Amazon.com 2002 Annual Report Download - page 66

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
segment fulÑllment-related costs incurred on behalf of other businesses are classiÑed as cost of sales rather
than fulÑllment.
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 online promotional
agreements with third parties to increase traÇc to its Web sites. Costs associated with these promotional
agreements consist of Ñxed 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 recorded as a reduction of expense.
Advertising expense and other promotional costs were $114 million, $125 million and $172 million in 2002,
2001 and 2000, respectively. Prepaid advertising costs were $1 million and $2 million at December 31,
2002 and 2001, respectively.
Technology and Content
Technology and content expenses consist principally of payroll and related expenses for development,
editorial, systems, and telecommunications operations personnel; and systems and telecommunications
infrastructure.
Technology and content costs are expensed as incurred, except for certain costs relating to the
development of internal-use software, including upgrades and enhancements to the Company's Web sites,
that are capitalized and depreciated over two years. Fixed assets associated with capitalized internal-use
software, net of accumulated depreciation, was $23 million and $24 million at December 31, 2002 and
2001, respectively. Costs capitalized during the application development stage for internal-use software,
oÅset by corresponding amortization, was a net expense of $1 million in 2002, and net deferrals of
$3 million and $14 million in 2001 and 2000, respectively.
Stock-Based Compensation
Stock-based compensation includes stock-based charges resulting from variable accounting treatment
of certain stock options, restricted stock issued to certain key employees and amounts associated with the
Company's restricted stock unit program, which commenced in the fourth quarter of 2002. 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.
The Company generally has four categories of employee stock-based awards: restricted stock units,
restricted stock, Ñxed-award stock options and options subject to variable accounting treatment. At
December 31, 2002, the Company has three stock-based employee compensation plans, which are more
fully described in ""Note 8 Ì Stockholders' Equity (DeÑcit).'' The Company accounts for those plans
under the intrinsic value method, which follows the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. The intrinsic value
method of accounting results in stock compensation expense to the extent option exercise prices are set
below market prices on the date of grant. Also, to the extent employee stock awards have been subject to
an exchange oÅer or other modiÑcations, such awards are subject to variable accounting treatment.
Variable accounting treatment results in expense or contra-expense recognition using the cumulative
expense method, calculated based on quoted prices of the Company's common stock and vesting schedules
of underlying awards.
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