To our Stockholders, Partners, Employees and the eBay Community
A Dedicated Community
eBay's global community of buyers and sellers amazed and inspired us in 2003. Not only did the
community grow by more than 33 million people during the year, but it demonstrated more passion for
trading than ever before. The community's drive and determination continued to build an ever more
dynamic and robust marketplace. By creating opportunity for millions of people, eBay's community is
changing the way commerce is done around the world.
Every day men and women around the world Ñnd new ways to take advantage of the eBay
marketplace. As a result, there are as many stories on eBay as there are members. An Ohio expert on 3D
viewers uses eBay to Ñnd rare models and vintage reels. A traveling salesman in Cape Cod sets up a
company selling high-end sneakers in order to stay home with his wife and young children. An
unemployed couple in Arkansas build a family business through selling art prints. A Minnesota farmer
searches eBay to Ñnd used farm equipment at a discount. A young man in Hong Kong turns his passion
for toy cars into a global trading business. These members, and millions more like them, are pursuing their
dreams and Ñnding new kinds of success with eBay.
Building a Company to Last
As the community has grown, the eBay marketplace has expanded and the business has become
stronger. Ninety-Ñve million users from more than 150 countries listed 971 million items on eBay last year.
The total value of goods sold on the site, which is called gross merchandise sales (or GMS), reached
nearly $24 billion, a 60% increase from 2002. At the same time, usage of PayPal, the company's online
payment service, also grew, demonstrating the convenience and value it brings to online trading. Total
PayPal accounts almost doubled to 40 million in 2003, driving 230 million transactions and total payment
volume of more than $12 billion, up 73% for the year.
As a result of this activity, 2003 was another year of signiÑcant revenue growth for eBay. Strong gross
merchandise sales and total payment volume drove 2003 consolidated net revenue past $2 billion for the
Ñrst time in our history, to $2.17 billion for the full year. It took eight years for eBay to reach $1 billion in
annual revenue. Just one year later, this amount has doubled.
There is no question that eBay is a fast growing company. To support this rapid growth and to lay the
groundwork for continued growth in the future, we increased our investment in key parts of the business in
2003. These strategic investments were made in product development, technology infrastructure, customer
support, Trust & Safety, and PayPal. Investing in these areas will help make eBay and PayPal even faster,
easier and safer to use, which will in turn allow our members to become even more successful.
Even though we made signiÑcant investments in 2003, we also delivered increasing proÑt and cash
growth. Net income grew to a record of $442 million, up 77% in 2003, resulting in record operating cash
Öows of $874 million, up 82%, and record free cash Öows of $509 million, up 49%.1 This helped us end the
year with an even stronger balance sheet consisting of $5.8 billion in total assets and $2.7 billion in cash
and investments.
Creating a healthy and Ñnancially sound company is crucial for our community. Because so many
people around the world depend on eBay for their hobbies and even their livelihoods, we feel we have a
responsibility to maintain a safe and reliable place for them to trade. As a result, we are committed to
building a company to last.
Our Future
Based on the growth we have seen over the past year, and the untapped potential that lies ahead, the
company's future looks very bright.
As we did in 2003, we will continue to invest in key growth areas of the business throughout 2004. In
Asia and Europe, we will invest in technology, marketing, and product development capacity. For PayPal,
(1) eBay deÑnes free cash Öows as operating cash Öows less purchases of property and equipment, which in
2003 were $874 million and $365 million, respectively.
we will continue to expand into new international markets, while further investing in technology and
infrastructure in the U.S. And, in eBay's North American business, we will continue to give our members
more online tools that help them pursue their own success.
A year of investment does not mean, however, a year of lower proÑt or cash Öow generation. In 2004,
we plan to continue to apply Ñnancial discipline in balancing investment with returns and operating margin
expansion as we seek to achieve record Ñnancial performance.
These results are not achieved easily or alone. We would like to express our gratitude to eBay's
partners, employees, and shareholders for their continued support. And, we also acknowledge the
contributions of our community, whose passion and entrepreneurial spirit are the true drivers of eBay's
success. We are extremely proud of the unique partnership we have with our community and look forward
to even greater achievements together in the years ahead.
Pierre Omidyar
Founder and Chairman of the Board
Meg Whitman
President and CEO
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
≤ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the Ñscal year ended December 31, 2003.
OR
n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the Transition Period from
to
.
Commission Ñle number 000-24821
eBay Inc.
(Exact name of registrant as speciÑed in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
2145 Hamilton Avenue
San Jose, California
(Address of principal executive oÇces)
77-0430924
(I.R.S. Employer
IdentiÑcation Number)
95125
(Zip Code)
(408) 376-7400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934: None
Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934: Common Stock
Indicate by check mark whether the registrant (1) Ñled all reports required to be Ñled by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to Ñle such reports), and (2) has been subject to such Ñling requirements for the past 90 days. Yes ≤ No n
Indicate by check mark if disclosure of delinquent Ñlers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the registrant's knowledge, in deÑnitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. n
Indicate by check mark whether the registrant is an accelerated Ñler (as deÑned in Exchange Act
Rule 12b-2). Yes ≤ No n
As of June 30, 2003, the last business day of the registrant's most recently completed second Ñscal quarter, there
were 640,739,874 shares (after giving retroactive eÅect to the registrant's two-for-one stock split eÅective August 28,
2003) of the registrant's common stock, $0.001 par value, outstanding, which is the only class of common or voting stock
of the registrant issued as of that date. The aggregate market value of the voting stock held by non-aÇliates, computed by
reference to the closing price for the common stock as quoted by the Nasdaq National Stock Market as of that date and
based upon information provided by stockholders on Schedules 13D and 13G Ñled with the Securities and Exchange
Commission, was approximately $22,611,343,000. Shares of common stock held by each executive oÇcer and director
and by each person who owns 5% or more of the registrant's outstanding common stock have been excluded in that such
persons may be deemed to be aÇliates. This determination of aÇliate status is not necessarily a conclusive determination
for other purposes.
As of March 1, 2004, there were 653,998,192 shares of the registrant's common stock outstanding.
FORWARD LOOKING STATEMENTS
PART I
This report contains statements that involve expectations, plans or intentions (such as those relating to
future business or Ñnancial results, new features or services, or management strategies). These statements
are forward-looking and are subject to risks and uncertainties, so actual results may vary materially. You
can identify these forward-looking statements by words such as ""may,'' ""will,'' ""should,'' ""expect,''
""anticipate,'' ""believe,'' ""estimate,'' ""intend,'' ""plan'' and other similar expressions. You should consider
our forward-looking statements in light of the risks discussed under the heading ""Risk Factors That May
AÅect Results of Operations and Financial Condition'' in Item 7, as well as our Consolidated Financial
Statements, related notes, and the other Ñnancial information appearing elsewhere in this report and our
other Ñlings with the Securities and Exchange Commission. We assume no obligation to update any
forward-looking statements.
ITEM 1: BUSINESS
eBay Inc. was formed as a sole proprietorship in September 1995 and was incorporated in California
in May 1996. In April 1998, we reincorporated in Delaware and in September 1998 we completed the
initial public oÅering of our common stock. Our principal executive oÇces are located at 2145 Hamilton
Avenue, San Jose, California, 95125, and our telephone number is (408) 376-7400. When we refer to
""we,'' ""our'' or ""eBay'' in this Annual Report on Form 10-K, we mean the current Delaware corporation
(eBay Inc.) and its California predecessor, as well as all of our consolidated subsidiaries. When we refer to
""eBay.com,'' we mean the online marketplace located at www.ebay.com. When we refer to ""PayPal.com,''
we mean the global payments platform located at www.paypal.com.
Our Mission
Our mission is to build the world's most eÇcient and abundant marketplace in which anyone,
anywhere, can buy or sell practically anything. 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 platform, we enable any business or consumer with email to send and receive online payments
securely, conveniently and cost-eÅectively.
Our Marketplace
Our marketplace exists as an online trading platform that enables a global community of buyers and
sellers to interact and trade with one another. Our role is to create, maintain, and expand the technological
functionality, safety, ease-of-use, and reliability of our trading platform while, at the same time, supporting
the growth and success of our community of users.
Our Trading Platform
Our trading platform is a fully automated, topically arranged, intuitive and easy-to-use online service
that is available 24-hours a day, seven-days a week, enabling sellers to list items for sale in either auction
or Ñxed-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 either for no charge or for a fee, that allow buyers and sellers to more easily trade with
one another. Our software tools and services Ì such as Turbo Lister, Seller's Assistant, Selling Manager
and Selling Manager Pro, which help automate the selling process; the Shipping Calculator, which makes
it easier for buyers and sellers to calculate shipping costs; the eBay Toolbar, which helps eBay users stay
connected with eBay wherever they are on the Internet; and PayPal, which facilitates the online exchange
of funds Ì are all designed to make our trading process easier and more eÇcient. Whether provided by us
2
or our commercial partners, services such as our global payments platform at PayPal.com, trust and safety
programs, user veriÑcation, buyer protection and assurance programs, postage and other shipping services,
vehicle inspections, escrow, authentication and appraisal are all intended to create a faster, easier and safer
trading environment.
Our Global Payments Platform
Our global payments platform, PayPal, enables any individual or business with an email address to
securely, easily and quickly send and receive payments online. Through PayPal, we intend to accelerate the
velocity of trade on eBay and other online businesses by eliminating the various obstacles presented by
traditional payment methods. The service builds on the existing Ñnancial infrastructure of bank accounts
and credit cards and utilizes one of the world's most advanced proprietary fraud prevention systems to
create a safe, global, real-time payment solution. The platform has quickly become a global leader in
online payment solutions with over 40 million account members worldwide. Buyers and sellers on eBay,
online retailers, online businesses, and traditional oÉine businesses are transacting using our global
payments platform, which is available in 38 countries around the world. PayPal was acquired by eBay in
October 2002 and is now located in San Jose, California.
Our Community
Our community of users is the largest and one of the most loyal online trading communities on the
Internet. We have aggregated a signiÑcant number of buyers, sellers, and items listed for sale, which, in
turn, has resulted in an extremely vibrant trading environment. Our sellers enjoy generally high conversion
rates and buyers enjoy an extensive selection of broadly priced goods and services. Key components of our
community philosophy are maintaining an honest and open marketplace and treating individual users with
respect. We seek to maintain the satisfaction and loyalty of our frequent buyers and sellers by oÅering a
variety of community and support features such as announcement and bulletin boards, customer support
boards and personal pages, as well as other topical or category-speciÑc information exchanges. In addition,
through the PayPal global payments platform, we enable our community of eBay users, as well as the
users of other online trading platforms, to pay for their transactions securely, easily and quickly. By
applying a consistent set of policies and fees to our community, we have created a level playing Ñeld that
lets individuals and businesses of all types and sizes access broad markets and compete equally.
Our Value Proposition
Our online marketplace makes ineÇcient markets more eÇcient.
Traditional oÉine marketplaces can be ineÇcient because:
‚ They are fragmented and regional, making it diÇcult and expensive for buyers and sellers to meet,
exchange information and complete transactions;
‚ They oÅer a limited variety and breadth of goods;
‚ They often have high transaction costs due to intermediaries; and
‚ They are information ineÇcient, as buyers and sellers lack a reliable and convenient means of
setting prices.
We make these ineÇcient marketplaces more eÇcient because:
‚ Our global community of users can easily and inexpensively communicate, exchange information
and complete transactions;
‚ Our marketplace includes tens of millions of items creating a very wide variety and selection of
goods;
‚ We bring buyers and sellers together for much lower fees than traditional intermediaries; and
3
‚ Our marketplace provides for eÇcient information exchange.
In particular, large markets with broad buyer and seller bases, wide product ranges, and moderate
shipping costs have been successful on eBay. Our marketplace is most eÅective, relative to available
alternatives, at addressing markets of new and scarce goods, end-of-life products and used and vintage
items.
Our global payments platform also makes online trading more eÇcient compared to traditional
payment methods such as checks, money orders, and credit cards via merchant accounts. These traditional
payment methods present various obstacles to the online trading experience, including lengthy processing
time, inconvenience, and high costs. PayPal delivers a product well suited for small businesses, online
merchants and individuals by allowing them to send and receive online payment securely, conveniently and
cost-eÅectively.
Our Strategy
We intend to achieve our mission of becoming the world's most eÇcient and abundant marketplace
by creating marketplace conditions that enable our users' success. By continuing to foster the vibrancy of
the world's largest network of buyers and sellers, and by making the online trading experience faster, easier
and safer, we better enable the success of our user community.
Growing our User Community
Delivering Value to Buyers and Sellers
Our success has been largely dependent upon the success of our community of conÑrmed registered
users, which has grown from approximately two million at the end of 1998 to 95 million at December 31,
2003. In addition, at December 31, 2003, we had over 41 million active users, compared to approximately
28 million at the end of 2002. We deÑne an active user as any user who bid on, purchased, or listed an
item during the prior 12 months.
We attract buyers and sellers to our community by oÅering:
Buyers
‚ Selection
‚ Value
‚ Convenience
‚ Entertainment
Sellers
‚ Access to broad markets
‚ EÇcient marketing and distribution costs
‚ Ability to maximize prices
‚ Opportunity to increase sales
We focus on three fundamental building blocks Ì acquisition, activation and activity Ì to grow the
gross merchandise sales and net revenues derived from the eBay platform. The speciÑc areas of focus in
each of our online trading marketplaces, both inside and outside of the United States, depends on the
stage of local market development and other considerations.
Creating a Global Marketplace
A key element of our growth strategy is to continually expand the eBay marketplace to new
communities around the world. Providing access to broad markets and reducing the barriers of global trade
creates value for both buyers and sellers and greatly increases the vibrancy of our marketplace. As of
4
December 31, 2003, eBay and our consolidated subsidiaries had websites directed toward the following
countries:
‚ Australia
‚ Austria
‚ Belgium
‚ Canada
‚ China
‚ France
‚ Germany
‚ Hong Kong
‚ Ireland
‚ Italy
‚ New Zealand
‚ Singapore
‚ South Korea
‚ Spain
‚ Sweden
‚ Switzerland
‚ Taiwan
‚ The Netherlands
‚ United Kingdom
‚ United States
In addition, through our equity investment in MercadoLibre, our geographic reach as of December 31,
2003, included the following countries:
‚ Argentina
‚ Brazil
‚ Chile
‚ Columbia
‚ Ecuador
‚ Mexico
‚ Uruguay
‚ Venezuela
Providing a Faster, Easier and Safer Trading Experience
Category Growth
Category growth both in number and size within the eBay marketplace is a key element in creating a
faster, easier, and safer online trading experience. In 2003, we made signiÑcant investments to grow
existing categories and to expand the number of categories in the eBay marketplace. By focusing
development, marketing and customer support eÅorts around major categories, we achieved greater than
27% year-over-year growth in gross merchandise sales in all of our major categories and increased the
number of global categories under which eBay users can list goods for sale, to more than 45,000 as of
December 31, 2003.
Major Categories
As of December 31, 2003, listings on eBay.com were organized under the following categories:
‚ Antiques
‚ Art
‚ Books
‚ Business & Industrial
‚ Clothing, Shoes and Accessories
‚ Coins
‚ Collectibles
‚ Computers & Electronics
‚ Dolls & Bears
‚ Entertainment
‚ Everything Else
‚ Home
‚ Jewelry & Watches
‚ Musical Instruments
‚ Pottery & Glass
‚ Real Estate
‚ Specialty Services
‚ Sports
‚ Stamps
‚ Tickets
‚ Toys & Hobbies
‚ Travel
‚ eBay Motors
‚ Motorcycles
‚ Other Vehicles
‚ Passenger Vehicles
‚ Parts & Accessories
Each major category has numerous subcategories, with the most popular items sold on eBay being
those that are relatively standardized, well represented with a photo, small and easily shipped and relatively
inexpensive.
Payment Services
Providing more eÇcient and eÅective payment methods is essential to creating a faster, easier and
safer online trading experience. Traditional payment methods such as checks, money orders and credit
cards processed through merchant accounts, all present various obstacles to the online trading 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 other online businesses, to pay for their
transactions securely, easily and quickly.
5
Our goal for PayPal is to become the world's most convenient, secure, and cost-eÅective online
payments solution. PayPal currently oÅers its services in English to users in 38 countries, including the
United States. During 2003, over $12.2 billion in total payment volume, or TPV, was transacted on the
PayPal platform, consisting primarily of payment to individuals and small businesses trading on eBay and
various other online shopping sites. As of December 31, 2003, PayPal had 40 million accounts, compared
to 23 million accounts at December 31, 2002.
PayPal has achieved its rapid growth by delivering a combination of user convenience, competitive
pricing and customer safeguards. During the year ended December 31, 2003, PayPal's total number of
accounts grew by 17 million, an average of 46,000 per day. During this same period, PayPal processed an
average of 629,000 payments per day, averaging $33.5 million in daily payment volume, with an average
payment of $53 sent during this period.
The eBay Online Trading Experience
We describe below the typical buying and selling experience on the eBay websites, subject to some
variation on a country-by-country basis.
Registration
Any visitor to eBay.com and our international websites can browse through the eBay service and view
the items listed for sale. To bid on, list or purchase an item, buyers and sellers must Ñrst register with
eBay by completing a short online form and conÑrmation process.
Buying on eBay
Users can search for speciÑc items by browsing through a list of items within a category or
subcategory and then ""click through'' to a detailed description for a particular item. Users can also search
speciÑc categories, interest pages or the entire database of listings using keywords to describe their areas of
interest. Our search engine generates lists of relevant items with links to detailed descriptions. Each item is
assigned a unique identiÑer so that users can easily search for and track speciÑc items. Users also can
search for a particular bidder or seller by name to review his or her listings and feedback history and
search for products by speciÑc region or other attributes. Once a user has found an item and registered,
the user may enter a bid for the maximum amount he or she is willing to pay at that time, or for those
listings that oÅer the Buy-It-Now feature, purchase the item by paying the Buy-It-Now price established
by the seller. In the event of competitive bids, the eBay service automatically increases bidding in
increments based upon the current high bid, up to the bidder's maximum price.
We encourage direct interaction between buyers and sellers. Potential buyers wishing additional
information about a listed item can contact the seller through email. We believe that this interaction
between potential buyers and sellers enhances the trading experience on eBay and is an important element
of our service. Once each bid is made, we send an email conÑrmation to the bidder and an outbid notice
to the next highest bidder and automatically update the item's auction status. During the course of the
transaction, we notify bidders immediately through email if they are outbid. Buyers are not charged for
making bids or purchases through eBay. In addition, buyers can specify items of interest on a service
called ""Favorite Searches'' (previously named ""Personal Shopper'') and receive automated email messages
when these particular items are available for sale on eBay.
Selling on eBay
Users can sell items on eBay by registering and selling items on their own, or with the help of an
eBay ""Trading Assistant,'' described below under ""Trading Assistants.''
6
Selling Items
Registered sellers can list a product for sale by completing a short online form or using ""Turbo
Lister,'' ""Selling Manager,'' ""Seller's Assistant,'' or third-party tools that facilitate the listing of multiple
items. The seller selects a minimum price for opening bids for the item and chooses whether the sale will
last one, three, Ñve, seven or 10 days. Additionally, a seller may select a reserve price for an item, which is
the minimum price at which the seller is willing to sell the item and is typically higher than the minimum
price set for the opening bid. The reserve price is not disclosed to bidders. Sellers with appropriate
feedback ratings may also choose to use the Buy-It-Now feature at the time of listing, which allows sellers
to name a price at which they would be willing to sell the item to any buyer. Listings that oÅer the
Buy-It-Now feature are conducted in the normal auction-style format, but will also feature a Buy-It-Now
icon and price. Until the Ñrst bid is placed, or in the case of a reserve auction, until the reserve price is
met, buyers have the option to buy the item instantly at the speciÑed price without waiting for the auction
to end. A seller can elect to sell items in individual item listings or, if he or she has multiple identical
items, can elect to hold a ""Dutch Auction.'' For example, an individual wishing to sell 10 identical
watches could hold 10 individual auctions or hold a Dutch Auction in which the 10 highest bidders would
each receive a watch at the price bid by the tenth-highest bidder. To be eligible to hold a Dutch Auction,
a seller must have a suÇciently high feedback rating and must have been a registered seller for at least
60 days. A seller may also specify that an auction will be a private auction. With this format, bidders' user
names are not disclosed on the item screen or bidding-history screen.
Sellers generally pay a nominal listing fee to list items for sale. By paying incremental placement fees,
sellers can have items featured in various ways. For example, a seller can highlight his or her item for sale
by using a bold font for the item heading, have his or her auction displayed as a ""Featured Auction,''
which allows an item to be rotated on the eBay home page, or select the Buy-It-Now feature, which
enables a seller to close an auction instantly once a speciÑed price is reached.
When an auction ends, the eBay system validates whether a bid has exceeded the minimum price, (and
the reserve price, if one has been set). For each successful auction, or if the buyer has elected the
Buy-It-Now feature, we automatically notify the buyer and seller via email, and the buyer and seller can
then complete the transaction independently from us. At the time of the email notification, we generally
charge the seller a final value fee. eBay does not take possession of either the item being sold or the buyer's
payment for the item. Rather, the buyer and seller must independently arrange for the shipment of and
payment for the item, with the buyer typically paying for shipping. We also offer sellers a free checkout
feature that provides a consistent process for exchanging payment and other details at a listing's end. This
process helps sellers get paid faster and reduces the number of emails between buyers and sellers.
Under the terms of eBay's user agreement, if a seller receives one or more bids above the stated
minimum or reserve price, whichever is higher, the seller is obligated to complete a transaction. We have
no power to force the seller or buyer to complete the transaction, other than to suspend them from using
the eBay service in the future. In the event the buyer and seller are unable to complete the transaction
and the seller notiÑes us, we have the right to credit the seller the amount of the Ñnal value fee.
We send invoices for listing, feature and Ñnal value fees using email to sellers on at least a monthly
basis. We require all new sellers to have a credit card account on Ñle. Sellers who pay us by credit card
are charged shortly after the invoice is sent. Our fees vary based on country. Our U.S. listing fees, or
insertion fees, range from $0.30 to list an item with a minimum bid, opening value or reserve price of
under $0.99, to $4.80 to list an item with a minimum bid, opening value or reserve price of $500.00 or
more. In addition to the insertion fee, we charge a Ñnal value fee if the item sells. These Ñnal value fees
range from 5.25% of the Ñnal listing price for items that sell for less than $25.01, to $28.12 plus 1.5% of
the amount over $1,000 for items that sell for over $1,000. The insertion and the Ñnal value fees are higher
for our special category items such as vehicles or real estate. Through our eBay Picture Services, we oÅer
one free picture in each listing, and charge $0.15 for each additional picture. A detailed listing of our
eBay.com fee structure as well as other features available, can be found under ""Selling Fees'' on our
website at www.ebay.com. All pricing is subject to change.
7
Trading Assistants
The eBay Trading Assistants program is a network of experienced eBay sellers who have indicated
their willingness to assist others in the sale of items for a fee. Interested sellers can search the Trading
Assistant Directory to Ñnd someone to sell items on their behalf. The Trading Assistants and their clients
negotiate the terms and conditions of these services.
Other eBay Services
Customer Support
We devote signiÑcant 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 are focusing our resources on increasing our
accessibility and capacity, expanding our category speciÑc support, extending our online self-help features,
and improving our systems and processes to allow us to provide the most eÇcient and eÅective support
possible.
Value-Added Services
eBay users have access to a variety of ""pre-trade'' and ""post-trade'' services to enhance their user
experience and to make trading faster, easier, and safer for them. ""Pre-trade'' services simplify the listing
process and include photo hosting, authentication and seller productivity software. ""Post-trade'' services,
which make transactions easier and more comfortable to complete, include payment processing, insurance,
vehicle inspections, escrow, shipping and postage. We currently provide these services directly or through
contractual arrangements with third parties.
Trust and Safety Programs
We have developed a number of programs, including our Feedback Forum and SafeHarborTM
program, to make eBay users more comfortable dealing with unknown trading partners and completing
commerce transactions on the Internet.
Feedback Forum
eBay's Feedback Forum encourages each user to provide comments on other eBay users with whom
he or she trades and lets every user view other users' proÑles, which include feedback ratings and
comments by other users. Every registered eBay user has a feedback proÑle containing compliments,
criticisms and other comments by users who have conducted business with the person. The Feedback
Forum requires feedback to be related to speciÑc transactions and provides an easy tool for users to match
speciÑc transactions with the user names of their trading partners. This information is recorded in a
feedback proÑle that includes a feedback rating for the person with feedback sorted according to whether
it was given over the past month, six months, or twelve months. Users who develop positive reputations
will have a color-coded star symbols displayed next to their user names 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 proÑle to check his or her reputation within the eBay community.
The terms of eBay's user agreement prohibit actions that would undermine the integrity of the
Feedback Forum, such as a users' leaving positive feedback about himself or herself through multiple
accounts or leaving multiple negative feedback for others through multiple accounts. The Feedback Forum
has several automated features designed to detect and prevent some forms of abuse. For example, feedback
postings from the same account, positive or negative, cannot aÅect a user's net feedback rating (i.e., the
number of positive postings, less the number of negative postings) by more than one point, no matter how
many comments an individual makes. Also, a user can only leave feedback for completed transactions.
Users who receive a suÇciently negative net feedback rating have their registrations suspended and are
unable to bid on or list items for sale. We believe our Feedback Forum is extremely useful in overcoming
8
initial user hesitancy when trading over the Internet, as it reduces the anonymity and uncertainty of
dealing with an unknown trading partner.
SafeHarborTM Program
In addition to the Feedback Forum, we oÅer the SafeHarborTM program, which provides guidelines for
trading, provides information to resolve user disputes and responds to reports of misuses of the eBay
service. eBay's SafeHarbor staÅ investigates users' complaints of possible misuse of the eBay service and
takes appropriate action, including issuing warnings to users or suspending users from bidding on or listing
items for sale. Some of the complaints the SafeHarbor staÅ investigates include various forms of bid
manipulation, malicious posting of negative feedback and posting of illegal items for sale. The SafeHarbor
group is organized into three areas: Investigations, Fraud Prevention and Community Watch. The
Investigations team investigates reported trading infractions and misuse of the eBay service. The Fraud
Prevention team provides information to assist users with disputes over the quality of the goods sold or
potentially fraudulent transactions. When we receive an oÇcially Ñled, written claim of fraud from a user,
we will generally suspend the oÅending user from the eBay service or take other appropriate action. The
Community Watch team investigates the listing of illegal, infringing or inappropriate items on the eBay
sites and violations of certain of our policies. When we receive a valid written claim of intellectual property
infringement by the owner of the intellectual property, we remove the oÅending item. Users who
repeatedly infringe intellectual property rights are suspended. In addition, we have increased the number of
people reviewing potentially illegal items and have developed software programs that scan new listings for
keywords that may indicate illegal, infringing, or inappropriate items. Our trust and safety initiatives,
including user identity veriÑcation, insurance, integrated escrow, authentication, and other proactive anti-
fraud eÅorts are key elements of our eÅort to make eBay a safe place to trade.
My eBay
We oÅer My eBay, which permits users to receive a report of their recent eBay activity, including
bidding, selling, account balances, favorite categories and recent feedback. Users with their own web pages
also may post links from their pages to eBay and list the items they are selling on eBay. We also oÅer
About Me, which provides users the opportunity to create their own personal home page free of charge on
eBay using step-by-step instructions. The About Me home page can include personal information, items
listed for sale, eBay feedback ratings, images and links to other favorite sites.
eBay Foundation
In June 1998, we donated 1,287,000 split-adjusted shares of our common stock to the Community
Foundation Silicon Valley, a tax-exempt donor-advised public charity, and established a fund known as the
""eBay Foundation.'' Since its inception, the eBay Foundation has made millions of dollars in grants to
dozens of programs and initiatives focused on education and expanded access to technology. We also seek
user suggestions for worthwhile charities through our website, where charity auctions and other unique
promotions are held to support such causes.
The PayPal Online Payment Experience
Following a completed transaction, eBay buyers and sellers can exchange funds by the payment
method of their choice, most frequently through our PayPal global payments platform, but in some cases
using check, money order or merchant credit card accounts. PayPal enables any business or consumer with
email to send and receive online payments securely, conveniently and cost-eÅectively. PayPal's email-
driven system builds on the legacy Ñnancial infrastructure of bank accounts and credit cards to create an
online payment network available to users in 38 countries. PayPal's global payments platform also provides
those individuals and businesses conducting e-commerce transactions on sites other than eBay the same
ability to exchange funds in settlement of such transactions.
9
How PayPal Works
Joining the Network
To send or receive a payment, a user Ñrst must open a PayPal account. PayPal oÅers three types of
accounts: Personal, Business, or Premier. A detailed description of the features of each of these accounts
can be found under ""Accounts'' on our website at www.paypal.com. A new user typically opens an account
to send money for an eBay purchase or a purchase on another website, a payment for services rendered, or
for a payment to an individual in lieu of cash. Allowing new users to join the network when they make or
receive payments encourages PayPal's natural, user-driven growth. PayPal's account sign-up process asks
each new user to provide PayPal his or her name, street address, phone number, and email address. The
user's email address serves as the unique account identiÑer.
Making Payments
Senders make payments at the PayPal website, at an item listing on eBay or another online
marketplace where the seller has integrated PayPal's Instant Purchase Feature, or at the sites of merchants
that have integrated PayPal's Web Accept feature. To make a payment at PayPal's website, a sender logs
in to his or her account and enters the recipient's email address and the amount of the payment. To make
a payment through Instant Purchase or Web Accept, a sender selects an item for purchase, conÑrms the
payment information and enters his or her email address and password to authorize the payment. PayPal
debits the money from the sender's PayPal balance, credit card, or bank account and instantly credits it to
the recipient's PayPal balance. In the case of an eCheck payment, the funds are credited to the recipient's
PayPal balance after two to three business days. In turn, the recipient can make payments to others or
withdraw his or her funds at any time via check (in the U.S.), electronic funds transfer, or a PayPal debit
card. PayPal earns revenues when a Business or Premier account receives a payment.
Funding Payments
Senders fund payments in three ways:
‚ from the sender's credit card or debit card;
‚ in the U.S. and, as of December 31, 2003, six other countries, from the sender's bank account,
using the local electronic funds transfer network; or
‚ from the sender's existing PayPal balance.
We incur funding costs on payments at varying levels based on the source of the payment, with credit
card and debit card funding costs being signiÑcantly higher than the other two funding sources. To those
users who choose to maintain PayPal balances in U.S. dollars, such users have the ability to select services
that provide a money market rate of return on balances placed in PayPal's Money Market Fund. The
PayPal Money Market Fund, which is invested in a portfolio managed by Barclays Global Fund Advisors,
bore a current compound annual yield of 1.01% as of December 31, 2003.
We use the terms ""balance'' and ""PayPal balance'' to refer to funds that PayPal customers choose
either to invest in the PayPal Money Market Fund (oÅered only to amounts held in U.S. dollars) or to
authorize PayPal to place in pooled bank accounts as agent of PayPal's customers. These funds belong to
our customers and as a result are not reÖected in our consolidated balance sheet. Funds belonging to our
customers that are not invested in FDIC-insured accounts, such as funds in transit to or from the
customer's bank, and funds held in non-U.S. denominated balances are shown as a liability on our balance
sheet. In 2004, the customer liability on our consolidated balance sheet is expected to increase because the
balances of our customers in the European Union will be treated as direct liabilities of PayPal's U.K.
subsidiary. These balances are not subject to FDIC insurance and will be invested by PayPal's U.K.
subsidiary in short-term investments.
10
VeriÑcation of PayPal's Account Holders
To fund payments from their bank accounts, senders must Ñrst become veriÑed PayPal users. The
primary method for veriÑcation is our Random Deposit technique. Under this technique, we make two
deposits ranging from 1 to 99 cents to the user's bank account. To verify ownership of the account, the
user then enters the two amounts as a four-digit code at the PayPal website. In addition to allowing
funding through bank accounts, veriÑcation 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 the U.S. and 22 other countries may withdraw money from their PayPal
account through an electronic fund transfer to his or her bank account or, in the U.S., by a mailed check
from PayPal. ACH withdrawals may take three to Ñve business days to arrive in the account holder's bank
account, depending on the bank. Mailed checks may take one to two weeks to arrive, and PayPal charges
$1.50 per check. Qualifying PayPal business users in the U.S. can receive a PayPal ATM/debit card,
which provides instant liquidity to their respective PayPal account balances. ATM/debit card holders can
withdraw cash, for a $1.00 fee per transaction, from any ATM connected to the Cirrus or Maestro
networks and can make purchases at any merchant accepting MasterCard.
PayPal Fees
PayPal does not charge a fee to open a Personal, Premier or Business account, or to send money or to
add funds. PayPal also does not charge to withdraw funds from any of these accounts that are based in the
U.S.; there is a nominal processing fee for withdrawals by non-U.S. accounts. PayPal charges Premier and
Business accounts to receive payments at rates from 2.2% plus $0.30 per transaction to 2.9% plus $0.30 per
transaction for payments denominated in dollars, and rates from 2.7% plus the equivalent of $0.30 to 3.4%
plus the equivalent of $0.30 for payments denominated in other currencies. PayPal also charges a cross
border fee amounting to an additional 1% for cross-border payments in dollars, and an additional fee of
0.5% for cross-border payments denominated in other currencies. If the transaction involves a currency
conversion, it will be completed at a retail foreign exchange rate determined by PayPal, which is adjusted
regularly based on market conditions. This exchange rate includes a 2.5% spread above the wholesale
exchange rate at which PayPal obtains foreign currency, and the spread is retained by PayPal. Personal
accounts do not pay a fee to receive payments, but may not receive credit card payments. A detailed
listing of PayPal fees for receiving payments and withdrawing funds from non-U.S. bank accounts can be
found under ""Fees'' at our website at www.paypal.com. All pricing is subject to change.
Technology
Our eBay Platform
The eBay platform is composed of a scalable transaction processing system, consumer user interface,
and externally accessible Application Programming Interface, or API, for third-party integrations. The
scalable system is primarily based on internally developed proprietary software, but also includes selected
vendor components. The eBay platform supports the full selling and buying processes, including initial
registration for the service, placing bids and managing outbids, listing items for sale, and auction close.
The eBay platform also manages various notiÑcations for sellers and buyers, including daily status updates,
bid and outbid notices, registration conÑrmations, account change notices, billing notices, and end-of-
auction notices. The platform maintains user registration information, billing accounts, current item listings
and historical listings. All information is regularly archived for record-keeping and analysis purposes. The
platform regularly updates a comprehensive search engine with the titles and descriptions of items, as well
as pricing and bidding updates for active items. The platform also updates the seller's billing account every
time an item is listed, a feature is selected, or an auction closes with a bid in excess of the seller-speciÑed
minimum bid. The platform sends electronic invoices to all sellers at least monthly. In addition to these
features, the eBay service also supports a community bulletin board and chat areas where users and eBay
11
customer support personnel can interact. Our overall system volume is signiÑcant, with peak usage in 2003
of 720 million page views per day and 7.8 gigabits of outbound data traÇc per second.
Our eBay platform is designed around industry standard architectures to reduce downtime in the event
of outages or catastrophic occurrences. The eBay service provides 24-hours a day, seven-days a week
availability. Substantially all of our system hardware is hosted at Cable & Wireless and Qwest facilities in
San Jose, California, and Sprint Communications facilities in Sacramento, California, each of which
provides redundant communications lines and emergency power backup. Although our systems have been
designed around industry-standard architecture to reduce downtime in the event of outages or catastrophic
occurrences, they remain vulnerable to damage or interruption, and we do not maintain fully redundant
systems. For more information regarding these risks, see the information in Item 7 under ""Risk Factors
That May AÅect Results of Operations and Financial Condition Ì System failures could harm our
business.''
Our platform consists of Sun database servers running Oracle relational database management
applications with a mix of Sun and Hitachi storage devices, along with a suite of Pentium-based Internet
servers running the Windows NT and Linux operating systems. We use F5 Networks' load balancing
systems and our own redundant servers along with select software from Veritas to provide for fault
tolerance, and we use IBM's WebSphere application server for certain platform functions. We use
internally developed systems to operate our service and for transaction processing, including billing and
collections processing. We have announced our intention to enhance our billing system with products from
CSG Systems. We must continually improve our systems to accommodate the increasing levels of use of
our websites. In addition, we may need to develop or license additional technology in order to add new
features and functionality to our services. The cost of our development eÅorts, plus the required
capitalization of certain site-related software and development costs, totaled $82.0 million in the year
ended December 31, 2001, $120.1 million in 2002 and $197.8 million in 2003. Our inability to upgrade our
technology, transaction processing systems, security infrastructure, or network infrastructure to accommo-
date increased traÇc or transaction volume could have adverse consequences. For more information
regarding these risks, see the information in Item 7 under ""Risk Factors That May AÅect Results of
Operations and Financial Condition Ì Our failure to manage growth could harm us.''
Our competitive space is characterized by rapidly changing technology, evolving industry standards,
frequent new service and product announcements, introductions and enhancements and changing customer
demands. Accordingly, our future success will depend on our ability to adapt to rapidly changing
technologies, to adapt our services to evolving industry standards and to improve the performance, features
and reliability of our services in response to competitive services and product oÅerings and evolving
demands of the Internet. Our failure to adapt to these changes would harm our business. In addition, the
widespread adoption of new Internet, networking or telecommunications technologies or other technological
changes could require substantial expenditures to modify or adapt our services or infrastructure. To address
the need for rapid change as well as stability, we have undertaken a project to enhance and evolve our
current architecture. The new architecture is intended to facilitate continued stability, improved scalability
and improved eÇciency. As of the fourth quarter of 2003, the new architecture is serving 80% of overall
traÇc on the eBay websites. This project is ongoing, with phased rollouts through 2004. We plan to time
these rollouts in a manner that minimizes the impact to our user community.
Our PayPal Platform
Our PayPal technology is designed to assure user access to the PayPal website. We focus much of
PayPal's development eÅorts on creating specialized software that enhances its Internet-based customer
functionality. One of PayPal's key challenges remains building and maintaining a scalable and reliable
system, capable of handling traÇc and transactions for a growing customer base. Most major components
of our PayPal network reside at our facilities in San Jose, California, at an Equinix data center in San
Jose, California, at a Cable & Wireless data center in Santa Clara, California, and at our PayPal
operations and customer support facility in Omaha, Nebraska.
12
Due to the Ñnancial nature of the PayPal product, we seek to oÅer a high level of data security in
order to build customer conÑdence and to protect our customers' private information. We have designed
our PayPal security infrastructure to protect data from unauthorized access, both physically and over the
Internet. PayPal's most sensitive data and hardware reside at the Equinix and Cable & Wireless data
centers. These data centers have redundant connections to the Internet, as well as fault-tolerant power and
Ñre suppression systems. Due to PayPal's special security needs, we house our PayPal equipment in
physically secure areas and we tightly control physical access to our systems. PayPal's systems and
operations are located in the same geographic area and are vulnerable to damage or interruption from
earthquakes, Öoods, Ñres, power loss, telecommunication failures and similar events. They are also subject
to break-ins, sabotage and intentional acts of vandalism, and to potential disruption if the operators of
these facilities have Ñnancial diÇculties. Because PayPal does not maintain fully redundant systems or
alternative providers of hosting services, any disaster in Northern California could cause PayPal to be
oÉine for a number of days. For more information regarding these risks, see the information in Item 7
under ""Risk Factors That May AÅect Results of Operations and Financial Condition Ì System failures
could harm our business.''
Multiple layers of network security and network intrusion detection devices further enhance the
security of our PayPal systems. We segment various components of the system logically and physically
from each other on our PayPal networks. Components of the system communicate with each other via
Secure Sockets Layer, or SSL, an industry-standard communications security protocol, and require mutual
authentication. Access to a system component requires at least two authorized staÅ members
simultaneously to enter secret passphrases. This procedure is designed to protect us from the unauthorized
use of PayPal's infrastructure components. Finally, we store all PayPal data we deem private or sensitive
only in encrypted form in our PayPal database. PayPal decrypts data only on an as-needed basis, using a
specially designated component of our PayPal system that requires authentication before fulÑlling a
decryption request.
Competition
We encounter vigorous competition in our business from numerous sources. Our users can Ñnd, buy,
sell, and pay for similar items through a variety of competing channels. These include but are not limited
to, online and oÉine retailers, distributors, liquidators, import and export companies, auctioneers, catalog
and mail-order companies, classiÑeds, directories, search engines, products of search engines, virtually all
online and oÉine commerce participants (consumer-to-consumer, business-to-consumer and business-to-
business) and online and oÉine shopping channels and networks. As our product oÅering continues to
broaden into new categories of items, we expect our competition to continue to broaden to include other
online and oÉine channels for those new oÅerings. We also compete on the basis of price, product
selection, and services. For our PayPal service, our users may choose to pay through a variety of
alternative means, including other online payment services, oÉine payment methods such as cash, check or
money order, and traditional online or oÉine merchant accounts. To compete eÅectively, we may need to
expend signiÑcant resources in technology and marketing. These eÅorts may be expensive and could
reduce our margins and have a material adverse eÅect on our business, Ñnancial position, operating results,
cash Öows and reduce the value of our stock. We believe that we will be able to maintain proÑtability by
preserving and expanding the abundance and diversity of our user community and enhancing our user
experience, but there can be no assurance that we will be able to continue to manage our operating
expenses to mitigate a decline in net income. For more information regarding these risks, see the
information in Item 7 under ""Risk Factors That May AÅect Results of Operations and Financial
Condition Ì Our industry is intensely competitive.''
Seasonality
Our results of operations historically have been seasonal because many of our users reduce their
activities on our websites with the onset of good weather during the summer months and on national
13
holidays. We have historically experienced our strongest quarters of online growth in our Ñrst and fourth
Ñscal quarters. PayPal has shown similar seasonality, except that its strongest quarter of online growth has
historically been the fourth Ñscal quarter. We expect these patterns of seasonality to become more
pronounced as our websites gain acceptance by a broader base of mainstream users and as the size of our
European operations, which experience greater seasonality, grows relative to our other operations.
Intellectual Property
We regard the protection of our trademarks, copyrights, patents, domain names, trade dress and trade
secrets as critical to our success. We have entered into conÑdentiality and invention assignment agreements
with our employees and contractors, and nondisclosure agreements with parties with whom we conduct
business in order to limit access to and disclosure of our proprietary information.
We aggressively protect our intellectual property rights by relying on a combination of trademark,
copyright, patent, trade dress and trade secret laws and by using the domain name dispute resolution
system. As a result, we actively pursue the registration of our trademarks, copyrights, patents and domain
names in the U.S. and other major countries. We must also protect our trademarks, patents and domain
names in an increasing number of jurisdictions, a process that is expensive, may require litigation, and may
not be successful in every location. We have registered or applied for our ""eBay'' trademark in the U.S.
and over 50 non-U.S. jurisdictions and have in place an active program to continue securing the ""eBay''
and ""PayPal'' domain names in major non-U.S. jurisdictions. We have Ñled to protect our rights to the
""eBay'' and ""PayPal'' names in certain new top-level domains such as "".biz'' "".info'' and "".us'' that have
become operational more recently. Our inability to secure our trademarks or domain names could
adversely aÅect us in any jurisdiction in which we are not able to register.
Third parties have from time to time claimed, and others may claim in the future, that we have
infringed their past, current or future intellectual property rights. We are involved in several such legal
proceedings. Please see the information in ""Item 3: Legal Proceedings'' and in Item 7 under ""Risk Factors
That May AÅect Results of Operations and Financial Condition Ì We are subject to intellectual property
and other litigation'' and ""Ì We may be unable to protect or enforce our own intellectual property rights
adequately.''
Employees
As of December 31, 2003, eBay employed approximately 5,700 persons (excluding approximately 500
temporary employees), of whom approximately 4,200 (excluding approximately 400 temporary employees)
were in the United States. Our future success is substantially dependent on the performance of our senior
management and key technical personnel and on our continuing ability to Ñnd and retain highly qualiÑed
technical and managerial personnel.
Segments
Reporting segments are based upon our internal organization structure, the manner in which our
operations are managed, the criteria used by our chief operating decision-maker to evaluate segment
performance, the availability of separate Ñnancial information and overall materiality considerations.
We have identiÑed three reporting segments: U.S., International and Payments. The U.S. segment
includes U.S. online marketplace trading platforms other than those of our PayPal and Billpoint
subsidiaries. The International segment includes our international online marketplace trading platforms
other than those of our PayPal and Billpoint subsidiaries. The Payments segment includes our global
payments platform consisting of our PayPal and Billpoint subsidiaries. The Payments amounts reÖect
Billpoint's historical operations and PayPal's operations for the post-acquisition period from October 4,
2002 through December 31, 2003. We discontinued Billpoint's operations in the Ñrst half of 2003.
14
Direct contribution consists of net revenues less direct segment costs. Direct segment costs include
speciÑc costs of net revenues, sales and marketing expenses, and general and administrative expenses over
which segment managers have direct discretionary control or inÖuence, such as advertising and marketing
programs, customer support expenses, bank charges, provisions for doubtful accounts, authorized credits
and transaction losses. Expenses over which segment managers do not currently have discretionary control
or inÖuence Ì such as site operations costs, product development expenses, and general and administrative
costs Ì are monitored by management through shared cost centers and are not evaluated in the
measurement of segment performance.
For an analysis of Ñnancial information about geographic areas as well as our segments, see
""Note 4 Ì Segments'' of the notes to our Consolidated Financial Statements, which we incorporate by
reference herein.
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 investors relations website under ""SEC
Filings'' our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically Ñle or
furnish such materials to the U.S. Securities and Exchange Commission.
ITEM 2: PROPERTIES
We own and lease various properties in the United States and in 16 other countries around the world.
We use the properties for corporate, administrative, customer support and other general business needs.
Our corporate headquarters are located in San Jose, California. Our owned and leased properties provide
us with 525,000 and 957,000 aggregate square feet, respectively. The total square feet occupied by our
U.S., International and Payments segments are 663,000, 375,000 and 444,000, respectively.
We are currently considering various alternatives related to our long-term facilities needs. While we
believe our existing facilities are adequate to meet our immediate needs, it may become necessary to lease
or acquire additional or alternative space to accommodate any future growth.
For a discussion of the accounting treatment of our leased corporate headquarters, see ""Note 8 Ì
Long-Term Obligations'' of the notes to our Consolidated Financial Statements, which we incorporate by
reference herein.
ITEM 3: LEGAL PROCEEDINGS
In April 2001, our European subsidiaries, eBay GmbH and eBay International AG, were sued by
Montres Rolex S.A. and certain of its aÇliates in the regional court of Cologne, Germany. The suit
subsequently was transferred to the regional court in Dusseldorf, Germany. Rolex alleged that our
subsidiaries were infringing Rolex's trademarks as a result of users selling counterfeit Rolex watches
through our German website. The suit also alleged unfair competition. Rolex sought an order forbidding
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 on all causes of action. Rolex appealed the ruling to the
Higher Regional Court of Dusseldorf, and the appeal was heard on October 30, 2003. On February 26,
2004, the court rejected Rolex's appeal and ruled in our favor. If it so chooses, Rolex may appeal the
ruling to the German Federal Supreme Court.
In September 2001, a complaint was Ñled by MercExchange LLC against us, our Half.com subsidiary
and ReturnBuy, Inc. in the U.S. District Court for the Eastern District of Virginia (No. 2:01-CV-736)
alleging infringement of three patents (relating to online auction technology, multiple database searching
and electronic consignment systems) and seeking a permanent injunction and damages (including treble
damages for willful infringement). In October 2002, the court granted in part our summary judgment
motion, eÅectively invalidating the patent related to online auction technology and rendering it
15
unenforceable. This ruling left only two patents in the case. Trial of the matter began on April 23, 2003.
In May 2003, the jury returned a verdict Ñnding that eBay had willfully infringed one and Half.com had
willfully infringed both of the patents in the suit, awarding $35.0 million in compensatory damages. Both
parties Ñled post-trial motions, and in August 2003, the court entered judgment for MercExchange in the
amount of $29.5 million, plus pre-judgment interest and post-judgment interest in an amount to be
determined. We have appealed the judgment and MercExchange has Ñled a cross-appeal. We continue to
believe that the verdict against us in the trial was incorrect and intend to continue to defend ourselves
vigorously. However, even if successful, our defense against this action will continue to be costly. In
addition, as a precautionary measure, we have modiÑed certain functionality of our websites and business
practices in a manner which we believe makes them non-infringing. Nonetheless, if we are not successful
in appealing the court's ruling, we might be forced to pay signiÑcant additional damages and licensing fees.
In August 2002, Charles E. Hill & Associates, Inc. Ñled a lawsuit in the U.S. District Court for the
Eastern District of Texas (No. 2:02-CV-186) alleging that we and 17 other companies, primarily large
retailers, infringed three patents owned by Hill generally relating to electronic catalog systems and methods
for transmitting and updating data at a remote computer. The suit seeks an injunction against continuing
infringement, unspeciÑed damages, including treble damages for willful infringement, and interest, costs,
expenses, and fees. In January 2003, the case was transferred to the U.S. District Court for the Southern
District of Indiana. After pending in Indiana for almost a year, the case was transferred back to the U.S.
District Court for the Eastern District of Texas in December 2003. We are currently awaiting the judge's
scheduling order in the case. We believe that we have meritorious defenses and intend to defend ourselves
vigorously.
In February 2002, PayPal was sued in California state court (No. CV-805433) in a purported class
action alleging that its restriction of customer accounts and failure to promptly unrestrict 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-Ñled with a diÅerent named plaintiÅ in June 2002
(No. CV-808441), and a related action was also Ñled in the U.S. District Court for the Northern District
of California in June 2002 (No. C-02-2777). In March 2002, PayPal was sued in the U.S. District Court
for the Northern District of California (No. C-02-1227) in a purported class action alleging that its
restrictions of customer accounts and failure to promptly unrestrict legitimate accounts violates federal and
state consumer protection and unfair business practice laws. The federal court has denied PayPal's motion
to compel individual arbitration as required by the PayPal User Agreement and has invalidated that
provision of the User Agreement. PayPal has appealed that decision to the U.S. Court of Appeals for the
Ninth Circuit. The two federal court actions have been consolidated into a single case, and the state court
action has been stayed pending developments in the federal case. In September 2003, the plaintiÅs Ñled
their motion for class certiÑcation. In November 2003, the parties tentatively reached agreement as to the
monetary terms for settlement of the disputes and we fully accrued for this tentative settlement amount in
our income statement for the three months and year ended December 31, 2003. The parties have notiÑed
the court that they need time to negotiate and document other terms of any resulting agreement, and the
class certiÑcation hearing has been rescheduled for March 29, 2004. If PayPal is unable to prevail in these
lawsuits or settle them on acceptable terms, it may have to pay substantial damages and change its anti-
fraud operations in a manner that will harm its business. Even if PayPal's defense is successful, the
litigation could damage PayPal's reputation, require signiÑcant management time, and require changes to
its customer service and operations that could increase its costs and decrease the eÅectiveness of its anti-
fraud program.
Following the announcement of the PayPal merger in July 2002, three purported class action
complaints were Ñled in the Delaware Court of Chancery by PayPal stockholders. These three cases have
since been consolidated into a single action. Two additional purported class action complaints were Ñled in
the Superior Court of the State of California by PayPal stockholders. The two California state court
actions were consolidated and stayed. All of the complaints named as defendants PayPal and each member
of its board of directors as well as eBay. The complaints were purported class actions that alleged that,
among other things, eBay controlled PayPal prior to the execution of their merger agreement, the
16
defendants breached Ñduciary duties they assertedly owed to PayPal's stockholders in connection with
PayPal entering into the merger agreement, and the exchange ratio in the merger was unfair and
inadequate. The plaintiÅs sought, among other things, an award of unspeciÑed compensatory damages. In
January 2004, the plaintiÅs in the consolidated Delaware actions voluntarily dismissed these actions
without prejudice. The consolidated California actions remain pending, but there has been no activity in
them for over a year and the plaintiÅs have indicated their intent to dismiss these actions.
In September 2002, Bank One Delaware (formerly known as First USA Bank, N.A.) Ñled a
complaint against PayPal in the U.S. District Court for the District of Delaware (No. 02-CV-1462)
alleging infringement of two First USA patents relating to assigning an alias to a credit card so as to
eliminate the need for the physical presence of the card in a Ñnancial transaction. In September 2003,
PayPal Ñled a complaint against Bank One Corp., Bank One Delaware's parent, in the same district court
alleging infringement of a PayPal patent relating to a process that allows Internet users to make secure
payments and authenticated transactions over a computer network. On October 20, 2003, the parties
Ñnalized the terms of an agreement to dismiss both lawsuits. The terms of the settlement agreement are
conÑdential.
In November 2003, AT&T Corporation Ñled a lawsuit against eBay and PayPal in the U.S. District
Court for the District of Delaware (No. 03-1051) alleging infringement of a patent entitled ""Mediation of
Transactions by a Communication System.'' AT&T claims that PayPal's and Billpoint's payment services
infringe its patent, and seeks monetary damages and injunctive relief. On December 24, 2003, eBay and
PayPal answered the complaint, denied infringement of AT&T's patent, and Ñled counterclaims. The case
is at a very early stage, with trial currently scheduled for April 2005. We believe that we have meritorious
defenses to this suit and intend to defend ourselves vigorously. Even if our defense is successful, the
litigation could be costly and require signiÑcant management time.
In May 2002, Tumbleweed Communications Corporation Ñled a complaint against PayPal alleging
infringement of two patents relating to electronic document delivery. Tumbleweed subsequently amended
the complaint to add eBay as a defendant, and later amended the complaint to add a third related patent.
On December 19, 2003, the parties entered into a settlement agreement dismissing the lawsuit, including
counterclaims Ñled by PayPal, and entered into a patent cross-licensing agreement. The terms of the
settlement agreement are conÑdential.
Other third parties have from time to time claimed, and others may claim in the future, that we have
infringed their intellectual property rights. We have been notiÑed of several potential patent disputes, and
expect that we will increasingly be subject to patent infringement claims as our services expand in scope
and complexity. In particular, we expect to face additional patent infringement claims involving services we
provide, including various aspects of our Payments business. We have in the past been forced to litigate
such claims. We may also become more vulnerable to intellectual property claims as laws such as the
Digital Millennium Copyright Act are interpreted by the courts and as we expand into jurisdictions where
the underlying laws with respect to the potential liability of online intermediaries like ourselves is less
favorable. We expect that we will increasingly be subject to copyright and trademark infringement claims
as the geographical reach of our services expands. These claims, whether meritorious or not, could be time
consuming, result in costly litigation, cause service upgrade delays, require expensive changes in our
methods of doing business, or could require us to enter into costly royalty or licensing agreements.
From time to time, we are involved in other disputes that arise in the ordinary course of business. The
number and signiÑcance of 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 signiÑcant amounts of management time, and result in the diversion of signiÑcant
operational resources.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no submissions of matters to a vote of security holders during the quarter ended
December 31, 2003.
17
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Price Range of Common Stock
Our common stock has been traded on The Nasdaq Stock MarketSM under the symbol ""EBAY''
since September 24, 1998. The following table sets forth the intra-day high and low per share bid prices of
our common stock (after giving retroactive eÅect to the two-for-one stock split eÅective August 28, 2003)
for the periods indicated, as reported by The Nasdaq Stock Market.
High
Low
Year Ended December 31, 2002
First QuarterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Third Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$34.75
32.05
31.24
35.43
Year Ended December 31, 2003
First QuarterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Third Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
45.22
52.89
58.93
64.80
$24.42
24.62
25.52
25.11
33.75
42.75
49.87
50.63
As of March 1, 2004, there were approximately 2,400 holders of record of our common stock,
although we believe that there is a signiÑcantly larger number of beneÑcial owners of our common stock.
Dividend Policy
We have never paid cash dividends on our stock and currently anticipate that we will continue to
retain any future earnings to Ñnance the growth of our business.
Equity Compensation Plans
For information on securities authorized for issuance under our equity compensation plans, refer to
""Equity Compensation Plan Information'' under Item 12, which we incorporate by reference herein.
18
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated Ñnancial and supplemental operating data should be read in
conjunction with, and is qualiÑed by reference to, 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 ended, and as at, December 31, 1999, 2000, 2001, 2002 and
2003 are derived from our audited Consolidated Financial Statements. All share and per share amounts
included in the following consolidated Ñnancial data have been retroactively adjusted to reÖect all previous
stock splits, including our two-for-one stock split, eÅective August 28, 2003.
Year Ended December 31,
1999
2000
(in thousands, except per share data)
2001
2002
2003
Consolidated Statement of Income Data:
Net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cost of net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$224,724
57,588
$431,424
95,453
$748,821
134,816
$1,214,100
213,876
$2,165,096
416,058
Gross proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
167,136
335,971
614,005
1,000,224
1,749,038
Operating expenses:
Sales and marketing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Product development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
General and administrative ÏÏÏÏÏÏÏÏÏÏÏ
Patent litigation expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Payroll tax on employee stock options ÏÏ
Amortization of acquired intangible
assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Merger related costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
96,239
24,847
43,919
Ì
Ì
1,145
4,359
166,767
55,863
73,027
Ì
2,337
253,474
75,288
105,784
Ì
2,442
1,433
1,550
36,591
Ì
349,650
104,636
171,785
Ì
4,015
15,941
Ì
567,565
159,315
302,703
29,965
9,590
50,659
Ì
Total operating expenses ÏÏÏÏÏÏÏÏÏÏÏ
170,509
300,977
473,579
646,027
1,119,797
Income (loss) from operations ÏÏÏÏÏÏÏÏÏÏ
Interest and other income, net ÏÏÏÏÏÏÏÏÏÏ
Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impairment of certain equity investments
(3,373)
23,833
(2,319)
Ì
34,994
46,337
(3,374)
Ì
140,426
41,613
(2,851)
(16,245)
354,197
49,209
(1,492)
(3,781)
629,241
37,803
(4,314)
(1,230)
Income before cumulative eÅect of
accounting change, income taxes and
minority interestsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interests ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before cumulative eÅect of
18,141
(8,472)
(102)
77,957
(32,725)
3,062
162,943
(80,009)
7,514
398,133
(145,946)
(2,296)
661,500
(206,738)
(7,578)
accounting changeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
9,567
48,294
90,448
249,891
447,184
Cumulative eÅect of accounting change,
net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
Ì
Ì
(5,413)
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
9,567
$ 48,294
$ 90,448
$ 249,891
$ 441,771
Net income per basic share:
Income before cumulative eÅect of
accounting changeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative eÅect of accounting change
Net income per basic share ÏÏÏÏÏÏÏÏÏ
$
$
0.02
Ì
0.02
$
$
0.10
Ì
0.10
$
$
0.17
Ì
0.17
$
$
0.43
Ì
0.43
$
$
0.70
(0.01)
0.69
19
1999
Year Ended December 31,
2000
(in thousands, except per share data)
2001
2002
2003
Net income per diluted share:
Income before cumulative eÅect of
accounting changeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative eÅect of accounting change
Net income per diluted share ÏÏÏÏÏÏÏ
Weighted average shares:
$
$
0.02
Ì
0.02
$
$
0.09
Ì
0.09
$
$
0.16
Ì
0.16
$
$
0.43
Ì
0.43
$
$
0.68
(0.01)
0.67
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
435,348
503,552
537,942
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
546,066
560,692
561,190
574,992
585,640
638,288
656,657
1999
2000
2001
2002
2003
Year Ended December 31,
(in millions)
Supplemental Operating Data:
U.S. and International Segments:
ConÑrmed registered usersÏÏÏÏÏÏÏÏÏÏÏÏ
Active users(1)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Number of items listed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross merchandise salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
10.0
Ì
129.6
2,805
$
22.5
Ì
264.7
5,422
$
42.4
17.8
423.1
9,319
$
$
Payments Segment(3):
Total accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Active accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Number of payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total payment volume ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì $
61.7
27.7
638.3
14,868
23.3
7.9
39.2
2,138
94.9
41.2
971.0
23,779
40.3
13.2
229.8
12,226
$
$
(1) Active user information not available for periods prior to 2001.
(2) Excludes active users registered with Internet Auction and EachNet.
(3) Amounts shown are for the periods subsequent to our October 3, 2002 acquisition of PayPal.
1999
2000
December 31,
2001
(in thousands)
2002
2003
Consolidated Balance Sheet Data:
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏ
$221,801
$ 201,873
$ 523,969
$1,109,313
$1,381,513
Short-term investments ÏÏÏÏÏÏÏÏÏÏÏÏÏ
181,086
Long-term investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
373,988
Long-term restricted cash and
investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Working capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
372,266
354,166
218,197
126,390
538,022
199,450
286,998
129,614
703,666
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
969,825
1,182,403
1,678,529
Long-term obligationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
15,018
11,404
12,008
89,690
470,227
340,576
934,171
134,644
1,082,234
4,040,226
13,798
127,432
1,498,606
5,820,134
124,476
Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏ
854,129
1,013,760
1,429,138
3,556,473
4,896,242
20
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This report contains statements that involve expectations, plans or intentions (such as those relating to
future business or Ñnancial results, new features or services, or management strategies). These statements
are forward-looking and are subject to risks and uncertainties, so actual results may vary materially. You
can identify these forward-looking statements by words such as ""may,'' ""will,'' ""should,'' ""expect,''
""anticipate,'' ""believe,'' ""estimate,'' ""intend,'' ""plan'' and other similar expressions. You should consider
our forward-looking statements in light of the risks discussed under the heading ""Risk Factors That May
AÅect Results of Operations and Financial Condition" below, as well as our consolidated Ñnancial
statements, related notes, and the other Ñnancial information appearing elsewhere in this report and our
other Ñlings with the Securities and Exchange Commission. We assume no obligation to update any
forward-looking statements.
You should read the following Management's Discussion and Analysis of Financial Condition and
Results of Operations in conjunction with the Consolidated Financial Statements and the related notes that
appear elsewhere in this document.
Overview
About 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 or
consumer with email to send and receive online payments securely, conveniently and cost-eÅectively.
Executive Operating and Financial Summary
Members of our senior management team regularly review key operating metrics such as new users,
active users, listings and gross merchandise sales transacted on our global marketplace as well as new user
accounts, total payment volume and oÅ-eBay transactions processed by our wholly-owned PayPal
subsidiary. This information allows us to monitor marketplace trends and anticipate new features and
functionality that may be required to serve the needs of our users. We believe that an understanding of the
key operating metrics and how they change over time is important to investors, analysts and other parties
analyzing our market opportunities and business results.
Members of our senior management also regularly review key Ñnancial information including net
revenues, operating income margins, earnings per share, cash Öows from operations and free cash Öows,
which we deÑne as operating cash Öows less purchases of property and equipment. This information allows
us to monitor the proÑtability of our business and evaluate the eÅectiveness of investments that we have
made and continue to make in the areas of international expansion, customer support, product
development, marketing and site operations. We believe that an understanding of key Ñnancial information
and how it changes over time is important to investors, analysts and other parties analyzing our business
results and future market opportunities.
We expect that our growth in net revenues during 2004 will result primarily from transaction net
revenues across our U.S., International, and Payments segments, with a potentially more signiÑcant eÅect
of seasonality during the second and third quarters. The expected future growth in our Payments segment
net revenues will also cause downward pressure on our gross margin and operating proÑt margin. We
continue to make investments in our business and infrastructure to help us achieve our long-term growth
objectives. We expect to continue our investments in the areas of international expansion, product
development, site operations and various corporate infrastructure areas. We believe these investments are
necessary to support the long-term demands of our growing business. In addition, to the extent that the
21
U.S. dollar strengthens or weakens against foreign currencies, and, in particular, the Euro, the translation
of these foreign currency denominated transactions into U.S. dollars will impact our net revenues,
operating expenses and net income.
The detailed discussion of our Ñnancial condition and results of operations contained herein is
intended to provide information to assist investors, analysts and other parties reading this report understand
the key operating metrics and Ñnancial information summarized above as well as the changes in our results
of operations from year to year, the primary factors that accounted for those changes and how certain
accounting principles, policies, judgments, and estimates aÅect our Consolidated Financial Statements.
Business Combinations
Our historical Ñnancial statements reÖect the impact of various business combinations that have been
accounted for as pooling-of-interests and purchase transactions. Our Consolidated Financial Statements
have been retroactively restated to include the historical Ñnancial statements of all entities acquired in
pooling-of-interests transactions. The Ñnancial statements of entities acquired in purchase transactions are
reÖected in our consolidated results from the eÅective dates of each acquisition. The aggregate purchase
price for all acquisitions using the purchase method of accounting during the three years ended
December 31, 2003 totaled approximately $2.1 billion and was been allocated in our Consolidated
Financial Statements as follows (in thousands):
Net tangible assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 207,717
IdentiÑable intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
326,353
Deferred tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interests ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(51,000)
(21,690)
Unearned compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
9,943
Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,665,257
$2,136,580
Tangible net assets were valued at their respective carrying amounts as we believe that these amounts
approximated their current fair values at the respective acquisition dates. The valuation of identiÑable
intangible assets acquired was based on management's estimates using valuation reports prepared by an
independent third-party valuation consultant. Such assets consist of customer lists, trademarks and
tradenames, developed technologies and other acquired intangible assets including contractual agreements.
IdentiÑable intangible assets are amortized using the straight-line method over the estimated useful lives of
one to seven years. We believe the straight-line method of amortization best represents the distribution of
the economic value of the identiÑable intangible assets. Goodwill represents the excess of the purchase
price over the fair value of the net tangible and identiÑable intangible assets acquired in each business
combination. In accordance with SFAS No. 142, goodwill is no longer subject to amortization. Rather,
goodwill is subject to at least an annual assessment for impairment, applying a fair-value based test. See
""Note 1 Ì The Company and Summary of SigniÑcant Accounting Policies'' and ""Note 3 Ì Business
Combinations, Goodwill and Intangible Assets'' to our Consolidated Financial Statements, which we
incorporate by reference herein.
22
Results of Operations
The following table sets forth, for the periods presented, certain data from our consolidated statement
of income as a percentage of net revenues. This information should be read in conjunction with ""Critical
Accounting Policies, Judgments and Estimates'' as well as our Consolidated Financial Statements and
Notes thereto included elsewhere in this Annual Report on Form 10-K.
Year Ended December 31,
2003
2002
2001
Net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
100.0% 100.0% 100.0%
Cost of net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating expenses:
Sales and marketing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Product development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
General and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Patent litigation expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Payroll tax on employee stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of acquired intangible assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest and other income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impairment of certain equity investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
18.0
82.0
33.8
10.1
14.1
Ì
0.3
4.9
63.2
18.8
5.6
17.6
82.4
28.8
8.6
14.1
Ì
0.3
1.3
53.1
29.3
4.1
19.2
80.8
26.2
7.4
14.0
1.4
0.4
2.3
51.7
29.1
1.7
(0.4)
(2.2)
(0.1)
(0.3)
(0.2)
(0.1)
Income before cumulative eÅect of accounting change, income
taxes and minority interests ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
21.8
32.8
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(10.7)
(12.0)
Minority interests ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1.0
(0.2)
Income before cumulative eÅect of accounting change ÏÏÏÏÏÏÏ
12.1
Cumulative eÅect of accounting change, net of tax ÏÏÏÏÏÏÏÏÏÏ
Ì
20.6
Ì
30.6
(9.5)
(0.4)
20.7
(0.3)
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
12.1% 20.6% 20.4%
23
Net Revenues Summary
Segment Net Revenues:
2001
Percent
Change
Percent
Change
2002
(in thousands, except percent changes)
2003
U.S. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
InternationalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$617,011
114,162
17,648
32%
165%
440%
$ 816,596
302,136
95,368
30%
120%
359%
$1,062,834
664,640
437,622
Total net revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$748,821
62%
$1,214,100
78%
$2,165,096
Transaction net revenues:
U.S. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
InternationalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$474,970
110,802
16,899
Total transaction net revenues ÏÏÏÏÏÏÏÏÏ
602,671
51%
168%
452%
84%
$ 718,239
297,485
93,303
1,109,027
43%
121%
360%
90%
$1,024,915
657,874
429,453
2,112,242
Advertising and other non-transaction net
revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
146,150
(28)%
105,073
(50)%
52,854
Total net revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$748,821
62%
$1,214,100
78%
$2,165,096
Geographical Net Revenues:
U.S. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
InternationalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$634,659
114,162
41%
177%
$ 897,701
316,399
57%
140%
$1,406,512
758,584
Total net revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$748,821
62%
$1,214,100
78%
$2,165,096
Net revenues are allocated between U.S. and International geographies based upon the country in
which the seller, payment recipient, advertiser or service provider is located.
The U.S. segment includes our U.S. online trading platforms, excluding those of our PayPal and
Billpoint subsidiaries. The International segment includes our international online trading platforms
excluding those of our PayPal and Billpoint subsidiaries. The Payments segment includes our global
payments platform including the operations of our PayPal and Billpoint subsidiaries. The Payments
segment reÖects Billpoint's historical operations and PayPal's operations for the periods subsequent to
October 3, 2002. We completed our planned wind-down of Billpoint in the Ñrst half of 2003.
Our net revenues result from fees associated with our transaction, advertising and other services in our
U.S., International and Payments segments. Transaction net revenues are derived primarily from listing,
feature and Ñnal value fees paid by sellers and fees from payment processing services. Net revenues from
advertising are derived principally from the sale of online banner and sponsorship advertisements for cash
and through barter arrangements. Other net revenues are derived principally from contractual arrangements
with third parties that provide transaction services to eBay and PayPal users and also from oÉine services
provided by our ButterÑelds and Kruse subsidiaries, which were divested in the second half of 2002.
The successive year-over-year growth in net revenues from 2001 through 2003, was primarily the
result of increased auction and Ñxed-price transaction activity, reÖected in the growth in the number of our
conÑrmed registered users, user activity, listings, gross merchandise sales and payment transactions
processed by PayPal. Our net revenue growth during the year ended December 31, 2003, also reÖects a
full year of payment transactions processed by PayPal, which we acquired on October 3, 2002.
The number of conÑrmed registered users from our U.S. and International segments increased 54%
during 2003 to 94.9 million at December 31, 2003. ConÑrmed registered users increased 45% during 2002
to 61.7 million at December 31, 2002, from 42.4 million at December 31, 2001. The increase in registered
users reÖects steady growth across our U.S. and international platforms.
24
The number of active users on the eBay platform (which excludes the Internet Auction and EachNet
websites) increased 49% during 2003 to 41.2 million at December 31, 2003. Active users increased 56%
during 2002 to 27.7 million at December 31, 2002, from 17.8 million at December 31, 2001. Active users
are the number of users on the eBay platform who bid, bought or listed over the trailing twelve months.
We believe that increases in user activity are largely the result of our promotional eÅorts and our emphasis
on helping our user community be successful through the introduction of new site features and
functionality and expanded trust and safety programs.
The number of items listed on eBay.com and our international sites increased by 52% to 971.0 million
in 2003, from 638.3 million in 2002, and increased 51% in 2002 from 423.1 million in 2001. This
acceleration in listing growth was experienced across our U.S. and international platforms.
Gross merchandise sales from the U.S. and International segments increased 60% in both 2003 and
2002. SigniÑcant contributions to this growth came from our U.S., German, U.K. and South Korean
operations. eBay transaction net revenues as a percentage of gross merchandise sales was 7.1% in 2003,
6.8% in 2002 and 6.3% in 2001.
During 2003, over $12.2 billion in TPV was transacted on the PayPal platform. As of December 31,
2003, PayPal had 40 million accounts, compared to 23 million accounts at December 31, 2002.
U.S. and International Segment Net Transaction Revenues
U.S. segment transaction net revenues increased 43% in 2003 and 51% in 2002. International segment
transaction net revenues increased 121% in 2003 and 168% in 2002. The successive year-over-year growth
in U.S. and International segment transaction net revenues was primarily the result of increased auction
transaction activity, reÖected in the growth of the number of registered users, listings and gross
merchandise sales. We experienced transaction net revenue growth across all major categories with motors,
home & garden, computers, consumer electronics, clothing & accessories, and collectibles making the most
signiÑcant dollar impact.
International segment transaction net revenues as a percentage of total transaction net revenues was
31% in 2003, 27% in 2002 and 18% in 2001. This growth is primarily the result of strong performances in
Germany, the United Kingdom and South Korea. Additionally, the relative strength of foreign currencies,
primarily the Euro, against the U.S. dollar resulted in increased net revenues of approximately
$82.0 million during 2003, when compared to the weighted-average foreign currency exchange rates used
in the preparation of our 2002 Consolidated Financial Statements. Our operations located in Europe
experienced seasonally slower growth in July and August, with September and the fourth quarter of 2003
showing improved activity in all markets. We expect that International segment transaction net revenues
will continue to grow in signiÑcance to our business as we continue to develop and deploy our global online
trading platform during 2004.
On July 1, 2003, eBay began collecting value-added taxes, or VAT, on the fees we charge certain
sellers in the European Union, or EU. We continue to work with the relevant tax authorities to clarify our
obligations under these new regulations. There have been and will continue to be substantial ongoing costs
associated with complying with the VAT rules throughout the EU, and the increased costs to our
European users may reduce their activity on our websites and could adversely aÅect our international
transaction net revenues. We also believe that changes in foreign currency rates will impact our operations
and to the extent that the U.S. dollar strengthens, our foreign currency denominated transaction net
revenues will be negatively impacted.
Payments Segment Net Transaction Revenues
Payments segment transaction net revenues increased 360% in 2003 and 452% in 2002. The year-over-
year growth in 2003 reÖects a full year of transaction activity from PayPal and substantial increases in
transaction volume. The Payments segment contributed approximately 20% of our total net transaction
revenues in 2003 compared to 8% in 2002.
25
PayPal payment volume totaled $12.2 billion in 2003, and transaction net revenues as a percentage of
total payment volume was 3.5%. The growth in Payments transaction net revenues was also positively
aÅected by PayPal's continued penetration of eBay transactions in the United States and the United
Kingdom, growth in our cross border international payment transactions and growth in the oÅ-eBay
business. Net transaction revenues from the Payments segment earned internationally totaled $93.9 million
during 2003, representing 21.9% of total Payments segment net transaction revenues. We expect the
Payments segment transaction net revenues to increase in absolute dollars and as a percentage of total
transaction net revenues during 2004.
Advertising and Other Net Revenues
Advertising and other net revenues decreased in both absolute dollars and as a percentage of total net
revenues. Advertising and other net revenues totaled $52.9 million in 2003, $105.1 million in 2002 and
$146.2 million in 2001. These amounts as a percentage of total net revenues represented 2% in 2003, 9% in
2002 and 20% in 2001. The decrease in net revenues from advertising and other services was primarily the
result of a general deterioration in the online advertising market in 2002, our decision in 2002 to no longer
use America Online as our sales agent in the online advertising market, and our divestiture of both of our
oÉine businesses in 2002. We continue to view our business as primarily transaction driven and we expect
advertising and other net revenues to continue to decrease as a percentage of total net revenues and
possibly in absolute dollars during 2004.
Cost of Net Revenues
2001
Percent
Percent
Change
Change
2002
(in thousands, except percent changes)
2003
Cost of net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$134,816
59%
$213,876
95%
$416,058
As a percentage of net revenues ÏÏÏÏÏÏ
18%
18%
19%
Cost of net revenues consists primarily of costs associated with customer support, site operations and
payment processing. SigniÑcant cost components include bank charges, credit card interchange, other
payment processing costs, employee compensation and facilities costs for our customer support and site
operations, Internet connectivity charges, depreciation of equipment, amortization of required capitalization
of major site and product development costs, and certain corporate overhead allocations.
Cost of net revenues increased in absolute dollars and slightly as a percentage of net revenues during
2003 as compared to 2002. The increase in absolute dollars was due to a full year of payment processing
costs resulting from our acquisition of PayPal on October 3, 2002, an increase in the volume of
transactions on the eBay websites, and continued development and expansion of our customer support and
site operations infrastructure. The increase in cost of net revenues as a percentage of net revenues was
primarily due to the impact of PayPal's higher structural costs relating to payment processing oÅset, in
part, by eBay's site operations costs growing at a slower rate than net revenues. Payment processing costs
increased to $215.7 million in 2003 from $120.8 million in 2002, reÖecting the full year of PayPal activity
in 2003, the substantial increase in PayPal's total payment volume and increased payment processing costs
related to the collection of our eBay fees. Aggregate customer support and site operations costs increased
$80.0 million during 2003, compared to the prior year, and resulted primarily from an increase in
headcount and related employee costs of approximately $26.5 million. In addition, aggregate depreciation
of site equipment and amortization of capitalized software development costs increased $21.5 million as
compared to 2002. Costs of net revenues are expected to increase in absolute dollars and to remain
generally comparable as a percentage of net revenues during 2004.
Cost of net revenues increased in absolute dollars but remained generally constant as a percentage of
net revenues in 2002. The increase in absolute dollars was due to payment processing costs primarily
resulting from our acquisition of PayPal on October 3, 2002, an increase in the volume of transactions on
the eBay websites, and continued development and expansion of our customer support and site operations
26
infrastructure. The consistency of costs of net revenues as a percentage of net revenues was primarily due
to the oÅsetting impacts of PayPal's higher structural costs relating to payment processing and eBay's cost
savings as site operations costs grew at a slower rate than net revenues. Payment processing costs, which
consist of credit card interchange fees, bank charges, and other processing charges increased by
approximately $50.4 million in 2002. The increase in aggregate customer support and site operations costs
totaled $18.6 million in 2002.
Operating Expenses
Sales and Marketing
2001
Percent
Percent
Change
Change
2002
(in thousands, except percent changes)
2003
Sales and marketing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$253,474
38%
$349,650
62%
$567,565
As a percentage of net revenues ÏÏÏÏÏÏ
34%
29%
26%
Sales and marketing expenses consist primarily of advertising, tradeshow and other promotional costs,
employee compensation for our category development and marketing staÅ, certain trust and safety
programs and certain corporate overhead allocations.
Sales and marketing expenses increased in absolute dollars in 2003, but decreased as a percentage of
total net revenues due to the continued cost leverage in our business and the acquisition of PayPal, which
presently has a signiÑcantly lower sales and marketing requirement. Growth in advertising and marketing
costs as well as employee-related costs comprised the majority of the increases in absolute dollars.
Combined advertising and marketing costs increased $155.2 million in 2003. This increase was primarily
the result of our marketing programs directed towards our Internet marketing and national television
advertising campaigns as well as several category-focused print campaigns. Employee-related costs
increased by $34.0 million in 2003 as we continued to expand our international operations. Sales and
marketing expenses are expected to increase in absolute dollars, and to remain generally comparable as a
percentage of net revenues during 2004. In addition, our 2004 online marketing expenses will likely
increase because of increases in the volume of, and rates for, online advertising that we expect to purchase
in order to attract new customers and increase the activity on our websites.
The increase in sales and marketing expense in 2002, was primarily the result of year-over-year
increases in advertising costs of $54.7 million, referral fees paid to marketing partners of $12.6 million and
other aggregate expenses related to trade shows and professional fees of $10.5 million.
Product Development
2001
Percent
Percent
Change
Change
2002
(in thousands, except percent changes)
2003
Product development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$75,288
39%
$104,636
52%
$159,315
As a percentage of net revenues ÏÏÏÏÏÏÏ
10%
9%
7%
Product development expenses consist primarily of employee compensation, payments to outside
contractors, depreciation on equipment used for development and certain corporate overhead allocations.
Product development expenses are net of required capitalization of major site and other product
development eÅorts, including the development of our ""V3'' platform architecture, global billing, seller
tools and payment gateway projects. These capitalized costs totaled $38.5 million in 2003, $15.5 million in
2002 and $6.7 million in 2001, and are reÖected as a cost of net revenues when amortized in future
periods. We anticipate that we will continue to devote signiÑcant resources to product development in the
future as we add new features and functionality to the eBay and PayPal platforms.
27
The increase in absolute dollars in 2003, was primarily the result of increased headcount and
computer equipment depreciation. These increases were partially oÅset by the amounts capitalized in
connection with major site and other product development eÅorts in 2003. The headcount growth was
focused on hiring new employees for various platform development initiatives at eBay and PayPal. Our
development staÅ increased 60% from 635 at December 31, 2002 to 1,007 at December 31, 2003. Product
development expenses are expected to increase in absolute dollars and slightly as a percentage of net
revenues in 2004, as we develop new site features and functionality and continue to improve and expand
operations across all our segments.
The increase in absolute dollars in 2002, was primarily the result of an $18.9 million increase in
employee compensation costs, resulting from the growth in our development staÅ, which increased to 635
at December 31, 2002 from 320 at December 31, 2001, and a $7.3 million increase in maintenance and
depreciation costs for equipment used in product development.
General and Administrative
2001
Percent
Percent
Change
2002
Change
(in thousands, except percent changes)
2003
General and administrative ÏÏÏÏÏÏÏÏÏÏ
$105,784
62%
$171,785
76%
$302,703
As a percentage of net revenue ÏÏÏÏÏÏÏ
14%
14%
14%
General and administrative expenses consist primarily of employee compensation, provision for
doubtful accounts, provisions for transaction losses associated with our Payments segment, insurance, fees
for external professional advisors and certain corporate overhead allocations.
The increase in absolute dollars in 2003, was due primarily to employee and facilities related costs,
fees for external professional advisors, payment transaction loss expenses resulting from our acquisition of
PayPal and charges associated with various legal matters. The increases in employee and facilities related
costs resulted from the addition of PayPal employees in various trust and safety functions as well as
continued headcount growth in the Ñnance, human resource and legal departments to meet the demands of
our expanding business, including growing international operations and the integration of acquired
businesses. We increased our general and administrative staÅ from 1,253 at December 31, 2002 to 1,944 at
December 31, 2003. Fees for external professional advisors increased by $10.4 million. Charges associated
with various legal matters recorded in general and administrative expense totaled $8.6 million. PayPal's
payment transaction loss increased $28.6 million in 2003, reÖecting a full year of consolidated operations.
PayPal's payment transaction loss rate, which is the transaction loss expense as a percentage of PayPal's
total payment volume, was 0.30% in 2003. Despite higher transaction loss rates expected to be experienced
as a result of increased patterns of seasonality and the buyer protection program implemented in
September 2003, we expect our full year transaction loss rate will decrease during 2004. With our
continued investment in the infrastructure needed to support our business, primarily in our International
and Payments segments as well as in our corporate functions, we expect general and administrative
expenses to increase in absolute dollars and to remain generally comparable as a percentage of net
revenues during 2004.
The increase in absolute dollars in 2002, was primarily the result of increases of $16.0 million in fees
for external professional advisors, $7.8 million in the provision for transaction losses, and $6.5 million in
facilities costs. These costs increased to meet the demands of our expanding business, including operations
in new countries and the integration of new businesses. To support this growth, we increased our general
and administrative staÅ from 415 at December 31, 2001 to 1,253 at December 31, 2002, which includes
the addition of approximately 360 general and administrative employees resulting from our acquisition of
PayPal. Of these incremental PayPal employees, a substantial number support PayPal's various trust and
safety programs.
28
Patent Litigation Expense
2001
Percent
Change
(in thousands, except percent changes)
Percent
Change
2002
2003
Patent litigation expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì
N/A
As a percentage of net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì
Ì
Ì
N/A
$29,965
1%
Patent litigation expense during 2003 relates to the accrual of an August 6, 2003 court judgment
resulting from the MercExchange patent infringement lawsuit. See ""Note 11 Ì Commitments and
Contingencies'' to our Consolidated Financial Statements.
Payroll Tax on Employee Stock Options
2001
Percent
Change
2002
(in thousands, except percent changes)
2003
Percent
Change
Payroll tax on employee stock options ÏÏÏÏÏÏÏ
$2,442
64%
$4,015
139%
$9,590
As a percentage of net revenues ÏÏÏÏÏÏÏÏÏÏÏÏ
0%
0%
0%
We are subject to employer payroll taxes on employee gains resulting from exercises of non-qualiÑed
stock options. These employer payroll taxes are recorded as a charge to operations in the period in which
such options are exercised and sold based on actual gains realized by employees. The increases in 2003
and 2002 were primarily a result of larger individual gains recognized on stock option exercises by our
employees during periods in which our stock price was high relative to historic levels. Our results of
operations and cash Öows could vary signiÑcantly depending on the actual period that stock options are
exercised by employees and, consequently, the amount of employer payroll taxes assessed. In general, we
expect payroll taxes on employee stock option gains to increase during periods in which our stock price is
high relative to historic levels.
Amortization of Acquired Intangible Assets
2001
Percent
Percent
Change
2002
Change
(in thousands, except percent changes)
2003
Amortization of acquired intangible assets
$36,591
(56)% $15,941
218%
$50,659
As a percentage of net revenues ÏÏÏÏÏÏÏÏÏ
5%
1%
2%
From time to time we have purchased, and we expect to continue purchasing, assets or businesses to
accelerate category and geographic expansion, increase the features and functions available to our users
and maintain a leading role in online trading. These purchase transactions may result in the creation of
acquired intangible assets and lead to a corresponding increase in the amortization expense in future
periods.
Intangible assets include purchased customer lists, trademarks and tradenames, developed technolo-
gies, and other intangible assets. We amortize intangible assets, excluding goodwill, using the straight-line
method over estimated useful lives ranging from one to eight years. We believe the straight-line method of
amortization best represents the distribution of economic value of the identiÑed intangible assets.
Goodwill represents the excess of the purchase price over the fair value of the net tangible and
identiÑable intangible assets acquired in a business combination. In accordance with SFAS No. 142,
goodwill is subject to assessment for impairment and is no longer subject to amortization. Rather, goodwill
is subject to at least an annual assessment for impairment, applying a fair-value based test. We evaluate
goodwill, at a minimum, on an annual basis and whenever events and changes in circumstances suggest
that the carrying amount may not be recoverable. Impairment of goodwill is tested at the reporting unit
level by comparing the reporting unit's carrying amount, including goodwill, to the fair value of the
29
reporting unit. The fair values of the reporting units are estimated using a combination of the income, or
discounted cash Öows, approach and the market approach, which utilizes comparable companies' data. If
the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a
second step is performed to measure the amount of impairment loss, if any. Our annual impairment test
was carried out as of August 31, 2003 and there were no events or circumstances from that date through
December 31, 2003 that would impact this assessment.
The increased amortization expense in 2003 primarily reÖects the full-year amortization resulting from
our acquisition of PayPal on October 3, 2002. Amortization of acquired intangible assets decreased during
2002, primarily from the elimination of goodwill amortization as part of our adoption of SFAS No. 142,
""Goodwill and Other Intangible Assets'' on January 1, 2002. We expect amortization of acquired
intangible assets will increase in 2004 as a result of the incremental acquired intangible assets associated
with our purchase of additional ownership interests in EachNet and Internet Auction Co. during 2003.
Non-Operating Items
Interest and Other Income, Net
2001
Percent
Percent
Change
2002
Change
(in thousands, except percent changes)
2003
Interest and other income, netÏÏÏÏÏÏÏÏÏÏÏ
$41,613
18%
$49,209
(23)% $37,803
As a percentage of net revenues ÏÏÏÏÏÏÏÏÏ
6%
4%
2%
Interest and other income, net consists of interest earned on cash, cash equivalents and investments as
well as foreign exchange transaction gains and losses and other miscellaneous non-operating transactions.
Our interest and other income, net decreased in absolute dollars and as a percentage of net revenues
during 2003, primarily as a result of one-time gains recognized in 2002 from the sale of certain
subsidiaries, real estate properties and an equity investment that totaled $20.3 million. This decrease was
oÅset, in part, by increased investment income on a larger aggregate balance of cash, cash equivalents and
investments even though the weighted-average interest rate of our portfolio declined to 1.6% in 2003 from
2.8% in 2002. We expect that interest and other income, net, will increase in absolute dollars during 2004,
as our cash, cash equivalents, and investments balances continue to grow.
Our interest and other income, net increased during 2002 primarily as a result of one-time gains from
the sale of certain subsidiaries, real estate properties and an equity investment that totaled $20.3 million.
These gains were oÅset by a decrease in interest and investment income of $4.1 million resulting from
lower average interest rates, despite an increase in our cash, cash equivalents and investments balances in
2002 and from decreased realized gains on the sale of investments, and a decrease in foreign exchange
gains of $3.5 million. Our weighted-average interest rate decreased to approximately 2.8% in 2002 from
3.6% in 2001.
Interest Expense
2001
Percent
Change
2002
(in thousands, except percent changes)
2003
Percent
Change
Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,851
(48)% $1,492
189%
$4,314
As a percentage of net revenues ÏÏÏÏÏÏÏÏÏÏÏÏ
0%
0%
0%
Interest expense consists of interest charges on mortgage notes, capital leases and our consolidated
operating lease arrangement related to our San Jose corporate headquarters.
In January 2003, the FASB issued FIN 46, ""Consolidation of Variable Interest Entities.'' In
accordance with the provisions of this standard, we have included our San Jose headquarters lease
arrangement in our Consolidated Financial Statements eÅective July 1, 2003. Beginning July 1, 2003, our
30
income statement reÖects the reclassiÑcation of lease payments on our San Jose headquarters from
operating expense to interest expense. The increase in interest expense in 2003, is primarily the result of
this new accounting standard. We expect our interest expense will increase in absolute dollars, due to the
inclusion of a full year of the interest payments on our San Jose lease, and will remain generally
comparable as a percentage of net revenue during 2004.
The decrease in interest expense during 2002, compared to the prior year, was primarily the result of
a reduction in the outstanding mortgage note balances in connection with the sale of certain underlying
properties.
Impairment of Certain Equity Investments
2001
Percent
Change
Percent
Change
2002
(in thousands, except percent changes)
2003
Impairment of certain equity investments ÏÏÏ
$16,245
(77)% $3,781
(67)% $1,230
As a percentage of net revenues ÏÏÏÏÏÏÏÏÏÏÏ
2%
0%
0%
During 2003, 2002 and 2001, we recorded impairment charges totaling $1.2 million, $3.8 million and
$16.2 million, respectively, as a result of the deterioration of the Ñnancial condition of certain of our
private and public equity investees. We identiÑed these impairment losses as part of our normal process of
assessing the quality of our investment portfolio. They reÖect declines in fair value and other market
conditions that we believe are other than temporary. We expect that the fair value of our equity
investments will Öuctuate from time to time and future impairment assessments may result in additional
charges to our operating results.
Provision for Income Taxes
2001
Percent
Percent
Change
Change
2002
(in thousands, except percent changes)
2003
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏ
$80,009
82%
$145,946
42%
$206,738
As a percentage of net revenues ÏÏÏÏÏÏÏ
EÅective tax rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
11%
47%
12%
37%
10%
32%
The provision for income taxes diÅers from the amount computed by applying the statutory U.S.
federal rate principally due to non-deductible expenses related to acquisitions, state taxes, subsidiary losses
for which we have not provided a beneÑt and other factors that increase the eÅective tax rate. These
expenses are partially oÅset by decreases resulting from foreign income with lower eÅective tax rates, tax
credits, and tax-exempt interest income.
The lower eÅective tax rates in 2003 and 2002 reÖect the increasing proÑt contribution from our
international operations that have lower eÅective tax rates.
We receive tax deductions from the gains realized by employees on the exercise of certain non-
qualiÑed stock options for which the beneÑt is recognized as a component of stockholders' equity. We have
evaluated our deferred tax assets relating to these stock option deductions along with our other deferred
tax assets and concluded that a valuation allowance is required for that portion of the total deferred tax
assets that are not considered more likely than not to be realized in future periods. To the extent that the
deferred tax assets with a full valuation allowance become realizable in future periods, we will have the
ability, subject to carryforward limitations, to use up to $165.8 million of additional deferred tax assets to
reduce future income tax liabilities. When recognized, the tax beneÑt 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 tax
provision.
31
Minority Interests
2001
Percent
Change
2002
(in thousands, except percent changes)
Percent
Change
2003
Minority interests ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$7,514
(131)% $(2,296)
(230)% $(7,578)
As a percentage of net revenue ÏÏÏÏÏÏÏÏÏÏÏ
1%
0%
0%
Minority interests in consolidated companies represents the minority investors' percentage share of
income or losses from subsidiaries in which we hold a majority ownership interest and consolidate the
subsidiaries' results in our Ñnancial statements. Third parties held minority interests in various of our
subsidiaries during 2003, 2002 and 2001.
The change in minority interests in 2003 is due primarily to the minority interests' portion of the net
income generated by Internet Auction. We expect that minority interests will continue to Öuctuate in
future periods. If Internet Auction continues to be proÑtable, the minority interests adjustment on the
consolidated statement of income will continue to decrease our net income by the minority investor's share
of Internet Auction's net income.
The change in minority interests in 2002 primarily resulted from Internet Auction generating net
income for the Ñrst time in 2002 along with our January 2002 acquisition of the remaining 35% minority
interest in Billpoint.
Cumulative EÅect of Change in Accounting Principle
In accordance with the provisions of FIN 46, ""Consolidation of Variable Interest Entities,'' we have
included our San Jose headquarters lease arrangement in our Consolidated Financial Statements eÅective
July 1, 2003. Under this new accounting standard, our balance sheet at December 31, 2003, reÖects
additions for land and buildings totaling $126.4 million, lease obligations of $122.5 million and non-
controlling minority interests of $3.9 million. Our income statement for the year ended December 31,
2003, reÖects the reclassiÑcation of lease payments on our San Jose headquarters from operating expense
to interest expense, beginning with the quarters following our adoption of FIN 46 on July 1, 2003, a
$5.4 million after-tax charge for cumulative depreciation for periods from lease inception through June 30,
2003, and incremental depreciation expense of approximately $400,000, net of tax, per quarter for the third
and fourth quarters of 2003. We have adopted the provisions of FIN 46 prospectively from July 1, 2003,
and as a result, have not restated prior periods. The cumulative eÅect of the change in accounting
principle arising from the adoption of FIN 46 has been reÖected in net income in 2003.
Impact of Foreign Currency Translation
During 2003, our international net revenues, based upon the country in which the seller, payment
recipient, advertiser or other service provider is located, accounted for 35% of our consolidated net
revenues, as compared to 26% of our net revenues in 2002 and 15% of our net revenues in 2001. The
growth in our international operations has increased our exposure to foreign currency Öuctuations. Net
revenues and related expenses generated from international locations are denominated in the functional
currencies of the local countries, and include Euros, British Pounds, Korean Won, Canadian Dollars and
Australian Dollars. The results of operations and certain of our intercompany balances associated with our
international locations are exposed to foreign exchange rate Öuctuations. The income statements of our
international operations are translated into U.S. dollars at the average exchange rates in each applicable
period. To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign
currency denominated transactions results in increased net revenues, operating expenses and net income.
Similarly, our net revenues, operating expenses and net income will decrease when the U.S. dollar
strengthens against foreign currencies.
A signiÑcant portion of our international net revenues, operating expenses and net income are
denominated in Euros. During 2003, the U.S. dollar weakened against the Euro. The weighted-average
32
translation rate changes for the Euro, combined with translation rate changes in other foreign currencies,
resulted in increased net revenues of approximately $82.0 million in 2003 when compared to the weighted-
average foreign currency exchange rates used in the preparation of our consolidated Ñnancial statements in
2002. In addition, the weighted-average translation rate changes in foreign currencies increased operating
expenses by approximately $37.9 million in 2003 when compared to the weighted average translation rates
used in 2002.
We expect our international operations will continue to grow in signiÑcance as we develop and deploy
our global marketplace. As a result, foreign currency Öuctuations in future periods could become more
signiÑcant and may have a negative impact on our 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.
Liquidity and Capital Resources
Cash Flows
2001
Year Ended December 31,
2002
(in thousands)
2003
Net cash provided by (used in):
Operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
252,112
$
479,903
$
874,119
Investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(29,819)
(157,759)
(1,319,542)
Financing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
101,505
252,067
688,866
EÅect of exchange rates on cash and cash
equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(1,702)
11,133
28,757
Net increase in cash and cash equivalents ÏÏÏÏÏ
$
322,096
$
585,344
$
272,200
We have generated annual cash provided by operating activities in amounts greater than net income
in 2001, 2002 and 2003, driven mainly by non cash charges to earnings. Non-cash charges to earnings
included depreciation and amortization on our long-term assets, tax beneÑts on the exercise of employee
stock options resulting from our increasing stock price and the related increases in the personal gains
recognized by our employees, provision for doubtful accounts and authorized credits resulting from
increasing revenues, provision for transaction losses resulting from increased total payment volumes
processed by our PayPal subsidiary and other costs. In 2001, operating cash Öows were partially oÅset by
cash used to support working capital needs. In 2002 and 2003, operating cash Öows were positively
impacted by the net cash amounts provided by year-over-year changes in working capital assets and
liabilities. During 2003, we used net cash provided by operating and Ñnancing activities to fund purchases
of property and equipment, acquisitions and repayments of borrowings. Net cash provided by operating
activities also contributed to an increase in our aggregate cash, cash equivalents and investments balance
by $979.8 million in 2003 to approximately $2.8 billion. We currently expect that Ñscal 2004 cash Öows
from operations will continue to exceed net income. We believe that existing cash, cash equivalents and
investments, together with any cash generated from operations, will be suÇcient to fund our operating
activities, capital expenditures and other obligations for the foreseeable future. However, if during that
period or thereafter we are not successful in generating suÇcient cash Öows from operations or in raising
additional capital when required in suÇcient amounts and on terms acceptable to us, our business could
suÅer.
The net cash Öows used in investing activities in 2001, 2002 and 2003 were due primarily to the
movement of cash between cash and investments, the purchase of property and equipment, and
acquisitions. Purchases of property and equipment totaled $57.4 million in 2001, $138.7 million in 2002
and $365.4 million in 2003. Purchases of property and equipment in 2001 and 2002 related mainly to
purchases of computer equipment and software to support our site operations, customer support and
33
international expansion. In 2003, purchases of property and equipment included the $125.1 million
purchase of additional oÇce space in San Jose, California. Purchases of property and equipment in 2003
also included amounts for improvements to various facilities in the U.S. and around the world as well as
computer equipment and software to support our site operations, customer support and international
expansion. We expect capital expenditures for the purchase of property and equipment to approximate
$250 million during 2004, without taking into account any acquisitions or other costs associated with the
potential purchase of additional facilities. This amount for 2004 consists primarily of hardware and
software for our platform architecture, site operations and corporate information systems. Cash expended
for acquisitions, net of cash acquired, totaled $111.7 million in 2001, $59.4 million in 2002 and
$216.4 million in 2003. In 2001, we expended cash to acquire a controlling interest in Internet Auction,
located in South Korea. Our cash acquisitions in 2002 included acquiring the remaining ownership interest
in our Billpoint subsidiary and a 38% interest in EachNet, located in China. We completed our acquisition
of PayPal during 2002 through the exchange of our common stock, and we did not include cash payments
in the purchase price. Our cash acquisitions in 2003 included acquiring the remaining ownership interest in
EachNet and an additional ownership interest in Internet Auction Co.
The net cash Öows provided by Ñnancing activities in 2001, 2002 and 2003 were due primarily to
proceeds from stock option exercises. Proceeds from stock option exercises totaled $123.7 million in 2001,
$252.2 million in 2002 and $700.8 million in 2003. Our future cash Öows from stock options are diÇcult to
project as such amounts are a function of both our stock price and the decisions by employees to exercise
stock options. In general, we expect proceeds from stock option exercises to increase during periods in
which our stock price has increased.
Commitments and Contingencies
The contractual obligations presented in the table below represent our estimates of future payments
under Ñxed contractual obligations and commitments. Changes in our business needs, cancellation
provisions, changing interest rates, and other factors may result in actual payments diÅering from the
estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented
below a summary of the most signiÑcant assumptions used in our determination of amounts presented in
the tables, in order to assist in the review of this information within the context of our consolidated
Ñnancial position, results of operations, and cash Öows. The following table summarizes our Ñxed
contractual obligations and commitments (in thousands):
Year Ending
December 31,
Capital
Leases
Operating
Leases
Other
Purchase
Obligations
Total
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
2,840
$ 22,765
$265,237
$290,842
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
128,376
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ThereafterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
Ì
Ì
17,556
11,693
9,724
9,661
44,361
162,912
308,844
54,580
7,601
749
Ì
66,273
17,325
10,410
44,361
$131,216
$115,760
$491,079
$738,055
Capital lease amounts include leases obligations associated with computer and other oÇce equipment.
The amounts presented are consistent with contractual terms and are not expected to diÅer signiÑcantly,
unless we decide to purchase the individual assets prior to the end of the respective lease terms. The
purchase obligation amount in 2005 also includes the assumed purchase of the corporate headquarters in
San Jose, California, in March 2005, when the lease is scheduled to expire. See ""Note 17 Ì Subsequent
Events'' in the notes to the Consolidated Financial Statements.
34
Operating lease amounts include minimum rental payments under our non-cancelable operating leases
for oÇce facilities, including our corporate headquarters located in San Jose, California, as well as limited
computer and oÇce equipment that we utilize under lease arrangements. The amounts presented are
consistent with contractual terms and are not expected to diÅer signiÑcantly, unless a substantial change in
our headcount needs requires us to exit an oÇce facility early or expand our occupied space.
Other purchase obligation amounts include minimum purchase commitments for advertising,
computer equipment, software applications, engineering development services and other goods and services
that were entered into through our ordinary course of business. For those contractual arrangements in
which there are signiÑcant performance requirements, we have developed estimates to project expected
payment obligations. These estimates have been developed based upon historical trends, when available,
and our anticipated future obligations. Given the signiÑcance of such performance requirements within our
advertising and other arrangements, actual payments could diÅer signiÑcantly from these estimates.
IndemniÑcation Provisions
During the ordinary course of business, in certain limited circumstances, we have included
indemniÑcation provisions within certain of our contracts. Pursuant to these agreements, we indemnify,
hold harmless, and agree to reimburse the indemniÑed party for losses suÅered or incurred by the
indemniÑed party, generally parties with which we have commercial relations, in connection with certain
intellectual property infringement claims by any third party with respect to our services. To date, we have
not incurred any costs in connection with such indemniÑcation clauses.
Subsequent Events
On January 26, 2004, we entered into an agreement with mobile.de to acquire all of its outstanding
shares for 121 million Euros (approximately $153 million at the January 26, 2004 exchange rate), subject
to certain closing adjustments, plus acquisition costs. mobile.de is a classiÑeds website for vehicles in
Germany. The acquisition, which is subject to regulatory approval in Germany by the Federal Cartel
OÇce, is expected to close in the second quarter of 2004. The acquisition will be accounted for using the
purchase method of accounting.
In February 2004, we elected not to exercise certain rights to extend the lease period for our San Jose
corporate headquarters. The lease on these facilities will end on March 1, 2005, and we are obligated to
make payments to the lessor of $126.4 million at lease expiration.
Critical Accounting Policies, Judgments and Estimates
General
The preparation of our Consolidated Financial Statements and related notes requires us to make
judgments, estimates, and assumptions that aÅect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and liabilities. We have based our estimates on
historical experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Our senior management has
discussed the development, selection and disclosure of these estimates with the Audit Committee of our
Board of Directors. Actual results may diÅer from these estimates under diÅerent assumptions or
conditions.
An accounting policy is considered to be critical if it requires an accounting estimate to be made
based on assumptions about matters that are highly uncertain at the time the estimate is made, and if
diÅerent estimates that reasonably could have been used, or changes in the accounting estimates that are
reasonably likely to occur periodically, could materially impact the Ñnancial statements. We believe the
following critical accounting policies reÖect the more signiÑcant estimates and assumptions used in the
preparation of the Consolidated Financial Statements. The following descriptions of critical accounting
35
policies, judgments and estimates should be read in conjunction with our Consolidated Financial
Statements and other disclosures included in this report.
Provisions for Doubtful Accounts and Authorized Credits
Our U.S. and International segments are exposed to losses due to uncollectible accounts and credits
to sellers. Provisions for these items represent our estimate of actual losses and credits based on our
historical experience, are monitored monthly, and are made at the time the related revenue is recognized.
The provision for doubtful accounts is recorded as a charge to operating expense, while the authorized
credits are recorded as a reduction of revenues. The following table illustrates the provision related to
doubtful accounts and authorized credits as a percentage of net revenues for 2001, 2002, and 2003 (in
thousands, except percents).
Years Ended December 31,
2001
2002
2003
Net revenues from the U.S. and International segments ÏÏ
$731,173
$1,118,732
$1,727,474
Provision for doubtful accounts and authorized credits ÏÏÏ
Provision for doubtful accounts and authorized credits as
a % of net revenues from the U.S. and International
segmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
25,243
25,455
46,049
3.5%
2.3%
2.7%
Historically, our actual losses and credits have been consistent with these provisions. However,
unexpected or signiÑcant future changes in trends could result in a material impact to future statements of
income and cash Öows. Based on our results for the year ended December 31, 2003, a 25 basis point
deviation from our estimates would have resulted in an increase or decrease in operating expenses and/or
net revenues of approximately $4.3 million. The following analysis demonstrates, for illustrative purposes
only, the potential eÅect a 25 basis point deviation from our estimates would have upon our Consolidated
Financial Statements and is not intended to provide a range of exposure or expected deviation (in
thousands, except per share data):
¿25 Basis
Points
Our
2003
Estimate
°25 Basis
Points
Expense/revenue reduction related to doubtful accounts
and authorized credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 41,731
$ 46,049
$ 50,368
Income from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
633,559
444,722
0.68
629,241
441,771
0.67
624,922
438,816
0.67
Provision for Transaction Losses
Our Payments segment is exposed to transaction losses due to credit card and other payment misuse,
as well as non-performance 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 overdrafts. These allowances represent an accumulation of the estimated amounts, using an
actuarial technique, necessary to provide for transaction losses incurred as of the reporting date, including
those of which we have not yet been notiÑed. The allowances are monitored monthly and are updated
based on actual claims data reported by our claims processors. Customers typically have up to 180 days to
Ñle transaction disputes. Consequently, the time between estimating the loss provisions and realization of
the actual amount is short. The allowances are based on known facts and circumstances, internal factors
including our experience with similar cases, historical trends involving loss payment patterns and the mix
of transaction and loss types. Additions to the allowance, in the form of provisions, are reÖected as a
36
general and administrative expense in our results of operations, while write-oÅs to the allowance are made
when a loss is determined to have occurred. Recoveries, when collected, are recorded as an increase to the
allowance for transaction losses. As of December 31, 2003, the allowance for transaction losses totaled
$12.0 million and was included in accrued expenses and other current liabilities in our consolidated
balance sheet.
The following table illustrates the provision for transaction loss expense as a percentage of total
payment volume from PayPal operations for the period from October 3, 2002 through December 31, 2002
and for the year ended December 31, 2003 (in thousands, except percents).
Period from
October 3, 2002
through
Year Ended
December 31, 2002 December 31, 2003
Total payment volume ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,138,093
$12,226,305
Transaction loss expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
As a % of total payment volume ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
7,832
0.37%
36,401
0.30%
The establishment of appropriate allowances for transaction losses is an inherently uncertain process,
and ultimate losses may vary from the current estimates. We regularly update our allowance estimates as
new facts become known and events occur that may impact the settlement or recovery of losses. The
allowances are maintained at a level we deem appropriate to adequately provide for losses incurred at the
balance sheet date. Based on our results for the year ended December 31, 2003, a Ñve basis point deviation
from our estimates would have resulted in an increase or decrease in our operating expenses of
approximately $6.1 million. The following analysis demonstrates, for illustrative purposes only, the potential
eÅect a Ñve basis point deviation from our estimates would have upon our Consolidated Financial
Statements for the year ended December 31, 2003, and is not intended to provide a range of exposure or
expected deviation (in thousands, except per share data):
¿5 Basis
Points
Our
2003
Estimate
°5 Basis
Points
Transaction loss expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 30,288
$ 36,401
$ 42,515
Income from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
635,354
Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
445,949
Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
0.68
629,241
441,711
0.67
623,127
437,588
0.67
Legal Contingencies
In connection with certain pending litigation and other claims, we have estimated the range of
probable loss and provided for such losses through charges to our income statement. These estimates 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 change in the future. We are currently involved in certain legal proceedings as
discussed in ""Item 3: Legal Proceedings'' and ""Note 11 Ì Commitments and Contingencies Ì Litigation
and Other Legal Matters'' to our Consolidated Financial Statements, which we incorporate by reference
herein. 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. If the plaintiÅs were to prevail on certain claims, we might be forced
to pay signiÑcant damages and licensing fees, modify our business practices or even be prohibited from
conducting a signiÑcant part of our U.S. business. Any such results could materially harm our business and
37
could result in a material adverse impact on the Ñnancial position, results of operations or cash Öows of all
or any of our three segments.
Accounting for Income Taxes
We are required to recognize a provision for income taxes based upon the taxable income and
temporary diÅerences for each of the tax jurisdictions in which we operate. This process requires a
calculation of taxes payable under currently enacted tax laws around the world and an analysis of
temporary diÅerences between the book and tax bases of our assets and liabilities, including various
accruals, allowances, depreciation and amortization. The tax eÅect of these temporary diÅerences and the
estimated tax beneÑt from our tax net operating losses are reported as deferred tax assets and liabilities in
our consolidated balance sheet. We also assess the likelihood that our net deferred tax assets will be
realized from future taxable income. To the extent we believe that it is more likely than not that some
portion, or all of, the deferred tax asset will not be realized, we establish a valuation allowance. To the
extent we establish a valuation allowance or change the allowance in a period, we reÖect the change with a
corresponding increase or decrease in our tax provision in our income statement. Where the change in the
valuation allowance relates to the deduction for employee stock option exercises, the change is reÖected as
a credit to additional paid-in capital. As employee stock option exercises are highly dependent upon our
stock price, it is extremely diÇcult to predict the amount of deductions that will be generated from future
option exercises and, therefore, for us to ascertain the amount of deferred tax assets related to employee
stock option exercises that may be realized in future periods. The deferred tax asset, net of a valuation
allowance of $165.8 million, totaled $52.0 million at December 31, 2003 and was oÅset by deferred tax
liabilities of $107.1 million resulting in a net deferred tax liability of $55.1 million. In addition, due to our
signiÑcant anticipated international expansion, we have not provided for U.S. federal income and foreign
withholding taxes on non-U.S. subsidiaries' undistributed earnings as of December 31, 2003, because such
earnings are intended to be reinvested indeÑnitely. In the event that our future international expansion
plans change and such amounts are not reinvested indeÑnitely, we would be subject to U.S. income taxes
partially oÅset by foreign tax credits. The following table illustrates the provision for income taxes as a
percentage of income before income taxes for 2001, 2002, and 2003 (in thousands, except percents):
Year Ended December 31,
2001
2002
2003
Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$170,457
$395,837
$653,922
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
80,009
145,946
206,738
As a % of income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
47%
37%
32%
Historically, these provisions have adequately provided for our actual income tax liabilities. However,
unexpected or signiÑcant future changes in trends could result in a material impact to future statements of
income and cash Öows. Based on our results for the year ended December 31, 2003, a one-percentage
point change in our provision for income taxes as a percentage of income before taxes would have resulted
in an increase or decrease in expense of approximately $6.5 million. The following analysis demonstrates,
for illustrative purposes only, the potential eÅect such a one-percentage point deviation change would have
upon our Ñnancial statements and is not intended to provide a range of exposure or expected deviation (in
thousands, except per share data):
Our
2003
Estimate
°1%
¿1%
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$200,199
$206,738
$213,277
Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
653,922
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
448,310
Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
0.68
653,922
441,771
0.67
653,922
435,232
0.66
38
Advertising and Other Non-Transaction Revenues
A portion of our net revenues result from fees associated with advertising and other non-transaction
services in our U.S., International and Payments segments. Net revenues from advertising are derived
principally from the sale of online banner and sponsorship advertisements for cash and through barter
arrangements. Other non-transaction net revenues are derived principally from contractual arrangements
with third parties that provide transaction services to eBay users and from oÉine services provided by
wholly-owned subsidiaries that were divested in the second half of 2002. Advertising and other non-
transaction net revenues, including barter transactions, totaled 20%, 9% and 2% of our consolidated net
revenues for the years ended December 31, 2001, 2002 and 2003, respectively, and were primarily
generated by our U.S. segment. Revenue from barter arrangements totaled $10.4 million in 2001,
$10.1 million in 2002 and $10.1 million in 2003. Certain judgments are involved in the determination of
the appropriate revenue recognition, including, but not limited to, the assessment and allocation of fair
values in multiple element arrangements and the appropriateness of gross or net revenue recognition. Our
advertising and other non-transaction net revenues may be aÅected by the Ñnancial condition of the parties
with whom we have these relationships 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
highly concentrated customer base. During the years ended December 31, 2001, 2002 and 2003, all
advertising and other non-transaction net revenues, excluding oÉine revenues, were derived from
approximately 40, 50 and 110 customers, respectively.
Business Combinations
In accordance with the provisions of SFAS 141, the purchase price of an acquired company is
allocated between intangible assets and the net tangible assets of the acquired business with the residual of
the purchase price recorded as goodwill. The determination of the value of the intangible assets acquired
involves certain judgments and estimates. These judgments can include, but are not limited to, the cash
Öows that an asset is expected to generate in the future, the appropriate weighted average cost of capital,
and the cost savings expected to be derived from acquiring an asset.
At December 31, 2003 our goodwill totaled $1.7 billion and our identiÑable intangible assets totaled
$274.1 million. In accordance with the provisions of SFAS 142, we assess the impairment of goodwill and
identiÑable intangible assets of our reportable units annually, or more often if events or changes in
circumstances indicate that the carrying value may not be recoverable. This assessment is based upon a
discounted cash Öow analysis and analysis of our market capitalization. The estimate of cash Öow is based
upon, among other things, certain assumptions about expected future operating performance and an
appropriate discount rate determined by our management. Our estimates of discounted cash Öows may
diÅer from actual cash Öows due to, among other things, economic conditions, changes to its business
model or changes in operating performance. SigniÑcant diÅerences between these estimates and actual
cash Öows could materially aÅect our future Ñnancial results. We completed our annual goodwill
impairment test as of August 31, 2003 and determined that no adjustment to the carrying value of
goodwill for any of our reportable units was required. We have determined that no events have occurred
during the four months ended December 31, 2003 that would require updated analysis.
39
Risk Factors That May AÅect Results of Operations and Financial Condition
The risks and uncertainties described below are not the only ones facing eBay. Other events that we do
not currently anticipate or that we currently deem immaterial also may impair our business operations.
Our operating results may Öuctuate.
Our operating results have varied on a quarterly basis during our operating history. Our operating
results may Öuctuate signiÑcantly as a result of a variety of factors, many of which are outside our control.
Factors that may aÅect our quarterly operating results include the following:
‚ our ability to retain an active user base, to attract new users and to encourage existing users to list
items for sale, purchase items through our service, or use our payment services, both in the U.S.
and internationally;
‚ the amount and timing of operating costs and capital expenditures relating to the maintenance and
expansion of our businesses, operations, and infrastructure;
‚ foreign or domestic government regulation, including investigations prompted by items listed, sold,
or paid for by our users;
‚ our ability to comply with the requirements of entities whose services are required for our
operations, such as credit card associations;
‚ the success of our geographic and product expansion;
‚ the introduction of new sites, services, and products by us or our competitors;
‚ volume, size, timing, and completion rate of transactions on our websites;
‚ consumer conÑdence in the safety and security of transactions on our websites;
‚ the costs and results of litigation that involves us;
‚ our ability to upgrade and develop our systems, infrastructure, and customer service capabilities to
accommodate growth at a reasonable cost;
‚ our ability to keep our websites operational at a reasonable cost;
‚ our ability to develop product enhancements at a reasonable cost and to develop programs and
features in a timely manner;
‚ our ability to integrate successfully and cost eÅectively manage our acquisitions, including PayPal
and, more recently, EachNet;
‚ our ability to manage PayPal's transaction loss and credit card chargeback rate and payment
funding mix;
‚ our ability to expand PayPal's product oÅerings internationally (including our ability to obtain any
necessary regulatory approvals) and to increase the acceptance of PayPal by online merchants
outside of the eBay marketplace;
‚ our ability to attract new personnel in a timely and eÅective manner;
‚ our ability to retain key employees in our businesses;
‚ our ability to expand our product oÅerings involving Ñxed-price trading;
‚ the results of regulatory decisions that aÅect us;
‚ technical diÇculties or service interruptions involving our websites or services provided to our users
by third parties;
‚ the actions of our competitors;
40
‚ the timing, cost and availability of advertising in traditional media and on other websites and online
services;
‚ the timing of payments to us and of marketing and other expenses under existing and future
contracts;
‚ the success of our brand building and marketing campaigns;
‚ the continued Ñnancial strength of our technology suppliers and other parties with which we have
commercial relations;
‚ increasing consumer acceptance of the Internet and other online services for commerce and, in
particular, for the trading of products such as those listed on our websites;
‚ general economic conditions and those economic conditions speciÑc to the Internet and e-commerce
industries; and
‚ geopolitical events such as war, threat of war, or terrorist actions.
Our limited operating history and the increased variety of services oÅered on our websites make it
diÇcult for us to forecast the level or source of our revenues or earnings accurately. In view of the rapidly
evolving nature of our business and our limited operating history, we believe that period-to-period
comparisons of our operating results may not be meaningful, and you should not rely upon them as an
indication of future performance. We do not have backlog, and substantially all of our net revenues each
quarter come from transactions involving sales or payments during that quarter. Due to the inherent
diÇculty in forecasting revenues it is also diÇcult to forecast income statement expenses as a percentage
of net revenues. Quarterly and annual income statement expenses as a percentage of net revenues may be
signiÑcantly diÅerent from historical or projected rates. Our operating results in one or more future
quarters may fall below the expectations of securities analysts and investors. In that event, the trading
price of our common stock would almost certainly decline.
We may not maintain our level of proÑtability.
We believe that our continued proÑtability at historical levels will depend in large part on our ability
to do the following:
‚ attract new users and keep existing users active on our websites;
‚ manage the costs of our business, including the costs associated with maintaining and developing
our websites, customer support, transaction and chargeback rates, and international and product
expansion;
‚ maintain suÇcient transaction volume to attract buyers and sellers;
‚ increase the awareness of our brands; and
‚ provide our customers with superior community, customer support, and trading experiences.
We invest heavily in marketing and promotion, customer support, and further development of
operating infrastructure for our core and recently acquired operations. Some of this investment entails
long-term contractual commitments. As a result, we may be unable to adjust our spending rapidly enough
to compensate for any unexpected revenue shortfall, which may harm our proÑtability. In addition, we are
spending in advance of anticipated growth, which may also harm our proÑtability.
There are many risks associated with our international operations.
Our international expansion has been rapid and we have only limited experience in many of the
countries in which we now do business. Our international business, especially in Germany, the U.K.,
Canada, and South Korea, has also become critical to our revenues and proÑts. Expansion into
international markets, such as our recent entry into the People's Republic of China, requires management
41
attention and resources. We have limited experience in localizing our service to conform to local cultures,
standards and policies. In many countries, we compete with local companies who understand the local
market better than we do. We may not be successful in expanding into particular international markets or
in generating revenues from foreign operations. For example, in 2002 we withdrew from the Japanese
market. Even if we are successful, we expect the costs of operating new sites to exceed our net revenues
for at least 12 months in most countries. As we continue to expand internationally, including through the
expansion of PayPal, we are subject to risks of doing business internationally, including the following:
‚ regulatory requirements, including regulation of auctioneering, professional selling, distance selling,
banking, and money transmitting, that may limit or prevent the oÅering of eBay's and PayPal's
services in some jurisdictions, prevent enforceable agreements between sellers and buyers, prohibit
the listing of certain categories of goods, require special licensure, or limit the transfer of
information between eBay and our aÇliates;
‚ legal uncertainty regarding liability for the listings and other content provided by our users,
including uncertainty as a result of less Internet-friendly legal systems, unique local laws, and lack
of clear precedent or applicable law;
‚ diÇculties in integrating with local payment providers, including banks, credit and debit card
associations and electronic fund transfer systems;
‚ diÅerent employee/employer relationships and the existence of workers' councils and labor unions;
‚ diÇculties in staÇng and managing foreign operations;
‚ longer payment cycles, diÅerent accounting practices, and greater problems in collecting accounts
receivable;
‚ potentially adverse tax consequences, including local taxation of our fees or of transactions on our
websites;
‚ higher telecommunications and Internet service provider costs;
‚ strong local competitors;
‚ diÅerent and more stringent consumer protection, data protection and other laws;
‚ cultural ambivalence towards, or non-acceptance of, online trading;
‚ seasonal reductions in business activity;
‚ expenses associated with localizing our products, including oÅering customers the ability to transact
business in the local currency;
‚ laws and business practices that favor local competitors;
‚ proÑt repatriation restrictions, foreign currency exchange restrictions, and exchange rate Öuctuations;
‚ changes in a speciÑc country's or region's political or economic conditions; and
‚ diÅering intellectual property laws.
Some of these factors may cause our international costs of doing business to exceed our comparable
domestic costs. To the extent we expand our international operations and have additional portions of our
international revenues denominated in foreign currencies, we also could become subject to increased
diÇculties in collecting accounts receivable and risks relating to foreign currency exchange rate
Öuctuations. The impact of currency exchange rate Öuctuations is discussed in more detail under ""We are
exposed to Öuctuations in currency exchange rates,'' below.
We intend to expand PayPal's services internationally. Both eBay and PayPal have limited experience
with the payments business outside of the U.S. In some countries, expansion of PayPal's business may
require a close commercial relationship with one or more local banks. We do not know if these or other
42
factors may prevent, delay, or limit PayPal's expansion or reduce its proÑtability. Any limitation on our
ability to expand PayPal internationally could harm our business.
Our investment in EachNet is subject to risks and uncertainties relating to the laws and regulations of the
People's Republic of China.
In July 2003, we completed the acquisition of the remaining outstanding capital stock and options of
EachNet. EachNet is a Delaware corporation and a foreign person under the laws of the People's Republic
of China, or PRC, and is subject to many of the risks of doing business internationally described above
under ""There are many risks associated with our international operations.'' The PRC currently regulates its
Internet sector through regulations restricting the scope of foreign investment and through the enforcement
of content restrictions on the Internet. While many aspects of these regulations remain unclear, they
purport to limit and require licensing of various aspects of the provision of Internet information services.
These regulations have created substantial uncertainties regarding the legality of foreign investments in
PRC Internet companies, including EachNet and the business operations of such companies. In order to
meet local ownership and regulatory licensing requirements, the EachNet website is operated through a
foreign-owned enterprise indirectly owned by EachNet Inc., which acts in cooperation with a local PRC
company owned by certain EachNet employees. We believe EachNet's current ownership structure
complies with all existing PRC laws, rules, and regulations. There are, however, substantial uncertainties
regarding the interpretation of current PRC laws and regulations, and it is possible that the PRC
government will ultimately take a view contrary to ours. There are also uncertainties regarding EachNet's
ability to enforce contractual relationships it has entered into with respect to management and control of
the company's business. If EachNet were found to be in violation of any existing or future PRC laws or
regulations, it could be subject to Ñnes and other Ñnancial penalties, have its business and Internet content
provider licenses revoked, or be forced to discontinue its business entirely.
We are exposed to Öuctuations in currency exchange rates.
Net revenues outside the United States accounted for approximately 35% of our net revenues in 2003.
Because we conduct a signiÑcant and growing portion of our business outside the United States, we face
exposure to adverse movements in non-U.S. currency exchange rates. In connection with its multi-currency
service, PayPal Ñxes exchange rates twice per day, and may face Ñnancial exposure if it incorrectly Ñxes
the exchange rate. PayPal also holds some corporate funds in non-U.S. currencies to facilitate customer
withdrawals, and thus its Ñnancial results are aÅected by the translation of these non-U.S. currencies into
U.S. dollars. In addition, the results of operations of our internationally focused websites are exposed to
foreign exchange rate Öuctuations as the Ñnancial results of the applicable subsidiaries are translated from
the local currency into U.S. dollars upon consolidation. If the U.S. dollar weakens against foreign
currencies, as it did during 2003, the translation of these foreign-currency-denominated transactions will
result in increased net revenues, operating expenses, and net income. The change in weighted average
foreign currency exchange rates in 2003 relative to the comparable rates used in preparation of our
consolidated 2002 Ñnancial statements resulted in an increase in net revenue of approximately
$82.0 million and an increase in operating expenses of approximately $37.9 million. Similarly, our net
revenues, operating expenses, and net income will decrease if the U.S. dollar strengthens against foreign
currencies. As exchange rates vary, net sales and other operating results, when translated, may diÅer
materially from expectations. In particular, to the extent the U.S. dollar strengthens against the Euro and
British Pound, our European revenues and proÑts will be reduced as a result of these translation
adjustments.
Our business may be subject to sales and other taxes.
We do not collect sales or other similar taxes on goods or services sold by users through our services.
One or more states or any foreign country may seek to impose sales, use, or value-added tax collection or
record-keeping obligations on companies such as eBay that engage in or facilitate online commerce. Such
taxes could be imposed if, for example, we were ever deemed to be an auctioneer or the agent of our
43
sellers. Several proposals have been made at the state and local level that would impose additional taxes
on the sale of goods and services through the Internet. These proposals, if adopted, could substantially
impair the growth of e-commerce, and could diminish our opportunity to derive Ñnancial beneÑt from our
activities. In 1998 and 2000, the U.S. federal government enacted legislation prohibiting states or other
local authorities from imposing access or discriminatory taxes on the Internet through November 1, 2003.
The expiration of this moratorium may permit new access or discriminatory taxes on the Internet that
could adversely aÅect our business. Legislation has also been introduced in the U.S. Congress to override
the Supreme Court's Quill decision, which limits the ability of state governments to require sellers outside
of their own state to collect and remit sales taxes on goods purchased by in-state residents. Passage of
such legislation and the imposition of such sales tax requirements would adversely aÅect our sellers and
our business. On July 1, 2003, eBay began collecting value-added tax, or VAT, on the fees we charge
sellers in the European Union, or EU. We continue to work with the relevant tax authorities to clarify our
obligations under these new regulations. There have been and will continue to be substantial ongoing costs
associated with complying with the VAT rules throughout the EU, and the increased costs to our
European users may reduce their activity on our websites and could adversely aÅect our international
transaction net revenues. A successful assertion by one or more states or any foreign country that we
should collect sales or other taxes on the exchange of merchandise or services on our system would harm
our business.
Our business may be harmed by fraudulent activities on our websites and disputes between users of
our services.
PayPal faces signiÑcant risks of loss due to fraud and disputes between senders and recipients,
including:
‚ merchant fraud and other disputes over the quality of goods and services;
‚ unauthorized use of credit card and bank account information and identity theft;
‚ the need to provide eÅective customer support to process disputes between senders and recipients;
‚ potential breaches of system security;
‚ potential employee fraud; and
‚ use of PayPal's system by customers to make or accept payment for illegal or improper purposes.
For the year ended December 31, 2003, PayPal's provision for transaction losses totaled $36.4 million,
representing 0.30% of PayPal's total payment volume. Failure to deal eÅectively with fraudulent
transactions and customer disputes would increase PayPal's loss rate and harm its business.
The highly automated nature of, and liquidity oÅered by, PayPal's payment service makes PayPal an
attractive target for fraud. In conÑguring its service, PayPal faces an inherent trade-oÅ between customer
convenience and security. Identity thieves and those committing fraud using stolen credit card or bank
account numbers, often in bulk and in conjunction with automated mechanisms of online communication,
potentially can steal large amounts of money from businesses such as PayPal's. We believe that several of
PayPal's current and former competitors in the electronic payments business have gone out of business or
signiÑcantly restricted their businesses largely due to losses from this type of fraud. We expect that
technically knowledgeable criminals will continue to attempt to circumvent PayPal's anti-fraud systems. In
addition, PayPal's service could be subject to employee fraud or other internal security breaches, and
PayPal is required to reimburse customers for any funds stolen as a result of such breaches. If PayPal fails
to prevent external or internal fraud, our business will be harmed.
PayPal incurs substantial losses from merchant fraud, including claims from customers that merchants
have not performed or that their goods or services do not match the merchant's description. PayPal also
incurs losses from claims that the customer did not authorize the purchase, from erroneous transmissions
and from customers who have closed bank accounts or have insuÇcient funds in them to satisfy payments.
In addition to the direct costs of such losses, if they are related to credit card transactions and become
44
excessive they could result in PayPal losing the right to accept credit cards for payment. If PayPal were
unable to accept credit cards, the velocity of trade on eBay could decrease, in which case our business
would further suÅer. PayPal has been assessed substantial Ñnes for excess chargebacks in the past, and
excessive chargebacks may arise in the future. PayPal has taken measures to detect and reduce the risk of
fraud, but these measures may not be eÅective. If these measures do not succeed, our business will suÅer.
In addition, prior to September 2003, some card issuers treated purchases made through PayPal as
the purchase of a money transfer service rather than the purchase of goods and services, which resulted in
reduced chargeback rights for the consumer if the consumer did not receive the goods or received
unsatisfactory goods. PayPal could be required to provide consumers full chargeback rights in such pre-
September 2003 cases, even if the normal time for exercising chargeback rights has expired. PayPal must
also now absorb the costs of chargebacks from all card issuers for goods that are not delivered or are not
as described, which may result in increased losses from merchant fraud and from disputes over the quality
of goods and services.
In October 2003, PayPal launched a new buyer protection program that will refund buyers up to $500
in certain eBay transactions if they do not receive the goods they purchased or if the goods are
signiÑcantly not as described. In the event that PayPal makes such a refund, it will seek to collect
reimbursement from the seller, but may not be able to receive any funds from the seller. The PayPal
Buyer Protection program has increased PayPal's loss rate and could cause future Öuctuations.
eBay faces similar risks to those of PayPal with respect to fraudulent activities, although eBay's risks
may to some extent be less signiÑcant. eBay periodically receives complaints from users who did not
receive the purchase price or the goods that were to have been exchanged. In some cases individuals have
been arrested and convicted for fraudulent activities using our websites. While eBay can suspend the
accounts of users who fail to fulÑll their delivery obligations to other users, eBay does not have the ability
to require users to make payments or deliver goods, or otherwise make users whole other than through our
limited buyer protection programs. Other than through these programs, eBay does not compensate users
who believe they have been defrauded by other users. eBay also periodically receives complaints from
buyers as to the quality of the goods purchased. We expect to continue to receive communications from
users requesting reimbursement or threatening or commencing legal action against us if no reimbursement
is made. Our liability for these sort of claims is only beginning to be clariÑed and may be higher in some
non-U.S. jurisdictions than it is in the U.S. Litigation of this sort could be costly for us, divert
management attention, result in increased costs of doing business, lead to adverse judgments, or could
otherwise harm our business. In addition, aÅected users will likely complain to regulatory agencies that
could take action against us, including imposing Ñnes or seeking injunctions.
Negative publicity generated as a result of fraudulent or deceptive conduct by users of our eBay and
PayPal services is increasing, and such publicity could damage our reputation, reduce our ability to attract
new users and diminish the value of our brand name.
PayPal's success in reducing fraud losses depends in part on its ability to restrict the withdrawal of
customer funds while it investigates suspicious transactions. PayPal has been and could again be sued by
plaintiÅs and has received inquiries from governmental entities regarding its account restriction and
disclosure practices. If the results of these lawsuits or inquiries are adverse to PayPal, it could be required
to pay substantial damages and restructure its anti-fraud processes in ways that would harm its business.
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 are identiÑed by PayPal's anti-
fraud models as suspicious. PayPal is subject to purported class action lawsuits challenging its procedures
and disclosures with respect to suspicious accounts, and alleging that those procedures and disclosures
violate federal and state law on consumer protection and unfair business practice and are inconsistent with
PayPal's user agreement. In addition, many customers who are subject to such restrictions complain to
regulatory agencies. As a result of customer complaints, PayPal has also received inquiries regarding its
45
restriction and disclosure practices from the Federal Trade Commission and the attorneys general of a
number of states. If PayPal's processes are found to violate federal or state law on consumer protection
and unfair business practices, it could be subject to an enforcement action or Ñnes. If PayPal loses the
litigation described above or becomes subject to an enforcement action, it could be required to restructure
its anti-fraud processes in ways that would harm its business, and to pay substantial damages or Ñnes.
Even if PayPal is able to defend itself successfully, the litigation or 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 operations in ways that could increase its costs
and decrease the eÅectiveness of its anti-fraud program.
Changes to card association rules or practices could negatively aÅect PayPal's service and, if it does not
comply with the rules, could result in a termination of PayPal's ability to accept credit cards. If PayPal is
unable to accept credit cards, our business would suÅer.
Because PayPal is not a bank, it cannot belong to or directly access the Visa and MasterCard credit
card associations. As a result, PayPal must rely on banks or payment processors to process transactions.
PayPal is required by its processors to comply with credit card association operating rules, and PayPal has
agreed to reimburse its processors for any Ñnes they are assessed by credit card associations as a result of
processing payments for PayPal. The credit card associations and their member banks set and interpret the
credit card rules. Some of those member banks compete with PayPal. Visa, MasterCard, American
Express, or Discover could adopt new operating rules or re-interpret existing rules which PayPal and/or its
processors might Ñnd diÇcult or even impossible to follow. As a result, PayPal could lose its ability to give
customers the option of using credit cards to fund their payments. If PayPal were unable to accept credit
cards, its business would be seriously damaged. In addition, the velocity of trade on eBay could decrease
and our business would further suÅer.
In 2002, both Visa and MasterCard adopted new operating rules for Internet payment services like
PayPal. In order to comply with the associations' new rules, PayPal and its credit card processors have
implemented changes to existing business processes for U.S. customers, and have worked aggressively
throughout 2003 on changes with respect to processes for transactions involving international customers.
PayPal and its processors completed the implementation of these changes with respect to Canadian and
European customers in February 2004. Any problems with this implementation could result in Ñnes, the
amount of which would be within Visa's and MasterCard's discretion. PayPal and its processors could be
unable to implement the necessary changes with respect to customers outside the U.S., Canada, and
Europe, which could result in Ñnes or the inability of PayPal to process MasterCard payments for
international merchants in certain countries. PayPal also could be subject to Ñnes from MasterCard and
Visa if it fails to register and conduct additional monitoring with respect to the activities of merchants that
are considered ""high risk,'' primarily certain merchants that sell digital content. PayPal's credit card
processors have passed on to PayPal Ñnes of $50,000 in 2003 and $25,000 through March 1 in the Ñrst
quarter of 2004 relating to PayPal's failure to detect the use of its service by certain ""high risk'' merchants
using the PayPal service.
Increases in credit card processing fees could increase PayPal's costs, aÅect its proÑtability, or otherwise
limit its operations.
From time to time, Visa, MasterCard, American Express and Discover may increase the interchange
fees that they charge for each transaction using one of their cards. MasterCard and Visa have each
announced increases to their credit card interchange fees eÅective April 2004. Visa and MasterCard both
implemented a decrease in their debit card interchange fees in August 2003 as a result of the settlement of
litigation, but the settlement agreement required them to maintain these lower interchange fees only until
January 2004, and they have announced increases in debit card interchange fees, in January 2004 and
April 2004, respectively, to levels close to those that prevailed prior to August 2003. PayPal's credit card
processors have the right to pass any increases in interchange fees on to PayPal. Such increased fees will
increase PayPal's operating costs and reduce its proÑt margins.
46
If PayPal were found to be subject to or in violation of any U.S. laws or regulations governing banking,
money transmission or electronic funds transfers, it could be subject to liability and forced to change its
business practices.
We believe that the licensing or approval requirements of the U.S. OÇce of the Comptroller of the
Currency, the Federal Reserve Board and other federal or state agencies that regulate banks, bank holding
companies, or other types of providers of electronic commerce services do not apply to PayPal, except for
certain money transmitter licenses mentioned below. However, one or more states may conclude that
PayPal is engaged in an unauthorized banking business. PayPal received written communications from
regulatory authorities in New York and Louisiana in early 2002 expressing the view that its service as it
formerly operated constituted an unauthorized banking business, and from authorities in California and
Idaho in 2001 that its service might constitute an unauthorized banking business. PayPal has taken steps
to address these states' concerns and received a conclusion in 2002 from the New York Banking
Department that its current business model does not constitute illegal banking. PayPal also has obtained
licenses to operate as a money transmitter in California, Louisiana, Idaho and many other states. However,
we cannot guarantee that the steps PayPal has taken to address state regulatory concerns will be eÅective
in all states. If PayPal is found to be engaged in an unauthorized banking business in one or more states, it
might be subject to monetary penalties and adverse publicity and might be required to cease doing
business with residents of those states. Even if the steps it has taken to resolve these states' concerns are
deemed suÇcient by the state regulatory authorities, PayPal could be subject to Ñnes and penalties for its
prior activities. The need to comply with state laws prohibiting unauthorized banking activities could also
limit PayPal's ability to enhance its services in the future. Any change to PayPal's business practices that
makes the service less attractive to customers or prohibits its use by residents of a particular jurisdiction
could decrease the velocity of trade on eBay, which would further harm our business.
A number of states have enacted legislation regulating money transmitters and PayPal has applied for
licenses under this legislation in 31 jurisdictions. To date, PayPal has obtained licenses in 24 of these
jurisdictions. As a licensed money transmitter, PayPal is subject to bonding requirements, restrictions on
its investment of customer funds, reporting requirements, and inspection by state regulatory agencies. If
PayPal's pending applications were denied, or if it were found to be subject to and in violation of any
money services laws or regulations, PayPal also could be subject to liability, forced to cease doing business
with residents of certain states, or forced to change its business practices. Any change to PayPal's business
practices that makes the service less attractive to customers or prohibits its use by residents of a particular
jurisdiction could decrease the velocity of trade on eBay, which would further harm our business. Even if
PayPal is not forced to change its business practices, it could be required to obtain licenses or regulatory
approvals that could impose a substantial cost on PayPal.
Although there have been no deÑnitive interpretations to date, PayPal has assumed that its service is
subject to the Electronic Fund Transfer Act and Regulation E of the Federal Reserve Board. As a result,
among other things, PayPal must provide advance disclosure of changes to its service, follow speciÑed error
resolution procedures and absorb losses above $50 from transactions not authorized by the consumer. In
addition, PayPal is subject to the Ñnancial privacy provisions of the Gramm-Leach-Bliley Act and related
regulations. As a result, some customer Ñnancial information that PayPal receives is subject to limitations
on reuse and disclosure. Existing and potential future privacy laws may limit PayPal's ability to develop
new products and services that make use of data gathered through its service. The provisions of these laws
and related regulations are complicated, and PayPal does not have extensive experience in complying with
them. Even technical violations of these laws can result in penalties of up to $1,000 for each non-
compliant transaction. During 2003, PayPal processed approximately 629,000 transactions per day, and any
violations could expose PayPal to signiÑcant liability.
47
PayPal's status under banking or Ñnancial services laws or other laws in countries outside the U.S. is
unclear. The cost of obtaining any required licenses or regulatory approvals in these countries could aÅect
PayPal's future proÑtability.
PayPal currently allows its customers with credit cards to send payments from 37 countries outside
the U.S., and to receive payments in 32 of those countries. In 22 of these countries, customers can
withdraw funds to local bank accounts. In the fourth quarter of 2002, PayPal began oÅering customers the
ability to send or receive payments denominated in Pounds, Euros, Canadian Dollars or Yen, in addition to
U.S. Dollars. In February 2004, PayPal (Europe) Ltd., a wholly-subsidiary of PayPal, received a license to
operate as an Electronic Money Institution in the United Kingdom as a vehicle for providing localized
versions of PayPal's service to customers in the European Union. PayPal has completed the migration of
all EU customers to that subsidiary. Fifteen of the 37 countries whose residents can use the PayPal service
are members of the European Union. As PayPal (Europe) develops localized services for the domestic
market in these countries, it will seek approval to implement such localized service through an expedited
""passport'' notiÑcation process. Any delay in obtaining clearance through the ""passport'' process could
force PayPal to delay its plans for expanding its business. PayPal has Ñled ""passport'' notices for Germany,
France, Netherlands, Belgium and Austria. PayPal (Europe) is subject to signiÑcant Ñnes or other
enforcement action if it violates the disclosure, reporting, anti money laundering, capitalization, funds
management or other requirements imposed on electronic money institutions.
In the 22 countries that are not members of the European Union, it is not clear whether PayPal's
U.S.-based service is subject to local law or, if it is subject to local law, whether such local law requires a
payment processor like PayPal to be licensed as a bank or Ñnancial institution or otherwise. Even if PayPal
is not currently required to obtain a license in those countries, future localization or targeted marketing of
PayPal's service in those countries could require licensure. Even if PayPal is not required to obtain a
license, other laws of those countries (such as data protection laws) may apply. If PayPal were found to
be subject to and in violation of any foreign laws or regulations, it could be subject to liability, forced to
change its business practices or forced to suspend providing services to customers in one or more countries.
Alternatively, PayPal could be required to obtain licenses or regulatory approvals that could impose a
substantial cost on it and involve considerable delay to the provision or development of its product. Delay
or failure to receive such a license would require PayPal to change its business practices or features in
ways that would adversely aÅect PayPal's international expansion plans and could require PayPal to
suspend providing services to customers in one or more countries.
Our auction business may be subject to regulation which could require us to modify our business practices.
Numerous states and foreign jurisdictions, including the State of California, where our headquarters
are located, have regulations regarding how ""auctions'' may be conducted and the liability of ""auctioneers''
in conducting such auctions. No Ñnal legal determination has been made as to whether the California
regulations apply to our business and little precedent exists in this area. Several states and some foreign
jurisdictions have attempted, and may attempt in the future, to impose such regulations upon us or our
users, which could harm our business. We are currently subject to potential regulation under the OÇce of
Banks and Real Estate in Illinois concerning the applicability of the Illinois auction law to our services. In
August 2002, Illinois amended its auction law to provide for a special regulatory regime for ""Internet
auction listing services.'' We expect to register as an Internet auction listing service in Illinois following the
adoption of regulations under the amended statute. Although we do not expect this registration to have a
negative impact on our business, other regulatory and licensure claims could result in costly litigation or
could require us to change our manner of doing business in ways that increase our costs or reduce our
revenues or force us to prohibit listings of certain items for some locations. We could also be subject to
Ñnes or other penalties. Any of these outcomes could harm our business.
We are subject to regulations relating to consumer privacy.
Several domestic jurisdictions have proposed, and California, Minnesota, Utah, and Vermont have
recently passed, legislation that would limit the uses of personal user information gathered online or oÉine.
48
Many jurisdictions already have such laws and continuously consider strengthening them, especially against
online services. eBay and PayPal in certain instances are subject to some of these current laws. PayPal
may be subject to recently enacted legislation in several states and countries imposing greater restrictions
on the ability of Ñnancial services companies to share user information with third parties without
aÇrmative user consent. However, the Fair Credit Reporting Act, or FCRA, a federal statute enacted in
1970 to protect consumer privacy, includes a provision preempting conÖicting state laws on the sharing of
information between corporate aÇliates. The preemptive provisions of FCRA were permanently extended
last year, thus ensuring that PayPal and eBay are not subject to the laws of each individual state with
respect to matters within the scope of FCRA, but remain subject to the provisions of FCRA.
The U.S. Federal Trade Commission also has settled several proceedings against companies regarding
the manner in which personal information is collected from users and provided to third parties. SpeciÑc
statutes intended to protect user privacy have been passed in many non-U.S. jurisdictions, including
virtually every non-U.S. jurisdiction in which we currently have a localized website. Compliance with these
laws, given the tight integration of our systems across diÅerent countries and the need to move data to
facilitate transactions amongst our users (e.g., to payment companies, shipping companies, etc.), is both
necessary and diÇcult. Failure to comply could subject us to lawsuits, Ñnes, criminal penalties, statutory
damages, adverse publicity, and other losses that could harm our business. Changes to existing laws or the
passage of new laws intended to address these issues could directly aÅect the way we do business or could
create uncertainty on the Internet. This could reduce demand for our services, increase the cost of doing
business as a result of litigation costs or increased service or delivery costs, or otherwise harm our business.
New and existing regulations could harm our business.
We are subject to the same foreign and domestic laws as other companies conducting business on and
oÅ the Internet. Today, there are still relatively few laws speciÑcally directed towards online services.
However, due to the increasing popularity and use of the Internet and online services, many laws relating
to the Internet are being debated at all levels of government around the world and it is possible that such
laws and regulations will be adopted. These laws and regulations could cover issues such as user privacy,
freedom of expression, pricing, fraud, content and quality of products and services, taxation, advertising,
intellectual property rights, and information security. Applicability to the Internet of existing laws
governing issues such as property ownership, copyrights and other intellectual property issues, taxation,
libel and defamation, obscenity, and personal privacy is uncertain. The vast majority of these laws were
adopted prior to the advent of the Internet and related technologies and, as a result, do not contemplate or
address the unique issues of the Internet and related technologies. Those laws that do reference the
Internet, such as the U.S. Digital Millennium Copyright Act and the European Union's (E.U.) Directive
on Distance Selling and Electronic Commerce have only recently begun to be interpreted by the courts
and implemented by the E.U. Member States, so their applicability and scope remain somewhat uncertain.
As our activities and the types of goods listed on our site expand, regulatory agencies may claim that we
or our users are subject to licensure in their jurisdiction, either with respect to our services in general, or in
order to allow the sale of certain items (e.g., real estate, event tickets, boats, automobiles).
In addition, because our services are accessible worldwide, and we facilitate sales of goods to users
worldwide, foreign jurisdictions may claim that we are required to comply with their laws. For example,
the Australian high court has ruled that a U.S. website in certain circumstances must comply with
Australian laws regarding libel. As we have expanded and localized our international activities, we have
become obligated to comply with the laws of the countries in which we operate. Laws regulating Internet
companies outside of the U.S. may be less favorable than those in the U.S., giving greater rights to
consumers, content owners, and users. Compliance may be more costly or may require us to change our
business practices or restrict our service oÅerings relative to those in the U.S. Our failure to comply with
foreign laws could subject us to penalties ranging from criminal Ñnes to bans on our services.
49
PayPal's Ñnancial success will remain highly sensitive to changes in the rate at which its customers fund
payments using credit cards rather than bank account transfers or existing PayPal account balances.
PayPal's proÑtability could be harmed if the rate at which customers fund using credit cards goes up.
PayPal pays signiÑcant transaction fees when senders fund payment transactions 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.
During 2003, senders funded 55% of PayPal's payment volume using credit cards. Senders may resist
funding payments by electronic transfer from bank accounts because of the greater protection oÅered by
credit cards, including the ability to dispute and reverse charges if merchandise is not delivered or is not as
described, because of frequent Öier miles or other incentives oÅered by credit cards, because of the ability
to defer payment, or because of generalized fears regarding privacy or loss of control in providing bank
account information to a third party.
PayPal has limited experience in managing and accounting accurately for large amounts of customer
funds. PayPal's failure to manage these funds properly would harm its business.
PayPal's ability to manage and account accurately for customer funds requires a high level of internal
controls. PayPal has neither an established operating history nor proven management experience in
maintaining, over a long term, these internal controls. As PayPal's business continues to grow, it must
strengthen its internal controls accordingly. PayPal's success requires signiÑcant public conÑdence in its
ability to handle large and growing transaction volumes and amounts of customer funds. Any failure to
maintain necessary controls or to manage accurately customer funds could diminish customer use of
PayPal's product severely.
Our failure to manage growth could harm us.
We are currently expanding our headcount, facilities, and infrastructure in the U.S., internationally,
and with PayPal. We anticipate that further expansion will be required to address potential growth in our
customer base and number of listings and payment transactions, as well as our expansion into new
geographic areas, types of goods, and alternative methods of sale. This expansion has placed, and we
expect it will continue to place, a signiÑcant strain on our management, operational and Ñnancial resources.
The areas that are put under strain by our growth include the following:
‚ The Websites. We must constantly add new hardware, update software and add new engineering
personnel to accommodate the increased use of our and our subsidiaries' websites and the new
products and features we are regularly introducing. This upgrade process is expensive, and the
increased complexity of our websites increases the cost of additional enhancements. If we are
unable to upgrade our technology, transaction processing systems, security infrastructure, or network
infrastructure to accommodate increased traÇc or transaction volume, our business could be
harmed. Adverse consequences could include 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, and delays in reporting accurate Ñnancial
information. Our failure to provide an increasing level of new features and functionality in a cost-
eÅective manner also could result in these consequences. We may be unable to eÅectively upgrade
and expand our systems in a timely manner or to integrate smoothly with our existing systems any
newly developed or purchased technologies or businesses such as PayPal. We are in the midst of
signiÑcant multi-year projects to enhance our current technical architecture. If these projects are
not successful, our business could be harmed. We have experienced periodic unscheduled
downtime. Continued unscheduled downtime would harm our business and also could anger users of
our websites and reduce future revenues.
‚ Customer Support. We are expanding our customer support operations to accommodate the
increased number of users and transactions on our websites and the increased level of trust and
50
safety activity we provide worldwide. If we are unable to provide these operations in a cost-eÅective
manner, users of our websites may have negative experiences, current and future revenues could
suÅer, and our operating margins may decrease.
‚ Customer Accounts. Our revenues depend on prompt and accurate billing processes. We are in the
midst of a signiÑcant project to enhance our billing software. Failure to successfully complete this
project or grow our transaction-processing capabilities to accommodate the increasing number of
transactions that must be billed would harm our ability to collect revenue and our business.
We must continue to hire, train, and manage new employees at a rapid rate. If our new hires perform
poorly, if we are unsuccessful in hiring, training, managing, and integrating these new employees, or if we
are not successful in retaining our existing employees, our business may be harmed. To manage the
expected growth of our operations and personnel, we will need to improve our transaction processing,
operational and Ñnancial systems, procedures, and controls. This is a special challenge as we acquire new
operations with diÅerent systems. Our current and planned personnel, systems, procedures, and controls
may not be adequate to support our future operations. The additional headcount and capital investments
we are adding increase our cost base, which will make it more diÇcult for us to oÅset any future revenue
shortfalls by expense reductions in the short term.
Our business is adversely aÅected by anything that causes our users to spend less time on their computers,
including seasonal factors and national events.
Anything that diverts our users from their customary level of usage of our websites could adversely
aÅect our business. We would therefore be adversely aÅected by geopolitical events such as war, the threat
of war, or terrorist activity. Similarly, our results of operations historically have been seasonal because
many of our users reduce their activities on our websites with the onset of good weather during the
summer months, and on and around national holidays. We have historically experienced our strongest
quarters of online growth in our Ñrst and fourth Ñscal quarters. PayPal has shown similar seasonality,
except that its strongest quarter of online growth has historically been the fourth Ñscal quarter. We expect
these patterns of seasonality to become more pronounced as our websites gain acceptance by a broader
base of mainstream users and as the size of our European operations, which experience greater seasonality,
grows relative to our other operations.
Our business may be harmed if our services are used for illegal purposes.
The law relating to the liability of providers of online services for the activities of their users on their
service is currently unsettled in the United States and internationally. We are aware that certain goods,
such as Ñrearms, other weapons, adult material, tobacco products, alcohol, and other goods that may be
subject to regulation, have been listed and traded on our service. We may be unable to prevent our users
from selling unlawful goods or selling goods in an unlawful manner, and we may be subject to allegations
of civil or criminal liability for unlawful activities carried out by users through our service. We have been
subject to several lawsuits based upon such allegations. Our Korean subsidiary and one of its employees
were recently found criminally liable for a listing on the Korean subsidiary's website. In order to reduce
our exposure to this liability, we have prohibited the listing of certain items and increased the number of
personnel reviewing questionable items. In the future, we may implement other protective measures that
could require us to spend substantial resources or discontinue certain service oÅerings. Any costs incurred
as a result of potential liability relating to the sale of unlawful goods or the unlawful sale of goods could
harm our business. In addition, we have received signiÑcant and continuing media attention relating to the
listing or sale of unlawful goods on our websites. This negative publicity could damage our reputation and
diminish the value of our brand name. It also could make users reluctant to continue to use our services.
PayPal's payment system is also susceptible to potentially illegal or improper uses. These may include
illegal online gambling, fraudulent sales of goods or services, illicit sales of prescription medications or
controlled substances, piracy of software and other intellectual property, money laundering, bank fraud,
child pornography traÇcking, prohibited sales of alcoholic beverages or tobacco products, and online
51
securities fraud. Despite measures PayPal has taken to detect and lessen the risk of this kind of conduct,
illegal activities may be funded using PayPal.
PayPal is subject to money laundering laws and regulations that prohibit, among other things, its
involvement in transferring the proceeds of criminal activities. Although PayPal has adopted a program to
comply with these laws and regulations, any errors or failure to implement the program properly could lead
to lawsuits, administrative action, and prosecution by the government. In July 2003, PayPal reached
agreement with the U.S. Attorney for the Eastern District of Missouri that it would pay $10 million as a
civil forfeiture to settle allegations that its provision of services to online gambling merchants violated
provisions of the USA PATRIOT Act and further agreed to have its compliance program reviewed by an
independent audit Ñrm. PayPal is also subject to regulations that require it to report suspicious activities
involving transactions of $2,000 or more and may be required to obtain and keep more detailed records on
the senders and recipients in certain transfers of $3,000 or more. The interpretation of suspicious activities
in this context is uncertain. Future regulations under the USA PATRIOT Act may require PayPal to
revise the procedures it uses to verify the identity of its customers and to monitor more closely
international transactions. These regulations could impose signiÑcant costs on PayPal and make it more
diÇcult for new customers to join its network. PayPal could be required to learn more about its customers
before opening an account, to obtain additional veriÑcation of international customers and to monitor its
customers' activities more closely. These requirements, as well as any additional restrictions imposed by
Visa, MasterCard, American Express and Discover, could raise PayPal's costs signiÑcantly and reduce the
attractiveness of its product. Failure to comply with federal and state money laundering laws could result
in signiÑcant criminal and civil lawsuits, penalties, and forfeiture of signiÑcant assets.
We are subject to intellectual property and other litigation.
In April 2001, our European subsidiaries, eBay GmbH and eBay International AG, were sued by
Montres Rolex S.A. and certain of its aÇliates in the regional court of Cologne, Germany. The suit
subsequently was transferred to the regional court in Dusseldorf, Germany. Rolex alleged that our
subsidiaries were infringing Rolex's trademarks as a result of users selling counterfeit Rolex watches
through our German website. The suit also alleged unfair competition. Rolex sought an order forbidding
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 on all causes of action. Rolex appealed the ruling to the
Higher Regional Court of Dusseldorf and the appeal was heard on October 30, 2003. On February 26,
2004, the court rejected Rolex's appeal and ruled in our favor. If it so chooses, Rolex may appeal the
ruling to the German Federal Supreme Court.
In September 2001, a complaint was Ñled by MercExchange LLC against us, our Half.com subsidiary
and ReturnBuy, Inc. in the U.S. District Court for the Eastern District of Virginia (No. 2:01-CV-736)
alleging infringement of three patents (relating to online auction technology, multiple database searching
and electronic consignment systems) and seeking a permanent injunction and damages (including treble
damages for willful infringement). In October 2002, the court granted in part our summary judgment
motion, eÅectively invalidating the patent related to online auction technology and rendering it
unenforceable. This ruling left only two patents in the case. Trial of the matter began on April 23, 2003.
In May 2003, the jury returned a verdict Ñnding that eBay had willfully infringed one and Half.com had
willfully infringed both of the patents in the suit, awarding $35.0 million in compensatory damages. Both
parties Ñled post-trial motions, and in August 2003, the court entered judgment for MercExchange in the
amount of $29.5 million, plus pre-judgment interest and post-judgment interest in an amount to be
determined. We have appealed the judgment and MercExchange has Ñled a cross-appeal. We continue to
believe that the verdict against us in the trial was incorrect and intend to continue to defend ourselves
vigorously. However, even if successful, our defense against this action will continue to be costly. In
addition, as a precautionary measure, we have modiÑed certain functionality of our websites and business
practices in a manner which we believe makes them non-infringing. Nonetheless, if we are not successful
in appealing the court's ruling, we might be forced to pay signiÑcant additional damages and licensing fees.
52
In August 2002, Charles E. Hill & Associates, Inc. Ñled a lawsuit in the U.S. District Court for the
Eastern District of Texas (No. 2:02-CV-186) alleging that we and 17 other companies, primarily large
retailers, infringed three patents owned by Hill generally relating to electronic catalog systems and methods
for transmitting and updating data at a remote computer. The suit seeks an injunction against continuing
infringement, unspeciÑed damages, including treble damages for willful infringement, and interest, costs,
expenses, and fees. In January 2003, the case was transferred to the U.S. District Court for the Southern
District of Indiana. After pending in Indiana for almost a year, the case was transferred back to the
U.S. District Court for the Eastern District of Texas in December 2003. We are currently awaiting the
judge's scheduling order in the case. We believe that we have meritorious defenses and intend to defend
ourselves vigorously.
In February 2002, PayPal was sued in California state court (No. CV-805433) in a purported class
action alleging that its restriction of customer accounts and failure to promptly unrestrict 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-Ñled with a diÅerent named plaintiÅ in June 2002
(No. CV-808441), and a related action was also Ñled in the U.S. District Court for the Northern District
of California in June 2002 (No. C-02-2777). In March 2002, PayPal was sued in the U.S. District Court
for the Northern District of California (No. C-02-1227) in a purported class action alleging that its
restrictions of customer accounts and failure to promptly unrestrict legitimate accounts violates federal and
state consumer protection and unfair business practice laws. The federal court has denied PayPal's motion
to compel individual arbitration as required by the PayPal User Agreement and has invalidated that
provision of the User Agreement. PayPal has appealed that decision to the U.S. Court of Appeals for the
Ninth Circuit. The two federal court actions have been consolidated into a single case, and the state court
action has been stayed pending developments in the federal case. In September 2003, the plaintiÅs Ñled
their motion for class certiÑcation. In November 2003, the parties tentatively reached agreement as to the
monetary terms for settlement of the disputes and we fully accrued for this tentative settlement amount in
our income statement for the three months and year ended December 31, 2003. The parties have notiÑed
the court that they need time to negotiate and document other terms of any resulting agreement, and the
class certiÑcation hearing has been rescheduled for March 29, 2004. If PayPal is unable to prevail in these
lawsuits or settle them on acceptable terms, it may have to pay substantial damages and change its anti-
fraud operations in a manner that will harm its business. Even if PayPal's defense is successful or if it is
able to settle the lawsuits, the litigation could damage PayPal's reputation, require signiÑcant management
time, and require changes to its customer service and operations that could increase its costs and decrease
the eÅectiveness of its anti-fraud program.
Following the announcement of the PayPal merger in July 2002, three purported class action
complaints were Ñled in the Delaware Court of Chancery by PayPal stockholders. The two California state
court actions were consolidated and stayed. All of the complaints named as defendants PayPal and each
member of its board of directors as well as eBay. The complaints were purported class actions that alleged
that, among other things, eBay controlled PayPal prior to the execution of their merger agreement, the
defendants breached Ñduciary duties they assertedly owed to PayPal's stockholders in connection with
PayPal entering into the merger agreement, and the exchange ratio in the merger was unfair and
inadequate. The plaintiÅs sought, among other things, an award of unspeciÑed compensatory damages. In
January 2004, the plaintiÅs in the consolidated Delaware actions voluntarily dismissed these actions
without prejudice. The consolidated California actions remain pending, but there has been no activity in
them for over a year and the plaintiÅs have indicated their intent to dismiss these actions.
In September 2002, Bank One Delaware (formerly known as First USA Bank, N.A.) Ñled a
complaint against PayPal in the U.S. District Court for the District of Delaware (No. 02-CV-1462)
alleging infringement of two First USA patents relating to assigning an alias to a credit card so as to
eliminate the need for the physical presence of the card in a Ñnancial transaction. In September 2003,
PayPal Ñled a complaint against Bank One Corp., Bank One Delaware's parent, in the same district court
alleging infringement of a PayPal patent relating to a process that allows Internet users to make secure
payments and authenticated transactions over a computer network. On October 20, 2003, the parties
53
Ñnalized the terms of an agreement to dismiss both lawsuits. The terms of the settlement agreement are
conÑdential.
In November 2003, AT&T Corporation Ñled a lawsuit against eBay and PayPal in the U.S. District
Court for the District of Delaware (No. 03-1051) alleging infringement of a patent entitled ""Mediation of
Transactions by a Communication System.'' AT&T claims that PayPal's and Billpoint's payment services
infringe its patent, and seeks monetary damages and injunctive relief. On December 24, 2003, eBay and
PayPal answered the complaint, denied infringement of AT&T's patent, and Ñled counterclaims. The case
is at a very early stage, with trial currently scheduled for April 2005. We believe that we have meritorious
defenses to this suit and intend to defend ourselves vigorously. Even if our defense is successful, the
litigation could be costly and require signiÑcant management time.
In May 2002, Tumbleweed Communications Corporation Ñled a complaint against PayPal alleging
infringement of two patents relating to electronic document delivery. Tumbleweed subsequently amended
the complaint to add eBay as a defendant, and later amended the complaint to add a third related patent.
On December 19, 2003, the parties entered into a settlement agreement dismissing the lawsuit, including
counterclaims Ñled by PayPal, and entered into a patent cross-licensing agreement. The terms of the
settlement are conÑdential.
Other third parties have from time to time claimed, and others may claim in the future, that we have
infringed their intellectual property rights. We have been notiÑed of several potential patent disputes, and
expect that we will increasingly be subject to patent infringement claims as our services expand in scope
and complexity. In particular, we expect to face additional patent infringement claims involving services we
provide, including various aspects of our Payments business. We have in the past been forced to litigate
such claims. We may also become more vulnerable to intellectual property claims as laws such as the
Digital Millennium Copyright Act are interpreted by the courts and as we expand into jurisdictions where
the underlying laws with respect to the potential liability of online intermediaries like ourselves is less
favorable. We expect that we will increasingly be subject to copyright and trademark infringement claims
as the geographical reach of our services expands. These claims, whether meritorious or not, could be time
consuming, result in costly litigation, cause service upgrade delays, require expensive changes in our
methods of doing business, or could require us to enter into costly royalty or licensing agreements.
From time to time, we are involved in other disputes that arise in the ordinary course of business. The
number and signiÑcance of 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 signiÑcant amounts of management time, and result in the diversion of signiÑcant
operational resources.
Government inquiries may lead to charges or penalties.
In January 1999, we received initial requests to produce certain records and information to the federal
government relating to an investigation of possible illegal transactions in connection with our websites. We
were informed that the inquiry includes an examination of our practices with respect to these transactions.
We have continued to provide further information in connection with this ongoing inquiry. In order to
protect the investigation, the court has ordered that no further public disclosures be made with respect to
the matter. Should this or any other investigation lead to civil or criminal charges against us, we would
likely be harmed by negative publicity, the cost of litigation, the diversion of management time, and any
Ñnes 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, while small as
a percentage of our total transactions, are large in aggregate numbers. As a result, we have from time to
time been contacted by various foreign and domestic governmental regulatory agencies that have questions
about our operations and the steps we take to protect our users from fraud. Both eBay and PayPal are
likely to receive additional inquiries from regulatory agencies in the future, which may lead to action
against either company. We have responded to all inquiries from regulatory agencies by describing our
54
current and planned antifraud eÅorts, customer support procedures and operating procedures. If one or
more of these agencies is not satisÑed with our response to current or future inquiries, we could be subject
to Ñnes or other penalties, or 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 identiÑable information about our
users and their transfers, especially outside of the U.S. Violation of these laws, which in many cases apply
not only to third-party transfers but also to transfers of information between ourselves and our subsidiaries,
and between ourselves, our subsidiaries, and other parties with which we have commercial relations, could
subject us to signiÑcant penalties and negative publicity and could adversely aÅect us.
Our business is subject to online commerce security risks.
To succeed, online commerce and communications must provide a secure transmission of conÑdential
information over public networks. Our security measures may not prevent security breaches that could
harm our business. Currently, a signiÑcant number of our users authorize us to bill their credit card
accounts directly for all transaction fees charged by us. PayPal's users routinely provide credit card and
other Ñnancial information. We rely on encryption and authentication technology licensed from third
parties to provide the security and authentication technology to eÅect secure transmission of conÑdential
information, including customer credit card numbers. Advances in computer capabilities, new discoveries
in the Ñeld of cryptography or other developments may result in a compromise or breach of the technology
used by us to protect customer transaction data. A number of websites have reported breaches of their
security. Any compromise of our security could harm our reputation and, therefore, our business. In
addition, a party who is able to circumvent our security measures could misappropriate proprietary
information or cause interruptions in our operations.
Our servers are also vulnerable to computer viruses, physical or electronic break-ins, and similar
disruptions, and we have experienced ""denial-of-service'' type attacks on our system that have made all or
portions of our websites unavailable for periods of time. We may need to expend signiÑcant resources to
protect against security breaches or to address problems caused by breaches. These issues are likely to
become more diÇcult as we expand the number of places where we operate. Security breaches could
damage our reputation and expose us to a risk of loss or litigation and possible liability. Our insurance
policies carry low coverage limits, which may not be adequate to reimburse us for losses caused by security
breaches.
In addition, our users, as well as those of other prominent 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 by the sender of the email or request that the
recipient send a password or other conÑdential information via email. We actively pursue the parties
responsible for these attempts at misappropriation and encourage our users to divulge sensitive information
only after they have veriÑed that they are on our legitimate websites, but we cannot entirely eliminate
these types of activities. In addition to harming our users, these fraudulent emails may damage our
reputation, reduce our ability to attract new users to our websites, and diminish the value of our brand
names.
Our business may be harmed by the listing or sale by our users of pirated or counterfeit items.
We have received in the past, and we anticipate receiving in the future, communications alleging that
certain items listed or sold through our service by our users infringe third-party copyrights, trademarks and
tradenames, or other intellectual property rights. Although we have sought to work actively with the
content community to eliminate infringing listings on our websites, some content owners have expressed
the view that our eÅorts are insuÇcient. Content owners have been active in defending their rights against
online companies, including eBay. Allegations of infringement of intellectual property rights have resulted
in litigation against us from time to time. Such litigation is costly for us, could result in increased costs of
55
doing business through adverse judgment or settlement, could require us to change our business practices
in expensive ways, or could otherwise harm our business. Litigation against other online companies could
result in interpretations of the law that could also require us to change our business practices or otherwise
increase our costs.
We are subject to risks associated with information disseminated through our service.
The law relating to the liability of online services companies for information carried on or
disseminated through their services is currently unsettled. Claims could be made against online services
companies under both U.S. and foreign law for defamation, libel, invasion of privacy, negligence, copyright
or trademark infringement, or other theories based on the nature and content of the materials disseminated
through their services. Several private lawsuits seeking to impose liability upon us under a number of these
theories have been brought against us. In addition, domestic and foreign legislation has been proposed that
prohibits or imposes liability for the transmission over the Internet of certain types of information. Our
service features a Feedback Forum, which includes information from users regarding other users. Although
all such feedback is generated by users and not by us, claims of defamation or other injury have been
made in the past and could be made in the future against us for content posted in the Feedback Forum.
Claims like these are more likely and may have a higher probability of success in jurisdictions outside the
U.S. where laws governing Internet transactions are unsettled. If we become liable for information
provided by our users and carried on our service in any jurisdiction in which we operate, we could be
directly harmed and we may be forced to implement new measures to reduce our exposure to this liability.
This may require us to expend substantial resources or to discontinue certain service oÅerings, which
would negatively aÅect our Ñnancial results. In addition, the increased attention focused upon liability
issues as a result of these lawsuits and legislative proposals could harm our reputation or otherwise impact
the growth of our business. Any costs incurred as a result of this potential liability could harm our
business.
Customer complaints or negative publicity about our customer service could diminish use of our services
adversely and, as a result, our business could suÅer.
Customer complaints or negative publicity about our customer service could severely diminish
consumer conÑdence in and use of our services. Breaches of our customers' privacy and our security
measures could have the same eÅect. Measures we sometimes take to combat risks of fraud and breaches
of privacy and security can damage relations with our customers. These measures heighten the need for
prompt and accurate customer service to resolve irregularities and disputes. EÅective customer service
requires signiÑcant personnel expense, and this expense, if not managed properly, could impact our
proÑtability signiÑcantly. Any inability by us to manage or train our customer service representatives
properly could compromise our ability to handle customer complaints eÅectively. If we do not handle
customer complaints eÅectively, our reputation may suÅer and we may lose our customers' conÑdence.
Because it is providing a Ñnancial 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. PayPal has received negative publicity with respect to its customer
service and is the subject of purported class action lawsuits and state attorney general inquiries alleging,
among other things, failure to resolve promptly certain account restrictions. If PayPal is unable to provide
quality customer support operations in a cost-eÅective manner, its users may have negative experiences,
PayPal may receive additional negative publicity and its ability to attract new customers may be damaged.
Current and future revenues could suÅer, or its operating margins may decrease. In addition, negative
publicity about or experiences with PayPal's customer support could cause eBay's reputation to suÅer or
aÅect consumer conÑdence in eBay as a whole.
Acquisitions could result in operating diÇculties, dilution and other harmful consequences.
We have acquired a number of businesses, including our acquisitions of Half.com, Internet Auction,
iBazar, NeoCom, PayPal, CARad, EachNet, and FairMarket. We recently announced that we have agreed
56
to acquire mobile.de, a German classiÑed automobile-listing website, subject to receipt of regulatory
approval. We expect to continue to evaluate and consider a wide array of potential strategic transactions,
including business combinations, acquisitions and dispositions of businesses, technologies, services, products
and other assets, including interests in our existing subsidiaries and joint ventures. At any given time we
may be engaged in discussions or negotiations with respect to one or more of such transactions. Any of
such transactions could be material to our Ñnancial condition and results of operations. There is no
assurance that any such discussions or negotiations will result in the consummation of any transaction. The
process of integrating any acquired business may create unforeseen operating diÇculties and expenditures
and is itself risky. The areas where we may face diÇculties include:
‚ diversion of management time, as well as a shift of focus from operating the businesses to issues of
integration and future products;
‚ declining employee morale and retention issues resulting from changes in compensation, reporting
relationships, future prospects, or the direction of the business;
‚ the need to integrate each company's accounting, management information, human resource and
other administrative systems to permit eÅective management, and the lack of control if such
integration is delayed or not implemented;
‚ the need to implement controls, procedures and policies appropriate for a larger public company at
companies that prior to acquisition had lacked such controls, procedures and policies; and
‚ in some cases, the need to transition operations onto the existing eBay platform.
Foreign acquisitions involve special risks, including those related to integration of operations across
diÅerent cultures and languages, currency risks, and the particular economic, political, and regulatory risks
associated with speciÑc countries. Moreover, we may not realize the anticipated beneÑts of any or all of
our acquisitions. As a result of future acquisitions or mergers, we might need to issue additional equity
securities, spend our cash,or incur debt, contingent liabilities, or amortization expenses related to intangible
assets, any of which could reduce our proÑtability and harm our business.
System failures could harm our business.
Any interruption in the availability of our websites will reduce our revenues and proÑts, and our future
revenues and proÑts could be harmed if our users believe that our system is unreliable. Although our
systems have been designed around industry-standard architectures to reduce downtime in the event of
outages or catastrophic occurrences, they remain vulnerable to damage or interruption from earthquakes,
Öoods, Ñres, power loss, telecommunication failures, terrorist attacks, computer viruses, computer denial-of-
service attacks, and similar events. Some of our systems, including the PayPal site and PayPal's customer
support operations, are not fully redundant, and our disaster recovery planning is not suÇcient for all
eventualities. PayPal, in particular, could be oÉine for a number of days in the event of a disaster in
Northern California. Our systems are also subject to break-ins, sabotage, intentional acts of vandalism, and
potential disruption if the operators of these facilities have Ñnancial diÇculties. Despite any precautions we
may take, the occurrence of a natural disaster, a decision by any of our third-party hosting providers to
close a facility we use without adequate notice for Ñnancial or other reasons, or other unanticipated
problems at our hosting facilities could result in lengthy interruptions in our services. In addition, the
failure by our hosting facilities to provide our required data communications capacity could result in
interruptions in our service. We do not carry business interruption insurance suÇcient to compensate us for
losses that may result from interruptions in our service as a result of system failures.
We have experienced system failures from time to time. eBay's primary website has been interrupted
for periods of up to 22 hours. In addition to placing increased burdens on our engineering staÅ, these
outages create a Öood of user questions and complaints that need to be addressed by our customer support
personnel. Any unscheduled interruption in our services results in an immediate loss of revenues that can
be substantial and may cause some users to switch to our competitors. If we experience frequent or
persistent system failures on our websites, our reputation and brand could be permanently harmed. We
57
have been taking steps to increase the reliability and redundancy of our systems. These steps are expensive,
reduce our margins, and may not be successful in reducing the frequency or duration of unscheduled
downtime.
Our infrastructure could prove unable to handle a larger volume of customer transactions. Any failure
to accommodate transaction growth could impair customer satisfaction, lead to a loss of customers, impair
our ability to add customers, or increase our costs, all of which would harm our business.
Because our customers may use our products for critical transactions, any errors, defects, or other
infrastructure problems could result in damage to our customers' businesses. These customers could seek
signiÑcant compensation from us for their losses. Even if unsuccessful, this type of claim likely would be
time consuming and costly for us to address.
Our stock price has been and may continue to be extremely volatile.
The trading price of our common stock has been and is likely to be extremely volatile. Our stock
price could be subject to wide Öuctuations in response to a variety of factors, including the following:
‚ actual or anticipated variations in our quarterly operating results;
‚ unscheduled system downtime;
‚ additions or departures of key personnel;
‚ announcements of technological innovations or new services by us or our competitors;
‚ changes in or failure to meet Ñnancial estimates by securities analysts;
‚ initiation of or developments in litigation aÅecting us;
‚ conditions or trends in the Internet and online commerce industries;
‚ changes in the market valuations of other Internet companies;
‚ developments in regulation;
‚ announcements by us or our competitors of signiÑcant acquisitions, strategic partnerships, joint
ventures, new products or capital commitments;
‚ unanticipated economic or political events;
‚ sales of our common stock or other securities in the open market; and
‚ other events or factors, including these described in this ""Risk Factors That May AÅect Results of
Operations and Financial Condition'' section and others that may be beyond our control.
In addition, the trading prices of Internet stocks in general, and ours in particular, have experienced
extreme price and volume Öuctuations in recent periods. These Öuctuations often have been unrelated or
disproportionate to the operating performance of these companies. The valuation of our stock remains
extraordinarily high based on conventional valuation standards such as price-to-earnings and price-to-sales
ratios. The trading price of our common stock has increased enormously from our initial public oÅering
price and from our stock price during 2002. This trading price and valuation may not be sustained.
Negative changes in the public's perception of the prospects of Internet or e-commerce or technology
companies have in the past and may in the future depress our stock price regardless of our results. Other
broad market and industry factors may decrease the market price of our common stock, regardless of our
operating performance. Market Öuctuations, as well as general political and economic conditions, such as
recession or interest rate or currency rate Öuctuations, also may decrease the market price of our common
stock. Securities class-action litigation is often instituted following declines in the market price of a
company's securities. Litigation of this type could result in substantial costs and a diversion of
management's attention and resources.
58
Problems with third parties who provide services to our users could harm us.
A number of parties provide services to our users that indirectly beneÑt us. Such services include
seller tools that automate and manage listings, merchant tools that manage listings and interface with
inventory management software, and other services. In many cases we have contractual agreements with
these companies that give us a direct Ñnancial interest in their success, while in other cases we have none.
In either circumstance, Ñnancial, regulatory, or other problems that prevent these companies from
providing services to our users could reduce the number of listings on our websites or make completing
transactions on our websites more diÇcult, and thereby harm our business. Any security breach at one of
these companies could also aÅect our customers and harm our business. Although we generally have been
able to renew or extend the terms of contractual arrangements with these third party service providers on
acceptable terms, there can be no assurance that we will continue to be able to do so in the future.
Other companies or governmental agencies may view our behavior as anti-competitive.
Other companies have in the past and may in the future allege that actions taken by us violate the
antitrust or competition laws of the U.S. or other countries, or otherwise constitute unfair competition.
Such claims typically are very expensive to defend, involve negative publicity and diversion of management
time and eÅort and could result in signiÑcant judgments against us, all of which would adversely aÅect us.
We have provided information to the Antitrust Division of the U.S. Department of Justice in
connection with an inquiry into our conduct with respect to ""auction aggregators'' including our licensing
program and a previously settled lawsuit against Bidder's Edge. Although the Antitrust Division has closed
this inquiry, if the Department of Justice or any other antitrust agency were to open other investigations of
our activities, we would likely be harmed by negative publicity, the costs of the action, possible private
antitrust lawsuits, the diversion of management time and eÅort and penalties we might suÅer if we
ultimately were not to prevail.
We depend on the continued growth of online commerce.
The business of selling goods over the Internet, particularly through online trading, is dynamic and
relatively new. Acceptance of and growth in use of the Internet as a medium for consumer commerce may
not continue. Concerns about fraud, privacy, and other problems may discourage additional consumers
from adopting the Internet as a medium of commerce. In particular, our websites require users to make
publicly available personal information that some potential users may be unwilling to provide. These
concerns may increase as additional publicity over privacy issues on eBay or generally over the Internet
increase. Market acceptance for recently introduced services and products over the Internet is highly
uncertain, and there are few proven services and products. In order to expand our user base, we must
appeal to and acquire consumers who historically have used traditional means of commerce to purchase
goods. If these consumers prove to be less active than our earlier users, and we are unable to gain
eÇciencies in our operating costs, including our cost of acquiring new customers, our business could be
adversely impacted.
We depend on key personnel.
Our future performance depends substantially on the continued services of our senior management
and other key personnel. Our future performance also will depend on our ability to retain and motivate our
other oÇcers and key personnel. The loss of the services of any of our executive oÇcers or other key
employees could harm our business. We do not have long-term employment agreements with any of our
key personnel, we do not maintain any ""key person'' life insurance policies, and our Chief Executive
OÇcer has fully vested the vast majority of her equity incentives. Our new businesses all depend on
attracting and retaining key personnel. Our future success also will depend on our ability to attract, train,
retain and motivate highly skilled technical, managerial, marketing and customer support personnel.
Competition for these personnel is intense, and we may be unable to successfully attract, integrate or
retain suÇciently qualiÑed personnel. In making employment decisions, particularly in the Internet and
59
high-technology industries, job candidates often consider the value of the stock options they are to receive
in connection with their employment. Fluctuations in our stock price may make it more diÇcult to retain
and motivate employees whose stock option strike prices are substantially above current market prices.
Our industry is intensely competitive.
We 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. We expect competition to intensify in the future.
The barriers to entry into these channels are relatively low, and current oÉine and new competitors can
easily launch online sites at a nominal cost using commercially available software or partnering with any
one of a number of successful electronic commerce companies.
Our broad-based competitors include the vast majority of traditional department, warehouse, discount,
and general merchandise stores, emerging online retailers, online classiÑed services, and other shopping
channels such as oÉine and online home shopping networks. These include most prominently: Wal-Mart,
Kmart, Target, Sears, Macy's, JC Penney, Costco, OÇce Depot, Staples, OÇceMax, Sam's Club,
Amazon.com, Buy.com, AOL.com, Yahoo! Shopping, MSN, QVC, and Home Shopping Network/
HSN.com. A number of companies have launched a variety of services that provide new channels for
buyers to Ñnd and buy items from sellers of all sizes. For example, sites such as Buy.com, DealTime,
Google's Froogle, MySimon.com, Nextag.com, and Yahoo! Product Search oÅer shopping search engines
that allow consumers to search the Internet for speciÑed products. Similarly, sellers are increasingly
acquiring new customers by paying for search-related advertisements on search engine sites. We use
product search engines and paid search advertising to channel users to our sites, but these services also
have the potential to divert users to other online shopping destinations.
We also face competition from local, regional, and national specialty retailers and exchanges in each
of our categories of products. Many competitors have been successful at establishing marketplaces that
cater to a particular retail category, such as vehicles, tickets, or sporting goods. Additional category-speciÑc
competitors include:
Antiques and Art: Bonhams & ButterÑelds, Christie's, Sotheby's, Ruby Lane, Tias, Allposters.com,
Artnet, Art.com, Barewalls.com, Guild.com, other regional auction houses, antique and art dealers and
galleries, antique and collectible fairs, estate sales
Automotive (used cars and parts): Advance Auto Parts, AutoByTel.com, Autonation.com,
AutoPartsPlace, AutoTrader.com, Autozone, Barons Ltd., Barrett-Jackson, California Classics, Car Parts
Wholesale, Car-Part.com, CarMax, Cars.com, CarsDirect.com, Collectorcartraderonline.com, CSK Auto,
Dealix, Discount Auto Parts, Dupont Registry, eClassics.com, ExpressAutoparts.com, General Parts
(Carquest), Genuine/NAPA, Hemmings, iMotors.com, JC Whitney, Kragen, Kruse International,
OpenAuto.com, PartsAmerica.com, RM Auctions, Inc., TraderOnline, Trader Publishing, newspaper
classiÑeds, used car dealers, swap meets, car clubs, vehicle recyclers
Books, Movies, Music: Abebooks.com, Amazon.com, Barnes & Noble, Barnesandnoble.com,
Alibris.com, Blockbuster, BMG, Columbia House, Best Buy, CDNow, Express.com, Emusic.com, Tower
Records/Tower Records.com
Business-to-Business: Ariba, BidFreight.com, Bid4Assets, BizBuyer.com, bLiquid.com, Buyer Zone,
CloseOutNow.com, Commerce One, Concur Technologies, DoveBid, FreeMarkets, Iron Planet, labx.com,
Oracle, Overstock.com, PurchasePro.com, RicardoBiz.com, Sabre, SurplusBin.com, Ventro, VerticalNet
Clothing and Accessories: Abercrombie.com, AE.com, Amazon.com, BlueÖy.com, Coldwater-
Creek.com, Delias.com, Dockers.com, Eddie Bauer, The Gap, Gap Online sites, J. Crew, JCrew.com,
LandsEnd.com, The Limited, LLBean.com, Macy's, The Men's Wearhouse, Overstock.com, Payless.com,
Ross, Urbanq.com, VictoriasSecret.com, Yoox.com
60
Coins and Stamps: Collectors Universe, Heritage, US Mint, US Postal Service, Shop At Home,
Bowers and Morena, auction houses, independent coin and stamp dealers
Collectibles: Collectiblestoday.com, Franklin Mint, Go Collect, Heritage, Mastronet,
Replacements.com, Ruby Lane, Tias, antique and collectible dealers, antique and collectible fairs, Öea
markets and swap meets, specialty retailers, regional auction houses
Computers & Consumer Electronics: Amazon.com, Best Buy, Buy.com, Circuit City, CNET,
CompUSA, Dell, Electronics Boutique, Fry's Electronics, Gamestop, Gateway, The Good Guys, Hewlett
Packard, IBM, MicroWarehouse, PC Connection, PCMall.com, Radio Shack, Ritz Camera, Tech Depot,
Tiger Direct, Tweeter Home Entertainment, uBid, Computer Discount Warehouse, computer, consumer
electronics and photography retailers
Home & Garden: IKEA, Crate & Barrel, Home Depot, Williams-Sonoma Inc. (Pottery Barn,
Williams-Sonoma), Bed, Bath & Beyond, Lowes, Linens 'n Things, Pier One, Ethan Allen, Frontgate,
Burpee.com, Spiegel, TJ Max, Tuesday Morning, Kohl's
Jewelry: Bluenile.com, Diamond.com, Ice.com, Macy's, Mondera.com, HSN.com, QVC.com,
Wal-Mart.com, Zales
Musical Instruments: Guitar Center/Musicians Friend, Sam Ash, Gbase.com, Harmony-Central.com,
musical instrument retailers and manufacturers
Pottery & Glass: Just Glass, Pottery Auction, Go Collect, Pier 1 Imports, Williams-Sonoma,
Replacements.com, Ruby Lane, Tias, antique and collectible dealers, antique and collectible fairs, Öea
markets and swap meets, specialty retailers, regional auction houses
Sporting Goods/Equipment: Amazon.com, Bass Pro Shops, Big 5, Cabela's, Dick's Sporting Goods,
GSI Commerce, GolfClubExchange.com, Performance Bike, Play It Again Sports, REI, The Sports
Authority, SportsLine.com, TGW.com
Sports Memorabilia: Beckett's, Collectors Universe, Gray Flannel, MastroNet, Lelands, NAXCOM,
ThePit.com, Steiner Sports, Superior, hobby shops and discount retailers
Tickets and Experiences: Craigslist, Musictoday, Paciolan, RazorGator.com, SCI Ticketing, StubHub,
Ticketmaster, Tickets.com, TicketsNow.com, ticket brokers
Tool/Equipment/Hardware: Home Depot, HomeBase, Amazon.com, Ace Hardware, OSH, Do-It-
Best Hardware, True Value Hardware
Toys and Hobbies: Toys R Us, Amazon.com/Toysrus.com, KB Toys/KBToys.com, FAO Inc. (FAO
Schwarz, Zany Brainy, the Right Start)
Our international websites compete with similar online and oÉine channels in each of their vertical
categories in most countries. In addition, they compete with general online e-commerce sites, such as
Quelle and Otto in Germany, Yahoo-Kimo in Taiwan, Daum in South Korea, TaoBao and a proposed
partnership between Sina.com and Yahoo! in China, and Amazon in the U.K. and other countries. In
some of these countries, there are online sites that have much larger customer bases and greater brand
recognition than we do, and in each of these countries there are competitors that have a better
understanding of local culture and commerce than we do.
The principal competitive factors for eBay include the following:
‚ ability to attract buyers and sellers;
‚ volume of transactions and price and selection of goods;
‚ customer service; and
‚ brand recognition.
61
With respect to our online competition, additional competitive factors include:
‚ community cohesion and interaction;
‚ system reliability;
‚ reliability of delivery and payment;
‚ website convenience and accessibility;
‚ level of service fees; and
‚ quality of search tools.
Some current and potential competitors have longer company operating histories, larger customer
bases and greater brand recognition in other business and Internet sectors than we do. Some of these
competitors also have signiÑcantly greater Ñnancial, marketing, technical and other resources. Other online
trading services may be acquired by, receive investments from, or enter into other commercial relationships
with larger, well-established and well-Ñnanced companies. As a result, some of our competitors with other
revenue sources may be able to devote more resources to marketing and promotional campaigns, adopt
more aggressive pricing policies and devote substantially more resources to website and systems
development than we can. Some of our competitors have oÅered services for free and others may do this
as well. We may be unable to compete successfully against current and future competitors. In addition,
certain oÉine competitors may encourage manufacturers to limit or cease distribution of their products to
dealers who sell through online channels such as eBay, or may attempt to use existing or future
government regulation to prohibit or limit online commerce in certain categories of goods or services. The
adoption by manufacturers or government authorities of policies or regulations discouraging the sales of
goods or services over the Internet could force eBay users to stop selling certain products on our site.
Increased competition or anti-Internet distribution policies or regulations may result in reduced operating
margins, loss of market share and diminished value of our brand.
In order to respond to changes in the competitive environment, we may, from time to time, make
pricing, service or marketing decisions or acquisitions that could harm our business. For example, we have
implemented a buyer protection program that generally insures items up to a value of $200, with a $25
deductible, for users with a non-negative feedback rating at no cost to the user, and PayPal recently
implemented a similar buyer protection program covering losses from selected eBay sellers up to $500,
with no deductible. In addition, certain competitors may oÅer or continue to oÅer free shipping or other
transaction related services, which could be impractical or ineÇcient for eBay users to match. New
technologies may increase the competitive pressures by enabling our competitors to oÅer a lower cost
service.
Although we have established Internet traÇc arrangements with several large online services and
search engine companies, these arrangements may not be renewed on commercially reasonable terms or
these companies may decide to promote competitive services. Even if these arrangements are renewed,
they may not result in increased usage of our service. In addition, companies that control user access to
transactions through network access, Internet browsers, or search engines, could promote our competitors,
channel current or potential users to their vertically integrated electronic commerce sites or their
advertisers' sites, attempt to restrict our access, or charge us substantial fees for inclusion.
The market for PayPal's product is emerging, intensely competitive, and characterized by rapid
technological change. PayPal competes with existing online and oÅ-line payment methods, including,
among others:
‚ credit card merchant processors that oÅer their services to online merchants, including First Data,
Paymentech, Wells Fargo, and iPayment; and payment gateways, including CyberSource, VeriSign,
and Authorize.net;
‚ Western Union Auction Payment at BidPay.com and Western Union MoneyZap. Western Union is
a subsidiary of First Data;
62
‚ Yahoo! PayDirect oÅered by Yahoo! and HSBC;
‚ current and announced payment services oÅered by Amazon.com;
‚ CheckFree;
‚ processors that provide online merchants the ability to oÅer their customers the option of paying for
purchases from their bank account, including Certegy and TeleCheck, a subsidiary of First Data;
and
‚ providers of traditional payment methods, particularly credit cards, checks, money orders, and
Automated Clearing House transactions.
Some of these competitors have longer operating histories, signiÑcantly greater Ñnancial, technical,
marketing, customer service and other resources, greater name recognition, or a larger base of customers in
aÇliated businesses than PayPal. PayPal's competitors may respond to new or emerging technologies and
changes in customer requirements faster and more eÅectively than PayPal. They may devote greater
resources to the development, promotion, and sale of products and services than PayPal, and they may
oÅer lower prices. Some of these competitors have oÅered, and may continue to oÅer, their services for
free in order to gain market share, and PayPal may be forced to lower its prices in response. Competing
services tied to established banks and other Ñnancial institutions may oÅer greater liquidity and engender
greater consumer conÑdence in the safety and eÇcacy of their services than PayPal. If these competitors
acquired signiÑcant market share, this could result in PayPal losing market share.
PayPal's service relies on the credit card networks, the Automated Clearing House network in the
U.S., and similar bank clearing networks overseas. Associations of traditional Ñnancial institutions such as
Visa, MasterCard and the National Automated Clearing House Association, or NACHA, generally set the
features of these payment methods. Changes in these associations' rules could negatively aÅect PayPal's
competitive position.
Overseas, PayPal faces competition from similar channels and payment methods in most countries
and from regional and national online and oÉine competitors in each country including Visa's Visa Direct,
MasterCard's MoneySend, ING's Way2Pay and Royal Bank of Scotland's World Pay in the European
Community, NOCHEX, Moneybookers, and Royal Bank of Scotland's FastPay in the U.K., CertaPay and
HyperWallet in Canada, Paymate in Australia and Inicis in South Korea. In addition, in certain countries,
such as Germany, electronic funds transfer is a leading method of payment for both online and oÉine
transactions. As in the U.S., established banks and other Ñnancial institutions that do not currently oÅer
online payments could quickly and easily develop such a service. EÅective July 1, 2003, Ñnancial
institutions in the European Union are restricted from charging customers higher fees for many cross-
border Euro payments than they charge for domestic Euro payments. This development could increase the
eÅectiveness of using traditional Ñnancial institutions instead of PayPal for European customers seeking to
complete cross-border payments.
Half.com competes directly with online and oÉine retailers in its product categories such as
Amazon.com, as well as with traditional oÉine and online sellers of new and used books, videos and CDs,
consumer electronics, and other products.
Our business depends on the development and maintenance of the Internet infrastructure.
The success of our service will depend largely on the development and maintenance of the Internet
infrastructure. This includes maintenance of a reliable network backbone with the necessary speed, data
capacity, and security, as well as timely development of complementary products, for providing reliable
Internet access and services. The Internet has experienced, and is likely to continue to experience,
signiÑcant growth in the numbers of users and amount of traÇc. The Internet infrastructure may be
unable to support such demands. In addition, the performance of the Internet may be harmed by increased
number of users or bandwidth requirements or by ""viruses,'' ""worms,'' and similar programs. The backbone
computers of the Internet have been the targets of such programs. The Internet has experienced a variety
63
of outages and other delays as a result of damage to portions of its infrastructure, and it could face outages
and delays in the future. These outages and delays could reduce the level of Internet usage as well as the
level of traÇc and the processing transactions on our service.
We must keep pace with rapid technological change to remain competitive.
Our competitive arena is characterized by rapidly changing technology, evolving industry standards,
frequent new service and product introductions and enhancements, and changing customer demands. These
characteristics are caused in part by the emerging and changing nature of the Internet. Our future success
therefore will depend on our ability to adapt to rapidly changing technologies and evolving industry
standards and to improve the performance, features, and reliability of our service. Our failure to adapt to
such changes would harm our business. New technologies, such as the development of a peer-to-peer
personal trading technology, could adversely aÅect us. In addition, the widespread adoption of new
Internet, networking, or telecommunications technologies or other technological changes could require us
to make substantial expenditures to modify or adapt our services or infrastructure.
We need to develop new services, features and functions in order to expand.
We plan to expand our operations by developing new or complementary services, products or
transaction formats and expanding the breadth and depth of our pre-trade and post-trade services. We may
be unable to expand our operations in a cost-eÅective or timely manner. We are pursuing strategic
relationships with other companies to provide many of these services. As a result, we may be unable to
control the quality of these services or address problems that arise. Expanding our operations in this
manner also will require signiÑcant additional expenses and development, operations and other resources
and will strain our management, Ñnancial and operational resources. The lack of acceptance of any new
businesses or services could harm our business, damage our reputation, and diminish the value of our
brand.
Our growth will depend on our ability to develop our brand.
We believe that our historical growth has been largely attributable to word of mouth. Both eBay and
PayPal have beneÑted from frequent and high visibility media exposure both nationally and locally. We
believe that continuing to strengthen our brand will be critical to achieving widespread acceptance of our
services. Promoting and positioning our brand will depend largely on the success of our marketing eÅorts
and our ability to provide high-quality services. In order to promote our brand, we will need to increase
our marketing budget and otherwise increase our Ñnancial commitment to creating and maintaining brand
loyalty among users. Brand promotion activities may not yield increased revenues, and even if they do, any
increased revenues may not oÅset the expenses we incurred in building our brand. If we do attract new
users to our services, they may not conduct transactions over our services on a regular basis. If we fail to
promote and maintain our brand or incur substantial expenses in an unsuccessful attempt to promote and
maintain our brand, our business would be harmed.
We may be unable to protect or enforce our own intellectual property rights adequately.
We regard the protection of our trademarks, copyrights, patents, domain names, trade dress and trade
secrets as critical to our success. We aggressively protect our intellectual property rights by relying on a
combination of trademark, copyright, patent, trade dress and trade secret laws, and through the domain
name dispute resolution system. We also rely on contractual restrictions to protect our proprietary rights in
products and services. We have entered into conÑdentiality and invention assignment agreements with our
employees and contractors, and nondisclosure agreements with parties with whom we conduct business in
order to limit access to and disclosure of our proprietary information. These contractual arrangements and
the other steps we have taken to protect our intellectual property may not prevent misappropriation of our
technology or deter independent development of similar technologies by others. We pursue the registration
of our domain names, trademarks, and service marks in the U.S. and internationally. EÅective trademark,
copyright, patent, trade dress, trade secret, and domain name protection is very expensive to maintain and
64
may require litigation. We must protect our trademarks, patents, and domain names in an increasing
number of jurisdictions, a process that is expensive and may not be successful in every location. We have
licensed in the past, and expect to license in the future, certain of our proprietary rights, such as
trademarks or copyrighted material, to others. These licensees may take actions that diminish the value of
our proprietary rights or harm our reputation.
We are subject to the risks of owning real property.
We own real property including land, buildings and interests in a partnership holding land and
buildings, primarily related to our operations. We have little experience in managing real property.
Ownership of this property subjects us to risks, including:
‚ the possibility of environmental contamination and the costs associated with Ñxing any
environmental problems;
‚ adverse changes in the value of these properties, due to interest rate changes, changes in the
neighborhoods in which the properties are located, or other factors;
‚ the possible need for structural improvements in order to comply with zoning, seismic, disability
act, or other requirements; and
‚ possible disputes with tenants, neighboring owners, or others.
Some anti-takeover provisions may aÅect the price of our common stock.
Our Board of Directors has the authority to issue up to 10,000,000 shares of preferred stock and to
determine the preferences, rights and privileges of those shares without any further vote or action by the
stockholders. The rights of the holders of common stock may be harmed by the rights of the holders of
any preferred stock that may be issued in the future. Some provisions of our certiÑcate of incorporation
and bylaws could have the eÅect of making it more diÇcult for a potential acquiror to acquire a majority
of our outstanding voting stock. These include provisions that provide for a classiÑed board of directors,
prohibit stockholders from taking action by written consent and restrict the ability of stockholders to call
special meetings. We are also subject to provisions of Delaware law that prohibit us from engaging in any
business combination with any interested stockholder for a period of three years from the date the person
became an interested stockholder, unless certain conditions are met. This restriction could have the eÅect
of delaying or preventing a change of control.
65
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The primary objective of our investment activities is to preserve principal while at the same time
maximizing yields without signiÑcantly increasing risk. To achieve this objective, we maintain our portfolio
of cash equivalents, short-term and long-term investments in a variety of securities, including government
and corporate obligations and money market funds. These securities are generally classiÑed 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.
Investments in both Ñxed-rate and Öoating-rate interest-earning instruments carry varying degrees of
interest rate risk. The fair market value of our Ñxed-rate securities may be adversely impacted due to a
rise in interest rates. In general, securities with longer maturities are subject to greater interest-rate risk
than those with shorter maturities. While Öoating rate securities generally are subject to less interest-rate
risk than Ñxed-rate securities, Öoating-rate securities may produce less income than expected if interest
rates decrease. Due in part to these factors, our investment income may fall short of expectations or we
may suÅer losses in principal if securities are sold that have declined in market value due to changes in
interest rates. As of December 31, 2003, our Ñxed-income investments earned a pretax yield of
approximately 1.69%, with a weighted average maturity of 7.5 months. If interest rates were to
instantaneously increase (decrease) by 100 basis points, the fair market value of the total investment
portfolio could decrease (increase) by approximately $17.5 million.
We entered into two interest rate swaps on June 19 and July 20, 2000, with notional amounts totaling
$95 million to reduce the impact of changes in interest rates on a portion of the Öoating rate operating
lease for our primary oÇce facilities. The interest rate swaps allow us to receive Öoating rate receipts based
on the London Interbank OÅered Rate, or LIBOR, in exchange for making Ñxed rate payments which
eÅectively changes our interest rate exposure on our operating lease from a Öoating rate to a Ñxed rate on
$95 million of the total $126.4 million notional amount of our corporate headquarters facility lease
commitment. The balance of $31.4 million remains at a Öoating rate of interest based on the spread over
3-month LIBOR. If the 3-month LIBOR rates were to increase (decrease) by 100 basis points, then our
payments would increase (decrease) by $78,000 per quarter.
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 in third parties that are subject to considerable market risk due to
their volatility. We typically do not attempt to reduce or eliminate our market exposure in these equity
investments. As of December 31, 2003, we did not have any unrealized gains or losses associated with our
equity investments. In accordance with our policy to assess whether an impairment loss on our investments
has occurred due to declines in fair value and other market conditions, we determined that declines in fair
value of certain of our marketable and non-marketable equity investments were other than temporary.
Accordingly, we recorded impairment charges totaling $16.2 million, $3.8 million and $1.2 million during
the years ended December 31, 2001, 2002 and 2003, respectively, relating to the other-than-temporary
impairment in the fair value of equity investments. At December 31, 2003, the total fair value of our
equity investments was $14.3 million, including $1.1 million in marketable investments. At December 31,
2002, the total fair value of our equity investments was $44.2 million, including $3.4 million in marketable
investments.
Foreign Currency Risk
International net revenues result from transactions by our foreign operations and are typically
denominated in the local currency of each country. These operations also incur most of their expenses in
the local currency. Accordingly, our foreign operations use the local currency, which is primarily the Euro
as their functional currency. Our international operations are subject to risks typical of international
66
operations, including, but not limited to, diÅering economic conditions, changes in political climate,
diÅering tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly,
our future results could be materially adversely impacted by changes in these or other factors.
Foreign exchange rate Öuctuations may adversely impact our Ñnancial position as well as our results of
operations. Foreign exchange rate Öuctuations may adversely impact our Ñnancial position as the assets and
liabilities of our foreign operations are translated into U.S. dollars in preparing our consolidated balance
sheet. The eÅect of foreign exchange rate Öuctuations on our consolidated Ñnancial position for the year
ended December 31, 2003, was a translation gain of approximately $66.3 million. This gain is recognized
as an adjustment to stockholders' equity through other comprehensive income. Additionally, foreign
exchange rate Öuctuations may adversely impact our results of operations as exchange rate Öuctuations on
transactions denominated in currencies other than our functional currencies create gains and losses that are
reÖected in our consolidated statement of income. In addition, as at December 31, 2003, we held balances
in cash, cash equivalents and investments outside the U.S. totaling approximately $597 million.
As of December 31, 2003, we had outstanding forward foreign exchange contracts with notional values
equivalent to approximately $222.4 million with maturity dates within 92 days. The forward contracts are
used to oÅset changes in the value of assets and liabilities denominated in foreign currencies as a result of
currency Öuctuations. Transaction gains and losses on the contracts and the assets and liabilities are
recognized each period in our statement of income and generally are oÅsetting.
We convert the Ñnancial statements of our foreign subsidiaries into U.S. dollars. When there is a
change in foreign currency exchange rates, the conversion of the foreign subsidiaries' Ñnancial statements
into the U.S. dollars will lead to a translation gain or loss. Translation exposure is the change in the book
value of assets, liabilities, revenues, and expenses that results from changes in foreign currency exchange
rates. From time to time we enter into transactions to hedge portions of our foreign currency denominated
earnings translation exposure using both options and forward contracts. The notional amount of the options
hedges entered into in 2003 was 57 million Euro. The premium cost was approximately $869,000 and the
net loss on the options totaled approximately $486,000, which was recorded in other income and expense
in 2003. The notional amount of forward contracts entered into in 2003 was 20 million Euro. The net loss
on these forward contracts totaled approximately $635,000 and was recorded in other income and expense
in 2003. All contracts that hedge translation exposure mature ratably over the quarter in which they are
executed.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Annual Financial Statements and Selected Quarterly Financial Data: See Part IV, Item 15(a)(1) of
this Annual Report on Form 10-K.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on the evaluation of our disclosure
controls and procedures (as deÑned in the Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the ""Exchange Act'')) required by Exchange Act Rules 13a-15(b) or
15d-15(b), our Chief Executive OÇcer and our Chief Financial OÇcer have concluded that as of the end
of the period covered by this report, our disclosure controls and procedures were eÅective.
(b) Changes in internal controls. There were no changes in our internal controls over Ñnancial
reporting that occurred during our most recent Ñscal quarter that have materially aÅected, or are
reasonably likely to materially aÅect, our internal control over Ñnancial reporting.
67
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 directors and executive oÇcers as of March 1,
2004.
Name
Age
Position
Pierre M. Omidyar(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Margaret C. Whitman(4) ÏÏÏÏÏÏÏÏÏÏÏ
Martin L. Abbott ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Matthew J. Bannick ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
36
47
36
39
William C. Cobb ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
47
Rajiv Dutta ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Michael R. Jacobson ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
JeÅrey D. Jordan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lynn M. ReedyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Maynard G. Webb, Jr. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fred D. Anderson, Jr (1)(5) ÏÏÏÏÏÏÏÏ
Philippe Bourguignon(2)(4) ÏÏÏÏÏÏÏÏÏ
Scott D. Cook(3)(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Robert C. Kagle(1)(2)(5) ÏÏÏÏÏÏÏÏÏÏ
Dawn G. Lepore(1)(3)(6) ÏÏÏÏÏÏÏÏÏÏ
Thomas J. Tierney(2)(3)(4) ÏÏÏÏÏÏÏÏ
42
49
45
48
48
59
56
51
48
49
49
Founder, Chairman of the Board and Director
President, Chief Executive OÇcer and Director
Senior Vice President, Technology
Senior Vice President and General Manager, Global
Online Payments
Senior Vice President and General Manager, eBay
International
Senior Vice President and Chief Financial OÇcer
Senior Vice President, Legal AÅairs, General Counsel
and Secretary
Senior Vice President, eBay North America
Senior Vice President, Product, Development and
Architecture
Chief Operating OÇcer
Director
Director
Director
Director
Director
Director
(1) Member of our Audit Committee
(2) Member of our Compensation Committee
(3) Member of our Corporate Governance and Nominating Committee
(4) Director continuing in oÇce until our 2004 Annual Meeting
(5) Director continuing in oÇce until our 2005 Annual Meeting
(6) Director continuing in oÇce until our 2006 Annual Meeting
Pierre M. Omidyar founded eBay as a sole proprietorship in September 1995. He has been a director
and Chairman of the Board since eBay's incorporation in May 1996 and also served as its Chief Executive
OÇcer, Chief Financial OÇcer and President from inception to February 1998, November 1997 and
August 1996, respectively. Prior to founding eBay, Mr. Omidyar was a developer services engineer at
General Magic, a mobile communication platform company from December 1994 to July 1996.
Mr. Omidyar co-founded Ink Development Corp. (later renamed eShop) in May 1991 and served as a
software engineer there from May 1991 to September 1994. Prior to co-founding Ink, Mr. Omidyar was a
developer for Claris, a subsidiary of Apple Computer, and for other Macintosh-oriented software
development companies. Mr. Omidyar also serves on the governing boards of Tufts University, The Santa
Fe Institute, The Omidyar Foundation and Meetup, Inc. Mr. Omidyar holds a B.S. degree in Computer
Science from Tufts University.
Margaret C. Whitman serves eBay as President and Chief Executive OÇcer. She has served in that
capacity since February 1998 and as a director since March 1998. From January 1997 to February 1998,
68
she was General Manager of the Preschool Division of Hasbro Inc., a toy company. From February 1995
to December 1996, Ms. Whitman was employed by FTD, Inc., a Öoral products company, most recently as
President, Chief Executive OÇcer and a director. From October 1992 to February 1995, Ms. Whitman
was employed by The Stride Rite Corporation, a footwear company, in various capacities, including
President, Stride Rite Children's Group and Executive Vice President, Product Development, Marketing &
Merchandising, Keds Division. From May 1989 to October 1992, Ms. Whitman was employed by The
Walt Disney Company, an entertainment company, most recently as Senior Vice President, Marketing,
Disney Consumer Products. Before joining Disney, Ms. Whitman was at Bain & Co., a consulting Ñrm,
most recently as a Vice President. Ms. Whitman also serves on the board of directors of The Procter &
Gamble Company and Gap Inc. and is a Member of the Board of Trustees of Princeton University.
Ms. Whitman holds an A.B. degree in Economics from Princeton University and an M.B.A. degree from
the Harvard Business School.
Martin L. Abbott serves eBay as Senior Vice President of Technology. He has served in that capacity
since June 2003, and has served in a variety of executive positions at eBay since joining the company in
October 1999. From March 1998 to September 1999, Mr. Abbott was employed by Gateway, Inc., a
computer manufacturer, most recently as Director of IT Operations. Prior to joining Gateway, Mr. Abbott
held various management and engineering positions at Motorola, Inc., an electronics and communications
technology company, and was an oÇcer in the U.S. Army. Mr. Abbott holds a B.S. degree from the
United States Military Academy, an M.S. degree in Computer Engineering from the University of Florida
and is a graduate of Harvard Business School's executive education program.
Matthew J. Bannick serves eBay as Senior Vice President and General Manager, Global Online
Payments and Chief Executive OÇcer of PayPal. He has served in those capacities since October 2002.
From December 2000 to October 2002, Mr. Bannick served as eBay's Senior Vice President and General
Manager, eBay International. From February 1999 to December 2000, Mr. Bannick served in a variety of
other executive positions at eBay. From April 1995 to January 1999, Mr. Bannick was an executive for
Navigation Technologies (NavTech), a leading provider of digital map databases for the vehicle navigation
and internet mapping industries. Mr. Bannick was President of NavTech North America for three years
and also served as Senior Vice President of Marketing and Vice President of Operations. From June 1992
to August 1992, Mr. Bannick served as a consultant for McKinsey & Company, a consulting Ñrm, in
Europe and from June 1993 to April 1995 in the U.S. Mr. Bannick also served as a U.S. diplomat in
Germany during the period of German uniÑcation. Mr. Bannick holds a B.A. in Economics and
International Studies from University of Washington and an M.B.A degree from the Harvard Business
School.
William C. Cobb serves eBay as Senior Vice President and General Manager, eBay International. He
has served in that capacity since September 2002. 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 July 1997 to February 2000, Mr. Cobb served as the Senior Vice President of
International Marketing for Tricon Global Restaurants, Inc. (now known as Yum! Brands, Inc.), a
restaurant operator and franchiser. From August 1995 to July 1997, Mr. Cobb served as the Senior Vice
President and Chief Marketing OÇcer for Pizza Hut, Inc., a division of Tricon Global Restaurants, Inc.
From May 1994 to August 1995, Mr. Cobb served as Vice President of Colas for the Pepsi-Cola
Company, a division of PepsiCo., Inc. Mr. Cobb holds a B.S. degree in Economics from the University of
Pennsylvania and an M.B.A. degree from Northwestern University.
Rajiv Dutta serves eBay as Senior Vice President and Chief Financial OÇcer. He has served in that
capacity since January 2001. From August 1999 to January 2001, Mr. Dutta served as eBay's Vice
President of Finance and Investor Relations. From July 1998 to August 1999, Mr. Dutta served as eBay's
Finance director. From February 1998 to July 1998, Mr. Dutta served as the World Wide Sales Controller
of KLA-Tencor, a manufacturer of semiconductor equipment. Prior to KLA-Tencor, Mr. Dutta spent ten
years, from January 1988 to February 1998, at Bio-Rad Laboratories, Inc., a manufacturer and distributor
of life science and diagnostic products with operations in over 24 countries. Mr. Dutta held a variety of
69
positions with Bio-Rad, including the group controller of the Life Science Group. Mr. Dutta holds a
B.A. degree in Economics from St. Stephen's College, Delhi University in India and an M.B.A. degree
from Drucker School of Management.
Michael R. Jacobson serves eBay as Senior Vice President, Legal AÅairs, General Counsel and
Secretary. He has served in that capacity or as Vice President, Legal AÅairs, General Counsel since
August 1998. From 1986 to August 1998, Mr. Jacobson was a partner with the law Ñrm of Cooley
Godward LLP, specializing in securities law, mergers and acquisitions, and other transactions.
Mr. Jacobson holds an A.B. degree in Economics from Harvard College and a J.D. degree from Stanford
Law School.
JeÅrey D. Jordan serves eBay as Senior Vice President, eBay North America. He has served in that
capacity since April 2000. From September 1999 to April 2000, Mr. Jordan served as eBay's Vice
President, Regionals and Services. From September 1998 to September 1999, Mr. Jordan served as Chief
Financial OÇcer for Hollywood Entertainment Corporation, a video rental company, and President of their
subsidiary, Reel.com. From September 1990 to September 1998, Mr. Jordan served in various capacities
including most recently Senior Vice President and Chief Financial OÇcer of The Disney Store Worldwide,
a subsidiary of The Walt Disney Company. Mr. Jordan holds a B.A. degree in Political Science and
Psychology from Amherst College and an M.B.A. degree from the Stanford Graduate School of Business.
Lynn M. Reedy serves eBay as Senior Vice President, Product, Development and Architecture. She
has served in that capacity since June 2003. From February 2003 to May 2003, Ms. Reedy served as
eBay's Vice President, Product, Development and Architecture. From March 2002 to January 2003,
Ms. Reedy served as eBay's Vice President, Product. From November 1999 to February 2002, Ms. Reedy
served as eBay's Vice President, Product Development. From March 1993 to October 1999, Ms. Reedy
was Senior Vice President and Chief Information OÇcer at Miller Freeman, Inc. Ms. Reedy holds a
B.S. degree from the University of Illinois and an M.B.A. from Santa Clara University.
Maynard G. Webb, Jr. serves eBay as Chief Operating OÇcer. He has served in that capacity since
June 2002. From August 1999 to June 2002, Mr. Webb served as President, eBay Technologies. From
July 1998 to August 1999, Mr. Webb was Senior Vice President and Chief Information OÇcer at
Gateway, Inc., a computer manufacturer. From February 1995 to July 1998, Mr. Webb was Vice President
and Chief Information OÇcer at Bay Networks, Inc., a manufacturer of computer networking products.
From June 1991 to January 1995, Mr. Webb was Director, IT at Quantum Corporation. Mr. Webb also
serves on the board of directors of Gartner, Inc., a high technology research and consulting Ñrm.
Mr. Webb holds a B.A.A. degree from Florida Atlantic University.
Fred D. Anderson has served as a director of eBay since July 2003. Mr. Anderson is Executive Vice
President and Chief Financial OÇcer of Apple Computer, Inc., a manufacturer of personal computers and
related software, since March 1996. Prior to joining Apple, Mr. Anderson was Corporate Vice President
and Chief Financial OÇcer of Automatic Data Processing, Inc., an electronic transaction processing Ñrm,
from August 1992 to March 1996. Mr. Anderson also serves on the board of directors of E.piphany, Inc.
Mr. Anderson holds a B.A. degree from Whittier College 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 Co-Chief Executive OÇcer of The World Economic Forum (The DAVOS Forum) since September
2003. From August 2003 to October 2003, Mr. Bourguignon served as Managing Director of The World
Economic Forum. From April 1997 to January 2003, Mr. Bourguignon served as Chairman of the Board
of Club Mediterranee S.A., a resort operator. Prior to his appointment at Club Mediterranee S.A.,
Mr. Bourguignon was Chief Executive OÇcer of Euro Disney S.A., the parent company of Disneyland
Paris, since 1993, and Executive Vice President of The Walt Disney Company (Europe) S.A., since
October 1996. Mr. Bourguignon was named President of Euro Disney in 1992, a post he held through
April 1993. He joined The Walt Disney Company in 1988 as head of Real Estate development.
Mr. Bourguignon holds a Masters Degree in Economics at the University of Aix-en-Provence and holds a
post-graduate diploma from the Institut d'Administration des Enterprises (IAE) in Paris.
70
Scott D. Cook has served as a director of eBay since June 1998. Mr. Cook is the founder of Intuit
Inc., a Ñnancial software developer. Mr. Cook has been a director of Intuit since March 1984 and is
currently Chairman of the Executive Committee of the Board of Intuit. From March 1993 to July 1998,
Mr. Cook served as Chairman of the Board of Intuit. From March 1984 to April 1994, Mr. Cook served
as President and Chief Executive OÇcer of Intuit. Mr. Cook also serves on the board of directors of The
Procter & Gamble Company. Mr. Cook holds a B.A. degree in Economics and Mathematics from the
University of Southern California and an M.B.A. degree from the Harvard Business School.
Robert C. Kagle has served as a director of eBay since June 1997. Mr. Kagle has been a Member of
Benchmark Capital, the General Partner of Benchmark Capital Partners, L.P. and Benchmark Founders'
Fund, L.P., since its founding in May 1995. Mr. Kagle also has been a General Partner of Technology
Venture Investors since January 1984. Mr. Kagle also serves on the board of directors of E-LOAN, Inc.
Mr. Kagle holds a B.S. degree in Electrical and Mechanical Engineering from the General Motors
Institute (renamed Kettering University in January 1998) and an M.B.A. degree from the Stanford
Graduate School of Business.
Dawn G. Lepore has served as a director of eBay since December 1999. Ms. Lepore is Vice Chairman
of Technology, Active Trader, Operations, Business Strategy, and Administration for the Charles Schwab
Corporation and Charles Schwab & Co, Inc., a Ñnancial holding company, since August 2003. Prior to this
appointment, she has held various positions with the Charles Schwab Corporation including: Vice
Chairman of Technology, Operations, Business Strategy, and Administration from May 2003 August 2003;
Vice Chairman of Technology, Operations, and Administration from March 2002 to May 2003; Vice
Chairman of Technology and Administration from November 2001 to March 2002; Vice Chairman and
Chief Information OÇcer from July 1999 to November 2001; and Executive Vice President and Chief
Information OÇcer from October 1993 to July 1999. Ms. Lepore is a member of Schwab's Executive
Committee and is a trustee of SchwabFunds. She also serves on the board of directors of Wal-Mart
Stores, Inc. Ms. Lepore holds a B.A. degree from Smith College.
Thomas J. Tierney has served as a director of eBay since March 2003. Mr. Tierney is the founder of
The Bridgespan Group, a non-proÑt business consulting Ñrm serving the non-proÑt sector, and has been its
Chairman of the Board since late 1999. Prior to founding Bridgespan, Mr. Tierney served as Chief
Executive OÇcer of Bain & Company, a consulting Ñrm, from June 1992 to January 2000. Mr. Tierney
holds a B.A. degree in Economics from the University of California at Davis and an M.B.A. degree with
distinction from the Harvard Business School. Mr. Tierney is the co-author of a book about organization
and strategy called Aligning the Stars.
Audit Committee and Audit Committee Financial Expert
Our Board has a separately-designated standing Audit Committee established in accordance with
Section 3(a)(58)(A) of the Exchange Act. The members of the Audit Committee are Fred D. Anderson,
Robert C. Kagle, and Dawn G. Lepore. Our Board has determined that Fred D. Anderson, Chairman of
the Audit Committee, is an audit committee Ñnancial expert as deÑned by Item 401(h) of Regulation S-K
of the Exchange Act and that each member of the Audit Committee is independent within the meaning of
Rule 4200(a)(15) of the National Association of Securities Dealers' listing standards.
Code of Ethics, Governance Guidelines and Committee Charters
We have adopted a Code of Business Conduct and Ethics that applies to all eBay employees. We have
also adopted a Code of Ethics for Senior Financial OÇcers that applies to our senior Ñnancial oÇcers,
including our principal executive oÇcer, principal Ñnancial oÇcer and principal accounting oÇcer. The
Code of Ethics for Senior Financial OÇcers is posted on our website at http://investor.ebay.com/code-of-
ethics.cfm. We will post any amendments to or waivers from the Code of Ethics for Senior Financial
OÇcers at that location.
71
We have also adopted Governance Guidelines for the Board of Directors and a written committee
charter for each of our Audit Committee, Compensation Committee, and Corporate Governance and
Nominating Committee. Each of these documents is available on our website at
http://investor.ebay.com/corp-gov.cfm.
Section 16(a) BeneÑcial 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 Ñle reports regarding their ownership and changes in ownership of our
securities with the SEC, and to furnish us with copies of all Section 16(a) reports that they Ñle.
We believe that during the Ñscal year ended December 31, 2003, our directors, executive oÇcers, and
greater than 10% stockholders complied with all applicable Section 16(a) Ñling requirements, except that
one late Form 4 report was Ñled by each of Messrs. Bannick, Cobb, Dutta, Jacobson, Jordan, and Webb,
and Mark Rubash, our Principal Accounting OÇcer, on March 7, 2003 to report stock options granted on
March 3, 2003. In making this statement, we have relied upon a review of the copies of Section 16(a)
reports furnished to us and the written representations of our directors, executive oÇcers, and greater than
10% stockholders.
72
ITEM 11: EXECUTIVE COMPENSATION
Summary of Compensation
The following table shows certain compensation earned during the Ñscal years ended December 31,
2001, 2002 and 2003, by our Chief Executive OÇcer and four most highly-compensated other executive
oÇcers (based on their total annual salary and bonus compensation), also referred to as the Named
Executive OÇcers, at December 31, 2003.
SUMMARY COMPENSATION TABLE
Annual Compensation
Long-Term and Other
Compensation
Name and 2003 Principal Positions
Margaret C. Whitman ÏÏÏÏÏÏÏÏÏÏ
President and Chief Executive
OÇcer
Maynard G. Webb, Jr. ÏÏÏÏÏÏÏÏÏÏ
Chief Operating OÇcer
JeÅrey D. Jordan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Senior Vice President,
eBay North America
Matthew J. Bannick ÏÏÏÏÏÏÏÏÏÏÏÏ
Senior Vice President and
General Manager,
Global Online Payments
William C. Cobb ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Senior Vice President and
General Manager,
eBay International
Fiscal
Year
2003
2002
2001
2003
2002
2001
2003
2002
2001
2003
2002
2001
2003
2002
2001
Salary(1)
Bonus(2)
$843,823 $1,229,132(6)
419,698(6)
250,008
139,332
241,256
1,266,601(7)
582,007
837,154(7)
531,250
646,137(7)
500,000
858,793(8)
439,345
739,762(8)
345,102
467,041(8)
322,404
596,264(9)
423,084
472,540(9)
334,086
133,396
279,506
382,519
312,185
283,666
368,899(10)
240,390(10)
202,026(10)
Number of
Securities
Underlying
Compensation(3) Options(4) Compensation(5)
Other Annual
All Other
$115,857
133,062
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
15,987
Ì
Ì
Ì
Ì
1,100,000
600,000
1,500,000
550,000
300,000
1,000,000
300,000
270,000
800,000
300,000
280,000
600,000
250,000
250,000
Ì
$ 3,164
1,980
1,884
1,009
1,104
384
790
672
4,759
2,257
2,173
1,884
2,173
2,173
92,127
(1) EÅective March 1, 2003, all eligible employees of eBay, including certain of the Named Executive
OÇcers, received an annual salary increase representing: (i) in the case of Ms. Whitman, a salary of
$990,000 per annum; (ii) in the case of Mr. Webb, a salary of $600,024 per annum; (iii) in the case
of Mr. Jordan, a salary of $470,208 per annum; (iv) in the case of Mr. Bannick, a salary of $450,144
per annum; and (v) in the case of Mr. Cobb, a salary of $400,080 per annum. Total salary amounts
reported are lower than these annual salaries because lower salaries were in eÅect prior to March 1,
2003.
(2) All 2003 bonuses represent amounts paid in 2003 and 2004 for services rendered in 2003, all 2002
bonuses represent amounts paid in 2002 and 2003 for services rendered in 2002, and all 2001
bonuses represent amounts paid in 2001 and 2002 for services rendered in 2001.
(3) Represents: (i) in the case of Ms. Whitman for 2003, her personal use of eBay's corporate aircraft,
which is valued at rates prescribed under applicable IRS regulations; (ii) in the case of
Ms. Whitman for 2002, her personal use of eBay's corporate aircraft ($58,101), which is valued at
rates prescribed under applicable IRS regulations, and of a corporate aircraft from an unaÇliated
third-party vendor, which is valued at actual invoiced amounts ($74,961); and (iii) in the case of
Mr. Bannick, costs associated with family transportation while Mr. Bannick worked out of our
European oÇces during the summer of 2002.
(4) Amounts have been adjusted to reÖect all prior stock splits, including eBay's two-for-one stock split
that occurred on August 28, 2003.
(5) Represents: (i) in the case of Mr. Jordan, a reimbursement for relocation expenses paid to him in
2001 ($2,875); (ii) in the case of Mr. Cobb, a reimbursement for relocation expenses paid to him in
73
2001 ($90,243); and (iii) in the case of each of the Named Executive OÇcers, insurance premiums
we paid with respect to group life insurance for their beneÑt and matching contributions under our
401(k) Plan (subject to the maximum of $1,500 per annum).
(6) Represents for 2003, $1,159,132 paid under eBay's Management Incentive Plan and an additional
$70,000 bonus granted by the Compensation Committee in 2004 and, represents for 2002, $329,698
paid under eBay's Management Incentive Plan and an additional $90,000 bonus granted by the
Compensation Committee in 2003.
(7) Represents for 2003, $620,501 paid under eBay's Management Incentive Plan and $646,100 paid
under Mr. Webb's special retention plan, represents for 2002, $387,254 paid under eBay's
Management Incentive Plan and $449,900 paid under Mr. Webb's special retention plan and
represents for 2001, $290,927 paid under eBay's Management Incentive Plan and $355,200 under
Mr. Webb's special retention plan. See ""Item 13: Certain Relationships and Related Transactions.''
(8) Represents for 2003, $361,505 for 2003 paid under eBay's Management Incentive Plan, $497,288
under Mr. Jordan's special retention plans, represents for 2002, $202,212 paid under eBay's
Management Incentive Plan, $522,550 under Mr. Jordan's special retention plans and $15,000
pursuant to our discretionary reward program, and represents for 2001, $153,041 paid under eBay's
Management Incentive Plan and $314,000 under Mr. Jordan's special retention plan. See ""Item 13:
Certain Relationships and Related Transactions.''
(9) Represents for 2003, $346,264 paid under eBay's Management Incentive Plan, $250,000 under
Mr. Bannick's special retention plan and Represents for 2002, $207,540 paid under eBay's
Management Incentive Plan, $250,000 under Mr. Bannick's special retention plan and $15,000
pursuant to our discretionary reward program. See ""Item 13: Certain Relationships and Related
Transactions.''
(10) Represents for 2003, $298,899 paid under eBay's Management Incentive Plan, $70,000 under
Mr. Cobb's special retention plan, represents for 2002, $170,390 paid under eBay's Management
Incentive Plan and $70,000 under Mr. Cobb's special retention plan and represents for 2001,
$132,026 paid under eBay's Management Incentive Plan and $70,000 under Mr. Cobb's special
retention plan. See ""Item 13: Certain Relationships and Related Transactions.''
The following executive oÇcers received grants of options in 2003 under eBay's 2001's Equity
Incentive Plan, which we also refer to as the 2001 Plan.
Option Grants During 2003
Name
Number of
Securities
Underlying
Options
Percentage of
Total Options
Granted to
Employees
Granted(1) During 2003(2) Per Share(3)
Exercise
Price
Margaret C. Whitman ÏÏÏ
Maynard G. Webb, Jr. ÏÏ
JeÅrey D. Jordan ÏÏÏÏÏÏÏ
Matthew J. Bannick ÏÏÏÏÏ
William C. Cobb ÏÏÏÏÏÏÏ
1,100,000
550,000
300,000
300,000
250,000
4.1%
2.1
1.1
1.1
0.9
$44.04
38.78
38.78
38.78
38.78
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Option Term(4)
5%
10%
$30,466,171 $77,207,260
33,988,550
13,411,964
18,539,209
7,315,617
18,539,209
7,315,617
15,449,341
6,096,347
Expiration
Date
03/18/13
03/03/13
03/03/13
03/03/13
03/03/13
(1) Options granted in 2003 were granted under the 2001 Plan. All options granted in 2003 to the Named
Executive OÇcers were granted by our Board, are nonqualiÑed stock options and are subject to a
four-year vesting schedule, vesting 12.5% after six months and 1/48 per month thereafter. Amounts
have been adjusted to reÖect the two-for-one stock split eÅective on August 28, 2003.
(2) Based on options to purchase 26,533,518 shares of our common stock granted to employees in 2003.
(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
74
table above are rounded to the nearest cent. The exercise per share has been adjusted to reÖect the
two-for-one stock split eÅective on August 28, 2003.
(4) ReÖects the value of the stock option on the date of grant assuming (i) for the 5% column, a 5%
annual rate of appreciation in our common stock over the ten-year term of the option and (ii) for the
10% column, a 10% annual rate of appreciation in our common stock over the ten-year term of the
option, in each case without discounting to net present value and before income taxes associated with
the exercise. The 5% and 10% assumed rates of appreciation are based on the rules of the SEC and
do not represent our estimate or projection of the future common stock price. The amounts in this
table may not necessarily be achieved.
The following table sets forth the number of shares acquired and the value realized upon exercise of
stock options during 2003 and the number of shares of our common stock subject to exercisable and
unexercisable stock options held as of December 31, 2003, by each of the Named Executive OÇcers. The
value at Ñscal year end is measured as the diÅerence between the exercise price and the fair market value
at close of market on December 31, 2003, which was $64.61.
Aggregate Option Exercises in 2003 and Values at December 31, 2003
Number of
Shares
Acquired on
Exercise(1)
Value
Realized(2)
Number of Securities
Underlying Unexercised
Options at December 31,
2003(1)
Exercisable Unexercisable
(#)
(#)
Value of Unexercised
In-the-Money Options at
December 31, 2003(3)
Exercisable
($)
Unexercisable
($)
Name
Margaret C. Whitman ÏÏÏÏÏ
Maynard G. Webb, Jr. ÏÏÏÏÏ
JeÅrey D. JordanÏÏÏÏÏÏÏÏÏÏ
Matthew J. Bannick ÏÏÏÏÏÏÏ
William C. Cobb ÏÏÏÏÏÏÏÏÏÏ
Ì
800,000
440,664
482,494
155,000
Ì 1,168,750
992,848
824,045
342,081
268,124
$21,395,255
10,729,467
10,561,316
4,080,193
2,031,250
637,152
416,389
412,083
466,876
$44,676,294
40,320,571
27,107,751
10,007,700
10,143,483
$66,169,756
18,565,841
12,613,256
12,437,300
15,907,824
(1) Amounts have been adjusted to reÖect the two-for-one stock split eÅective on August 28, 2003.
(2) Value realized is based on the fair market value of our common stock on date of exercise minus the
exercise price and does not necessarily reÖect proceeds actually received by the oÇcer.
(3) Calculated using the fair market value of our common stock on December 31, 2003 ($64.61) less the
exercise price of the option.
Employment Agreements, Change-in-Control Arrangements, and Retention Bonus Plans
We do not have long-term employment agreements or change-in-control arrangements with any of our
executive oÇcers, nor are any of our executive oÇcers covered by any pension plan or deferred
compensation plan. ""Item 13: Certain Relationships and Related Transactions'' contains descriptions of the
special retention bonus plans that we have entered into with certain of our executive oÇcers.
Compensation of Directors
New directors who are not employees of eBay, or any parent, subsidiary or aÇliate of eBay, receive
deferred stock units, or DSUs, with an initial value of $150,000 under our 2003 Deferred Stock Unit Plan.
DSUs represent an unfunded, unsecured right to receive shares of eBay common stock (or the equivalent
value thereof in cash or property), and the value of DSUs varies directly with the price of eBay's common
stock. Each DSU award granted to a non-employee director upon election to the Board will vest as to 25%
of the DSUs on the Ñrst anniversary of the date of grant and as to 1/48 of the DSUs each month
thereafter, provided the director continues as a director or consultant of eBay.
75
Non-employee directors are also eligible to participate in the 1998 Directors Stock Option Plan, also
referred to as the Directors Plan. Option grants under the Directors Plan are automatic and non-
discretionary, and the exercise price of the options must be 100% of the 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. All options granted under the Directors Plan vest as to 25% of the shares
on the Ñrst anniversary of the date of grant and as to 1/48 of the shares each month thereafter, provided
the optionee continues as a director or consultant of eBay.
Non-employee directors are paid a retainer of $50,000 per year, the chairman of the Audit Committee
receives an additional $10,000 per year, and all other committee chairs receive an additional $5,000 per
year. Each non-employee director also receives meeting fees of $2,000 for each Board meeting and $1,000
for each committee meeting.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee of our Board are Philippe Bourguinon, Robert C.
Kagle, and Thomas J. Tierney. No member of our Board's Compensation Committee is or was formerly
an oÇcer or an employee of eBay. No interlocking relationship exists between our Board and its
Compensation Committee and the board of directors or compensation committee of any other company,
nor has such interlocking relationship existed in the past.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to us with respect to beneÑcial ownership of
the Common Stock as of March 1, 2004, by (i) each stockholder known to us to be the beneÑcial owner
of more than 5% of our common stock, (ii) each director and nominee for director, (iii) each of the
executive oÇcers named in the Summary Compensation Table set forth under ""Item 11: Executive
Compensation Ì Summary of Compensation'' and (iv) all executive oÇcers and directors as a group.
Name of BeneÑcial Owner
Shares BeneÑcially
Owned(1)
Number
Percent
Pierre M. Omidyar(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
JeÅrey S. Skoll(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Margaret C. Whitman(4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Maynard G. Webb, Jr.(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
JeÅrey D. Jordan(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Matthew J. Bannick(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
William C. Cobb(8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fred D. Anderson(9) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Philippe Bourguignon(10) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Scott D. Cook(11) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Robert C. Kagle(12)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dawn G. Lepore(13) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Thomas J. Tierney(14)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
All directors and executive oÇcers as a group (16 persons)(15) ÏÏÏÏÏÏÏÏ
114,525,884
51,549,752
14,600,208
891,458
797,934
220,522
256,457
0
210,000
1,056,503
2,116,043
157,500
0
137,060,559
17.5%
7.9
2.2
*
*
*
*
*
*
*
*
*
*
21.0
* Less than one percent.
(1) This table is based upon information supplied by oÇcers, directors and principal stockholders and
Schedules 13D and 13G Ñled with the Securities and Exchange Commission. BeneÑcial ownership is
determined in accordance with the rules of the Securities and Exchange Commission and generally
76
includes voting or investment power with respect to securities. Unless otherwise indicated below, the
persons and entities named in the table have sole voting and sole investment power with respect to
all shares beneÑcially owned, subject to community property laws where applicable. Shares of our
common stock subject to options that are currently exercisable or exercisable within 60 days of
March 1, 2004 are deemed to be outstanding for the purpose of computing the percentage ownership
of the person holding those options, but are not treated as outstanding for the purpose of computing
the percentage ownership of any other person. The percentage of beneÑcial ownership is based on
653,998,192 shares of our common stock outstanding as of March 1, 2004.
(2) Mr. Omidyar is our Founder and Chairman of the Board. Includes 337,600 shares held by his spouse
as to which he disclaims beneÑcial ownership. The address for Mr. Omidyar is 2145 Hamilton
Avenue, San Jose, California 95125.
(3) The address for Mr. Skoll is c/o Capricorn Management, LLC, 2005 Hamilton Avenue, Suite 260,
San Jose, California 95125.
(4) Ms. Whitman is our President and Chief Executive OÇcer. Includes 9,180,000 shares held by the
GriÇth R. Harsh, IV & Margaret C. Whitman TTEES of Sweetwater Trust U/A/D 10/15/99,
1,000,000 shares held by the GriÇth R. Harsh, IV, TTEE, GRH 2003 GRAT, and 1,000,000 shares
held by the Margaret C. Whitman TTEE, MCW 2003 GRAT. In addition, it includes (a) 2,396
shares held by GriÇth Rutherford Harsh IV Custodian GriÇth Rutherford Harsh V UTMA
California as to which Ms. Whitman's spouse is custodian for the trust and as to which
Ms. Whitman disclaims beneÑcial ownership and (b) 2,396 shares held by GriÇth Rutherford Harsh
IV Custodian William Whitman Harsh UTMA California as to which Ms. Whitman's spouse is
custodian for the trust and as to which Ms. Whitman disclaims beneÑcial ownership. Includes
1,435,416 shares Ms. Whitman has the right to acquire pursuant to outstanding options exercisable
within 60 days. The address for Ms. Whitman is 2145 Hamilton Avenue, San Jose, California 95125.
(5) Mr. Webb is our Chief Operating OÇcer. Includes 891,458 shares Mr. Webb has the right to
acquire pursuant to outstanding options exercisable within 60 days. The address for Mr. Webb is
2145 Hamilton Avenue, San Jose, California 95125.
(6) Mr. Jordan is our Senior Vice President, eBay North America. Includes 797,934 shares Mr. Jordan
has the right to acquire pursuant to outstanding options exercisable within 60 days. The address for
Mr. Jordan is 2145 Hamilton Avenue, San Jose, California 95125.
(7) Mr. Bannick is our Senior Vice President and General Manager, Global Online Payments. Includes
219,582 shares Mr. Bannick has the right to acquire pursuant to outstanding options exercisable
within 60 days. The address for Mr. Bannick is 2145 Hamilton Avenue, San Jose, California 95125.
(8) Mr. Cobb is our Senior Vice President and General Manager, eBay International. Includes 256,457
shares Mr. Cobb has the right to acquire pursuant to outstanding options exercisable within 60 days.
The address for Mr. Cobb is 2145 Hamilton Avenue, San Jose, California 95125.
(9) The address for Mr. Anderson is c/o Apple Computer, Inc., 1 Infinite Loop, Cupertino, California
95014.
(10) Includes 210,000 shares Mr. Bourguignon has the right to acquire pursuant to outstanding options
exercisable within 60 days. The address for Mr. Bourguignon is c/o The World Economic Forum,
91-93 Route de la Capite, 1223 Cologny, Geneva, Switzerland.
(11) Includes 975,000 shares Mr. Cook has the right to acquire pursuant to outstanding options
exercisable within 60 days. The address for Mr. Cook is c/o Intuit, Inc., 2535 Garcia Avenue,
Mountain View, California 94043.
(12) Includes 130,000 shares Mr. Kagle has the right to acquire pursuant to outstanding options
exercisable within 60 days. The address for Mr. Kagle is c/o Benchmark Capital, 2480 Sand Hill
Road, Suite 200, Menlo Park, California 94025.
(13) Includes 157,500 shares Ms. Lepore has the right to acquire pursuant to outstanding options
exercisable within 60 days. The address for Ms. Lepore is c/o The Charles Schwab Corporation,
101 Montgomery Street, M.S., 120-30-305, San Francisco, California 94104.
77
(14) The address for Mr. Tierney is c/o Bain & Company, 131 Clarendon Street, Boston, MA 02116
(15) Includes 7,021,702 shares subject to options exercisable within 60 days.
Equity Compensation Plan Information
The following table gives information about our shares of common stock that may be issued upon the
exercise of options, warrants and rights under all of our existing equity compensation plans as of
December 31, 2003, including our 1996 Stock Option Plan, 1997 Stock Option Plan, 1998 Equity Incentive
Plan, 1998 Directors Stock Option Plan, 1999 Global Equity Incentive Plan, 2001 Equity Incentive Plan, and
2003 Deferred Stock Unit Plan, as well as shares of our common stock that may be issued under individual
compensation arrangements that were not approved by our stockholders, also referred to as our Non-Plan
Grants. No warrants or rights are outstanding under any of the foregoing plans.
(a)
Number of
Securities
to Be Issued
upon Exercise of
Outstanding Options,
Warrants and Rights
(b)
Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(c)
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation Plans
(Excluding Securities
ReÖected in Column(a))
Plan Category
Equity compensation plans
approved by securityholders
66,898,984
$34.69
56,280,794(1)
Equity compensation plans
not approved by
securityholdersÏÏÏÏÏÏÏÏÏÏÏ
845,000(2)(3)(4)(5)(6)
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
67,743,984
$ .78
$34.27
Ì
56,280,794
(1) Includes 3,019,672 shares of our common stock remaining available for future issuance under our
1998 Employee Stock Purchase Plan, as amended, or the ESPP, as of December 31, 2003. 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
in the preceding calendar year, provided that the aggregate number of shares issued over the term of
the plan does not exceed 18 million shares. An aggregate amount of 580,328 shares was purchased
under the ESPP in 2003. None of our other plans has an ""evergreen'' provision.
(2) Does not include 398 shares of our common stock, with a weighted average exercise price of $0.55
per share, to be issued upon exercise of outstanding options assumed by us under the Billpoint, Inc.
1999 Stock Option Plan, or the Billpoint Plan, in connection with our acquisition of Billpoint in 1999,
as we cannot make subsequent grants or awards of our equity securities under the Billpoint Plan. Prior
to our acquisition of Billpoint, the stockholders of Billpoint approved the Billpoint Plan. Our
stockholders, however, did not approve the Billpoint Plan in connection with our acquisition of
Billpoint.
(3) Does not include 22,720 shares of our common stock, with a weighted average exercise price of
$21.0711 per share, to be issued upon exercise of outstanding options assumed by us under the
Half.com, Inc. 1999 Equity Compensation Plan, or the Half.com Plan, in connection with our
acquisition of Half.com in 2000, as we cannot make subsequent grants or awards of our equity
securities under the Half.com Plan. Prior to our acquisition of Half.com, the stockholders of Half.com
approved the Half.com Plan. Our stockholders, however, did not approve the Half.com Plan in
connection with our acquisition of Half.com.
(4) Does not include 11,154 shares of our common stock, with a weighted average exercise price of $0.14
per share, to be issued upon exercise of outstanding options assumed by us under the ConÑnity, Inc.
1999 Stock Plan, or the ConÑnity Plan, in connection with our acquisition of PayPal in October 2002,
as we cannot make subsequent grants or awards of our equity securities under the ConÑnity Plan. The
78
ConÑnity Plan was assumed by PayPal in connection with its merger with ConÑnity in 2000. Prior to
our acquisition of PayPal and PayPal's merger with ConÑnity, the stockholders of ConÑnity approved
the ConÑnity Plan. Our stockholders, however, did not approve the ConÑnity Plan in connection with
our acquisition of PayPal.
(5) Does not include 219,395 shares of our common stock, with a weighted average exercise price of
$1.53 per share, to be issued upon exercise of outstanding options assumed by us under the X.com
Corporation 1999 Stock Plan, or the X.com Plan, in connection with our acquisition of PayPal in
October 2002, as we cannot make subsequent grants or awards of our equity securities under the
X.com Plan. Prior to our acquisition of PayPal, the stockholders of PayPal approved the X.com Plan.
Our stockholders, however, did not approve the X.com Plan in connection with our acquisition of
PayPal.
(6) Does not include 1,207,404 shares of our common stock, with a weighted average exercise price of
$17.46 per share, to be issued upon exercise of outstanding options assumed by us under the PayPal,
Inc. 2001 Equity Incentive Plan, or the PayPal Plan, in connection with our acquisition of PayPal in
October 2002, as we cannot make subsequent grants or awards of our equity securities under the
PayPal Plan. Prior to our acquisition of PayPal, the stockholders of PayPal approved the PayPal Plan.
Our stockholders, however, did not approve the PayPal Plan in connection with our acquisition of
PayPal.
The only outstanding Non-Plan Grant as of December 31, 2003 relates to an individual compensation
arrangement that was made prior to the initial public oÅering of our Common Stock in 1998. At the time
of this Non-Plan Grant, members of our Board and their aÇliates beneÑcially owned in excess of 90% of
our then outstanding equity and voting interests. This Non-Plan Grant has been previously disclosed in our
initial public oÅering Prospectus Ñled with the SEC on September 25, 1998 under the headings
""Management Ì Director Compensation'' and ""Ì Compensation Arrangements.'' Except as set forth
below, the terms and conditions of this Non-Plan Grant are identical to the terms of our 1997 Stock
Option Plan, a copy of which was Ñled as an exhibit to our S-1 Registration Statement (No. 33-59097)
Ñled in connection with our initial public oÅering.
The outstanding Non-Plan Grant involved the Board's grant of an option to purchase 1,800,000 shares
of our Common Stock at an exercise price of $0.78 to Mr. Cook upon his joining our Board in June 1998
as an independent director. These options granted to Mr. Cook were non-qualiÑed options and were
immediately exercisable, with a term of 10 years. These options vested as to 25% of the underlying shares
in June 1999 and as to 2.08% of the shares each month thereafter until they fully vested in June 2002.
Mr. Cook exercised options to purchase 240,000 shares in 2002 and exercised options to purchase an
additional 715,000 shares during 2003. As of December 31, 2003, options to purchase 845,000 shares
remain outstanding under the Non-Plan Grant.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have entered into indemniÑcation agreements with each of our directors and executive oÇcers.
These agreements require us to indemnify such individuals, to the fullest extent permitted by Delaware
law, for certain liabilities to which they may become subject as a result of their aÇliation with eBay.
In August 2000, Mr. Webb, our Chief Operating OÇcer, entered into a four-year term loan with us at
an interest rate of 6.37% per annum, with 10%, 15%, 25% and 50% of principal on the loan due on each of
the Ñrst, second, third and fourth anniversary of the loan's issue date, respectively. The principal amount
on the loan was approximately $2,169,800, which amount represented the principal and accrued interest
due at the end of a one-year term loan entered into in August 1999 between Mr. Webb and us shortly
after his relocation to San Jose as a result of his joining eBay in 1999, and was secured by Mr. Webb's
principal place of residence. In January 2001, we entered into a special retention bonus plan with
Mr. Webb, under which Mr. Webb received bonus payments in August of 2001, 2002, and 2003 and
remains eligible to receive a bonus payment in August 2004 if he is then employed by us. Payment
amounts under Mr. Webb's bonus plan are $355,200 for 2001, $449,900 for 2002, $646,100 for 2003 and
79
$1,154,000 for 2004, and the terms of the bonus plan allowed those amounts to be used to pay principal
and interest owed to us under the terms of his loan. In August 2001 and August 2002, in accordance with
the terms of his loan, Mr. Webb paid down $355,200 and $449,900, respectively, of principal and accrued
interest on the loan. In January 2003, Mr. Webb prepaid in full the principal and accrued interest on his
loan in the amount of approximately $1,670,800. Mr. Webb's maximum indebtedness to eBay during 2003
was $1,670,800.
In May 2000, Mr. Jordan, our Senior Vice President, eBay North America, entered into two four-year
term loans with us at an interest rate of 6.40% per annum, with principal and accrued interest payable on
each loan in equal installments on each anniversary. The principal amounts on the loans were $1,000,000
and $900,000, respectively, with the loan amounts secured by Mr. Jordan's principal place of residence. In
May 2000, we entered into a special retention bonus plan with Mr. Jordan under which Mr. Jordan
received bonus payments in May of 2001, 2002, and 2003 and remains eligible to receive a bonus payment
in May 2004 if he is then employed by us. Payment amounts under this Mr. Jordan's bonus plan are
$314,000 for 2001, $298,000 for 2002, $282,000 for 2003, and $266,000 for 2004, the terms of the bonus
plan allowed those amounts to pay principal and interest owed to us under the loans described in this
paragraph. In July 2000, Mr. Jordan repaid in full the principal and accrued interest on the $900,000 term
loan. In addition, in April 2001, Mr. Jordan entered into a four-year term loan with us at an interest rate
of 4.94% per annum, with principal and accrued interest payable in equal installments on each anniversary
of this loan. The principal amount on this loan was $750,000, with the loan amount secured by
Mr. Jordan's principal place of residence. In April 2001, we entered into a second special retention bonus
plan with Mr. Jordan under which Mr. Jordan received bonus payments in April of 2002 and 2003 and
remains eligible to receive bonus payments in April 2004 and 2005 if he is then employed by us. Payment
amounts under this bonus plan with Mr. Jordan are $224,550 for 2002, $215,288 for 2003, $206,025 for
2004, and $196,763 for 2005, and the terms of the bonus plan allowed those amounts to be used to pay
principal and interest owed to us under the loans described in this paragraph. In May 2001, May 2002,
and May 2003, Mr. Jordan paid down $314,000, $298,000 and $282,000, respectively, of principal and
accrued interest on his May 2000 loan. In April 2002 and April 2003, Mr. Jordan paid down $224,550 and
$215,288, respectively, of principal and accrued interest on his April 2001 loan. In July 2003, Mr. Jordan
prepaid in full the principal and accrued interest on both the May 2000 and April 2001 loans in the
amounts of $252,762 and $380,380, respectively. Mr. Jordan's maximum indebtedness to eBay during 2003
was $1,118,288.
In March 2001, in connection with his relocation to San Jose as a result of his joining eBay in
November 2000, Mr. Cobb, our Senior Vice President and General Manager, eBay International, entered
into a four-year, non-interest bearing term loan with us in the amount of $840,000. The loan to Mr. Cobb
is secured by his principal place of residence. Principal payments of $70,000 are due on the Ñrst, second
and third anniversary, with a balloon payment of the remaining principal due on the fourth anniversary. In
November 2000, we entered into a special retention bonus plan with Mr. Cobb under which Mr. Cobb
received a $70,000 bonus payment in November of 2001, 2002 and 2003 and remains eligible to receive a
bonus payment in November 2004 if he is then employed by us. In April 2002, we entered into a second
special retention bonus plan with Mr. Cobb under which Mr. Cobb will receive a $280,000 bonus payment
in November 2004 if he is then employed by us. Mr. Cobb may use these bonus payments to pay principal
payments due under his loan. In each of November 2001, 2002 and 2003, Mr. Cobb paid down $70,000 of
principal on his loan. Mr. Cobb's maximum indebtedness to eBay during 2003 was $700,000. Mr. Cobb's
aggregate indebtedness to eBay as of March 1, 2004 was $630,000.
In September 2002, we entered into a special retention bonus plan with Mr. Bannick. Under the
terms of this bonus plan, Mr. Bannick received a $250,000 bonus payment after the closing of our
acquisition of PayPal in October 2002 and upon his acceptance of the new position as our Senior Vice
President and General Manager, Global Online Payments. In addition, the terms of the bonus plan
provided for three performance-based bonus payments of up to $250,000 related primarily to the
integration and performance of our PayPal subsidiary, payable on each of the nine months, 18 months, and
24 months after the October 2002 closing of the PayPal acquisition. Mr. Bannick received a $250,000
80
payment in July 2003, and remains eligible to receive bonus payments of up to $250,000 in April and
October 2004.
Mr. Omidyar, our Founder and the Chairman of our Board of Directors, and Mr. Skoll, a beneÑcial
owner of more than 5% of our common stock, from time to time make their personal aircraft available to
our oÇcers for business purposes at no cost to us. The imputed cost of the aircraft use was not material to
our Consolidated Financial Statements.
Mr. Cook, a member of our Board of Directors, is a director and Chairman of the Executive
Committee of the Board of Directors of Intuit. In September 2000, prior to eBay's acquisition of PayPal,
PayPal entered into a strategic marketing agreement with Intuit. The agreement was terminated in
December 2002, and PayPal paid Intuit an early termination fee of $1,349,000 in January 2003 in
accordance with the terms of the agreement. In addition, in July 2003, Intuit purchased Income
Dynamics, Inc., a company with which eBay had a pre-existing data licensing agreement. Under the terms
of eBay's agreement with Income Dynamics, eBay recognized $156,251 of revenue in 2003, and expects to
recognize revenue of up to $26,000 per month in 2004.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
During the Ñscal years ended December 31, 2002 and December 31, 2003, fees for services provided
by PricewaterhouseCoopers LLP, or PwC, were as follows (in thousands):
Year Ended
December 31,
2002
2003
Audit Fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Audit-Related Fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Tax Fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
All Other Fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,195
747
19
91
$1,548
720
65
Ì
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,052
$2,333
""Audit Fees'' consisted of fees billed for services rendered for the audit of eBay's annual Ñnancial
statements, review of Ñnancial statements included in eBay's quarterly reports on Form 10-Q, and other
services normally provided in connection with statutory and regulatory Ñlings. ""Audit-Related Fees''
consisted of fees billed for due diligence procedures in connection with acquisitions and divestitures and
consultation regarding Ñnancial accounting and reporting matters. ""Tax Fees'' consisted of fees billed for
tax payment planning and tax preparation services. Approximately 3% of Tax Fees for 2003 were approved
by eBay's Audit Committee after the provision of services pursuant to the ""de minimis'' services safe
harbor exception for non-audit engagements. ""All Other Fees'' consisted of fees billed for services in
connection with legal matters and technical accounting research.
The Audit Committee of our Board of Directors has determined that the rendering of non-audit
services by PwC was compatible with maintaining their independence.
Audit Committee Pre-Approval Policy
The Audit Committee of our Board of Directors has adopted a policy requiring the pre-approval of
any non-audit engagement of PwC. In the event that we wish to engage PwC to perform accounting,
technical, diligence or other permitted services not related to the services performed by PwC as our
independent auditor, our internal Ñnance personnel will prepare a summary of the proposed engagement,
detailing the nature of the engagement, the reasons why PwC is the preferred provider of such services and
the estimated duration and cost of the engagement. The report will be provided to our Audit Committee
or a designated committee member, who will evaluate whether the proposed engagement will interfere with
the independence of PwC in the performance of its auditing services. Beginning with the Ñrst quarter of
81
2003, we have disclosed all approved non-audit engagements during a quarter in the appropriate quarterly
report on Form 10-Q or annual report on Form 10-K.
Our Audit Committee approved one non-audit engagement during the quarter ended December 31,
2003, relating to the provision by PwC of due diligence review services in connection with a potential
acquisition.
82
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are Ñled as part of this report:
1. Consolidated Financial Statements:
Report of Independent Accountants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Balance Sheet ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statement of IncomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statement of Comprehensive Income ÏÏÏÏÏÏÏÏ
Consolidated Statement of Stockholders' Equity ÏÏÏÏÏÏÏÏÏÏ
Consolidated Statement of Cash Flows ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Notes to Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2. Financial Statement Schedules.
Page
Number
86
87
88
89
90
91
92
Page
Number
Schedule II Ì Valuation and Qualifying Accounts ÏÏÏÏÏÏÏÏ
126
All other schedules have been omitted because the information required to be set forth therein is not
applicable or is shown in the Ñnancial statements or notes thereto.
3. Exhibits
Exhibit Description
Filed
with
this
10-K
Incorporated by Reference
Date
Filed
File No.
Form
Registrant's Amended and Restated CertiÑcate of
Incorporation.
10-Q
000-24821
11/13/98
Registrant's CertiÑcate of Amendment of
CertiÑcate of Incorporation.
10-K
000-24821
03/28/01
Registrant's Corrected CertiÑcate of CertiÑcate of
Amendment of CertiÑcate of Incorporation.
10-K
000-24821
03/28/01
No.
3.01
3.02
3.03
3.04
Registrant's Amended and Restated By-laws
10-Q
000-24821
11/13/98
4.01
4.02
Form of Specimen CertiÑcate for Registrant's
Common Stock.
Investor Rights Agreement, dated June 20, 1997,
between the Registrant and certain stockholders
named therein.
S-1
333-59097
08/19/98
S-1
333-59097
07/15/98
10.01° Form of Indemnity Agreement entered into by
S-1
333-59097
07/15/98
Registrant with each of its directors and
executive oÇcers.
10.02° Registrant's 1996 Stock Option Plan.
S-1
333-59097
07/15/98
83
No.
Exhibit Description
10.03° Registrant's 1997 Stock Option Plan.
10.04° Registrant's 1998 Equity Incentive Plan, as
amended.
Filed
with
this
10-K
Incorporated by Reference
Date
Filed
File No.
Form
S-1
S-1
333-59097
07/15/98
333-59097
07/15/98
10.05° Registrant's 2001 Equity Incentive Plan.
S-8
333-107932
08/11/03
10.06° Registrant's 1998 Directors Stock Option Plan.
10-Q
000-24821
05/14/03
10.07° Registrant's 2003 Deferred Stock Unit Plan.
S-8
333-107832
08/11/03
10.08° Registrant's Amended and Restated 1998
Employee Stock Purchase Plan.
10-K
000-24821
03/25/02
10.09° Registrant's 1999 Global Equity Incentive Plan,
S-8
333-97729
08/06/02
as amended.
10.10° Employment Letter Agreement dated January 16,
1998, between Margaret C. Whitman and
Registrant.
10.11° Employment Letter Agreement dated August 20,
1998, between Michael R. Jacobson and
Registrant.
S-1
333-59097
08/19/98
S-1
333-59097
09/01/98
10.12° OÅer Letter to Maynard G. Webb, Jr. dated
S-3
333-88205
09/30/99
July 17, 1999.
10.13° Retention Bonus Plan dated January 10, 2001,
between Registrant and Maynard G. Webb, Jr.
(Corrected).
10-Q
000-24821
08/14/01
10.14° Stock Option Agreement dated June 9, 1998
10-K
000-24821
03/31/03
between Registrant and Scott D. Cook.
10.15° OÅer Letter to JeÅrey D. Jordan dated July 30,
S-3
333-88205
09/30/99
1999.
10.16° Retention Bonus Plan dated May 16, 2000,
between Registrant and JeÅrey D. Jordan.
10.17° Retention Bonus Plan dated April 3, 2001,
between Registrant and JeÅrey D. Jordan.
10-K
000-24821
03/28/01
10-Q
000-24821
08/14/01
10.18° OÅer Letter to William C. Cobb dated
10-K
000-24821
03/25/02
November 22, 2000.
10.19° Supplemental Retention Bonus Plan dated
10-Q
000-24821
08/06/02
April 14, 2002, between Registrant and
William C. Cobb.
84
No.
Exhibit Description
Filed
with
this
10-K
Incorporated by Reference
Date
Filed
File No.
Form
10.20° Special Bonus Plan between Registrant and
10-Q
000-24821
11/14/02
10-K
000-24821
03/30/00
10-K
000-24821
03/30/00
10.21
10.22
Matthew J. Bannick, dated as of September 6,
2002.
Lease dated March 1, 2000, between eBay Realty
Trust and Registrant.
Cash Collateral Agreement between Registrant
and Chase Manhattan Bank as Agent, dated
March 1, 2000.
21.01
List of Subsidiaries.
23.01
PricewaterhouseCoopers LLP consent.
24.01
Power of Attorney (see signature page).
31.01
31.02
32.01
32.02
CertiÑcation of the Registrant's Chief Executive
OÇcer, as required by Section 302 of the
Sarbanes-Oxley Act of 2002.
CertiÑcation of Registrant's Chief Financial
OÇcer, as required by Section 302 of the
Sarbanes-Oxley Act of 2002.
CertiÑcation of Registrant's Chief Executive
OÇcer, as required by Section 906 of the
Sarbanes-Oxley Act of 2002.
CertiÑcation of Registrant's Chief Financial
OÇcer, as required by Section 906 of the
Sarbanes-Oxley Act of 2002.
X
X
X
X
X
X
X
° Indicates a management contract or compensatory plan or arrangement
(b) Reports on Form 8-K during the fourth quarter of Ñscal 2003:
On October 16, 2003, eBay furnished a current report on Form 8-K to report under Item 12 that it
was Ñling a copy of its press release announcing its Ñnancial results for the three months ended
September 30, 2003 and that such press release contained non-GAAP Ñnancial measures under
Regulation G.
(c) See the Exhibits listed under Item 15(a)(3) above.
(d) The Ñnancial statement schedules required by this item are listed under Item 15(a)(2) above.
85
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and
Stockholders of eBay Inc.:
In our opinion, the Consolidated Financial Statements listed in the index appearing under
Item 15(a) 1. on page 83 present fairly, in all material respects, the Ñnancial position of eBay Inc. and its
subsidiaries (the Company) at December 31, 2003 and December 31, 2002, and the results of their
operations and their cash Öows for each of the three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States of America. In addition, in
our opinion, the Ñnancial statement schedule listed in the index appearing under item 15(a) 2. on page 83
present fairly, in all material respects, the information set forth therein when read in conjunction with the
related Consolidated Financial Statements. These Ñnancial statements and the Ñnancial statement schedule
are the responsibility of the Company's management; our responsibility is to express an opinion on these
Ñnancial statements and the Ñnancial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable assurance about whether
the Ñnancial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the Ñnancial statements, assessing the accounting
principles used and signiÑcant estimates made by management, and evaluating the overall Ñnancial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Notes 1 and 8 to the Consolidated Financial Statements, eÅective July 1, 2003 the
Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 46,
""Consolidation of Variable Interest Entities Ì an interpretation of ARB 51''. As discussed in Note 3 to
the Consolidated Financial Statements, eÅective January 1, 2002 the Company changed its method of
accounting for goodwill in accordance with Statement of Financial Accounting Standards No. 142,
""Goodwill and Other Intangible Assets''.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 4, 2004
86
eBay Inc.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
December 31,
2002
2003
Current assets:
ASSETS
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts receivable, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Funds receivableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other current assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,109,313
89,690
131,453
41,014
96,988
Total current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restricted cash and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Property and equipment, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Intangible assets, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,468,458
470,227
134,644
218,028
1,456,024
279,465
13,380
$1,381,513
340,576
225,871
79,893
118,029
2,145,882
934,171
127,432
601,785
1,719,311
274,057
17,496
$4,040,226
$5,820,134
Current liabilities:
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Funds payable and amounts due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued expenses and other current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred revenue and customer advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
Total current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred tax liabilities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interests ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commitments and contingencies (Notes 8, 9, and 11)
Stockholders' equity:
47,424
50,396
199,323
18,846
2,970
67,265
386,224
13,798
27,625
22,874
33,232
483,753
$
64,633
106,568
356,491
28,874
2,840
87,870
647,276
124,476
79,238
33,494
39,408
923,892
Convertible Preferred Stock, $0.001 par value; 10,000 shares authorized; no
shares issued or outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common Stock, $0.001 par value; 900,000 shares authorized; 622,554 and
649,293 shares issued and outstandingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unearned stock-based compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated other comprehensive incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
623
3,108,131
(5,253)
414,474
38,498
649
3,937,160
(2,008)
856,245
104,196
Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3,556,473
4,896,242
$4,040,226
$5,820,134
The accompanying notes are an integral part of these Consolidated Financial Statements.
87
eBay Inc.
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share amounts)
Year Ended December 31,
2002
2003
2001
Net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cost of net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$748,821
134,816
$1,214,100
213,876
$2,165,096
416,058
Gross proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
614,005
1,000,224
1,749,038
Operating expenses:
Sales and marketing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Product development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
General and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Patent litigation expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Payroll tax on employee stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of acquired intangible assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
253,474
75,288
105,784
Ì
2,442
36,591
349,650
104,636
171,785
Ì
4,015
15,941
567,565
159,315
302,703
29,965
9,590
50,659
Total operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
473,579
646,027
1,119,797
Income from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest and other income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impairment of certain equity investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before cumulative eÅect of accounting change, income
taxes and minority interests ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interests ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
140,426
41,613
(2,851)
(16,245)
162,943
(80,009)
7,514
Income before cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏ
Cumulative eÅect of accounting change, net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
90,448
Ì
354,197
49,209
(1,492)
(3,781)
398,133
(145,946)
(2,296)
249,891
Ì
629,241
37,803
(4,314)
(1,230)
661,500
(206,738)
(7,578)
447,184
(5,413)
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 90,448
$ 249,891
$ 441,771
Net income per basic share:
Income before cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏ
Cumulative eÅect of accounting changeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
Net income per basic share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
Net income per diluted share:
Income before cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏ
Cumulative eÅect of accounting changeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
Net income per diluted share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
0.17
Ì
0.17
0.16
Ì
0.16
$
$
$
$
0.43
Ì
0.43
0.43
Ì
0.43
$
$
$
$
0.70
(0.01)
0.69
0.68
(0.01)
0.67
Weighted average shares:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
537,942
574,992
638,288
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
561,190
585,640
656,657
The accompanying notes are an integral part of these Consolidated Financial Statements.
88
eBay Inc.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in thousands)
Year Ended December 31,
2002
2003
2001
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$90,448
$249,891
$441,771
Other comprehensive income (loss):
Foreign currency translation adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized gains (losses) on investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment gain included in net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized gains (losses) on cash Öow hedges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Estimated tax beneÑt (provision) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(5,835)
1,215
3,799
(3,865)
(458)
48,000
774
558
(2,637)
448
66,326
(5,861)
364
4,249
620
Net change in other comprehensive income (loss) before cumulative
eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative eÅect of accounting changeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(5,144)
(2,626)
47,143
Ì
65,698
Ì
Comprehensive incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$82,678
$297,034
$507,469
The accompanying notes are an integral part of these Consolidated Financial Statements.
89
eBay Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
Year Ended December 31,
2002
2003
2001
Convertible preferred stock:
Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
Ì $
Ì $
Balance, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock:
Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
539
16
555
Ì
555
68
623
Ì
Ì
623
26
649
Additional paid-in-capital:
Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock repurchased ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unearned stock-based compensation, net of cancellations ÏÏÏÏÏ
Stock option income tax beneÑtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
941,015
252,387
(145)
Ì
81,705
1,274,962
1,740,454
(132)
298
92,549
3,108,131
694,315
(79)
4,155
130,638
Balance, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,274,962
3,108,131
3,937,160
Unearned stock-based compensation:
Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unearned stock-based compensation, net of cancellations ÏÏÏÏÏ
Amortization of unearned stock-based compensation ÏÏÏÏÏÏÏÏÏ
Balance, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earnings:
Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Partnership distributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(1,423)
(4,035)
3,091
(2,367)
74,504
(319)
90,448
Balance, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
164,633
Accumulated other comprehensive income (loss):
Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized gain (loss) on investments, net of tax ÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized gain (loss) on cash Öow hedges, net of taxÏÏÏÏÏÏÏÏ
Foreign currency translation adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(875)
3,010
(4,945)
(5,835)
(8,645)
(2,367)
(8,839)
5,953
(5,253)
164,633
(50)
249,891
414,474
(8,645)
724
(1,581)
48,000
38,498
(5,253)
(1,079)
4,324
(2,008)
414,474
Ì
441,771
856,245
38,498
(3,178)
2,549
66,327
104,196
Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,429,138
$3,556,473
$4,896,242
Common stock:
Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuance of common stock for cash and services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuance of common stock for acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
538,500
11,662
4,356
Balance, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
554,518
554,518
20,056
47,980
622,554
622,554
26,739
Ì
649,293
Number of shares
The accompanying notes are an integral part of these Consolidated Financial Statements.
90
eBay Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended December 31,
2002
2003
2001
Cash Öows from operating activities:
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustments to reconcile to net cash provided by operating activities:
$
90,448
$ 249,891
$
441,771
Cumulative eÅect of accounting changeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for doubtful accounts and authorized creditsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for transaction losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Depreciation and amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock-based compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Tax beneÑt on the exercise of employee stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impairment of certain equity investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interests ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gain on sale of assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes in assets and liabilities, net of acquired businesses:
Accounts receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Funds receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other non-current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred tax assets, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Funds payable and amounts due to customersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued expenses and other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred revenue and customer advancesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
25,243
Ì
86,641
3,091
81,705
16,245
(10,170)
Ì
(50,221)
Ì
11,607
(4,787)
(11,408)
(4,087)
Ì
6,790
1,516
9,499
Net cash provided by operating activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
252,112
Ì
25,455
7,832
76,576
5,953
91,237
3,781
1,324
(21,378)
(54,583)
(11,819)
10,716
(1,195)
8,134
14,631
(6,027)
35,481
2,780
41,114
479,903
5,413
46,049
36,401
159,003
5,492
130,638
1,230
7,784
Ì
(153,373)
(38,879)
(13,133)
(4,111)
69,770
17,348
56,172
85,704
8,864
11,976
874,119
Cash Öows from investing activities:
Purchases of property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchases of investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Maturities and sales of investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from sale of assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Acquisitions, net of cash acquiredÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(57,420)
(602,485)
738,989
2,827
(111,730)
(138,670)
(723,307)
727,455
36,174
(59,411)
(365,384)
(2,035,053)
1,297,262
Ì
(216,367)
Net cash used in investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(29,819)
(157,759)
(1,319,542)
Cash Öows from Ñnancing activities:
Proceeds from issuance of common stock, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Principal payments on long-term obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Partnership distributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
123,710
(21,886)
(319)
Net cash provided by Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
101,505
EÅect of exchange rate changes on cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏ
(1,702)
Net increase in cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and cash equivalents at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
322,096
201,873
252,181
(64)
(50)
252,067
11,133
585,344
523,969
700,817
(11,951)
Ì
688,866
28,757
272,200
1,109,313
Cash and cash equivalents at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 523,969
$1,109,313
$ 1,381,513
Supplemental cash Öow disclosures:
Cash paid for interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash paid for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unearned stock-based compensationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
$
Non-cash investing and Ñnancing activities:
2,195
$
Ì $
$
4,035
1,492
2,382
8,839
Common stock issued for acquisition ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 128,540
$1,476,504
$
$
$
$
3,237
3,519
1,079
Ì
The accompanying notes are an integral part of these Consolidated Financial Statements.
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
eBay Inc.
Note 1 Ì The Company and Summary of SigniÑcant Accounting Policies:
The Company
eBay Inc. (""eBay'') was incorporated in California in May 1996, and reincorporated in Delaware in
April 1998. As of December 31, 2003, through our wholly-owned and majority-owned subsidiaries and
aÇliates, we had websites directed toward the United States, Australia, Austria, Belgium, Canada, China,
France, Germany, Hong Kong, Ireland, Italy, the Netherlands, New Zealand, Singapore, South Korea,
Spain, Sweden, Switzerland, Taiwan and the United Kingdom. We 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 in a fully-automated, topically-arranged service that is
available online seven days a week. Through our PayPal service, we enable any business or consumer with
email in 38 countries to send and receive online payments.
On October 3, 2002, we completed our acquisition of PayPal, Inc. (""PayPal'') in a tax-free, stock-for-
stock transaction. PayPal provides an online global payments platform and is headquartered in San Jose,
California. The PayPal Ñnancial statements are included in our Consolidated Financial Statements from
October 4, 2002.
When we refer to ""we,'' ""our,'' ""us'' or ""eBay'' in this document, we mean the current Delaware
corporation (eBay Inc.) and its California predecessor, as well as all of our consolidated subsidiaries.
When we refer to ""eBay.com'' we mean the online marketplace located at www.ebay.com. When we refer
to ""PayPal'', we mean the global payments platform located at www.paypal.com.
Stock split
On July 24, 2003, our Board of Directors approved a two-for-one split of our shares of common stock
eÅected in the form of a stock dividend. As a result of the stock split, our stockholders received one
additional share of our common stock for each share of common stock held of record on August 4, 2003.
The additional shares of our common stock were distributed on August 28, 2003. All share and per share
amounts in these Consolidated Financial Statements and related notes have been retroactively adjusted to
reÖect this and all prior stock splits for all periods presented.
Use of estimates
The preparation of Consolidated Financial Statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that aÅect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
Consolidated Financial Statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could diÅer from those estimates.
Principles of consolidation and basis of presentation
The accompanying Ñnancial statements are consolidated and include the Ñnancial statements of eBay
and our majority-owned subsidiaries. All signiÑcant intercompany balances and transactions have been
eliminated in consolidation.
The consolidated accounts include 100% of the assets and liabilities of these majority-owned
subsidiaries and the ownership interests of minority investors are recorded as minority interests.
Investments in entities where we hold more than a 20% but less than a 50% ownership interest and have
the ability to signiÑcantly inÖuence the operations of the investee are accounted for using the equity
method of accounting and the investment balance is included in long term investments, while our share of
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
the investees' operations is included in other income. As of December 31, 2003, we did not have any
equity method investments. Investments in entities where we hold less than a 20% ownership interest or
where we do not have the ability to signiÑcantly inÖuence the operations of the investee are accounted for
using the cost method of accounting and are included in long-term investments.
Certain prior period balances have been reclassiÑed to conform to the current period presentation.
Fair value of Ñnancial instruments
Cash and cash equivalents are short-term, highly liquid investments with original or remaining
maturities of three months or less when purchased. Our Ñnancial instruments, including cash, cash
equivalents, accounts receivable, and accounts payable are carried at cost, which approximates their fair
value because of the short-term maturity of these instruments.
Short and long-term investments, which include marketable equity securities, municipal, government
and corporate bonds, are classiÑed as available-for-sale and reported at fair value using the speciÑc
identiÑcation method. Realized gains and losses are included in earnings and were immaterial in all periods
presented. Unrealized gains and losses are excluded from earnings and reported as a component of other
comprehensive income (loss), net of related estimated tax provisions or beneÑts. Additionally, we assess
whether an other-than-temporary impairment loss on our investments has occurred due to declines in fair
value or other market conditions. Declines in fair value that are considered other than temporary are
recorded as an impairment of certain equity investments in the consolidated statement of income.
Derivative instruments
We recognize all derivative instruments on the balance sheet at fair value. Changes in the fair value
(i.e., gains or losses) of the derivatives are recorded each period in the consolidated statement of income
or other comprehensive income (loss). For a derivative designated as a cash Öow hedge, the gain or loss
on the derivative is initially reported as a component of other comprehensive income (loss) and
subsequently reclassiÑed into the statement of income when the hedged transaction aÅects earnings. For
derivatives recognized as a fair value hedge, the gain or loss on the derivative in the period of change and
the oÅsetting loss or gain of the hedged item attributed to the hedged risk, are recognized in the
consolidated statement of income. For derivatives not recognized as hedges, the gain or loss on the
derivative in the period of changes is recognized as other income.
Concentrations of credit risk
Our cash, cash equivalents, investments and accounts receivable are potentially subject to
concentration of credit risk. Cash, cash equivalents and investments are placed with Ñnancial 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 typically
settled through customer credit cards and, as a result, the majority of accounts receivable are collected
upon processing of credit card transactions. We maintain an allowance for doubtful accounts receivable
and authorized credits based upon our historical experience. Historically, such losses have been within our
expectations. However, unexpected or signiÑcant future changes in trends could result in a material impact
to future statements of income or cash Öows. Generally, due to the relatively small dollar amount of
individual accounts receivable, we do not require collateral on these balances. The provision for doubtful
accounts is recorded as a charge to operating expense, while the provision for authorized credits is
recognized as a reduction of revenues.
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
We also entered into two interest rate swaps with two separate Ñnancial institutions to reduce our
interest rate exposure on our San Jose corporate headquarters lease payments. If either of these Ñnancial
institutions should fail to deliver under these contracts, we may be subject to variable interest rate
payments.
During the years ended and as of December 31, 2002 and 2003, no customers accounted for more
than 10% of net revenues or net accounts receivable.
Allowances for transaction losses
Our Payments segment is exposed to transaction losses due to fraud, as well as non-performance of
customers and others. 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, Automated Clearing House, or ACH, returns, and debit card
overdrafts. These allowances represent an accumulation of the estimated amounts, using an actuarial
technique, necessary to provide for transaction losses incurred as of the reporting date, including those to
which we have not yet been notiÑed. The allowances are monitored monthly and are updated based on
actual claims data reported by our claims processors. Customers typically have up to 180 days to Ñle
transaction disputes. Consequently, the time between estimating the loss provisions and realization of the
actual amount is short. The allowances are based on known facts and circumstances, internal factors
including our experience with similar cases, historical trends involving loss payment patterns and the mix
of transaction and loss types. Additions to the allowance, in the form of provisions, are reÖected as a
general and administrative expense in our consolidated statement of income, while write-oÅs to the
allowance are made when a loss is determined to have occurred. Recoveries, when collected, are recorded
as an increase to the allowance for transaction losses. At December 31, 2003 and 2002, the allowance for
transaction losses totaled $12.0 million and $10.1 million, respectively, and was included in accrued
expenses and other current liabilities in our consolidated balance sheet.
Funds receivable and funds payable
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 to their bank account or through a debit card transaction, there
is a clearing period before the cash is received or sent by PayPal, usually two or three days. Hence, these
funds are treated as a receivable or payable until the cash is settled.
Foreign currency
Substantially all of our foreign subsidiaries use the local currency of their respective countries as their
functional currency. Assets and liabilities are translated at exchange rates prevailing at the balance sheet
dates. Revenues, costs and expenses are translated into United States dollars at average exchange rates for
the period. Gains and losses resulting from translation are accumulated as a component of other
comprehensive income (loss).
Realized gains and losses from foreign currency transactions are recognized as other income and are
insigniÑcant for all periods presented.
Property and equipment
Property and equipment are stated at historical cost less accumulated depreciation. Depreciation and
amortization are computed using the straight-line method over the estimated useful lives of the assets,
generally, one to three years for computer equipment and software, up to thirty years for buildings and
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
building improvements, ten years for aviation equipment, the shorter of Ñve years or the term of the lease
for leasehold improvements, three years for furniture and Ñxtures and three years for vehicles.
Intangible assets
Intangible assets resulting 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. IdentiÑable
intangible assets are comprised of purchased customer lists, trademarks and tradenames, developed
technologies, and other intangible assets. IdentiÑable intangible assets are being amortized using the
straight-line method over estimated useful lives ranging from one to eight years.
Goodwill represents the excess of the purchase price over the fair value of the net tangible and
identiÑable intangible assets acquired in a business combination. We adopted Statement of Financial
Accounting Standards No. 142, or SFAS No. 142, ""Goodwill and Other Intangible Assets,'' on January 1,
2002 on a prospective basis. In accordance with SFAS No. 142, goodwill is no longer subject to
amortization. Rather, goodwill is subject to at least an annual assessment for impairment, applying a fair-
value based test. The consolidated statement of income for the year ended December 31, 2001 includes
goodwill amortization of $32.6 million.
Impairment of long-lived assets and Goodwill
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable in accordance with SFAS No. 144,
""Accounting for the Impairment or Disposal of Long-Lived Assets.'' An asset is considered impaired if its
carrying amount exceeds the future net cash Öow the asset is expected to generate. If an asset is
considered to be impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds its fair market value. We assess the recoverability of our long-lived
and intangible assets by determining whether the unamortized balances can be recovered through
undiscounted future net cash Öows of the related assets. The amount of impairment, if any, is measured
based on projected discounted future net cash Öows.
We evaluate goodwill, at a minimum, on an annual basis and whenever events and changes in
circumstances suggest that the carrying amount may not be recoverable. Impairment of goodwill is tested
at the reporting unit level by comparing the reporting unit's carrying amount, including goodwill, to the
fair value of the reporting unit. The fair values of the reporting units are estimated using a combination of
the income, or discounted cash Öows, approach and the market approach, which utilizes comparable
companies' data. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered
impaired and a second step is performed to measure the amount of impairment loss, if any. We conducted
our annual impairment test as of August 31, 2003 and determined there to be no impairment. There were
no events or circumstances from that date through December 31, 2003 that would impact this assessment.
Due to customers
Customers utilize our payment services to transfer money electronically over the Internet. Any stored
value remaining from transactions in a customer's account represents a liability to the customer.
Customers can elect to sweep their account balances into the PayPal Money Market fund to earn a rate of
return; otherwise, no interest is paid on customer account balances.
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
Custodial accounts
We deposit all U.S.-based customer funds not transferred to PayPal's Money Market Fund into
Federal Deposit Insurance Corporation, or FDIC, insured bank accounts. FDIC insurance is available to
U.S. based PayPal customers if we (1) place pooled customer funds in bank accounts denominated
""PayPal as Agent for the BeneÑt of its Customers'' or similar caption, (2) maintain records suÇcient to
identify the claim of each customer in the FDIC-insured account, (3) comply with applicable FDIC
recordkeeping requirements, and (4) truly operate as an agent of our customers. We receive a custodial
credit from our service provider in the form of a reduction in transaction processing fees based upon
balances held with each institution. This credit is recognized as a reduction in processing costs.
Comprehensive income
Comprehensive income includes all changes in equity (net assets) during a period from non-owner
sources. The change in accumulated other comprehensive income for all periods presented resulted from
foreign currency translation gains and losses, unrealized and realized gains and losses on investments, and
unrealized gains and losses on cash Öow hedges.
Revenue recognition
Our net revenues result from fees associated with our transaction, advertising and other non-
transaction services in our U.S., International and Payments segments. Transaction revenue is derived
primarily from listing, feature and Ñnal value fees paid by sellers and fees from payment processing
services. Revenue from advertising is derived principally from the sale of online banner and sponsorship
advertisements for cash and through barter arrangements. Other non-transaction net revenue is primarily
composed of our end-to-end services net revenue that is derived principally from contractual arrangements
with third parties that provide transaction services to eBay users. Other non-transaction net revenue was
also derived from our oÉine services from a variety of sources including seller commissions, buyer
premiums, bidder registration fees and auction-related services including appraisal and authentication,
primarily related to our ButterÑelds and Kruse subsidiaries.
Listing and feature fee revenues are recognized ratably over the estimated period of the auction while
revenues related to Ñnal value fees are recognized at the time that the transaction is successfully
concluded. A transaction is considered successfully concluded when at least one buyer has bid above the
seller's speciÑed minimum price or reserve price, whichever is higher, at the end of the transaction term.
We earn transaction fees, allocated to our Payments segment, from processing transactions for certain
customers. Revenue resulting from a payment processing transaction is recognized once the transaction is
complete. Provisions for doubtful accounts, authorized credits and transaction losses are made at the time
of revenue recognition based upon our historical experience. The provision for doubtful accounts is
recorded as a charge to operating expense, while the provisions for authorized credits and transaction losses
are recognized as reductions of net revenues.
Our advertising revenue is derived principally from the sale of online banner and sponsorship
advertisements for cash and through barter arrangements. To date, the duration of our banner and
sponsorship advertising contracts has ranged from one week to Ñve years, but is generally one week to one
year. Advertising revenues on both banner and sponsorship contracts are recognized as ""impressions'' (i.e.,
the number of times that an advertisement appears in pages viewed by users of our websites) are delivered
or ratably over the term of the agreement where such agreements provide for minimum monthly or
quarterly advertising commitments or where such commitments are Ñxed throughout the term. Barter
transactions are valued on amounts realized in similar cash transactions occurring within six months prior
to the date of the barter transaction. To the extent that signiÑcant delivery obligations remain at the end of
a period or collection of the resulting account receivable is not considered probable, revenues are deferred
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
until the obligation is satisÑed or the uncertainty is resolved. These amounts are included in deferred
revenue in our balance sheet. Revenue from barter arrangements totaled $10.4 million, $10.1 million and
$10.1 million for the years ended December 31, 2001, 2002 and 2003, respectively.
Our end-to-end services revenues are derived principally from contractual arrangements with third
parties that provide transaction services to eBay users. To date, the duration of our end-to-end services
contracts has ranged from one to three years. End-to-end services revenues are recognized as the
contracted services are delivered to end users. To the extent that signiÑcant obligations remain at the end
of a period or collection of the resulting receivable is not considered probable, revenues are deferred until
the obligation is satisÑed or the uncertainty is resolved.
OÉine revenues represents seller commissions, buyer premiums, bidder registration fees, and auction-
related services including appraisal and authentication derived from the traditional auction services
provided by ButterÑelds and Kruse International. ButterÑelds auction revenues were derived primarily from
auction commissions and fees from the sale of property through the auction process. Revenues from seller
commissions and buyer premiums were recognized at the date the related auction was concluded. Service
revenues were derived from Ñnancial, appraisal and other related services and were recognized as such
services were rendered. During 2002, we sold our ButterÑelds and Kruse subsidiaries and accordingly, no
oÉine revenues were recognized in 2003.
Website development costs
We expense costs related to the planning and post implementation phases of our website development
eÅorts. Direct costs incurred in the development phase are capitalized and amortized over the product's
estimated useful life of one to three years as charges to cost of net revenues. Costs associated with minor
enhancements and maintenance for the website are included in cost of net revenues in the accompanying
consolidated statement of income.
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
advertising expenses are recognized based on the terms of the individual agreements, which is generally
over the greater of the ratio of the number of impressions delivered over the total number of contracted
impressions, or on a straight-line basis over the term of the contract. Advertising expenses totaled
$127.1 million, $181.8 million and $321.4 million during the years ended December 31, 2001, 2002, and
2003, respectively.
Stock-based compensation
Consistent with predominant industry practice, we account for stock-based employee compensation
issued under compensatory plans using the intrinsic value method, which calculates compensation expense
based on the diÅerence, 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 value method to also determine the fair value of option grants using
an option pricing model, such as the Black-Scholes model, and to disclose the impact of fair value
accounting in a note to the Ñnancial statements. In December 2002, the Financial Accounting Standards
Board, or FASB, issued Statement of Financial Accounting Standards No. 148, ""Accounting for Stock-
Based Compensation Transition and Disclosure, an Amendment of FASB Statement No. 123.'' We did
not elect to voluntarily change to the fair value based method of accounting for stock based employee
compensation and record such amounts as charges to operating expense. The impact of recognizing the fair
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
value of option grants and stock grants under our employee stock purchase plan as an expense would have
substantially reduced our net income, as follows (in thousands, except per share amounts):
Year Ended December 31,
2002
2001
2003
Net income, as reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
90,448
$ 249,891
$ 441,771
Add: Amortization of stock-based compensation expense
determined under the intrinsic value method ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3,091
5,953
5,492
Deduct: Stock-based compensation expense determined under the
fair value method, net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(211,526)
(192,902)
(201,775)
Pro forma net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(117,987)
$
62,942
$ 245,488
Earnings (loss) per share:
Basic Ì as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
pro forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted Ì as reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
$
$
0.17
(0.22)
0.16
(0.22)
$
$
$
$
0.43
0.11
0.43
0.11
$
$
$
$
0.69
0.38
0.67
0.37
We calculated the fair value of each option award on the date of grant using the Black-Scholes option
pricing model. The following assumptions were used for each respective period:
Year Ended
December 31,
2002
2001
2003
Risk-free interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4.4%
3.0%
1.9%
Expected lives (in years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3.0
3.0
3.0
Dividend yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected volatility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
0%
81%
0%
68%
0%
64%
The weighted average fair value of options granted in the years ended December 31, 2001, 2002 and
2003, were $11.84, $11.21 and $16.31, respectively.
For options granted prior to our initial public oÅering, the fair value of option grants was determined
using the Black-Scholes option pricing model with a zero volatility assumption. For options granted
subsequent to our initial public oÅering, the fair value of option grants was determined using the Black-
Scholes option pricing model with volatility assumptions based on actual or expected Öuctuations in the
price of our common stock.
We account for stock-based arrangements issued to non-employees using the fair value based method,
which calculates compensation expense based on the fair value of the stock option granted using the
Black-Scholes 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 and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in our Ñnancial statements or tax returns. The
measurement of current and deferred tax assets and liabilities is based on provisions of enacted tax laws;
the eÅects of future changes in tax laws or rates are not anticipated. If necessary, the measurement of
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
deferred tax assets is reduced by the amount of any tax beneÑts that are not expected to be realized based
on available evidence.
Consolidation of Variable Interest Entities
In accordance with the provisions of FIN 46, ""Consolidation of Variable Interest Entities,'' we have
included our San Jose corporate headquarters lease arrangement in our Consolidated Financial Statements
eÅective July 1, 2003. Under this new accounting standard, our balance sheet at December 31, 2003
reÖects additions for land and buildings totaling $126.4 million, lease obligations of $122.5 million and
non-controlling minority interests of $3.9 million. Our consolidated income statement for year ended
December 31, 2003, reÖects the reclassiÑcation of lease payments on our San Jose corporate headquarters
from operating expense to interest expense, beginning with quarters following our adoption of FIN 46 on
July 1, 2003, a $5.4 million after-tax charge for cumulative depreciation for periods from lease inception
through June 30, 2003, and incremental depreciation expense of approximately $400,000, net of tax, per
quarter for the third and fourth quarters of 2003. We have adopted the provisions of FIN 46 prospectively
from July 1, 2003, and as a result, prior periods have not been restated. The cumulative eÅect of the
change in accounting principle arising from the adoption of FIN 46 has been reÖected in net income in
2003.
Note 2 Ì Net Income Per Share:
Basic net income per share is computed by dividing the net income for the period by the weighted
average number of common shares outstanding during the period. Diluted net income per share is
computed by dividing the net income for the period by the weighted average number of common and
common equivalent shares outstanding during the period. Potentially dilutive securities, composed of
unvested, restricted common stock and incremental common shares issuable upon the exercise of stock
options and warrants, are included in diluted net income per share to the extent such shares are dilutive.
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
The following table sets forth the computation of basic and diluted net income per share for the
periods indicated (in thousands, except per share amounts):
Year Ended December 31,
2001
2002
2003
Numerator:
Income before cumulative eÅect of accounting change ÏÏÏÏÏÏÏ
$ 90,448
$249,891
$447,184
Cumulative eÅect of accounting, net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
(5,413)
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 90,448
$249,891
$441,771
Denominator:
Weighted average common sharesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted average restricted common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
545,134
575,360
638,337
(7,192)
(368)
(49)
Denominator for basic calculation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
537,942
574,992
638,288
Weighted average eÅect of dilutive securities:
Weighted average restricted common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Employee stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
7,192
16,056
368
49
10,280
18,320
Denominator for diluted calculation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
561,190
585,640
656,657
Net income per basic share:
Income before cumulative eÅect of accounting change ÏÏÏÏÏÏÏ
$
0.17
Cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Net income per basic share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
0.17
Net income per diluted share:
Income before cumulative eÅect of accounting change ÏÏÏÏÏÏÏ
$
0.16
Cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Net income per diluted share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
0.16
$
$
$
$
0.43
Ì
0.43
0.43
Ì
0.43
$
$
$
$
0.70
(0.01)
0.69
0.68
(0.01)
0.67
Potentially dilutive shares are excluded from the calculation of diluted net income per share because
they are anti-dilutive. For the years ended December 31, 2001, 2002 and 2003, this number, as calculated
based on the weighted average closing price of our common stock for the period, amounted to
approximately 24.5 million, 26.6 million and 3.5 million shares, respectively.
100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
Note 3 Ì Business Combinations, Goodwill and Intangible Assets:
During 2002 and 2003, we completed the purchase acquisitions of Billpoint, EachNet, NeoCom,
PayPal, eBay Australia and New Zealand, CARad, FairMarket and Internet Auction. The following table
summarizes our purchase acquisitions with aggregate purchase prices in excess of $30 million:
Company Name
Acquisition Date
Billpoint ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
January 2002
EachNetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ March 2002
PayPal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ October 2002
eBay Australia and
New ZealandÏÏÏÏÏÏÏÏÏÏÏÏÏ October 2002
EachNetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Internet Auction ÏÏÏÏÏÏÏÏÏÏÏÏ December 2003
July 2003
Post
Acquisition
Ownership
Net
Tangible
Assets
IdentiÑable Deferred
Intangible
Assets
Tax
Liabilities
Other
Intangibles
Goodwill
Aggregate
Purchase
Price
100%
34%
100%
100%
100%
62%
$
6,643
9,379
104,965
$
1,750
2,280
277,000
$
(700) $ Ì $
(912)
(34,958)
Ì
9,943
35,848
19,253
1,135,554
$
43,541
30,000
1,492,504
444
12,345
N/A
4,650
11,212
14,981
(1,860)
(3,599)
(4,449)
Ì
Ì
12,144
62,266
124,932
71,227
65,500
144,890
93,903
Tangible net assets were valued at their respective carrying amounts as we believe that these amounts
approximated their current fair values at the respective acquisition dates. The valuation of identiÑable
intangible assets acquired was based on management's estimates using valuation reports prepared by an
independent third-party valuation consultant. Such assets consist of customer lists, trademarks and trade
names, developed technologies and other acquired intangible assets including contractual agreements.
IdentiÑable intangible assets are amortized using the straight-line method over the estimated useful lives of
one to eight years. We believe the straight-line method of amortization best represents the distribution of
the economic value of the identiÑable intangible assets. Goodwill represents the excess of the purchase
price over the fair value of the net tangible and identiÑable intangible assets acquired in each business
combination. In accordance with SFAS No. 142, goodwill is no longer subject to amortization. Rather,
goodwill is subject to at least an annual assessment for impairment, applying a fair-value based test. See
""Note 1 Ì The Company and Summary of SigniÑcant Accounting Policies.''
Billpoint
On May 25, 1999, eBay acquired a 100% interest in Billpoint, Inc. a leading provider of billing and
payment fulÑllment services. On February 24, 2000, Billpoint reincorporated in Delaware and we sold an
approximate 35% ownership interest to Wells Fargo Bank. In January 2002, we acquired the 35% minority
interest in Billpoint held by Wells Fargo Bank in a purchase acquisition for approximately $43.5 million in
cash. In October 2002, we acquired PayPal, Inc. and announced that we would phase out Billpoint's
operations. The phase out was completed in the Ñrst half of 2003.
Internet Auction Co., Ltd.
On February 15, 2001, we acquired an approximately 51% majority interest in Internet Auction Co.,
Ltd., (""IAC'' or ""Internet Auction''), a South Korean company in a purchase acquisition for
$120.8 million in cash and incurred $1.1 million of direct acquisition costs. Internet Auction introduced
online trading in South Korea when it launched in April 1998. Shares of Internet Auction are listed on the
KOSDAQ. The transaction was accounted for using the purchase method of accounting and accordingly,
the results of operations of Internet Auction have been included in our Consolidated Financial Statements
since February 15, 2001.
On December 17, 2003, we settled our tender oÅer to purchase additional common shares of IAC.
We purchased approximately 1.6 million shares, increasing our ownership to approximately 62%. Based on
the December 17, 2003 exchange rate and estimated acquisition related expenses of $2.2 million, the
purchase price was $93.9 million. Prior to the fourth quarter of 2003, we consolidated our original
investment in IAC's common shares and recorded the minority investor's percentage share of income or
101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
losses in the non-operating section of our consolidated income statement. We have accounted for the
acquisition of the additional common shares using the purchase method of accounting and accordingly, the
purchase price has been allocated to the percentage of the acquired intangible assets and a reduction in the
minority interest liability on the basis of their respective fair values on the acquisition date.
EachNet, Inc. Acquisition
On March 17, 2002, we acquired an approximate 38% interest in the outstanding common stock of
EachNet, Inc. (""EachNet''), which was an approximate 33% interest on a fully diluted basis, in a
purchase acquisition for $30.0 million in cash. EachNet provides an online marketplace for the trading of
goods and services for both individual and business customers in the People's Republic of China. We
accounted for our investment using the equity method of accounting and the total investment, including
identiÑable intangible assets, deferred tax liabilities and goodwill, was classiÑed on our balance sheet as a
long-term investment.
In July 2003, we completed the acquisition of all of the remaining outstanding capital stock of
EachNet. The total purchase price was $144.9 million and comprised of approximately $143.3 million in
cash and $1.6 million in acquisition related expenses. Under the terms of the transaction, $104.9 million of
the cash amount was paid at closing and the remaining $38.4 million was paid on March 1, 2004. We have
accounted for the acquisition of the remaining outstanding capital stock as a purchase and, accordingly, the
purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed on
the basis of their respective fair values on the acquisition date. The valuation of the identiÑable intangible
assets acquired was based on management's estimates using a valuation report prepared by an independent
third-party.
The Ñnal allocation of the purchase price will depend upon our Ñnal determination of the fair value of
the net assets acquired, the liabilities assumed, and the total acquisition related expenses. The results of
operations for EachNet during periods prior to our acquisition of the remaining ownership interest were not
material to our consolidated results of operations and, accordingly, pro forma results of operations have not
been presented.
PayPal, Inc. Merger
Overview
On October 3, 2002, we acquired a 100% interest in PayPal, Inc. in a tax-free, stock-for-stock
transaction. PayPal provides a global payments platform and is headquartered in Mountain View,
California. We acquired PayPal to provide a signiÑcantly improved customer experience to eBay's users by
making their trading experience easier, safer, and faster. The PayPal Ñnancial results are included herein
for periods subsequent to our acquisition date.
The purchase price reÖected the issuance of approximately 47,650,000 shares of our common stock to
PayPal stockholders using a Ñxed exchange ratio of 0.39 shares of our common stock for each PayPal
share of common stock outstanding on October 3, 2002, assuming retroactive eÅect of a split of PayPal's
stock corresponding to our two-for-one stock split. In addition, we assumed PayPal's outstanding stock
options. The fair value of the shares of our common stock issued and PayPal options assumed is based on
a per share value of $28.96, which is equal to our weighted average closing share price for the Ñve trading
102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
days surrounding the July 8, 2002 acquisition announcement date. Total purchase price comprised of the
following (in thousands):
Fair value of eBay common stock issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,379,944
Fair value of PayPal stock options assumed by eBay ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Estimated acquisition related costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
96,560
16,000
Aggregate purchase price ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,492,504
The acquisition related costs consist primarily of investment banking fees, legal and accounting fees,
printing costs, and other direct costs of the acquisition.
The intrinsic value of PayPal's unvested common stock options and restricted stock subject to
repurchase assumed in the merger totaled $9.9 million as of October 3, 2002, and was recorded as
unearned stock-based compensation. For purposes of purchase price allocation, PayPal's outstanding
options that vested solely as a result of the proposed merger were deemed to be vested as of the
October 3, 2002 acquisition date. The unearned stock-based compensation relating to the unvested options
and the restricted stock subject to repurchase will be amortized on an accelerated basis over the remaining
vesting period of less than one year to three years, consistent with the graded vesting approach described in
FASB Interpretation No. 28.
Acquisition-Related Liabilities Capitalized as a Cost of Acquisition
During the year ended December 31, 2003, we Ñnalized our formal plan to exit certain activities and
integrate certain facilities of PayPal. This plan includes provisions to terminate leases for redundant
facilities, dispose of redundant Ñxed assets and leasehold improvements, resolve certain pre-acquisition
legal contingencies, provide various employee-related beneÑts and exit certain contractual obligations. As
of December 31, 2002, the aggregate purchase price for PayPal included $38.5 million of accruals for
acquisition related liabilities and assumed lease liabilities totaling $4.7 million. As of December 31, 2003,
the total remaining accrual was $36.9 million.
The components of the acquisition related liabilities are as follows (in thousands):
Balance at
December 31,
2002
Cash
Payments
Non-Cash
Amount Used Adjustments
Balance at
December 31,
2003
Excess facilities and Ñxed assets ÏÏÏÏÏÏÏÏÏ
$36,705
$ (2,263)
$(1,098)
$ (392)
$32,952
Other liabilities and contingencies ÏÏÏÏÏÏÏÏ
6,447
(17,119)
Ì
14,621
3,949
Total liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$43,152
$(19,382)
$(1,098)
$14,229
$36,901
Excess facilities and Ñxed assets liabilities consist primarily of accruals for PayPal's remaining lease
obligations, net of estimated sublease income, and the write-oÅ of certain leasehold improvements and
other property and equipment at redundant facilities which we exited in February 2004. A substantial
portion of the excess facilities and Ñxed assets liabilities recorded as of December 31, 2003, are expected
to settle in cash during future periods.
Other liabilities and contingencies consist primarily of accruals for legal contingencies, employee
severance, relocation and other beneÑts, and contract termination costs. Accruals for legal contingencies
are based on our assessment of probable losses arising from pre-acquisition litigation, claims and
assessments. Accruals for employee severance, relocation and other beneÑts as well as for contract
terminations are based on estimated costs associated with the acquisition-related terminations of certain
PayPal employees and contracts. During the year ended December 31, 2003, cash payments were made to
103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
resolve various legal, employee severance and contract terminations. A substantial portion of the other
liabilities recorded as of December 31, 2003, are expected to settle in cash during future periods.
Adjustments to our original estimates are based primarily upon the Ñnal resolution of various pre-
acquisition legal contingencies and acquisition-related employee severance arrangements.
Pro Forma Financial Information
The following unaudited pro forma Ñnancial information presents the combined results of eBay and
PayPal as if the acquisition had occurred as of the beginning of 2001 and 2002, respectively after applying
certain adjustments, including amortization of acquired intangible assets and other acquisition related
transaction expenses (in thousands except per share amounts):
Year Ended
December 31,
2001
2002
Net revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 852,536
$1,377,771
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
15,328
$ 240,264
Net income per share:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
0.02
0.02
$
$
0.39
0.38
The pro forma Ñnancial information does not necessarily reÖect the results of operations that would
have occurred had eBay and PayPal constituted a consolidated entity during such periods.
Acquisition of Remaining Equity Interest in eBay Australia & New Zealand Pty Ltd.
In October 2002, we acquired the remaining 50% interest in our eBay Australia & New Zealand joint
venture held by ecorp Limited in a purchase acquisition for approximately $65.5 million in cash. This
acquisition increased our ownership of this entity to 100%. The results of operations of eBay Australia and
New Zealand have been included in our Consolidated Financial Statements since October 2002.
Sale of ButterÑelds, Kruse and Certain Real Estate Properties
During 2002, we sold our ButterÑelds and Kruse subsidiaries as well as several real estate properties
we acquired as a result of our 1999 acquisition of ButterÑelds. During the year ended December 31, 2002,
we recognized an aggregate gain of $17.1 million, which is reported in other income. No properties were
sold during the year ended December 31, 2003.
104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
Goodwill and Intangible Assets
Goodwill information for each reportable segment is as follows (in thousands):
December 31,
2002
Goodwill
Acquired
Goodwill
Disposals
Adjustments
December 31,
2003
Segments:
U.S. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 118,649
$
5,587
$ Ì
$(3,197)
$ 121,039
InternationalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
294,761
196,159
Payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,061,867
Ì
Ì
Ì
33,994
11,491
524,914
1,073,358
$1,475,277
$201,746
$ Ì
$42,288
$1,719,311
The increase in goodwill acquired during the year ended December 31, 2003, resulted primarily from
our acquisition of the remaining capital stock of EachNet and an additional ownership interest in Internet
Auction as noted above as well as our other insigniÑcant acquisitions. Adjustments to goodwill during the
year ended December 31, 2003, resulted primarily from foreign currency translation adjustments in
addition to purchase price adjustments on prior period acquisitions. Foreign currency translation
adjustments, reÖecting movements in the underlying entities' foreign currency exchange rate, totaled
approximately $44.9 million for the year ended December 31, 2003.
The components of acquired identiÑable intangible assets are as follows (in thousands):
December 31, 2002
December 31, 2003
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Intangible assets:
Customer lists ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $208,811
65,140
Trademarks and trade names ÏÏÏ
27,825
Developed technologies ÏÏÏÏÏÏÏÏ
733
All other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(10,723)
(3,235)
(8,353)
(733)
$198,088
61,905
19,472
Ì
$223,158
75,269
30,396
19,605
$(42,093)
(13,992)
(16,147)
(2,139)
$181,065
61,277
14,249
17,466
$302,509
$(23,044)
$279,465
$348,428
$(74,371)
$274,057
Acquired identiÑable intangible assets are subject to amortization and are comprised of customer lists,
trademarks and trade names, developed technologies, and other acquired intangible assets including patents
and contractual agreements. IdentiÑable intangible assets are amortized using the straight-line method over
weighted average periods of seven years for customer lists, seven years for trademarks and tradenames,
three years for developed technologies and three years and Ñve years for all other intangible assets. No
signiÑcant residual value is estimated for the intangible assets. The increase in intangible assets during the
year ended December 31, 2002, resulted primarily from the acquisition of PayPal totaling approximately
$277.0 million. The increase in intangible assets during the year ended December 31, 2003, resulted
primarily from the acquisition of the remaining ownership interest in EachNet, totaling approximately
$12.6 million, including $1.4 million recorded as an investment upon the original acquisition, the
acquisition of an additional ownership interest in Internet Auction totaling approximately $15.0 million, the
acquisition of a license and contractual covenants related to certain patented technologies totaling
approximately $14.4 million and foreign currency translation adjustments totaling approximately $1.8 mil-
lion. Aggregate amortization expense for intangible assets totaled $4.0 million, $16.3 million and
$53.2 million for the years ended December 31, 2001, 2002 and 2003, respectively.
105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
As of December 31, 2003, expected future intangible asset amortization is as follows (in thousands):
Fiscal Years:
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 55,021
51,630
43,502
40,674
39,223
44,007
$274,057
Goodwill Amortization
In accordance with SFAS No. 142, goodwill is no longer subject to amortization. The following table
summarizes the pro forma impact of excluding goodwill amortization from our operating results (in
thousands, except per share amounts):
Year Ended
December 31, 2001
Net income as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Add: Goodwill amortization expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income, pro forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basic net income per share:
As reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pro forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted net income per share:
As reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pro forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 90,448
32,586
$123,034
$
$
$
$
0.17
0.23
0.16
0.22
Note 4 Ì Segments:
Reporting segments are based upon our internal organization structure, the manner in which our
operations are managed, the criteria used by our chief operating decision-maker to evaluate segment
performance, the availability of separate Ñnancial information, and overall materiality considerations.
The U.S. segment includes U.S. online marketplace trading platforms other than PayPal and Billpoint
subsidiaries. The International segment includes our international online marketplace trading platforms
other than PayPal and Billpoint subsidiaries. The Payments segment includes our global payments platform
consisting of our PayPal and Billpoint subsidiaries. The Payments amounts reÖect Billpoint's historical
operations and PayPal's operations for the post-acquisition period from October 4, 2002 through
December 31, 2003. We discontinued Billpoint's operations in the Ñrst half of 2003.
Direct contribution consists of revenues less direct costs. Direct costs include speciÑc costs of net
revenues, sales and marketing expenses, and general and administrative 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 discretionary control, such as site operations
106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
costs, product development expenses, and general and administrative costs, are monitored by management
through shared cost centers and are not evaluated in the measurement of segment performance.
The following tables summarize the Ñnancial performance and total assets of our reporting segments
(in thousands):
Year Ended December 31, 2001
U.S.
International
Payments
Consolidated
Net revenues from external customersÏÏÏÏÏ
$617,011
$114,162
Direct costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
246,664
Direct contribution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
370,347
63,964
50,198
$17,648
18,640
$748,821
329,268
(992)
419,553
Operating expenses and indirect costs of net
revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest and other income, net ÏÏÏÏÏÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impairment of certain equity investments ÏÏ
Income before income taxes and minority
interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
279,127
140,426
41,613
(2,851)
(16,245)
$162,943
Year Ended December 31, 2002
U.S.
International
Payments
Consolidated
Net revenues from external customersÏÏÏÏÏ
$816,596
Direct costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
300,659
$302,136
123,784
Direct contribution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
515,937
178,352
$95,368
68,107
27,261
$1,214,100
492,550
721,550
Operating expenses and indirect costs of net
revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest and other income, net ÏÏÏÏÏÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impairment of certain equity investments ÏÏ
Income before income taxes and minority
interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
367,353
354,197
49,209
(1,492)
(3,781)
$ 398,133
107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
Year Ended December 31, 2003
U.S.
International
Payments
Consolidated
Net revenues from external customers ÏÏÏ
$1,062,834
Direct costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
389,376
$664,640
257,888
Direct contribution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
673,458
406,752
$437,622
$2,165,096
243,179
194,443
890,443
1,274,653
Operating expenses and indirect costs of
net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest and other income, net ÏÏÏÏÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impairment of certain equity investments
Income before income taxes and minority
interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
645,412
629,241
37,803
(4,314)
(1,230)
$ 661,500
December 31,
2002
2003
Total assets:
U.S. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
International ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,849,859
583,252
1,607,115
$2,768,995
1,280,440
1,770,699
$4,040,226
$5,820,134
The following tables summarizes the allocation of net revenues and the long-lived assets based on
geography (in thousands):
Year Ended December 31,
2001
2002
2003
United States net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
International net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$634,659
114,162
$ 897,701
316,399
$1,406,512
758,584
Net revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$748,821
$1,214,100
$2,165,096
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.
December 31,
2002
2003
United States long-lived assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
International long-lived assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,648,753
304,765
$1,997,140
598,013
Total long-lived assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,953,518
$2,595,153
Long-lived assets are allocated between U.S. and International geographies based upon the country in
which the long-lived asset is located or owned.
108
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
Note 5 Ì Investments:
At December 31, 2002 and 2003, short and long-term investments were classiÑed as available-for-sale
securities, except for restricted cash and investments, and are reported at fair value as follows (in
thousands):
Gross
December 31, 2002
Gross
Gross
Amortized Unrealized Unrealized
Gains
Losses
Cost
Estimated
Fair
Value
Short-term investments:
Municipal bonds and notes ÏÏÏÏÏÏÏÏÏÏÏ
$ 46,158
$ 157
$ Ì
$ 46,315
Government and agency securitiesÏÏÏÏÏ
Ì
Time deposits and other ÏÏÏÏÏÏÏÏÏÏÏÏÏ
43,299
Ì
152
Ì
(76)
Ì
43,375
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 89,457
$ 309
$ (76)
$ 89,690
Long-term investments:
Restricted cash and investments ÏÏÏÏÏÏ
$133,541
Municipal bonds and notes ÏÏÏÏÏÏÏÏÏÏÏ
388,535
Government and agency securitiesÏÏÏÏÏ
Equity instrumentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
35,232
44,150
$1,103
2,320
281
Ì
$ Ì
Ì
(291)
Ì
$134,644
390,855
35,222
44,150
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$601,458
$3,704
$(291)
$604,871
December 31, 2003
Gross
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Estimated
Fair
Value
Short-term investments:
Municipal bonds and notes ÏÏÏÏÏÏÏÏÏÏ
$
8,065
$ Ì
$ Ì
$
8,065
Corporate securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
223,400
Government and agency securities ÏÏÏÏ
Time deposits and otherÏÏÏÏÏÏÏÏÏÏÏÏÏ
60,419
48,474
2
259
Ì
(43)
Ì
Ì
223,359
60,678
48,474
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 340,358
$261
$
(43)
$ 340,576
Long-term investments:
Restricted cash and investments ÏÏÏÏÏÏ
$ 127,544
$328
$ (440)
$ 127,432
Corporate securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Government and agency securities ÏÏÏÏ
Equity instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
458,997
462,879
14,252
365
236
Ì
(491)
(2,067)
Ì
458,871
461,048
14,252
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,063,672
$929
$(2,998)
$1,061,603
109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
The following table summarizes the fair value and gross unrealized losses of our long-term
investments, aggregated by type of investment instrument and length of time that individual securities have
been in a continuous unrealized loss position, at December 31, 2003 (in thousands):
Restricted cash and investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Government and agency securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 63,331
431,689
340,863
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$835,883
Fair Value
Gross
Unrealized
Losses
$ (440)
(534)
(2,067)
$(3,041)
At December 31, 2003, our gross unrealized losses on investments were all in loss positions for less
than 12 months.
Our investment portfolio 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 show a mark-to-market unrealized loss. All unrealized losses are due to changes in
interest rates and bond yields. We expect to realize the full value of all these investments upon maturity or
sale. The losses on these securities have an average duration of approximately 3.8 months.
The estimated fair value of short and long-term investments classiÑed by date of contractual maturity
at December 31, 2003 are as follows (in thousands):
December 31,
2003
Due within one year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 340,576
Due after one year through two years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after two years through three years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after three years through four years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restricted cash and investments expiring in less than Ñve years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
286,581
633,338
Ì
127,432
14,252
$1,402,179
During 2001, 2002 and 2003, we recorded impairment charges totaling $16.2 million, $3.8 million and
$1.2 million, respectively, as a result of the deterioration of the Ñnancial condition of certain of our private
and public equity investees that were considered to be other than temporary.
Note 6 Ì Derivative Instruments:
We entered into two interest rate swaps on June 19 and July 20, 2000, with notional amounts totaling
$95 million to reduce the impact of changes in interest rates on a portion of the Öoating rate operating
lease for our primary oÇce facilities. The interest rate swaps allow us to receive Öoating rate receipts based
on the London Interbank OÅered Rate, or LIBOR, in exchange for making Ñxed rate payments of
approximately 7% of the notional amount, which eÅectively changes our interest rate exposure on our
operating lease from a Öoating rate to a Ñxed rate on $95 million of the total $126.4 million notional
amount of our corporate headquarters facility lease commitment. The balance of $31.4 million remains at
a Öoating rate of interest based on the spread over 3-month LIBOR. The fair value of the interest rate
110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
swaps as of December 31, 2003 was an unrealized loss of $4.0 million, net of tax beneÑt, and is recorded
in accumulated other comprehensive loss on the balance sheet.
On January 1, 2001, we adopted Statement of Financial Accounting Standards No. 133, as amended,
and the cumulative eÅect of this change in accounting method relating to the interest rate swaps was an
immaterial gain on net income and an unrealized loss, net of tax, of approximately $2.6 million on other
comprehensive income. At December 31, 2003, we expect to reclassify approximately $3.4 million of
losses, net of tax, on the interest rate swaps from accumulated other comprehensive income to interest
expense during the next twelve months.
As of December 31, 2003, we had outstanding forward foreign exchange contracts with notional values
equivalent to approximately $222.4 million with maturity dates within 92 days. The forward contracts are
used to oÅset changes in the value of assets and liabilities denominated in foreign currencies as a result of
currency Öuctuations. Transaction gains and losses on the contracts and the assets and liabilities are
recognized each period in our statement of income and generally are oÅsetting.
We convert the Ñnancial statements of our foreign subsidiaries into U.S. dollars. When there is a
change in foreign currency exchange rates, the conversion of the foreign subsidiaries' Ñnancial statements
into the U.S. dollars will lead to a translation gain or loss. Translation exposure is the change in the book
value of assets, liabilities, revenues, and expenses that results from changes in foreign currency exchange
rates. From time to time we enter into transactions to hedge portions of our foreign currency denominated
earnings translation exposure using both options and forward contracts. The notional amount of the options
hedges entered into in 2003 was 57 million Euro. The premium cost was approximately $869,000 and the
net loss on the options totaled approximately $486,000, which was recorded in other income and expense
in 2003. The notional amount of forward contracts entered into in 2003 was 20 million Euro. The net loss
on these forward contracts totaled approximately $635,000 and was recorded in other income and expense
in 2003. All contracts hedging translation exposure mature ratably over the quarter in which they are
executed.
Note 7 Ì Balance Sheet Components:
December 31,
2002
2003
(in thousands)
Accounts receivable, net:
Accounts receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Allowance for authorized credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$162,155
(27,731)
(2,971)
$273,940
(43,194)
(4,875)
$131,453
$225,871
Write-oÅs against the allowance for doubtful accounts and authorized credits were $10.3 million,
$23.8 million and $28.8 million in the years ended December 31, 2001, 2002 and 2003, respectively.
111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
December 31,
2003
2002
(in thousands)
Other current assets:
Prepaid expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restricted cash and investments, current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred tax asset, current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$32,315
21,448
16,030
27,195
$ 33,101
14,859
24,134
45,935
$96,988
$118,029
December 31,
2002
2003
(in thousands)
Property and equipment, net:
Computer equipment and software ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Land and buildings, including building improvements ÏÏÏÏÏÏÏ
Aviation equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Leasehold improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Furniture and Ñxtures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Vehicles and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 279,026
31,926
30,473
18,916
19,345
103
$ 462,971
293,238
30,473
49,645
35,026
80
Accumulated depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
379,789
(161,761)
871,433
(269,648)
$ 218,028
$ 601,785
The increase in land and buildings during the year ended December 31, 2003, resulted primarily from
the inclusion of our San Jose corporate headquarters facilities lease in our Consolidated Financial
Statements, totaling $126.4 million and the acquisition of additional facilities located in San Jose,
California totaling approximately $125.1 million. During the years ended December 31, 2001, 2002 and
2003, we capitalized $6.7 million, $15.5 million and $38.5 million, respectively, for major site and other
product development eÅorts. Total depreciation expense on our property and equipment was $41.8 million
in 2001, $60.7 million in 2002 and $105.8 million in 2003.
December 31,
2002
2003
(in thousands)
Accrued expenses:
Acquisition related accrued expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Compensation and related beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Advertising ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Contractors and consultants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Professional fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Transaction loss reserve ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other current liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 40,475
27,687
32,420
12,617
10,242
10,107
65,775
$ 78,527
61,429
45,498
11,638
49,330
12,008
98,061
$199,323
$356,491
112
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
Note 8 Ì Long-Term Obligations:
The following table summarizes our long-term obligations, including the current portion (in
thousands):
December 31,
2003
2002
Consolidated facilities lease ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage notes, 8.175% variable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capital leases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ Ì $122,498
Ì
4,818
9,300
7,468
SubtotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less: Current portionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
16,768
(2,970)
127,316
(2,840)
Long-term portion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$13,798
$124,476
In accordance with the provisions of FIN 46, ""Consolidation of Variable Interest Entities,'' we have
included our San Jose headquarters lease arrangement in our Consolidated Financial Statements eÅective
July 1, 2003. Under this new accounting standard, our balance sheet at December 31, 2003 reÖects
additions for land and buildings totaling $126.4 million, lease obligations of $122.5 million and non-
controlling minority interests of $3.9 million. This property is leased under a Ñve-year lease agreement that
terminates on March 1, 2005. In February 2004, we elected not to exercise certain rights to extend the
lease period for these facilities and are obligated to make payments to the lessor totalling $126.4 million at
lease expiration. The payments under this lease agreement are based on the $126.4 million cost of the
property that was funded by an unrelated third-party. At December 31, 2003, we were in compliance with
our Ñnancial covenants under the lease.
Capital leases consist of various computer and other oÇce leases that totaled $4.8 million at
December 31, 2003. During 2003, we repaid our $9.3 million mortgage note obligation.
Minimum annual repayments on our consolidated facilities lease and capital leases at December 31,
2003, are as follows (in thousands):
Year ending
December 31,
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total
$
2,840
128,376
Ì
$131,216
Approximately $126.4 million of the 2005 obligation payable represents the payment to the lessor,
including the $3.9 million in relation to the non-controlling minority interest, for the corporate
headquarters in San Jose, California. See ""Note 17 Ì Subsequent Events.'' The future lease payments
through March 2005 under this lease arrangement are included within our obligations under operating
leases. See ""Note 9 Ì Operating Lease Arrangements.''
We also maintain credit facilities with a Ñnancial institution, which provide up to $14.4 million for
equipment purchases and $23.2 million for general working capital requirements. The credit facility is due
August 6, 2005 and there were no amounts outstanding at December 31, 2003.
113
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
Note 9 Ì Operating Lease Arrangements:
We also have lease obligations under certain other non-cancelable operating leases. Future minimum
rental payments under our non-cancelable operating leases, at December 31, 2003, are as follows (in
thousands):
Year ending
December 31,
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating
Leases
$ 22,765
17,556
11,693
9,724
9,661
44,361
Total minimum lease paymentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$115,760
Lease payments related to our corporate headquarters in San Jose, California are estimated based on
market interest rates (LIBOR) at December 31, 2003, adjusted to reÖect our two interest rate swaps and
certain collateral assumptions. We entered into two interest rate swaps on June 19, 2000 and July 20, 2000
to reduce the impact of changes in interest rates on a portion of the Öoating rate operating lease for this
facility. See ""Note 6 Ì Derivative Instruments.''
Rent expense in the years ended December 31, 2001, 2002 and 2003, totaled $5.7 million,
$3.6 million, and $8.6 million, excluding payments under our consolidated facilities lease, respectively.
Note 10 Ì Purchase and Sale of Properties or Property Interests:
From time to time and in the ordinary course of business, we elect to sell real estate properties
previously held for lease, or purchase properties or property interests for future rental. During 2002, we
sold interests in nine real estate properties related to our ButterÑelds subsidiary for approximately
$21.8 million in cash and recognized gains of $10.6 million. No real estate properties were sold during
2003.
Note 11 Ì Commitments and Contingencies:
Litigation and Other Legal Matters
In April 2001, our European subsidiaries, eBay GmbH and eBay International AG, were sued by
Montres Rolex S.A. and certain of its aÇliates in the regional court of Cologne, Germany. The suit
subsequently was transferred to the regional court in Dusseldorf, Germany. Rolex alleged that our
subsidiaries were infringing Rolex's trademarks as a result of users selling counterfeit Rolex-branded
watches through our German website. The suit also alleged unfair competition. Rolex sought an order
forbidding the sale of Rolex 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 on all causes of action. Rolex appealed the ruling
to the Higher Regional Court of Dusseldorf and the appeal was heard on October 30, 2003. On
February 26, 2004, the court rejected Rolex's appeal and ruled in our favor. If it so chooses, Rolex may
appeal the ruling to the German Federal Supreme Court.
In September 2001, a complaint was Ñled by MercExchange LLC against us, our Half.com subsidiary
and ReturnBuy, Inc. in the U.S. District Court for the Eastern District of Virginia (No. 2:01-CV-736)
alleging infringement of three patents (relating to online auction technology, multiple database searching
and electronic consignment systems) and seeking a permanent injunction and damages (including treble
114
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
damages for willful infringement). In October 2002, the court granted in part our summary judgment
motion, eÅectively invalidating the patent related to online auction technology and rendering it
unenforceable. This ruling left only two patents in the case. Trial of the matter began on April 23, 2003.
In May 2003, the jury returned a verdict Ñnding that eBay had willfully infringed one and Half.com had
willfully infringed both of the patents in the suit, awarding $35.0 million in compensatory damages. Both
parties Ñled post-trial motions, and in August 2003, the court entered judgment for MercExchange in the
amount of $29.5 million, plus pre-judgment interest and post-judgment interest in an amount to be
determined. We have appealed the judgment and MercExchange has Ñled a cross-appeal. We continue to
believe that the verdict against us in the trial was incorrect and intend to continue to defend ourselves
vigorously. However, even if successful, our defense against this action will continue to be costly. In
addition, as a precautionary measure, we have modiÑed certain functionality of our websites and business
practices in a manner which we believe makes them non-infringing. Nonetheless, if we are not successful
in appealing the court's ruling, we might be forced to pay signiÑcant additional damages and licensing fees.
Any such results could materially harm our business. While it is not possible to predict the ultimate legal
and Ñnancial implications of this lawsuit, in the light of the court's judgment, we have reassessed the
likelihood of a favorable outcome in accordance with SFAS No. 5, ""Accounting for Contingencies.'' Based
on this reassessment, we have taken an operating charge in the amount of $30.0 million, reÖecting the
$29.5 million judgment, together with our estimate for pre-judgment interest of $0.5 million. The charge
and the related estimated tax beneÑt of $12.1 million were reÖected in our operating results as patent
litigation expense in the second quarter of 2003.
In August 2002, Charles E. Hill & Associates, Inc. Ñled a lawsuit in the U.S. District Court for the
Eastern District of Texas (No. 2:02-CV-186) alleging that we and 17 other companies, primarily large
retailers, infringed three patents owned by Hill generally relating to electronic catalog systems and methods
for transmitting and updating data at a remote computer. The suit seeks an injunction against continuing
infringement, unspeciÑed damages, including treble damages for willful infringement, and interest, costs,
expenses, and fees. In January 2003, the case was transferred to the U.S. District Court for the Southern
District of Indiana. After pending in Indiana for almost a year, the case was transferred back to the
U.S. District Court for the Eastern District of Texas in December 2003. We are currently awaiting the
judge's scheduling order in the case. We believe that we have meritorious defenses and intend to defend
ourselves vigorously.
In February 2002, PayPal was sued in California state court (No. CV-805433) in a purported class
action alleging that its restriction of customer accounts and failure to promptly unrestrict 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-Ñled with a diÅerent named plaintiÅ in June 2002
(No. CV-808441), and a related action was also Ñled in the U.S. District Court for the Northern District
of California in June 2002 (No. C-022777). In March 2002, PayPal was sued in the U.S. District Court
for the Northern District of California (No. C-02-1227) in a purported class action alleging that its
restrictions of customer accounts and failure to promptly unrestrict legitimate accounts violates federal and
state consumer protection and unfair business practice laws. The federal court has denied PayPal's motion
to compel individual arbitration as required by the PayPal User Agreement and has invalidated that
provision of the User Agreement. PayPal has appealed that decision to the U.S. Court of Appeals for the
Ninth Circuit. The two federal court actions have been consolidated into a single case, and the state court
action has been stayed pending developments in the federal case. In September 2003, the plaintiÅs Ñled
their motion for class certiÑcation. In November 2003, the parties reached agreement as to the monetary
terms for settlement of the disputes among them, and we fully accrued for this tentative settlement
amount in our income statement for the three months and year ended December 31, 2003 as the amounts
are considered both probable and reasonably estimable. The amount was not material to our results of
operations or cash Öows. The parties have notiÑed the court that they need time to negotiate and
115
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
document other terms of any resulting agreement, and the class certiÑcation hearing has been rescheduled
for March 29, 2004. If PayPal is unable to prevail in these lawsuits or settle them on acceptable terms, it
may have to pay substantial damages and change its anti-fraud operations in a manner that will harm its
business. Even if PayPal's defense is successful, the litigation could damage PayPal's reputation, require
signiÑcant management time, and require changes to its customer service and operations that could
increase its costs and decrease the eÅectiveness of its anti-fraud program.
Following the announcement of the merger in July 2002, three purported class action complaints were
Ñled in the court of Delaware Court of Chancery by PayPal stockholders. These three cases have since
been consolidated into a single action. Two additional purported class action complaints were Ñled in the
Superior Court of the State of California by PayPal stockholders. The two California state court actions
were consolidated and stayed. All of the complaints named as defendants PayPal and each member of its
board of directors as well as eBay. The complaints were purported class actions that alleged that, among
other things, eBay controlled PayPal prior to the execution of their merger agreement, the defendants
breached Ñduciary duties they assertedly owed to PayPal's stockholders in connection with PayPal entering
into the merger agreement, and the exchange ratio in the merger was unfair and inadequate. The plaintiÅs
sought, among other things, an award of unspeciÑed compensatory damages. In January 2004, the plaintiÅs
in the consolidated Delaware actions voluntarily dismissed these actions without prejudice. The
consolidated California actions remain pending, but there has been no activity in them for over a year and
the plaintiÅs have indicated their intent to dismiss these actions.
In September 2002, Bank One Delaware (formerly known as First USA Bank, N.A.) Ñled a
complaint against PayPal in the U.S. District Court for District of Delaware (No. 02-CV-1462) alleging
infringement of two First USA patents relating to assigning an alias to a credit card so as to eliminate the
need for the physical presence of the card in a Ñnancial transaction. In September 2003, PayPal Ñled a
complaint against Bank One Corp., Bank One Delaware's parent, in the same district court alleging
infringement of a PayPal patent relating to a process that allows Internet users to make secure payments
and authenticated transactions over a computer network. On October 20, 2003, the parties Ñnalized the
terms of an agreement to dismiss both lawsuits. The terms of the settlement agreement are conÑdential
and did not have a material impact on our consolidated Ñnancial position, results of operations or cash
Öows.
In November 2003, AT&T Corporation Ñled a lawsuit against eBay and PayPal in the U.S. District
Court for the District of Delaware (No. 03-1051) alleging infringement of a patent entitled ""Mediation of
Transactions by a Communication System.'' AT&T claims that PayPal's and Billpoint's payment services
infringe its patent, and seeks monetary damages and injunctive relief. On December 24, 2003, eBay and
PayPal answered the complaint, denied infringement of AT&T's patent, and Ñled counterclaims. The case
is at a very early stage, with trial currently scheduled for April 2005. We believe that we have meritorious
defenses to this suit and intend to defend ourselves vigorously. Even if our defense is successful, the
litigation could be costly and require signiÑcant management time.
In May 2002, Tumbleweed Communications Corporation Ñled a complaint against PayPal alleging
infringement of two patents relating to electronic document delivery. Tumbleweed subsequently amended
the complaint to add eBay as a defendant, and later amended the complaint to add a third related patent.
On December 19, 2003, the parties entered into a settlement agreement dismissing the lawsuit, including
counterclaims Ñled by PayPal, and entered into a patent cross-licensing agreement. The settlement and
patent cross-licensing agreements did not have a material impact on our consolidated Ñnancial position,
results of operations or cash Öows.
Other third parties have from time to time claimed, and others may claim in the future, that we have
infringed their intellectual property rights. We have been notiÑed of several potential patent disputes, and
expect that we will increasingly be subject to patent infringement claims as our services expand in scope
116
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
and complexity. In particular, we expect to face additional patent infringement claims involving services we
provide, including various aspects of our Payments business. We have in the past been forced to litigate
such claims. We may also become more vulnerable to intellectual property claims as laws such as the
Digital Millennium Copyright Act are interpreted by the courts and as we expand into jurisdictions where
the underlying laws with respect to the potential liability of online intermediaries like ourselves is less
favorable. We expect that we will increasingly be subject to copyright and trademark infringement claims
as the geographical reach of our services expands. These claims, whether meritorious or not, could be time
consuming, result in costly litigation, cause service upgrade delays, require expensive changes in our
methods of doing business, or could require us to enter into costly royalty or licensing agreements.
From time to time, we are involved in other disputes that arise in the ordinary course of business. The
number and signiÑcance of 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 signiÑcant amounts of management time, and result in the diversion of signiÑcant
operational resources.
While we currently believe that the ultimate resolution of these unresolved matters will not have a
material adverse impact on our Ñnancial position, cash Öow or results of operations, the litigation and other
claims noted above are subject to inherent uncertainties and our view of these matters may change in the
future. Were an unfavorable Ñnal outcome to occur, there exists the possibility of a material adverse
impact on our Ñnancial position and results of operations for the period in which the eÅect becomes
reasonably estimable. We are unable to determine what potential losses we may incur if these matters
were to have an unfavorable outcome.
IndemniÑcation Provisions
During the ordinary course of business, in certain limited circumstances, we have included
indemniÑcation provisions within certain of our contracts. Pursuant to these agreements, we indemnify,
hold harmless, and agree to reimburse the indemniÑed party for losses suÅered or incurred by the
indemniÑed party, generally parties with which we have commercial relations, in connection with certain
intellectual property infringement claims by any third party with respect to our services. To date, we have
not incurred any costs in connection with such indemniÑcation clauses.
Note 12 Ì Related Party Transactions:
We have entered into indemniÑcation agreements with each of our directors, executive oÇcers and
certain other oÇcers. These agreements require us to indemnify such individuals, to the fullest extent
permitted by Delaware law, for certain liabilities to which they may become subject as a result of their
aÇliation with us.
Commercial agreements
A member of our Board of Directors and the Audit and Compensation Committees of our Board of
Directors, is a general partner of certain venture capital funds that beneÑcially hold in the aggregate a
greater than 10% equity interest in several public and private companies. We engaged in the following
transactions with such companies:
In December 1999, we entered into an Internet marketing agreement with a privately held company
that facilitates buying decisions for consumers. Under this agreement, we paid fees approximating $503,000
in 2001, and none in 2002 or 2003 for the promotion of eBay.
In April 2000, we entered into an advertising and promotions agreement with a privately held
company that provides a marketplace for live advice. Under this agreement, we recognized revenues of
117
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
approximately $1.0 million in 2001, $200,000 in 2002 and none in 2003. In 1999, we invested $2.0 million
in capital stock of such company and received a warrant to purchase additional shares, which if exercised
would bring our total ownership to less than 5% of its capital stock.
In July 2000, we entered into an advertising and promotions agreement, which we subsequently
amended in December 1999 and April 2000, with a privately held company that provides a real estate
solution to home buyers and sellers. Under the terms of this agreement, we recognized revenues of
approximately $441,000 in 2001, and none in 2002 or 2003. The member of our Board of Directors
mentioned above is also a member of such company's Board of Directors. In 2000, we invested
$3.0 million in capital stock of such company and received a warrant to purchase additional shares, which
if exercised would bring our total ownership to less than 5% of its capital stock.
In February 2001, our wholly owned subsidiary Half.com, entered into a content licensing and
inventory sales agreement with a company that provides order management and fulÑllment solutions.
Under this agreement, such company agreed to list its inventory on Half.com's website and to allow
Half.com to use such company's catalog data to supplement Half.com's existing catalog data. Half.com
paid such company approximately $100,000 in 2001, $25,000 in 2002 and none in 2003 under this
agreement.
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 agreement. The agreement was terminated in
December 2002, and PayPal paid the company an early termination fee of $1,348,000 in January 2003 in
accordance with the terms of the agreement. In addition, in July 2003, the company purchased an entity
with which eBay had a pre-existing data licensing agreement. Under the terms of eBay's agreement with
the purchased entity, eBay recognized $156,251 of revenue in 2003, and expects to recognize revenue of up
to $26,000 per month in 2004.
All contracts with related parties are at rates and terms that we believe are comparable with those
entered into with independent third parties.
Notes receivable from eBay executive oÇcers
At December 31, 2002 and 2003, we held notes receivable from certain executive oÇcers totaling
$3.5 million and $630,000, respectively. During 2003, all but one of such outstanding notes were pre-paid
in full. The remaining outstanding note is a non-interest-bearing note issued in connection with the
relocation of one executive oÇcer to San Jose, California. The outstanding note is collateralized by a Deed
of Trust, which we hold. The outstanding principal is due and payable in November 2005.
Note 13 Ì Preferred Stock:
We are authorized, subject to limitations prescribed by Delaware law: to issue Preferred Stock in one
or more series; to establish the number of shares included within each series; to Ñx the rights, preferences
and privileges of the shares of each wholly unissued series and any related qualiÑcations, limitations or
restrictions; and to increase or decrease the number of shares of any series (but not below the number of
shares of a series then outstanding) without any further vote or action by the stockholders. At
December 31, 2002 and 2003, there were 10 million shares of Preferred Stock authorized for issuance, and
no shares issued or outstanding.
Note 14 Ì Common Stock:
Our CertiÑcate of Incorporation, as amended, authorizes us to issue 900 million shares of common
stock. A portion of the shares outstanding are subject to repurchase over a four-year period from the
118
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
earlier of the issuance date or employee hire date, as applicable. At December 31, 2002, there were
184,000 shares subject to repurchase rights at an average price of $0.45. At December 31, 2003, there
were 17,000 shares subject to repurchase at an average price of $1.54.
At December 31, 2003, we had reserved 51.3 million shares of common stock available for future
issuance under our stock option plans, approximately 2.0 million shares of common stock available for
future issuance under our deferred stock unit plan, and approximately 3.0 million shares of common stock
available for future issuance under the employee stock purchase plan.
Note 15 Ì Employee BeneÑt 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 oÅering period with a maximum duration of two years (or, in
the case of eligible employees in two non-U.S. jurisdictions, a maximum duration of six months) at 85% of
the lower of the fair market value on the Ñrst day of the applicable oÅering period or on the last day of
the six-month purchase period. Employees may purchase shares having a value not exceeding 10% of their
gross compensation during an oÅering period. During the years ended December 31, 2001, 2002 and 2003,
employees purchased 248,000, 352,000 and 580,000 shares at average prices of $21.86, $26.63 and
$52.06 per share, respectively. At December 31, 2003, approximately 3.0 million shares of common stock
were reserved for future issuance under our employee stock purchase plan. Our employee stock purchase
plan contains an ""evergreen'' provision that automatically increases, on each January 1, the number of
shares reserved for issuance under the employee stock purchase plan by the number of shares purchased
under this plan in the preceding calendar year, provided that the aggregate number of shares issued over
the term of the plan does not exceed 18 million shares.
401(k) Savings Plan
We have a savings plan, which qualiÑes under Section 401(k) of the Internal Revenue Code.
Participating employees may contribute up to 25% of their annual salary, but not more than statutory
limits. We contribute one dollar for each dollar a participant contributes, with a maximum contribution of
$1,500 per employee. Our matching contributions were $1.7 million in 2001, $2.3 million in 2002 and
$3.9 million in 2003.
Stock Unit Plan
We have a deferred stock unit plan for non-employee new directors elected after December 31, 2002
under which awards of deferred stock units may be made. Under this plan, each new director shall receive
a one-time grant of deferred stock units equal to the result of dividing $150,000 by the fair market value
of our common stock on the date of grant. Each deferred stock unit constitutes an unfunded and
unsecured promise by us to deliver one share of our common stock (or the equivalent value thereof in
cash or property). These deferred stock units vest 25% one year from the date of grant, and at a rate of
2.08% per month thereafter. If the services of the director are terminated at any time, all rights to the
unvested deferred stock units shall also terminate. As at December 31, 2003, 5,630 units have been
awarded under this plan.
Stock Option Plans
We have stock option plans for directors, oÇcers and employees, under which we have made to date
only nonqualiÑed and incentive stock option grants. These stock options generally vest 25% one year from
the date of grant (or in the case of existing employees, 12.5% six months from the date of grant) and vest
119
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
at a rate of 2.08% per month thereafter, and expire 10 years from the date of grant. Stock options issued
prior to June 1998, were exercisable immediately, subject to repurchase rights held by us, which lapse over
the vesting period. At December 31, 2003, 51.3 million shares were available for future grant under our
stock option plans.
The following table summarizes activity under our stock option plans for the years ended
December 31, 2001, 2002 and 2003 (shares in thousands):
2001
Year Ended December 31,
2002
2003
Weighted
Average
Exercise
Price
$19.50
23.44
8.63
25.60
Weighted
Average
Exercise
Price
$23.12
26.71
13.08
26.99
Weighted
Average
Exercise
Price
$26.86
45.25
25.91
32.36
Shares
74,357
26,694
(26,144)
(5,702)
Shares
70,208
33,733
(19,538)
(10,046)
Shares
52,502
39,242
(13,626)
(7,910)
Outstanding at beginning of period ÏÏÏÏÏ
Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cancelled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Outstanding at end of period ÏÏÏÏÏÏÏÏÏÏ
70,208
$23.12
74,357
$26.86
69,205
$33.86
Options exercisable at end of period ÏÏÏÏ
20,930
$20.84
26,248
$26.29
22,505
$27.84
The following table summarizes information about Ñxed stock options outstanding at December 31,
2003 (shares in thousands):
Range of
Exercise Prices
$0.10 - $23.43 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$23.44 - $29.02 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$29.03 - $37.13 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$37.19 - $38.77 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$38.78 - $54.75 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$54.86 - $63.40 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Options Outstanding at
December 31, 2003
Options Exercisable at
December 31, 2003
Number of
Shares
Outstanding
Weighted
Average
Remaining
Contractual Life
Weighted
Average
Exercise
Price
Number of
Shares
Exercisable
11,593
16,553
12,729
11,913
13,502
2,915
69,205
6.6 years
8.2
7.6
8.7
8.9
9.5
8.1
$16.04
28.01
32.33
38.55
48.70
56.82
$33.86
7,293
4,499
5,365
3,041
2,155
152
22,505
Weighted
Average
Exercise
Price
$14.33
27.86
32.49
38.24
45.08
58.14
$27.84
Exercisable
Unexercisable
Total
Weighted
Average
Exercise Price
Shares
In-the-Money ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Out-of-the-Money ÏÏÏÏÏÏÏÏÏÏÏÏ
22,505
Ì
Total options outstanding ÏÏÏÏÏÏ
22,505
$27.84
Ì
$27.84
Weighted
Average
Exercise Price
$36.77
Ì
$36.77
Shares
46,700
Ì
46,700
Weighted
Average
Exercise Price
$33.86
Ì
$33.86
Shares
69,205
Ì
69,205
In-the-money options are options with an exercise price lower than the $64.61 closing price of our
common stock on December 31, 2003. Out-of-the-money options are options with an exercise price greater
than the $64.61 closing price of our common stock on December 31, 2003.
120
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
The following table summarizes additional stock option information related to grants made to our
employees and grants made speciÑcally to named oÇcers, which include our chief executive oÇcer and the
other four most highly compensated oÇcers during the year (in thousands, except percentages):
Year Ended December 31,
2002
2003
2001
Total outstanding shares of common stock
(at year end) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
554,518
622,554
649,293
As a percentage of total outstanding shares of common
stock:
Grants during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total outstanding ""in-the-money'' grants ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total outstanding grants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Grants to named oÇcers during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total outstanding grants to named oÇcers ÏÏÏÏÏÏÏÏÏÏÏ
7%
10%
13%
1%
1%
5%
10%
12%
0%
1%
4%
11%
11%
0%
1%
Total stock option grants during the yearÏÏÏÏÏÏÏÏÏÏÏÏÏ
39,242
33,733
26,694
Grants to named oÇcers during the period as a percent
of total grants during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
10%
5%
9%
Total outstanding stock option grants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
70,208
74,357
69,205
Total outstanding grants to named oÇcers as a percent
of total stock option grants outstanding ÏÏÏÏÏÏÏÏÏÏÏÏ
10%
9%
11%
Non-stockholder approved stock option grants
Prior to our initial public oÅering in 1998, our Board of Directors approved three stock option grants
outside of formally approved stockholder plans to two independent directors upon their joining our Board
of Directors and to an executive oÇcer upon his hiring. All of such option grants vested over 25% one year
from the date of grant, with the remainder vesting at a rate of 2.08% per month thereafter and expire
10 years from the date of grant. The options granted to the independent directors were immediately
exercisable, subject to repurchase rights held by us, which lapse over the vesting period. The terms and
conditions of such grants are otherwise identical to nonqualiÑed option grants made under the stock option
plan in eÅect at that time. At the time of such grants, members of our Board of Directors (and their
aÇliates) beneÑcially owned in excess of 90% of our then outstanding voting interests. We have previously
disclosed such option grants in our Prospectus Ñled with the Securities and Exchange Commission on
September 25, 1998 in connection with our initial public oÅering under the headings ""Management Ì
Director Compensation'' and ""Management Ì Compensation Arrangements.'' Prior to 2003, one director
and the executive oÇcer had exercised all available options under their respective grants. At December 31,
2003, one grant remained outstanding to one independent director, with 845,000 shares to be issued upon
exercise of the outstanding options at an average exercise price of $0.78. There were no shares remaining
available under these non-stockholder approved plans for future grants as of December 31, 2003.
121
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
Note 16 Ì Income Taxes:
The components of income including minority interest in consolidated companies and equity interest
in partnership income before income taxes, for the years ended December 31, 2001, 2002 and 2003 are as
follows (in thousands):
Year Ended December 31,
2002
2003
2001
United StatesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$177,084
$266,152
$449,078
International ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(6,627)
129,685
204,844
$170,457
$395,837
$653,922
The provision for income taxes is composed of the following (in thousands):
Year Ended December 31,
2002
2003
2001
Current:
Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 70,552
$103,606
$124,075
State and localÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
17,357
3,540
18,992
10,062
36,646
10,378
91,449
132,660
171,099
Deferred:
Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(10,187)
State and localÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(1,253)
Foreign ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
8,091
5,195
Ì
40,619
(1,041)
(3,939)
(11,440)
13,286
35,639
$ 80,009
$145,946
$206,738
122
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
The following is a reconciliation of the diÅerence between the actual provision for income taxes and
the provision computed by applying the federal statutory rate of 35% for 2001, 2002, and 2003 to income
before income taxes (in thousands):
Year Ended December 31,
2002
2003
2001
Provision at statutory rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$59,660
$138,543
$228,873
Permanent diÅerences:
Foreign income taxed at diÅerent rates ÏÏÏÏÏÏÏÏÏÏ
(4,212)
(5,406)
(45,190)
Acquisition related expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
11,834
Change in valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
Ì
Subsidiary loss not beneÑted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5,807
1,052
Ì
5,756
Ì
Tax-exempt interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(3,737)
(2,378)
(1,272)
State taxes, net of federal beneÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
10,468
15,722
23,297
Tax credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
189
(2,021)
(7,943)
434
3,217
$80,009
$145,946
$206,738
Deferred tax assets and liabilities are recognized for the future tax consequences of diÅerences
between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates
in eÅect for the year in which the diÅerences are expected to reverse. SigniÑcant deferred tax assets and
liabilities consist of the following (in thousands):
December 31,
2002
2003
Deferred tax assets:
Net operating loss and credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 207,276
$ 186,142
Accruals and allowances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
40,941
38,344
Depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(5,708)
(16,164)
Net unrealized losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2,921
9,469
Net deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
245,430
217,791
Valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(145,182)
(165,831)
Deferred tax liabilities:
Acquisition-related intangibles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(111,843)
(107,064)
100,248
51,960
$ (11,595)
$ (55,104)
As of December 31, 2003, our federal and state net operating loss carryforwards for income tax
purposes were approximately $502.6 million and $238.8 million, respectively. If not utilized, the federal net
operating loss carryforwards will begin to expire in 2019, and the state net operating loss carryforwards will
begin to expire in 2006. The Company's federal and state research tax credit carryforwards for income tax
purposes are approximately $20.2 million and $17.4 million, respectively. If not utilized, the federal tax
credit carryforwards will begin to expire in 2021. Deferred tax assets of approximately $151.6 million at
December 31, 2003 pertain primarily to certain net operating loss carryforwards resulting from the exercise
123
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
eBay Inc.
of employee stock options of $391.1 million and the remainder relates to losses at certain subsidiaries. We
receive tax deductions from the gains realized by employees on the exercise of certain non-qualiÑed stock
options for which the beneÑt is recognized as a component of stockholders' equity. We have evaluated the
deferred tax assets relating to these stock option deductions along with our other deferred tax assets and
concluded that a valuation allowance is required for that portion of the total deferred tax assets that are
not considered more likely than not to be realized in future periods. To the extent that the deferred tax
assets with a valuation allowance become realizable in future periods, we will have the ability, subject to
carryforward limitations, to beneÑt from these amounts. When recognized, the tax beneÑt 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 tax provision.
We have not provided for U.S. federal income and foreign withholding taxes on non-U.S. subsidiaries'
undistributed earnings as of December 31, 2003, because such earnings are intended to be reinvested in
the operations and potential acquisitions of our International segment indeÑnitely. Upon distribution of
those earnings in the form of dividends of otherwise, we would be subject to U.S. income taxes (subject to
an adjustment for foreign tax credits).
Note 17 Ì Subsequent Events:
On January 26, 2004, we entered into an agreement with mobile.de to acquire all of its outstanding
shares for 121 million Euros (approximately $153 million at the January 26, 2004 exchange rate), subject
to certain closing adjustments, plus acquisition costs. mobile.de is a classiÑeds website for vehicles in
Germany. The acquisition, which is subject to regulatory approval in Germany by the Federal Cartel
OÇce, is expected to close in the second quarter of 2004. The acquisition will be accounted for under the
purchase method of accounting.
In February 2004, we elected not to exercise certain rights to extend the lease period for our San Jose
corporate headquarters. The lease on these facilities will end on March 1, 2005, and we are obligated to
make payments to the lessor of $126.4 million at lease expiration.
124
Supplementary Data Ì Quarterly Financial Data-Unaudited:
The following tables present certain unaudited consolidated quarterly Ñnancial information for each of
the 12 quarters ended December 31, 2003. This quarterly information has been prepared on the same basis
as the Consolidated Financial Statements and includes all adjustments necessary to present 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.
Quarterly Financial Data
(unaudited, in thousands, except per share amounts)
March 31
June 30
September 30
December 31
Quarter Ended
2001
Net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$154,090
$180,905
$194,425
Gross proÑtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$127,088
$148,033
$159,472
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 21,067
$ 24,608
$ 18,838
Net income per share-basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income per share-diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
0.04
0.04
$
$
0.05
0.04
$
$
0.03
0.03
$219,401
$179,412
$ 25,935
$
$
0.05
0.05
Weighted-average shares:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
528,558
557,464
534,150
567,164
542,472
564,634
549,198
567,128
March 31
June 30
September 30
December 31
Quarter Ended
2002
Net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$245,106
$266,287
$288,779
Gross proÑtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$203,829
$221,726
$243,405
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 47,584
$ 54,308
$ 61,003
Net income per share-basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income per share-diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
0.09
0.08
$
$
0.10
0.10
$
$
0.11
0.11
$413,928
$331,264
$ 86,996
$
$
0.14
0.14
Weighted-average shares:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
556,664
569,782
561,414
570,832
564,534
573,182
617,288
628,790
March 31
June 30
September 30
December 31
Quarter Ended
2003
Net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$476,492
$509,269
$530,942
Gross proÑtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$384,394
$410,119
$421,589
Income before cumulative eÅect of accounting change
$104,191
$ 91,868
$108,663
$648,393
$532,936
$142,462
Cumulative eÅect of accounting change, net of tax ÏÏÏ
$
Ì $
Ì $ (5,413)
$
Ì
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$104,191
$ 91,868
$103,250
$142,462
Net income per share-basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income per share-diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
0.17
0.16
$
$
0.14
0.14
$
$
0.16
0.16
$
$
0.22
0.21
Weighted-average shares:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
627,316
642,518
636,680
656,147
642,729
662,231
646,819
666,165
125
eBay Inc.
FINANCIAL STATEMENT SCHEDULE
The Ñnancial statement Schedule II Ì VALUATION AND QUALIFYING ACCOUNTS is Ñled
as part of this Form 10-K.
Balance at
Beginning
of Period
Charged
to
Expense
Charged to
Other
Account
(in thousands)
Charges
Utilized/
Write-oÅs
Balance at
End of
Period
Allowance for Doubtful Accounts and
Authorized Credits
Year ended December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏ
$ 14,130
$25,243
$ Ì
$(10,349)
$ 29,024
Year ended December 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏ
Year ended December 31, 2003 ÏÏÏÏÏÏÏÏÏÏÏ
29,024
30,702
25,455
46,049
Ì
Ì
(23,777)
(28,682)
30,702
48,069
Allowance for Transaction Losses
Year ended December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏ
Year ended December 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
Ì
7,832
Ì
8,848*
Year ended December 31, 2003 ÏÏÏÏÏÏÏÏÏÏÏ
10,107
36,401
Tax Valuation Allowance
Year ended December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏ
101,586
Year ended December 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏ
129,212
Year ended December 31, 2003 ÏÏÏÏÏÏÏÏÏÏÏ
145,182
27,626
15,970
20,649
Ì
Ì
Ì
Ì
Ì
(6,573)
(34,500)
Ì
10,107
12,008
Ì
Ì
Ì
129,212
145,182
165,831
* Assumed liability in connection with PayPal acquisition on October 3, 2002.
126
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of San Jose, State of California, on the 5th day of March, 2004.
eBay Inc.
By: /s/ MARGARET C. WHITMAN
Margaret C. Whitman
President, Chief Executive OÇcer
and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Margaret C. Whitman, Rajiv Dutta and Michael R. Jacobson, and each or any
one of them, each with the power of substitution, his or her attorney-in-fact, to sign any amendments to
this report, with exhibits thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and conÑrming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has
been signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: March 5, 2004
Principal Executive OÇcer:
By : /s/ MARGARET C. WHITMAN
Margaret C. Whitman
President, Chief Executive OÇcer and Director
Principal Financial OÇcer:
By : /s/ RAJIV DUTTA
Rajiv Dutta
Senior Vice President and Chief Financial OÇcer
Principal Accounting OÇcer:
By : /s/ MARK J. RUBASH
Mark J. Rubash
Vice President, Finance and Chief Accounting
OÇcer
Additional Directors
By : /s/ PIERRE M. OMIDYAR
Pierre M. Omidyar
Founder, Chairman of the Board and Director
By : /s/ FRED D. ANDERSON
Fred D. Anderson
Director
By : /s/ PHILIPPE BOURGUIGNON
By : /s/ SCOTT D. COOK
Philippe Bourguignon
Director
Scott D. Cook
Director
By : /s/ ROBERT C. KAGLE
By : /s/ DAWN G. LEPORE
Robert C. Kagle
Director
By : /s/ THOMAS J. TIERNEY
Thomas J. Tierney
Director
Dawn G. Lepore
Director
127