eBay 2002 Annual Report Download - page 18

amendments to those reports as soon as reasonably practicable after we electronically Ñle or furnish such
materials to the U.S. Securities and Exchange Commission.
ITEM 2: PROPERTIES
On March 1, 2000, we entered into a Ñve-year lease for general oÇce facilities located in San Jose,
California. This Ñve-year lease is commonly referred to as a synthetic lease because it represents a form of
oÅ-balance sheet Ñnancing under which an unrelated third-party funds 100% of the costs of the acquisition
of the property and leases the asset to us as lessee. Under our lease structure, upon termination or
expiration, at our option, we must either purchase the property from the lessor for a predetermined amount
or sell the real property to a third party. Our San Jose lease consists of approximately 460,000 square feet
of oÇce space. As of December 31, 2002, we occupied approximately 314,000 square feet of this total
oÇce space and subleased additional space in the facility to third parties.
Payments under our lease are based on the $126.4 million cost of the property funded by the third
party and are adjusted as the London Interbank OÅered Rate, or LIBOR, Öuctuates. Under the terms of
the lease agreement, the lease terminates on March 1, 2005, unless extended to September 1, 2006. At any
time prior to the Ñnal 12 months of the lease term, we may, at our option, purchase the property for
approximately $126.4 million. If we elect not to purchase the property, we will undertake to sell the
facility to one or more third parties and have guaranteed to the lessor a residual value equal to
approximately 88% of the $126.4 million cost of the property. Our maximum exposure to loss is the entire
amount of $126.4 million if we default on any of certain lease obligations and Ñnancial covenants. If this
payment were made, we would then receive title to the property. At December 31, 2002, we had not made
a decision with respect to which option we will pursue at the end of the lease term. Management believes
that the contingent liability relating to the residual value guarantee will not have a material adverse eÅect
on our Ñnancial condition, results of operations or cash Öows. See ""Note 9 Ì Operating Lease
Arrangements'' and ""Note 6 Ì Derivative Instruments'' of the notes to our Consolidated Financial
Statements, which are incorporated by reference herein.
In January 2003, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation
No. 46, or FIN 46, ""Consolidation of Variable Interest Entities.'' This interpretation of Accounting
Research Bulletin No. 51, ""Consolidated Financial Statements,'' addresses consolidation by business
enterprises of certain variable interest entities where there is a controlling Ñnancial interest in a variable
interest entity or where the variable interest entity does not have suÇcient equity at risk to Ñnance its
activities without additional subordinated Ñnancial support from other parties. This interpretation applies
immediately to variable interest entities created after January 31, 2003 and applies in the Ñrst year or
interim period beginning after June 15, 2003 to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. We expect that the adoption of FIN 46 will
require us to include our San Jose facilities lease and potentially certain investments in our Consolidated
Financial Statements eÅective July 1, 2003. In connection with our San Jose facilities lease arrangement,
our balance sheet following the July 1, 2003 adoption of FIN 46 will reÖect changes to record assets of
$126.4 million, liabilities of $122.5 million and non-controlling interests of $3.9 million. In addition, our
post-adoption income statement will reÖect the reclassiÑcation of rent expense payments from operating
expenses to interest expense as well as the recognition of depreciation expense, within operating expenses,
for our use of the buildings. We estimate that the income statement impact of consolidating our San Jose
facilities lease will consist of a charge against earnings, net of taxes, of $5.6 million upon the adoption of
FIN 46 on July 1, 2003. This charge will reÖect the accumulated depreciation charges that would have
been recorded in previous periods had consolidation of the San Jose facilities been required. Additionally,
we have not decided whether we will keep the existing Ñnancing arrangement or purchase the San Jose
facilities. Whether or not we keep the existing Ñnancing arrangement, we anticipate recording additional
annual operating expenses of $1.7 million, net of taxes, for the recognition of depreciation expense on the
buildings. In the event we purchase the San Jose facilities, we will also pay $126.4 million, eliminate
Ñnancing payments and settle our two interest rate swaps we used to establish a Ñxed rate of interest for
$95 million of our Ñnancing arrangement. During the year ended December 31, 2002, our Ñnancing
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