Amazon.com 2001 Annual Report Download - page 61

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Marketing
Marketing expenses consist of advertising, promotional and public relations expenditures, and payroll and
related expenses for personnel engaged in marketing and selling activities. The Company expenses general media
advertising costs as incurred. The Company enters into certain on-line promotional agreements with third parties
to increase traffic to its Web sites. Costs associated with these promotional agreement consist of fixed payments,
variable activity-based payments, or a combination of the two. Fixed payments are amortized ratably over the
corresponding agreement term, and variable payments are expensed in the period incurred. The Company
receives reimbursements from vendors for certain general media and other advertising costs. Such
reimbursements are classified as a contra-marketing expense. Advertising expense and other promotional costs
were $125 million, $172 million and $166 million in 2001, 2000 and 1999, respectively. Prepaid advertising
costs were $2 million and $6 million at December 31, 2001 and 2000, respectively.
Technology and Content
Technology and content expenses consist principally of payroll and related expenses for development,
editorial, systems and telecommunications operations personnel and consultants; systems and
telecommunications infrastructure; and costs of acquired content, including freelance reviews.
Technology and content costs are expensed as incurred, except for certain costs relating to the development
of internal-use software, including those relating to operating the Company’s Web sites, that are capitalized and
depreciated over two years. For the years ended December 31, 2001, 2000 and 1999, capitalized costs related to
the development of internal-use software, including those relating to operating the Company’s Web sites, net of
amortization, were $24 million, $21 million and $7 million, respectively.
Stock-Based Compensation
Stock-based compensation includes stock-based charges resulting from variable accounting treatment of
certain options, and option-related deferred compensation recorded at the Company’s initial public offering, as
well as certain other compensation and severance arrangements. Stock-based compensation also includes the
portion of acquisition-related consideration conditioned on the continued tenure of key employees of certain
acquired businesses, which must be classified as compensation expense rather than as a component of purchase
price under accounting principles generally accepted in the United States.
During the first quarter of 2001, the Company offered a limited non-compulsory exchange of employee
stock options that resulted in variable accounting treatment for, at the time of the exchange, approximately
15 million stock options, which includes options granted under the exchange offer and 3 million options, with a
weighted average exercise price of $52.41, that were subject to the exchange offer but were not exchanged.
Variable accounting will continue until all options subject to variable accounting treatment are exercised,
cancelled or expired.
For employee stock awards not subject to variable accounting, the Company recognizes expense based on the
intrinsic value of the stock awards granted. Generally, expense is not recorded to the extent individual stock award
exercise prices are set equal to or greater than the current market price of the Company’s stock on the date of grant.
Foreign Currency
The Company has the following internationally-focused Web sites: www.amazon.co.uk,www.amazon.de,
www.amazon.fr and www.amazon.co.jp. Net sales generated from these Web sites, as well as most of the related
expenses incurred, are denominated in the functional currencies of the Web sites. Additionally, the functional
currency of the Company’s subsidiaries that either operate or support www.amazon.co.uk,www.amazon.de,
www.amazon.fr and www.amazon.co.jp is the same as the local currency of the United Kingdom, Germany,
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