eBay 2003 Annual Report Download

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To our Stockholders, Partners, Employees and the eBay Community
A Dedicated Community
eBay's global community of buyers and sellers amazed and inspired us in 2003. Not only did the
community grow by more than 33 million people during the year, but it demonstrated more passion for
trading than ever before. The community's drive and determination continued to build an ever more
dynamic and robust marketplace. By creating opportunity for millions of people, eBay's community is
changing the way commerce is done around the world.
Every day men and women around the world Ñnd new ways to take advantage of the eBay
marketplace. As a result, there are as many stories on eBay as there are members. An Ohio expert on 3D
viewers uses eBay to Ñnd rare models and vintage reels. A traveling salesman in Cape Cod sets up a
company selling high-end sneakers in order to stay home with his wife and young children. An
unemployed couple in Arkansas build a family business through selling art prints. A Minnesota farmer
searches eBay to Ñnd used farm equipment at a discount. A young man in Hong Kong turns his passion
for toy cars into a global trading business. These members, and millions more like them, are pursuing their
dreams and Ñnding new kinds of success with eBay.
Building a Company to Last
As the community has grown, the eBay marketplace has expanded and the business has become
stronger. Ninety-Ñve million users from more than 150 countries listed 971 million items on eBay last year.
The total value of goods sold on the site, which is called gross merchandise sales (or GMS), reached
nearly $24 billion, a 60% increase from 2002. At the same time, usage of PayPal, the company's online
payment service, also grew, demonstrating the convenience and value it brings to online trading. Total
PayPal accounts almost doubled to 40 million in 2003, driving 230 million transactions and total payment
volume of more than $12 billion, up 73% for the year.
As a result of this activity, 2003 was another year of signiÑcant revenue growth for eBay. Strong gross
merchandise sales and total payment volume drove 2003 consolidated net revenue past $2 billion for the
Ñrst time in our history, to $2.17 billion for the full year. It took eight years for eBay to reach $1 billion in
annual revenue. Just one year later, this amount has doubled.
There is no question that eBay is a fast growing company. To support this rapid growth and to lay the
groundwork for continued growth in the future, we increased our investment in key parts of the business in
2003. These strategic investments were made in product development, technology infrastructure, customer
support, Trust & Safety, and PayPal. Investing in these areas will help make eBay and PayPal even faster,
easier and safer to use, which will in turn allow our members to become even more successful.
Even though we made signiÑcant investments in 2003, we also delivered increasing proÑt and cash
growth. Net income grew to a record of $442 million, up 77% in 2003, resulting in record operating cash
Öows of $874 million, up 82%, and record free cash Öows of $509 million, up 49%.1 This helped us end the
year with an even stronger balance sheet consisting of $5.8 billion in total assets and $2.7 billion in cash
and investments.
Creating a healthy and Ñnancially sound company is crucial for our community. Because so many
people around the world depend on eBay for their hobbies and even their livelihoods, we feel we have a
responsibility to maintain a safe and reliable place for them to trade. As a result, we are committed to
building a company to last.
Our Future
Based on the growth we have seen over the past year, and the untapped potential that lies ahead, the
company's future looks very bright.
As we did in 2003, we will continue to invest in key growth areas of the business throughout 2004. In
Asia and Europe, we will invest in technology, marketing, and product development capacity. For PayPal,
(1) eBay deÑnes free cash Öows as operating cash Öows less purchases of property and equipment, which in
2003 were $874 million and $365 million, respectively.

Table of contents

  • Page 1
    ... users from more than 150 countries listed 971 million items on eBay last year. The total value of goods sold on the site, which is called gross merchandise sales (or GMS), reached nearly $24 billion, a 60% increase from 2002. At the same time, usage of PayPal, the company's online payment service...

  • Page 2
    ... new international markets, while further investing in technology and infrastructure in the U.S. And, in eBay's North American business, we will continue to give our members more online tools that help them pursue their own success. A year of investment does not mean, however, a year of lower pro...

  • Page 3
    ... market value of the voting stock held by non-aÇliates, computed by reference to the closing price for the common stock as quoted by the Nasdaq National Stock Market as of that date and based upon information provided by stockholders on Schedules 13D and 13G Ã'led with the Securities and Exchange...

  • Page 4
    ... and easy-to-use online service that is available 24-hours a day, seven-days a week, enabling sellers to list items for sale in either auction or Ã'xed-price formats, buyers to bid for and purchase items of interest, and all eBay users to browse through listed items from any place in the world...

  • Page 5
    ... using our global payments platform, which is available in 38 countries around the world. PayPal was acquired by eBay in October 2002 and is now located in San Jose, California. Our Community Our community of users is the largest and one of the most loyal online trading communities on the Internet...

  • Page 6
    ...at addressing markets of new and scarce goods, end-of-life products and used and vintage items. Our global payments platform also makes online trading more eÇcient compared to traditional payment methods such as checks, money orders, and credit cards via merchant accounts. These traditional payment...

  • Page 7
    ... By focusing development, marketing and customer support eÃ...orts around major categories, we achieved greater than 27% year-over-year growth in gross merchandise sales in all of our major categories and increased the number of global categories under which eBay users can list goods for sale, to more...

  • Page 8
    ... 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 speciÃ'c items by browsing through a list of items within a category...

  • Page 9
    ... sellers a free checkout feature that provides a consistent process for exchanging payment and other details at a listing's end. This process helps sellers get paid faster and reduces the number of emails between buyers and sellers. Under the terms of eBay's user agreement, if a seller receives one...

  • Page 10
    ... and conditions of these services. Other eBay 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, online text chat and, in...

  • Page 11
    ..., eBay buyers and sellers can exchange funds by the payment method of their choice, most frequently through our PayPal global payments platform, but in some cases using check, money order or merchant credit card accounts. PayPal enables any business or consumer with email to send and receive online...

  • Page 12
    ... account sign-up process asks each new user to provide PayPal his or her name, street address, phone number, and email address. The user's email address serves as the unique account identiÃ'er. Making Payments Senders make payments at the PayPal website, at an item listing on eBay or another online...

  • Page 13
    ... check. Qualifying PayPal business users in the U.S. can receive a PayPal ATM/debit card, which provides instant liquidity to their respective PayPal account balances. ATM/debit card holders can withdraw cash, for a $1.00 fee per transaction, from any ATM connected to the Cirrus or Maestro networks...

  • Page 14
    ... required capitalization of certain site-related software and development costs, totaled $82.0 million in the year ended December 31, 2001, $120.1 million in 2002 and $197.8 million in 2003. Our inability to upgrade our technology, transaction processing systems, security infrastructure, or network...

  • Page 15
    ... for those new oÃ...erings. We also compete on the basis of price, product selection, and services. For our PayPal service, our users may choose to pay through a variety of alternative means, including other online payment services, oÉine payment methods such as cash, check or money order, and...

  • Page 16
    ...broader base of mainstream users and as the size of our European operations, which experience greater seasonality, grows relative to our other operations. Intellectual Property We regard the protection of our trademarks, copyrights, patents, domain names, trade dress and trade secrets as critical to...

  • Page 17
    .... ITEM 2: PROPERTIES We own and lease various properties in the United States and in 16 other countries around the world. We use the properties for corporate, administrative, customer support and other general business needs. Our corporate headquarters are located in San Jose, California. Our...

  • Page 18
    ... California state court actions were consolidated and stayed. All of the complaints named as defendants PayPal and each member of its board of directors as well as eBay. The complaints were purported class actions that alleged that, among other things, eBay controlled PayPal prior to the execution...

  • Page 19
    ... of the card in a Ã'nancial transaction. In September 2003, PayPal Ã'led a complaint against Bank One Corp., Bank One Delaware's parent, in the same district court alleging infringement of a PayPal patent relating to a process that allows Internet users to make secure payments and authenticated...

  • Page 20
    PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Price Range of Common Stock Our 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 bid ...

  • Page 21
    ...Consolidated Statement of Income Data: Net revenues Cost of net revenues Gross proÃ't Operating expenses: Sales and marketing Product development General and administrative Patent litigation expense Payroll tax on employee stock options ÏÏ Amortization of acquired intangible assets Merger...

  • Page 22
    ...2003 Year Ended December 31, 2001 2002 (in millions) Supplemental Operating Data: U.S. and International Segments: ConÃ'rmed registered users Active users(1)(2 Number of items listed Gross merchandise sales Payments Segment(3): Total accounts Active accounts Number of payments Total payment...

  • Page 23
    ...-use environment to browse, buy and sell an enormous variety of items. Through our PayPal service, we enable any business or consumer with email to send and receive online payments securely, conveniently and cost-eÃ...ectively. Executive Operating and Financial Summary Members of our senior management...

  • Page 24
    ... information summarized above as well as the changes in our results of operations from year to year, the primary factors that accounted for those changes and how certain accounting principles, policies, judgments, and estimates aÃ...ect our Consolidated Financial Statements. Business Combinations...

  • Page 25
    ... of Operations The following table sets forth, for the periods presented, certain data from our consolidated statement of income as a percentage of net revenues. This information should be read in conjunction with ""Critical Accounting Policies, Judgments and Estimates'' as well as our Consolidated...

  • Page 26
    ... other services in our U.S., International and Payments segments. Transaction net revenues are derived primarily from listing, feature and Ã'nal value fees paid by sellers and fees from payment processing services. Net revenues from advertising are derived principally from the sale of online banner...

  • Page 27
    ... in all markets. We expect that International segment transaction net revenues will continue to grow in signiÃ'cance to our business as we continue to develop and deploy our global online trading platform during 2004. On July 1, 2003, eBay began collecting value-added taxes, or VAT, on the fees we...

  • Page 28
    ... our customer support and site operations infrastructure. The increase in cost of net revenues as a percentage of net revenues was primarily due to the impact of PayPal's higher structural costs relating to payment processing oÃ...set, in part, by eBay's site operations costs growing at a slower rate...

  • Page 29
    ... was primarily due to the oÃ...setting impacts of PayPal's higher structural costs relating to payment processing and eBay's cost savings as site operations costs grew at a slower rate than net revenues. Payment processing costs, which consist of credit card interchange fees, bank charges, and other...

  • Page 30
    ... and facilities related costs resulted from the addition of PayPal employees in various trust and safety functions as well as continued headcount growth in the Ã'nance, human resource and legal departments to meet the demands of our expanding business, including growing international operations and...

  • Page 31
    ... 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 include purchased customer lists, trademarks and tradenames, developed technologies, and...

  • Page 32
    ... (48)% 2002 $1,492 0% Percent Change 189% 2003 $4,314 0% (in thousands, except percent changes) Interest expense consists of interest charges on mortgage notes, capital leases and our consolidated operating lease arrangement related to our San Jose corporate headquarters. In January 2003, the FASB...

  • Page 33
    ... statement reÃ-ects the reclassiÃ'cation of lease payments on our San Jose headquarters from operating expense to interest expense. The increase in interest expense in 2003, is primarily the result of this new accounting standard. We expect our interest expense will increase in absolute dollars...

  • Page 34
    ... include Euros, British Pounds, Korean Won, Canadian Dollars and Australian Dollars. The results of operations and certain of our intercompany balances associated with our international locations are exposed to foreign exchange rate Ã-uctuations. The income statements of our international operations...

  • Page 35
    ...doubtful accounts and authorized credits resulting from increasing revenues, provision for transaction losses resulting from increased total payment volumes processed by our PayPal subsidiary and other costs. In 2001, operating cash Ã-ows were partially oÃ...set by cash used to support working capital...

  • Page 36
    ... oÇce space in San Jose, California. Purchases of property and equipment in 2003 also included amounts for improvements to various facilities in the U.S. and around the world as well as computer equipment and software to support our site operations, customer support and international expansion. We...

  • Page 37
    ... change in our headcount needs requires us to exit an oÇce facility early or expand our occupied space. Other purchase obligation amounts include minimum purchase commitments for advertising, computer equipment, software applications, engineering development services and other goods and services...

  • Page 38
    ... who accept payment through PayPal. We establish 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...

  • Page 39
    ... and other current liabilities in our consolidated balance sheet. The following table illustrates the provision for transaction loss expense as a percentage of total payment volume from PayPal operations for the period from October 3, 2002 through December 31, 2002 and for the year ended December 31...

  • Page 40
    ... in our income statement. Where the change in the valuation allowance relates to the deduction for employee stock option exercises, the change is reÃ-ected as a credit to additional paid-in capital. As employee stock option exercises are highly dependent upon our stock price, it is extremely...

  • Page 41
    ... and Other Non-Transaction Revenues A portion of our net revenues result from fees associated with advertising and other non-transaction services in our U.S., International and Payments segments. Net revenues from advertising are derived principally from the sale of online banner and sponsorship...

  • Page 42
    ... by items listed, sold, or paid for by our users; ‚ our ability to comply with the requirements of entities whose services are required for our operations, such as credit card associations; ‚ the success of our geographic and product expansion; ‚ the introduction of new sites, services, and...

  • Page 43
    ... proÃ'tability at historical levels will depend in large part on our ability to do the following: ‚ attract new users and keep existing users active on our websites; ‚ manage the costs of our business, including the costs associated with maintaining and developing our websites, customer support...

  • Page 44
    ... or prevent the oÃ...ering of eBay's and PayPal's services in some jurisdictions, prevent enforceable agreements between sellers and buyers, prohibit the listing of certain categories of goods, require special licensure, or limit the transfer of information between eBay and our aÇliates; ‚ legal...

  • Page 45
    ... transactions will result in increased net revenues, operating expenses, and net income. The change in weighted average foreign currency exchange rates in 2003 relative to the comparable rates used in preparation of our consolidated 2002 Ã'nancial statements resulted in an increase in net revenue...

  • Page 46
    ... to provide eÃ...ective customer support to process disputes between senders and recipients; ‚ potential breaches of system security; ‚ potential employee fraud; and ‚ use of PayPal's system by customers to make or accept payment for illegal or improper purposes. For the year ended December 31...

  • Page 47
    ...Ã'cant. eBay periodically receives complaints from users who did not receive the purchase price or the goods that were to have been exchanged. In some cases individuals have been arrested and convicted for fraudulent activities using our websites. While eBay can suspend the accounts of users who...

  • Page 48
    ... using the PayPal service. 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 may increase the interchange fees that they charge for each transaction...

  • Page 49
    ...service might constitute an unauthorized banking business. PayPal has taken steps to address these states' concerns and received a conclusion in 2002 from the New York Banking Department that its current business model does not constitute illegal banking. PayPal also has obtained licenses to operate...

  • Page 50
    ...these countries could aÃ...ect PayPal's future proÃ'tability. PayPal currently allows its customers with credit cards to send payments from 37 countries outside the U.S., and to receive payments in 32 of those countries. In 22 of these countries, customers can withdraw funds to local bank accounts. In...

  • Page 51
    ... laws and regulations could cover issues such as user privacy, freedom of expression, pricing, fraud, content and quality of products and services, taxation, advertising, intellectual property rights, and information security. Applicability to the Internet of existing laws governing issues such as...

  • Page 52
    ...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 senders fund payment transactions using credit...

  • Page 53
    ... complete this project or grow our transaction-processing capabilities to accommodate the increasing number of transactions that must be billed would harm our ability to collect revenue and our business. We must continue to hire, train, and manage new employees at a rapid rate. If our new...

  • Page 54
    ... uses to verify the identity of its customers and to monitor more closely international transactions. These regulations could impose signiÃ'cant costs on PayPal and make it more diÇcult for new customers to join its network. PayPal could be required to learn more about its customers before opening...

  • Page 55
    ... of the card in a Ã'nancial transaction. In September 2003, PayPal Ã'led a complaint against Bank One Corp., Bank One Delaware's parent, in the same district court alleging infringement of a PayPal patent relating to a process that allows Internet users to make secure payments and authenticated...

  • Page 56
    ..., AT&T Corporation Ã'led a lawsuit against eBay and PayPal in the U.S. District Court for the District of Delaware (No. 03-1051) alleging infringement of a patent entitled ""Mediation of Transactions by a Communication System.'' AT&T claims that PayPal's and Billpoint's payment services infringe its...

  • Page 57
    ... 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 breaches of their security...

  • Page 58
    ... environment, 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 and...

  • Page 59
    ... 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 eÃ...ective management, and the lack...

  • Page 60
    ... stock price during 2002. 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 in the past and may in the future depress our stock price regardless of our results. Other broad market...

  • Page 61
    ... that prevent these companies from providing services to our users could reduce the number of listings on our websites or make completing transactions on our websites more diÇcult, and thereby harm our business. Any security breach at one of these companies could also aÃ...ect our customers and harm...

  • Page 62
    ... are increasingly acquiring new customers by paying for search-related advertisements on search engine sites. We use product search engines and paid search advertising to channel users to our sites, but these services also have the potential to divert users to other online shopping destinations. We...

  • Page 63
    ... antique and collectible dealers, antique and collectible fairs, Ã-ea markets and swap meets, specialty retailers, regional auction houses Sporting Goods/Equipment: Amazon.com, Bass Pro Shops, Big 5, Cabela's, Dick's Sporting Goods, GSI Commerce, GolfClubExchange.com, Performance Bike, Play It Again...

  • Page 64
    ... time to time, make pricing, service or marketing decisions or acquisitions that could harm our business. For example, we have implemented a buyer protection program that generally insures items up to a value of $200, with a $25 deductible, for users with a non-negative feedback rating at no cost to...

  • Page 65
    ... methods, particularly credit cards, checks, money orders, and Automated Clearing House transactions. Some of these competitors have longer operating histories, signiÃ'cantly greater Ã'nancial, technical, marketing, customer service and other resources, greater name recognition, or a larger base...

  • Page 66
    ... Internet, networking, or telecommunications technologies or other technological changes could require us to make substantial expenditures to modify or adapt our services or infrastructure. We need to develop new services, features and functions in order to expand. We plan to expand our operations...

  • Page 67
    ...the value of these properties, due to interest rate changes, changes in the neighborhoods in which the properties are located, or other factors; ‚ the possible need for structural improvements in order to comply with zoning, seismic, disability act, or other requirements; and ‚ possible disputes...

  • Page 68
    ... 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 other comprehensive income (loss...

  • Page 69
    ... Ã'nancial statements into the U.S. dollars will lead to a translation gain or loss. Translation exposure is the change in the book value of assets, liabilities, revenues, and expenses that results from changes in foreign currency exchange rates. From time to time we enter into transactions to hedge...

  • Page 70
    ... 49 Founder, Chairman of the Board and Director President, Chief Executive OÇcer and Director Senior Vice President, Technology Senior Vice President and General Manager, Global Online Payments Senior Vice President and General Manager, eBay International Senior Vice President and Chief Financial...

  • Page 71
    ... and Investor Relations. From July 1998 to August 1999, Mr. Dutta served as eBay's Finance director. From February 1998 to July 1998, Mr. Dutta served as the World Wide Sales Controller of KLA-Tencor, a manufacturer of semiconductor equipment. Prior to KLA-Tencor, Mr. Dutta spent ten years, from...

  • Page 72
    ... and related software, since March 1996. Prior to joining Apple, Mr. Anderson was Corporate Vice President and Chief Financial OÇcer of Automatic Data Processing, Inc., an electronic transaction processing Ã'rm, from August 1992 to March 1996. Mr. Anderson also serves on the board of directors of...

  • Page 73
    ... from the University of Southern California and an M.B.A. degree from the Harvard Business School. Robert C. Kagle has served as a director of eBay since June 1997. Mr. Kagle has been a Member of Benchmark Capital, the General Partner of Benchmark Capital Partners, L.P. and Benchmark Founders' Fund...

  • Page 74
    ... on our website at http://investor.ebay.com/corp-gov.cfm. Section 16(a) BeneÃ'cial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires our directors, executive oÇcers, and holders of more than 10% of our common stock to Ã'le reports regarding their ownership and changes in...

  • Page 75
    ... 2002 for services rendered in 2001. (3) Represents: (i) in the case of Ms. Whitman for 2003, her personal use of eBay's corporate aircraft, which is valued at rates prescribed under applicable IRS regulations; (ii) in the case of Ms. Whitman for 2002, her personal use of eBay's corporate aircraft...

  • Page 76
    ... refer to as the 2001 Plan. Option Grants During 2003 Number of Securities Underlying Options Granted(1) Percentage of Total Options Granted to Employees During 2003(2) Exercise Price Per Share(3) Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term(4) 5% 10...

  • Page 77
    ...2003 Deferred Stock Unit Plan. DSUs represent an unfunded, unsecured right to receive shares of eBay common stock (or the equivalent value thereof in cash or property), and the value of DSUs varies directly with the price of eBay's common stock. Each DSU award granted to a non-employee director upon...

  • Page 78
    ... and its Compensation Committee and the board of directors or compensation committee of any other company, nor has such interlocking relationship existed in the past. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information known to...

  • Page 79
    ... Manager, Global Online Payments. Includes 219,582 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. Mr. Cobb is our Senior Vice President and General Manager, eBay...

  • Page 80
    (14) The address for Mr. Tierney is c/o Bain & Company, 131 Clarendon Street, Boston, MA 02116 (15) Includes 7,021,702 shares subject to options exercisable within 60 days. Equity Compensation Plan Information The following table gives information about our shares of common stock that may be issued ...

  • Page 81
    ..., options to purchase 845,000 shares remain outstanding under the Non-Plan Grant. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS We have entered into indemniÃ'cation agreements with each of our directors and executive oÇcers. These agreements require us to indemnify such individuals, to...

  • Page 82
    .... 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. In addition, the terms of the...

  • Page 83
    ... use was not material to our Consolidated Financial Statements. 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...

  • Page 84
    ... during a quarter in the appropriate quarterly report on Form 10-Q or annual report on Form 10-K. Our Audit Committee approved one non-audit engagement during the quarter ended December 31, 2003, relating to the provision by PwC of due diligence review services in connection with a potential...

  • Page 85
    ... 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 86
    ...'s 2001 Equity Incentive Plan. Registrant's 1998 Directors Stock Option Plan. Registrant's 2003 Deferred Stock Unit Plan. Registrant's Amended and Restated 1998 Employee Stock Purchase Plan. Registrant's 1999 Global Equity Incentive Plan, as amended. Employment Letter Agreement dated January 16...

  • Page 87
    ... results for the three months ended September 30, 2003 and that such press release contained non-GAAP Ã'nancial measures under Regulation G. (c) See the Exhibits listed under Item 15(a)(3) above. (d) The Ã'nancial statement schedules required by this item are listed under Item 15(a)(2) above. 85

  • Page 88
    ... material respects, the information set forth therein when read in conjunction with the related Consolidated Financial Statements. These Ã'nancial statements and the Ã'nancial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these...

  • Page 89
    eBay Inc. CONSOLIDATED BALANCE SHEET (in thousands, except per share amounts) December 31, 2002 2003 ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net Funds receivable Other current assets Total current assets Long-term investments Restricted ...

  • Page 90
    ... STATEMENT OF INCOME (in thousands, except per share amounts) 2001 Year Ended December 31, 2002 2003 Net revenues Cost of net revenues Gross proÃ't Operating expenses: Sales and marketing Product development General and administrative Patent litigation expense Payroll tax on employee stock...

  • Page 91
    eBay Inc. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in thousands) Year Ended December 31, 2001 2002 2003 Net income Other comprehensive income (loss): Foreign currency translation adjustments Unrealized gains (losses) on investments Investment gain included in net income Unrealized gains ...

  • Page 92
    ... of year Issuance of common stock for cash and services Issuance of common stock for acquisitions Balance, end of year 538,500 11,662 4,356 554,518 554,518 20,056 47,980 622,554 622,554 26,739 Ì 649,293 The accompanying notes are an integral part of these Consolidated Financial Statements...

  • Page 93
    eBay Inc. CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) 2001 Year Ended December 31, 2002 2003 Cash Ã-ows from operating activities: Net income Adjustments to reconcile to net cash provided by operating activities: Cumulative eÃ...ect of accounting change Provision for doubtful accounts and ...

  • Page 94
    ... for sale, buyers to bid on items of interest, and all eBay users to browse through listed items in a fully-automated, topically-arranged service that is available online seven days a week. Through our PayPal service, we enable any business or consumer with email in 38 countries to send and receive...

  • Page 95
    ...accounts receivable are derived from revenue earned from customers located in the U.S. and internationally. 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...

  • Page 96
    ... transactions through external 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...

  • Page 97
    ...utilize our payment services to transfer money electronically over the Internet. Any stored value remaining from transactions in a customer's account represents a liability to the customer. Customers can elect to sweep their account balances into the PayPal Money Market fund to earn a rate of return...

  • Page 98
    eBay Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED) Custodial accounts We deposit all U.S.-based customer funds not transferred to PayPal's Money Market Fund into Federal Deposit Insurance Corporation, or FDIC, insured bank accounts. FDIC insurance is available to U.S. based PayPal ...

  • Page 99
    ... Kruse International. ButterÃ'elds auction revenues were derived primarily from auction commissions and fees from the sale of property through the auction process. Revenues from seller commissions and buyer premiums were recognized at the date the related auction was concluded. Service revenues were...

  • Page 100
    eBay Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED) value of option grants and stock grants under our employee stock purchase plan as an expense would have substantially reduced our net income, as follows (in thousands, except per share amounts): Year Ended December 31, 2001 2002 ...

  • Page 101
    ...and buildings totaling $126.4 million, lease obligations of $122.5 million and non-controlling minority interests of $3.9 million. Our consolidated income statement for year ended December 31, 2003, reÃ-ects the reclassiÃ'cation of lease payments on our San Jose corporate headquarters from operating...

  • Page 102
    ... FINANCIAL STATEMENTS ÃŒ (CONTINUED) The following table sets forth the computation of basic and diluted net income per share for the periods indicated (in thousands, except per share amounts): Year Ended December 31, 2001 2002 2003 Numerator: Income before cumulative eÃ...ect of accounting change...

  • Page 103
    ... 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 104
    ...100% interest in PayPal, 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...

  • Page 105
    ... CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED) days surrounding the July 8, 2002 acquisition announcement date. Total purchase price comprised of the following (in thousands): Fair value of eBay common stock issued Fair value of PayPal stock options assumed by eBay Estimated acquisition related...

  • Page 106
    ... Net revenues Net income Net income per share: Basic Diluted 852,536 $ 15,328 $1,377,771 $ 240,264 $ $ 0.02 0.02 $ $ 0.39 0.38 The pro forma Ã'nancial information does not necessarily reÃ-ect the results of operations that would have occurred had eBay and PayPal constituted a consolidated...

  • Page 107
    ...of customer lists, trademarks and trade names, developed technologies, and other acquired intangible assets including patents and contractual agreements. IdentiÃ'able intangible assets are amortized using the straight-line method over weighted average periods of seven years for customer lists, seven...

  • Page 108
    ... control, 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 currently have discretionary control, such as site operations 106 $ 90,448...

  • Page 109
    ... costs of net revenues Income from operations Interest and other income, net Interest expense Impairment of certain equity investments ÏÏ Income before income taxes and minority interest 617,011 246,664 370,347 Year Ended December 31, 2001 International Payments Consolidated $114,162 63...

  • Page 110
    eBay Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED) Year Ended December 31, 2003 International Payments Consolidated $664,640 257,888 406,752 $437,622 243,179 194,443 $2,165,096 890,443 1,274,653 645,412 629,241 37,803 (4,314) (1,...

  • Page 111
    eBay Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ÃŒ (CONTINUED) Note 5 ÃŒ Investments: At December 31, 2002 and 2003, short and long-term investments were classiÃ'ed as available-for-sale securities, except for restricted cash and investments, and are reported at fair value as follows (in ...

  • Page 112
    ..., in exchange for making Ã'xed rate payments of approximately 7% of the notional amount, which eÃ...ectively changes our interest rate exposure on our operating lease from a Ã-oating rate to a Ã'xed rate on $95 million of the total $126.4 million notional amount of our corporate headquarters facility...

  • Page 113
    ... Ã'nancial statements into the U.S. dollars will lead to a translation gain or loss. Translation exposure is the change in the book value of assets, liabilities, revenues, and expenses that results from changes in foreign currency exchange rates. From time to time we enter into transactions to hedge...

  • Page 114
    ...and buildings during the year ended December 31, 2003, resulted primarily from the inclusion of our San Jose corporate headquarters facilities lease in our Consolidated Financial Statements, totaling $126.4 million and the acquisition of additional facilities located in San Jose, California totaling...

  • Page 115
    ... for the corporate headquarters in San Jose, California. See ""Note 17 Ì Subsequent Events.'' The future lease payments through March 2005 under this lease arrangement are included within our obligations under operating leases. See ""Note 9 Ì Operating Lease Arrangements.'' We also maintain credit...

  • Page 116
    ...): Year ending December 31, Operating Leases 2004 2005 2006 2007 2008 Thereafter Total minimum lease payments $ 22,765 17,556 11,693 9,724 9,661 44,361 $115,760 Lease payments related to our corporate headquarters in San Jose, California are estimated based on market interest rates...

  • Page 117
    eBay Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ÃŒ (CONTINUED) damages for willful infringement). In October 2002, the court granted in part our summary judgment motion, eÃ...ectively invalidating the patent related to online auction technology and rendering it unenforceable. This ruling left ...

  • Page 118
    ... of the card in a Ã'nancial transaction. In September 2003, PayPal Ã'led a complaint against Bank One Corp., Bank One Delaware's parent, in the same district court alleging infringement of a PayPal patent relating to a process that allows Internet users to make secure payments and authenticated...

  • Page 119
    .... Commercial agreements A member of our Board of Directors and the Audit and Compensation Committees of our Board of Directors, is a general partner of certain venture capital funds that beneÃ'cially hold in the aggregate a greater than 10% equity interest in several public and private companies. We...

  • Page 120
    ... sales agreement with a company that provides order management and fulÃ'llment solutions. Under this agreement, such company agreed to list its inventory on Half.com's website and to allow Half.com to use such company's catalog data to supplement Half.com's existing catalog data. Half.com paid...

  • Page 121
    ... purchase plan. Our employee stock purchase plan contains an ""evergreen'' provision that automatically increases, on each January 1, the number of shares reserved for issuance under the employee stock purchase plan by the number of shares purchased under this plan in the preceding calendar year...

  • Page 122
    ... following table summarizes information about Ã'xed stock options outstanding at December 31, 2003 (shares in thousands): Options Outstanding at December 31, 2003 Weighted Weighted Number of Average Average Shares Remaining Exercise Outstanding Contractual Life Price Options Exercisable at December...

  • Page 123
    ...summarizes additional stock option information related to grants made to our employees and grants made speciÃ'cally to named oÇcers, which include our chief executive oÇcer and the other four most highly compensated oÇcers during the year (in thousands, except percentages): Year Ended December 31...

  • Page 124
    eBay Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED) Note 16 Ì Income Taxes: The components of income including minority interest in consolidated companies and equity interest in partnership income before income taxes, for the years ended December 31, 2001, 2002 and 2003 are as ...

  • Page 125
    ... 35% for 2001, 2002, and 2003 to income before income taxes (in thousands): Year Ended December 31, 2001 2002 2003 Provision at statutory rate Permanent diÃ...erences: Foreign income taxed at diÃ...erent rates Acquisition related expenses Change in valuation allowance Subsidiary loss not beneÃ'ted...

  • Page 126
    ... entered into an agreement with mobile.de to acquire all of its outstanding shares for 121 million Euros (approximately $153 million at the January 26, 2004 exchange rate), subject to certain closing adjustments, plus acquisition costs. mobile.de is a classiÃ'eds website for vehicles in Germany. The...

  • Page 127
    ... June 30 September 30 2003 Net revenues Gross proÃ't Income before cumulative eÃ...ect of accounting change Cumulative eÃ...ect of accounting change, net of tax ÏÏÏ Net income Net income per share-basic Net income per share-diluted Weighted-average shares: Basic Diluted $476,492 $384,394...

  • Page 128
    ... statement 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...

  • Page 129
    ... to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the 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 5th day of March, 2004. eBay Inc...