eBay 2005 Annual Report Download

Download and view the complete annual report

Please find the complete 2005 eBay annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 123

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123

To our Stockholders, Partners, Employees and our Communities of Users
As the Internet spreads throughout the world, more and more people are unlocking the opportunities it
brings. The Internet is connecting us in ways not possible just a decade ago, and transforming the way we
meet, communicate, learn, and do business. It has also sparked a new wave of innovation that continues to
expand the boundaries of what technology can enable us to achieve.
The changing Internet environment has allowed eBay to change as well. In 2005 we expanded our vision
of how to best connect people online through community and commerce. We continued to innovate within our
existing businesses while adding new formats and opportunities for our ever-growing communities of users.
While the company may look different than it did a year ago, our core mission remains the same. We are
pioneering communities built on commerce, sustained by trust, and inspired by opportunity.
The Power of Three
Today, the company is organized into three businesses: Marketplaces, Payments and Communications.
Each is a thriving and successful business in its own right. Together, these three businesses create synergies
that we believe will provide even more opportunity for our communities and lead to additional growth across
the board.
At the heart of the Marketplaces business is the eBay trading platform, which connects buyers and sellers
in a single global marketplace. Continued innovation in marketing and product development and close
cooperation with our community of users led to accelerating growth in 2005, particularly in our largest
markets Ó the US and Germany. eBay ended the year with 181 million registered users around the world. And
in 2005, those users traded more than $44.3 billion in gross merchandise volume, the total value of all
successfully closed items, which represents an increase of 30 percent from 2004.
Alongside the eBay platform, we expanded into other types of marketplaces in 2005. In February, we
acquired Rent.com, a leading Internet listing service for apartments and rental housing. Also in February, we
launched Kijiji, our international classifieds business that brings people together in local markets to find jobs,
trade goods and services, and make personal connections. In August we acquired Shopping.com, a leading
comparison shopping website, which provides eBay sellers with a new channel and access to a new set of
buyers while bringing more traffic and leads to Shopping.com's merchants. eBay's Marketplaces websites now
enable people to meet, buy and sell in a variety of formats and trading experiences.
Our Payments service, PayPal, reached a new milestone in 2005 when it generated more than a billion
dollars in net revenue. In addition to expanding its reach among eBay users around the world, PayPal has also
grown its merchant services business outside the eBay universe, which now accounts for approximately a third
of its total payment volume (TPV). In total, the service ended 2005 with 96 million accounts worldwide, and
processed more than $27 billion in TPV during the year. Excluding the payment gateway business that PayPal
acquired from VeriSign in November, this activity represents an organic increase of 45 percent in TPV from
2004.
In October, we acquired a new business called Skype. A leader in online voice communications, Skype is
revolutionizing the way in which people communicate over the Internet. A strong stand-alone business, Skype
added an average of 190,000 new users a day at the end of 2005 and finished the year with a total of 75 million
users, up 38 percent since we announced the acquisition and representing year-over-year growth of
280 percent.
And while the Skype of today is largely focused on communications, we see incredible potential for its use
in ecommerce. Integrating Skype into the eBay marketplace, for example, has the potential to reduce
communications friction between buyers and sellers and increase the velocity of trade. Creating a PayPal
wallet associated with each Skype account can make it even easier for users to pay for Skype's fee-based
services while at the same time increasing PayPal's payment volume. The acquisition also enables eBay and
Skype to pursue new lines of business, such as services and travel, based on pay-per-call lead generation.
Even as we invested in acquisitions, the organic growth of our company delivered strong financial results
in 2005. eBay Inc. produced net revenues of $4.552 billion, an increase of 39 percent over the prior year. Net
income grew at the same rate as net revenues and surpassed $1 billion for the first time. Operating cash flow

Table of contents

  • Page 1
    ... and lead to additional growth across the board. At the heart of the Marketplaces business is the eBay trading platform, which connects buyers and sellers in a single global marketplace. Continued innovation in marketing and product development and close cooperation with our community of users led...

  • Page 2
    ... eBay is opening their first bricks-and-mortar store. And a single mom in Nebraska is able to spend more time with her children by selling products to customers all over the world. The power of community is just as apparent in our other businesses as well. A woman who makes handmade soaps can accept...

  • Page 3
    ...0430924 (I.R.S. Employer Identification Number) 2145 Hamilton Avenue San Jose, California (Address of principal executive offices) 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...

  • Page 4
    ... Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions Principal Accounting Fees and Services PART IV Exhibits and Financial Statement Schedules 1 13 39 39 40 43 Item 5. Item Item Item Item Item...

  • Page 5
    ...mobile telephones. Together, we believe eBay Marketplaces, PayPal and Skype provide unparalleled e-commerce and communications offerings for buyers and sellers around the world. During 2005, we made a number of strategic acquisitions in order to expand and enhance our offerings to our user community...

  • Page 6
    ..., and easy-to-use online services that seek to provide availability 24 hours a day, seven days a week, enabling sellers to list items for sale in either auction or fixedprice formats, buyers to bid for and purchase items of interest, and all eBay users to browse through listed items from any place...

  • Page 7
    ..., relative to available alternatives, at addressing markets of new and scarce goods, end-of-life products and used and vintage items. eBay Marketplaces Strategy We intend to achieve our mission of creating the world's online marketplace by improving and expanding across three main areas: categories...

  • Page 8
    ... offer their goods and services. eBay Stores enable sellers to show all of their listings and to describe their respective businesses through customized pages. In addition to our eBay.com formats, we are continually looking for ways to better enable members of our community to interact and transact...

  • Page 9
    ... 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 profile to check his or her reputation within the eBay community. The...

  • Page 10
    ...$25 processing fee. Customer Support We devote significant 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 certain circumstances, telephone. We...

  • Page 11
    ... as checks, money orders and credit cards processed through merchant accounts, all present various obstacles to the online commerce experience, including lengthy processing time, inconvenience and high costs. Our PayPal online payments solution allows our community of eBay users, as well as users of...

  • Page 12
    ... PayPal his or her name, street address, phone number, and email address. The user's email address serves as the unique account identifier. PayPal also offers customers who sell on their own websites the ability to accept credit card payments from buyers without requiring the buyer to open a PayPal...

  • Page 13
    ... pay for the item, and the buyer must use the seller's e-mail address associated with the listing. Claims must be filed within 45 days of PayPal payment, and buyers are limited to three PayPal Buyer Protection refunds per year. Communications We added the Communications business upon our acquisition...

  • Page 14
    ...manages various notifications for sellers and buyers, including daily status updates, bid and outbid notices, registration confirmations, account change notices, billing notices, and end-of-auction notices. The platform maintains user registration information, billing accounts, current item listings...

  • Page 15
    ... registered users of Skype. To use Skype offerings, users need only a broadband Internet-connected computer with microphone and speakers, a headset, or a USB phone. Once the software is downloaded, users register with Skype, contact their peers and begin the online communication process. Skype is...

  • Page 16
    ... 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, offline payment methods such as cash, check or money order, and traditional online or offline credit card merchant accounts...

  • Page 17
    ... active user base, to attract new users, and to encourage existing users to list items for sale, purchase items through our websites, or use our payment service or communication software and products; ‚ the volume, size, timing, and completion rate of transactions using our websites or technology...

  • Page 18
    ... the acceptance of PayPal by online merchants outside of the eBay marketplaces; ‚ our ability to develop product enhancements at a reasonable cost and to develop programs and features in a timely manner; ‚ our ability to manage PayPal's transaction loss and credit card chargeback rates and...

  • Page 19
    ... use of the Internet and develop new sources of monetization for some of our services; ‚ 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...

  • Page 20
    ... with local payment providers, including banks, credit and debit card associations, and electronic fund transfer systems; ‚ differing levels of retail distribution, shipping, and communications infrastructures; ‚ different employee/employer relationships and the existence of workers' councils...

  • Page 21
    ... In order to meet local ownership and regulatory licensing requirements, the eBay EachNet website is operated through a foreign-owned enterprise indirectly owned by eBay's European operating entity, which acts in cooperation with a local PRC company owned by certain local employees. The PayPal China...

  • Page 22
    ... a larger public company at companies that prior to acquisition had lacked such controls, procedures and policies; and ‚ in some cases, including in connection with PayPal's recent acquisition of VeriSign's payment gateway business, the need to transition operations, users, and/or customers onto...

  • Page 23
    ... be harmed. Our business and users may be subject to sales tax and other taxes. The application of indirect taxes (such as sales and use tax, value added tax, or VAT, goods and services tax, business tax, and gross receipt tax) to e-commerce businesses such as eBay and our users is a complex and...

  • Page 24
    ...in cases of buyer fraud; ‚ unauthorized use of credit card and bank account information and identity theft; ‚ the need to provide effective customer support to process disputes between senders and recipients; ‚ potential breaches of system security; ‚ potential employee fraud; and ‚ use of...

  • Page 25
    ... target for fraud. In configuring its service, PayPal faces an inherent trade-off between customer convenience and security. Identity thieves and those committing fraud using stolen credit card or bank account numbers can potentially steal large amounts of money from businesses such as PayPal. We...

  • Page 26
    ...of trade on eBay could decrease and our business would further suffer. PayPal is required to comply with credit card associations' special operating rules for Internet payment services. PayPal and its credit card processors have implemented specific business processes for merchant customers in order...

  • Page 27
    ... money transmitter, PayPal is subject to bonding requirements, restrictions on its investment of customer funds, reporting requirements, and inspection by state regulatory agencies. In July 2005, PayPal entered into a settlement agreement and agreed to pay $225,000 to the California Department...

  • Page 28
    ...and could require PayPal to suspend providing services to customers in one or more countries. The current regulatory environment for Voice over Internet Protocol (VoIP) is unclear, and Skype's business could be harmed by new regulations or the application of existing regulations to its products. The...

  • Page 29
    ... Supreme Court and Federal Communications Commission. In addition, Internet service providers could attempt to charge us each time our customers use our offerings, or could charge us for delivery of email to our customers. Worldwide, a number of companies have announced plans to take such actions or...

  • Page 30
    ... confidential information over public networks. Our security measures may not prevent security breaches that could harm our business. Currently, a significant number of our users authorize us to bill their credit card accounts directly for all transaction fees charged by us. PayPal's users routinely...

  • Page 31
    ... unanticipated system disruptions, slower response times, degradation in levels of customer support, impaired quality of users' experiences of our services, impaired quality of services for third-party application developers using our externally accessible Application Programming Interface, or API...

  • Page 32
    ... the level of market penetration of our services is high, acquiring new users for our services may be more difficult 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...

  • Page 33
    ... beverages or tobacco products, and online securities fraud. PayPal's acceptable use policy enables PayPal to fine users in certain jurisdictions up to $500 or take legal action to recover its losses for certain violations of that policy, including online gambling and illegal sales of prescription...

  • Page 34
    ... of users selling counterfeit Rolex watches through our German website. The suit also alleged unfair competition. Rolex sought an order enjoining the sale of Rolex-branded watches on the website as well as damages. In December 2002, a trial was held in the matter and the court ruled in favor of eBay...

  • Page 35
    ... action alleging that its limiting access to customer accounts and failure to promptly restore access to legitimate accounts violates California state consumer protection laws and is an unfair business practice and a breach of PayPal's User Agreement. This action was re-filed with a different named...

  • Page 36
    ... accrued in our consolidated income statement for the year ended December 31, 2005. In January 2005, 51 former shareholders of Epinions, Inc. common stock including founders and former employees of that company filed a lawsuit in Superior Court of the State of California County of San Francisco (No...

  • Page 37
    ... harm its business, and to pay substantial fines. Even if PayPal is able to defend itself successfully, an enforcement action could cause damage to its reputation, could consume substantial amounts of its management's time and attention, and could require PayPal to change its customer service and...

  • Page 38
    ... 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 temporarily restrict the ability of customers to withdraw their funds if those funds or the customer's account activity...

  • Page 39
    .... Marketplaces eBay's Marketplaces businesses currently or potentially compete with a number of companies providing both particular categories of goods and broader ranges of goods. The Internet provides new, rapidly evolving and intensely competitive channels for the sale of all types of goods...

  • Page 40
    ... the Internet for specified products. Similarly, sellers are increasingly 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...

  • Page 41
    ..., from time to time, make pricing, service or marketing decisions or acquisitions that could harm our profitability. 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 42
    ... current users to migrate to a competing company. In addition, some of Skype's competitors, such as telecommunications carriers and cable television providers, may be able to bundle services and products that Skype does not offer. These could include various forms of wireless communications, voice...

  • Page 43
    ... applicable. ITEM 2: PROPERTIES We own and lease various properties in the United States and in 24 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...

  • Page 44
    ... of users selling counterfeit Rolex watches through our German website. The suit also alleged unfair competition. Rolex sought an order enjoining the sale of Rolex-branded watches on the website as well as damages. In December 2002, a trial was held in the matter and the court ruled in favor of eBay...

  • Page 45
    ... action alleging that its limiting access to customer accounts and failure to promptly restore access to legitimate accounts violates California state consumer protection laws and is an unfair business practice and a breach of PayPal's User Agreement. This action was re-filed with a different named...

  • Page 46
    ... accrued in our consolidated income statement for the year ended December 31, 2005. In January 2005, 51 former shareholders of Epinions, Inc. common stock including founders and former employees of that company filed a lawsuit in Superior Court of the State of California County of San Francisco (No...

  • Page 47
    expands and our company grows larger. Any claims or regulatory actions against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, and result in the diversion of significant operational resources. ITEM 4: SUBMISSION OF...

  • Page 48
    PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY, 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 ...

  • Page 49
    ... pursuant to DSUs under our 2003 Deferred Stock Unit Plan are not included in the calculation of weighted average exercise price. (3) Includes 5,788,596 shares of our common stock remaining reserved for future issuance under our 1998 Employee Stock Purchase Plan, as amended, or the ESPP, as of...

  • Page 50
    ... the consolidated financial statements and notes thereto and ""Management's Discussion and Analysis of Financial Condition and Results of Operations'' appearing elsewhere in this Annual Report on Form 10-K. The consolidated statement of income and the consolidated balance sheet data for the years 46

  • Page 51
    ... share amounts) 2005 Consolidated Statement of Income Data(1): Net revenues Cost of net revenues Gross profit Operating expenses: Sales and marketing Product development General and administrative Payroll tax on employee stock options Amortization of acquired intangible assets ÏÏÏ Total...

  • Page 52
    ...new communities around the world built on commerce, sustained by trust, and inspired by opportunity. We bring together millions of buyers and sellers every day on a local, national and international basis through an array of websites. We provide online marketplaces for the sale of goods and services...

  • Page 53
    ... such as new users, new user accounts, active users, listings and gross merchandise volume, as well as total payment volume processed by our wholly owned PayPal subsidiary and number of users registered with our Skype subsidiary. Members of our senior management also regularly review key financial...

  • Page 54
    ... each year, primarily as a result of increased auction and fixed-price transaction activity, reflected in the growth in the number of our confirmed registered users, user activity, listings, user gross merchandise volume on our eBay Marketplaces platforms and payment transactions processed by PayPal...

  • Page 55
    online commerce experience of our user community, both domestically and internationally, through the introduction of new site features and functionality and expanded trust and safety programs. Net Revenues Summary Year Ended December 31, 2003 Year Ended Percent December 31, Percent Change 2004 ...

  • Page 56
    ...listing subsequently closed successfully. Total value of all successfully closed items between users on eBay's trading platforms during the quarter, regardless of whether the buyer and seller actually consummated the transaction. Cumulative total of all personal, premier, or business accounts opened...

  • Page 57
    ... increased auction and fixed-price transaction activity, reflected in the growth in the number of our confirmed registered users, user activity, listings, gross merchandise volume and payment transactions processed by PayPal. eBay Marketplaces Net Transaction Revenues Total net transaction revenues...

  • Page 58
    ... the Euro, against the U.S. dollar, resulted in higher net revenues of approximately $5.3 million during 2005 when compared to the results if the weighted-average foreign currency exchange rates used in the preparation of our 2004 consolidated financial statements were used. Net transaction revenues...

  • Page 59
    ... components include bank charges, credit card interchange, other payment processing costs, employee compensation and facilities costs for our customer support and site operations, depreciation of equipment and amortization of required capitalization of major site and product development costs. The...

  • Page 60
    ... of increases in the volume of online advertising that we expect to purchase in order to attract new customers and increased user activity on our websites, including growth initiatives in sales and marketing activities in our Marketplaces segments. Sales and marketing expenses increased in 2004, but...

  • Page 61
    ... the expansion of our PayPal Buyer Protection Program. PayPal's transaction loss expense rate, which is the transaction loss expense as a percentage of PayPal's total payment volume, was consistent at 0.27% in 2005 and 2004. With our continued investment across all areas of our business and related...

  • Page 62
    .... The increase in amortization of acquired intangibles during 2005 compared to prior years is due to the business acquisitions consummated during 2004 and 2005. Intangible assets include purchased customer lists and user base, trademarks and trade names, developed technologies, and other intangible...

  • Page 63
    ..., we included our San Jose headquarters lease arrangement in our consolidated financial statements effective July 1, 2003. Beginning July 1, 2003, our consolidated statement of income reflected the reclassification of lease payments on our San Jose headquarters office facilities from operating...

  • Page 64
    ... complete the purchase of the facility. Impact of Foreign Currency Translation During 2005, our international net revenues, based upon the country in which the seller, payment recipient, advertiser or other service provider is located, accounted for approximately 46% of our consolidated net revenues...

  • Page 65
    ... the U.S. dollar strengthens relative to other currencies. 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...

  • Page 66
    ... our employee stock purchase plan rather than disclose the impact on our consolidated net income within our footnotes, as is our current practice (see ""Note 1 Ì The Company and Summary of Significant Accounting Policies'' of the notes to the condensed consolidated financial statements contained...

  • Page 67
    ... and 2004 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 office space in San Jose, California. Purchases of...

  • Page 68
    ...in our headcount needs requires us to exit an office 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 that were...

  • Page 69
    ... with our consolidated financial statements and other disclosures included in this report. Provisions for Doubtful Accounts and Authorized Credits Our U.S. Marketplaces and International Marketplaces segments are exposed to losses due to uncollectible accounts and credits to sellers. Provisions for...

  • Page 70
    ... 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, Automated Clearing House, or ACH, returns, buyer protection program claims and debit card overdrafts. These...

  • Page 71
    ... statements included elsewhere in this Annual Report on Form 10-K. We believe that we have meritorious defenses to the claims against us, and we will defend ourselves vigorously. However, even if successful, our defense against certain actions will be costly and could divert our management's time...

  • Page 72
    ... and by the success 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 The purchase price of an acquired company is allocated between...

  • Page 73
    ... securities and money market funds. These securities are generally classified 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), net of estimated tax...

  • Page 74
    ... for their use of intellectual property and technology and for certain corporate services provided by eBay and PayPal. These charges are denominated in Euros and these forecasted inter-company transactions represent a foreign currency cash flow exposure. To reduce foreign exchange risk relating to...

  • Page 75
    ...this Annual Report on Form 10-K. ITEM 9B: None. PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT OTHER INFORMATION Incorporated by reference from eBay's Proxy Statement for its 2006 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year...

  • Page 76
    ... RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from eBay's Proxy Statement for its 2006 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2005. ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES Incorporated by...

  • Page 77
    ... Stock. Investor Rights Agreement, dated June 20, 1997, between the Registrant and certain stockholders named therein. Form of Indemnity Agreement entered into by Registrant with each of its directors and executive officers. Registrant's 1996 Stock Option Plan. Registrant's 1997 Stock Option Plan...

  • Page 78
    ...Award Agreement. Form of 2003 Deferred Stock Unit Plan New Director Award Agreement. Summary of Compensation Payable to Named Executive Officers. eBay Incentive Plan. Registration Rights Agreement dated as of September 11, 2005, by and among eBay Inc. and the parties identified on Schedule I thereto...

  • Page 79
    ... Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002. X X X ° Indicates a management contract or compensatory plan or arrangement (b) See the Exhibits listed under Item 15(a)(3) above. (c) The financial statement schedules required by this item are listed under Item...

  • Page 80
    ... the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and...

  • Page 81
    ... financial statements in accordance with generally 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...

  • Page 82
    ... STOCKHOLDERS' EQUITY Current liabilities: Accounts payable 37,958 Funds payable and amounts due to customers 331,805 Accrued expenses and other current liabilities 421,969 Deferred revenue and customer advances 50,439 Short-term obligations 124,272 Income taxes payable 118,427 Total current...

  • Page 83
    eBay Inc. CONSOLIDATED STATEMENT OF INCOME Year Ended December 31, 2003 2004 2005 (In thousands, except per share amounts) Net revenues Cost of net revenues Gross profit Operating expenses: Sales and marketing Product development General and administrative Payroll tax on employee stock ...

  • Page 84
    eBay Inc. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 2003 Year Ended December 31, 2004 2005 (In thousands) Net income Other comprehensive income (loss): Foreign currency translation Unrealized gains (losses) on investments, net Unrealized gains on cash flow hedges Estimated tax benefit/(...

  • Page 85
    ..., net of tax ÏÏÏ 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 $ 1,246 53...

  • Page 86
    ... revenue and customer advances Income taxes payable Net cash provided by operating activities Cash flows from investing activities: Purchases of property and equipment, net Proceeds from sale of corporate aircraft Purchases of investments Maturities and sales of investments Acquisitions, net...

  • Page 87
    ... of buyers and sellers every day on a local, national and international basis through an array of websites. eBay provides online marketplaces for the sale of goods and services, online payment services and online communication offerings to a diverse community of individuals and businesses. eBay...

  • Page 88
    ... 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, Automated Clearing House, or ACH, returns, and debit card overdrafts. These allowances 84

  • Page 89
    ... customers Funds receivable and payable relate to our Payments segment and arise due to the time taken to clear transactions through external payment networks. When customers fund their account using their bank account or credit card, or withdraw money from their bank account or through a debit card...

  • Page 90
    ... from the acquisitions of entities accounted for using the purchase method of accounting are estimated by management based on the fair value of assets received. Identifiable intangible assets are comprised of purchased customer lists and user base, trademarks and trade names, developed technologies...

  • Page 91
    ... one buyer has bid above the seller's specified minimum price or reserve price, whichever is higher, at the end of the transaction term. For services offered on Shopping.com, our comparison shopping site, revenue is generated from lead referral fees based on the number of times a user clicks through...

  • Page 92
    eBay Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) Advertising expense We expense the costs of producing advertisements at the time production occurs and expense the cost of communicating advertising in the period during which the advertising space or airtime is used. Internet ...

  • Page 93
    ...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 an asset and liability approach, which requires the recognition of taxes payable or refundable for the current year...

  • Page 94
    ... required to expense the fair value of our stock option grants and stock purchases under our employee stock purchase plan rather than disclose the impact on our consolidated net income within our footnotes, as is our current practice (see ""The Company and Summary of Significant Accounting Policies...

  • Page 95
    ... 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 effect of dilutive securities: Weighted average unvested common stock subject to repurchase Employee...

  • Page 96
    ... assets by type related to the above purchase acquisitions (in thousands): Year Acquired Customer List/ User Base Trade name/ Trademarks Developed Technologies Other Intangible Assets Total Acquired Intangible Assets Company Name mobile.de Baazee.com Marktplaats.nl Internet Auction Rent.com...

  • Page 97
    ...two years for the trade name. Baazee.com Acquisition On August 2, 2004, we acquired a 100% interest in Baazee.com for a cash purchase price of approximately $50 million. Baazee.com is an online marketplace in India. Through this acquisition, we have established eBay in India and will open our global...

  • Page 98
    .... Rent.com is an Internet listing website in the apartment and rental housing industry. The acquisition better enables our expansion into the online real estate market and is consistent with our strategy of growing our global online marketplaces. The total purchase price recorded was approximately...

  • Page 99
    ... estimated fair values on the applicable acquisition date. The estimated useful economic lives of the identifiable intangible assets acquired in these acquisitions are five years for both the trade names and for the customer lists. The final purchase price allocation will depend primarily upon...

  • Page 100
    .... The estimated useful economic lives of the identifiable intangible assets acquired in the Skype acquisition are five years for registered user technology and trade names, two years for existing technology, and one year for network access agreements. The final purchase price allocation will depend...

  • Page 101
    ...NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) technologies that enable and better protect online transactions, including the purchase of up to one million two-factor authentication tokens. We accounted for the acquisition as a purchase transaction and, accordingly, the purchase price has...

  • Page 102
    ... of customer lists and user base, trademarks and trade names, developed technologies, and other acquired intangible assets including patents and contractual agreements. No significant residual value is estimated for the intangible assets. The increase in intangible assets during the year ended...

  • Page 103
    ... expenses over which segment managers have direct discretionary 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...

  • Page 104
    eBay Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) Year Ended December 31, 2004 International U.S. Marketplaces Marketplaces Payments Consolidated Net revenues from external customers Direct costs Direct contribution Operating expenses and indirect costs of net revenues Income ...

  • Page 105
    ...to the U.S. and International geographies are based upon the country in which the seller, payment recipient, advertiser or end-to-end service provider is located. Germany accounted for greater than 10% of our total net revenues for the years ended December 31, 2003, 2004, and 2005, respectively. The...

  • Page 106
    ... consists of both corporate and government securities that have a maximum maturity of three years. The longer the duration of these securities, the more susceptible they are to changes in market interest rates and bond yields. As yields increase, those securities purchased with a lower yield-at-cost...

  • Page 107
    ...for their use of intellectual property and technology and for certain corporate services provided by eBay and by PayPal. These charges are denominated in Euros and these forecasted inter-company transactions represent a foreign currency cash flow exposure. To reduce foreign exchange risk relating to...

  • Page 108
    eBay Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) forward contracts is to better ensure that the U.S. dollar-equivalent cash flows are not adversely affected by changes in the U.S. dollar/Euro exchange rate. Pursuant to Statement of Financial Accounting Standards No. 133 ""...

  • Page 109
    eBay Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) December 31, 2004 2005 (In thousands) Property and equipment, net: Computer equipment and software Land and buildings, including building improvements Leasehold improvements Furniture and fixtures Aviation equipment and other ...

  • Page 110
    ... of users selling counterfeit Rolex watches through our German website. The suit also alleged unfair competition. Rolex sought an order enjoining the sale of Rolex-branded watches on the website as well as damages. In December 2002, a trial was held in the matter and the court ruled in favor of eBay...

  • Page 111
    ... action alleging that its limiting access to customer accounts and failure to promptly restore access to legitimate accounts violates California state consumer protection laws and is an unfair business practice and a breach of PayPal's User Agreement. This action was re-filed with a different named...

  • Page 112
    ... accrued in our consolidated income statement for the year ended December 31, 2005. In January 2005, 51 former shareholders of Epinions, Inc. common stock including founders and former employees of that company filed a lawsuit in Superior Court of the State of California County of San Francisco (No...

  • Page 113
    ... claims, whether meritorious or not, could be time consuming and costly to resolve, cause service upgrade delays, require expensive changes in our methods of doing business, or could require us to enter into costly royalty or licensing agreements. From time to time, we are involved in other disputes...

  • Page 114
    ... plan. Note 12 Ì Employee Benefit Plans: Employee Stock Purchase Plan We have an employee stock purchase plan for all eligible employees. Under the plan, shares of our common stock may be purchased over an offering period with a maximum duration of two years at 85% of the lower of the fair market...

  • Page 115
    ...the employee stock purchase plan by the number of shares purchased under this plan in the preceding calendar year. Employee Savings Plans We have a savings plan, which qualifies under Section 401(k) of the Internal Revenue Code. Participating employees may contribute up to 25% of their annual salary...

  • Page 116
    ... than the $43.22 closing price of our common stock on December 31, 2005. 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...

  • Page 117
    ...assumptions: risk-free interest rate, 4.43%; effective contractual life, 3 years; dividend yield, 0%; and expected volatility, 35%. The following table summarizes additional stock option information related to grants made to our employees and grants made specifically to named officers, which include...

  • Page 118
    ... available under these non-stockholder approved plans for future grants as of December 31, 2005. Note 13 Ì Income Taxes: The components of pretax income before cumulative effect of accounting change and minority interest in consolidated companies for the years ended December 31, 2003, 2004 and...

  • Page 119
    ... limitations, to benefit from these amounts. When realized, the tax benefits of tax deductions related to stock options are accounted for as an increase to additional paid-in capital rather than a reduction of the income tax provision. Our profitability coupled with the level of stock option...

  • Page 120
    ... prepared on the same basis as the Consolidated Financial Statements and includes all adjustments necessary to state fairly the information for the periods presented. The results of operations for any quarter are not necessarily indicative of results for the full year or for any future period. All...

  • Page 121
    eBay Inc. FINANCIAL STATEMENT SCHEDULE The Financial Statement Schedule II Ì VALUATION AND QUALIFYING ACCOUNTS is filed 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-offs ...

  • Page 122
    ... 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 23rd day of February, 2006. eBay Inc...

  • Page 123
    Additional Directors By: /s/ PIERRE M. OMIDYAR Pierre M. Omidyar Founder, Chairman of the Board and Director /s/ EDWARD W. BARNHOLT Edward W. Barnholt Director /s/ SCOTT D. COOK Scott D. Cook Director /s/ ROBERT C. KAGLE Robert C. Kagle Director /s/ RICHARD T. SCHLOSBERG, III Richard T. Schlosberg, ...