eBay 2004 Annual Report Download

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To our Stockholders, Partners, Employees and the eBay Community
A Global Community Ì 10 Years Old
eBay is an extraordinary company. During the past 10 years Ì the company's Ñrst decade Ì eBay has
revolutionized the way people shop and trade. Before eBay came along very few people had ever experienced
an auction. eBay has introduced millions of people to a whole new trading format Ì a format based on the
fairness inherent in natural market dynamics and the good we Ñnd in our friends and neighbors.
Perhaps more importantly, eBay has empowered millions of people to pursue their dreams of economic
and entrepreneurial success. And that success has had an even deeper social impact. After all, the eBay
platform is built on trust. The millions of successful transactions that take place on the site each day are a
testament to the fact that people, when left to their own devices, almost always do the right thing. Every
successful eBay transaction validates two people's beliefs in the good of others. In our world, that is a very
powerful achievement.
eBay thrived in 2004 because our global community of buyers and sellers unleashed their passion for
trading. Our community grew to 135 million registered users worldwide, with more and more people
recognizing the many opportunities available to them through eBay. Small business on eBay really came into
its own in 2004. Early in the year, we discovered through our research that more than 430,000 users in the
United States make all or some of their livelihoods through selling on the site.
The ingenuity and creativity of our users, no matter where they are, is inspiring. A mother of six in
Germany started a business selling kitchen products on eBay, and now teaches others in her isolated
community how to use the site to make extra money. A man in China who always dreamed of starting his own
business now sells coins and stamps from his home in Shanghai to buyers around the world. A radio collector
in Colorado has purchased more than 1,300 radios on eBay, fulÑlling his passion to own one of the world's
most comprehensive radio collections. And a Utah restaurateur purchased the majority of the equipment for
his family-owned restaurant on eBay at a savings that allowed him to start his business much sooner than
expected. These stories, and millions more just like them, convince us that eBay is the best place to buy and
sell online.
A Fast Growing Company
Thanks to our community's success, eBay experienced exceptional growth across every part of the
business in 2004. The eBay community listed more than 1.4 billion items last year, a 45% increase from 2003.
This increase in listings led to gross merchandise volume or GMV, which is the value of all successfully closed
listings on eBay, of $34.2 billion in 2004, up from $23.8 billion in 2003. As a result, 2004 net revenues reached
nearly $3.3 billion, a jump of 51% over the prior year.
eBay achieved new milestones in 2004. Operating proÑt grew more than 68%, reaching well over one
billion dollars for the Ñrst time in eBay's history. This proÑt growth translated directly into cash Öows, with
operating cash Öows also breaking the one billion dollar mark for the Ñrst time ever and free cash Öows1
growing by more than 95% to $992 million. eBay ended 2004 with more than $7.9 billion in total assets,
including nearly $3.4 billion in cash and investments, which gives us the Ñnancial Öexibility to reinvest in the
business. Few ten year old companies can deliver these types of results.
2004 was also a year of expansion for eBay. In India, we acquired Baazee.com, which allowed us to enter
a very young but promising Internet market. We launched two new sites of our own in the Philippines and
Malaysia, and consolidated our ownership of Internet Auction Company in Korea, our third largest market
outside the U.S. In the U.S., we announced the acquisition of Rent.com, the leading transaction-based website
for apartment rentals, which closed in early 2005. We believe Rent.com will complement our own real estate
category and provide for additional growth in this area. With the acquisition of mobile.de in Germany and
Marktplaats.nl in the Netherlands, as well as our equity investment in craigslist.org, we took important Ñrst
1eBay deÑnes free cash Öows as operating cash Öows less purchase of property and equipment, which in
2004 were $1.3 billion and $293 million, respectively.

Table of contents

  • Page 1
    ... ownership of Internet Auction Company in Korea, our third largest market outside the U.S. In the U.S., we announced the acquisition of Rent.com, the leading transaction-based website for apartment rentals, which closed in early 2005. We believe Rent.com will complement our own real estate category...

  • Page 2
    ... already the most visited Ã'nancial services website in the U.S. and the United Kingdom. eBay communities around the world have enthusiastically welcomed PayPal. In the last two years, we have localized in 10 countries. Today, users from 45 countries can use their PayPal account as buyers. In 23 of...

  • Page 3
    ...) 2145 Hamilton Avenue San Jose, California (Address of principal executive oÇces) 95125 (Zip Code) (Registrant's telephone number, including area code) (408) 376-7400 Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934: None Securities registered pursuant to...

  • Page 4
    ... 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 at any time. The platform includes software tools and services, available...

  • Page 5
    ... customer support boards and personal pages, as well as other topical or category-speciÃ'c information exchanges. By applying a consistent set of policies and fees to our community, we have created a level playing Ã'eld that lets individuals and businesses of all types and sizes access broad markets...

  • Page 6
    ...for opening bids, with the option to set a reserve price for the item, which is the minimum price at which the seller is willing to sell the item. In addition, a seller with appropriate feedback ratings can also choose to use the Buy-It-Now feature at the time of the listing, which allows sellers to...

  • Page 7
    ... color-coded star symbols displayed next to their user name to indicate the number of positive feedback ratings they have received. Before bidding on items listed for sale, eBay users are encouraged to review a seller's feedback proÃ'le to check his or her reputation within the eBay community. The...

  • Page 8
    ... qualiÃ'ed purchases are eligible for up to $1,000 coverage. 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...

  • Page 9
    .... The About Me home page can include personal information, items listed for sale, eBay feedback ratings, images and links to other favorite sites. PayPal Global Payments Platform Our global payments platform, PayPal, enables any individual or business with an email address to securely, easily and...

  • Page 10
    ...four-digit code at the PayPal website. In addition to allowing funding through bank accounts, veriÃ'cation also removes some spending limits on users' accounts and gives them reputational advantages when transacting with other members of the PayPal community. Withdrawing Money Each account holder in...

  • Page 11
    ...with eBay listings and seeking to add product features important to the eBay community. During 2004, we added features such as PayPal Buyer Credit and payment for postage and shipment insurance through PayPal, we expanded the free coverage aÃ...orded to buyers under the PayPal Buyer Protection Program...

  • Page 12
    ...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 eBay platform also manages various notiÃ'cations for sellers and buyers, including daily status updates, bid...

  • Page 13
    ...item is listed, a feature is selected, or an auction closes with a bid in excess of the seller-speciÃ'ed minimum bid. The platform sends electronic invoices to all sellers at least monthly. In addition to these features, the eBay service supports a community bulletin board and chat areas where users...

  • Page 14
    ... of alternative means, including other online payment services, oÉine payment methods such as cash, check or money order, and traditional online or oÉine credit card merchant accounts. To compete eÃ...ectively, we may need to expend signiÃ'cant resources in technology and marketing. These eÃ...orts...

  • Page 15
    ... 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 costs, product development expenses...

  • Page 16
    ...Available Information Our Internet address is www.ebay.com. Our investor relations website is located at http://investor.ebay.com. We make available free of charge on our investor relations website under ""SEC Filings'' our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports...

  • Page 17
    ... in November 2004 and a preliminary trial date has been set for February 2006. The case is currently in fact discovery and claim construction discovery. We believe that we have meritorious defenses and intend to defend ourselves vigorously. In February 2002, PayPal was sued in California state court...

  • Page 18
    ...disputes is increasing as our business expands and our company grows larger. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require signiÃ'cant amounts of management time, and result in the diversion of signiÃ'cant operational resources. ITEM...

  • Page 19
    ..., RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 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 prices of...

  • Page 20
    ...-one stock split, eÃ...ective February 16, 2005. 2000 Year Ended December 31, 2001 2002(1) 2003 (In thousands, except per share amounts) 2004 Consolidated Statement of Income Data: Net revenues Cost of net revenues Gross proÃ't Operating expenses: Sales and marketing Product development General...

  • Page 21
    ...eBay We pioneered online trading by developing an Internet-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...

  • Page 22
    ... of international expansion for both our eBay Marketplace and our PayPal businesses, customer support, site operations, marketing and various corporate infrastructure areas. We believe these investments are necessary to support the long-term demands of our growing business as well as to build the...

  • Page 23
    ... in this Annual Report on Form 10-K. Year Ended December 31, 2002 2003 2004 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 Amortization...

  • Page 24
    ... the country in which the seller, payment recipient, advertiser or service provider is located. Our Payments segment net revenues include amounts earned internationally. 2000 Year Ended December 31, 2001 2002 2003 (In millions) 2004 Supplemental Operating Data: U.S. and International Marketplace...

  • Page 25
    ... all major categories, with the motors, clothing & accessories, consumer electronics, home & garden, books/movies/music, sports, and computer categories having the most signiÃ'cant dollar impact. The number of active users on the eBay platform increased 36% during 2004 to 56.1 million at December 31...

  • Page 26
    ... that the growth rates of our International Marketplace segment transaction net revenues will continue to decline in 2005, although we expect such revenues to grow in signiÃ'cance relative to our total eBay Marketplace as we continue to develop and deploy our global online trading platform during...

  • Page 27
    ... 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 than net revenues. Payment processing costs, which consist of credit card interchange fees, bank charges and other processing charges increased by...

  • Page 28
    ... print campaigns. Employee-related costs increased by $68.4 million in 2004 as we continued to expand our domestic and international operations. Sales and marketing expenses are expected to increase in total and as a percentage of net revenues during 2005. In addition, our 2005 online marketing...

  • Page 29
    ... in this percentage from 2003 to 2004 was oÃ...set in part by the increase in coverage for our PayPal Buyer Protection Program. With our continued investment, primarily in the expansion in our Marketplace and Payments segments, and related corporate functions, we expect general and administrative...

  • Page 30
    ... migration process and to allow additional time for quality assurance reviews. The delay in billing cycles continued for the remainder of the year and resulted in an increase in the average days our customer account balances were outstanding. Although we believe this change in account balance aging...

  • Page 31
    ...and Marktplaats.nl, as well as our additional investment in Internet Auction during 2004 and our recent acquisition of Rent.com. Amortization of acquired intangible assets will also increase should we make additional acquisitions in the future. Non-Operating Items Interest and Other Income, Net 2002...

  • Page 32
    ... oÃ...set by decreases resulting from foreign income with lower eÃ...ective tax rates, tax credits, and taxexempt interest income. The lower eÃ...ective tax rates in 2004 and 2003 as compared to the respective prior years reÃ-ect the increasing proÃ't contribution from our international operations that...

  • Page 33
    ... exchange rates from 2003, our net revenues for 2004 would have been lower than we reported using the actual exchange rates for 2004 by approximately $129.9 million, of which $117.0 million and $12.9 million relate to our International Marketplace and Payments segments, respectively. In addition...

  • Page 34
    ...on our consolidated net revenues and net income. See the information in Item 7A under ""Foreign Currency Risk'' for additional discussion of the impact of foreign currency translation and related hedging activities. Foreign Exchange Hedging Policy We are a rapidly growing company, with an increasing...

  • Page 35
    .... These diÃ...erences include, but are not limited to, the accounting for the tax beneÃ't on employee stock options and for stock issued under our employee stock purchase plan. In addition to the appropriate fair value model to be used for valuing share-based payments, we will also be required to...

  • Page 36
    ...in 2004 and 2002 related mainly to purchases of computer equipment and software to support our site operations, customer support and international expansion. In 2003, purchases of property and equipment included the $125.1 million purchase of additional oÇce space in San Jose, California. Purchases...

  • Page 37
    ... or expand our occupied space. Other purchase obligation amounts include minimum purchase commitments for advertising, computer equipment, software applications, a corporate airplane, engineering development services and other goods and services that were entered into through our ordinary course...

  • Page 38
    ... Internet listing website in the apartment and rental housing industry. In January 2005, our Board of Directors approved a two-for-one split of our shares of common stock to be issued in the form of a stock dividend. As a result of the stock split, our stockholders received one additional share...

  • Page 39
    ... of sellers 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...

  • Page 40
    ... have been based on our assessment of the facts and circumstances at each balance sheet date and are subject to change based upon new information and future events. From time to time, we are involved in disputes that arise in the ordinary course of business, and we do not expect this trend to...

  • Page 41
    ... of our net revenues result from fees associated with advertising and other non-transaction services in our U.S. Marketplace, International Marketplace and Payments segments. Net revenues from advertising are derived principally from the sale of online banner and sponsorship advertisements for cash...

  • Page 42
    ... of online services and promotions in general. Unlike our transaction revenues, advertising and other non-transaction net revenues are derived from a relatively concentrated customer base. Business Combinations In accordance with the provisions of SFAS 141, the purchase price of an acquired company...

  • Page 43
    ... new users, and to encourage existing users to list items for sale, purchase items through our service, or use our payment services; ‚ the volume, size, timing, and completion rate of transactions on our websites; ‚ the amount and timing of operating costs and capital expenditures relating...

  • Page 44
    ...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, transaction and chargeback rates, and international and product expansion; ‚ maintain suÇcient transaction...

  • Page 45
    ... have been available for some time, acquiring new users for our services may be more diÇcult and costly than it has been in the past. 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. If these...

  • Page 46
    ...In 2004, our international net transaction revenues represented 36% of our total net transaction revenues. Expansion into international markets requires management attention and resources. We have limited experience in localizing our service to conform to local cultures, standards, and policies. The...

  • Page 47
    ... the exchange rate. PayPal also holds some corporate funds in non-U.S. currencies to facilitate customer withdrawals, and thus its Ã'nancial results are aÃ...ected by the translation of these non-U.S. currencies into U.S. dollars. In addition, the results of operations of our internationally focused...

  • Page 48
    ...or some aspect of e-commerce. The application of existing, new, or future laws could have adverse eÃ...ects on our business. Several proposals have been made at the U.S. state and local level that would impose additional taxes on the sale of goods and services through the Internet. These proposals, if...

  • Page 49
    ... of goods and services; ‚ unauthorized use of credit card and bank account information and identity theft; ‚ the need to provide eÃ...ective customer support to process disputes between senders and recipients; ‚ potential breaches of system security; ‚ potential employee fraud; and ‚ use of...

  • Page 50
    ... using credit cards, nominal fees when customers fund payment transactions by electronic transfer of funds from bank accounts, and no fees when customers fund payment transactions from an existing PayPal account balance. Senders funded 53% of PayPal's payment volume during 2004 using credit cards...

  • Page 51
    remain highly sensitive to changes in the rate at which its senders fund payments using credit cards. Senders may prefer funding using credit cards rather than bank account transfers for a number of reasons, including the ability to dispute and reverse charges if merchandise is not delivered or is ...

  • Page 52
    ... would adversely aÃ...ect PayPal's international expansion plans and could require PayPal to suspend providing services to customers in one or more countries. We are subject to regulations relating to consumer privacy. Several domestic jurisdictions have proposed, and California, Minnesota, Utah, and...

  • Page 53
    ... listings of certain items for some locations. We could also be subject to Ã'nes or other penalties, and any of these outcomes could harm our business. In addition, because our services are accessible worldwide, and we facilitate sales of goods to users worldwide, foreign jurisdictions may claim...

  • Page 54
    ... Internet companies, have been and will continue to be targeted by parties using fraudulent emails to misappropriate passwords, credit card numbers, or other personal information. These emails appear to be legitimate emails sent by eBay or PayPal, but direct recipients to fake websites operated...

  • Page 55
    ...to the new billing system during the second and third quarters of 2004 caused incorrect account balance totals to be displayed for some users. In July 2004, a complaint seeking class action status was Ã'led alleging that eBay improperly billed its users and improperly debited some user accounts. The...

  • Page 56
    ... relating to the listing or sale of unlawful goods using our services. This negative publicity could damage our reputation and diminish the value of our brand names. It also could make users reluctant to continue to use our services. PayPal's payment system is also susceptible to potentially illegal...

  • Page 57
    ...in November 2004, and a preliminary trial date has been set for February 2006. The case is currently in fact discovery and claim construction discovery. We believe that we have meritorious defenses and intend to defend ourselves vigorously. In February 2002, PayPal was sued in California state court...

  • Page 58
    ... negative publicity, the cost of litigation, the diversion of management time, and any Ã'nes or penalties assessed. A large number of transactions occur on our websites. We believe that government regulators have received a substantial number of consumer complaints about both eBay and PayPal, which...

  • Page 59
    ... forced to change our operating practices in ways that could harm our business. We are subject to laws relating to the use and transfer of personally identiÃ'able information about our users, especially users located outside of the U.S. Violation of these laws, which in many cases apply not only to...

  • Page 60
    .... Because it is providing a Ã'nancial service and operating in a more regulated environment, PayPal, unlike eBay, must provide telephone as well as email customer service and must resolve certain customer contacts within shorter time frames. As part of PayPal's program to reduce fraud losses, it may...

  • Page 61
    ...sharply from its level in the fourth quarter in 2004, but remains much higher than our stock price during 2002 and early 2003. 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...

  • Page 62
    ...harm our business. A number of parties provide services to our users that indirectly beneÃ't us. Such services include seller tools that automate and manage listings, merchant tools that manage listings and interface with inventory management software, storefronts that help our users list items, and...

  • Page 63
    ... acquiring new customers by paying for search-related advertisements on search engine sites such as Google and Yahoo!. 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...

  • Page 64
    ..., from time to time, make pricing, service or marketing decisions or acquisitions that could harm our proÃ'tability. 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...

  • Page 65
    ... their bank account, including Certegy and TeleCheck, a subsidiary of First Data, or to pay on credit, including Bill Me Later from I4 Commerce and CIT Bank; ‚ providers of traditional payment methods, particularly credit cards, checks, money orders, and Automated Clearing House transactions; and...

  • Page 66
    ... address problems that arise. Expanding our operations in this manner also will require signiÃ'cant additional expenses and development, operations and other resources and will strain our management, Ã'nancial and operational resources. The lack of acceptance of any new businesses or services...

  • Page 67
    ... interest rate swap will mature in March 2005, at which time the lease will expire and we will purchase our San Jose headquarters facility. Equity Price Risk We are exposed to equity price risk on the marketable portion of equity investments we hold, typically as the result of strategic investments...

  • Page 68
    ... approximately $467 million. Transaction Exposure: As of December 31, 2004, we had outstanding forward foreign exchange hedge contracts with notional values equivalent to approximately $316 million with maturity dates within 11 days. The hedge contracts are used to oÃ...set changes in the functional...

  • Page 69
    ... statements and accompanying notes listed in Part IV, Item 15(a)(1) of this Annual Report on Form 10-K are included elsewhere in this Annual Report. ITEM 9: None. ITEM 9A. CONTROLS AND PROCEDURES CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE (a) Evaluation...

  • Page 70
    ... in this Annual Report on Form 10-K. ITEM 9B. None. PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT OTHER INFORMATION Executive oÇcers are elected annually by the Board and serve at the discretion of the Board. The following table sets forth certain information regarding our...

  • Page 71
    ... and General Manager, eBay International. From November 2000 to September 2002, Mr. Cobb served as 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...

  • Page 72
    ...., Inc., a Ã'nancial holding company. Mr. Corrado has also held executive level positions at Deutsche Bank and Morgan Stanley & Co. Mr. Corrado holds a B.S. degree in Management Information Systems and Business Administration from State University of New York. Rajiv Dutta serves eBay as Senior Vice...

  • Page 73
    ... and an M.B.A. from the University of California, Los Angeles. Philippe Bourguignon has served as a director of eBay since December 1999. Mr. Bourguignon has been the Chairman of Aegis Media France, a media communications and market research company since April 2004. From September 2003 to March...

  • Page 74
    ... documents is available on our website at http://investor.ebay.com/governance/ home.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...

  • Page 75
    ... Annual Bonus(2) Compensation(3) Margaret C. Whitman ÏÏÏ President and Chief Executive OÇcer Maynard G. Webb, Jr. ÏÏ Chief Operating OÇcer JeÃ...rey D. Jordan President, PayPal Matthew J. Bannick ÏÏÏÏÏ President, eBay International William C. Cobb President, eBay North America 2004...

  • Page 76
    ... case of Mr. Cobb for 2004, personal use of eBay's corporate aircraft, valued at the incremental cost of such use to the company. Prior to 2004, eBay calculated the cost of the personal use of its corporate aircraft using the Standard Industrial Fare Level (SIFL) tables prescribed under applicable...

  • Page 77
    ...on options to purchase 42,964,094 shares of our common stock granted to employees in 2004. (3) Options were granted at an exercise price equal to the fair market value of our common stock, as determined by the Board of Directors on the date of grant. The exercise prices per share listed in the table...

  • Page 78
    ... fair market value of the common stock on the date of grant. Each eligible director is granted an option to purchase 15,000 shares, of eBay common stock at the time of each annual meeting if he or she has served continuously as a member of the Board since the date elected. The Compensation Committee...

  • Page 79
    .... Mr. Kagle, a member of our Compensation Committee, is a member of the general partner of certain venture capital funds that beneÃ'cially hold greater than a 10% equity interest in Business.com, Inc. In late 2003, we entered into an advertising and related services agreement with Business.com, Inc...

  • Page 80
    ... two-for-one stock split eÃ...ective on February 16, 2005. (2) Mr. Omidyar is our Founder and Chairman of the Board. Includes 490,000 shares held by his spouse as to which he disclaims beneÃ'cial ownership. The address for Mr. Omidyar is 2145 Hamilton Avenue, San Jose, California 95125. (3) Mr. Skoll...

  • Page 81
    ... President, PayPal. Includes 1,400,034 shares Mr. Jordan has the right to acquire pursuant to outstanding options exercisable within 60 days. The address for Mr. Jordan is c/o eBay Inc., 2145 Hamilton Avenue, San Jose, California 95125. (7) Mr. Bannick is our President, eBay International. Includes...

  • Page 82
    ...under our 1998 Employee Stock Purchase Plan, as amended, or the ESPP, as of December 31, 2004. 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 number of shares purchased under the ESPP...

  • Page 83
    ... connection with our acquisition of PayPal. The only outstanding Non-Plan Grant as of December 31, 2004 relates to an individual compensation arrangement that was made prior to the initial public offering of our Common Stock in 1998. At the time of this Non-Plan Grant, members of our Board and their...

  • Page 84
    ... 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 bonus plan provided for three performancebased bonus payments of up to $250,000 related primarily...

  • Page 85
    ...the case of 2004, for attestation services related to Sarbanes-Oxley compliance. ""Audit-Related Fees'' consisted of fees billed for due diligence procedures in connection with acquisitions and divestitures and consultation regarding Ã'nancial accounting and reporting matters. ""Tax Fees'' consisted...

  • Page 86
    ... Number Schedule II ÃŒ Valuation and Qualifying Accounts 128 All other schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the Ã'nancial statements or notes thereto. 3. Exhibits. No. Exhibit Description Filed with this 10-K Form...

  • Page 87
    ... Plan. Form of Stock Option Agreement under eBay Inc. 1999 Global Equity Incentive Plan. Form of Stock Option Agreement under eBay Inc. 2001 Equity Incentive Plan. Description of eBay Inc.'s Executive Management Incentive Plan. OÃ...er Letter to Christopher Corrado dated November 19, 2004. OÃ...er...

  • Page 88
    ...Exhibit Description Filed with this 10-K Form Incorporated by Reference File No. Date Filed 21.01 23.01 24.01 31.01 List of Subsidiaries. PricewaterhouseCoopers LLP consent. Power of Attorney (see signature page). CertiÃ'cation of the Registrant's Chief Executive OÇcer, as required by Section...

  • Page 89
    ... 31, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the Ã'nancial statement schedule listed in the index appearing under Item 15(a) (2) on page 84 presents fairly, in all material respects, the information set forth...

  • Page 90
    ... accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use...

  • Page 91
    eBay Inc. CONSOLIDATED BALANCE SHEET December 31, December 31, 2003 2004 (In thousands, except par value amounts) ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net Funds receivable from customers Restricted cash and investments Other current ...

  • Page 92
    ...December 31, 2002 2003 2004 (In thousands, except per share amounts) 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 Amortization of acquired...

  • Page 93
    ... INCOME Year Ended December 31, 2002 2003 2004 (In thousands) Net income Other comprehensive income: Foreign currency translation Unrealized gains (losses) on investments, net Investment losses included in net income Unrealized gains (losses) on cash Ã-ow hedges Estimated tax beneÃ't Net...

  • Page 94
    ... hedges, net of tax Foreign currency translation adjustment Balance, end of year Total stockholders' equity Number of shares Common stock: Balance, beginning of year Issuance of common stock for cash and services Issuance of common stock for acquisitions Balance, end of year $ Ì Ì 1,110...

  • Page 95
    ... unearned stock-based compensation Tax beneÃ't on the exercise of employee stock options Impairment of certain equity investments Minority interests Gain on sale of assets Changes in assets and liabilities, net of acquisition eÃ...ects: Accounts receivable Funds receivable from customers Other...

  • Page 96
    ... pioneered online trading by developing an Internet-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...

  • Page 97
    ...nancial institutions that management believes are of high credit quality. Our accounts receivable are derived from revenue earned from customers located in the U.S. and internationally. Accounts receivable balances are settled through customer credit cards, debit cards, and PayPal accounts, with the...

  • Page 98
    ... or payable until the cash is settled. Customer accounts We deposit all U.S.-based customer funds held in U.S. dollars 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 customers...

  • Page 99
    ..., and (4) truly operate as an agent of our customers. The customer funds held in FDIC insured bank accounts are not reÃ-ected on our consolidated balance sheet. Additionally, we receive a custodial credit from our service provider in the form of a reduction in transaction processing fees based upon...

  • Page 100
    ... 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 in the U.S. can elect to sweep their account balances into the PayPal Money Market fund to earn a rate of...

  • Page 101
    ... method, which calculates compensation expense based on the diÃ...erence, if any, on the date of the grant, between the fair value of our stock and the option exercise price. Generally accepted accounting principles require companies who choose to account for stock option grants using the intrinsic...

  • Page 102
    ...-employees using the fair value based method, which calculates compensation expense based on the fair value of the stock option granted using the BlackScholes option pricing model at the date of grant, or over the period of performance, as appropriate. Income taxes We account for income taxes using...

  • Page 103
    .... These diÃ...erences include, but are not limited to, the accounting for the tax beneÃ't on employee stock options and for stock issued under our employee stock purchase plan. In addition to the appropriate fair value model to be used for valuing share-based payments, we will also be required to...

  • Page 104
    ... of accounting, net of tax Net income Denominator: Weighted average common shares Weighted average unvested common stock subject to repurchase Denominator for basic calculation Weighted average eÃ...ect of dilutive securities: Weighted average unvested common stock subject to repurchase Employee...

  • Page 105
    ... our strategy of establishing and expanding our global online marketplace. The following table summarizes our acquired intangible assets by type related to the above purchase acquisitions (in thousands): Company Name Year Acquired Customer List/ User Base Trade Name/ Trademarks Developed Technology...

  • Page 106
    ... in South Korea, one of the largest online markets in Asia. This is consistent with our strategy of establishing and expanding our global online marketplace in countries that represent the majority of the world's e-commerce revenue. The estimated useful economic lives of the identiÃ'able intangible...

  • Page 107
    ... open our global online marketplace to Baazee.com's strong and growing community. The total purchase price recorded was approximately $50 million, including $1 million in estimated acquisition-related expenses. We accounted for the acquisition as a purchase transaction and, accordingly, the purchase...

  • Page 108
    ... the acquisition-related terminations of certain PayPal employees. Goodwill Goodwill information for each segment is as follows (in thousands): December 31, 2003 Goodwill Acquired Goodwill Disposals Adjustments December 31, 2004 Segments: U.S. Marketplace International Marketplace ÏÏÏ Payments...

  • Page 109
    ... are managed, the criteria used by our chief operating decision-maker to evaluate segment performance, the availability of separate Ã'nancial information, and overall materiality considerations. The U.S. Marketplace segment includes U.S. online marketplace trading platforms other than our PayPal and...

  • Page 110
    ... 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 costs, product development expenses...

  • Page 111
    ...$1,997,140 598,013 $2,595,153 $2,040,601 1,741,875 $3,782,476 Net revenues are allocated between U.S. and International geographies based upon the country in which the seller, payment recipient, advertiser or end-to-end service provider is located. Long-lived assets are allocated between U.S. and...

  • Page 112
    eBay Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ÃŒ (Continued) Note 5 ÃŒ Investments: At December 31, 2003 and 2004, 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 113
    ..., inc. of approximately 25%. craigslist is an online community featuring classiÃ'eds and forums. We account for the investment in craigslist using the equity method of accounting and the total investment, including identiÃ'able intangible assets, deferred tax liabilities and goodwill (see ""Note...

  • Page 114
    ...San Jose headquarters facility. Transaction Exposure: As of December 31, 2004, we had outstanding forward foreign exchange hedge contracts with notional values equivalent to approximately $316 million with maturity dates within 11 days. The hedge contracts are used to oÃ...set changes in non-US dollar...

  • Page 115
    ... forecasted inter-company transactions at eBay Inc. represent a foreign currency cash Ã-ow exposure. To reduce foreign exchange risk relating to these forecasted intercompany transactions, we entered into forward foreign exchange contacts during the year ended December 31, 2004. The objective of the...

  • Page 116
    ... a license to operate as an ELMI from the United Kingdom's Financial Services Authority. As a result of regulatory requirements associated with this ELMI license, PayPal transferred the accounts and funds of its European Union users from its U.S. parent to its U.K. subsidiary. Customer funds in the...

  • Page 117
    ... and recognized a loss of approximately $800,000. December 31, 2003 2004 (In thousands) Accrued expenses: Acquisition related accrued expenses Compensation and related beneÃ'ts Advertising Contractors and consultants Professional fees Transaction loss reserve Other current liabilities $ 78...

  • Page 118
    ... our obligations under operating leases. See ""Note 9 ÃŒ Operating Lease Arrangements'' of these consolidated Ã'nancial statements. Lease payments related to our corporate headquarters in San Jose, California are estimated based on market interest rates (LIBOR) at December 31, 2004, adjusted to re...

  • Page 119
    ... in November 2004 and a preliminary trial date has been set for February 2006. The case is currently in fact discovery and claim construction discovery. We believe that we have meritorious defenses and intend to defend ourselves vigorously. In February 2002, PayPal was sued in California state court...

  • Page 120
    ...these disputes is increasing as our business expands and our company grows larger. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require signiÃ'cant amounts of management time, and result in the diversion of signiÃ'cant operational resources...

  • Page 121
    ... public oÃ...ering of its common stock in 2004. Separately, a member of our Board of Directors is a director and Chairman of the Executive Committee of the Board of Directors of a company with whom PayPal, in September 2000, prior to eBay's acquisition of PayPal, entered into a strategic marketing...

  • Page 122
    ... related to outstanding stock options. In addition, we had reserved approximately 4.0 million shares of common stock available for future issuance under our deferred stock unit plan, and approximately 6.0 million shares of common stock available for future issuance under our employee stock purchase...

  • Page 123
    .... Deferred stock units are payable following the termination of a director's tenure as a director. All eBay oÇcers, directors and employees are eligible to receive awards under the plan, although, to date, awards have been made only to new non-employee directors. As of December 31, 2004, 15...

  • Page 124
    ... the $58.17 closing price of our common stock on December 31, 2004. In connection with the change in status from an employee to a non-employee, we were required, in accordance with FASB Interpretation No. 44 ""Accounting for Certain Transactions Involving Stock Compensation Ì an interpretation of...

  • Page 125
    ... 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 ÃŒ Compensation Arrangements.'' Prior to 2004, one director and the executive oÇcer had exercised all available...

  • Page 126
    ... thousands): Year Ended December 31, 2002 2003 2004 Provision at statutory rate Permanent diÃ...erences: Foreign income taxed at diÃ...erent rates Change in valuation allowance Subsidiary loss not beneÃ'ted Tax-exempt interest income State taxes, net of federal beneÃ't Tax credits Other $138...

  • Page 127
    ... realizable in future periods, we will have the ability, subject to carryforward limitations, to beneÃ't from these amounts. When realized, the tax beneÃ't of tax deductions related to stock options are accounted for as a credit to additional paid-in capital rather than a reduction of the income...

  • Page 128
    eBay Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) In January 2005, our Board of Directors approved a two-for-one split of our shares of common stock to be issued in the form of a stock dividend. As a result of the stock split, our stockholders received one additional share of our ...

  • Page 129
    ... 31 Quarter Ended June 30 September 30 December 31 2003 Net revenues Gross proÃ't Income before cumulative eÃ...ect of accounting change Cumulative eÃ...ect of accounting change, net of tax Net income Net income per share-basic Net income per share-diluted Weighted-average shares: Basic Diluted...

  • Page 130
    ... STATEMENT SCHEDULE The Financial Statement Schedule II ÃŒ VALUATION AND QUALIFYING ACCOUNTS is Ã'led as part of this Annual Report on Form 10-K. Balance at Beginning of Period Charged/ Credited to Net Income Charged to Other Account (In thousands) Charges Utilized/ Write-OÃ...s Balance at End of...

  • Page 131
    ... 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 25th day of February, 2005. eBay Inc. By: /s/ MARGARET C. WHITMAN...

  • Page 132
    Additional Directors By: /s/ PIERRE M. OMIDYAR Pierre M. Omidyar Founder, Chairman of the Board and Director By: /s/ PHILIPPE BOURGUIGNON Philippe Bourguignon Director By: /s/ ROBERT C. KAGLE Robert C. Kagle Director By: /s/ RICHARD T. SCHLOSBERG, III Richard T. Schlosberg, III Director Date: ...

  • Page 133
    ... 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, 1998, between...

  • Page 134
    ... Plan. Form of Stock Option Agreement under eBay Inc. 1999 Global Equity Incentive Plan. Form of Stock Option Agreement under eBay Inc. 2001 Equity Incentive Plan. Description of eBay Inc.'s Executive Management Incentive Plan. OÃ...er Letter to Christopher Corrado dated November 19, 2004. OÃ...er...