Amazon.com 2000 Annual Report Download - page 51

Fulfillment costs represent costs incurred in operating and staffing fulfillment and customer service centers
(including costs attributable to receiving, inspecting and warehousing inventories; picking, packaging and
preparing customers’ orders for shipment; and responding to inquiries from customers), and credit card fees.
Fulfillment costs amounted to $415 million, $237 million, and $65 million in 2000, 1999, and 1998,
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 generally 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, 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 $16 million and $8 million, respectively. No such costs were capitalized during
1998.
Stock-Based Compensation
The Company recognizes expense relative to its employee stock option plans based on the intrinsic value
of the stock options granted. Generally, expense is not recorded to the extent individual stock option exercise
prices are set equal to the current market price of the Company’s stock on the date of grant. The Company
provides additional pro forma disclosure of the accounting impact as if it had adopted fair value treatment (see
Note 10).
Foreign Currency
The functional currency of the Company’s subsidiaries that operate our www.amazon.co.uk,
www.amazon.de,www.amazon.fr and www.amazon.co.jp Web sites and our foreign subsidiaries is the local
currency. Assets and liabilities of these subsidiaries are translated into U.S. dollars at year-end exchange rates,
and revenues and expenses are translated at average rates prevailing during the year. Translation adjustments
are included in ‘‘Accumulated other comprehensive loss,’’ a separate component of stockholders’ equity
(deficit). Transaction gains and losses arising from transactions denominated in a currency other than the
functional currency of the entity involved, which have been insignificant, are included in ‘‘Other income
(expense), net’’ on the consolidated statements of operations.
Hedging
The Company uses derivative financial instruments to hedge the risk of fluctuations in foreign exchange
rates associated with its Euro denominated debt. Currency gains and losses on hedge instruments are included
in ‘‘Other income (expense), net’’ and are recognized concurrently with currency gains and losses of the
hedged liabilities. The Company also uses a portion of the Euro denominated debt to hedge an equivalent
amount of Euro denominated cash equivalents and marketable fixed income securities classified as available for
sale. Currency gains and losses on the Euro debt are included in ‘‘Accumulated other comprehensive loss’’ as
an offset to the currency changes in the underlying cash equivalents and investments. The level of effectiveness
of the hedge is determined based on the extent to which changes in the value of the hedged item due to
fluctuations in the foreign exchange rates are reduced by inverse changes in the hedge instruments. The hedge
AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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