Amazon.com 2002 Annual Report Download - page 38

include, but are not limited to, hiring additional employees, oÅering additional Web site features and
product categories to our customers and implementing additional commercial relationships, as well as
potentially continuing our international expansion.
General and Administrative
General and administrative expenses consist of payroll and related expenses for executive, Ñnance and
administrative personnel, human resources, professional fees and other general corporate expenses. General
and administrative expenses were $79 million, $90 million and $109 million for 2002, 2001 and 2000,
respectively, representing 2%, 3% and 4% of net sales, respectively. The decline in 2002 in general and
administrative costs is primarily attributable to a decline in facility and depreciation costs resulting from
our 2001 operational restructuring plan that consolidated our corporate oÇce locations, and through
continued eÅorts to improve eÇciency. The decline in 2001 in general and administrative costs is
attributable to reductions in most administrative expense categories, including employee-related, facility
and depreciation costs, supplies and other miscellaneous charges, as well as decreased costs as a result of
our 2001 operational restructuring.
Stock-Based Compensation
Stock-based compensation was $69 million, $5 million and $25 million for 2002, 2001 and 2000,
respectively. Stock-based compensation includes stock-based charges resulting from variable accounting
treatment of certain stock options and restricted stock issued to certain key employees, as well as amounts
associated with our newly-implemented restricted stock unit program. Stock-based compensation also
includes, to a lesser extent, a portion of acquisition-related consideration conditioned on the continued
tenure of certain key employees of acquired businesses. Under our restricted stock unit program, which
commenced in the fourth quarter of 2002, we award restricted stock units as our primary vehicle for
employee equity compensation. Restricted stock units are measured at fair value on the date of grant based
on the number of shares granted and the quoted price of our common stock. Such value is recognized as
an expense ratably over the corresponding employee service period. To the extent restricted stock units are
forfeited prior to vesting, the corresponding previously recognized expense is reversed as an oÅset to
""Stock-based compensation.'' Stock-based compensation associated with our restricted stock unit program
was $4 million in 2002.
The number of shares of common stock subject to outstanding vested and unvested employee stock
awards (including restricted stock units) was approximately 45 million and 66 million, or 12% and 18% of
our outstanding common stock, at December 31, 2002 and 2001, respectively.
During the Ñrst quarter of 2001, we oÅered a limited non-compulsory exchange of employee stock
options, which resulted in variable accounting treatment for approximately 5 million stock options at
December 31, 2002, including approximately 4 million options granted under the exchange oÅer that have
exercise prices of $13.375 and expire in the third quarter of 2003. Variable accounting treatment results in
unpredictable and potentially signiÑcant charges or credits recorded to ""Stock-based compensation,''
dependent on Öuctuations in quoted prices for our common stock. We have quantiÑed the hypothetical
eÅect on ""Stock-based compensation'' associated with various quoted prices of our common stock, which
we are unable to forecast accurately, using a sensitivity analysis for our outstanding stock options subject
to variable accounting at December 31, 2002. We have provided this information to give additional insight
into the volatility we will experience in our future results of operations to the extent that the quoted price
for our common stock is above $13.375. This sensitivity analysis is not a prediction of future performance
of the quoted prices of our common stock.
Using the following hypothetical market prices of our common stock above $13.375 (including the
actual expense associated with options exercised), our hypothetical cumulative compensation expense at
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