loss for 2001 is based on past trends. As the interest expenses
have gone up, the net equity losses increases as well. This trend will continue in the
future, however, in 2003 when the interest expense goes down, the equity loss will go
down as well.
Dividend Policy – It should be noted that Amazon does not pay dividends to
shareholders; therefore, dividends are not mentioned within the pro forma income
statement.

Appendix F: Pro Forma Balance Sheet and
Year 2000 Balance Sheet
Appendix G: Analysis of Pro forma Balance Sheet
Analysis of Pro Forma Balance Sheet
(thousands)
Current Assets 2000 % Assets PF 2001 % Assets PF 2002 % Assets PF 2003 % Assets
Cash & Mktable Sec $1,100,522 52% $1,353,642 63% $1,544,189 66% $1,100,656 57%
Accouts Receivable N/A N/A N/A N/A N/A N/A N/A N/A
Inventory 174,563 8% 120,448 6% 108,403 5% 110,254 6%
Current assets 86,044 4% 92,928 4% 95,413 4% 99,671 5%
Total current assests 1,361,129 64% 1,567,018 73% 1,748,005 75% 1,310,581 68%
Fixed assets 366,416 17% 384,737 18% 400,821 17% 425,987 22%
Goodwill 158,990 7% 31,798 1% 23,115 1% 20,147 1%
Other intangibles 96,335 5% 38,534 2% 31,845 1% 28,659 1%
Investments in equity 52,073 2% 20,977 1% 14,020 1% 11,456 1%
Other investments 40,177 2% 18,250 1% 12,571 1% 10,236 1%
Other assets 60,049 3% 90,074 4% 109,513 5% 134,002 7%
Total Assets 2,135,169 2,151,388 2,339,890 1,941,068
Current Liabilities % Liab % Liab % Liab % Liab
Accounts Payable 485,383 23% 509,652 45% 521,238 50% 534,128 30%
Notes Payable 489,573 23% 886,127 78% 1,102,257 106% 1,452,687 81%
Total Current Liab 974,956 46% 1,395,779 123% 1,623,495 156% 1,986,815 110%
Long-Term Debt 2,127,464 100% 3,212,653 283% 3,954,875 380% 3,412,855 190%
Total Liabilites 3,102,420 145% 4,608,432 405% 5,578,370 537% 5,399,670 300%
Common Stock 3,571 0% 3,501 0% 3,421 0% 3,328 0%
Additional Paid-in Cap 1,338,303 63% 1,498,899 132% 1,598,925 154% 1,645,236 91%
Stock-based Comp (13448.00) (0.01) (7765.00) (0.01) (4232.00) (0.00) (1654.00) (0.00)
Accum. Comp. Loss (2376.00) (0.00) (3302.00) (0.00) (4152.00) (0.00) (5412.00) (0.00)
Accumulated Deficit (2293301.00) (1.07) (4962583.00) (4.36) (6132585.00) (5.90) (5242987.00) (2.92)
Stockholders' Equity (967251.00) (0.45) (3471250.00) (3.05) (4538623.00) (4.37) (3601489.00) (2.00)
Total Liabilities & Eq. 2,135,169 1,137,182 1,039,747 1,798,181
Add. Funds Needed 0 1,014,206 1,300,143 142,887

This analysis is an explanation for the projected figures that will result from
implementing the proposed changes by JBA Consultants. Any category listed on the
balance sheet, but not mentioned in this analysis was not affected by the
recommendations, and therefore estimations were made based on data from previous
years.
Cash & Marketable Securities – Cash, cash equivalents, and marketable securities are
predicted to increase with the trend for the next two years, as it did for the last six years.
However, in 2003, nearly 600 million dollars will be used to pay off long-term debt.
Inventory – Due to the elimination of two product segments in 2001, inventory value
will decrease. The Car segment will not affect inventory since Amazon does not
presently hold cars in inventory. Amazon does not have an ally for the Lawn and Patio
segment, so Amazon currently holds inventory for that segment. When Lawn and Patio
products are no longer sold, after the end of the summer season, inventories will be
reduced. Also, Lawn and Patio products are larger in size than most other products
because of outside furniture and grills. Therefore, it is estimated that inventories will be
reduced by approximately 30 percent in 2001 and an additional 10 percent in 2002.
Long-term debt – Amazon’s long-term debt has been increasing by almost one billion
dollars each year since 1998. It has been determined that this trend will continue until
2003 when Amazon has been instructed to pay off approximately 600 million dollars of
long-term debt. This is possible because new segments are no longer being added as in
previous years. Amazon used available cash to increase product base for the last six
years, and now Amazon is maintaining current segments. Beginning in 2003, cash will
be used to pay off long-term debt.
Common Stock – After a profitable year for the stock market overall in 1999, Amazon
saw a slight increase in stock. However, as Amazon experiences more and more
financial trouble, stocks are falling and investors are dwindling. This pattern is reflected
by a slow, gradual decline in common stock through 2003. After financials improve, and
Amazon appears to have a prosperous future, in 2004 or 2005, investors will likely
return.
Stock-based Compensation – As Amazon’s stock has lost value, stockholders have
pulled out or decreased investments. This lowers stock-based compensation each year.
Accumulated Deficit – Accumulated deficit is comparable to retained earnings for a
company in debt. As shown from previous data, the rate of increase is slowing for
Amazon. If the trend in accumulated deficit holds true, it will increase by more than $2.6
billion dollars from 2000 to 2001 and $1.1 billion dollars from 2001 to 2002. As
Amazon begins paying off long-term debt in 2003, accumulated deficit will decrease.

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