Amazon.com 2006 Annual Report Download - page 45

common stock, and the fair value of stock options is determined using the Black-Scholes valuation model, which
is consistent with our valuation techniques previously utilized for options in footnote disclosures required under
SFAS No. 123, Accounting for Stock Based Compensation, as amended by SFAS No. 148, Accounting for Stock-
Based Compensation—Transition and Disclosure. Such value is recognized as expense over the service period,
net of estimated forfeitures, using the accelerated method under SFAS No. 123(R). The estimation of stock
awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ
from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are
revised. We consider many factors when estimating expected forfeitures, including types of awards, employee
class, and historical experience. Actual results, and future changes in estimates, may differ substantially from our
current estimates. Additionally, because we implemented SFAS No. 123(R), we no longer have employee stock
awards subject to variable accounting treatment.
The adoption of SFAS No. 123(R) resulted in a cumulative benefit from accounting change of $26 million
in 2005, which reflects the net cumulative impact of estimating future forfeitures in the determination of period
expense, rather than recording forfeitures when they occur as previously permitted.
Stock-based compensation was $101 million, $87 million and $58 million during 2006, 2005, and 2004. We
applied the fair value accounting provisions of SFAS No. 123(R) for 2006 and 2005 compared with the
application of APB Opinion No. 25, including variable accounting treatment on certain awards, for 2004.
Because of the application of different methods of accounting as well as the effects of variable accounting
treatment in 2004, stock-based compensation for 2006 and 2005 is not comparable to prior periods. As of
December 31, 2006, there was $217 million of net unrecognized compensation cost, related to unvested stock-
based compensation arrangements.
Other Operating Expense (Income)
Other operating expense was $10 million in 2006, primarily attributable to amortization of other intangibles.
Other operating expense was $47 million in 2005, primarily attributable to our settlement of a patent lawsuit for
$40 million, as well as amortization of other intangibles of $5 million. Other operating income was $8 million for
2004, which includes net restructuring-related credits of $9 million and amortization of other intangibles of $1
million.
During 2004, we determined that certain of the office space previously vacated as part of our 2001
restructuring was necessary for our future needs. We reduced our restructuring-related liability resulting in a gain
of $13 million for 2004. Lease payments for this office space are expensed over the lease period and classified to
the corresponding operating expense categories on our consolidated statements of operations.
In 2004, we streamlined our organizational structure in France to reduce our operating costs. This reduction
resulted in severance costs of $4 million classified in “Other operating expense (income)” on our consolidated
statements of operations.
Income from Operations
Income from operations was $389 million, $432 million, and $440 million during 2006, 2005, and 2004.
The decrease in 2006 from 2005 is primarily a result of an increase in spending for technology and content. The
decrease in 2005 from 2004 is primarily a result of an increase in spending for technology and content, an
increase in stock-based compensation that is now recorded under SFAS No. 123(R) fair value accounting, and a
payment of $40 million to settle a patent lawsuit. These increased expenditures were partially offset by higher net
sales and gross profit.
Interest Expense and Income
The primary component of our net interest expense is the interest we incur on our long-term debt
instruments, including a $900 million principal balance of our 4.75% U.S. Convertible Subordinated Notes and a
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