Amazon.com, Inc. (AMZN)

FORM 8-K/A | Amended Current report
Nov. 13, 2017 4:58 PM
|
About: Amazon.com, Inc. (AMZN)View as PDF
AMAZON COM INC (Form: 8-K/A, Received: 11/13/2017 16:59:54)
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

_________________________
FORM 8-K/A
_________________________
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
August 28, 2017
Date of Report
(Date of earliest event reported)
  _________________________
AMAZON.COM, INC.
(Exact name of registrant as specified in its charter)
_________________________
Delaware
 
000-22513
 
91-1646860
(State or other jurisdiction of
incorporation)
 
(Commission File Number)
 
(IRS Employer Identification No.)
410 Terry Avenue North, Seattle, Washington 98109-5210
(Address of principal executive offices, including Zip Code)
(206) 266-1000
(Registrant’s telephone number, including area code)
_________________________

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
 



TABLE OF CONTENTS
 
 
 
 
 
EXHIBIT 23.1
 
 
 
EXHIBIT 99.1
 
 
 
EXHIBIT 99.2
 
 
 
EXHIBIT 99.3
 


2


EXPLANATORY NOTE
On August 28, 2017, Amazon.com, Inc. (“Amazon”) filed with the Securities and Exchange Commission a Current Report on Form 8-K (the “Initial 8-K”) to disclose that it had completed its previously announced acquisition of Whole Foods Market, Inc. (“Whole Foods Market”). This Form 8-K/A amends the Initial 8-K to include the historical audited and unaudited financial statements of Whole Foods Market and the pro forma combined financial information required by Items 9.01(a) and 9.01(b) of Form 8-K that were excluded from the Initial 8-K in reliance on the instructions to such items.
ITEM 9.01.  FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
The audited consolidated financial statements of Whole Foods Market for the year ended September 25, 2016 are incorporated by reference as Exhibit 99.1 to this Form 8-K/A.
The unaudited consolidated financial statements of Whole Foods Market for the forty weeks ended July 3, 2016 and July 2, 2017 are incorporated by reference as Exhibit 99.2 to this Form 8-K/A.
(b) Pro Forma Financial Information.
The unaudited pro forma combined statements of operations of Amazon and Whole Foods Market for the year ended December 31, 2016 and for the nine months ended September 30, 2017 is attached as Exhibit 99.3 to this Form 8-K/A and incorporated in this report by reference.
(d) Exhibits.
Exhibit
Number
Description
 
 
23.1
99.1
99.2
99.3


3


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 
AMAZON.COM, INC. (REGISTRANT)
 
 
 
 
By:
/s/ Shelley L. Reynolds
 
 
Shelley L. Reynolds
 
 
Vice President, Worldwide Controller
Dated: November 13, 2017


4


Exhibit 23.1
Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the following Registration Statements:
(a)
Registration Statement (Form S-4 No. 333-55943), as amended, pertaining to the acquisition shelf-registration of up to 30 million shares of common stock,
(b)
Registration Statement (Form S-8 No. 333-28763), as amended, pertaining to the Amazon.com, Inc. 1997 Stock Incentive Plan (formerly the “1997 Stock Option Plan”) and the Amended and Restated 1994 Stock Option Plan of Amazon.com, Inc.,
(c)
Registration Statement (Form S-8 No. 333-88825) pertaining to the Convergence Corporation Stock Option Plan,
(d)
Registration Statement (Form S-8 No. 333-80491) pertaining to the Alexa Internet Amended and Restated 1997 Stock Option Plan,
(e)
Registration Statement (Form S-8 No. 333-80495) pertaining to the Accept.com Financial Services Corporation 1998 Stock Plan,
(f)
Registration Statement (Form S-8 No. 333-78651) pertaining to the Innerlinx Technologies, Incorporated 1997 Stock Option Plan,
(g)
Registration Statement (Form S-8 No. 333-78653) pertaining to the e-Niche Incorporated Amended and Restated 1998 Stock Option and Grant Plan,
(h)
Registration Statement (Form S-8 No. 333-74419) pertaining to the Amazon.com, Inc. 1999 Nonofficer Employee Stock Option Plan,
(i)
Registration Statement (Form S-8 No. 333-63311), as amended, pertaining to the Junglee Corp. 1996 Stock Plan, the Junglee Corp. 1998 Equity Incentive Plan, the Sage Enterprises, Inc. 1997 Amended Stock Option Plan, and the Sage Enterprises, Inc. MVP Stock Option Plan,
(j)
Registration Statement (Form S-8 No. 333-118818) pertaining to the Joyo.com Limited 2004 Share Option Plan,
(k)
Registration Statement (Form S-8 No. 333-149845) pertaining to the Audible, Inc. 1999 Stock Incentive Plan,
(l)
Registration Statement (Form S-8 POS No. 333-160831) pertaining to the Zappos.com, Inc. 2009 Stock Plan,
(m)
Registration Statement (Form S-8 No. 333-169470) pertaining to 25,000,000 shares of Common Stock, par value $0.01 per share, to be issued pursuant to Amazon’s 1997 Stock Incentive Plan,
(n)
Registration Statement (Form S-8 No. 333-173054), pertaining to the Quidsi, Inc. (fka1800Diapers, Inc.) 2006 Stock Option/Stock Issuance Plan,
(o)
Registration Statement (Form S-8 No. 333-181073) pertaining to the Kiva Systems, Inc. 2003 Stock Plan, as amended,
(p)
Registration Statement (Form S-3 No. 333-185137) pertaining to the shelf-registration of Amazon.com, Inc. securities,
(q)
Registration Statement (Form S-8 No. 333-199572) pertaining to the Twitch Interactive, Inc. Amended and Restated 2007 Stock Plan, and
(r)
Registration Statement (Form S-8 No. 333-207591) pertaining to the Elemental Technologies, Inc. 2006 Stock Incentive Plan, as amended and restated;

of our reports dated November 18, 2016, with respect to the consolidated financial statements of Whole Foods Market, Inc., and the effectiveness of internal control over financial reporting of Whole Foods Market, Inc., incorporated by reference in this Current Report on Form 8-K/A of Amazon.com, Inc.
/s/ Ernst & Young LLP
Austin, Texas
November 13, 2017




Exhibit 99.3
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
On August 28, 2017, Amazon.com, Inc. (“Amazon”) completed its acquisition of Whole Foods Market, Inc., a Texas corporation (“Whole Foods Market”), pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated as of June 15, 2017, by and among Amazon, Whole Foods Market, and Walnut Merger Sub, Inc., a wholly-owned subsidiary of Amazon (“Merger Sub”). Pursuant to the Merger Agreement, Merger Sub merged with and into Whole Foods Market on August 28, 2017, with Whole Foods Market continuing as the surviving corporation and a wholly-owned subsidiary of Amazon (the “Merger”). Amazon acquired 100% of the outstanding stock of Whole Foods Market for cash consideration of approximately $13.2 billion, net of cash acquired.
Amazon financed the acquisition with net proceeds from its debt issuance on August 22, 2017. Amazon issued $1,000,000,000 aggregate principal amount of Amazon’s 1.900% notes due 2020 (the “2020 Notes”), $1,000,000,000 aggregate principal amount of Amazon’s 2.400% notes due 2023 (the “2023 Notes”), $2,000,000,000 aggregate principal amount of Amazon’s 2.800% notes due 2024 (the “2024 Notes”), $3,500,000,000 aggregate principal amount of Amazon’s 3.150% notes due 2027 (the “2027 Notes”), $2,750,000,000 aggregate principal amount of Amazon’s 3.875% notes due 2037 (the “2037 Notes”), $3,500,000,000 aggregate principal amount of Amazon’s 4.050% notes due 2047 (the “2047 Notes”), and $2,250,000,000 aggregate principal amount of Amazon’s 4.250% notes due 2057 (the “2057 Notes” and, together with the 2020 Notes, the 2023 Notes, the 2024 Notes, the 2027 Notes, the 2037 Notes, and the 2047 Notes, the “August 2017 Notes”). The August 2017 Notes were not registered under the Securities Act of 1933, as amended (the “Securities Act”), or any state securities laws. The August 2017 Notes were offered only to “qualified institutional buyers” under Rule 144A of the Securities Act or, outside the United States, to persons other than “U.S. persons” in compliance with Regulation S under the Securities Act.
A pro forma balance sheet has not been presented since the transaction was already reflected in Amazon’s unaudited financial statements and accompanying notes as of September 30, 2017, included in Amazon’s Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission (“SEC”) on October 27, 2017.
The unaudited pro forma combined statements of operations were prepared using the acquisition method of accounting in accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 805, Business Combinations , with Amazon considered as the accounting acquirer and Whole Foods Market as the accounting acquiree. Accordingly, consideration paid by Amazon to complete the Merger has been allocated to identifiable assets and liabilities of Whole Foods Market based on estimated fair values as of the closing date of the Merger. Management made a preliminary allocation of the consideration transferred to the assets acquired and liabilities assumed based on the information available and management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed. The finalization of the purchase accounting assessment may result in changes to the valuation of assets acquired and liabilities assumed, which could be material. Accordingly, the pro forma adjustments related to the allocation of consideration transferred are preliminary and have been presented solely for the purpose of providing unaudited pro forma combined statements of operations in the Current Report on Form 8-K/A. Management expects to finalize the accounting for the business combination as soon as practicable within the measurement period in accordance with ASC 805, but in no event later than one year from August 28, 2017.
The following unaudited pro forma combined statements of operations and related notes present the historical statements of operations of Amazon adjusted to reflect Amazon’s acquisition of all outstanding shares of Whole Foods Market and the issuance of the August 2017 Notes. The historical consolidated financial statements have been adjusted in the Unaudited Pro Forma Combined Statement of Operations to give effect to pro forma events that are: (1) directly attributable to the Merger, (2) factually supportable, and (3) with respect to the unaudited pro forma combined statements of operations, expected to have a continuing impact on the combined results following the business combination. The unaudited pro forma combined statements of operations for the nine months ended September 30, 2017 and for the year ended December 31, 2016 give effect to the acquisition as if it had occurred on January 1, 2016, the first day of Amazon’s last fiscal year.
These unaudited pro forma combined statements of operations have been derived from, and should be read in conjunction with:
The audited consolidated financial statements and accompanying notes of Amazon as of and for the year ended December 31, 2016, as contained in its Annual Report on Form 10-K filed on February 10, 2017;
The unaudited consolidated financial statements and accompanying notes of Amazon as of and for the nine months ended September 30, 2017, as contained in its Quarterly Report on Form 10-Q filed on October 27, 2017;
The unaudited consolidated financial statements and accompanying notes of Whole Foods Market as of and for the 16 weeks ended January 17, 2016, as contained in its Quarterly Report on Form 10-Q filed on February 26, 2016;



The audited consolidated financial statements and accompanying notes of Whole Foods Market as of and for the 52 weeks ended September 25, 2016, as contained in its Annual Report on Form 10-K filed on November 18, 2016;
The unaudited consolidated financial statements and accompanying notes of Whole Foods Market as of and for the 16 weeks ended January 15, 2017, as contained in its Quarterly Report on Form 10-Q filed on February 16, 2017; and
The unaudited consolidated financial statements and accompanying notes of Whole Foods Market as of and for the 40 weeks ended July 2, 2017, as contained in its Quarterly Report on Form 10-Q filed on August 4, 2017.




Unaudited Pro Forma Combined Statements of Operations
Year Ended December 31, 2016
(in millions, except per share data)
 
Amazon
 
Whole Foods Market
(Notes 1 & 3)
 
Pro Forma
Adjustments
 
Notes
 
Pro Forma
Combined
Net product sales
$
94,665

 
$
15,797

 
$

 
 
 
$
110,462

Net service sales
41,322

 
16

 

 
 
 
41,338

Total net sales
135,987

 
15,813

 

 
 
 
151,800

Operating expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
88,265

 
9,431

 
11

 
 4(a)
 
97,707

Fulfillment
17,619

 
5,195

 
117

 
 4(b)
 
22,931

Marketing
7,233

 
83

 

 
 
 
7,316

Technology and content
16,085

 
169

 

 
 
 
16,254

General and administrative
2,432

 
159

 
17

 
 4(c)
 
2,608

Other operating expense, net
167

 

 
77

 
 4(d)
 
244

Total operating expenses
131,801

 
15,037

 
222

 
 
 
147,060

Operating income
4,186

 
776

 
(222
)
 
 
 
4,740

Interest income
100

 

 

 
 
 
100

Interest expense
(484
)
 
(49
)
 
(460
)
 
 4(e)
 
(993
)
Other income (expense), net
90

 
7

 

 
 
 
97

Total non-operating income (expense)
(294
)
 
(42
)
 
(460
)
 
 
 
(796
)
Income before income taxes
3,892

 
734

 
(682
)
 
 
 
3,944

Provision for income taxes
(1,425
)
 
(289
)
 
262

 
 4(f)
 
(1,452
)
Equity-method investment activity, net of tax
(96
)
 

 

 
 
 
(96
)
Net income
$
2,371

 
$
445

 
$
(420
)
 
 
 
$
2,396

Basic earnings per share
$
5.01

 
 
 
 
 
 4(g)
 
$
5.05

Diluted earnings per share
$
4.90

 
 
 
 
 
 4(g)
 
$
4.95

Weighted-average shares used in computation
of earnings per share:
 
 
 
 
 
 
 
 
 
Basic
474

 
 
 
 
 
 
 
474

Diluted
484

 
 
 
 
 
 
 
484


See accompanying notes to the unaudited pro forma combined statements of operations.




Unaudited Pro Forma Combined Statements of Operations
Nine Months Ended September 30, 2017
(in millions, except per share data)
 
Amazon
 
Whole Foods Market
(Notes 1 & 3)
 
Pro Forma
Adjustments
 
Notes
 
Pro Forma
Combined
Net product sales
$
77,248

 
$
9,827

 
$

 
 
 
$
87,075

Net service sales
40,165

 
12

 

 
 
 
40,177

Total net sales
117,413

 
9,839

 

 
 
 
127,252

Operating expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
73,439

 
5,869

 
(5
)
 
 4(a)
 
79,303

Fulfillment
16,275

 
3,405

 
27

 
 4(b)
 
19,707

Marketing
6,629

 
61

 

 
 
 
6,690

Technology and content
16,306

 
113

 

 
 
 
16,419

General and administrative
2,630

 
107

 
(119
)
 
 4(c)
 
2,618

Other operating expense, net
155

 

 
47

 
 4(d)
 
202

Total operating expenses
115,434

 
9,555

 
(50
)
 
 
 
124,939

Operating income
1,979

 
284

 
50

 
 
 
2,313

Interest income
137

 

 

 
 
 
137

Interest expense
(510
)
 
(30
)
 
(318
)
 
 4(e)
 
(858
)
Other income (expense), net
329

 
7

 

 
 
 
336

Total non-operating income (expense)
(44
)
 
(23
)
 
(318
)
 
 
 
(385
)
Income before income taxes
1,935

 
261

 
(268
)
 
 
 
1,928

Provision for income taxes
(755
)
 
(102
)
 
102

 
 4(f)
 
(755
)
Equity-method investment activity, net of tax
(4
)
 

 

 
 
 
(4
)
Net income
$
1,176

 
$
159

 
$
(166
)
 
 
 
$
1,169

Basic earnings per share
$
2.46

 
 
 
 
 
 4(g)
 
$
2.44

Diluted earnings per share
$
2.39

 
 
 
 
 
 4(g)
 
$
2.38

Weighted-average shares used in computation
of earnings per share:
 
 
 
 
 
 
 
 
 
Basic
479

 
 
 
 
 
 
 
479

Diluted
492

 
 
 
 
 
 
 
492


See accompanying notes to the unaudited pro forma combined statements of operations.





Notes to Unaudited Pro Forma Combined Statements of Operations
Note 1 — Basis of Presentation
The unaudited pro forma combined statements of operations were derived from the historical audited consolidated financial statements and unaudited consolidated financial statements of Amazon and Whole Foods Market, and give effect to the acquisition as if it had occurred on January 1, 2016, the first day of Amazon’s last fiscal year.
The historical consolidated financial statements have been adjusted in the unaudited pro forma combined statements of operations to give effect to pro forma events that are (1) directly attributable to the business combination, (2) factually supportable, and (3) with respect to the unaudited pro forma combined statements of operations, expected to have a continuing impact on the combined results following the business combination.
Amazon has a different fiscal year end than Whole Foods Market. Whole Foods Market utilizes a fiscal year ending on the last Sunday of the month of September and Amazon’s fiscal year ends on December 31 of each year. Whole Foods Market’s fiscal year ended September 25, 2016 represents the period from September 28, 2015 through September 25, 2016. As the fiscal years differ by more than 93 days, pursuant to Rule 11-02(c)(3) of Regulation S-X, Whole Foods Market financial information was adjusted for the purpose of preparing the unaudited pro forma combined statement of operations for the year ended December 31, 2016. This was done by taking the audited consolidated statements of operations for the 52 weeks ended September 25, 2016, subtracting the unaudited quarterly consolidated statements of operations for the 16 weeks ended January 17, 2016, and adding the unaudited quarterly consolidated statements of operations for the 16 weeks ended January 15, 2017. The historical statement of operations of Whole Foods Market financial information used in the unaudited pro forma combined statement of operations for the nine months ended September 30, 2017 was prepared by taking the unaudited quarterly consolidated statements of operations for the 40 weeks ended July 2, 2017, and subtracting the unaudited quarterly consolidated statements of operations for the 16 weeks ended January 15, 2017, and adding the unaudited consolidated statements of operations for the 8 weeks ended August 27, 2017.
The unaudited pro forma combined statement of operations are based on a preliminary purchase price allocation, provided for illustrative purposes only, and do not purport to represent what the combined company’s results of operations would have been had the acquisition occurred on the dates indicated. They also may not be useful in predicting the future financial condition and results of operations of the combined company. The actual results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors. In addition, the unaudited pro forma combined statement of operations do not reflect any future planned cost savings initiatives following the completion of the business combination.
Note 2 — Preliminary Purchase Price Allocation
Amazon completed the acquisition of Whole Foods Market for cash consideration of approximately $13.2 billion , net of cash acquired of $398 million, which consisted of consideration paid to former holders of common stock of Whole Foods Market at $42.00 a share, or $13.6 billion, including approximately $123 million to former holders of certain outstanding Whole Foods Market equity awards. Amazon financed the acquisition with net proceeds from the issuance of the August 2017 Notes.
The acquisition of Whole Foods Market has been accounted for as a business combination, under the acquisition method of accounting, which results in acquired assets and assumed liabilities being measured at their estimated fair values as of August 28, 2017, the acquisition date. As of the acquisition date, goodwill is measured as the excess of consideration transferred, which is also generally measured at fair value of the net acquisition date fair values of the assets acquired and liabilities assumed.





The following table summarizes the allocation of the preliminary purchase price as of the acquisition date (in millions):
Purchase Price
 
Cash paid, net of cash acquired
$
13,176

 
$
13,176

Allocation
 
Goodwill
$
8,985

Intangible assets (1):
 
Marketing-related
1,928

Contract-based
408

 
2,336

Property and equipment
3,826

Deferred tax assets
96

Other assets acquired
1,710

Long-term debt
(1,158
)
Deferred tax liabilities
(934
)
Other liabilities assumed
(1,685
)
 
$
13,176

___________________
(1)
Acquired intangible assets have estimated useful lives of between one and twenty-five years, with a weighted-average amortization period of twenty-four years, primarily driven by the Whole Foods Market tradename.
This preliminary purchase price allocation has been used to prepare pro forma adjustments in the unaudited pro forma combined statement of operations. The final purchase price allocation will be determined when Amazon has completed the detailed valuations and necessary calculations. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments. The final allocation may include (1) changes in fair values of property and equipment, (2) changes in allocations to intangible assets such as tradename and favorable and unfavorable leasehold interests, as well as goodwill, and (3) other changes to assets and liabilities, including deferred tax assets and liabilities.
Note 3 — Reclassifications
Amazon has made certain reclassifications to the Whole Foods Market historical statements of operations for the purpose of preparing the unaudited pro forma combined statement of operations for the 52 weeks ended January 15, 2017 and 32 weeks ended August 27, 2017, to conform to Amazon’s historical presentation as detailed below.





Reclassifications in the unaudited pro forma combined statement of operations for the 52 weeks ended January 15, 2017 (in millions):
 
Whole Foods Market Consolidated Statement of Operations
 
 
 
 
Whole Foods Market
Consolidated Statement of Operations after Adjustments
 
Adjustments
 
(a)
(b)
(c)
(d)
Net product sales
$

15,797




$
15,797

Net service sales

16




16

Sales
15,813

(15,813
)




Total net sales
15,813





15,813

Operating expenses:
 
 
 
 
 
 
Cost of goods sold and occupancy costs
10,393



(962
)

9,431

Fulfillment


123

962

4,110

5,195

Marketing




83

83

Technology and content




169

169

Selling, general and administrative expenses
4,521




(4,362
)
159

Other operating expense, net






Pre-opening expenses
72


(72
)



Relocation, store closure and lease termination costs
51


(51
)



Total operating expenses
15,037





15,037

Operating income
776





776

Interest expense
(49
)




(49
)
Investment and other income (expense)
7





7

Total non-operating income (expense)
(42
)




(42
)
Income before income taxes
734





734

Provision for income taxes
(289
)




(289
)
Net income
$
445





$
445

___________________
(a)
Represents the reclassification of $15.8 billion from sales to net product sales and net service sales.
(b)
Represents the reclassification of $72 million from pre-opening expenses and $51 million from relocation, store closure and lease termination costs to fulfillment costs.
(c)
Represents the reclassification of occupancy costs and non-retail costs of $962 million from cost of goods sold and occupancy costs to fulfillment costs. The occupancy costs primarily consist of store rental costs, property taxes, utility costs, repair and maintenance costs, and property insurance.
(d)
Represents the reclassification of various expenses of $4.1 billion , $83 million , and $169 million from selling, general and administrative expenses to fulfillment, marketing, and technology and content, respectively. The reclassification to fulfillment was primarily related to retail operational expenses.






Reclassifications in the unaudited pro forma combined statement of operations for the 32 weeks ended August 27, 2017 (in millions):
 
Whole Foods Market Consolidated Statement of Operations
 
 
 
 
Whole Foods Market
Consolidated Statement of Operations after Adjustments
 
Adjustments
 
(a)
(b)
(c)
(d)
Net product sales
$

9,827




$
9,827

Net service sales

12




12

Sales
9,839

(9,839
)




Total net sales
9,839





9,839

Operating expenses:
 
 
 
 
 

Cost of goods sold and occupancy costs
6,505



(636
)

5,869

Fulfillment


233

636

2,536

3,405

Marketing




61

61

Technology and content




113

113

Selling, general and administrative expenses
2,817




(2,710
)
107

Other operating expense, net






Pre-opening expenses
189


(189
)



Relocation, store closure and lease termination costs
44


(44
)



Total operating expenses
9,555





9,555

Operating income
284





284

Interest expense
(30
)




(30
)
Investment and other income (expense)
7





7

Total non-operating income (expense)
(23
)




(23
)
Income before income taxes
261





261

Provision for income taxes
(102
)




(102
)
Net income
$
159





$
159

___________________
(a)
Represents the reclassification of $9.8 billion from sales to net product sales and net service sales.
(b)
Represents the reclassification of $189 million from pre-opening expenses and $44 million from relocation, store closure and lease termination costs to fulfillment costs.
(c)
Represents the reclassification of occupancy costs and non-retail costs of $636 million from cost of goods sold and occupancy costs to fulfillment costs. The occupancy costs primarily consist of store rental costs, property taxes, utility costs, repair and maintenance costs, and property insurance.
(d)
Represents the reclassification of various expenses of $2.5 billion , $61 million , and $113 million from selling, general and administrative expenses to fulfillment, marketing, and technology and content, respectively. The reclassification to fulfillment was primarily related to retail operational expenses.
Note 4 — Adjustments to the Unaudited Pro Forma Combined Statements of Operations
The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma combined statement of operations:
(a) Represents the following adjustments to cost of sales (in millions):
 
Year ended
December 31, 2016
 
Nine months ended
September 30, 2017
Net lease expense adjustments relating to favorable and unfavorable leases
$
2

 
$
1

LIFO related expenses
9

 
(6
)
Total cost of sales adjustments
$
11

 
$
(5
)





For the year ended December 31, 2016 and the nine months ended September 30, 2017, the net lease expense adjustments of $2 million and $1 million are a result of the amortization of favorable and unfavorable leasehold improvements identified in the preliminary valuation analysis, netted with the historical amortization of deferred lease liabilities. The fair value of the favorable and unfavorable leasehold interests is determined using the “income approach” which is based on a forecast of all expected future cash flows.
For the year ended December 31, 2016 and the nine months ended September 30, 2017, last-in, first-out method (“LIFO”) related expenses of $9 million and $(6) million represent the change from Whole Foods Market’s historical LIFO accounting on its existing merchandise inventories to the first-in, first-out method, in order to conform to Amazon’s accounting policies.
(b) Represents the following adjustments to fulfillment costs (in millions):
 
Year ended
December 31, 2016
 
Nine months ended
September 30, 2017
Depreciation expense adjustment in connection with fair value of property and equipment
$
39

 
$
24

Net lease expense adjustments relating to favorable and unfavorable leases
78

 
52

Accelerated stock-based compensation expense

 
(49
)
Total fulfillment cost adjustments
$
117

 
$
27

For the year ended December 31, 2016 and the nine months ended September 30, 2017, the net depreciation expense adjustments of $39 million and $24 million are in connection with the net preliminary fair value adjustments related to Whole Foods Market’s property and equipment. The adjustment in depreciation is based on the estimated fair value and useful lives of 1 month to 40 years, and is calculated using the straight-line method.
For the year ended December 31, 2016 and the nine months ended September 30, 2017, the net lease expense adjustments of $78 million and $52 million are a result of the amortization of favorable and unfavorable leasehold improvements identified in the preliminary valuation analysis and netted with the historical amortization of deferred lease liabilities.
For the nine months ended September 30, 2017, the adjustment of $49 million to stock-based compensation expense represents the reversal of non-recurring accelerated expense. The previously unrecognized stock-based compensation expense was accelerated due to preexisting change in control provisions in Whole Foods Market’s stock compensation arrangements and included in the historical statements of operations for the 32 weeks ended August 27, 2017.
(c) Represents the following adjustments to general and administrative costs (in millions):
 
Year ended
December 31, 2016
 
Nine months ended
September 30, 2017
Depreciation expense adjustment in connection with fair value of property and equipment
$
11

 
$
7

Net lease expense adjustments relating to favorable and unfavorable leases
6

 
4

Transaction costs

 
(101
)
Accelerated stock-based compensation expense

 
(29
)
Total general and administrative cost adjustments
$
17

 
$
(119
)
For the year ended December 31, 2016 and the nine months ended September 30, 2017, the net depreciation expense adjustments of $11 million and $7 million are in connection with the fair value adjustment related to Whole Foods Market’s property and equipment used in its global and regional offices.
For the year ended December 31, 2016 and the nine months ended September 30, 2017, the net lease expense adjustments of $6 million and $4 million are a result of the amortization of favorable and unfavorable leasehold interests identified in the preliminary valuation analysis and netted with the historical amortization of deferred lease liabilities.
The transaction costs represent the reversal of non-recurring transaction costs directly attributable related to the Merger, incurred by Amazon and Whole Foods Market and included in the historical statements of operations for the nine months ended September 30, 2017 of $101 million .
The adjustment of $29 million to stock-based compensation expense represents the reversal of non-recurring accelerated expense, incurred by Whole Foods Market and included in the historical statements of operations for the 32 weeks ended August 27, 2017.





(d) Represents the following adjustments to other operating expense, net (in millions):
 
Year ended
December 31, 2016
 
Nine months ended
September 30, 2017
Amortization adjustment in connection with fair value of intangible assets
$
77

 
$
47

Total other operating expense, net adjustments
$
77

 
$
47

For the year ended December 31, 2016 and the nine months ended September 30, 2017, the net amortization expense adjustments of $77 million and $47 million are in connection with the fair value of acquired intangible assets based on the preliminary estimated fair value and useful lives of 25 years. The additional amortization expense is calculated using the straight-line method over the estimated remaining useful lives of the assets. As part of the preliminary valuation analysis, Amazon identified intangible assets principally consisting of the Whole Foods Market tradename. The fair value of identifiable intangible asset is determined using the “relief-from-royalty” method under the “income approach”.
(e) Represents the following adjustments to interest expense (in millions):
 
Year ended
December 31, 2016
 
Nine months ended
September 30, 2017
Interest expense on the proceeds from the issuance of the August 2017 Notes used to finance the Merger
$
(479
)
 
$
(331
)
Interest expense adjustments on the Whole Foods Market senior notes
19

 
13

Total interest expense adjustments
$
(460
)
 
$
(318
)
For the year ended December 31, 2016 and the nine months ended September 30, 2017, the adjustments made to record interest expense of $479 million and $331 million relate to the portion of the issuance of the August 2017 Notes used to finance the Merger, including the amortization of the discount on the notes.
For the year ended December 31, 2016 and the nine months ended September 30, 2017, the adjustments made to record interest expense of $19 million and $13 million relate to Whole Foods Market’s senior notes based on the estimated fair value recorded as a result of the Merger, net of historical interest expense.
(f) Reflects the income tax effect of pro forma adjustments based on the estimated blended federal and state statutory tax rate of 38.4% and 38.1% for the year ended December 31, 2016 and nine months ended September 30, 2017, respectively.
(g) The unaudited pro forma combined basic and diluted earnings per share calculations are based on Amazon’s consolidated basic and diluted weighted average outstanding common shares.