Edition: U.S. / Global

Amazing Amazon: Losses Grow as They Seem to Shrink

Published: February 2, 2001

AMAZON.COM says it will be profitable in the fourth quarter of this year. But what does that mean?

It does not mean Amazon will have net income. The forecast is for ''pro forma operating profitability,'' a number Amazon computes by ignoring lots of expenses.

Such numbers are becoming more and more common, although companies use different names and compute them in varying ways. Yahoo, for example, excludes some of the cash it pays in payroll taxes. One constant is that the preferred numbers always show bigger profits (or smaller losses) than do conventional net income figures based on generally accepted accounting principles.

More and more costs seem to be getting left out. In 1999, Amazon's net loss was double the adjusted loss it emphasized. In 2000, the net loss was four times as large. Its 2000 loss, which included $343 million in write-offs related to bad acquisitions and investments, totaled $1.4 billion.


Warren C. Jenson, Amazon's chief financial officer, told me he views the pro forma number as ''a companion, not a replacement'' for the conventional number. But Amazon provides forecasts just for the pro forma figure.

The funny numbers are not allowed in filings with the Securities and Exchange Commission. But compliant Wall Street analysts generally discuss the numbers the companies prefer. The analysts seldom bother to explain which variant of accounting each company uses.

''You're losing the comparability between companies,'' said Steven Wallman, a former member of the Securities and Exchange Commission. ''You're eating away at the usefulness of financial statements.''

Also in danger of being lost is the usefulness of accounting standards in forcing managements not to be too greedy at the expense of shareholders. It used to be common for companies with falling stock quotes to reprice their stock options, thus making profits more likely for executives. But the practice dried up after accounting rule makers decreed in 1998 that repricings would cause reported earnings to decline.

Amazon is apparently the first company since then to reprice its options and accept the accounting blow. It announced that employees with options may trade them in for a lesser number of new options whose strike price would be set at the lowest closing price of the stock from Jan. 1 through Feb. 14, or at a 15 percent discount to the Feb. 14 price if that is higher. Amazon stock is down on the news, but the employees -- at least the ones not being laid off -- have reason to be happy. If the stock keeps falling, they will get options with lower exercise prices.

Amazon hopes that investors will ignore the inconvenient expense numbers in the real income statement, which will be left out of the creative one the company emphasizes.

The new options will vest quickly, some in just six months, so that even a little bounce in the stock price will let the insiders cash in. That is a good thing for them, since the long-term outlook for Amazon remains dubious.

Amazon's most unfortunate decision was to borrow a lot of money when its stock was hot, even though it could have gotten virtually free capital from stock buyers. Now, with the shares down 86 percent from the peak, Amazon has a $130 million annual interest expense. It may yet have to restructure its debts by giving equity to the bondholders.

Amazon's preferred profit number excludes interest expense. But ignoring something does not make it vanish. Some investors may learn that lesson the hard way.