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February 5, 2001

Amazon's Losses Grow as They Seem to Shrink
By Floyd Norris, The New York Times

Gimmicks, Tricks, and Lies ... Weiss comments

NEW YORK - 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."

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.

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% 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.

The February issue of Safe Money Report points out the myriad ways companies embellish their earnings reports. Among the tricks used to produce so-called profitability -- writing off bad acquisitions or "goodwill", sweeping bad investments under the carpet, not counting stock options as a part of payroll expenses, and ignoring interest expenses on junk bonds. is a stellar example of a company that uses these accounting tricks to its advantage -- and to the detriment of its investors. hasn't booked one penny of profits since it opened its virtual doors. But that doesn't keep Amazon from trying any accounting gimmick it can find in order to convince investors to lend them more money. loudly announced that it will reach "pro forma operating profitability" by the fourth quarter of 2001. That sounds impressive, but, as this article points out, "pro forma operating profitability" is a meaningless number used by and Wall Street cheerleaders to pump up Amazon's share price.

In reality,'s losses are expanding. Fourth-quarter GAAP net loss for was $545 million, or $1.53 per share, and includes charges totaling $339 million for the impairment of goodwill and equity investments. This compares to a net loss of $323 million, or $0.96 per share, in the fourth quarter of 1999. Those numbers certainly don't indicate a trend toward profitability.

Profitability isn't visible at the end of the tunnel -- any the only light we see for sees is an oncoming train of debt and bad investments.

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