eBay 2002 Annual Report Download

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To our Stockholders, Partners, Employees and the eBay Community:
A DeÑning Year for eBay
The year 2002 was a deÑning time in eBay's history Ì a time when all the aspects of the business
came together to demonstrate the company's true potential. The eBay community led the company to
another year of record performance, reÖected in extraordinary growth across all metrics. Registered users
grew to nearly 62 million by the end of the year, an increase of 46% from the year-ago level. And those
users listed more than 638 million items in 2002, a 51% year-over-year increase. Gross merchandise sales,
which is the value of all items sold on eBay, totaled nearly $15 billion in 2002, a 60% increase over 2001.
For the Ñrst time in our history, net revenues surpassed $1 billion, totaling $1.21 billion for the full year.
This growth strengthens our conÑdence in the depth of the US market, the potential of international
expansion, and the promise of online payments. But more importantly, the outstanding momentum we
achieved in 2002 fully validates our long-term strategy, and sets the stage for an even broader, larger and
more engaged community and a stronger company for years to come.
As we look back on the year, there were a few powerful trends that strengthened and expanded the
eBay marketplace:
e-commerce continues to broaden its appeal. Consumers are becoming increasingly comfortable with
shopping online, as reÖected in the fact that more people are coming online than ever before and more
Internet users are shopping each month, both in the US and around the world. According to the
US Department of Commerce, total retail e-commerce in the United States jumped 27% in 2002 to more
than $45 billion. eBay is beneÑting from this trend as it is one of the Ñrst places that consumers want to
visit.
eBay is now a global, mainstream shopping destination. A truly global marketplace, eBay ended
2002 with a presence in 27 markets around the world and 62 million users in more than 150 countries. As
a result, the eBay community fully reÖects the diversity of the Internet. And when these users come to
eBay, they are Ñnding unparalleled selection and value across a wide range of items, including everything
from collectibles to clothing, and everyday household items to automobiles. In total, our users can Ñnd
more than 16 million items listed in more than 27,000 categories on any given day. Providing this broad
and ever-changing selection are eBay sellers, now representing every link in the distribution chain, from
large manufacturers and wholesalers, to small businesses and individual merchants.
Our partnership with the eBay community continues to drive innovation and strengthen the
marketplace. Our sellers are quick to identify trends and oÃ…er new types of goods at a pace nearly
impossible anywhere else. Their constant innovation makes a compelling user proposition, which attracts
more shoppers and improves the overall marketplace.
eBay's strategy of managing the marketplace and listening to the community enables us to develop
features and functionality that assist sellers as well as buyers. We help our users become successful by
improving the experience, building out new and existing categories, helping sellers expand sales, attracting
and activating buyers, making online payments easier, and creating new communities around the world.
Perhaps nothing illustrates our role as marketplace manager better than our strategy to continuously
simplify and improve the trading process. eBay's most signiÑcant achievement in this area in 2002 was the
acquisition of PayPal, the leading online payment service that allows any business or consumer with an
email address to securely, conveniently, and cost-eÃ…ectively send and receive payments online. Payment is
a vital function to trading on eBay and integrating PayPal's functionality into the eBay platform is
expanding trading, improving trust and safety, and making the eBay user experience easier, faster and safer
for everyone. Having only completed the acquisition of PayPal in October, our Payments business has
become a third major engine of growth, both on eBay and oÃ….

Table of contents

  • Page 1
    ... to the community enables us to develop features and functionality that assist sellers as well as buyers. We help our users become successful by improving the experience, building out new and existing categories, helping sellers expand sales, attracting and activating buyers, making online payments...

  • Page 2
    ... trading on the site. We will make product development advances that will make it easier and faster for our users to trade, and technology innovations that expand the platform itself. We are going to further integrate payments, and continue to build customer support and trust & safety so that users...

  • Page 3
    ...0430924 (I.R.S. Employer IdentiÃ'cation Number) 2145 Hamilton Avenue San Jose, California (Address of principal executive oÇces) 95125 (Zip Code) (408) 376-7400 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Securities Exchange Act of...

  • Page 4
    ...-to-use online service that is available, 24 hours-a-day, seven days-a-week (subject to a weekly scheduled two-hour maintenance period), enabling sellers to list items for sale in either auction or Ã'xed-price formats, buyers to bid for and/or purchase items of interest, and all eBay users to browse...

  • Page 5
    ... eÇcient information exchange. In particular, large markets with broad buyer and seller bases, wide product ranges, and moderate shipping costs have been successful on eBay. Our marketplace is most eÃ...ective, relative to available alternatives, at addressing markets of new and scarce goods, end-of...

  • Page 6
    ... with email access in 38 countries to send and receive online payments securely, conveniently and cost-eÃ...ectively. PayPal's network builds on the existing Ã'nancial infrastructure of bank accounts and credit cards to create an international payment system. PayPal delivers a product well suited for...

  • Page 7
    ... & Glass ‚ Real Estate ‚ Sports ‚ Fan Shop ‚ Memorabilia ‚ Sporting Goods ‚ Stamps ‚ Tickets ‚ Toys & Hobbies ‚ Crafts ‚ Diecast ‚ Travel ‚ Everything Else ‚ Gifts ‚ Health & Beauty ‚ More Specialty Sites eBay Motors eBay Stores Half.com by eBay PayPal Sothebys.com...

  • Page 8
    ... to eBay.com and our international websites can browse through the eBay service and view the items listed for sale. To bid on, list or purchase an item, buyers and sellers must Ã'rst register with eBay by completing a short online form and conÃ'rmation process. Buying on eBay Users can search for...

  • Page 9
    ... ends, the eBay system validates whether a bid has exceeded the minimum price, and the reserve price if one has been set. If the auction was successful or if the buyer elected the Buy-ItNow feature, we automatically notify the buyer and seller via email, and the buyer and seller can then complete...

  • Page 10
    ... these services. Payments Following a completed transaction, eBay buyers and sellers can exchange funds by the payment method of their choice, typically electronically through our PayPal global payments platform and also via check or money order. PayPal enables any business or consumer with email to...

  • Page 11
    ... eBay or another online marketplace where the seller has integrated PayPal's Instant Purchase Feature, or at the sites of merchants that have integrated PayPal's Web Accept feature. To make a payment at PayPal's website, a sender logs in to his or her account and enters the recipient's email address...

  • Page 12
    Other Services Customer Support We devote signiÃ'cant resources to providing personalized, accurate and timely support services to our community of users. Buyers and sellers can contact us through a variety of means, including email, text chat and an expanding phone capability. We are focusing our ...

  • Page 13
    ... The eBay platform supports the full selling and buying processes, including initial registration for the service, placing bids and managing outbids, listing items for sale, and auction close. The platform also manages various notiÃ'cations for sellers and buyers, including daily status updates, bid...

  • Page 14
    ... listed by users has been increasing continually, requiring us to expand and upgrade our technology, transaction processing systems, API capacity, security infrastructure, and network infrastructure and to add new engineering and operations personnel. The process of upgrading and expansion is part...

  • Page 15
    ... through 2004. We plan to time these rollouts in a manner that minimizes the impact to our user community. Our PayPal Platform Our PayPal technology assures user access to the PayPal website, both to acquire new customers and to allow existing ones to conduct Ã'nancial transactions. We focus much...

  • Page 16
    ...) and online and oÉine shopping channels and networks. For our PayPal service, our users may choose to pay through a variety of competing channels, including other online payment services, payment methods (e.g. cash, money order), and traditional online or oÉine merchant accounts. As our product...

  • Page 17
    ... such as advertising and marketing programs, customer support expenses, bank charges, provisions for doubtful accounts, authorized credits and transaction losses. Expenses over which segment managers do not have discretionary control, such as site operations costs, product development expenses, and...

  • Page 18
    ...general oÇce facilities located in San Jose, California. This Ã've-year lease is commonly referred to as a synthetic lease because it represents a form of oÃ...-balance sheet Ã'nancing under which an unrelated third-party funds 100% of the costs of the acquisition of the property and leases the asset...

  • Page 19
    ... construction. Upon completion, this facility will house the primary customer service operations center for our Payments segment. In 2002, we sold commercial real estate properties in California and Indiana totaling approximately 551,000 square feet, primarily in connection with the sales of our...

  • Page 20
    ... signiÃ'cant management time, will be costly and could require changes to its customer service and operations that could increase its costs and decrease the eÃ...ectiveness of its anti-fraud program. Three purported class action complaints were Ã'led following announcement of the PayPal merger in July...

  • Page 21
    ... and are subject to a suit by Tumbleweed Communications Corporation that is currently ongoing. These claims, whether meritorious or not, could be time-consuming, result in costly litigation, cause service upgrade delays, require expensive changes in our methods of doing business or could require us...

  • Page 22
    PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Price Range of Common Stock eBay's common stock has been traded on The Nasdaq Stock MarketSM under the symbol ""EBAY'' since September 24, 1998. The following table sets forth the intra-day high and low per share ...

  • Page 23
    ... of Income Data: Net revenues Cost of net revenues Gross proÃ't Operating expenses: Sales and marketing Product development General and administrative Payroll taxes on stock option gains Amortization of acquired intangible assets Merger related costs Total operating expenses Income (loss...

  • Page 24
    ... online trading by developing a Web-based marketplace in which a community of buyers and sellers are brought together in an entertaining, intuitive, easy-to-use environment to browse, buy and sell an enormous variety of items. Through our PayPal service, we enable any business or consumer with email...

  • Page 25
    ...this Annual Report on Form 10-K. Year Ended December 31, 2000 2001 2002 Net revenues Cost of net revenues Gross proÃ't Operating expenses: Sales and marketing Product development General and administrative Payroll taxes on stock option gains Amortization of acquired intangible assets Merger...

  • Page 26
    ...$634,659 114,162 $748,821 Percent Change 41% 177% 62% 2002 $ 897,701 316,399 $1,214,100 (in thousands, except percent changes) Net revenues are allocated between U.S. and International geographies based upon the country in which the seller, advertiser or end-to-end service provider is located. 24

  • Page 27
    ...end services, and oÉine services in our U.S., International and Payments segments. Transaction revenue is derived primarily from listing, feature and Ã'nal value fees paid by sellers and fees from payment processing services. Revenue from third-party advertising is derived principally from the sale...

  • Page 28
    ... scheduled to terminate on March 31, 2003, with AOL to continue its electronic delivery of our online advertisements for a speciÃ'ed wind-down period. After March 31, 2003, our third-party advertising revenues will be dependent on the eÃ...orts of our existing internal sales staÃ.... End-to-End Services...

  • Page 29
    ... dollars was due to increased payment processing costs resulting from our acquisition of PayPal and continued development and expansion of our customer support and site operations infrastructure. The increase in payment processing costs totaled $50.4 million and consists of bank charges, credit card...

  • Page 30
    ... depreciation costs for equipment used in product development. The increase in these costs results from the development of additional site features and functionality such as eBay Stores, eBay Checkout, enhanced payment features and expanded search capabilities. The increase in absolute dollars from...

  • Page 31
    ... such as enhanced search functionality, improved seller tools, expanded eBay Stores merchandising capabilities, added Ã'xed price functionality and improved site security. Product development expenses are expected to increase in absolute dollars in 2003, as we develop new site features and...

  • Page 32
    ...role in online trading. These purchase transactions may result in the creation of acquired intangible assets and lead to a corresponding increase in the amortization expense in future periods. Intangible assets are comprised of purchased customer lists, developed technologies, trade names, and other...

  • Page 33
    ... our ButterÃ'elds subsidiary and certain real estate properties of $10.6 million, a gain on the sale of our Kruse subsidiaries of $6.5 million and a gain on the sale of an equity investment in a privately held company of $3.2 million. These gains were oÃ...set by a decrease in interest and investment...

  • Page 34
    ... on the buildings. In the event we purchase the San Jose facilities, we will also pay $126.4 million, eliminate Ã'nancing payments and settle our two interest rate swaps we used to establish a Ã'xed rate of interest for $95 million of our Ã'nancing arrangement. During the year ended December 31...

  • Page 35
    ... rate used to convert Euro denominated transactions into U.S. dollar equivalents, decreased by approximately 6% compared to the weighted-average translation rate for the year ended December 31, 2001. This weighted-average translation rate change for the Euro resulted in increased net revenues of...

  • Page 36
    ... the year ended December 31, 2002, we purchased $8.6 million under this contract. In December 2002, we entered into an agreement to purchase computer equipment, software and related services to further expand our platform architecture, site operations and corporate information systems. Under the...

  • Page 37
    ...general oÇce facilities located in San Jose, California. This Ã've-year lease is commonly referred to as a synthetic lease because it represents a form of oÃ...-balance sheet Ã'nancing under which an unrelated third-party funds 100% of the costs of the acquisition of the property and leases the asset...

  • Page 38
    ...,000 square feet of commercial oÇce space in San Jose, California under the terms of our synthetic lease for our corporate headquarters. We own and occupy approximately 72,000 square feet of commercial oÇce space in Salt Lake City, Utah for our domestic customer support center. We lease and occupy...

  • Page 39
    ... of the amended agreement, we will pay AOL for its advertising services on a new user performance basis, up to a maximum of $15 million. We are recognizing these fees as sales and marketing expense as such services are provided. From time to time, we have also entered into incremental, discretionary...

  • Page 40
    ...of Half.com, a wholly owned subsidiary acquired in July 2000, with the eBay.com platform by the end of 2004. Half.com's oÇce in Pennsylvania, where 65 of its employees work, will be shut down once this process is complete. Management is in the process of formalizing an exit and integration plan and...

  • Page 41
    ... allowances for estimated losses arising from processing customer transactions, such as charge-backs for unauthorized credit card use and merchant related charge-backs due to non-delivery of goods or services, ACH returns, and debit card overdrafts. These allowances represent an accumulation...

  • Page 42
    ...updated based on actual claims data reported by our claims processors. Customers typically have up to 180 days to Ã'le transaction disputes. Consequently, the time... balance sheet date and are subject to change based upon new information and future events. 40 $ 6,842 355,187 250,516 0.86 Management's...

  • Page 43
    ... actions will be costly and could divert our management's time. If the plaintiÃ...s were to prevail on certain claims, we might be forced to pay signiÃ'cant damages and licensing fees, modify our business practices or even be prohibited from conducting a signiÃ'cant part of our U.S. business. Any such...

  • Page 44
    ... our third-party advertising revenues will be dependent on the eÃ...orts of our existing internal sales staÃ.... End-to-End Services Revenues Our end-to-end services revenues are derived principally from contractual arrangements with third parties that provide transaction services to eBay users. To date...

  • Page 45
    ...view our business as primarily transaction driven and expect end-to-end services revenues in future periods to decrease as a percentage of total net revenues and in absolute dollars. Impairment of Long-Lived Assets, Goodwill and Investments Our long-lived assets at December 31, 2002 are property and...

  • Page 46
    ...methods for entities that voluntarily adopt the fair value method of recording expenses when accounting for stock based compensation. Further, the statement requires disclosure of comparable information for all companies regardless of whether, when, or how an entity adopts the preferable, fair value...

  • Page 47
    ... on the buildings. In the event we purchase the San Jose facilities, we will also pay $126.4 million, eliminate Ã'nancing payments and settle our two interest rate swaps we used to establish a Ã'xed rate of interest for $95 million of our Ã'nancing arrangement. During the year ended December 31...

  • Page 48
    ...our operations, such as the credit card associations; ‚ the success of our geographical and product expansion; ‚ the introduction of new sites, services and products by us or our competitors; ‚ volume, size, timing and completion rate of transactions on our websites; ‚ consumer conÃ'dence in...

  • Page 49
    ... maintain suÇcient transaction volume to attract buyers and sellers; ‚ manage the costs of our business, including the costs associated with maintaining and developing our websites, customer support, fraud and chargebacks and international and product expansion; ‚ increase the awareness of our...

  • Page 50
    ...cer left the company shortly thereafter. Accordingly, PayPal's new Chief Executive OÇcer and certain other members of its management have only limited experience with PayPal. There can be no assurance that PayPal's business will be integrated into the eBay platform in a timely and eÇcient manner...

  • Page 51
    ... factors listed above, we expect that successful international expansion of PayPal's business will require successful integration with local payment providers (including banks, credit and debit card associations, electronic fund transfer systems and others) and in some countries may require a close...

  • Page 52
    ... use of credit card and bank account information and identity theft; ‚ merchant fraud and other disputes over the quality of goods and services; ‚ potential breaches of system security; ‚ potential employee fraud; and ‚ use of PayPal's system by customers to make or accept payment...

  • Page 53
    ..., PayPal, unlike eBay, must provide telephone as well as email customer service, and must resolve certain customer contacts within shorter time frames. PayPal has received negative publicity with respect to its customer service and is the subject of purported class action lawsuits alleging...

  • Page 54
    ... would cease processing payments from its New York members to such merchants and pay the State of New York $200,000 in penalties and disgorged proÃ'ts and to cover the cost of investigation. Beginning in July 2002, PayPal provided documents and information related to its services to online gambling...

  • Page 55
    ...its credit card processor that three issues remained unresolved. These issues relate to PayPal's international membership fees, its fees for international credit card funded payments, and its process for obtaining authorization to charge a customer's Visa account if the customer's ACH transfer fails...

  • Page 56
    ..., restrictions on its investment of customer funds, reporting requirements and inspection by state regulatory agencies. If PayPal's pending applications were denied, or if it were found to be subject to and in violation of any money services laws or regulations, PayPal also could be subject to...

  • Page 57
    ... to changes in the rate at which its customers fund payments using credit cards rather than bank account transfers or existing PayPal account balances. PayPal's proÃ'tability could be harmed if the rate at which customers fund using credit cards goes up. PayPal pays signiÃ'cant transaction fees when...

  • Page 58
    .... Increases in credit card processing fees could increase PayPal's costs, aÃ...ect its proÃ'tability, or otherwise limit its operations. From time to time, Visa, MasterCard, American Express and Discover increase the interchange fees that they charge for each transaction using their cards. MasterCard...

  • Page 59
    ... on prompt and accurate billing processes. If we are unable to grow our transaction processing abilities to accommodate the increasing number of transactions that must be billed, our ability to collect revenue will be harmed. We must continue to hire, train and manage new employees at a rapid rate...

  • Page 60
    ... to online auction technology, multiple database searching and electronic consignment systems) and seeking a permanent injunction and damages (including treble damages for willful infringement). We answered the complaint, denying the allegations. In April 2002, we Ã'led four motions for summary...

  • Page 61
    ...us to change our business practices or otherwise increase our costs. Our business may be harmed by fraudulent activities on our websites. Our future success will depend largely upon sellers reliably delivering and accurately representing their listed goods and buyers paying the agreed purchase price...

  • Page 62
    ... these programs, we do not compensate users who believe they have been defrauded by other users. We also periodically receive complaints from buyers as to the quality of the goods purchased. Negative publicity generated as a result of fraudulent or deceptive conduct by users of our service could...

  • Page 63
    ... declining employee morale and retention issues resulting from changes in compensation, reporting relationships, future prospects or the direction of the business; ‚ the need to integrate each company's accounting, management information, human resource and other administrative systems to permit...

  • Page 64
    ... our activities and the types of goods listed on our site expand, state regulatory agencies may claim that we are subject to licensure in their jurisdiction, either with respect to our services in general, or in order to allow the sale of certain items (e.g., real estate, boats, automobiles). We are...

  • Page 65
    ... any increases in a timely fashion. We use internally developed systems to operate our service for transaction processing, including billing and collections processing. We must continually improve these systems in order to accommodate the level of use of our websites. In addition, we may add new...

  • Page 66
    ...experienced system failures from time to time. eBay's primary website has been interrupted for periods of up to 22 hours. In addition to placing increased burdens on our engineering staÃ..., these outages create a Ã-ood of user questions and complaints that need to be addressed by our customer support...

  • Page 67
    ...and price-to-sales ratios. The trading price of our common stock has increased enormously from the initial public oÃ...ering price. This trading price and valuation may not be sustained. Negative changes in the public's perception of the prospects of Internet or e-commerce or technology companies have...

  • Page 68
    ... products listed by our users changes, we may become subject to new regulatory restrictions, such as licensure as an auto dealer or real estate broker. Several domestic jurisdictions have proposed, and Minnesota has recently passed, legislation that would limit the uses of personal user information...

  • Page 69
    ... Market acceptance for recently introduced services and products over the Internet is highly uncertain, and there are few proven services and products. In order to expand our user base, we must appeal to and acquire consumers who historically have used traditional means of commerce to purchase goods...

  • Page 70
    ... competition from various online commerce sites including: Amazon.com, BargainAndHaggle, Surplus Auction, uBid, Yahoo! Auctions and a large number of other regional and national companies engaged in consumer-to-consumer or business-to-consumer sales. DiÃ...erent aspects of our Ã'xed-priced business...

  • Page 71
    ... or ineÇcient for eBay users to match. New technologies may increase the competitive pressures by enabling our competitors to oÃ...er a lower cost service. Although we have established Internet traÇc arrangements with several large online services and search engine companies, these arrangements may...

  • Page 72
    ... traditional oÉine and online sellers of new and used books, videos and CDs, consumer electronics and other products. Our business is dependent on the development and maintenance of the Internet infrastructure. The success of our service will depend largely on the development and maintenance of the...

  • Page 73
    ... information, including customer credit card numbers. Advances in computer capabilities, new discoveries in the Ã'eld of cryptography or other developments may result in a compromise or breach of the technology used by us to protect customer transaction data. A number of websites have reported...

  • Page 74
    ... protect our intellectual property rights by relying on a combination of trademark, copyright, patent, trade dress and trade secret laws and through the domain name dispute resolution system. We also rely on contractual restrictions to protect our proprietary rights in products and services. We have...

  • Page 75
    ... on Form 10-Q, and other services normally provided in connection with statutory and regulatory Ã'lings. Audit-related fees consisted primarily of fees billed for due diligence review in connection with acquisitions and divestitures and consultation regarding Ã'nancial accounting and reporting...

  • Page 76
    ...; ‚ the engagement by PayPal Asset Management, Inc. of PwC to audit the Ã'nancial statements and prepare the federal tax return of PayPal Money Market Reserve Fund; and ‚ the engagement by PayPal of PwC to prepare the personal income tax return of an expatriate employee of PayPal working in the...

  • Page 77
    ... of securities, including government and corporate obligations and money market funds. These securities are generally classiÃ'ed as available for sale and consequently are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated...

  • Page 78
    ...year ended December 31, 2002, was a transaction loss of approximately $1.1 million. As of December 31, 2002, we had outstanding forward foreign exchange contracts with notional values equivalent to approximately $69 million with maturity dates within 92 days. The forward contracts are used to oÃ...set...

  • Page 79
    .... Prior to founding eBay, Mr. Omidyar was a developer services engineer at General Magic, a mobile communication platform company from December 1994 to July 1996. Mr. Omidyar co-founded Ink Development Corp. (later renamed eShop) in May 1991 and served as a software engineer there from May 1991...

  • Page 80
    ... eBay's Senior Vice President, Global Marketing. From February 2000 to June 2000, Mr. Cobb served as the General Manager of Consumer Sales for Netpliance, Inc., an Internet-based content Company. From July 1997 to February 2000, Mr. Cobb served as the Senior Vice President of International Marketing...

  • Page 81
    ..., since 1993, and Executive Vice President of The Walt Disney Company (Europe) S.A., since October 1996. Mr. Bourguignon was named President of Euro Disney in 1992, a post he held through April 1993. He joined The Walt Disney Company in 1988 as head of Real Estate development. Mr. Bourguignon holds...

  • Page 82
    ... Exchange Act of 1934 requires our directors and executive oÇcers, and persons who own more than 10% of a registered class of our equity securities, to Ã'le with the SEC initial reports of ownership and reports of changes in ownership of our Common Stock and other equity securities of the company...

  • Page 83
    ...104 384 384 672 4,759 30,750 2,173 1,884 1,872 2,173 92,127 14,064 (1) EÃ...ective April 1, 2002, all eligible employees of eBay, including certain of the Named Executive OÇcers, received an annual salary increase representing: (i) in the case of Mr. Webb, a salary of $525,000 per annum; (ii) in the...

  • Page 84
    ...$132,026 paid under eBay's Management Incentive Plan and $70,000 under Mr. Cobb's special retention plan. See ""Item 13: Certain Relationships and Related Transactions.'' The following executive oÇcers received grants of options in 2002 under eBay's 2001's Equity Incentive Plan, which we also refer...

  • Page 85
    ..., is a member of the general partner of certain venture capital funds that beneÃ'cially hold greater than 10% of the equity interests in Keen.com and Vcommerce, Inc. We engaged in the following transactions with these companies in 2002: In April 2000, we entered into an advertising and promotions...

  • Page 86
    .... (3) The address for Mr. Skoll is c/o Capricorn Management, LLC, 2005 Hamilton Avenue, Suite 260, San Jose, California 95125. (4) Janus Capital has an indirect 100% ownership stake in Bay Isle Financial LLC, or Bay Isle, and an indirect 50.1% ownership stake in Enhanced Investment Technologies LLC...

  • Page 87
    ...Online Payments. Includes 225,832 shares Mr. Bannick has the right to acquire pursuant to outstanding options exercisable within 60 days. The address for Mr. Bannick is 2145 Hamilton Avenue, San Jose, California 95125. (9) Mr. Cobb is our Senior Vice President and General Manager, eBay International...

  • Page 88
    ... remaining available for future issuance under our 1998 Employee Stock Purchase Plan, as amended, or the ESPP, as of December 31, 2002. Our ESPP contains an ""evergreen'' provision that automatically increases, on each January 1, the number of securities available for issuance under the ESPP by the...

  • Page 89
    ... the PayPal Plan in connection with our acquisition of PayPal. The only outstanding Non-Plan Grant as of December 31, 2002 relates to an individual compensation arrangement that was made prior to the initial public oÃ...ering of our Common Stock in 1998. At the time of this Non-Plan Grant, members of...

  • Page 90
    .... Under the terms of this bonus plan, Mr. Bannick received a $250,000 bonus payment after the closing of our acquisition of PayPal in October 2002 and upon his acceptance of the new position as our Senior Vice President and General Manager, Global Online Payments. Mr. Bannick remains eligible to...

  • Page 91
    .... Mr. Cook, a member of our Board of Directors, is a director and Chairman of the Executive Committee of the Board of Directors of Intuit. In September 2000, prior to eBay's acquisition of PayPal, PayPal entered into a strategic marketing agreement with Intuit. PayPal paid Intuit approximately $672...

  • Page 92
    ... IV ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are Ã'led as part of this report: 1. Consolidated Financial Statements: Page Number Report of Independent Accountants Consolidated Balance Sheet Consolidated Statement of Income Consolidated...

  • Page 93
    ...'s 2001 Equity Incentive Plan. Registrant's 1998 Directors Stock Option Plan. Amendment No. 1 to Registrant's 1998 Directors Stock Option Plan. Registrant's Amended and Restated 1998 Employee Stock Purchase Plan. Registrant's 1999 Global Equity Incentive Plan, as amended. Employment Letter Agreement...

  • Page 94
    ... state money transmitter laws to complete its previously announced merger with PayPal, Inc. No Ã'nancial statements were Ã'led with the report. 2. On October 4, 2002, eBay Ã'led a report on Form 8-K to report under Item 2 that it had obtained the approval of the holders of a majority of common stock...

  • Page 95
    ... Statements, eÃ...ective January 1, 2002, the Company changed its method of accounting for goodwill in accordance with Statement of Financial Accounting Standards No. 142, ""Goodwill and Other Intangible Assets.'' PricewaterhouseCoopers LLP San Jose, California January 17, 2003, except for Note 17...

  • Page 96
    ... Property and equipment, net Goodwill Intangible assets, net Deferred tax assets Other assets LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable Funds payable and amounts due to customers Accrued expenses and other current liabilities Deferred revenue and customer...

  • Page 97
    ...) 2000 Year Ended December 31, 2001 2002 Net revenues Cost of net revenues Gross proÃ't Operating expenses: Sales and marketing Product development General and administrative Payroll taxes on stock option gains Amortization of intangible assets Merger related costs Total operating expenses...

  • Page 98
    ... eÃ...ect of change in accounting principle Comprehensive income $ 48,294 803 (11,583) ÃŒ ÃŒ 4,811 (5,969) ÃŒ $ 42,325 $90,448 (5,835) 1,215 3,799 (3,865) (458) (5,144) (2,626) $82,678 $249,891 48,000 774 558 (2,637) 448 47,143 ÃŒ $297,034 The accompanying notes are an integral part of these...

  • Page 99
    ...803 (5,835) 48,000 (875) (8,645) 38,498 $1,013,760 $1,429,138 $3,556,473 Number of shares Common stock: Balance, beginning of year Issuance of common stock for cash Issuance of common stock for acquisitions Balance, end of year 262,087 4,593 2,570 269,250 269,250 5,831 2,178 277,259 277,259...

  • Page 100
    ... and amortization Stock-based compensation Tax beneÃ't on the exercise of stock options Impairment of certain equity investments Minority interests and other Gain on sale of assets Changes in assets and liabilities, net of acquired businesses: Accounts receivable Funds receivable Other...

  • Page 101
    .... We pioneered online trading by developing a Web-based community in which buyers and sellers are brought together to buy and sell almost anything. The eBay online service permits sellers to list items for sale, buyers to bid on items of interest, and all eBay users to browse through listed items in...

  • Page 102
    ... and revenue earned from our international sites are denominated in the country's functional currency. Accounts receivable balances are typically settled through customer credit cards and, as a result, the majority of accounts receivable are collected upon processing of credit card transactions. We...

  • Page 103
    ... payment networks. When customers fund their account using their bank account or credit card, or withdraw money to their bank account or through a debit card transaction, there is a clearing period before the cash is received or sent by PayPal, usually two or three days. Hence, these funds are...

  • Page 104
    ... in transaction processing fees based upon balances held with each institution. This credit is recognized as a reduction in processing costs. Environmental expenditures As a result of our 1999 merger with ButterÃ'elds, we own real estate properties that are either used in our business or leased...

  • Page 105
    ...buyer has bid above the seller's speciÃ'ed minimum price or reserve price, whichever is higher, at the end of the transaction term. We earn transaction fees, allocated to our Payments segment, from processing transactions for certain customers. Revenue resulting from a payment processing transaction...

  • Page 106
    ... and Kruse International. ButterÃ'elds auction revenues are derived primarily from auction commissions and fees from the sale of property through the auction process. Revenues from seller commissions and buyer premiums are recognized at the date the related auction is concluded. Service revenues are...

  • Page 107
    ... December 31, 2000 and 2001, respectively. We account for stock-based arrangements issued to non-employees using the fair value based method, which calculates compensation expense based on the fair value of the stock granted using the BlackScholes option pricing model at the date of grant. Income...

  • Page 108
    ...for the interim and annual periods ending after December 15, ...accounting for stock based compensation. Further, the statement requires disclosure of comparable information for all companies...Accounting Research Bulletin No. 51, ""Consolidated Financial Statements,'' addresses consolidation by business...

  • Page 109
    ... on the buildings. In the event we purchase the San Jose facilities, we will also pay $126.4 million, eliminate Ã'nancing payments and settle our two interest rate swaps we used to establish a Ã'xed rate of interest for $95 million of our Ã'nancing arrangement. During the year ended December 31...

  • Page 110
    ...using a valuation report prepared by an independent third-party valuation consultant. Such assets consist of developed technologies, customer lists, trade names and other acquired intangible assets including contractual agreements. IdentiÃ'able intangible assets are amortized using the straight-line...

  • Page 111
    ...in thousands, except number of years): Company Name Acquisition Date Developed Technologies Estimated Useful Life (in years) Customer Lists Estimated Useful Life (in years) Trade Names Estimated Useful Life (in years) Billpoint EachNet NeoCom PayPal eBay Australia and New Zealand ÏÏÏÏ Total...

  • Page 112
    ... company in a purchase acquisition for $120.8 million in cash and incurred $1.1 million of direct acquisition costs. Internet Auction introduced online trading in South Korea when it launched in April 1998. Shares of Internet Auction are listed on the KOSDAQ. The transaction was accounted for using...

  • Page 113
    ..., Inc. in a tax-free, stock-for-stock transaction. PayPal provides a global payments platform and is headquartered in Mountain View, California. We acquired PayPal to provide a signiÃ'cantly improved customer experience to eBay's users by making their trading experience easier, safer, and faster...

  • Page 114
    ...During the year ended December 31, 2002, revenues generated from PayPal's online gambling payment processing, including revenues generated prior to our acquisition of PayPal on October 3, 2002, represented 6% of PayPal's total revenues for 2002. Included in the PayPal purchase price allocation as of...

  • Page 115
    ...277 The increase in goodwill during the year ended December 31, 2002, resulted from business acquisitions and from foreign currency translation adjustments relating to goodwill associated with prior period acquisitions, partially oÃ...set by the disposal of goodwill in connection with the sale of our...

  • Page 116
    ...and our acquisition of PayPal prompted us to change the basis for measuring our Ã'nancial performance and evaluating resource allocations, and therefore our reportable segments. We changed our business segments from Online and OÉine services to U.S., International, and Payments operations. This new...

  • Page 117
    ..., such as advertising and marketing programs, customer support expenses, bank charges, provisions for doubtful accounts, authorized credits and transaction losses. Expenses over which segment managers do not have discretionary control, such as site operations costs, product development expenses, and...

  • Page 118
    ...,426 41,613 (2,851) (16,245) $162,943 December 31, 2001 International Payments $322,561 $34,621 U.S. Net revenues from external customersÏÏÏÏÏ Direct costs Direct contribution Operating expenses and indirect costs of sales Income from operations Interest and other income and expense, net...

  • Page 119
    ...$ 35,050 March 31, 2002 International Payments $361,956 $35,747 $ 76,237 U.S. Total assets 1,021,298 Consolidated $1,257,029 U.S. $1,391,311 Consolidated $1,789,014 Three Months Ended June 30, U.S. Net revenues from external customers Direct costs Direct contribution Operating expenses and...

  • Page 120
    ... 35,169 September 30, 2002 International Payments $467,782 $31,396 $ $ 206,491 76,284 130,207 $ 76,194 31,754 44,440 $ 6,094 7,222 (1,128) U.S. Net revenues from external customers Direct costs Direct contribution Operating expenses and indirect costs of sales Income from operations Interest and...

  • Page 121
    ...,909 $97,494 $1,182,403 Year Ended December 31, 2001 Online OÉine Consolidated Net revenues from external customers Operating income (loss), as adjusted Interest and other income and expense, net Interest expense Impairment of certain equity investments Amortization of certain non-cash items...

  • Page 122
    eBay Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED) Year Ended December 31, 2000 2001 2002 United States net revenues International net revenues Net revenues 402,446 28,978 $431,424 $634,659 114,162 $748,821 $ 897,701 316,399 $1,214,100 December 31, 2001 2002 United States long-...

  • Page 123
    ...,000 impairment charge for an equity investment in a public company based upon a signiÃ'cant decline in the market value of our investment during 2002, which we determined to be other than temporary. We recorded $3.2 million in impairment charges for certain private equity investments based upon the...

  • Page 124
    ... income to rent expense during the next twelve months. As of December 31, 2002, we had outstanding forward foreign exchange contracts with notional values equivalent to approximately $69 million with maturity dates within 92 days. The forward contracts are used as to oÃ...set changes in the...

  • Page 125
    ..., for site-related software and development costs. Total depreciation expense was $36.7 million in 2000, $41.8 million in 2001, and $60.7 million in 2002. December 31, 2001 2002 (in thousands) Accrued expenses: Acquisition related accrued expenses Compensation and related beneÃ'ts Advertising...

  • Page 126
    ...general oÇce facilities located in San Jose, California. This Ã've-year lease is commonly referred to as a synthetic lease because it represents a form of oÃ...-balance sheet Ã'nancing under which an unrelated third-party funds 100% of the costs of the acquisition of the property and leases the asset...

  • Page 127
    ..., and we became obligated to pay the purchase price of the land and buildings, we would show the cost as an asset on our balance sheet and our restricted cash and investments position would be reduced by the amount of the purchase price. Currently, we reÃ-ect rent payments as operating expenses on...

  • Page 128
    ...,000 square feet of commercial oÇce space in San Jose, California under the terms of our synthetic lease for our corporate headquarters. We own and occupy approximately 72,000 square feet of commercial oÇce space in Salt Lake City, Utah for our domestic customer support center. We lease and occupy...

  • Page 129
    ... to online auction technology, multiple database searching and electronic consignment systems) and seeking a permanent injunction and damages (including treble damages for willful infringement). We answered the complaint, denying the allegations. In April 2002, we Ã'led four motions for summary...

  • Page 130
    ... signiÃ'cant management time, will be costly and could require changes to its customer service and operations that could increase its costs and decrease the eÃ...ectiveness of its anti-fraud program. Three purported class action complaints were Ã'led following announcement of the PayPal merger in July...

  • Page 131
    ... of the amended agreement, we will pay AOL for its advertising services on a new user performance basis, up to a maximum of $15 million. We are recognizing these fees as sales and marketing expense as such services are provided. From time to time, we have also entered into incremental, discretionary...

  • Page 132
    ... stock. In July 2000, we entered into an advertising and promotions agreement, which we subsequently amended in December 1999 and April 2000, with a privately held company that provides a real estate solution to home buyers and sellers. Under the terms of this agreement, we recognized revenues...

  • Page 133
    ...: Employee Stock Purchase Plan We have an employee stock purchase plan for all eligible employees. Under the plan, shares of our common stock may be purchased over an oÃ...ering period with a maximum duration of two years at 85% of the lower of the fair market value on the Ã'rst day of the applicable...

  • Page 134
    ... ÃŒ (CONTINUED) stock purchase plan will be increased automatically by the number of shares purchased under this plan in the preceding calendar year. 401(k) Savings Plan We have a savings plan, which qualiÃ'es under Section 401(k) of the Internal Revenue Code. Participating employees may contribute...

  • Page 135
    ....92 closing price of our common stock on December 31, 2002. 2000 2001 2002 Grants during period as percent of outstanding shares Total outstanding grants ""in-the-money'' as a percent of outstanding shares Total outstanding grants as a percent of outstanding shares ÏÏÏ Grants to named oÇcers...

  • Page 136
    ... our then outstanding voting interests. We have previously disclosed such option grants in our Prospectus Ã'led with the Securities and Exchange Commission on September 25, 1998 in connection with our initial public oÃ...ering under the headings ""Management ÃŒ Director Compensation'' and ""Management...

  • Page 137
    ... rate Permanent diÃ...erences: Foreign income taxed at diÃ...erent rates Acquisition related expenses Stock-based compensation Subsidiary loss not beneÃ'ted Tax-exempt interest income State taxes, net of federal beneÃ't Tax credits Other $28,357 2,876 175 125 665 (4,241) 4,493 ÃŒ 275 $32...

  • Page 138
    ...stock price and timing of employee stock option exercises have on the likelihood that we will realize future beneÃ'ts from these amounts. To the extent that we generate...commercial oÇce space in Vancouver, British Columbia for a customer support center. The sublease commences on July 1, 2003 and ends...

  • Page 139
    ...of Half.com, a wholly owned subsidiary acquired in July 2000, with the eBay.com platform by the end of 2004. Half.com's oÇce in Pennsylvania, where 65 of its employees work, will be shut down once this process is complete. Management is in the process of formalizing an exit and integration plan and...

  • Page 140
    ... been restated to reÃ-ect our acquisition Half.com in July 2000, which was accounted for as a pooling of interests. Quarterly Financial Data (unaudited, in thousands, except per share amounts) March 31 Quarter Ended June 30 September 30 December 31 2000 Net revenues Gross proÃ't Net income Net...

  • Page 141
    ... amounts have been adjusted to reÃ-ect the correction of previously calculated pro forma option pricing and amortization amounts. These adjustments are limited to the footnote disclosure of non-cash SFAS No. 123, ""Accounting for Stock-Based Compensation'' pro forma expense and do not result in any...

  • Page 142
    ... Schedule II ÃŒ VALUATION AND QUALIFYING ACCOUNTS is Ã'led as part of this Form 10-K. Balance at Beginning of Period Charged to Expense Charged to Charges Other Utilized/ Account Write-oÃ...s (in thousands) Balance at End of Period Allowance for Doubtful Accounts and Authorized Credits Year ended...

  • Page 143
    ...Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California, on the 31st day of March, 2003. eBay Inc. /s/ MARGARET C. WHITMAN Margaret C. Whitman President, Chief Executive OÇcer and Director POWER OF...

  • Page 144
    ...ect the registrant's ability to record, process, summarize and report Ã'nancial data and have identiÃ'ed for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a signiÃ'cant role in...

  • Page 145
    ...ect the registrant's ability to record, process, summarize and report Ã'nancial data and have identiÃ'ed for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a signiÃ'cant role in...