e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
|
|
For the quarterly period ended September 30, 2005 |
|
or |
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
|
|
For the transition period
from to |
Commission file number 000-24821
eBay Inc.
(Exact name of registrant as specified in its charter)
|
|
|
Delaware |
|
74-0430924 |
(State or other jurisdiction of
incorporation or organization) |
|
(I.R.S. Employer
Identification Number) |
|
2145 Hamilton Avenue
San Jose, California |
|
95125 |
(Address of principal executive offices)
|
|
(Zip Code) |
(408) 376-7400
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed 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 file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange
Act). Yes þ No o
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of October 21, 2005, there were
1,393,766,979 shares of the registrants common stock,
$0.001 par value, outstanding, which is the only class of
common or voting stock of the registrant issued.
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
|
|
Item 1: |
Financial Statements |
eBay Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
September 30, | |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In thousands, except | |
|
|
par value amounts) | |
|
|
(Unaudited) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
1,330,045 |
|
|
$ |
2,180,598 |
|
|
Short-term investments
|
|
|
682,004 |
|
|
|
888,783 |
|
|
Accounts receivable, net
|
|
|
240,856 |
|
|
|
274,238 |
|
|
Funds receivable from customers
|
|
|
123,424 |
|
|
|
210,593 |
|
|
Restricted cash and investments
|
|
|
155,405 |
|
|
|
33,256 |
|
|
Other current assets
|
|
|
379,415 |
|
|
|
403,525 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,911,149 |
|
|
|
3,990,993 |
|
Long-term investments
|
|
|
1,267,707 |
|
|
|
827,191 |
|
Property and equipment, net
|
|
|
709,773 |
|
|
|
762,413 |
|
Goodwill
|
|
|
2,709,794 |
|
|
|
3,529,895 |
|
Intangible assets, net
|
|
|
362,909 |
|
|
|
490,245 |
|
Other assets
|
|
|
29,719 |
|
|
|
25,306 |
|
|
|
|
|
|
|
|
|
|
$ |
7,991,051 |
|
|
$ |
9,626,043 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
37,958 |
|
|
$ |
42,726 |
|
|
Funds payable and amounts due to customers
|
|
|
331,805 |
|
|
|
517,309 |
|
|
Accrued expenses and other current liabilities
|
|
|
421,969 |
|
|
|
523,584 |
|
|
Deferred revenue and customer advances
|
|
|
50,439 |
|
|
|
44,222 |
|
|
Short-term obligations
|
|
|
124,272 |
|
|
|
|
|
|
Income taxes payable
|
|
|
118,427 |
|
|
|
138,951 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,084,870 |
|
|
|
1,266,792 |
|
Deferred tax liabilities, net
|
|
|
135,971 |
|
|
|
298,197 |
|
Other liabilities
|
|
|
41,869 |
|
|
|
33,690 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,262,710 |
|
|
|
1,598,679 |
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Convertible Preferred Stock, $0.001 par value;
10,000 shares authorized; no shares issued or outstanding
|
|
|
|
|
|
|
|
|
Common Stock, $0.001 par value; 3,580,000 shares
authorized; 1,338,608 and 1,360,459 shares issued and
outstanding
|
|
|
1,339 |
|
|
|
1,360 |
|
Additional paid-in capital
|
|
|
4,855,717 |
|
|
|
5,453,627 |
|
Unearned stock-based compensation
|
|
|
(4,825 |
) |
|
|
(11,862 |
) |
Retained earnings
|
|
|
1,634,468 |
|
|
|
2,437,290 |
|
Accumulated other comprehensive income
|
|
|
241,642 |
|
|
|
146,949 |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
6,728,341 |
|
|
|
8,027,364 |
|
|
|
|
|
|
|
|
|
|
$ |
7,991,051 |
|
|
$ |
9,626,043 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
|
|
(Unaudited) | |
Net revenues
|
|
$ |
805,876 |
|
|
$ |
1,105,515 |
|
|
$ |
2,335,527 |
|
|
$ |
3,223,542 |
|
Cost of net revenues
|
|
|
157,121 |
|
|
|
200,375 |
|
|
|
438,010 |
|
|
|
578,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
648,755 |
|
|
|
905,140 |
|
|
|
1,897,517 |
|
|
|
2,644,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
207,155 |
|
|
|
293,746 |
|
|
|
588,995 |
|
|
|
852,239 |
|
|
Product development
|
|
|
63,403 |
|
|
|
78,881 |
|
|
|
176,079 |
|
|
|
224,309 |
|
|
General and administrative
|
|
|
105,871 |
|
|
|
144,287 |
|
|
|
299,447 |
|
|
|
410,016 |
|
|
Payroll tax on employee stock options
|
|
|
1,957 |
|
|
|
2,291 |
|
|
|
12,289 |
|
|
|
9,582 |
|
|
Amortization of acquired intangible assets
|
|
|
16,456 |
|
|
|
29,199 |
|
|
|
46,188 |
|
|
|
77,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
394,842 |
|
|
|
548,404 |
|
|
|
1,122,998 |
|
|
|
1,573,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
253,913 |
|
|
|
356,736 |
|
|
|
774,519 |
|
|
|
1,071,296 |
|
Interest and other income, net
|
|
|
13,163 |
|
|
|
30,657 |
|
|
|
59,105 |
|
|
|
85,585 |
|
Interest expense
|
|
|
(2,236 |
) |
|
|
(431 |
) |
|
|
(6,614 |
) |
|
|
(2,556 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests
|
|
|
264,840 |
|
|
|
386,962 |
|
|
|
827,010 |
|
|
|
1,154,325 |
|
Provision for income taxes
|
|
|
(80,749 |
) |
|
|
(131,989 |
) |
|
|
(248,103 |
) |
|
|
(351,455 |
) |
Minority interests
|
|
|
(1,742 |
) |
|
|
(2 |
) |
|
|
(6,063 |
) |
|
|
(48 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
182,349 |
|
|
$ |
254,971 |
|
|
$ |
572,844 |
|
|
$ |
802,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.14 |
|
|
$ |
0.19 |
|
|
$ |
0.44 |
|
|
$ |
0.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.13 |
|
|
$ |
0.18 |
|
|
$ |
0.42 |
|
|
$ |
0.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,323,145 |
|
|
|
1,357,239 |
|
|
|
1,314,456 |
|
|
|
1,350,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1,369,954 |
|
|
|
1,387,038 |
|
|
|
1,360,830 |
|
|
|
1,383,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
(Unaudited) | |
Net income
|
|
$ |
182,349 |
|
|
$ |
254,971 |
|
|
$ |
572,844 |
|
|
$ |
802,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
9,310 |
|
|
|
(13,934 |
) |
|
|
5,732 |
|
|
|
(96,181 |
) |
|
Unrealized gains (losses) on investments, net
|
|
|
4,176 |
|
|
|
22 |
|
|
|
(4,849 |
) |
|
|
(333 |
) |
|
Investment gains (losses) included in net income
|
|
|
|
|
|
|
(42 |
) |
|
|
24 |
|
|
|
41 |
|
|
Unrealized gains (losses) on cash flow hedges
|
|
|
921 |
|
|
|
(2,319 |
) |
|
|
3,171 |
|
|
|
2,824 |
|
|
Estimated tax benefit (provision)
|
|
|
(1,874 |
) |
|
|
937 |
|
|
|
787 |
|
|
|
(1,044 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in accumulated other comprehensive income (loss)
|
|
|
12,533 |
|
|
|
(15,336 |
) |
|
|
4,865 |
|
|
|
(94,693 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$ |
194,882 |
|
|
$ |
239,635 |
|
|
$ |
577,709 |
|
|
$ |
708,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In thousands) | |
|
|
(Unaudited) | |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
572,844 |
|
|
$ |
802,822 |
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts and authorized credits
|
|
|
57,994 |
|
|
|
65,653 |
|
|
|
Provision for transaction losses
|
|
|
32,692 |
|
|
|
46,956 |
|
|
|
Depreciation and amortization
|
|
|
180,841 |
|
|
|
256,867 |
|
|
|
Amortization of unearned stock-based compensation
|
|
|
1,626 |
|
|
|
8,971 |
|
|
|
Tax benefit on the exercise of employee stock options
|
|
|
184,455 |
|
|
|
172,164 |
|
|
|
Minority interests
|
|
|
6,053 |
|
|
|
|
|
|
|
Changes in assets and liabilities, net of acquisition effects:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(137,867 |
) |
|
|
(83,235 |
) |
|
|
|
Funds receivable from customers
|
|
|
(75,214 |
) |
|
|
(84,692 |
) |
|
|
|
Other current assets
|
|
|
(148,454 |
) |
|
|
(23,667 |
) |
|
|
|
Other non-current assets
|
|
|
(3,925 |
) |
|
|
(6,564 |
) |
|
|
|
Deferred tax liabilities, net
|
|
|
35,734 |
|
|
|
129,824 |
|
|
|
|
Accounts payable
|
|
|
4,968 |
|
|
|
(5,238 |
) |
|
|
|
Funds payable and amounts due to customers
|
|
|
149,208 |
|
|
|
192,877 |
|
|
|
|
Accrued expenses and other liabilities
|
|
|
23,017 |
|
|
|
(3,276 |
) |
|
|
|
Deferred revenue and customer advances
|
|
|
13,602 |
|
|
|
(4,394 |
) |
|
|
|
Income taxes payable
|
|
|
6,534 |
|
|
|
18,586 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
904,108 |
|
|
|
1,483,654 |
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment, net
|
|
|
(209,950 |
) |
|
|
(240,534 |
) |
|
Proceeds from sale of corporate aircraft
|
|
|
|
|
|
|
28,290 |
|
|
Purchases of investments
|
|
|
(1,262,174 |
) |
|
|
(849,851 |
) |
|
Maturities and sales of investments
|
|
|
911,173 |
|
|
|
1,335,128 |
|
|
Purchases of intangible and other non-current assets
|
|
|
(7,257 |
) |
|
|
(2,575 |
) |
|
Acquisitions, net of cash acquired
|
|
|
(703,706 |
) |
|
|
(1,118,744 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,271,914 |
) |
|
|
(848,286 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net
|
|
|
429,242 |
|
|
|
384,384 |
|
|
Payment of headquarters lease facility obligation
|
|
|
|
|
|
|
(126,390 |
) |
|
Principal payments on long-term obligations
|
|
|
(2,599 |
) |
|
|
(1,849 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
426,643 |
|
|
|
256,145 |
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(4,440 |
) |
|
|
(40,960 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
54,397 |
|
|
|
850,553 |
|
Cash and cash equivalents at beginning of period
|
|
|
1,381,513 |
|
|
|
1,330,045 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
1,435,910 |
|
|
$ |
2,180,598 |
|
|
|
|
|
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
Common stock options assumed pursuant to acquisition
|
|
$ |
|
|
|
$ |
43,232 |
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 The Company and Summary of
Significant Accounting Policies
eBay Inc., together with its subsidiaries (eBay),
pioneers communities built on commerce, sustained by trust, and
inspired by opportunity. eBay brings together millions of buyers
and sellers every day on a local, national and international
basis through an array of websites that focus on commerce and
payments.
Our Marketplaces online services create a powerful platform for
the sale of goods and services by a global community of
individuals and businesses. On any given day, there are millions
of products and services available through auction-style and
fixed-price trading.
Our PayPal online services enable individuals and businesses to
quickly, easily and securely send and receive payments online.
PayPals services build on the existing financial
infrastructure of bank accounts and credit cards and use the
advanced proprietary fraud prevention systems to create safe
payment solutions.
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.
In January 2005, our Board of Directors approved a two-for-one
split of our shares of common stock to be issued in the form of
a stock dividend. As a result of the stock split, our
stockholders received one additional share of our common stock
for each share of common stock held of record on
January 31, 2005. The additional shares of our common stock
were distributed on February 16, 2005. All share and per
share amounts in these condensed consolidated financial
statements and related notes have been retroactively adjusted to
reflect this and all prior stock splits for all periods
presented.
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect 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. On an
ongoing basis, we evaluate our estimates, including those
related to provisions for doubtful accounts and authorized
credits, the provision for transaction losses, legal
contingencies, accruals, income taxes, advertising and other
non-transaction revenues, and goodwill and intangible assets. We
base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances. Actual results could differ from those estimates.
|
|
|
Principles of Consolidation and Basis of
Presentation |
The accompanying financial statements are consolidated and
include the financial statements of eBay and our majority-owned
subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
The consolidated financial statements 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 or have the
ability to significantly influence 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 the investees operations is included in
other income. Investments in entities where we hold less than a
20% ownership interest and where we do not have the ability to
significantly influence the operations of the investee are
accounted for using the cost method of accounting and are
included in long-term investments.
6
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
These unaudited interim financial statements reflect our
condensed consolidated financial position as of
December 31, 2004 and September 30, 2005. These
statements also show our condensed consolidated statement of
income for the three and nine months ended September 30,
2004 and 2005 and our condensed consolidated statement of cash
flows for the nine months ended September 30, 2004 and
2005. These statements include all normal recurring adjustments
that we believe are necessary to fairly state our financial
position, operating results and cash flows. Because all of the
disclosures required by generally accepted accounting principles
in the United States of America for annual consolidated
financial statements are not included herein, these interim
financial statements should be read in conjunction with the
audited financial statements and the notes thereto for the year
ended December 31, 2004, included in our Annual Report on
Form 10-K filed with the Securities and Exchange Commission
on February 28, 2005. The condensed consolidated statements
of income and cash flows for the periods presented are not
necessarily indicative of results that we expect for any future
period.
We account for stock-based employee compensation issued under
compensatory plans using the intrinsic value method, which
calculates compensation expense based on the difference, 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 that 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 financial statements. In
December 2002, the Financial Accounting Standards Board
(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. We amortize the stock-based compensation
charge in accordance with FASB Interpretation No. 28 over
the vesting period of the related options, which is generally
four years. The impact of recognizing the fair value of stock
option grants and stock purchased under our employee stock
purchase plan as an expense under FASB Statement No. 148
would have substantially reduced our net income, as follows (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Net income, as reported
|
|
$ |
182,349 |
|
|
$ |
254,971 |
|
|
$ |
572,844 |
|
|
$ |
802,822 |
|
Add: Amortization of stock-based compensation expense determined
under the intrinsic value method (net of cancellations)
|
|
|
309 |
|
|
|
4,138 |
|
|
|
1,177 |
|
|
|
3,735 |
|
Deduct: Total stock-based compensation expense determined under
fair value based method, net of tax
|
|
|
(79,328 |
) |
|
|
(59,446 |
) |
|
|
(118,949 |
) |
|
|
(184,150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
103,330 |
|
|
$ |
199,663 |
|
|
$ |
455,072 |
|
|
$ |
622,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Reported
|
|
$ |
0.14 |
|
|
$ |
0.19 |
|
|
$ |
0.44 |
|
|
$ |
0.59 |
|
|
|
Pro forma
|
|
$ |
0.08 |
|
|
$ |
0.15 |
|
|
$ |
0.35 |
|
|
$ |
0.46 |
|
|
Diluted Reported
|
|
$ |
0.13 |
|
|
$ |
0.18 |
|
|
$ |
0.42 |
|
|
$ |
0.58 |
|
|
|
Pro forma
|
|
$ |
0.08 |
|
|
$ |
0.14 |
|
|
$ |
0.33 |
|
|
$ |
0.45 |
|
The weighted average fair value of options granted in the three
months ended September 30, 2004 and 2005 was $11.56 and
$12.16, respectively. The weighted average fair value of options
granted in the nine months ended September 30, 2004 and
2005 was $11.95 and $11.97, respectively.
7
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amounts disclosed above are not necessarily indicative of
the amounts that will be expensed upon adoption of FAS 123R
Share-Based Payment on January 1, 2006, as
discussed under Recent Accounting
Pronouncements Share-Based Payment, below.
Compensation expense calculated under FAS 123R will differ
from amounts currently disclosed within these footnotes based on
changes in the fair value of our common stock, changes in the
number of options granted or the terms of such options, the
treatment of tax benefits and changes in interest rates or other
factors. In addition, upon adoption of FAS 123R, we may
choose to use a different valuation model to value the
compensation expense associated with employee stock options and
stock purchases under our employee stock purchase plan.
For stock options granted, we calculated the fair value of each
option award on the date of grant using the Black-Scholes option
pricing model. The following weighted average assumptions were
used for each respective period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Risk-free interest rates
|
|
|
2.9% |
|
|
|
4.0% |
|
|
|
2.4% |
|
|
|
3.6% |
|
Expected lives
|
|
|
3 years |
|
|
|
3 years |
|
|
|
3 years |
|
|
|
3 years |
|
Dividend yield
|
|
|
0% |
|
|
|
0% |
|
|
|
0% |
|
|
|
0% |
|
Expected volatility
|
|
|
39% |
|
|
|
35% |
|
|
|
50% |
|
|
|
36% |
|
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.
|
|
|
Recent Accounting Pronouncements |
In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 123 (revised 2004),
Share-Based Payment (FAS 123R), that addresses
the accounting for share-based payment transactions in which an
enterprise receives employee services in exchange for either
equity instruments of the enterprise or liabilities that are
based on the fair value of the enterprises equity
instruments or that may be settled by the issuance of such
equity instruments. The statement eliminates the ability to
account for share-based compensation transactions, as we do
currently, using the intrinsic value method as prescribed by
Accounting Principles Board, or APB, Opinion No. 25,
Accounting for Stock Issued to Employees, and
generally requires that such transactions be accounted for using
a fair-value-based method and recognized as expenses in our
consolidated statement of income. The statement requires
companies to assess the most appropriate model to calculate the
value of the options. We currently use the Black-Scholes option
pricing model to value options and are currently assessing which
model we may use in the future under the new statement and may
deem an alternative model to be more appropriate. The use of a
different model to value options may result in a different fair
value than the use of the Black-Scholes option pricing model. In
addition, there are a number of other requirements under the new
standard that would result in differing accounting treatment
than currently required. These differences include, but are not
limited to, the accounting for the tax benefit on employee stock
options and for stock issued under our employee stock purchase
plan, and the presentation of these tax benefits within the
consolidated statement of cash flows. In addition to the
appropriate fair value model to be used for valuing share-based
payments, we will also be required to determine the transition
method to be used at date of adoption. The allowed transition
methods are the prospective and retroactive adoption
alternatives. The prospective method requires that compensation
expense be recorded for all unvested stock options and
restricted stock at the beginning of the first quarter of
adoption
8
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of FAS 123R, while the retroactive method requires
companies to record compensation expense for all unvested stock
options and restricted stock beginning with the first disclosed
period restated.
In April 2005, the Securities and Exchange Commission announced
the adoption of a new rule that amends the effective date of
FAS 123R. The effective date of the new standard under
these new rules for our consolidated financial statements is
January 1, 2006. Adoption of this statement will have a
significant impact on our consolidated financial statements as
we will be required to expense the fair value of our stock
option grants and stock purchases under our employee stock
purchase plan rather than disclose the impact on our
consolidated net income within our footnotes, as is our current
practice.
Note 2 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 shares of common stock and
potentially dilutive common stock outstanding during the period.
Potentially dilutive common stock, composed of unvested
restricted common stock and incremental common shares issuable
upon the exercise of stock options, are included in diluted net
income per share using the treasury stock method to the extent
such shares are dilutive. 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
182,349 |
|
|
$ |
254,971 |
|
|
$ |
572,844 |
|
|
$ |
802,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
1,323,231 |
|
|
|
1,357,279 |
|
|
|
1,314,530 |
|
|
|
1,350,876 |
|
|
Weighted average unvested restricted common stock subject to
repurchase
|
|
|
(86 |
) |
|
|
(40 |
) |
|
|
(74 |
) |
|
|
(40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic calculation
|
|
|
1,323,145 |
|
|
|
1,357,239 |
|
|
|
1,314,456 |
|
|
|
1,350,836 |
|
|
Weighted average effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average unvested restricted common stock subject to
repurchase
|
|
|
86 |
|
|
|
40 |
|
|
|
74 |
|
|
|
40 |
|
|
Employee stock options
|
|
|
46,723 |
|
|
|
29,759 |
|
|
|
46,300 |
|
|
|
32,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted calculation
|
|
|
1,369,954 |
|
|
|
1,387,038 |
|
|
|
1,360,830 |
|
|
|
1,383,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.14 |
|
|
$ |
0.19 |
|
|
$ |
0.44 |
|
|
$ |
0.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.13 |
|
|
$ |
0.18 |
|
|
$ |
0.42 |
|
|
$ |
0.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The calculation of diluted net income per share excludes all
anti-dilutive options. For the three months ended
September 30, 2004 and 2005, the number of anti-dilutive
options, as calculated based on the weighted average closing
price of our common stock for the period, amounted to
approximately 3.2 million and 29.6 million shares,
respectively. For the nine months ended September 30, 2004
and 2005, the number of anti-dilutive options, as calculated
based on the weighted average closing price of our common stock
for the period, amounted to approximately 2.4 million and
26.0 million shares, respectively.
9
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 3 |
Business Combinations, Goodwill and Intangible Assets |
Through both domestic and international acquisitions, we have
continued to expand our global online businesses. Tangible net
assets for our acquisitions 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 identifiable intangible assets acquired
reflects managements estimates based on, among other
factors, use of established valuation methods. Such assets
consist of customer lists and user base, trademarks and trade
names, developed technologies and other acquired intangible
assets including patents and contractual agreements.
Identifiable 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
identifiable intangible assets acquired to date. Goodwill
represents the excess of the purchase price over the fair value
of the net tangible and identifiable intangible assets acquired
in each business combination. The purchase prices of the
acquisitions described below exceeded the estimated fair value
of the respective related identifiable intangible and tangible
assets because we believe these acquisitions will assist with
our strategy of establishing and expanding our global online
marketplace.
On February 23, 2005, we acquired Viva Group, Inc., which
does business under the name Rent.com, for a cash purchase price
of approximately $415 million plus payments for net cash
and investments of approximately $18 million. Rent.com is
an Internet listing website in the apartment and rental housing
industry. The acquisition better enables our expansion into the
online real estate market and is consistent with our strategy of
growing our global online marketplace. The total purchase price
recorded was approximately $435 million, including
approximately $2 million in estimated acquisition-related
expenses. We accounted for the acquisition as a non-taxable
purchase transaction and, accordingly, the purchase price has
been allocated to the tangible and intangible assets acquired
and liabilities assumed on the basis of their respective
estimated fair values on the acquisition date.
The preliminary allocation of the purchase price is summarized
below (in thousands):
|
|
|
|
|
|
Net current assets
|
|
$ |
17,327 |
|
Property and equipment and other non-current assets
|
|
|
723 |
|
Customer list and user base
|
|
|
34,500 |
|
Trade name
|
|
|
18,000 |
|
Developed technology
|
|
|
8,200 |
|
Advertising relationships
|
|
|
1,100 |
|
Deferred tax liabilities
|
|
|
(24,924 |
) |
Goodwill
|
|
|
380,439 |
|
|
|
|
|
|
Total purchase price
|
|
$ |
435,365 |
|
|
|
|
|
The estimated useful economic lives of the identifiable
intangible assets acquired in the Rent.com acquisition are six
years for the customer list, five years for the trade name,
three years for the developed technology and the advertising
relationships, and one year for the user base. The final
purchase price allocation will depend primarily upon the
execution of our integration plan.
The results of operations for Rent.com have been included in our
consolidated statement of income for the period subsequent to
our acquisition of Rent.com. The results of operations for
periods prior to this acquisition were not material to our
consolidated statement of income and, accordingly, pro forma
results of operations have not been presented.
10
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Acquisition of International Classifieds Websites |
During the second quarter of 2005, we announced our acquisitions
of three international classifieds websites, Gumtree.com, LoQUo,
and opusforum, that operate in select international cities.
These acquisitions help us expand internationally our global
network of classifieds websites to create a more efficient place
for local consumers to come together online. The aggregate
purchase price recorded for these acquisitions was approximately
$81.6 million, including approximately $1.3 million in
estimated acquisition-related expenses. We accounted for two of
these acquisitions as non-taxable and one as a taxable purchase
transaction and, accordingly, the purchase price for each
acquisition has been allocated to the tangible and intangible
assets acquired and liabilities assumed on the basis of their
respective estimated fair values on the applicable acquisition
date.
The preliminary allocation of the aggregate purchase price for
these acquisitions is summarized below (in thousands):
|
|
|
|
|
|
Property and equipment and other non-current assets
|
|
$ |
63 |
|
Net current liabilities
|
|
|
(264 |
) |
Trade name
|
|
|
11,200 |
|
Customer lists
|
|
|
2,600 |
|
Deferred tax liabilities
|
|
|
(3,786 |
) |
Goodwill
|
|
|
71,771 |
|
|
|
|
|
|
Total purchase price
|
|
$ |
81,584 |
|
|
|
|
|
The estimated useful economic lives of the identifiable
intangible assets acquired in these acquisitions are five years
for both the trade names and for the customer lists. The final
purchase price allocations will depend primarily upon the
execution of our integration plans.
The results of operations for these acquired websites have been
included in our consolidated statement of income for the period
subsequent to these acquisitions. The aggregate results of
operations for periods prior to these acquisitions were not
material to our consolidated statement of income and,
accordingly, pro forma results of operations have not been
presented.
|
|
|
Acquisition of Shopping.com Ltd. |
On August 30, 2005, we acquired Shopping.com Ltd., or
Shopping.com, for a purchase price of approximately
$685.3 million. We acquired all outstanding shares of
Shopping.coms common stock for $21 per share in cash
totaling approximately $634.5 million and we assumed
Shopping.coms outstanding common stock options, valued at
approximately $43.2 million (see
Note 9 Employee Benefit Plans of
these condensed consolidated financial statements for the
valuation method and assumptions used). The total purchase price
also includes approximately $7.6 million in estimated
acquisition-related expenses. Shopping.com is a provider of
online comparison shopping and consumer reviews. This
acquisition is consistent with our strategy of growing our
global online marketplace and we believe that it will create a
premier online shopping experience for individuals and
businesses of all sizes. We accounted for the acquisition as a
taxable purchase transaction and, accordingly, the purchase
price has been allocated to the tangible and intangible assets
acquired and liabilities assumed on the basis of their
respective estimated fair values on the acquisition date.
11
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The preliminary allocation of the purchase price for
Shopping.com is summarized below (in thousands):
|
|
|
|
|
|
Cash
|
|
$ |
50,126 |
|
Short-term investments
|
|
|
100,133 |
|
Net current liabilities
|
|
|
(30,608 |
) |
Property and equipment and other non-current assets
|
|
|
26,247 |
|
Customer base
|
|
|
73,600 |
|
Trade names
|
|
|
38,700 |
|
Developed technology
|
|
|
21,300 |
|
Deferred tax liabilities
|
|
|
(29,683 |
) |
Unearned stock-based compensation
|
|
|
16,759 |
|
Goodwill
|
|
|
418,711 |
|
|
|
|
|
|
Total purchase price
|
|
$ |
685,285 |
|
|
|
|
|
The intrinsic value of Shopping.coms unvested common stock
options assumed in the acquisition totaled approximately
$16.8 million and was recorded as unearned stock-based
compensation. The unearned stock-based compensation relating to
the unvested options will be amortized on an accelerated basis
over the remaining vesting period of less than one year to four
years, consistent with the graded vesting approach under FASB
Interpretation No. 28.
The estimated useful economic lives of the identifiable
intangible assets acquired in the Shopping.com acquisition are
4 years for the customer base and 5 years for the
trade names and the developed technology. The final purchase
price allocation will depend primarily upon the completion of
our integration plan and the final valuation of certain acquired
tax attributes.
The results of operations for Shopping.com have been included in
our consolidated statement of income for the period subsequent
to our acquisition of Shopping.com. The results of operations
for periods prior to this acquisition were not material to our
consolidated statement of income and, accordingly, pro forma
results of operations have not been presented.
12
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Goodwill information for each reportable segment is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
Goodwill | |
|
|
|
September 30, | |
|
|
2004 | |
|
Acquired | |
|
Adjustments | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplaces
|
|
$ |
1,664,758 |
|
|
$ |
881,442 |
|
|
$ |
(61,341 |
) |
|
$ |
2,484,859 |
|
|
Payments
|
|
|
1,072,396 |
|
|
|
|
|
|
|
|
|
|
|
1,072,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,737,154 |
|
|
$ |
881,442 |
|
|
$ |
(61,341 |
) |
|
$ |
3,557,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in goodwill acquired during the nine months ended
September 30, 2005, resulted primarily from our
acquisitions of Rent.com, certain international classifieds
websites, and Shopping.com. Adjustments to goodwill during the
nine months ended September 30, 2005, resulted primarily
from foreign currency translation adjustments relating to
goodwill.
Investments accounted for under the equity method of accounting
are classified on our balance sheet as long-term investments.
Such investments include identifiable intangible assets,
deferred tax liabilities and goodwill, and are included in the
table above in the Marketplaces reportable segment. As of
September 30, 2005, the goodwill related to our equity
investment totaled approximately $27.4 million.
In accordance with Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets
(FAS 142), goodwill is subject to at least an annual
assessment for impairment, applying a fair-value based test. We
conducted our annual impairment test as of August 31, 2005
and determined there was no impairment. There were no events or
circumstances from that date through September 30, 2005
indicating that a further assessment was necessary.
The components of acquired identifiable intangible assets are as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 | |
|
September 30, 2005 | |
|
|
| |
|
| |
|
|
|
|
| |
|
|
Gross | |
|
|
|
Net | |
|
Weighted | |
|
Gross | |
|
|
|
Net | |
|
Weighted | |
|
|
Carrying | |
|
Accumulated | |
|
Carrying | |
|
Average Useful | |
|
Carrying | |
|
Accumulated | |
|
Carrying | |
|
Average Useful | |
|
|
Amount | |
|
Amortization | |
|
Amount | |
|
Economic Life | |
|
Amount | |
|
Amortization | |
|
Amount | |
|
Economic Life | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(Years) | |
|
|
|
|
|
|
|
(Years) | |
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists and user base
|
|
$ |
300,929 |
|
|
$ |
(80,097 |
) |
|
$ |
220,832 |
|
|
|
7 |
|
|
$ |
410,267 |
|
|
$ |
(121,446 |
) |
|
$ |
288,821 |
|
|
|
6 |
|
|
Trademarks and trade names
|
|
|
139,239 |
|
|
|
(30,811 |
) |
|
|
108,428 |
|
|
|
6 |
|
|
|
201,539 |
|
|
|
(53,291 |
) |
|
|
148,248 |
|
|
|
6 |
|
|
Developed technologies
|
|
|
40,686 |
|
|
|
(28,488 |
) |
|
|
12,198 |
|
|
|
3 |
|
|
|
72,818 |
|
|
|
(39,180 |
) |
|
|
33,638 |
|
|
|
4 |
|
|
All other
|
|
|
33,895 |
|
|
|
(7,534 |
) |
|
|
26,361 |
|
|
|
4 |
|
|
|
36,477 |
|
|
|
(12,899 |
) |
|
|
23,578 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
514,749 |
|
|
$ |
(146,930 |
) |
|
$ |
367,819 |
|
|
|
|
|
|
$ |
721,101 |
|
|
$ |
(226,816 |
) |
|
$ |
494,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of our acquired identifiable intangible assets are subject
to amortization. Acquired identifiable intangible assets are
comprised of customer lists and user base, trademarks and trade
names, developed technologies, and other acquired intangible
assets including patents and contractual agreements. The
increase in intangible assets during the nine months ended
September 30, 2005 resulted primarily from intangible
assets acquired as part of our acquisitions of Rent.com, certain
international classifieds websites, and Shopping.com. Included
in the table above, as of September 30, 2005, the net
carrying amount of intangible assets related to our equity
investment totaled approximately $4.0 million. Aggregate
amortization expense for
13
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
intangible assets totaled $17.5 million and
$30.6 million for the three months ended September 30,
2004 and 2005, respectively. Aggregate amortization expense for
intangible assets totaled $48.8 million and
$81.9 million for the nine months ended September 30,
2004 and 2005, respectively.
As of September 30, 2005, expected future intangible asset
amortization is as follows (in thousands):
|
|
|
|
|
|
Fiscal Years:
|
|
|
|
|
|
2005 (remaining three months)
|
|
$ |
34,175 |
|
|
2006
|
|
|
118,555 |
|
|
2007
|
|
|
107,887 |
|
|
2008
|
|
|
103,137 |
|
|
2009
|
|
|
84,761 |
|
|
Thereafter
|
|
|
45,770 |
|
|
|
|
|
|
|
$ |
494,285 |
|
|
|
|
|
Reportable 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 financial
information, and overall aggregation and materiality
considerations.
Marketplaces includes our online marketplace trading,
classifieds and other platforms other than our PayPal platform.
The disclosures below give the results of our Marketplaces
reportable segment by geography. The Payments reportable segment
includes our global payments platform consisting of our PayPal
subsidiary.
Our net revenues result from fees associated primarily with our
transaction services derived from our Marketplaces and our
Payments reportable segments.
Direct contribution consists of revenues less direct costs.
Direct costs include specific 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 costs, product development expenses, and
certain general and administrative costs, are monitored by
management through shared cost centers and are not evaluated in
the measurement of segment performance by geography.
14
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes our financial performance (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
|
U.S. | |
|
International | |
|
|
|
U.S. | |
|
International | |
|
|
|
|
Marketplace | |
|
Marketplace | |
|
Payments | |
|
Consolidated | |
|
Marketplace | |
|
Marketplace | |
|
Payments | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Net revenues from external customers
|
|
$ |
347,343 |
|
|
$ |
286,516 |
|
|
$ |
172,017 |
|
|
$ |
805,876 |
|
|
$ |
449,549 |
|
|
$ |
408,868 |
|
|
$ |
247,098 |
|
|
$ |
1,105,515 |
|
Direct costs
|
|
|
112,576 |
|
|
|
112,151 |
|
|
|
91,478 |
|
|
|
316,205 |
|
|
|
153,052 |
|
|
|
167,651 |
|
|
|
120,861 |
|
|
|
441,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution
|
|
$ |
234,767 |
|
|
$ |
174,365 |
|
|
$ |
80,539 |
|
|
|
489,671 |
|
|
$ |
296,497 |
|
|
$ |
241,217 |
|
|
$ |
126,237 |
|
|
|
663,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses and indirect costs of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
235,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
307,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
253,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
356,736 |
|
Interest and other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,657 |
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,236 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(431 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
264,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
386,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
|
U.S. | |
|
International | |
|
|
|
U.S. | |
|
International | |
|
|
|
|
Marketplace | |
|
Marketplace | |
|
Payments | |
|
Consolidated | |
|
Marketplace | |
|
Marketplace | |
|
Payments | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Net revenues from external customers
|
|
$ |
1,020,394 |
|
|
$ |
823,450 |
|
|
$ |
491,683 |
|
|
$ |
2,335,527 |
|
|
$ |
1,277,962 |
|
|
$ |
1,221,499 |
|
|
$ |
724,081 |
|
|
$ |
3,223,542 |
|
Direct costs
|
|
|
333,433 |
|
|
|
313,634 |
|
|
|
260,424 |
|
|
|
907,491 |
|
|
|
448,645 |
|
|
|
481,580 |
|
|
|
348,903 |
|
|
|
1,279,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution
|
|
$ |
686,961 |
|
|
$ |
509,816 |
|
|
$ |
231,259 |
|
|
|
1,428,036 |
|
|
$ |
829,317 |
|
|
$ |
739,919 |
|
|
$ |
375,178 |
|
|
|
1,944,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses and indirect costs of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
653,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
873,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
774,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,071,296 |
|
Interest and other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,585 |
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,614 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,556 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
827,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,154,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2004 and September 30, 2005, short and
long-term investments were classified as available-for-sale
securities, except for restricted cash and investments, and are
reported at fair value as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 | |
|
|
| |
|
|
Gross | |
|
Gross | |
|
Gross | |
|
|
|
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
Estimated | |
|
|
Cost | |
|
Gains | |
|
Losses | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and investments
|
|
$ |
156,130 |
|
|
$ |
25 |
|
|
$ |
(750 |
) |
|
$ |
155,405 |
|
|
Corporate debt securities
|
|
|
581,058 |
|
|
|
33 |
|
|
|
(2,908 |
) |
|
|
578,183 |
|
|
Government and agency securities
|
|
|
80,274 |
|
|
|
|
|
|
|
(432 |
) |
|
|
79,842 |
|
|
Time deposits and other
|
|
|
23,979 |
|
|
|
|
|
|
|
|
|
|
|
23,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
841,441 |
|
|
$ |
58 |
|
|
$ |
(4,090 |
) |
|
$ |
837,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and investments
|
|
$ |
1,397 |
|
|
$ |
21 |
|
|
$ |
|
|
|
$ |
1,418 |
|
|
Corporate debt securities
|
|
|
827,505 |
|
|
|
107 |
|
|
|
(2,137 |
) |
|
|
825,475 |
|
|
Government and agency securities
|
|
|
397,211 |
|
|
|
|
|
|
|
(4,733 |
) |
|
|
392,478 |
|
|
Equity instruments and equity method investments
|
|
|
48,336 |
|
|
|
|
|
|
|
|
|
|
|
48,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,274,449 |
|
|
$ |
128 |
|
|
$ |
(6,870 |
) |
|
$ |
1,267,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
|
| |
|
|
Gross | |
|
Gross | |
|
Gross | |
|
|
|
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
Estimated | |
|
|
Cost | |
|
Gains | |
|
Losses | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and investments
|
|
$ |
33,256 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
33,256 |
|
|
Corporate debt securities
|
|
|
492,174 |
|
|
|
33 |
|
|
|
(2,186 |
) |
|
|
490,021 |
|
|
Government and agency securities
|
|
|
383,720 |
|
|
|
|
|
|
|
(4,198 |
) |
|
|
379,522 |
|
|
Time deposits and other
|
|
|
19,240 |
|
|
|
|
|
|
|
|
|
|
|
19,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
928,390 |
|
|
$ |
33 |
|
|
$ |
(6,384 |
) |
|
$ |
922,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and investments
|
|
$ |
1,654 |
|
|
$ |
29 |
|
|
$ |
|
|
|
$ |
1,683 |
|
|
Corporate debt securities
|
|
|
649,430 |
|
|
|
82 |
|
|
|
(3,258 |
) |
|
|
646,254 |
|
|
Government and agency securities
|
|
|
130,494 |
|
|
|
|
|
|
|
(1,758 |
) |
|
|
128,736 |
|
|
Equity instruments and equity method investments
|
|
|
50,518 |
|
|
|
|
|
|
|
|
|
|
|
50,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
832,096 |
|
|
$ |
111 |
|
|
$ |
(5,016 |
) |
|
$ |
827,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included within short-term restricted cash and investments at
December 31, 2004 was $126.4 million that was utilized
as payment of a lease obligation for our San Jose
headquarters facility on March 1, 2005 (see
Note 7 Balance Sheet Components of
these condensed consolidated financial statements).
16
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 6 |
Derivative Instruments |
As of September 30, 2005, we had outstanding forward
foreign exchange hedge contracts with notional values equivalent
to approximately $296.4 million with maturity dates within
32 days. The hedge contracts are used to offset changes in
non-U.S. dollar denominated functional currency value of
assets and liabilities as a result of foreign exchange rate
fluctuations. Transaction gains and losses on the contracts and
the assets and liabilities are recognized each period in our
consolidated statement of income.
We consolidate the earnings of our international subsidiaries by
converting them into U.S. dollars in accordance with
Statement of Financial Accounting Standards No. 52
Foreign Currency Translation (FAS 52). Such
earnings will fluctuate when there is a change 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 foreign
currency options and forward contracts. All contracts that hedge
translation exposure mature ratably over the quarter in which
they are executed. During the three and nine months ended
September 30, 2005, the realized gains and losses related
to these hedges were not significant.
We currently charge our international subsidiaries on a monthly
basis for their use of intellectual property and technology and
for certain corporate services provided by eBay and by PayPal.
These charges are denominated in Euros and these forecasted
inter-company transactions represent a foreign currency cash
flow exposure. To reduce foreign exchange risk relating to these
forecasted inter-company transactions, we entered into forward
foreign exchange contracts during the three and nine months
ended September 30, 2005. The objective of the forward
contracts is to better ensure that the
U.S. dollar-equivalent cash flows are not adversely
affected by changes in the U.S. dollar/ Euro exchange rate.
Pursuant to Statement of Financial Accounting Standards
No. 133 Accounting for Derivative Instruments and
Hedging Activities (FAS 133), we expect the hedge of
certain of these forecasted transactions to be highly effective
in offsetting potential changes in cash flows attributed to a
change in the U.S. dollar/ Euro exchange rate. Accordingly,
we record as a component of accumulated other comprehensive
income all unrealized gains and losses related to the forward
contracts that receive hedge accounting treatment. We record all
unrealized gains and losses in interest and other income, net,
related to the forward contracts that do not receive hedge
accounting treatment pursuant to FAS 133. During the three
and nine months ended September 30, 2004 and 2005, the
realized gains and losses related to these hedges were not
significant. The notional amount of our economic hedges
receiving hedge accounting treatment and the losses, net of
gains, recorded to accumulated other comprehensive income as of
September 30, 2004 was $49.9 million and
$1.4 million, respectively. The notional amount of our
economic hedges receiving hedge accounting treatment and the
gains, net of losses, recorded to accumulated other
comprehensive income as of September 30, 2005 was
$77.7 million and $1.7 million, respectively.
|
|
Note 7 |
Balance Sheet Components |
As of December 31, 2004, we had $126.4 million
included within current restricted cash and investments relating
to our San Jose headquarters facility lease arrangement,
which had effectively provided us with full ownership rights to
these facilities. In February 2004, we elected not to exercise
our right to extend the lease period and therefore the lease on
these facilities ended on March 1, 2005. As a result, we
were required to pay the lease obligation for our San Jose
headquarters facility lease during the first quarter of 2005,
utilizing the
17
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$126.4 million included within current restricted cash and
investments, and have offset the corresponding liability related
to the consolidated operating lease obligation of
$122.5 million and the minority interest of
$3.9 million.
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
September 30, | |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Customer accounts
|
|
$ |
270,918 |
|
|
$ |
299,581 |
|
Prepaid expenses
|
|
|
54,159 |
|
|
|
42,146 |
|
Deferred tax asset, net
|
|
|
10,427 |
|
|
|
7,249 |
|
Other
|
|
|
43,911 |
|
|
|
54,549 |
|
|
|
|
|
|
|
|
|
|
$ |
379,415 |
|
|
$ |
403,525 |
|
|
|
|
|
|
|
|
Customer accounts include liquid assets set aside for certain
customer liabilities as required in conjunction with
PayPals Electronic Money Institution license from the
United Kingdoms Financial Services Authority. The customer
liabilities represent claims on PayPals U.K. subsidiary
and may be invested only in specified types of liquid assets.
These assets are included on our balance sheet as current assets
with an offsetting current liability in funds payable and
amounts due to customers. Customer U.S. dollar denominated
funds in the U.S. are held in deposit accounts insured by
the Federal Deposit Insurance Corporation. These funds are owned
by customers and held by PayPal as an agent for the benefit of
its customers and, accordingly, are not reflected in our
consolidated balance sheet.
|
|
Note 8 |
Litigation and Other Contingencies |
|
|
|
Litigation and Other Legal Matters |
In April 2001, two of our European subsidiaries, eBay GmbH and
eBay International AG, were sued by Montres Rolex S.A. and
certain of its affiliates in the regional court of Cologne,
Germany. The suit subsequently was transferred to the regional
court in Düsseldorf, Germany. Rolex alleged that our
subsidiaries were infringing Rolexs trademarks as a result
of users selling counterfeit Rolex watches through our German
website. The suit also alleged unfair competition. Rolex sought
an order enjoining the sale of Rolex-branded watches on the
website as well as damages. In December 2002, a trial was held
in the matter and the court ruled in favor of eBay on all causes
of action. Rolex appealed the ruling to the Higher Regional
Court of Düsseldorf, and the appeal was heard in October
2003. In February 2004, the court rejected Rolexs appeal
and ruled in our favor. Rolex has appealed the ruling to the
German Federal Supreme Court. In March 2004, the German Federal
Supreme Court ruled in favor of Rolex in a case involving an
unrelated company, ricardo.de AG, but somewhat comparable legal
theories. The court issued its written decision in that case in
September 2004. Although it is not yet clear what effect the
reasoning of the German Federal Supreme Courts ricardo.de
decision would have when applied to eBay, we believe the
Courts decision will likely not require any significant
change in our business practices.
In September 2001, MercExchange LLC filed a complaint 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 consignment 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, effectively
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 in April 2003. In May 2003,
the jury returned a verdict finding that eBay had willfully
infringed one and Half.com had willfully infringed both of the
patents
18
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
in the suit, awarding $35 million in compensatory damages.
Both parties filed 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, while denying
MercExchanges request for an injunction and
attorneys fees. We appealed the verdict and judgment in
favor of MercExchange and MercExchange filed a cross-appeal of
the granting in part of our summary judgment motion and the
denial of its request for an injunction and attorneys fees.
In March 2005, the U.S. Court of Appeals for the Federal
Circuit issued a ruling in the appeal of the MercExchange patent
litigation suit which, among other things (1) invalidated
all claims asserted against eBay and Half.com arising out of the
multiple database search patent and reduced the verdict amount
by $4.5 million; (2) upheld the electronic consignment
system patent; (3) affirmed the district courts
refusal to award attorneys fees or enhanced damages
against us; (4) reversed the district courts order
granting summary judgment in our favor regarding the auction
patent; and (5) reversed the district courts refusal
to grant an injunction and remanded that issue to the district
court for further proceedings. In May 2005, the Court of Appeals
for the Federal Circuit granted our petition to stay the mandate
in the case in order to allow us to petition the
U.S. Supreme Court for review on certain issues. We filed
our petition for review with the U.S. Supreme Court on
July 25, 2005. In parallel with the federal court
proceedings, at our request, the U.S. Patent and Trademark
Office is actively reexamining each of the patents in suit,
having found that substantial questions exist regarding the
validity of the claims contained in them. In January 2005, the
Patent and Trademark Office issued an initial ruling rejecting
all of the claims contained in the patent that related to online
auctions; in March 2005, the Patent and Trademark Office issued
an initial ruling rejecting all of the claims contained in the
patent that related to electronic consignment systems; and in
May 2005, the Patent and Trademark Office issued an initial
ruling rejecting all of the claims contained in the patent that
related to multiple database searching. Even if successful, our
litigation of these matters will continue to be costly. In
addition, as a precautionary measure, we have modified certain
functionality of our websites and business practices in a manner
which we believe would avoid any further infringement. For this
reason, we believe that any injunction that might be issued by
the district court will not have any impact on our business. We
also believe we have appropriate reserves for this litigation.
Nonetheless, if we are not successful in appealing or modifying
the courts ruling, and if the modifications to the
functionality of our websites and business practices are not
sufficient to make them non-infringing, we would likely be
forced to pay significant additional damages and licensing fees
and/or modify our business practices in an adverse manner.
In August 2002, Charles E. Hill & Associates, Inc.
filed 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, unspecified damages, including treble damages for
willful infringement, and interest, costs, expenses, and fees.
The case was transferred to the U.S. District Court for the
Southern District of Indiana in January 2003, but was
transferred back to the U.S. District Court for the Eastern
District of Texas in December 2003. A scheduling conference was
held in November 2004 and a preliminary trial date has been set
for February 2006. A claim construction hearing was held on
August 19, 2005. The defendants have filed a motion for
summary judgment of noninfringement and a motion for summary
judgment on the priority date of the parent patent and
consequential invalidity of the two subsequent patents. 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
limiting access to customer accounts and failure to promptly
restore access to legitimate accounts violates California state
consumer protection laws and is an unfair business practice and
a breach of PayPals User Agreement. This action was
re-filed with a different named plaintiff in June 2002
(No. CV-808441), and a similar action was also filed 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
19
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
District of California (No. C-02-1227) in a purported class
action alleging that its limiting access to customer accounts
and failure to promptly restore access to legitimate accounts
violates federal and state consumer protection and unfair
business practice laws. The two federal court actions were
consolidated into a single case, and the state court action was
stayed pending developments in the federal case. In June 2004,
the parties announced that they had reached a proposed
settlement. The settlement received approval from the federal
court on November 2, 2004, and the state court action was
dismissed with prejudice in March 2005. In the settlement,
PayPal does not acknowledge that any of the allegations in the
case are true. Under the terms of the settlement, certain PayPal
account holders will be eligible to receive payment from a
settlement fund of $9.25 million, less administrative costs
and the amount awarded to plaintiffs counsel by the court.
That sum is being distributed to class members who have
submitted timely claims in accordance with the settlements
plan of allocation, part of which still must be approved by the
court. The parties expect that the remaining part of the plan of
allocation will be submitted to the court in the fourth quarter
of 2005. The amount of the settlement was fully accrued in our
consolidated statement of income for the year ended
December 31, 2003.
In July 2004, a purported class action lawsuit was filed by two
eBay users in Superior Court of the State of California, County
of Santa Clara (No. 104CV022708) alleging that eBay engaged
in improper billing practices as the result of problems with the
rollout of a new billing software system in the second and third
quarters of 2004. The lawsuit sought damages and injunctive
relief. An amended complaint was filed in January 2005, dropping
one plaintiff, changing the capacity of the other plaintiff to
that of representative plaintiff, and adding seven additional
eBay users as plaintiffs. The amended complaint expanded its
claim to include numerous alleged improper billing practices
from September 2003 until the present. In February 2005, eBay
filed a motion to strike and a demurrer seeking to dismiss the
complaint. In April 2005, the court sustained portions of the
demurrer, but granted the plaintiffs leave to amend their
complaint. The plaintiffs filed a second amended complaint,
dropping the last original plaintiff and again adding new
plaintiffs. We filed a motion to strike and a demurrer regarding
the plaintiffs second amended complaint. In July 2005, the
court again sustained a portion of the demurrer and again
granted the plaintiffs leave to amend their complaint, and the
plaintiffs filed a third amended complaint. We have filed an
answer to the plaintiffs third amended complaint, and are
currently in the initial phase of discovery. We believe that we
have meritorious defenses and intend to defend ourselves
vigorously.
In February 2005, eBay was sued in Superior Court of the State
of California, County of Santa Clara (No. 105CV035930)
in a purported class action alleging that certain bidding
features of our site constitute shill bidding for
the purpose of artificially inflating bids placed by buyers on
the site. The complaint alleges violations of Californias
Auction Act, Californias Consumer Remedies Act, and unfair
competition. The complaint seeks injunctive relief, damages, and
a constructive trust. In April 2005, we filed a demurrer seeking
to dismiss the complaint. We have agreed to stay the demurrer
and participate in a mediation with the plaintiffs, which is
scheduled to take place in October 2005. We believe that we have
meritorious defenses and intend to defend ourselves vigorously.
In March 2005, eBay, PayPal, and an eBay seller were sued in
Supreme Court of the State of New York, County of Kings
(No. 6125/05) in a purported class action alleging that
certain disclosures regarding PayPals Buyer Protection
Policy, users chargeback rights, and the effects of
users choice of funding mechanism are deceptive and/or
misleading. The complaint alleged misrepresentation on the part
of eBay and PayPal, breach of contract and deceptive trade
practices by PayPal, and that PayPal and eBay have jointly
violated the civil RICO statute (18 U.S.C.
Section 1961(4)). In April 2005, eBay and PayPal removed
the case to the U.S. District Court for the Eastern
District of New York and the plaintiffs filed an amended
complaint in the U.S. District Court (No. 05-CV-01720)
repeating the allegations of the initial complaint but dropping
the civil RICO allegations. The complaint seeks injunctive
relief, compensatory damages, and punitive damages. The parties
agreed to stay further proceedings pending a mediation hearing,
which took place in July 2005. The parties are continuing
mediation discussions, though the stay of proceedings has
expired. We believe that eBay and PayPal have meritorious
defenses and intend to defend ourselves vigorously.
20
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In January 2005, 51 former shareholders of Epinions, Inc. common
stock including founders and former employees of that company
filed a lawsuit in Superior Court of the State of California,
County of San Francisco (No. CGC 05-437906)
related to the April 2003 merger of Epinions and DealTime, Ltd.
The lawsuit was filed against certain of Epinions former
officers and directors and preferred shareholders and the
company that resulted from the merger, Shopping.com Ltd. eBay
completed its acquisition of Shopping.com Ltd. on
August 30, 2005. The lawsuit contended that the defendants
were responsible for breaches of fiduciary duty and material
misstatements and omissions, that defendants undervalued the
DealTime stock that Epinions shareholders received in
connection with the merger, and that plaintiffs common
stock of Epinions was wrongfully cancelled without compensation.
Defendants disputed the contentions of the case and denied any
allegations of wrongdoing. In September 2005, the parties
tentatively reached agreement as to the monetary terms for
settlement of the dispute. The settlement remains subject to the
final written approval of the parties. The tentative settlement
amount has been accounted for as an assumed liability in
connection with our acquisition of Shopping.com.
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 notified 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 and
communications businesses. We have in the past been forced to
litigate such claims. We may also become more vulnerable to
third-party claims as laws such as the Digital Millennium
Copyright Act, the Lanham Act and the Communications Decency Act
are interpreted by the courts and as we expand geographically
into jurisdictions where the underlying laws with respect to the
potential liability of online intermediaries like ourselves are
either unclear or less favorable. These claims, whether
meritorious or not, could be time consuming and costly to
resolve, cause service upgrade delays, require expensive changes
in our methods of doing business, or could require us to enter
into costly royalty or licensing agreements.
From time to time, we are involved in other disputes or
regulatory inquiries that arise in the ordinary course of
business. The number and significance of these disputes and
inquiries are increasing as our business expands and our company
grows larger. Any claims or regulatory actions against us,
whether meritorious or not, could be time consuming, result in
costly litigation, require significant amounts of management
time, and result in the diversion of significant operational
resources. While we currently believe that the ultimate
resolution of these unresolved matters will not have a material
adverse impact on our financial position, results of operations
or cash flows, the litigation, inquiries and other claims noted
specifically or generally above are subject to inherent
uncertainties and our view of these matters may change in the
future. Were an unfavorable final outcome to occur, there exists
the possibility of a material adverse impact on our financial
position, results of operations or cash flows for the period in
which the effect becomes reasonably estimable. We are unable to
determine what potential losses we may incur if these matters
were to have an unfavorable outcome.
|
|
|
Indemnification Provisions |
In the ordinary course of business, we have included limited
indemnification provisions in certain of our agreements with
parties with whom we have commercial relations, including our
standard marketing, promotions and
application-programming-interface license agreements. Under
these contracts, we generally indemnify, hold harmless, and
agree to reimburse the indemnified party for losses suffered or
incurred by the indemnified party in connection with claims by
any third party with respect to our domain names, trademarks,
logos and other branding elements to the extent that such marks
are applicable to our performance under the subject agreement.
In a limited number of agreements, including agreements under
which we have developed technology for certain commercial
parties, we have provided an indemnity for other types of
third-party claims, substantially all of which are indemnities
related to our copyrights, trademarks, and patents. In our
PayPal business, we have provided an indemnity to our payments
processors in the event of certain third-party claims or card
association fines against the processor arising out of conduct
by PayPal. To date, no significant costs have been incurred,
either individually or collectively, in connection with our
indemnification provisions.
21
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 9 |
Employee Benefit Plans |
|
|
|
Employee Stock Purchase Plan |
We have an employee stock purchase plan for all eligible
employees. Under the plan, shares of our common stock may be
purchased over an offering period with a maximum duration of two
years at 85% of the lower of the fair market value on the first
day of the applicable offering 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
offering period. During the nine months ended September 30,
2005, employees purchased approximately 696,000 shares at
an average price of $24.93 per share. During the same
period in 2004, employees purchased approximately
606,000 shares at an average price of $18.48 per
share. At September 30, 2005, approximately
6.5 million shares were reserved for future issuance. 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.
We have a deferred stock unit plan under which deferred stock
units have been granted to new non-employee directors elected to
our Board of Directors after December 31, 2002. Under this
plan, each new director receives 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. These
deferred stock units vest 25% one year from the date of grant,
and at a rate of
1/48th 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. Further, each non-employee director may
elect to receive, in lieu of his or her annual retainer (which
is currently $50,000) and any fees payable for service as a
committee chair or Lead Independent Director at the time these
fees would be otherwise payable (i.e., on a quarterly basis in
arrears for services provided), deferred stock units with an
initial value equal to the result of dividing the cash amount
the director otherwise would have received by the fair market
value of our common stock on the date of grant. These deferred
stock units vest immediately upon 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 at our election). Deferred stock
units generally are payable following the termination of a
directors tenure as a director. All eBay officers,
directors and employees are eligible to receive awards under the
plan, although, to date, awards have been made only to
non-employee directors. As of September 30, 2005,
25,509 units had been awarded under this plan.
|
|
|
Other Equity Incentive Plans |
We also have equity incentive plans for directors, officers and
employees. Stock options granted under these plans generally
vest 25% one year from the date of grant (or 12.5% six months
from the date of grant for grants to existing employees) and the
remainder vest at a rate of
1/48th per
month thereafter, and generally 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 lapsed over the vesting period. Restricted stock
grants made under our equity incentive plans are subject to
repurchase by us at such times as determined by the Board of
Directors, typically five years. At September 30, 2005,
96.1 million shares were available for future grant under
these equity incentive plans.
22
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes activity under our equity
incentive plans for the three and nine months ended
September 30, 2004 and 2005 (shares in thousands):
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|
|
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|
|
Nine Months Ended | |
|
|
Three Months Ended September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Average | |
|
|
|
Average | |
|
|
|
Average | |
|
|
|
Average | |
|
|
|
|
Exercise | |
|
|
|
Exercise | |
|
|
|
Exercise | |
|
|
|
Exercise | |
|
|
Shares | |
|
Price | |
|
Shares | |
|
Price | |
|
Shares | |
|
Price | |
|
Shares | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Outstanding at beginning of period
|
|
|
145,374 |
|
|
$ |
21.15 |
|
|
|
139,272 |
|
|
$ |
26.69 |
|
|
|
138,410 |
|
|
$ |
16.93 |
|
|
|
137,208 |
|
|
$ |
23.63 |
|
Granted and assumed
|
|
|
6,450 |
|
|
|
42.50 |
|
|
|
6,475 |
|
|
|
33.61 |
|
|
|
38,745 |
|
|
|
36.51 |
|
|
|
28,599 |
|
|
|
39.75 |
|
Exercised
|
|
|
(4,318 |
) |
|
|
17.16 |
|
|
|
(7,063 |
) |
|
|
17.66 |
|
|
|
(26,610 |
) |
|
|
15.72 |
|
|
|
(21,255 |
) |
|
|
17.25 |
|
Cancelled
|
|
|
(1,616 |
) |
|
|
24.44 |
|
|
|
(3,501 |
) |
|
|
30.48 |
|
|
|
(4,655 |
) |
|
|
22.42 |
|
|
|
(9,369 |
) |
|
|
32.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
145,890 |
|
|
|
22.17 |
|
|
|
135,183 |
|
|
|
27.38 |
|
|
|
145,890 |
|
|
|
22.17 |
|
|
|
135,183 |
|
|
|
27.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of period
|
|
|
51,465 |
|
|
$ |
16.13 |
|
|
|
59,988 |
|
|
$ |
20.52 |
|
|
|
51,465 |
|
|
$ |
16.13 |
|
|
|
59,988 |
|
|
$ |
20.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the acquisition of Shopping.com, we assumed
approximately 2.4 million common stock options with a
weighted average exercise price of $23.58. The fair value of the
assumed options as of the date of acquisition was approximately
$43.2 million and was calculated using the Black-Scholes
option pricing model with the following weighted average
assumptions: risk-free interest rate, 4.0%; approximate expected
remaining life, 18 months; dividend yield, 0%; and expected
volatility, 35%. The intrinsic value of the unvested assumed
options was approximately $16.8 million and is being
amortized using the graded vesting approach under FASB
Interpretation No. 28.
The following table summarizes information about fixed stock
options outstanding at September 30, 2005 (shares in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable at | |
|
|
Options Outstanding at September 30, 2005 | |
|
September 30, 2005 | |
|
|
| |
|
| |
|
|
|
|
Weighted |
|
Weighted | |
|
|
|
Weighted | |
|
|
Number of | |
|
Average |
|
Average | |
|
Number of | |
|
Average | |
|
|
Shares | |
|
Remaining |
|
Exercise | |
|
Shares | |
|
Exercise | |
Range of Exercise Prices |
|
Outstanding | |
|
Contractual Life |
|
Price | |
|
Exercisable | |
|
Price | |
|
|
| |
|
|
|
| |
|
| |
|
| |
$ 0.08 - $13.74
|
|
|
13,895 |
|
|
5.1 years |
|
$ |
8.44 |
|
|
|
11,875 |
|
|
$ |
8.07 |
|
$13.75 - $14.51
|
|
|
13,854 |
|
|
6.6 |
|
|
14.22 |
|
|
|
9,450 |
|
|
|
14.26 |
|
$14.51 - $18.79
|
|
|
11,883 |
|
|
6.2 |
|
|
16.38 |
|
|
|
9,112 |
|
|
|
16.27 |
|
$18.79 - $19.39
|
|
|
13,648 |
|
|
7.2 |
|
|
19.34 |
|
|
|
7,381 |
|
|
|
19.31 |
|
$19.39 - $27.38
|
|
|
16,953 |
|
|
7.4 |
|
|
24.58 |
|
|
|
8,266 |
|
|
|
24.20 |
|
$27.43 - $34.50
|
|
|
7,387 |
|
|
8.5 |
|
|
30.86 |
|
|
|
2,412 |
|
|
|
30.35 |
|
$34.56 - $34.62
|
|
|
19,983 |
|
|
8.4 |
|
|
34.61 |
|
|
|
6,467 |
|
|
|
34.61 |
|
$34.63 - $41.89
|
|
|
13,556 |
|
|
9.3 |
|
|
38.60 |
|
|
|
1,611 |
|
|
|
38.76 |
|
$42.24 - $58.21
|
|
|
24,024 |
|
|
9.3 |
|
|
44.50 |
|
|
|
3,414 |
|
|
|
43.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,183 |
|
|
7.7 |
|
|
27.38 |
|
|
|
59,988 |
|
|
|
20.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable | |
|
Unexercisable | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Average | |
|
|
|
Average | |
|
|
|
Average | |
|
|
|
|
Exercise | |
|
|
|
Exercise | |
|
|
|
Exercise | |
|
|
Shares | |
|
Price | |
|
Shares | |
|
Price | |
|
Shares | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
In-the-money
|
|
|
56,417 |
|
|
$ |
19.04 |
|
|
|
53,460 |
|
|
$ |
28.19 |
|
|
|
109,877 |
|
|
$ |
23.50 |
|
Out-of-the-money
|
|
|
3,571 |
|
|
|
43.77 |
|
|
|
21,735 |
|
|
|
44.46 |
|
|
|
25,306 |
|
|
|
44.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total options outstanding
|
|
|
59,988 |
|
|
$ |
20.52 |
|
|
|
75,195 |
|
|
$ |
32.88 |
|
|
|
135,183 |
|
|
$ |
27.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-the-money options are options with an exercise price equal to
or lower than the $41.20 closing price of our common stock on
September 30, 2005. Out-of-the-money options are options
with an exercise price greater than the $41.20 closing price of
our common stock on September 30, 2005.
In connection with the change in status from an employee to a
non-employee in the fourth quarter of 2004, we were required, in
accordance with FASB Interpretation No. 44 Accounting
for Certain Transactions Involving Stock
Compensation an interpretation of APB Opinion
No. 25 and EITF 00-23 Issues Related to
the Accounting for Stock Compensation under APB Opinion
No. 25 and FASB Interpretation No. 44, to
remeasure the portion of an individuals options that were
unvested at the date of the change in status. The remeasurement
is required to be at fair value and will continue to be revalued
over the period of performance. The related stock-based
compensation amortization recognized during the three and nine
months ended September 30, 2005 totaled approximately
$1.2 million and $5.2 million, respectively. The fair
value of the unvested options have been estimated as of
September 30, 2005 using the Black-Scholes option pricing
model with the following weighted average assumptions: risk-free
interest rate, 4.1%; approximate remaining effective contractual
life, 3 years; dividend yield, 0%; and expected volatility,
35%.
The following table summarizes additional stock option
information related to grants made to our employees and grants
made specifically to named officers, which consist of our chief
executive officer and the other four most highly compensated
officers during fiscal year 2004 (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Total outstanding shares of common stock (at period end)
|
|
|
1,325,802 |
|
|
|
1,360,459 |
|
|
|
1,325,802 |
|
|
|
1,360,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total outstanding shares of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants during the period
|
|
|
* |
|
|
|
* |
% |
|
|
3 |
% |
|
|
2 |
% |
Total outstanding in-the-money grants
|
|
|
11 |
% |
|
|
8 |
% |
|
|
11 |
% |
|
|
8 |
% |
Total outstanding grants
|
|
|
11 |
% |
|
|
10 |
% |
|
|
11 |
% |
|
|
10 |
% |
Grants to named officers during the period
|
|
|
0 |
% |
|
|
0 |
% |
|
|
* |
|
|
|
* |
|
Total outstanding grants to named officers
|
|
|
1 |
% |
|
|
1 |
% |
|
|
1 |
% |
|
|
1 |
% |
Total stock options granted and assumed during the period
|
|
|
6,450 |
|
|
|
6,475 |
|
|
|
38,745 |
|
|
|
28,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants to named officers during the period as a percent of total
grants during the period
|
|
|
0 |
% |
|
|
0 |
% |
|
|
8 |
% |
|
|
5 |
% |
Total outstanding stock option grants (at period end)
|
|
|
145,890 |
|
|
|
135,183 |
|
|
|
145,890 |
|
|
|
135,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total outstanding grants to named officers as a percent of total
stock option grants outstanding
|
|
|
11 |
% |
|
|
11 |
% |
|
|
11 |
% |
|
|
11 |
% |
|
|
* |
Less than half of a percentage point |
24
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 10 Subsequent Events
|
|
|
Acquisition of Skype Technologies SA |
On October 14, 2005, we acquired all of the outstanding
securities of Skype Technologies SA (Skype), for a
total initial consideration of approximately $2.5 billion,
plus potential performance-based payments of up to
$1.3 billion. In addition, we agreed to assume Skypes
stock options outstanding as of the closing date and convert
them into options to acquire approximately 1.9 million shares of
our common stock. The initial consideration of $2.5 billion
is comprised of approximately $1.3 billion in cash and
32.8 million shares of our common stock. For accounting
purposes, the stock portion of the initial consideration is
valued at approximately $1.2 billion based on the average
closing price of our common stock surrounding the acquisition
announcement date of September 12, 2005. The shares of our
common stock issued in connection with the acquisition are
subject to certain contractual and other restrictions on resale.
Additionally, the assumed options will be valued and will be
included as part of the purchase price. The purchase price will
be allocated to the tangible and intangible assets acquired and
liabilities assumed based on their respective fair values at the
acquisition date.
In addition to the initial consideration, the maximum amount
potentially payable under the performance-based earn-out is
approximately
1.1 billion,
or approximately $1.4 billion, and would be payable in cash
or common stock, at our discretion. The earn-out payments are
contingent upon Skype achieving certain net revenue and gross
margin-based targets, gross profit-based targets and active user
targets. Base earn-out payments of up to an aggregate of
approximately
877 million,
or approximately $1.05 billion, weighted equally among the
three targets, would be payable if the targets are achieved over
any four-quarter period commencing on January 1, 2006
through June 30, 2009. Additional bonus earn out payments
of up to an aggregate of approximately
292 million,
or approximately $351 million, weighted equally among the
three targets, would be payable if Skype exceeds the targets
during calendar year 2008. Any contingent earn-out payments made
will be accounted for as additional purchase price and will
increase goodwill. As any contingent earn-out payments are to be
paid in Euros, the Dollar amounts set forth above were based on
the Euro-Dollar exchange rate as of October 12, 2005.
Skype is a Luxembourg-based company that was established in
2003. Skype has developed software that, among other things,
enables free PC to PC calls between Skype users. Skypes
premium services, which currently are its primary source of
revenue, provide low-cost connectivity to traditional fixed and
mobile telephones. We believe that Skype can increase the
velocity of trade on our websites, especially in categories that
require more involved communications, as well as enable us to
develop and provide new e-commerce services.
|
|
|
Announced Acquisition of VeriSign, Inc.s Payment
Gateway Business |
On October 10, 2005, we announced our agreement to acquire
VeriSign, Inc.s payment gateway business. We have agreed
to pay approximately $370 million, in cash or common stock,
at our discretion. The acquisition is subject to regulatory and
other approvals, and is expected to close in the fourth quarter
of 2005. VeriSign, Inc.s payment gateway is a real-time
scalable internet payment platform that allows merchants to
authorize, process, and manage online payments. Additionally, we
have signed a multi-year security technology agreement with
VeriSign, Inc. that calls for us to invest in the deployment of
their technologies that enable and better protect online
transactions, including the purchase of up to one million
two-factor authentication tokens.
25
|
|
Item 2: |
Managements 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 financial 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, 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 Affect Results of
Operations and Financial Condition below, as well as our
consolidated financial statements, related notes, and the other
financial information appearing elsewhere in this report and our
other filings with the Securities and Exchange Commission. We
assume no obligation to update any forward-looking
statements.
You should read the following Managements Discussion and
Analysis of Financial Condition and Results of Operations in
conjunction with the condensed consolidated financial statements
and the related notes that appear elsewhere in this document.
Overview
eBay Inc., together with its subsidiaries (eBay),
pioneers communities built on commerce, sustained by trust, and
inspired by opportunity. eBay brings together millions of buyers
and sellers every day on a local, national and international
basis through an array of websites that focus on commerce and
payments.
Our Marketplaces online services create a powerful platform for
the sale of goods and services by a global community of
individuals and businesses. On any given day, there are millions
of products and services available through auction-style and
fixed-price trading.
Our PayPal online services enable individuals and businesses to
quickly, easily and securely send and receive payments online.
PayPals services build on the existing financial
infrastructure of bank accounts and credit cards and use the
advanced proprietary fraud prevention systems to create safe
payment solutions.
|
|
|
Executive Operating and Financial Summary |
|
|
|
Our focus is on understanding our key operating and financial
metrics |
Members of our senior management team regularly review key
operating metrics such as new users, active users, listings and
gross merchandise volume as well as new user accounts and total
payment volume processed by our PayPal subsidiary. Members of
our senior management also regularly review key financial
information including net revenues, operating income margins,
earnings per share, cash flows from operations and free cash
flows, which we define as operating cash flows less purchases of
property and equipment, net. These operating and financial
measures allow us to monitor the health and vibrancy of our
marketplaces and our global payments platform, and the
profitability of our business and to evaluate the effectiveness
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 these key operating and financial measures and
how they change over time is important to investors, analysts
and other parties analyzing our business results and future
market opportunities.
|
|
|
Our expectations for growth |
We expect that our growth in net revenues during the remainder
of 2005 will result primarily from increased net transaction
revenues across our Marketplaces and Payments reportable
segments, both domestically and internationally. We continue to
make investments in our business and infrastructure, and strive
for cost and operational efficiencies to help us achieve our
long-term growth objectives. We expect to
26
continue our investments in the areas of international expansion
in our business segments and in customer support, site
operations, product development, trust and safety, marketing and
various corporate infrastructure areas. We are also investing in
expanding the format offerings of our global online marketplace,
both organically and through acquisitions. We believe these
investments are necessary to support the long-term demands of
our growing business. To the extent that the U.S. dollar
strengthens against foreign currencies, and, in particular, the
Euro, the remeasurement of these foreign currency denominated
transactions into U.S. dollars will negatively impact our
consolidated net revenues and, to the extent that they are not
hedged, our net income.
The detailed discussion of our consolidated financial results
contained herein is intended to provide information to assist
investors, analysts and other parties reading this report
understand our key operating and financial measures as well as
the changes in our consolidated results of operations from
period to period, and the primary factors that accounted for
those changes.
The following table sets forth, for the periods presented, our
total net revenues and the sequential quarterly growth of these
net revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31 | |
|
June 30 | |
|
September 30 | |
|
December 31 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
476,492 |
|
|
$ |
509,269 |
|
|
$ |
530,942 |
|
|
$ |
648,393 |
|
|
Current quarter vs prior quarter
|
|
|
15 |
% |
|
|
7 |
% |
|
|
4 |
% |
|
|
22 |
% |
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
756,239 |
|
|
$ |
773,412 |
|
|
$ |
805,876 |
|
|
$ |
935,782 |
|
|
Current quarter vs prior quarter
|
|
|
17 |
% |
|
|
2 |
% |
|
|
4 |
% |
|
|
16 |
% |
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
1,031,724 |
|
|
$ |
1,086,303 |
|
|
$ |
1,105,515 |
|
|
|
N/A |
|
|
Current quarter vs prior quarter
|
|
|
10 |
% |
|
|
5 |
% |
|
|
2 |
% |
|
|
|
|
As our business matures, transaction activity patterns on our
websites increasingly mirror general consumer buying patterns,
both online and offline. We have historically experienced our
strongest quarters of sequential growth in the first and fourth
fiscal quarters. This pattern of seasonality is reflected in the
sequentially lower revenue growth rates in the second and third
fiscal quarters.
27
Results of Operations
The following table sets forth, for the periods presented,
certain data from our condensed consolidated statement of income
as a percentage of net revenues. This information should be read
in conjunction with our condensed consolidated financial
statements and notes thereto included elsewhere in this
report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
| |
|
|
September 30, | |
|
December 31, | |
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
|
2004 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Net revenues
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of net revenues
|
|
|
19.5 |
|
|
|
18.9 |
|
|
|
18.1 |
|
|
|
17.7 |
|
|
|
18.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
80.5 |
|
|
|
81.1 |
|
|
|
81.9 |
|
|
|
82.3 |
|
|
|
81.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
25.7 |
|
|
|
28.7 |
|
|
|
26.3 |
|
|
|
26.4 |
|
|
|
26.6 |
|
|
Product development
|
|
|
7.9 |
|
|
|
6.9 |
|
|
|
7.2 |
|
|
|
6.6 |
|
|
|
7.1 |
|
|
General and administrative
|
|
|
13.1 |
|
|
|
12.4 |
|
|
|
13.2 |
|
|
|
11.9 |
|
|
|
13.1 |
|
|
Payroll tax on employee stock options
|
|
|
0.2 |
|
|
|
0.6 |
|
|
|
0.6 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
Amortization of acquired intangible assets
|
|
|
2.0 |
|
|
|
2.1 |
|
|
|
2.2 |
|
|
|
2.4 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
49.0 |
|
|
|
50.7 |
|
|
|
49.4 |
|
|
|
47.5 |
|
|
|
49.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
31.5 |
|
|
|
30.4 |
|
|
|
32.5 |
|
|
|
34.9 |
|
|
|
32.3 |
|
Interest and other income, net
|
|
|
1.6 |
|
|
|
2.0 |
|
|
|
2.2 |
|
|
|
3.0 |
|
|
|
2.8 |
|
Interest expense
|
|
|
(0.3 |
) |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
(0.0 |
) |
|
|
(0.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests
|
|
|
32.9 |
|
|
|
32.2 |
|
|
|
34.5 |
|
|
|
37.8 |
|
|
|
35.0 |
|
Provision for income taxes
|
|
|
(10.0 |
) |
|
|
(10.2 |
) |
|
|
(9.7 |
) |
|
|
(11.0 |
) |
|
|
(11.9 |
) |
Minority interests
|
|
|
(0.2 |
) |
|
|
(0.0 |
) |
|
|
(0.0 |
) |
|
|
(0.0 |
) |
|
|
(0.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
22.6 |
|
|
|
21.9 |
|
|
|
24.8 |
|
|
|
26.8 |
|
|
|
23.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our net revenues are derived primarily from listing, feature and
final value fees paid by sellers on our Marketplaces platforms
and fees from payment processing services on our global payments
platform. Our net revenues have continued to grow each year,
primarily as a result of increased transaction activity,
reflected in the growth in the number of our confirmed
registered users, user activity, listings and gross merchandise
volume on our Marketplaces platforms and payment transactions
processed by PayPal. We believe these increases are largely the
result of our promotional efforts and our emphasis on enhancing
the online trading experience of our user community, both
domestically and internationally, through the introduction of
new site features and functionality and expanded trust and
safety programs.
We continued to invest in international and domestic expansion,
customer support, site operations, trust and safety, corporate
infrastructure, product development and marketing. In the third
quarter of 2005, the cost of these investments was partially
offset by operational and cost efficiencies.
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
Nine Months | |
|
|
|
Nine Months | |
|
|
Ended | |
|
|
|
Ended | |
|
Ended | |
|
|
|
Ended | |
|
|
September 30, | |
|
Percent | |
|
September 30, | |
|
September 30, | |
|
Percent | |
|
September 30, | |
|
|
2004 | |
|
Change | |
|
2005 | |
|
2004 | |
|
Change | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percent changes) | |
Net Revenues by Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Marketplace
|
|
$ |
330,643 |
|
|
|
32 |
% |
|
$ |
434,937 |
|
|
$ |
975,979 |
|
|
|
26 |
% |
|
$ |
1,232,148 |
|
|
International Marketplace
|
|
|
282,294 |
|
|
|
42 |
% |
|
|
401,883 |
|
|
|
813,124 |
|
|
|
48 |
% |
|
|
1,200,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Marketplaces transaction net revenues
|
|
|
612,937 |
|
|
|
37 |
% |
|
|
836,820 |
|
|
|
1,789,103 |
|
|
|
36 |
% |
|
|
2,432,889 |
|
|
Payments
|
|
|
166,282 |
|
|
|
44 |
% |
|
|
239,922 |
|
|
|
480,610 |
|
|
|
47 |
% |
|
|
704,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total transaction net revenues
|
|
|
779,219 |
|
|
|
38 |
% |
|
|
1,076,742 |
|
|
|
2,269,713 |
|
|
|
38 |
% |
|
|
3,137,125 |
|
Advertising and other non- transaction net revenues
|
|
|
26,657 |
|
|
|
8 |
% |
|
|
28,773 |
|
|
|
65,814 |
|
|
|
31 |
% |
|
|
86,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$ |
805,876 |
|
|
|
37 |
% |
|
$ |
1,105,515 |
|
|
$ |
2,335,527 |
|
|
|
38 |
% |
|
$ |
3,223,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Marketplace
|
|
$ |
347,343 |
|
|
|
29 |
% |
|
$ |
449,549 |
|
|
$ |
1,020,394 |
|
|
|
25 |
% |
|
$ |
1,277,962 |
|
|
International Marketplace
|
|
|
286,516 |
|
|
|
43 |
% |
|
|
408,868 |
|
|
|
823,450 |
|
|
|
48 |
% |
|
|
1,221,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Marketplaces net revenues
|
|
|
633,859 |
|
|
|
35 |
% |
|
|
858,417 |
|
|
|
1,843,844 |
|
|
|
36 |
% |
|
|
2,499,461 |
|
|
Payments
|
|
|
172,017 |
|
|
|
44 |
% |
|
|
247,098 |
|
|
|
491,683 |
|
|
|
47 |
% |
|
|
724,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$ |
805,876 |
|
|
|
37 |
% |
|
$ |
1,105,515 |
|
|
$ |
2,335,527 |
|
|
|
38 |
% |
|
$ |
3,223,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$ |
467,545 |
|
|
|
30 |
% |
|
$ |
608,428 |
|
|
$ |
1,372,471 |
|
|
|
27 |
% |
|
$ |
1,746,525 |
|
|
International
|
|
|
338,331 |
|
|
|
47 |
% |
|
|
497,087 |
|
|
|
963,056 |
|
|
|
53 |
% |
|
|
1,477,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$ |
805,876 |
|
|
|
37 |
% |
|
$ |
1,105,515 |
|
|
$ |
2,335,527 |
|
|
|
38 |
% |
|
$ |
3,223,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
Net revenues are attributed to U.S. and International
geographies based upon the country in which the seller, payment
recipient, advertiser or service provider is located. Our
Payments segment net revenues include amounts earned
internationally and domestically.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
Nine Months | |
|
|
|
Nine Months | |
|
|
Ended | |
|
|
|
Ended | |
|
Ended | |
|
|
|
Ended | |
|
|
September 30, | |
|
Percent | |
|
September 30, | |
|
September 30, | |
|
Percent | |
|
September 30, | |
|
|
2004 | |
|
Change | |
|
2005 | |
|
2004 | |
|
Change | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions, except percentages) | |
Supplemental Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplaces Segment(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Confirmed registered users(2)
|
|
|
125.0 |
|
|
|
35 |
% |
|
|
168.1 |
|
|
|
125.0 |
|
|
|
34 |
% |
|
|
168.1 |
|
|
Active users(3)
|
|
|
51.7 |
|
|
|
32 |
% |
|
|
68.0 |
|
|
|
51.7 |
|
|
|
32 |
% |
|
|
68.0 |
|
|
Number of non-stores listings(4)
|
|
|
327.7 |
|
|
|
24 |
% |
|
|
407.0 |
|
|
|
963.3 |
|
|
|
26 |
% |
|
|
1,209.0 |
|
|
Number of stores listings(4)
|
|
|
20.3 |
|
|
|
154 |
% |
|
|
51.6 |
|
|
|
44.7 |
|
|
|
172 |
% |
|
|
121.5 |
|
|
Gross merchandise volume(5)
|
|
$ |
8,307 |
|
|
|
30 |
% |
|
$ |
10,800 |
|
|
$ |
24,358 |
|
|
|
33 |
% |
|
$ |
32,286 |
|
Payments Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accounts(6)
|
|
|
56.7 |
|
|
|
53 |
% |
|
|
86.6 |
|
|
|
56.7 |
|
|
|
53 |
% |
|
|
86.6 |
|
|
Active accounts(7)
|
|
|
17.4 |
|
|
|
41 |
% |
|
|
24.5 |
|
|
|
17.4 |
|
|
|
41 |
% |
|
|
24.5 |
|
|
Number of payments(8)
|
|
|
83.4 |
|
|
|
41 |
% |
|
|
117.4 |
|
|
|
240.3 |
|
|
|
42 |
% |
|
|
341.0 |
|
|
Total payment volume(9)
|
|
$ |
4,637 |
|
|
|
44 |
% |
|
$ |
6,667 |
|
|
$ |
13,308 |
|
|
|
46 |
% |
|
$ |
19,371 |
|
|
|
(1) |
Rent.com, Shopping.com, and our classifieds websites are not
included in these metrics. |
|
(2) |
Cumulative total of all users who have completed the
registration process on one of eBays trading platforms. |
|
(3) |
All users, excluding users of Half.com, Internet Auction,
Rent.com, Shopping.com, and our classifieds websites, who bid
on, bought, or listed an item within the previous 12-month
period. Includes users of eBay EachNet and eBay India since
their migration to the eBay platform in September 2004 and April
2005, respectively. |
|
(4) |
All listings on eBays trading platforms during the period,
regardless of whether the listing subsequently closed
successfully. |
|
(5) |
Total value of all successfully closed items between users on
eBays trading platforms during the period, regardless of
whether the buyer and seller actually consummated the
transaction. |
|
(6) |
Cumulative total of all personal, premier, or business accounts
opened, excluding accounts that have been closed or locked, and
including users that made payments using PayPal but have not
registered. |
|
(7) |
All accounts, and users whether registered or not, that sent or
received at least one payment through the PayPal system within
the previous three-month period. |
|
(8) |
Total number of payments initiated through the PayPal system
during the period, regardless of whether the payment was
actually sent successfully, or was reversed, rejected, or
pending at the end of the period. |
|
(9) |
Total dollar volume of payments initiated through the PayPal
system during the period, regardless of whether the payment was
actually sent successfully, or was reversed, rejected, or was
pending at the end of the period. |
Our Marketplaces segment includes our online marketplace
trading, classifieds and other platforms other than our PayPal
subsidiary. Certain of the disclosures above give the results of
our Marketplaces reportable
30
segment by geography. The Payments reportable segment includes
our global payments platform consisting of our PayPal subsidiary.
Our net revenues result from fees associated with our
transaction, advertising and other services in our Marketplaces
and our Payments segment. Net transaction revenues are derived
primarily from listing, feature and final value fees paid by
sellers and fees from payment processing services. Net revenues
from advertising are derived principally from the sale of 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 and PayPal users.
|
|
|
Marketplaces Net Transaction Revenues |
Total net transaction revenues from our Marketplaces segment
increased 37% and 36% in the aggregate during the third quarter
and first nine months of 2005, respectively, compared to the
same periods in the prior year. The growth in both domestic and
international net transaction revenues was primarily the result
of increased transaction activity, reflected in the growth of
the number of registered users, active users, listings and gross
merchandise volume. Gross merchandise volume from Marketplaces
increased 30% and 33% during the third quarter and first nine
months of 2005, respectively, compared to the same periods of
the prior year. During the third quarter and first nine months
of 2005, there was gross merchandise volume growth across all
major categories, with our motors, clothing &
accessories, home & garden, consumer electronics,
computers, books, movies, and music, and sports categories
contributing most to such year-over-year growth.
U.S. Marketplace net transaction revenues increased 32% and
26% during the third quarter and first nine months of 2005,
respectively, compared to the same periods in the prior year.
Net transaction revenues derived from the U.S. Marketplace
represented 40% and 39% of the total net transaction revenues in
both the third quarter and first nine months of 2005,
respectively, compared to 42% and 43%, respectively, in the same
periods of the prior year. Gross merchandise volume from the
U.S. Marketplace increased 21% and 20% during the third
quarter and first nine months of 2005, respectively, compared to
the same periods of the prior year. The U.S. Marketplace is
our largest and most developed business. We expect net
transaction revenues from our U.S. Marketplace to increase
during the remainder of 2005, but to decrease as a percentage of
total Marketplaces net transaction revenues as the International
Marketplace segment grows in significance. In addition, even as
the U.S. Marketplace continues to grow in total, we expect
the growth rate during the remainder of 2005 to be lower than
that of 2004.
|
|
|
International Marketplace |
International Marketplace net transaction revenues increased 42%
and 48% during the third quarter and first nine months of 2005,
respectively, compared to the same periods of the prior year.
International Marketplace net transaction revenues as a
percentage of total net transaction revenues was 37% and 38%
during the third quarter and first nine months of 2005,
respectively, compared to 36% in both the same periods of the
prior year. Gross merchandise volume from the International
Marketplace increased 40% and 48% during the third quarter and
first nine months of 2005, respectively, compared to the same
periods of the prior year. The growth in our International
Marketplace net transaction revenues, in total and as a
percentage of total net transaction revenues, was primarily the
result of strong performances in the United Kingdom and Germany
as well as significant increases in certain of our less
established markets, particularly Australia, France and Italy.
The relative strength of the Euro against the U.S. dollar
resulted in increased net revenues of approximately
$3.2 million and $47.5 million during the third
quarter and first nine months of 2005, respectively, as compared
to the same periods of the prior year. Changes in foreign
currency rates will impact our operating results, and to the
extent that the U.S. dollar strengthens, our foreign
currency denominated transaction net revenues will be negatively
impacted. Even as the International Marketplace continues to
grow in total, we expect that the growth rate of our
International Marketplace net transaction revenues will continue
to decline during the remainder of 2005.
31
|
|
|
Payments Segment Net Transaction Revenues |
Payments segment net transaction revenues increased 44% and 47%
during the third quarter and first nine months of 2005,
respectively, compared to the same periods of the prior year.
Payments segment net transaction revenues as a percentage of
total net transaction revenues was 22% during both the third
quarter and first nine months of 2005, compared to 21% in both
the same periods of the prior year. The growth in our Payments
segment net transaction revenues, both in total and as a
percentage of total net transaction revenues, is primarily the
result of increases in PayPal transaction volume driven by the
growth in both eBay Marketplace and PayPal merchant services
transactions, and the higher penetration of PayPal in the eBay
Marketplace.
Our Payments segment net transaction revenues as a percentage of
total payment volume was 3.6% during both the third quarter and
first nine months of 2005, compared to 3.6% in both the same
periods of the prior year. The growth in Payments segment net
transaction revenues was positively affected by PayPals
continued penetration of eBay Marketplace transactions,
particularly in the United States and the United Kingdom.
Further, Payments segment net transaction revenues have grown in
connection with the increase in our eBay Marketplace gross
merchandise volume during the third quarter and first nine
months of 2005 as compared to the same periods of the prior
year. In addition, revenues increased as a result of an increase
in total payment volume for our PayPal merchant services
transactions. The total payment volume for our PayPal merchant
services transactions was approximately $2.1 billion and
$5.9 billion in the third quarter and first nine months of
2005, respectively, which represents 32% and 30% of
PayPals total payment volume. The total payment volume for
our PayPal merchant services transactions was approximately
$1.4 billion and $4.1 billion, respectively, in the
same periods of the prior year, which represents 30% and 31% of
PayPals total payment volume. The relative strength of the
Euro against the U.S. dollar did not have a significant
impact on the net revenues during the third quarter of 2005 and
increased net revenues by approximately $5.2 million during
the first nine months of 2005, as compared to the same periods
of the prior year.
Net transaction revenues from the Payments segment earned
internationally totaled $88.2 million and
$255.5 million during the third quarter and first nine
months of 2005, respectively, representing 37% and 36% of total
Payments segment net transaction revenue during those periods.
This can be compared to net transaction revenues from the
Payments segment earned internationally of $51.8 million
and $139.6 million during the third quarter of and first
nine months of 2004, respectively, representing 31% and 29% of
total Payments segment net transaction revenue. Changes in
foreign currency rates will impact our operating results and, to
the extent that the U.S. dollar strengthens, our foreign
currency denominated net revenues will be negatively impacted.
We expect the Payments segment net transaction revenues to
increase in total during the remainder of 2005 and for net
transaction revenues earned internationally to increase in total
and as a percentage of the Payments segment net transaction
revenues. We also expect that the Payments segment net
transaction revenues may continue to increase as a percentage of
total net transaction revenues in the remainder of 2005.
|
|
|
Advertising and Other Non-Transaction Net Revenues |
Advertising and other non-transaction net revenues increased
during the third quarter and first nine months of 2005 as
compared to the same periods in 2004. Advertising and other
non-transaction net revenues represented 3% of total net
revenues during the third quarter and first nine months of 2005
and of 2004. We continue to view our business as primarily
transaction driven and we expect advertising and other
non-transaction net revenues to continue to represent a
relatively small portion of total net revenues during the
remainder of 2005.
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
Nine Months | |
|
|
|
Nine Months | |
|
|
Ended | |
|
|
|
Ended | |
|
Ended | |
|
|
|
Ended | |
|
|
September 30, | |
|
Percent | |
|
September 30, | |
|
September 30, | |
|
Percent | |
|
September 30, | |
|
|
2004 | |
|
Change | |
|
2005 | |
|
2004 | |
|
Change | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Cost of net revenues
|
|
$ |
157,121 |
|
|
|
28 |
% |
|
$ |
200,375 |
|
|
$ |
438,010 |
|
|
|
32 |
% |
|
$ |
578,584 |
|
As a percentage of net revenues
|
|
|
19.5 |
% |
|
|
|
|
|
|
18.1 |
% |
|
|
18.8 |
% |
|
|
|
|
|
|
17.9 |
% |
Cost of net revenues consists primarily of costs associated with
payment processing, site operations, and certain types of
customer support. Significant cost components include bank
charges, credit card interchange and assessments, other payment
processing costs, employee compensation and facilities costs for
our customer support and site operations, depreciation of
equipment and amortization of required capitalization of major
site and product development costs.
The increase in cost of net revenues during the third quarter
and first nine months of 2005, compared to the same periods in
the prior year, was primarily due to an increase in the volume
of transactions on our Marketplaces and Payments websites, and
continued development and expansion of our customer support and
site operations infrastructure. Payment processing costs
increased $22.4 million and $59.1 million during the
third quarter and first nine months of 2005, respectively,
compared to the same periods of the prior year. This increase
reflects the increase in PayPals total payment volume and
increased payment processing costs primarily related to the
growth of our eBay Marketplace activity. Aggregate customer
support and site operations costs increased approximately
$16.6 million and $68.1 million during the third
quarter and first nine months of 2005, respectively, compared to
the same periods of the prior year. The decrease in cost of net
revenues as a percentage of net revenues for both the third
quarter and first nine months of 2005 as compared to the same
periods of the prior year is primarily due to lower payment
processing costs as a percentage of total payment volume in our
Payments segment as compared to prior periods. Costs of net
revenues are expected to increase in total and as a percentage
of net revenues during the remainder of 2005 primarily due to
our recent acquisitions of Shopping.com and Skype, each of which
currently has a lower gross margin than our marketplaces
businesses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
Nine Months | |
|
|
|
Nine Months | |
|
|
Ended | |
|
|
|
Ended | |
|
Ended | |
|
|
|
Ended | |
|
|
September 30, | |
|
Percent | |
|
September 30, | |
|
September 30, | |
|
Percent | |
|
September 30, | |
|
|
2004 | |
|
Change | |
|
2005 | |
|
2004 | |
|
Change | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Sales and marketing
|
|
$ |
207,155 |
|
|
|
42 |
% |
|
$ |
293,746 |
|
|
$ |
588,995 |
|
|
|
45 |
% |
|
$ |
852,239 |
|
As a percentage of net revenues
|
|
|
25.7 |
% |
|
|
|
|
|
|
26.6 |
% |
|
|
25.2 |
% |
|
|
|
|
|
|
26.4 |
% |
Sales and marketing expenses consist primarily of advertising,
tradeshow and other promotional costs, employee compensation for
our category development and marketing staff and certain trust
and safety programs.
The increase in sales and marketing expenses in the third
quarter and first nine months of 2005 as compared to the same
periods in the prior year was primarily due to our continued
investment in growing our global user base. Growth in
advertising and marketing costs as well as employee-related
costs comprised the majority of the increase. Combined
advertising and marketing costs increased $53.6 million and
$163.1 million during the third quarter and first nine
months of 2005, respectively, as compared to the same periods of
the prior year. This increase, both in dollars and as a
percentage of net revenues, was primarily the result of
international expansion and industry-wide increases in Internet
marketing rates, partially offset by marketing efficiencies.
Employee-related costs increased by approximately
$19.5 million and $61.3 million during the
33
third quarter and first nine months of 2005, respectively, as
compared to the same periods of the prior year. Sales and
marketing expenses are expected to increase in total and as a
percentage of net revenues during the remainder of 2005 due
primarily to increased seasonal advertising in the fourth
quarter of the year and due to our recent acquisition of
Shopping.com, which has a higher sales and marketing expense as
a percentage of net revenues than our other businesses. In
addition, our online marketing expenses are expected to increase
because of increases in the volume of, online advertising that
we expect to purchase in order to attract new customers and
increase user activity on our websites, including growth
initiatives in sales and marketing activities in our
Marketplaces segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
Nine Months | |
|
|
|
Nine Months | |
|
|
Ended | |
|
|
|
Ended | |
|
Ended | |
|
|
|
Ended | |
|
|
September 30, | |
|
Percent | |
|
September 30, | |
|
September 30, | |
|
Percent | |
|
September 30, | |
|
|
2004 | |
|
Change | |
|
2005 | |
|
2004 | |
|
Change | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Product development
|
|
$ |
63,403 |
|
|
|
24 |
% |
|
$ |
78,881 |
|
|
$ |
176,079 |
|
|
|
27 |
% |
|
$ |
224,309 |
|
As a percentage of net revenues
|
|
|
7.9 |
% |
|
|
|
|
|
|
7.1 |
% |
|
|
7.5 |
% |
|
|
|
|
|
|
7.0 |
% |
Product development expenses consist primarily of employee
compensation, consultant costs, facilities costs and
depreciation on equipment used for development. Product
development expenses are net of required capitalization of major
site and other product development efforts. These capitalized
costs totaled $9.0 million and $27.7 million in the
third quarter and first nine months of 2005, respectively, and
are reflected as a cost of net revenues when amortized in future
periods. During the third quarter and first nine months of 2004,
capitalized costs for major site and other product development
efforts totaled $10.7 million and $30.7 million,
respectively. We anticipate that we will continue to devote
significant resources to product development in the future as we
add new features and functionality to our Marketplaces and
Payments businesses.
The increase in product development expenses in the third
quarter and first nine months of 2005, as compared to the same
periods in the prior year was primarily the result of increased
headcount to support various platform development initiatives in
our Marketplaces and Payments segments, domestically and
internationally. Employee-related costs increased by
approximately $9.0 million and $31.1 million during
the third quarter and first nine months of 2005, respectively,
as compared to the same periods in the prior year. Product
development expenses may increase in total and slightly as a
percentage of net revenues during the remainder of 2005 as we
develop new features and functionality and continue to improve
and expand operations across all our platforms.
|
|
|
General and Administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
Nine Months | |
|
|
|
Nine Months | |
|
|
Ended | |
|
|
|
Ended | |
|
Ended | |
|
|
|
Ended | |
|
|
September 30, | |
|
Percent | |
|
September 30, | |
|
September 30, | |
|
Percent | |
|
September 30, | |
|
|
2004 | |
|
Change | |
|
2005 | |
|
2004 | |
|
Change | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
General and administrative
|
|
$ |
105,871 |
|
|
|
36 |
% |
|
$ |
144,287 |
|
|
$ |
299,447 |
|
|
|
37 |
% |
|
$ |
410,016 |
|
As a percentage of net revenues
|
|
|
13.1 |
% |
|
|
|
|
|
|
13.1 |
% |
|
|
12.8 |
% |
|
|
|
|
|
|
12.7 |
% |
General and administrative expenses consist primarily of
employee compensation, provisions for transaction losses
associated with our Payments segment, depreciation of equipment,
provision for doubtful accounts, insurance and professional fees.
The increase in general and administrative expenses in the third
quarter and first nine months of 2005 as compared to the same
periods of the prior year was primarily due to employee related
and facilities costs. The increases in employee related costs
resulted from continued headcount growth primarily in trust and
safety and corporate functions. Employee-related costs increased
by approximately $22.7 million and $68.8 million
34
during the third quarter and first nine months of 2005,
respectively, compared to the same periods of the prior year.
Facilities costs increased by approximately $13.4 million
and $35.5 million during the third quarter and first nine
months of 2005, respectively, as compared to the same periods of
the prior year. PayPals payment transaction loss expense
increased approximately $5.5 million and $14.3 million
during the third quarter and first nine months of 2005, as
compared to same periods of the prior year. PayPals
payment transaction loss rate, which is the transaction loss
expense as a percentage of PayPals total payment volume,
totaled 0.24% during both the third quarter and first nine
months of 2005 as compared to 0.22% and 0.25%, respectively,
during the same periods of the prior year. The increase in this
percentage during the third quarter of 2005 as compared to the
same period of the prior year was due primarily to expanded
consumer protection programs. We expect general and
administrative expenses to increase and may slightly increase as
a percentage of net revenues during the remainder of 2005 due to
higher seasonal transaction loss rates in our Payments segment
as well as increasing consumer protection costs.
|
|
|
Payroll Tax on Employee Stock Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
Nine Months | |
|
|
|
|
|
|
Ended | |
|
|
|
Ended | |
|
Ended | |
|
|
|
Nine Months | |
|
|
September 30, | |
|
Percent | |
|
September 30, | |
|
September 30, | |
|
Percent | |
|
Ended | |
|
|
2004 | |
|
Change | |
|
2005 | |
|
2004 | |
|
Change | |
|
September 30, 2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Payroll tax expense from employee stock options
|
|
$ |
1,957 |
|
|
|
17 |
% |
|
$ |
2,291 |
|
|
$ |
12,289 |
|
|
|
(22 |
)% |
|
$ |
9,582 |
|
As a percentage of net revenues
|
|
|
0.2 |
% |
|
|
|
|
|
|
0.2 |
% |
|
|
0.5 |
% |
|
|
|
|
|
|
0.3 |
% |
We are subject to employer payroll taxes on employee gains from
the exercise of non-qualified 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. Our results of operations
and cash flows could vary significantly 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
Nine Months | |
|
|
|
Nine Months | |
|
|
Ended | |
|
|
|
Ended | |
|
Ended | |
|
|
|
Ended | |
|
|
September 30, | |
|
Percent | |
|
September 30, | |
|
September 30, | |
|
Percent | |
|
September 30, | |
|
|
2004 | |
|
Change | |
|
2005 | |
|
2004 | |
|
Change | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Amortization of acquired intangible assets
|
|
$ |
16,456 |
|
|
|
77 |
% |
|
$ |
29,199 |
|
|
$ |
46,188 |
|
|
|
68 |
% |
|
$ |
77,516 |
|
As a percentage of net revenues
|
|
|
2.0 |
% |
|
|
|
|
|
|
2.6 |
% |
|
|
2.0 |
% |
|
|
|
|
|
|
2.4 |
% |
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, functions, and
formats available to our users and maintain a leading role in
online e-commerce. These purchase transactions generally result
in the creation of acquired intangible assets and lead to a
corresponding increase in the amortization expense in future
periods. The increase in amortization of acquired intangibles
during the third quarter and first nine months of 2005 compared
to the same periods of the prior year is due to the business
acquisitions consummated during 2004 and in the first nine
months of 2005.
Intangible assets include purchased customer lists and user
base, trademarks and trade names, developed technologies, 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.
35
Goodwill represents the excess of the purchase price over the
fair value of the net tangible and identifiable intangible
assets acquired in a business combination. 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 units 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 flows, 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, 2005, and we determined that there was no
impairment. There were no events or circumstances from that date
through September 30, 2005 indicating that a further
assessment was necessary.
We expect amortization of acquired intangible assets to increase
during the remainder of 2005 as a result of the intangible
assets associated with our acquisitions of Shopping.com and
Skype. Amortization of acquired intangible assets will also
increase should we make additional acquisitions in the future.
|
|
|
Interest and Other Income, Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
Nine Months | |
|
|
|
Nine Months | |
|
|
Ended | |
|
|
|
Ended | |
|
Ended | |
|
|
|
Ended | |
|
|
September 30, | |
|
Percent | |
|
September 30, | |
|
September 30, | |
|
Percent | |
|
September 30, | |
|
|
2004 | |
|
Change | |
|
2005 | |
|
2004 | |
|
Change | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Interest and other income, net
|
|
$ |
13,163 |
|
|
|
133 |
% |
|
$ |
30,657 |
|
|
$ |
59,105 |
|
|
|
45 |
% |
|
$ |
85,585 |
|
As a percentage of net revenues
|
|
|
1.6 |
% |
|
|
|
|
|
|
2.8 |
% |
|
|
2.5 |
% |
|
|
|
|
|
|
2.7 |
% |
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, increased during the third
quarter and first nine months of 2005 as compared to the same
periods of the prior year, primarily as a result of increased
interest income due to increased cash, cash equivalents and
investments balances and higher interest rates. The
weighted-average interest rate of our portfolio was
approximately 3.2% and 2.8% in the third quarter and first nine
months of 2005, respectively, compared to 1.6% and 1.5%,
respectively, in the same periods of the prior year. We expect
that our interest income will decrease for the remainder of 2005
due to lower investment balances as a result of the cash portion
of the purchase price payment related to the acquisition of
Skype.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
Nine Months | |
|
|
|
Nine Months | |
|
|
Ended | |
|
|
|
Ended | |
|
Ended | |
|
|
|
Ended | |
|
|
September 30, | |
|
Percent | |
|
September 30, | |
|
September 30, | |
|
Percent | |
|
September 30, | |
|
|
2004 | |
|
Change | |
|
2005 | |
|
2004 | |
|
Change | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Interest expense
|
|
$ |
2,236 |
|
|
|
(81 |
)% |
|
$ |
431 |
|
|
$ |
6,614 |
|
|
|
(61 |
)% |
|
$ |
2,556 |
|
As a percentage of net revenues
|
|
|
0.3 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
0.3 |
% |
|
|
|
|
|
|
0.1 |
% |
Interest expense consists of interest charges related to our
San Jose headquarters lease facilities, capital leases, and
mortgage notes.
Interest expense decreased during the third quarter and first
nine months of 2005 as compared to the same periods of the prior
year primarily due to the payment of the lease obligation for
our San Jose headquarters facility on March 1, 2005.
As a result, we expect our interest expense will decrease both
in total and as a percentage of net revenues during the
remainder of 2005.
36
|
|
|
Provision for Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
Nine Months | |
|
|
|
Nine Months | |
|
|
Ended | |
|
|
|
Ended | |
|
Ended | |
|
|
|
Ended | |
|
|
September 30, | |
|
Percent | |
|
September 30, | |
|
September 30, | |
|
Percent | |
|
September 30, | |
|
|
2004 | |
|
Change | |
|
2005 | |
|
2004 | |
|
Change | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Provision for income taxes
|
|
$ |
80,749 |
|
|
|
63 |
% |
|
$ |
131,989 |
|
|
$ |
248,103 |
|
|
|
42 |
% |
|
$ |
351,455 |
|
As a percentage of net revenues
|
|
|
10.0 |
% |
|
|
|
|
|
|
11.9 |
% |
|
|
10.6 |
% |
|
|
|
|
|
|
10.9 |
% |
Effective tax rate
|
|
|
30 |
% |
|
|
|
|
|
|
34 |
% |
|
|
30 |
% |
|
|
|
|
|
|
30 |
% |
The provision for income taxes differs from the amount computed
by applying the statutory U.S. federal rate principally due
to state taxes, subsidiary losses for which we have not provided
a benefit and other factors that increase the effective tax
rate, offset by decreases resulting from foreign income with
lower effective tax rates and tax credits.
The higher effective tax rates for the third quarter of 2005 as
compared to the same period of the prior year resulted primarily
from a $16.6 million charge related to the final
application of tax regulations requiring the inclusion of stock
option expense in intercompany cost sharing arrangements. The
effective tax rate for the first nine months of 2005 reflects
this charge, offset by the increasing profit contribution from
our international operations that are subject to lower tax rates.
We receive tax deductions from the gains realized by employees
on the exercise of certain non-qualified stock options for which
the benefit 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 is not
considered more likely than not to be realized in future
periods. Should a valuation allowance no longer be required, the
reversal of the valuation allowance will be reflected as an
increase in additional paid-in capital rather than a reduction
of the income tax provision.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
Nine Months | |
|
|
|
Nine Months | |
|
|
Ended | |
|
|
|
Ended | |
|
Ended | |
|
|
|
Ended | |
|
|
September 30, | |
|
Percent | |
|
September 30, | |
|
September 30, | |
|
Percent | |
|
September 30, | |
|
|
2004 | |
|
Change | |
|
2005 | |
|
2004 | |
|
Change | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Minority interests
|
|
$ |
(1,742 |
) |
|
|
(100 |
)% |
|
$ |
(2 |
) |
|
$ |
(6,063 |
) |
|
|
(99 |
)% |
|
$ |
(48 |
) |
As a percentage of net revenues
|
|
|
0.2 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
0.3 |
% |
|
|
|
|
|
|
0.0 |
% |
Minority interests 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 financial statements. Third
parties held minority interests in one of our subsidiaries
during the third quarter and first nine months of 2005 and 2004.
The change in minority interests in the third quarter and first
nine months of 2005 as compared to the same periods of the prior
year was primarily due to our acquisition of an approximately
38% additional ownership interest in Internet Auction during
2004.
|
|
|
Impact of Foreign Currency Translation |
During the third quarter and first nine months of 2005, our
international net revenues, based upon the country in which the
seller, payment recipient, advertiser or other customer is
located, accounted for approximately 45% and 46% of our
consolidated net revenues, respectively, as compared to
approximately 42% and 41% of our net revenues in the same
periods of the prior year. The growth in our international
operations has increased our exposure to foreign currency
fluctuations. Net revenues and related expenses generated from
international locations are denominated in the functional
currencies of the local markets, and include Euros, British
pounds, Korean won, Canadian dollars, Taiwanese dollars,
Australian dollars, Chinese renminbi, and Indian rupee. The
results of operations and certain of our inter-company balances
associated with our
37
international locations are exposed to foreign exchange rate
fluctuations. The statements of income 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
remeasurement 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.
During the third quarter and first nine months of 2005, the
U.S. dollar weakened against most of the foreign currencies
listed above, as compared to the same periods in the prior year.
Using the weighted-average foreign currency exchange rates from
the third quarter of 2004, our net revenues for the third
quarter of 2005 would have been lower than we reported using the
actual exchange rate for the third quarter of 2005, by
approximately $3.1 million, which primarily relates to the
International Marketplace. Using the weighted-average foreign
currency exchange rates from the first nine months of 2004, our
net revenues for the first nine months of 2005 would have been
lower than we reported using the actual exchange rate for the
first nine months of 2005, by approximately $52.7 million,
of which $47.5 million and $5.2 million relate to the
International Marketplace and our Payments segment,
respectively. In addition, if the weighted-average foreign
currency exchange rates from the third quarter and first nine
months of 2004 were applied to our cost of revenues and
operating expenses for the corresponding periods of 2005, these
cost of revenues and operating expenses would have been lower in
total than we reported using the actual exchange rates during
these periods by approximately $4.2 million and
$28.5 million, respectively. The majority of this impact
relates to the relative strength of the Euro against the
U.S. dollar. We expect our international operations will
continue to grow in significance as we develop and deploy our
global marketplace and global payments platform. As a result,
the impact of foreign currency fluctuations in future periods
could become more significant and may have a negative impact on
our net revenues and net income. See the information in
Item 3 of Part I under the subheading Foreign
Currency Risk for additional discussion of the impact of
foreign currency translation and related hedging activities.
|
|
|
Foreign Exchange Hedging Policy |
We are a rapidly growing company, with an increasing proportion
of our operations outside the United States. Accordingly, our
foreign currency exposures have increased substantially and are
expected to continue to grow. The objective of our foreign
exchange exposure management program is to identify material
foreign currency exposures and to manage these exposures to
minimize the potential effects of currency fluctuations on our
reported consolidated cash flows and results of operations.
Our primary foreign currency exposures are transaction,
translation and economic:
|
|
|
Transaction Exposure: Around the world, we have certain
assets and liabilities, primarily receivables, investments and
accounts payable (including inter-company transactions) that are
denominated in currencies other than the relevant entitys
functional currency. In certain circumstances, changes in the
functional currency value of these assets and liabilities create
fluctuations in our reported consolidated financial position,
results of operations and cash flows. We may enter into foreign
exchange forward contracts or other instruments to minimize the
short-term foreign currency fluctuations on such assets and
liabilities. The gains and losses on the foreign exchange
forward contracts offset the transaction gains and losses on
certain foreign currency receivables, investments and payables
recognized in earnings. |
|
|
Earnings Translation Exposure: As our international
operations grow, fluctuations in the foreign currencies create
volatility in our reported results of operations as we are
required to consolidate the results of operations of our foreign
denominated subsidiaries. We may decide to purchase forward
exchange contracts or other instruments to offset the earnings
impact of currency fluctuations. Such contracts will be
marked-to-market on a monthly basis and any gain or loss
recorded in interest and other income, net. |
|
|
Economic Exposure: We also have anticipated and
unrecognized future cash flows, including revenues and expenses,
denominated in currencies other than the relevant entitys
functional currency. Our primary economic exposures include
future royalty receivables, customer collections, and vendor |
38
|
|
|
payments. Changes in the relevant entitys functional
currency value will cause fluctuations in the cash flows we
expect to receive when these cash flows are realized or settled.
We may enter into foreign exchange forward contracts or other
derivatives to hedge the value of a portion of these cash flows.
We account for these foreign exchange contracts as cash flow
hedges. The effective portion of the derivatives gain or
loss is initially reported as a component of accumulated other
comprehensive income (loss) and subsequently reclassified into
earnings when the transaction is settled. |
We believe that employee stock options represent an appropriate
and essential component of our overall compensation program. We
grant options to substantially all employees and believe that
this broad-based program helps us to attract, motivate, and
retain high quality employees, to the ultimate benefit of our
stockholders. Stock options granted during the year ended
December 31, 2004, net of cancellations, represented
approximately 3% of our total outstanding common stock at
December 31, 2004, a substantial portion of which were
granted to new employees. We expect that our stock option
grants, net of cancellations, for the full year 2005 will
represent approximately 2% of our total outstanding common stock
at December 31, 2005.
|
|
|
Recent Accounting Pronouncements |
In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 123 (revised 2004),
Share-Based Payment (FAS 123R) that addresses
the accounting for share-based payment transactions in which an
enterprise receives employee services in exchange for either
equity instruments of the enterprise or liabilities that are
based on the fair value of the enterprises equity
instruments or that may be settled by the issuance of such
equity instruments. The statement eliminates the ability to
account for share-based compensation transactions, as we do
currently, using the intrinsic value method prescribed by
Accounting Principles Board, or APB, Opinion No. 25,
Accounting for Stock Issued to Employees, and
generally requires that such transactions be accounted for using
a fair-value-based method and recognized as expenses in our
consolidated statement of income. The statement requires
companies to assess the most appropriate model to calculate the
value of the options. We currently use the Black-Scholes option
pricing model to value options and are currently assessing which
model we may use in the future under the new statement and may
deem an alternative model to be more appropriate. The use of a
different model to value options may result in a different fair
value than the use of the Black-Scholes option pricing model. In
addition, there are a number of other requirements under the new
standard that would result in differing accounting treatment
than currently required. These differences include, but are not
limited to, the accounting for the tax benefit on employee stock
options and for stock issued under our employee stock purchase
plan, and the presentation of these tax benefits within the
consolidated statement of cash flows. In addition to the
appropriate fair value model to be used for valuing share-based
payments, we will also be required to determine the transition
method to be used at date of adoption. The allowed transition
methods are the prospective and retroactive adoption
alternatives. The prospective method requires that compensation
expense be recorded for all unvested stock options and
restricted stock at the beginning of the first quarter of
adoption of FAS 123R, while the retroactive method requires
companies to record compensation expense for all unvested stock
options and restricted stock beginning with the first disclosed
period restated.
In April 2005, the Securities and Exchange Commission announced
the adoption of a new rule that amends the effective date of
FAS 123R. The effective date of the new standard under
these new rules for our consolidated financial statements is
January 1, 2006. Adoption of this statement will have a
significant impact on our consolidated financial statements as
we will be required to expense the fair value of our stock
option grants and stock purchases under our employee stock
purchase plan rather than disclose the impact on our
consolidated net income within our footnotes, as is our current
practice (see Note 1 The Company and
Summary of Significant Accounting Policies of the notes to
the condensed consolidated financial statements contained
herein). The amounts disclosed within our footnotes are not
necessarily indicative of the amounts that will be expensed upon
the adoption of FAS 123R. Compensation expense calculated
under FAS 123R
39
may differ from amounts currently disclosed within our footnotes
based on changes in the fair value of our common stock, changes
in the number of options granted or the terms of such options,
the treatment of tax benefits and changes in interest rates or
other factors. In addition, upon adoption of FAS 123R, we
may choose to use a different valuation model to value the
compensation expense associated with employee stock options and
stock purchases under our employee stock purchase plan.
As of September 30, 2005, eBay Inc. and its consolidated
subsidiaries employed approximately 9,300 people (excluding
approximately 700 temporary employees), of whom approximately
6,200 were located in the United States (excluding approximately
600 temporary employees). Our future success is
substantially dependent on the performance of our executive and
senior management and key technical personnel, and on our
continuing ability to find and retain highly qualified technical
and managerial personnel.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$ |
904,108 |
|
|
$ |
1,483,654 |
|
|
Investing activities
|
|
|
(1,271,914 |
) |
|
|
(848,286 |
) |
|
Financing activities
|
|
|
426,643 |
|
|
|
256,145 |
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
(4,440 |
) |
|
|
(40,960 |
) |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$ |
54,397 |
|
|
$ |
850,553 |
|
|
|
|
|
|
|
|
We generated cash from operating activities in amounts greater
than net income in the nine months ended September 30, 2005
and 2004, mainly due to non-cash charges to earnings. Non-cash
charges to earnings included depreciation and amortization on
our long-term assets, tax benefits on the exercise of employee
stock options resulting from personal gains recognized by our
employees, provision for doubtful accounts and authorized
credits resulting from increasing revenues and the provision for
transaction losses resulting from increased total payment
volumes processed by our PayPal subsidiary.
Net cash used in investing activities during the first nine
months of 2005 consisted primarily of net cash payments for
acquisitions of $1.1 billion, and maturities of investments
net of purchases of $485.3 million. Net cash payments for
acquisitions consisted primarily of the cash payment, net of
cash acquired, for the acquisition of Rent.com of approximately
$431.9 million, the cash payment for the acquisition of
certain international classifieds websites of approximately
$81.3 million, and the cash payment for the acquisition of
Shopping.com of approximately $584.4 million. Net cash used
in investing activities during the first nine months of 2004
primarily consisted of purchases of investments, net of
maturities, of $351.0 million, the payment of
$33.4 million as the last installment of our purchase of
EachNet, the payment of $137.8 million, net of cash
acquired, for the acquisition of mobile.de, the payment of
$46.2 million, net of cash acquired for the acquisition of
Baazee.com, and the payment of $484.8 million for the
purchase of additional shares of Internet Auction. Net purchases
of property and equipment totaled $212.2 million during the
first nine months of 2005 and $210.0 million during the
first nine months of 2004 and related mainly to purchases of
computer equipment and software to support our site operations,
customer support and international expansion.
The net cash flows provided by financing activities during the
first nine months of 2005 consisted primarily of proceeds from
stock option exercises of $384.4 million, partially offset
by the payment of our lease obligation and the related minority
interest for our San Jose headquarters facility totaling
approximately $126.4 million. Net cash flows provided by
financing activities during the first nine months of 2004 were
due primarily to proceeds from stock option exercises of
$429.2 million. Our future cash flows from stock options
40
are difficult to project as such amounts are a function of our
stock price, the number of options outstanding, 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 is high relative to historic
levels.
The negative effect of exchange rates on cash and cash
equivalents during the nine months ended September 30, 2005
and 2004 was due to the weakening of the U.S. dollar during
the nine months against other foreign currencies, primarily the
Euro.
We acquired Skype on October 14, 2005. The acquisition
price included an initial cash payment of $1.3 billion. We
believe that our remaining cash, cash equivalents and
investments, together with any cash generated from operations,
will be sufficient 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 sufficient cash flows from operations
or in raising additional capital when required in sufficient
amounts and on terms acceptable to us, our business could suffer.
We expect capital expenditures in the range of $340 million
to $400 million for the full year 2005, excluding the
payment of our lease obligation for our headquarters facility in
the first quarter of 2005 of $126 million.
|
|
|
Other Financial Arrangements |
As of September 30, 2005, we had no off-balance sheet
arrangements that are reasonably likely to have a future
material effect on our consolidated financial condition, results
of operations, liquidity, capital expenditures or capital
resources.
|
|
|
Indemnification Provisions |
In the ordinary course of business, we have included limited
indemnification provisions in certain of our agreements with
parties with whom we have commercial relations, including our
standard marketing, promotions and
application-programming-interface license agreements. Under
these contracts, we generally indemnify, hold harmless, and
agree to reimburse the indemnified party for losses suffered or
incurred by the indemnified party in connection with claims by
any third party with respect to our domain names, trademarks,
logos and other branding elements to the extent that such marks
are applicable to our performance under the subject agreement.
In a limited number of agreements, including agreements under
which we have developed technology for certain commercial
parties, we have provided an indemnity for other types of
third-party claims, substantially all of which are indemnities
related to our copyrights, trademarks, and patents. In our
PayPal business, we have provided an indemnity to our payments
processors in the event of certain third-party claims or card
association fines against the processor arising out of conduct
by PayPal. To date, no significant costs have been incurred,
either individually or collectively, in connection with our
indemnification provisions.
|
|
|
Acquisition of Skype Technologies SA |
On October 14, 2005, we acquired all of the outstanding
securities of Skype Technologies SA (Skype), for a
total initial consideration of approximately $2.5 billion,
plus potential performance-based payments of up to $1.3 billion.
In addition, we agreed to assume Skypes stock options
outstanding as of the closing date and convert them into options
to acquire approximately 1.9 million shares of our common stock.
The initial consideration of $2.5 billion is comprised of
approximately $1.3 billion in cash and 32.8 million
shares of our common stock. For accounting purposes, the stock
portion of the initial consideration is valued at approximately
$1.2 billion based on the average closing price of our
common stock surrounding the acquisition announcement date of
September 12, 2005. The shares of our common stock issued
in connection with the acquisition are subject to certain
contractual and other restrictions on resale. Additionally, the
assumed options will be valued and will be included as part of
the purchase price. The purchase price will be allocated
41
to the tangible and intangible assets acquired and liabilities
assumed based on their respective fair values at the acquisition
date.
In addition to the initial consideration, the maximum amount
potentially payable under the performance-based earn-out is
approximately for
1.1 billion,
or approximately $1.4 billion, and would be payable in cash
or common stock, at our discretion. The earn-out payments are
contingent upon Skype achieving certain net revenue and gross
margin-based targets, gross profit-based targets and active user
targets. Base earn-out payments of up to an aggregate of
approximately
877 million,
or approximately $1.05 billion, weighted equally among the
three targets, would be payable if the targets are achieved over
any four-quarter period commencing on January 1, 2006
through June 30, 2009. Additional bonus earn out payments
of up to an aggregate of approximately
292 million,
or approximately $351 million, weighted equally among the three
targets, would be payable if Skype exceeds the targets during
calendar year 2008. Any contingent earn-out payments made will
be accounted for as additional purchase price and will increase
goodwill. Any contingent earn-out payments are to be paid in
Euros, the Dollar amounts set forth above were based on the
Euro-Dollar exchange rate as of October 12, 2005.
Skype is a Luxembourg-based company that was established in
2003. Skype has developed software that, among other things,
enables free PC to PC calls between Skype users. Skypes
premium services, which currently are its primary source of
revenue, provide low-cost connectivity to traditional fixed and
mobile telephones. We believe that Skype can increase the
velocity of trade on our websites, especially in categories that
require more involved communications, as well as enable us to
develop and provide new e-commerce services.
The acquisition of Skype will significantly increase our
amortization of intangible assets, deferred stock-based
compensation and, due to the cash acquisition consideration,
will decrease our interest income. We expect that a significant
portion of the purchase price will be allocated to goodwill.
|
|
|
Announced Acquisition of VeriSign, Inc.s Payment
Gateway Business |
On October 10, 2005, we announced our agreement to acquire
VeriSign, Inc.s payment gateway business. We have agreed
to pay approximately $370 million, in cash or common stock,
at our discretion. The acquisition is subject to regulatory and
other approvals, and is expected to close in the fourth quarter
of 2005. VeriSign, Inc.s payment gateway is a real-time
scalable internet payment platform that allows merchants to
authorize, process, and manage online payments. Additionally, we
have signed a multi-year security technology agreement with
VeriSign, Inc. that calls for us to invest in the deployment of
their technologies that enable and better protect online
transactions, including the purchase of up to one million
two-factor authentication tokens.
Risk Factors That May Affect Results of Operations and
Financial Condition
The risks and uncertainties described below are not the only
ones facing us. Other events that we do not currently anticipate
or that we currently deem immaterial also may affect our results
of operations and financial condition.
|
|
|
Our operating results may fluctuate. |
Our operating results have varied on a quarterly basis during
our operating history. Our operating results may fluctuate
significantly as a result of a variety of factors, many of which
are outside our control. Factors that may affect our 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 websites, or use our payment or communication
services; |
|
|
|
the volume, size, timing, and completion rate of transactions on
our websites; |
|
|
|
the amount and timing of operating costs and capital
expenditures relating to the maintenance and expansion of our
businesses, operations, and infrastructure; |
42
|
|
|
|
|
technical difficulties or service interruptions involving our
websites or services provided to our users by third parties; |
|
|
|
regulatory actions imposing obligations on our businesses
(including Skype) or our users; |
|
|
|
the actions of our competitors, including the introduction of
new sites, services, and products; |
|
|
|
consumer confidence in the safety and security of transactions
on our websites; |
|
|
|
the cost and availability of online and traditional advertising,
and the success of our brand building and marketing campaigns; |
|
|
|
new laws or regulations, or interpretations of existing laws or
regulations, that harm the Internet, electronic commerce, or our
business models; |
|
|
|
our ability to comply with the requirements of entities whose
services are required for our operations, such as credit card
associations; |
|
|
|
our ability to upgrade and develop our systems, infrastructure,
and customer service capabilities to accommodate growth at a
reasonable cost; |
|
|
|
the costs and results of litigation that involves us; |
|
|
|
our ability to integrate, manage, and profitably expand the
newly-acquired Skype business; |
|
|
|
our ability to expand PayPals product offerings outside of
the U.S. (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 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,
including expanding our fixed-price offerings; |
|
|
|
our ability to successfully integrate and manage recent and
prospective acquisitions, including the recently closed
Shopping.com and Skype acquisitions, and the recently announced
pending acquisition by PayPal of VeriSign, Inc.s payment
gateway business; |
|
|
|
our ability to manage PayPals transaction loss and credit
card chargeback rates and payment funding mix; |
|
|
|
the success of our geographic and product expansions; |
|
|
|
our ability to attract new personnel in a timely and effective
manner and to retain key employees; |
|
|
|
the continued financial strength of our technology suppliers and
other parties with whom we have commercial relations; |
|
|
|
continued consumer acceptance of the Internet and other online
services for commerce in the face of increasing publicity about
fraud, spoofing, viruses, and other dangers of the Internet; |
|
|
|
general economic conditions and those economic conditions
specific 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 offered on our websites make it difficult 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 difficulty in forecasting revenues it is also difficult
to forecast income statement expenses as a percentage of net
revenues. Quarterly
43
and annual income statement expenses as a percentage of net
revenues may be significantly different 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 profitability or rates of
growth. |
We believe that our continued profitability and growth will
depend in large part on our ability to do the following:
|
|
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attract new users, keep existing users active on our websites,
and increase the activity levels of our active users; |
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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; |
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maintain sufficient transaction volume to attract buyers and
sellers; |
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increase the awareness of our brands; and |
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provide our customers with superior community, customer support,
and trading and payment experiences. |
We invest heavily in marketing and promotion, customer support,
and further development of the 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
profitability. In addition, we are spending in advance of
anticipated growth, which may also harm our profitability.
Growth rates in our most established markets, such as Germany
and the U.S., have declined over time and may continue to do so
as the existing base of users and transactions becomes larger.
The expected future growth of our PayPal and Skype businesses
may also cause downward pressure on our profit margin because
those businesses have lower gross margins than our eBay
Marketplaces business.
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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., and South Korea, has also become critical to our revenues
and profits. Net revenues outside the United States accounted
for approximately 42% and 46% of our net revenues in 2004 and
the first nine months of 2005, respectively. Expansion into
international markets requires management attention and
resources and requires us to localize our service to conform to
local cultures, standards, and policies. The commercial,
Internet, and transportation infrastructure in lesser-developed
countries may make it difficult for us to replicate our business
model. In many countries, we compete with local companies who
understand the local market better than we do, and we may not
benefit from first-to-market advantages. 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, Skype and Shopping.com, we are subject to
risks of doing business internationally, including the following:
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regulatory requirements, including regulation of Internet
services, auctioneering, professional selling, distance selling,
communications, banking, and money transmitting, that may limit
or prevent the offering of our 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
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legal uncertainty regarding our 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; |
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difficulties in integrating with local payment providers,
including banks, credit and debit card associations, and
electronic fund transfer systems; |
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differing levels of retail distribution, shipping, and
communications infrastructures; |
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different employee/employer relationships and the existence of
workers councils and labor unions; |
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difficulties in staffing and managing foreign operations; |
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longer payment cycles, different accounting practices, and
greater problems in collecting accounts receivable; |
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potentially adverse tax consequences, including local taxation
of our fees or of transactions on our websites; |
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higher telecommunications and Internet service provider costs; |
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strong local competitors; |
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different and more stringent consumer protection, data
protection and other laws; |
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cultural ambivalence towards, or non-acceptance of, online
trading; |
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seasonal reductions in business activity; |
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expenses associated with localizing our products, including
offering customers the ability to transact business in the local
currency; |
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laws and business practices that favor local competitors or
prohibit foreign ownership of certain businesses; |
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profit repatriation restrictions, foreign currency exchange
restrictions, and exchange rate fluctuations; |
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volatility in a specific countrys or regions
political or economic conditions; and |
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differing intellectual property laws. |
Some of these factors may cause our international costs of doing
business to exceed our comparable domestic costs. As we expand
our international operations and have additional portions of our
international revenues denominated in foreign currencies, we
also could become subject to increased difficulties in
collecting accounts receivable and risks relating to foreign
currency exchange rate fluctuations. The impact of currency
exchange rate fluctuations is discussed in more detail under
We are exposed to fluctuations in currency exchange
rates, below.
We are in the process of expanding PayPals services
internationally. Both eBay and PayPal have limited experience
with the payments business outside of the U.S. In some
countries, expansion of PayPals business may require a
close commercial relationship with one or more local banks. We
do not know if these or other factors may prevent, delay, or
limit PayPals expansion or reduce its profitability. Any
limitation on our ability to expand PayPal internationally could
harm our business.
We maintain a portion of Shopping.coms research and
development facilities and personnel in Israel, and as a result,
political, economic and military conditions in Israel affect
those operations. Increased hostilities or terrorism within
Israel or armed hostilities between Israel and neighboring
states could make it more difficult for us to continue our
operations in Israel, which could increase our costs. In
addition, many of Shopping.coms employees in Israel are
obligated to perform up to 36 days of military reserve duty
each year, and are subject to being called for active duty under
emergency circumstances. If a military conflict or war arises,
these individuals could be required to serve in the military for
extended periods of time. Shopping.coms
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Israeli operations could be disrupted by the absence of
employees due to military service, which could adversely affect
its business.
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Our operations in China are subject to risks and
uncertainties relating to the laws and regulations of the
Peoples Republic of China. |
Our operations in the Peoples Republic of China, or PRC,
are conducted through our EachNet subsidiary and through a
PayPal subsidiary. EachNet and PayPal are Delaware corporations
and foreign persons under the laws of the PRC and are subject to
many of the risks of doing business internationally described
above in 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 PayPal, and the
business operations of such companies. In order to meet local
ownership and regulatory licensing requirements, the eBay
EachNet website is operated through a foreign-owned enterprise
indirectly owned by eBays European operating entity, which
acts in cooperation with a local PRC company owned by certain
local employees. The PayPal China website is operated through a
foreign-owned enterprise owned by PayPals International
headquarters entity, which acts in cooperation with a local PRC
company owned by certain local employees. We believe
EachNets and PayPals 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. The Peoples Bank of China, or PBOC, has
recently proposed guidelines for payment settlement
organizations which, if enacted and applied to PayPals
operations in China, could have a material adverse effect on
those operations, including, but not limited to requiring PayPal
to act in cooperation with a different local PRC entity approved
by the PBOC. There are also uncertainties regarding
EachNets and PayPals ability to enforce contractual
relationships it has entered into with respect to management and
control of the companys business. If EachNet or PayPal
were found to be in violation of any existing or future PRC laws
or regulations, it could be subject to fines and other financial
penalties, have its business and Internet content provider
licenses revoked, or be forced to discontinue its business
entirely. In addition, any finding of a violation by EachNet or
PayPal of PRC laws or regulations could make it more difficult
for us to launch new or expanded services in the PRC.
Although Skype does not conduct operations in the PRC directly,
its service is used by residents of the PRC. PRC regulations
surrounding VoIP telephony are unclear or non-existent, and the
PRC may adopt regulations that restrict or prohibit the use of
Skypes services. Recent press reports have indicated that
certain provinces in the PRC may be taking steps to restrict the
use of Skypes services.
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We are exposed to fluctuations in currency exchange
rates. |
Because we conduct a significant and growing portion of our
business outside the United States but report our results in
U.S. dollars, we face exposure to adverse movements in
currency exchange rates. In connection with its multi-currency
service, PayPal fixes exchange rates twice per day, and may face
financial exposure if it incorrectly fixes the exchange rate.
PayPal also holds some corporate and customer funds in
non-U.S. currencies, and thus its financial results are
affected 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 fluctuations as the financial 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
in 2004 and the first quarter of 2005, 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
the first nine months of 2005 relative to the first nine months
of 2004 resulted in an increase in net revenues of approximately
$52.7 million and an increase in aggregate cost of revenues
and operating expenses of approximately $28.5 million.
Similarly, our net revenues, operating expenses, and net income
will decrease if the U.S. dollar strengthens against
foreign currencies. As exchange
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rates vary, net sales and other operating results, when
translated, may differ materially from expectations. In
particular, to the extent the U.S. dollar strengthens
against the Euro and British Pound, our European revenues and
profits will be reduced as a result of these translation
adjustments. In addition, to the extent the U.S. dollar
strengthens against the Euro and the British Pound, cross-border
trade related to purchases of dollar-denominated goods by
non-U.S. purchasers may decrease, and that decrease may not
be offset by a corresponding increase in cross-border trade
involving purchases by U.S. buyers of goods denominated in
other currencies. While we from time to time enter into
transactions to hedge portions of our foreign currency
translation exposure, these hedges are relatively costly and,
even with them in effect, it is impossible to perfectly predict
or completely eliminate the effects of this exposure.
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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. Growth in
the 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. Market acceptance for recently
introduced services and products over the Internet is highly
uncertain, and there are few proven services and products. In
countries such as the U.S. and Germany, where our services and
online commerce generally have been available for some time and
the level of market penetration of our services is high,
acquiring new users for our services may be more difficult and
costly than it has been in the past. In order to expand our user
base, we must appeal to and acquire consumers who historically
have used traditional means of commerce to purchase goods. If
these consumers prove to be less active than our earlier users,
and we are unable to gain efficiencies in our operating costs,
including our cost of acquiring new customers, our business
could be adversely impacted.
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Skype depends on key technology that is licensed from
third parties. |
Skype licenses from third parties it does not control technology
underlying certain components of its service, including the
technology underlying its peer-to-peer architecture and firewall
traversal technology, and the audio codec used to provide high
sound quality. Both of these technologies are key to the service
Skype provides. In addition, various other technologies used by
Skype to provide its service are licensed from third parties.
Although Skype has contracts in place with its third party
technology providers, there can be no assurance that the
licensed technology or other technology that we may seek to
license in the future will continue to be available on
commercially reasonable terms, or at all. The loss of, or
inability to maintain, existing licenses could result in service
delays, a decrease in service quality, or a complete failure of
Skypes service until equivalent technology or suitable
alternative products can be developed, identified, licensed and
integrated. While we believe Skype has the ability to either
extend these licenses on commercially reasonable terms or
identify and obtain or develop suitable alternative products,
the costs associated with licensing and/or developing such
products could be high. Any failure to maintain these licenses
on commercially reasonable terms or to license or develop
alternative technologies would harm Skypes business.
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Acquisitions could result in operating difficulties,
dilution and other harmful consequences. |
We have acquired a number of businesses in the past, and have
completed or announced eight acquisitions in 2005. These
include, most recently, the acquisition of Skype, the
acquisition of Shopping.com, and the pending acquisition through
PayPal, of VeriSign, Inc.s payment gateway business.
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. 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 financial 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
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business may create unforeseen operating difficulties and
expenditures and is itself risky. The areas where we may face
difficulties include:
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diversion of management time, as well as a shift of focus from
operating the businesses to issues of integration and future
products, particularly given the large number and size and
varying scope of our recent acquisitions; |
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declining employee morale and retention issues resulting from
changes in compensation, reporting relationships, future
prospects, or the direction of the business; |
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the need to integrate each companys accounting, management
information, human resource and other administrative systems to
permit effective management, and the lack of control if such
integration is delayed or not implemented; |
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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 |
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in some cases, including in connection with our pending
acquisition of VeriSigns payment gateway business, the
need to transition operations, users, and/or customers onto our
existing platforms. |
Foreign acquisitions involve special risks, including those
related to integration of operations across different cultures
and languages, currency risks, and the particular economic,
political, and regulatory risks associated with specific
countries. Moreover, we may not realize the anticipated benefits
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, liabilities,
or amortization expenses related to intangible assets, any of
which could reduce our profitability and harm our business.
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System failures could harm our business. |
We have experienced system failures from time to time, and any
interruption in the availability of our websites will reduce our
current revenues and profits, could harm our future revenues and
profits, and could subject us to regulatory scrutiny.
eBays primary website has been interrupted for periods of
up to 22 hours, and our PayPal site suffered intermittent
unavailability over a five-day period in October 2004. Any
unscheduled interruption in our services results in an
immediate, and possibly substantial, loss of revenues. Frequent
or persistent interruptions in our services could cause current
or potential users to believe that our systems are unreliable,
leading them to switch to our competitors or to avoid our sites,
and could permanently harm our reputation and brands. These
interruptions increase the burden on our engineering staff,
which, in turn, could delay our introduction of new features and
services on our sites. Because PayPal is a regulated financial
entity, frequent or persistent site interruptions could lead to
regulatory inquiries. These inquiries could result in fines,
penalties, or mandatory changes to PayPals business
practices, and ultimately could cause PayPal to lose existing
licenses it needs to operate or prevent it from obtaining
additional licenses that it needs to expand. Finally, because
our customers may use our products for critical transactions,
any system failures could result in damage to our
customers businesses. These customers could seek
significant compensation from us for their losses. Even if
unsuccessful, this type of claim likely would be time consuming
and costly for us to address.
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, floods, fires, power loss,
telecommunication failures, terrorist attacks, computer viruses,
computer denial-of-service attacks, and similar events. Some of
our systems, including PayPals customer support
operations, are not fully redundant, and our disaster recovery
planning is not sufficient for all eventualities. Our systems
are also subject to break-ins, sabotage, and intentional acts of
vandalism. 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 financial 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
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service. We do not carry business interruption insurance
sufficient to compensate us for losses that may result from
interruptions in our service as a result of system failures.
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Our growth will depend on our ability to develop our
brands, and these efforts may be costly. |
Our historical growth has been largely attributable to word of
mouth, and to frequent and high visibility national and local
media coverage. We believe that continuing to strengthen our
brands will be critical to achieving widespread acceptance of
our services, and will require an increased focus on active
marketing efforts. The demand for and cost of online and
traditional advertising have been increasing, and may continue
to increase. Accordingly, we will need to spend increasing
amounts of money on, and devote greater resources to,
advertising, marketing, and other efforts to create and maintain
brand loyalty among users. In addition, we are supporting an
increasing number of brands, each of which requires its own
resources. Brand promotion activities may not yield increased
revenues, and even if they do, any increased revenues may not
offset the expenses incurred in building our brands. 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 brands, or if we incur substantial
expenses in an unsuccessful attempt to promote and maintain our
brands, our business would be harmed.
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Our business and users may be subject to sales tax and
other taxes. |
The application of indirect taxes (such as sales and use tax,
value added tax, or VAT, goods and services tax, business tax,
and gross receipt tax) to e-commerce businesses such as eBay and
our users is a complex and evolving issue. Many of the
fundamental statutes and regulations that impose these taxes
were established before the growth of the Internet and
e-commerce. In many cases, it is not clear how existing statutes
apply to the Internet or e-commerce. In addition, some
jurisdictions have implemented or may implement laws
specifically addressing the Internet or some aspect of
e-commerce. The application of existing, new, or future laws
could have adverse effects on our business.
Several proposals have been made at the U.S. state and
local level that would impose additional taxes on the sale of
goods and services through the Internet. These proposals, if
adopted, could substantially impair the growth of e-commerce,
and could diminish our opportunity to derive financial benefit
from our activities. In December 2004, the U.S. federal
government enacted legislation extending the moratorium on
states and other local authorities imposing access or
discriminatory taxes on the Internet through November 2007. This
moratorium does not prohibit federal, state, or local
authorities from collecting taxes on our income or from
collecting taxes that are due under existing tax rules.
In conjunction with the Streamlined Sales Tax Project, the
U.S. Congress continues to consider overriding the Supreme
Courts 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. An overturning of the Quill decision would
harm our users and our business.
We do not collect taxes on the goods or services sold by users
of our services. One or more states or foreign countries may
seek to impose a tax collection or reporting or record-keeping
obligation on companies such as eBay that engage in or
facilitate e-commerce. Such an obligation could be imposed if
eBay were ever deemed to be the legal agent of eBay sellers by a
jurisdiction in which eBay operates. A successful assertion by
one or more states or foreign countries that we should collect
taxes on the exchange of merchandise or services on our websites
would harm our business.
In July 2003, in compliance with the changes brought about by
the European Union (EU) VAT directive on
electronically supplied services, eBay began
collecting VAT on the fees charged to EU sellers on eBay sites
catering to EU residents. eBay also pays input VAT to suppliers
within the various countries the company operates. In most
cases, eBay is entitled to reclaim input VAT from the various
countries with regard to our own payments to suppliers or
vendors. However, because of our unique business model, the
application of the laws and rules that allow such reclamation is
sometimes uncertain. A successful assertion by one or more
countries that eBay is not entitled to reclaim VAT would harm
our business.
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We continue to work with the relevant tax authorities and
legislators to clarify eBays obligations under new and
emerging laws and regulations. Passage of new legislation and
the imposition of additional tax requirements could harm eBay
sellers and our business. There have been, and will continue to
be, substantial ongoing costs associated with complying with the
various indirect tax requirements in the numerous markets in
which eBay conducts or will conduct business.
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Fraudulent activities on our websites and disputes between
users of our services may harm our business. |
PayPal faces significant risks of loss due to fraud and disputes
between senders and recipients, including:
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non-delivery of, or disputes over the quality of, goods and
services due to merchant fraud or inadequate merchant business
practices; |
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reversal of payment by buyers both for legitimate reasons and in
cases of buyer fraud; |
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unauthorized use of credit card and bank account information and
identity theft; |
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the need to provide effective customer support to process
disputes between senders and recipients; |
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potential breaches of system security; |
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potential employee fraud; and |
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use of PayPals system by customers to make or accept
payment for illegal or improper purposes. |
For the year ended December 31, 2004 and the nine months
ended September 30, 2005, PayPals transaction loss
expense totaled $50.5 million and $47.0 million,
representing 0.27% and 0.24% of PayPals total payment
volume, respectively. Failure to deal effectively with
fraudulent transactions and customer disputes would increase
PayPals loss rate and harm its business.
PayPals highly automated and liquid payment service makes
PayPal an attractive target for fraud. In configuring its
service, PayPal faces an inherent trade-off between customer
convenience and security. Identity thieves and those committing
fraud using stolen credit card or bank account numbers can
potentially steal large amounts of money from businesses such as
PayPal. We believe that several of PayPals current and
former competitors in the electronic payments business have gone
out of business or significantly restricted their businesses
largely due to losses from this type of fraud. We expect that
technically knowledgeable criminals will continue to attempt to
circumvent PayPals anti-fraud systems. In addition,
PayPals service could be subject to employee fraud or
other internal security breaches, and PayPal would be required
to reimburse customers for any funds stolen as a result of such
breaches. Merchants could also request reimbursement, or stop
using PayPal, if they are affected by buyer fraud.
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 merchants
description. PayPal also incurs losses from claims that the
customer did not authorize the purchase from buyer fraud, from
erroneous transmissions and from customers who have closed bank
accounts or have insufficient 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 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 suffer. PayPal has been assessed
substantial fines 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 effective against new forms of fraud. If
these measures do not succeed, our business will suffer.
In October 2003, PayPal launched a buyer protection program that
refunds to buyers up to $500 in certain eBay transactions if
they do not receive the goods they purchased or if the goods
differ significantly from what was described by the seller. In
November 2004, PayPal increased the amount of protection
available under its buyer protection program to $1,000. If
PayPal makes such a refund, it seeks 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
PayPals loss rate and could cause future fluctuations.
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eBay faces similar risks to those of PayPal with respect to
fraudulent activities. eBay periodically receives complaints
from users who may not have received the goods that they had
purchased. In some cases individuals have been arrested and
convicted for fraudulent activities using our websites. eBay
also receives complaints from sellers who have not received
payment for the goods that a buyer had contracted to purchase.
Non-payment may occur because of miscommunication, because a
buyer has changed his or her mind and decided not to honor the
contract to purchase the item, or because the buyer bid on the
item maliciously, in order to harm either the seller or eBay. In
some European jurisdictions, buyers may also have the right to
withdraw from a sale made by a professional seller within a
specified time period.
While eBay can suspend the accounts of users who fail to fulfill
their payment or delivery obligations to other users, eBay does
not have the ability to require users to make payment 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, although users who pay through
PayPal may have reimbursement rights from their credit card
company or bank, which in turn will seek reimbursement from
PayPal. 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 clarified and may be higher in some
non-U.S. jurisdictions than it is in the
U.S. Litigation involving liability for third-party actions
could be costly for us, divert management attention, result in
increased costs of doing business, lead to adverse judgments, or
otherwise harm our business. In addition, affected users will
likely complain to regulatory agencies that could take action
against us, including imposing fines or seeking injunctions.
Negative publicity and user sentiment generated as a result of
fraudulent or deceptive conduct by users of our eBay and PayPal
services could damage our reputation, reduce our ability to
attract new users or retain our current users, and diminish the
value of our brand names.
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Changes to credit card association fees, rules, or
practices could negatively affect PayPals business. |
Because PayPal is not a bank, it cannot belong to or directly
access credit card associations, such as Visa and MasterCard. As
a result, PayPal must rely on banks or payment processors to
process transactions, and must pay a fee for this service. From
time to time, credit card associations may increase the
interchange fees that they charge for each transaction using one
of their cards. MasterCard and Visa have each implemented
increases in their interchange fees for credit cards effective
in April 2005. PayPals credit card processors have the
right to pass any increases in interchange fees on to PayPal as
well as increase their own fees for processing. Such increased
fees increase PayPals operating costs and reduce its
profit margins. PayPal is also required by its processors to
comply with credit card association operating rules, and PayPal
has agreed to reimburse its processors for any fines 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 that PayPal or its processors might
find difficult 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 suffer.
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 merchant customers. Any problems with this
implementation could result in fines, the amount of which would
be within Visas and MasterCards discretion. PayPal
also could be subject to fines from MasterCard and Visa if it
fails to detect that merchants are engaging in activities that
are illegal or activities that are considered high
risk, primarily the sale of certain types of digital
content. For high risk merchants, PayPal must either
prevent such merchants from using PayPal or register such
merchants with MasterCard and Visa and conduct additional
monitoring with respect to such merchants. PayPal has incurred
fines from its credit card processor relating to PayPals
failure
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to detect the use of its service by high risk
merchants. The amount of these fines has not been material, but
any additional fines in the future would likely be for larger
amounts, could become material, and could result in a
termination of PayPals ability to accept credit cards or
changes in PayPals process for registering new customers,
which would seriously damage PayPals business.
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Changes in PayPals funding mix could adversely
affect PayPals results. |
PayPal pays significant 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.
Senders funded 53% and 52% of PayPals payment volume using
credit cards during 2004 and the first nine months of 2005,
respectively, and PayPals financial success will remain
highly sensitive to changes in the rate at which its senders
fund payments using credit cards. Senders may prefer funding
using credit cards rather than bank account transfers for a
number of reasons, including the ability to dispute and reverse
charges if merchandise is not delivered or is not as described,
the ability to earn frequent flier miles or other incentives
offered by credit cards, the ability to defer payment, or a
reluctance to provide bank account information to PayPal. PayPal
has received inquiries regarding its disclosure practices with
regard to funding mechanisms from the attorneys general of a
number of states, and in March 2005, a complaint seeking class
action status was filed alleging, among other things, that
PayPals disclosure regarding the effects of users
choice of funding mechanism is deceptive. While we believe
PayPals disclosure is legal and accurate, any required
change to our disclosure practices could result in increased use
of credit card funding, damaging PayPals business.
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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. |
A number of U.S. states have enacted legislation regulating
money transmitters. To date, PayPal has obtained licenses in 33
of these jurisdictions and interpretations in nine states that
licensing is not required under their existing statutes. 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. In July 2005, PayPal entered into a settlement
agreement and agreed to pay $225,000 to the California
Department of Financial Institutions in connection with alleged
violations of the California Financial Code relating to the use
of a receipt form for international payments that had not been
pre-approved by the Department, and incomplete reporting to the
Department. If PayPal were found to be in violation of other
money services laws or regulations, PayPal 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 PayPals 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 additional licenses or
regulatory approvals that could impose a substantial cost on
PayPal.
We believe that the licensing or approval requirements of the
U.S. Office 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
e-commerce services do not apply to PayPal, except for certain
money transmitter licenses mentioned above. However, PayPal has
received written communications in the past from state
regulatory authorities expressing the view that its service
might constitute an unauthorized banking business. PayPal has
taken steps to address these states concerns. However, we
cannot guarantee that the steps PayPal has taken to address
these regulatory concerns will be effective in all states, and
one or more states may conclude that PayPal is engaged in an
unauthorized banking business. 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 sufficient by the state
regulatory authorities, PayPal could be subject to fines and
penalties for its prior activities. The need to comply with
state laws prohibiting unauthorized banking activities could
also limit PayPals ability to enhance its services in the
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future. Any change to PayPals 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.
Although there have been no definitive 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
specified error resolution procedures and absorb losses above
$50 from transactions not authorized by the consumer. In
addition, PayPal is subject to the financial privacy provisions
of the Gramm-Leach-Bliley Act, state financial privacy laws, and
related regulations. As a result, some customer financial
information that PayPal receives is subject to limitations on
reuse and disclosure. Existing and potential future privacy laws
may limit PayPals 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. PayPal processed an average of approximately
1.25 million transactions per day during the first nine
months of 2005, and any violations could expose PayPal to
significant liability.
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PayPals status under banking or financial services
laws or other laws in markets outside the U.S. is
unclear. |
PayPal currently allows its customers with credit cards to send
payments from 54 markets outside the U.S., and to receive
payments in 42 of those markets. In 25 of these 42 markets,
customers can withdraw funds to local bank accounts, and in
eight of these markets customers can withdraw funds by receiving
a bank draft in the mail. PayPal offers customers the ability to
send or receive payments denominated in U.S. dollars,
British pounds, Euros, Canadian dollars, Chinese yen, and
Australian dollars. We act in cooperation with a local company
in the Peoples Republic of China, or PRC, which offers PRC
residents the ability to send or receive payments denominated in
renminbi. In March 2005, PayPal received an Australian Financial
Services License from the Australian Securities and Investments
Commission. In February 2004, PayPal (Europe) Ltd., a
wholly-owned 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 PayPals
service to customers in the EU. 25 of the 55 markets outside of
the U.S. 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 is implementing such localized services through an expedited
passport notification process through the UK
regulator to regulators in other EU member states, pursuant to
EU Directives. PayPal (Europe) has completed the
passport notice process in all EU member countries.
The regulators in these countries could notify PayPal (Europe)
of local consumer protection laws that will apply to its
business, in addition to UK consumer protection law. Any such
responses from these regulators could increase the cost of, or
delay, PayPals plans for expanding its business. PayPal
(Europe) is subject to significant fines 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 many markets outside of the U.S. and the European Union, it
is not clear whether PayPals 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 financial institution or otherwise. Even
if PayPal is not currently required to obtain a license in those
countries, future localization or targeted marketing of
PayPals service in those countries could require licensure
and other laws of those countries (such as data protection and
anti-money laundering 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 affect PayPals international
expansion plans and could require PayPal to suspend providing
services to customers in one or more countries.
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Growth of Skypes business may be harmed by a lack of
public acceptance of Voice over Internet Protocol (VoIP)
telephony, new or existing regulations, or the actions of
competitors. |
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The VoIP communications medium is in its early stages and may
not achieve broad public acceptance. |
The success of Skypes service depends on continued growth
in its network of users, which in turn depends on wider public
acceptance of VoIP telephony. The VoIP communications medium is
in its early stages, and it may not develop a broad audience.
Potential new users may view VoIP as unattractive relative to
traditional telephone services for a number of reasons,
including the need to purchase computer headsets, the need to
leave a personal computer on in order to make or receive calls,
or the perception that the price advantage for VoIP is
insufficient to justify the perceived inconvenience. Potential
users may also view more familiar online communication methods,
such as e-mail or instant messaging, as sufficient for their
communications needs. There is no assurance that VoIP will ever
achieve broad public acceptance.
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The current regulatory environment for VoIP services is
unclear, and Skypes business could be harmed by new
regulations or the application of existing regulations to its
services. |
The current regulatory environment for VoIP services is unclear.
Skypes VoIP communications services are not currently
subject to all of the same regulations that apply to traditional
telephony. VoIP providers are generally subject to different
regulatory regimes in different countries, and in some cases are
subject to lower regulatory fees and lesser regulatory
requirements. Governments may impose increased fees and
administrative burdens on VoIP providers. Increased fees could
include access charges payable to local exchange carriers to
carry and terminate traffic, contributions to the Universal
Service Fund in the United States and elsewhere, and other
charges. New laws and regulations may require Skype to meet
various emergency service requirements (such as
e911), disability access requirements, consumer
protection requirements, number assignment and portability
requirements, and interception or wiretapping requirements, such
as the Communications Assistance for Law Enforcement Act. Such
regulations could result in substantial costs depending on the
technical changes required to accommodate the requirements, and
any increased costs could erode Skypes pricing advantage
over competing forms of communication. Regulations that decrease
the degree of privacy on Skypes network could also slow
adoption of its service. The increasing growth of the VoIP
telephony market and popularity of VoIP telephony products and
services heighten the risk that governments will seek to
regulate VoIP telephony and the Internet. In the United States,
various state legislatures are considering legislation to impose
their own requirements and taxes on VoIP services. Increased
regulatory requirements or VoIP would increase Skypes
costs, and, as a result, our business would suffer.
Regulatory agencies may require Skype to conform to rules that
are unsuitable for VoIP communications technologies, that are
difficult or impossible to comply with due to the nature of IP
routing, or that are unnecessary or unreasonable in light of the
manner in which we offer service to our customers. For example,
while suitable alternatives may be developed in the future, the
current IP network does not enable Skype to identify the
geographic origin of the traffic traversing the Internet or to
provide detailed calling information about computer-to-computer
calls, either of which may make complying with future regulatory
requirements, such as emerging service requirements, difficult
or impossible.
In many countries in which Skype operates or provides VoIP
services, the laws that may relate to its services are unclear.
We cannot be certain that Skype or its customers are currently
in full compliance with regulatory or other legal requirements
in all countries in which Skypes service is offered, that
Skype or its customers will be able to comply with existing or
future requirements, or that Skype or its customers will
continue in full compliance with any requirements. Skypes
failure or the failure of those with whom Skype transacts
business to comply with these requirements could materially
adversely affect our business, financial condition and results
of operations.
New rules and regulations are being considered in various
countries around the world. Such new rules and regulations could
increase our costs of doing business or prevent us from
delivering our products and services over the Internet, which
could adversely affect Skypes customer base and its
revenue.
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Actions by competitors such as incumbent telephone companies
could harm Skypes service. |
Skype depends on many of its competitors, such as incumbent
telephone companies and cable operators, for access to
broadband, Internet, telecommunications and other services
needed to provide its service. Such competitors could use a
number of methods to disrupt or degrade the quality of
Skypes service in various ways such as restricting or
prohibiting the use of their lines for our services, filtering,
blocking or delaying VoIP packets used to transmit users
calls, or denying requests for number portability. These
activities are technically feasible, and recent
U.S. regulatory changes may permit competitors to take
these actions in the U.S. Worldwide, a number of companies have
announced plans to take such actions or are selling products
designed to facilitate such actions. In addition, large,
established telecommunication companies may devote substantial
lobbying efforts to influence the regulation of the VoIP
telephony market, seeking to encourage the increased regulatory
burdens described above.
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We are subject to regulations relating to consumer
privacy. |
Many jurisdictions have laws that limits the uses of personal
information gathered online or offline Several new jurisdictions
have recently passed such laws, and jurisdictions with these
laws continually consider strengthening them, especially against
online services. eBay and PayPal in certain instances are
subject to some of these current laws. PayPal may also be
subject to recently enacted legislation in several states and
countries imposing greater restrictions on the ability of
financial services companies to share user information with
third parties without affirmative user consent. However, the
Fair and Accurate Credit Transactions Act of 2003, or FACT,
included a provision preempting conflicting state laws on the
sharing of information between corporate affiliates, and as a
result we believe that PayPal and eBay will not be subject to
the laws of each individual state with respect to matters within
the scope of FACT, but will remain subject to the provisions of
FACT and the Fair Credit Reporting Act. Courts are currently
determining the scope of these preemptive provisions.
Specific 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 different countries and the
need to move data to facilitate transactions amongst our users,
including to payment companies and shipping companies, is both
necessary and difficult. Failure to comply could subject us to
lawsuits, fines, criminal penalties, statutory damages, adverse
publicity, and other losses that could harm our business. A
number of data protection and privacy laws are being discussed
by Congress, the states, and foreign governments. Changes to
existing laws or the passage of new laws intended to address
privacy and data protection and retention issues could directly
affect 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.
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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 off the Internet. Today,
there are still relatively few laws specifically 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. It is not clear how existing laws
governing issues such as property ownership, copyrights and
other intellectual property issues, taxation, libel and
defamation, obscenity, and personal privacy apply to online
businesses. 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 Unions Directive on Distance Selling
and Electronic Commerce have begun to be interpreted by the
courts and implemented by the EU Member States, but their
applicability and scope remain somewhat uncertain. As our
activities and the types of goods listed on our
55
website expand, regulatory agencies or courts may claim or hold
that we or our users are either subject to licensure or
prohibited from conducting our business in their jurisdiction,
either with respect to our services in general, or in order to
allow the sale of certain items, such as real estate, event
tickets, cultural goods, boats, and automobiles.
Numerous states and foreign jurisdictions, including the State
of California, where our headquarters are located, have
regulations regarding auctions and the handling of
property by pawnbrokers. No final legal
determination has been made as to whether the California
regulations apply to our business (or that of our users) 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.
Attempted enforcement of these laws against some of our users
appears to be increasing and such attempted enforcements could
harm our business. In August 2002, Illinois amended its auction
law to provide for a special regulatory regime for
Internet auction listing services, and we have
registered as an Internet auction listing service in Illinois.
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
the way we or our users do business in ways that increase costs
or reduce revenues or force us to prohibit listings of certain
items for some locations. We could also be subject to fines or
other penalties, and any of these outcomes could harm our
business.
In addition, because our services are accessible worldwide, and
we facilitate sales of goods to users worldwide, foreign
jurisdictions may claim 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 expand and localize
our international activities, we 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 offerings relative to those in the
U.S. Our failure to comply with foreign laws could subject
us to penalties ranging from criminal prosecution to bans on our
services.
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Our business is subject to online commerce security risks,
including security breaches and identity theft. |
To succeed, online commerce and communications must provide a
secure transmission of confidential information over public
networks. Our security measures may not prevent security
breaches that could harm our business. Currently, a significant
number of our users authorize us to bill their credit card
accounts directly for all transaction fees charged by us.
PayPals users routinely provide credit card and other
financial information. We rely on encryption and authentication
technology licensed from third parties to provide the security
and authentication to effect secure transmission of confidential
information, including customer credit card numbers. Advances in
computer capabilities, new discoveries in the field of
cryptography or other developments may result in a compromise or
breach of the technology used by us to protect transaction data.
In addition, any party who is able to illicitly obtain a
users password could access the users transaction
data. An increasing 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, damage our computers or those of our users,
or otherwise damage our reputation and business.
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
significant resources to protect against security breaches or to
address problems caused by breaches. These issues are likely to
become more difficult 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.
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
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personal information or to introduce viruses through
trojan horse programs to our users computers.
These emails appear to be legitimate emails sent by eBay, PayPal
or Skype but direct recipients to fake websites operated by the
sender of the email or request that the recipient send a
password or other confidential information via email or download
a program. We actively pursue the parties responsible for these
attempts at misappropriation, and we have developed tools to
detect, and help users detect, fake websites and unauthorized
access to customer accounts and we encourage our users to
divulge sensitive information only after they have verified that
they are on our legitimate websites, but we cannot entirely
eliminate these types of activities.
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PayPals failure to manage customer funds properly
would harm its business. |
PayPals 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 PayPals business continues to grow,
it must strengthen its internal controls accordingly.
PayPals success requires significant public confidence 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 PayPals product severely.
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Our failure to manage growth could harm our
business. |
We are currently expanding our headcount, facilities, and
infrastructure in the U.S. and internationally. 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
significant strain on our management, operational, and financial
resources. The areas that are put under strain by our growth
include the following:
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Our 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 regularly introduce. This upgrade
process is expensive, and the increased complexity of our
websites increases the cost of additional enhancements. Failure
to upgrade our technology, features, transaction processing
systems, security infrastructure, or network infrastructure to
accommodate increased traffic or transaction volume could harm
our business. 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 financial information. We may be unable to
effectively upgrade and expand our systems in a timely manner or
smoothly integrate any newly developed or purchased technologies
or businesses with our existing systems, and any failure to do
so could result in problems on our sites. For example, in
October 2004, we experienced unscheduled downtime on the PayPal
website related to system upgrades. Despite our efforts to
increase site scalability and reliability, 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. Further, steps to increase the
reliability and redundancy of our systems are expensive, reduce
our margins, and may not be successful in reducing the frequency
or duration of unscheduled downtime. |
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Customer Account Billing. Our revenues depend on
prompt and accurate billing processes. We recently completed a
significant project to enhance our billing software. Problems
with the conversion to the new billing system during the second
and third quarters of 2004 caused incorrect account balance
totals to be displayed for some users. While these problems have
been corrected and we believe that no users were overcharged,
our failure to grow our transaction-processing capabilities to
accommodate the increasing number of transactions that must be
billed would harm our business and our ability to collect
revenue. In July 2004, a complaint seeking class action status
was filed alleging that eBay improperly billed its users and
improperly debited some user accounts. The complaint was
recently amended to include a larger variety of billing related
problems and a longer time frame. |
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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 safety activity we provide worldwide. If we are unable to
provide these operations in a cost-effective manner, users of
our websites may have negative experiences, current and future
revenues could suffer, and our operating margins may decrease. |
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
financial systems, procedures, and controls. This is a special
challenge as we acquire new operations with different 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 difficult for us
to offset any future revenue shortfalls by expense reductions in
the short term.
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Our business is adversely affected 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 affect our business. We
would therefore be adversely affected by geopolitical events
such as war, the threat of war, or terrorist activity, and
natural disasters, such as hurricanes or earthquakes. 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 first and fourth fiscal quarters. PayPal has shown
similar seasonality, especially in the fourth fiscal quarter.
These patterns of seasonality may 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.
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Use of our services for illegal purposes could harm our
business. |
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 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. In
December 2004, an executive of Baazee.com, our Indian
subsidiary, was arrested in connection with a users
listing of a pornographic video clip on that site. Similarly,
our Korean subsidiary and one of its employees were found
criminally liable for listings on the Korean subsidiarys
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
offerings. 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
significant and continuing media attention relating to the
listing or sale of unlawful goods using our services. This
negative publicity could damage our reputation and diminish the
value of our brand names. It also could make users reluctant to
continue to use our services.
PayPals 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 trafficking, prohibited sales of
alcoholic beverages or tobacco products, and online securities
fraud. PayPal recently announced a change in its acceptable use
policy that would enable PayPal to fine users in certain
jurisdictions up to $500 or take legal action to recover its
losses for certain violations of that policy,
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including online gambling and illegal sales of prescription
medications. Despite measures PayPal has taken to detect and
lessen the risk of this kind of conduct, illegal activities
could still 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 agreed 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 firm. 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 international transactions more closely. As PayPal
localizes its service in other countries, additional
verification and reporting requirements could apply. These
regulations could impose significant costs on PayPal and make it
more difficult for new customers to join its network. PayPal
could be required to learn more about its customers before
opening an account, to obtain additional verification of
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 PayPals costs significantly and
reduce the attractiveness of its product. Failure to comply with
federal, state or foreign country money laundering laws could
result in significant criminal and civil lawsuits, penalties,
and forfeiture of significant assets.
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We are subject to intellectual property and other
litigation. |
In April 2001, two of our European subsidiaries, eBay GmbH and
eBay International AG, were sued by Montres Rolex S.A. and
certain of its affiliates in the regional court of Cologne,
Germany. The suit subsequently was transferred to the regional
court in Düsseldorf, Germany. Rolex alleged that our
subsidiaries were infringing Rolexs trademarks as a result
of users selling counterfeit Rolex watches through our German
website. The suit also alleged unfair competition. Rolex sought
an order enjoining the sale of Rolex-branded watches on the
website as well as damages. In December 2002, a trial was held
in the matter and the court ruled in favor of eBay on all causes
of action. Rolex appealed the ruling to the Higher Regional
Court of Düsseldorf, and the appeal was heard in October
2003. In February 2004, the court rejected Rolexs appeal
and ruled in our favor. Rolex has appealed the ruling to the
German Federal Supreme Court. In March 2004, the German Federal
Supreme Court ruled in favor of Rolex in a case involving an
unrelated company, ricardo.de AG, but somewhat comparable legal
theories. The court issued its written decision in that case in
September 2004. Although it is not yet clear what effect the
reasoning of the German Federal Supreme Courts ricardo.de
decision would have when applied to eBay, we believe the
Courts decision will likely not require any significant
change in our business practices.
In September 2001, MercExchange LLC filed a complaint 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 consignment 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, effectively
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 in April 2003. In May 2003,
the jury returned a verdict finding that eBay had willfully
infringed one and Half.com had willfully infringed both of the
patents in the suit, awarding $35 million in compensatory
damages. Both parties filed 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, while
denying MercExchanges request for an injunction and
attorneys fees. We appealed the verdict and judgment in
favor of MercExchange
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and MercExchange filed a cross-appeal of the granting in part of
our summary judgment motion and the denial of its request for an
injunction and attorneys fees.
In March 2005, the U.S. Court of Appeals for the Federal
Circuit issued a ruling in the appeal of the MercExchange patent
litigation suit which, among other things (1) invalidated
all claims asserted against eBay and Half.com arising out of the
multiple database search patent and reduced the verdict amount
by $4.5 million; (2) upheld the electronic consignment
system patent; (3) affirmed the district courts
refusal to award attorneys fees or enhanced damages
against us; (4) reversed the district courts order
granting summary judgment in our favor regarding the auction
patent; and (5) reversed the district courts refusal
to grant an injunction and remanded that issue to the district
court for further proceedings. In May 2005, the Court of Appeals
for the Federal Circuit granted our petition to stay the mandate
in the case in order to allow us to petition the
U.S. Supreme Court for review on certain issues. We filed
our petition for review with the U.S. Supreme Court on
July 25, 2005. In parallel with the federal court
proceedings, at our request, the U.S. Patent and Trademark
Office is actively reexamining each of the patents in suit,
having found that substantial questions exist regarding the
validity of the claims contained in them. In January 2005, the
Patent and Trademark Office issued an initial ruling rejecting
all of the claims contained in the patent that related to online
auctions; in March 2005, the Patent and Trademark Office issued
an initial ruling rejecting all of the claims contained in the
patent that related to electronic consignment systems; and in
May 2005, the Patent and Trademark Office issued an initial
ruling rejecting all of the claims contained in the patent that
related to multiple database searching. Even if successful, our
litigation of these matters will continue to be costly. In
addition, as a precautionary measure, we have modified certain
functionality of our websites and business practices in a manner
which we believe would avoid any further infringement. For this
reason, we believe that any injunction that might be issued by
the district court will not have any impact on our business. We
also believe we have appropriate reserves for this litigation.
Nonetheless, if we are not successful in appealing or modifying
the courts ruling, and if the modifications to the
functionality of our websites and business practices are not
sufficient to make them non-infringing, we would likely be
forced to pay significant additional damages and licensing fees
and/or modify our business practices in an adverse manner.
In August 2002, Charles E. Hill & Associates, Inc.
filed 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, unspecified damages, including treble damages for
willful infringement, and interest, costs, expenses, and fees.
The case was transferred to the U.S. District Court for the
Southern District of Indiana in January 2003, but was
transferred back to the U.S. District Court for the Eastern
District of Texas in December 2003. A scheduling conference was
held in November 2004 and a preliminary trial date has been set
for February 2006. A claim construction hearing was held on
August 19, 2005. The defendants have filed a motion for
summary judgment of noninfringement and a motion for summary
judgment on the priority date of the parent patent and
consequential invalidity of the two subsequent patents. 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
limiting access to customer accounts and failure to promptly
restore access to legitimate accounts violates California state
consumer protection laws and is an unfair business practice and
a breach of PayPals User Agreement. This action was
re-filed with a different named plaintiff in June 2002
(No. CV-808441), and a similar action was also filed 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 limiting access to customer accounts and
failure to promptly restore access to legitimate accounts
violates federal and state consumer protection and unfair
business practice laws. The two federal court actions were
consolidated into a single case, and the state court action was
stayed pending developments in the federal case. In June 2004,
the parties announced that they had reached a proposed
settlement. The settlement received approval from the federal
court on November 2, 2004, and the state court action was
dismissed with prejudice in March 2005. In the settlement,
PayPal does not acknowledge that any of the allegations in the
case are true. Under the terms of
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the settlement, certain PayPal account holders will be eligible
to receive payment from a settlement fund of $9.25 million,
less administrative costs and the amount awarded to
plaintiffs counsel by the court. That sum is being
distributed to class members who have submitted timely claims in
accordance with the settlements plan of allocation, part
of which still must be approved by the court. The parties expect
that the remaining part of the plan of allocation will be
submitted to the court in the fourth quarter of 2005. The amount
of the settlement was fully accrued in our consolidated
statement of income for the year ended December 31, 2003.
In July 2004, a purported class action lawsuit was filed by two
eBay users in Superior Court of the State of California, County
of Santa Clara (No. 104CV022708) alleging that eBay engaged
in improper billing practices as the result of problems with the
rollout of a new billing software system in the second and third
quarters of 2004. The lawsuit sought damages and injunctive
relief. An amended complaint was filed in January 2005, dropping
one plaintiff, changing the capacity of the other plaintiff to
that of representative plaintiff, and adding seven additional
eBay users as plaintiffs. The amended complaint expanded its
claim to include numerous alleged improper billing practices
from September 2003 until the present. In February 2005, eBay
filed a motion to strike and a demurrer seeking to dismiss the
complaint. In April 2005, the court sustained portions of the
demurrer, but granted the plaintiffs leave to amend their
complaint. The plaintiffs filed a second amended complaint,
dropping the last original plaintiff and again adding new
plaintiffs. We filed a motion to strike and a demurrer regarding
the plaintiffs second amended complaint. In July 2005, the
court again sustained a portion of the demurrer and again
granted the plaintiffs leave to amend their complaint, and the
plaintiffs filed a third amended complaint. We have filed an
answer to the plaintiffs third amended complaint, and are
currently in the initial phase of discovery. We believe that we
have meritorious defenses and intend to defend ourselves
vigorously.
In February 2005, eBay was sued in Superior Court of the State
of California, County of Santa Clara (No. 105CV035930)
in a purported class action alleging that certain bidding
features of our site constitute shill bidding for
the purpose of artificially inflating bids placed by buyers on
the site. The complaint alleges violations of Californias
Auction Act, Californias Consumer Remedies Act, and unfair
competition. The complaint seeks injunctive relief, damages, and
a constructive trust. In April 2005, we filed a demurrer seeking
to dismiss the complaint. We have agreed to stay the demurrer
and participate in a mediation with the plaintiffs, which is
scheduled to take place in October 2005. We believe that we have
meritorious defenses and intend to defend ourselves vigorously.
In March 2005, eBay, PayPal, and an eBay seller were sued in
Supreme Court of the State of New York, County of Kings
(No. 6125/05) in a purported class action alleging that
certain disclosures regarding PayPals Buyer Protection
Policy, users chargeback rights, and the effects of
users choice of funding mechanism are deceptive and/or
misleading. The complaint alleged misrepresentation on the part
of eBay and PayPal, breach of contract and deceptive trade
practices by PayPal, and that PayPal and eBay have jointly
violated the civil RICO statute (18 U.S.C.
Section 1961(4)). In April 2005, eBay and PayPal removed
the case to the U.S. District Court for the Eastern
District of New York and the plaintiffs filed an amended
complaint in the U.S. District Court (No. 05-CV-01720)
repeating the allegations of the initial complaint but dropping
the civil RICO allegations. The complaint seeks injunctive
relief, compensatory damages, and punitive damages. The parties
agreed to stay further proceedings pending a mediation hearing,
which took place in July 2005. The parties are continuing
mediation discussions, though the stay of proceedings has
expired. We believe that eBay and PayPal have meritorious
defenses and intend to defend ourselves vigorously.
In January 2005, 51 former shareholders of Epinions, Inc.
common stock including founders and former employees of that
company filed a lawsuit in Superior Court of the State of
California County of San Francisco (No. CGC 05-437906)
related to the April 2003 merger of Epinions and DealTime, Ltd.
The lawsuit was filed against certain of Epinions former
officers and directors and preferred shareholders and the
company that resulted from the merger, Shopping.com Ltd. eBay
completed its acquisition of Shopping.com Ltd. on
August 30, 2005. The lawsuit contended that the defendants
were responsible for breaches of fiduciary duty and material
misstatements and omissions, that defendants undervalued the
DealTime stock that Epinions shareholders received in
connection with the merger, and that plaintiffs common
stock of Epinions was wrongfully cancelled without compensation.
Defendants disputed the contentions of the case and denied any
allegations of wrongdoing. In September 2005, the parties
tentatively reached agreement as to the
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monetary terms for settlement of the dispute. The settlement
remains subject to the final written approval of the parties.
The tentative settlement amount has been accounted for as an
assumed liability in connection with our acquisition of
Shopping.com.
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 notified 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 and
communications businesses. We have in the past been forced to
litigate such claims. We may also become more vulnerable to
third-party claims as laws such as the Digital Millennium
Copyright Act, the Lanham Act and the Communications Decency Act
are interpreted by the courts and as we expand geographically
into jurisdictions where the underlying laws with respect to the
potential liability of online intermediaries like ourselves are
either unclear or less favorable. These claims, whether
meritorious or not, could be time consuming and costly to
resolve, cause service upgrade delays, require expensive changes
in our methods of doing business, or could require us to enter
into costly royalty or licensing agreements.
From time to time, we are involved in other disputes or
regulatory inquiries that arise in the ordinary course of
business. The number and significance of these disputes and
inquiries are increasing as our business expands and our company
grows larger. Any claims or regulatory actions against us,
whether meritorious or not, could be time consuming, result in
costly litigation, require significant amounts of management
time, and result in the diversion of significant operational
resources.
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Government inquiries may lead to charges or
penalties. |
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. PayPal has
received inquiries regarding its restriction and disclosure
practices from the Federal Trade Commission and these and other
business practices from the attorneys general of a number of
states. If PayPals 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
fines. If PayPal becomes subject to an enforcement action, it
could be required to restructure its business processes in ways
that would harm its business, and to pay substantial fines. Even
if PayPal is able to defend itself successfully, an enforcement
action could cause damage to its reputation, could consume
substantial amounts of its managements time and attention,
and could require PayPal to change its customer service and
operations in ways that could increase its costs and decrease
the effectiveness of its anti-fraud program. 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 current and planned
antifraud efforts, customer support procedures, operating
procedures and disclosures. If one or more of these agencies is
not satisfied with our response to current or future inquiries,
we could be subject to fines or other penalties, or forced to
change our operating practices in ways that could harm our
business.
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.
In order to protect the investigation, the court has ordered
that no further public disclosures be made with respect to the
matter. Any civil or criminal charges against us would likely
harm our business due to negative publicity, the cost of
litigation, the diversion of management time, and any fines or
penalties assessed.
We are subject to laws relating to the use and transfer of
personally identifiable information about our users, especially
users located outside of the U.S. Violation of these laws,
which in many cases apply not only to third-party transactions
but also to transfers of information between ourselves and our
subsidiaries, and
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between ourselves, our subsidiaries, and other parties with
which we have commercial relations, could subject us to
significant penalties and negative publicity and could adversely
affect us.
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The listing or sale by our users of pirated or counterfeit
items may harm our business. |
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 trade names, or other intellectual
property rights. Although we have sought to work actively with
the owners of intellectual property rights to eliminate listings
offering infringing items on our websites, some rights owners
have expressed the view that our efforts are insufficient.
Content owners and other intellectual property rights 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, including litigation brought by
Tiffany & Co. in the U.S., Rolex S.A. in Germany, and a
number of other owners of intellectual property rights. While we
have been largely successful to date in defending against such
litigation, more recent cases have been based, at least in part,
on different legal theories than those of earlier cases, and
there is no guarantee that we will continue to be successful in
our defense. In addition, we expect that this type of litigation
may increase as our sites gain prominence in markets outside of
the U.S., where the laws may be unsettled or less favorable to
us. Such litigation is costly for us, could result in damage
awards or increased costs of 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.
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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 would prohibit or impose 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. Several recent court decisions have narrowed the
scope of the immunity provided to Internet service providers
like us under the Communications Decency Act. This trend, if
continued, may increase our potential liability to third parties
for the user-provided content on our site. Our liability for
such claims may be higher 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 offerings, which would negatively
affect our financial 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.
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Customer complaints or negative publicity about our
customer service could diminish use of our services. |
Customer complaints or negative publicity about our customer
service could severely diminish consumer confidence in and use
of our services. Breaches of our customers privacy and our
security measures could have the same effect. 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. Effective
customer service requires significant personnel expense, and
this expense, if not managed properly, could significantly
impact our profitability.
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Failure to manage or train our customer service representatives
properly could compromise our ability to handle customer
complaints effectively. If we do not handle customer complaints
effectively, our reputation may suffer and we may lose our
customers confidence.
Because it is providing a financial service and operating in a
more regulated environment, PayPal, unlike eBay, must provide
telephone as well as email customer service and must resolve
certain customer contacts within shorter time frames. As part of
PayPals program to reduce fraud losses, it may temporarily
restrict the ability of customers to withdraw their funds if
those funds or the customers account activity are
identified by PayPals anti-fraud models as suspicious.
PayPal has in the past received negative publicity with respect
to its customer service and account restrictions, and is the
subject of purported class action lawsuits and state attorney
general inquiries alleging, among other things, failure to
resolve account restrictions promptly. If PayPal is unable to
provide quality customer support operations in a cost-effective
manner, PayPals users may have negative experiences,
PayPal may receive additional negative publicity, its ability to
attract new customers may be damaged, and it could become
subject to additional litigation. Current and future revenues
could suffer, or its operating margins may decrease. In
addition, negative publicity about or experiences with
PayPals customer support could cause eBays
reputation to suffer or affect consumer confidence in eBay as a
whole.
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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 and could fluctuate in response to a
variety of factors, including the following:
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actual or anticipated variations in our quarterly operating
results and expected future results; |
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changes in, or failure to meet, financial estimates by
securities analysts; |
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unscheduled system downtime; |
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announcements by us or our competitors of significant
acquisitions, strategic partnerships, joint ventures, new
products or capital commitments; |
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additions or departures of key personnel; |
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announcements of technological innovations or new services by us
or our competitors; |
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initiation of or developments in litigation affecting us; |
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conditions or trends in the Internet and online commerce
industries; |
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changes in the market valuations of other Internet, online
commerce, or technology companies; |
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developments in regulation; |
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unanticipated economic or political events; |
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sales of our common stock or other securities in the open
market; and |
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other events or factors, including those described in this
Risk Factors That May Affect Results of Operations and
Financial Condition section and others that may be beyond
our control. |
The trading prices of Internet stocks in general, and ours in
particular, have experienced extreme price and volume
fluctuations in recent periods. These fluctuations often have
been unrelated or disproportionate to the operating performance
of these companies. Even considering recent changes, the
valuation of our stock remains high based on conventional
valuation standards such as price-to-earnings and price-to-sales
ratios. The trading price of our common stock has decreased
sharply from its level in the fourth quarter of 2004, but
remains higher than our stock price during 2002 and early 2003.
This trading price and valuation may not be sustained. Negative
changes in the publics 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 fluctuations, as well as general
political and economic conditions, such as
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recession or interest rate or currency rate fluctuations, 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 companys securities. Litigation
of this type could result in substantial costs and a diversion
of managements attention and resources.
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Problems with third parties who provide services to our
users could harm our business. |
A number of parties provide services to our users that
indirectly benefit us. Such services include seller tools that
automate and manage listings, merchant tools that manage
listings and interface with inventory management software,
storefronts that help our users list items, caching services
that make our sites load faster, among others. In some cases we
have contractual agreements with these companies that give us a
direct financial interest in their success, while in other cases
we have none. In either circumstance, financial, 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
difficult, and thereby harm our business. Any security breach at
one of these companies could also affect 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.
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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 our actions 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
effort, and could result in significant judgments against us.
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We depend on key personnel. |
Our future performance depends substantially on the continued
services of our senior management and other key personnel and
our ability to retain and motivate them. The loss of the
services of any of our executive officers 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 Officer 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
sufficiently qualified personnel. In making employment
decisions, particularly in the Internet and 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 difficult to
retain and motivate employees whose stock option strike prices
are substantially above current market prices. Similarly,
decreases in the number of unvested stock options held by
existing employees, either because their options have vested or
because the size of follow-on option grants has declined, may
make it more difficult to retain and motivate employees.
Skypes future success depends substantially upon the
continued services of its senior management and key personnel,
and the loss of their services could harm our business. Several
key members of Skypes engineering team are consultants,
not full time employees, who provide services to us and third
parties. Many of Skypes employees had equity in Skype
prior to its acquisition by eBay. Skype equity holders were
given the option of receiving their portion of the acquisition
consideration in the form of a lump-sum up-front payment or
receiving a lower up-front payment in exchange for the
possibility of receiving additional consideration in the form of
potential earn-out payments tied to the achievement of certain
performance targets prior to June 30, 2009. Most of
Skypes senior management and key employees chose to
receive less up-front consideration in exchange for the
possibility of receiving the performance-based earn-out
payments. Eligible Skype employees are also expected to be
granted eBay stock options. However, the earn-out payments are
not tied to continued employment with Skype or eBay, and key
Skype employees may choose to depart due to
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differences in corporate culture, because they believe the
earn-out targets will be achieved without their contributions,
or because they believe the earn-out targets are not achievable.
The loss of the services of any of Skypes senior
management or key personnel could delay the development and
introduction of new features and services, and could harm our
ability to grow Skypes business.
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Our industry is intensely competitive. |
eBays Marketplaces businesses currently or potentially
compete with a number of companies providing both particular
categories of goods and broader ranges of goods. The Internet
provides new, rapidly evolving and intensely competitive
channels for the sale of all types of goods. We expect
competition to intensify in the future. The barriers to entry
into these channels are relatively low, and current offline 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 e-commerce companies.
Our broad-based competitors include the vast majority of
traditional department, warehouse, discount, and general
merchandise stores, emerging online retailers, online classified
services, and other shopping channels such as offline and online
home shopping networks. These include most prominently:
Wal-Mart, Kmart, Target, Sears, Macys, JC Penney, Costco,
Office Depot, Staples, OfficeMax, Sams Club, Amazon.com,
Buy.com, AOL.com, Yahoo! Shopping, MSN, QVC, and Home Shopping
Network.
A number of companies have launched a variety of services that
provide new channels for buyers to find and buy items from
sellers of all sizes. We recently acquired Shopping.com Ltd., an
online shopping comparison site. Shopping.com competes with
sites such as Buy.com, Googles Froogle, In-Store.com,
MySimon.com, Nextag.com, Pricegrabber.com, Shopzilla, and Yahoo!
Product Search, which offer shopping search engines that allow
consumers to search the Internet for specified products.
Similarly, sellers are increasingly acquiring new customers by
paying for search-related advertisements on search engine sites
such as Google and Yahoo!. We use product search engines and
paid search advertising to channel users to our sites, but these
services 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. Examples of
category-specific competitors include:
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Books/ Movies/ Music: Abebooks.com, Amazon.com,
Barnes & Noble, Alibris.com, Blockbuster, BMG, Columbia
House, Best Buy, CDNow, Express.com, Emusic.com, and Tower
Records; |
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Business & Industrial: Alibaba, Ariba,
Bid4Assets, BidFreight.com, Buyer Zone, Commerce One, DotMed,
DoveBid, Go Industry, Grainger, IronPlanet, labx.com,
Liquidation.com, Machinetools.com, Oracle, Partsforindustry.com,
PurchasePro.com, Ritchie Brothers Auctioneers, Testmart, Tractor
Supply Company, and VerticalNet; |
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Clothing & Accessories: Abercrombie &
Fitch, AE.com, Bloomingdales, Bluefly.com,
Coldwater-Creek.com, Delias.com, Dockers.com, DSW, Eddie Bauer,
eBags, eLuxury, The Gap, J. Crew, Kohls, Lands End,
Lane Bryant, The Limited, LLBean, Macys, The Mens
Wearhouse, Neiman-Marcus, Nordstrom, Old Navy, Overstock.com,
Payless, Ross, Saks Fifth Avenue, Shoes.com, Urban Outfitters,
Victorias Secret, Yoox.com, and Zappos.com; |
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Collectibles: Beckett, Bonhams & Butterfields,
Christies, Collectiblestoday.com, Go Collect, Greg Manning
Auctions, Heritage, Just Glass, Mastronet, Pottery Auction,
Replacements.com, Ruby Lane, Shop At Home, Sothebys, Tias,
US Mint, US Postal Service, antique and collectible dealers,
antique and collectible fairs, auction houses, estate sales,
flea markets and swap meets, independent coin and stamp dealers,
coin and stamp shows, and specialty retailers; |
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Computers, Consumer Electronics, and Cameras &
Photo: Abe Electronics, Best Buy, Buy.com, Circuit City,
CNET, CompUSA, Computer Discount Warehouse, Dell, Electronics
Boutique, Frys Electronics, Gamestop, Gateway, The Good
Guys, Hewlett Packard, IBM, MicroWarehouse, Over- |
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stock.com, PC Connection, PCMall.com, Radio Shack, Ritz Camera,
Tech Depot, Tiger Direct, Tweeter Home Entertainment, uBid,
major wireless carriers, and computer, consumer electronics, and
photography retailers; |
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Home & Garden: Ace Hardware, Babyage, Baby
Style, Baby Universe, Bed, Bath & Beyond, Brookstone,
Burpee.com, Crate & Barrel, Do-It-Best Hardware, Ethan
Allen, Frontgate, Harbor Freight, IKEA, HomeBase, Home Depot,
Kohls, Lamps Plus, Lowes, Linens n Things, Northern
Tool, OSH, Pier One, Pottery Barn, Restoration Hardware,
Smith & Hawken, Spiegel, TJ Max, Tuesday Morning, True
Value Hardware, and Williams-Sonoma; |
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Jewelry & Watches: Bluenile.com, Diamond.com,
Macys, Mondera.com, HSN.com, QVC.com, Odimo.com,
Ross-Simons, ShopNBC.com, Signet/ Sterling, Tiffany, Whitehall,
Zales, and a variety of independent jewelry and watch retailers
who have opened their own ecommerce sites; |
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Motors (used vehicles 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, Pep Boys, RM Auctions, Inc., The Tire Rack,
TraderOnline, Trader Publishing, newspaper classifieds, used car
dealers, swap meets, car clubs, and vehicle recyclers; |
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Sports: Academy Sports, Bass Pro Shops, Big 5,
Cabelas, Dicks Sporting Goods, GolfClubExchange.com,
Golfsmith, GSI Commerce, Performance Bike, Play It Again Sports,
REI, The Sports Authority, SportsLine.com, and TGW.com; and |
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Toys: FAO Schwarz, KB Toys, Towerhobbies.com, Toys R Us,
and independent specialty toy and hobby retailers. |
Our international marketplace websites compete with similar
online and offline 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 and Gmarket in South Korea, TaoBao and 1pai, a
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 certain of these
jurisdictions there are competitors that may have a better
understanding of local culture and commerce than we do.
The principal competitive factors for eBay include the following:
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ability to attract buyers and sellers; |
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volume of transactions and price and selection of goods; |
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customer service; and |
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brand recognition. |
With respect to our online competition, additional competitive
factors include:
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community cohesion, interaction and size; |
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system reliability; |
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reliability of delivery and payment; |
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website convenience and accessibility; |
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level of service fees; and |
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quality of search tools. |
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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.
Other online trading services may be acquired by, receive
investments from, or enter into other commercial relationships
with larger, well-established and well-financed 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 offered 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 offline 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 websites. 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 profitability. For
example, we have implemented a buyer protection program that
generally insures items up to a value of $200, with a
$25 deductible, for users with a non-negative feedback
rating at no cost to the user. PayPal has implemented a similar
buyer protection program covering losses from selected eBay
sellers up to $1,000, with no deductible. Depending on the
amount and size of claims we receive under these programs, these
product offerings could harm our profitability. In addition,
certain competitors may offer or continue to offer free shipping
or other transaction related services, which could be
impractical or inefficient for eBay users to match. New
technologies may increase the competitive pressures by enabling
our competitors to offer a lower cost service.
Although we have established Internet traffic 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 services. 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 PayPals product is emerging, intensely
competitive, and characterized by rapid technological change.
PayPal competes with existing online and off-line payment
methods, including, among others:
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credit card merchant processors that offer their services to
online merchants, including Card Services International, Chase,
First Data, iPayment, Paymentech, and Wells Fargo; and payment
gateways, including CyberSource, VeriSign, and Authorize.net; |
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Western Union, BidPay.com and Western Union MoneyZap, each
operated by subsidiaries of First Data; |
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CheckFree; |
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processors that provide online merchants the ability to offer
their customers the option of paying for purchases from their
bank account, including Certegy and TeleCheck, a subsidiary of
First Data, or to pay on credit, including Bill Me Later; |
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providers of traditional payment methods, particularly credit
cards, checks, money orders, and Automated Clearing House
transactions; and |
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issuers of stored value targeted at online payments, including
VisaBuxx, NetSpend and Net Estate. |
In addition, Google has stated it is developing a new payment
service.
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Some of these competitors have longer operating histories,
significantly greater financial, technical, marketing, customer
service and other resources, greater name recognition, or a
larger base of customers in affiliated businesses than PayPal.
PayPals competitors may respond to new or emerging
technologies and changes in customer requirements faster and
more effectively than PayPal. They may devote greater resources
to the development, promotion, and sale of products and services
than PayPal, and they may offer lower prices. PayPal may be
forced to lower its prices in response. Competing services tied
to established banks and other financial institutions may offer
greater liquidity and engender greater consumer confidence in
the safety and efficacy of their services than PayPal.
Overseas, PayPal faces competition from similar channels and
payment methods. In each country, numerous banks provide
standard online credit card acquiring and processing services,
and these banks typically have leading market share. In
addition, PayPal faces competition from Visas Visa Direct,
MasterCards MoneySend, INGs Way2Pay and Royal Bank
of Scotlands World Pay in the European Community, NOCHEX,
Moneybookers, and NETeller and FirePay in the U.K., CertaPay and
HyperWallet in Canada, Paymate in Australia, Alipay and 99Bill
in China and Inicis in South Korea. In addition, in certain
countries, such as Germany and Australia, electronic funds
transfer is a leading method of payment for both online and
offline transactions. As in the U.S., established banks and
other financial institutions that do not currently offer online
payments could quickly and easily develop such a service.
The market for Skypes services is also emerging, intensely
competitive, and characterized by rapid technological change.
Many traditional telecommunications carriers and cable providers
offer, or have indicated that they plan to offer, VoIP services
that compete with the services Skype provides. In addition, many
Internet companies, including AOL, Google, Microsoft, and Yahoo!
offer, or have indicated that they plan to offer in the near
future, VoIP services that are similar to Skypes. We
expect VoIP competitors to continue to improve the performance
of their current products and services and introduce new
products, services, and technologies. If Skypes
competitors successfully introduce new products or services or
enhance their existing products or services, this could reduce
the market for Skypes products and services, increase
price competition, or make Skypes products and services
obsolete. For example, Skypes competitors may integrate
more traditional methods of online communication that do not
involve VoIP technology, such as instant messaging, with content
and functionality that Skype does not have, or that is superior
to Skypes, which could lower Skypes adoption rates,
decrease its ability to attract new users or cause its current
users to migrate to a competing service. In addition, some of
Skypes competitors, such as telecommunications carriers
and cable television providers, may be able to bundle services
and products that Skype does not offer with VoIP telephony
services. These services could include various forms of wireless
communications, voice and data services, Internet access and
cable television. This form of bundling would put Skype at a
competitive disadvantage if these providers can combine a
variety of service offerings at a single attractive price.
Furthermore, competitors may choose to make their services
interoperable (as has recently been announced by Microsoft and
Yahoo) which could increase the attractiveness of their services
relative to Skype.
Many of Skypes current and potential competitors have
longer operating histories, are substantially larger, and have
greater financial, marketing, technical, and other resources.
Many also have greater name recognition and a larger installed
base of customers than Skype has. As a result of their greater
resources, many current and potential competitors may be able
may be able to lower their prices substantially, thereby eroding
some or all of Skypes cost advantage. Competitors may also
use their financial resources to lobby the government for
greater protection of their traditional businesses and to impose
costly regulatory burdens on Skypes business.
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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, significant growth in the
numbers of users and amount of traffic. The Internet
infrastructure may be unable to support such demands. In
addition, increasing numbers of users, increasing bandwidth
requirements, or problems
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caused by viruses, worms, and similar
programs may harm the performance of the Internet. The backbone
computers of the Internet have been the targets of such
programs. The Internet has experienced a variety 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 traffic and the
processing transactions on our service.
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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-effective or timely manner. We are pursuing strategic
relationships with other companies to provide some of these
services. As a result, we may be unable to control the quality
of these services or adequately address problems that arise.
Expanding our operations in this manner also will require
significant additional expenses, development, operations and
other resources and will strain our management, financial 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.
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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 confidentiality and
invention assignment agreements with our employees and
contractors, and confidentiality 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. Effective trademark, copyright, patent, domain
name, trade dress, and trade secret protection is very expensive
to maintain and 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.
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We are subject to the risks of owning real
property. |
We own real property including land and buildings related to our
operations. We have little experience in managing real property.
Ownership of this property subjects us to risks, including:
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the possibility of environmental contamination and the costs
associated with fixing any environmental problems; |
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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; |
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the possible need for structural improvements in order to comply
with zoning, seismic, disability act, or other
requirements; and |
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possible disputes with tenants, neighboring owners, or others. |
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Some anti-takeover provisions may affect 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 rights granted to the
holders of any preferred stock that may be issued in the future.
Some provisions of our certificate of incorporation and
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bylaws could have the effect of making it more difficult for a
potential acquirer to acquire a majority of our outstanding
voting stock. These include provisions that provide for a
classified 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 effect of delaying or preventing a
change of control.
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Item 3: |
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 significantly increasing risk. To achieve this
objective, we maintain our portfolio of cash equivalents and
short-term and long-term investments in a variety of securities,
including government and corporate securities and money market
funds. These securities are generally classified as available
for sale and consequently are recorded on the balance sheet at
fair value with unrealized gains or losses reported as a
separate component of accumulated other comprehensive income
(loss), net of estimated tax.
Investments in both fixed-rate and floating-rate
interest-earning instruments carry varying degrees of interest
rate risk. The fair market value of our fixed-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 floating rate securities generally are subject to less
interest-rate risk than fixed-rate securities, floating-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 suffer losses in
principal if securities are sold that have declined in market
value due to changes in interest rates. As of September 30,
2005, our fixed-income investments earned a pre-tax yield of
approximately 3.2%, with a weighted average maturity of
three months. If interest rates were to instantaneously
increase (decrease) by 100 basis points, the fair market
value of our total investment portfolio could decrease
(increase) by approximately $11.2 million.
Equity Price Risk
We are exposed to equity price risk on the marketable portion of
equity instruments and equity method 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. We
did not record an impairment charge during either of the three
or nine months ended September 30, 2005 or 2004 relating to
the other-than-temporary impairment in the fair value of equity
investments. At September 30, 2005, the total carrying
value of our equity instruments and equity method investments
was $50.8 million.
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,
and to a lesser extent, the British pound, as their functional
currency. Our international operations are subject to risks
typical of international operations, including, but not limited
to, differing economic conditions, changes in political climate,
differing 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. In addition, at September 30, 2005,
we held balances in cash, cash equivalents and investments
outside the U.S. totaling approximately $621.9 million.
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As of September 30, 2005, we had outstanding forward
foreign exchange hedge contracts with notional values equivalent
to approximately $296.4 million with maturity dates within
32 days. The hedge contracts are used to offset changes in
the functional currency value of assets and liabilities
denominated in foreign currencies as a result of currency
fluctuations. Transaction gains and losses on the contracts and
the assets and liabilities are recognized each period in our
consolidated statement of income.
Foreign exchange rate fluctuations may adversely impact our
consolidated financial position as well as our consolidated
results of operations. Foreign exchange rate fluctuations may
adversely impact our financial position as the assets and
liabilities of our foreign operations are translated into
U.S. dollars in preparing our consolidated balance sheet.
The effect of foreign exchange rate fluctuations on our
consolidated financial position for the nine months ended
September 30, 2005, was a net translation loss of
approximately $96.2 million. This loss is recognized as an
adjustment to stockholders equity through accumulated
other comprehensive income. Additionally, foreign exchange rate
fluctuations may adversely impact our consolidated results of
operations as exchange rate fluctuations on transactions
denominated in currencies other than our functional currencies
result in gains and losses that are reflected in our
consolidated statement of income.
We consolidate the earnings of our international subsidiaries by
converting them into U.S. dollars in accordance with
Statement of Financial Accounting Standards No. 52
Foreign Currency Translation (FAS 52). Such
earnings will fluctuate when there is a change 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 foreign
currency options and forward contracts. All contracts that hedge
translation exposure mature ratably over the quarter in which
they are executed. During the three and nine months ended
September 30, 2005, the realized gains and losses related
to these hedges were not significant.
We currently charge our international subsidiaries on a monthly
basis for their use of intellectual property and technology and
for certain corporate services provided by eBay and PayPal.
These charges are denominated in Euros and these forecasted
inter-company transactions represent a foreign currency cash
flow exposure. To reduce foreign exchange risk relating to these
forecasted inter-company transactions, we entered into forward
foreign exchange contracts during the three and nine months
ended September 30, 2005. The objective of the forward
contracts is to better ensure that the
U.S. dollar-equivalent cash flows are not adversely
affected by changes in the U.S. dollar/ Euro exchange rate.
Pursuant to Statement of Financial Accounting Standards
No. 133 Accounting for Derivative Instruments and
Hedging Activities (FAS 133), we expect the hedge of
certain of these forecasted transactions using the forward
contracts to be highly effective in offsetting potential changes
in cash flows attributed to a change in the U.S. dollar/
Euro exchange rate. Accordingly, we record as a component of
other comprehensive income all unrealized gains and losses
related to the forward contracts that receive hedge accounting
treatment. We record all unrealized gains and losses in interest
and accumulated other income, net, related to the forward
contracts that do not receive hedge accounting treatment
pursuant to FAS 133. During the three and nine months ended
September 30, 2004 and 2005, the realized gains and losses
related to these hedges were not significant. The notional
amount or our economic hedges receiving hedge accounting
treatment and the losses, net of gains, recorded to accumulated
other comprehensive income as of September 30, 2004 was
$49.9 million and $1.4 million, respectively. The
notional amount of our economic hedges receiving hedge
accounting treatment and the gains, net of losses, recorded to
accumulated other comprehensive income as of September 30,
2005 was $77.7 million and $1.7 million, respectively.
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Item 4: |
Controls and Procedures |
(a) Evaluation of disclosure controls and
procedures. Based on the evaluation of our disclosure
controls and procedures (as defined in Securities Exchange Act
of 1934 Rules 13a-15(e) and 15d-15(e))
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required by Securities Exchange Act Rules 13a-15(b) or
15d-15(b), our Chief Executive Officer and our Chief Financial
Officer have concluded that as of the end of the period covered
by this report, our disclosure controls and procedures were
effective.
(b) Changes in internal controls. There were no
changes in our internal control over financial reporting that
occurred during our most recent fiscal quarter that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II: OTHER INFORMATION
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Item 1: |
Legal Proceedings |
In April 2001, two of our European subsidiaries, eBay GmbH and
eBay International AG, were sued by Montres Rolex S.A. and
certain of its affiliates in the regional court of Cologne,
Germany. The suit subsequently was transferred to the regional
court in Düsseldorf, Germany. Rolex alleged that our
subsidiaries were infringing Rolexs trademarks as a result
of users selling counterfeit Rolex watches through our German
website. The suit also alleged unfair competition. Rolex sought
an order enjoining the sale of Rolex-branded watches on the
website as well as damages. In December 2002, a trial was held
in the matter and the court ruled in favor of eBay on all causes
of action. Rolex appealed the ruling to the Higher Regional
Court of Düsseldorf, and the appeal was heard in October
2003. In February 2004, the court rejected Rolexs appeal
and ruled in our favor. Rolex has appealed the ruling to the
German Federal Supreme Court. In March 2004, the German Federal
Supreme Court ruled in favor of Rolex in a case involving an
unrelated company, ricardo.de AG, but somewhat comparable legal
theories. The court issued its written decision in that case in
September 2004. Although it is not yet clear what effect the
reasoning of the German Federal Supreme Courts ricardo.de
decision would have when applied to eBay, we believe the
Courts decision will likely not require any significant
change in our business practices.
In September 2001, MercExchange LLC filed a complaint 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 consignment 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, effectively
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 in April 2003. In May 2003,
the jury returned a verdict finding that eBay had willfully
infringed one and Half.com had willfully infringed both of the
patents in the suit, awarding $35 million in compensatory
damages. Both parties filed 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, while
denying MercExchanges request for an injunction and
attorneys fees. We appealed the verdict and judgment in
favor of MercExchange and MercExchange filed a cross-appeal of
the granting in part of our summary judgment motion and the
denial of its request for an injunction and attorneys fees.
In March 2005, the U.S. Court of Appeals for the Federal
Circuit issued a ruling in the appeal of the MercExchange patent
litigation suit which, among other things (1) invalidated
all claims asserted against eBay and Half.com arising out of the
multiple database search patent and reduced the verdict amount
by $4.5 million; (2) upheld the electronic consignment
system patent; (3) affirmed the district courts
refusal to award attorneys fees or enhanced damages
against us; (4) reversed the district courts order
granting summary judgment in our favor regarding the auction
patent; and (5) reversed the district courts refusal
to grant an injunction and remanded that issue to the district
court for further proceedings. In May 2005, the Court of Appeals
for the Federal Circuit granted our petition to stay the mandate
in the case in order to allow us to petition the
U.S. Supreme Court for review on certain issues. We filed
our petition for review with the U.S. Supreme Court on
July 25, 2005. In parallel with the federal court
proceedings, at our request, the U.S. Patent and Trademark
Office is actively reexamining each of the patents in suit,
having found that substantial questions exist regarding the
validity of the claims contained in them. In January 2005, the
Patent and Trademark Office issued an initial ruling rejecting
all of the claims contained in the patent that related to
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online auctions; in March 2005, the Patent and Trademark Office
issued an initial ruling rejecting all of the claims contained
in the patent that related to electronic consignment systems;
and in May 2005, the Patent and Trademark Office issued an
initial ruling rejecting all of the claims contained in the
patent that related to multiple database searching. Even if
successful, our litigation of these matters will continue to be
costly. In addition, as a precautionary measure, we have
modified certain functionality of our websites and business
practices in a manner which we believe would avoid any further
infringement. For this reason, we believe that any injunction
that might be issued by the district court will not have any
impact on our business. We also believe we have appropriate
reserves for this litigation. Nonetheless, if we are not
successful in appealing or modifying the courts ruling,
and if the modifications to the functionality of our websites
and business practices are not sufficient to make them
non-infringing, we would likely be forced to pay significant
additional damages and licensing fees and/or modify our business
practices in an adverse manner.
In August 2002, Charles E. Hill & Associates, Inc.
filed 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, unspecified damages, including treble damages for
willful infringement, and interest, costs, expenses, and fees.
The case was transferred to the U.S. District Court for the
Southern District of Indiana in January 2003, but was
transferred back to the U.S. District Court for the Eastern
District of Texas in December 2003. A scheduling conference was
held in November 2004 and a preliminary trial date has been set
for February 2006. A claim construction hearing was held on
August 19, 2005. The defendants have filed a motion for
summary judgment of noninfringement and a motion for summary
judgment on the priority date of the parent patent and
consequential invalidity of the two subsequent patents. 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
limiting access to customer accounts and failure to promptly
restore access to legitimate accounts violates California state
consumer protection laws and is an unfair business practice and
a breach of PayPals User Agreement. This action was
re-filed with a different named plaintiff in June 2002
(No. CV-808441), and a similar action was also filed 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 limiting access to customer accounts and
failure to promptly restore access to legitimate accounts
violates federal and state consumer protection and unfair
business practice laws. The two federal court actions were
consolidated into a single case, and the state court action was
stayed pending developments in the federal case. In June 2004,
the parties announced that they had reached a proposed
settlement. The settlement received approval from the federal
court on November 2, 2004, and the state court action was
dismissed with prejudice in March 2005. In the settlement,
PayPal does not acknowledge that any of the allegations in the
case are true. Under the terms of the settlement, certain PayPal
account holders will be eligible to receive payment from a
settlement fund of $9.25 million, less administrative costs
and the amount awarded to plaintiffs counsel by the court.
That sum is being distributed to class members who have
submitted timely claims in accordance with the settlements
plan of allocation, part of which still must be approved by the
court. The parties expect that the remaining part of the plan of
allocation will be submitted to the court in the fourth quarter
of 2005. The amount of the settlement was fully accrued in our
consolidated statement of income for the year ended
December 31, 2003.
In July 2004, a purported class action lawsuit was filed by two
eBay users in Superior Court of the State of California, County
of Santa Clara (No. 104CV022708) alleging that eBay engaged
in improper billing practices as the result of problems with the
rollout of a new billing software system in the second and third
quarters of 2004. The lawsuit sought damages and injunctive
relief. An amended complaint was filed in January 2005, dropping
one plaintiff, changing the capacity of the other plaintiff to
that of representative plaintiff, and adding seven additional
eBay users as plaintiffs. The amended complaint expanded its
claim to include numerous alleged improper billing practices
from September 2003 until the present. In February 2005, eBay
filed a motion to strike and a demurrer seeking to dismiss the
complaint. In April 2005, the court sustained portions of the
demurrer, but granted the plaintiffs leave to amend their
complaint. The plaintiffs
74
filed a second amended complaint, dropping the last original
plaintiff and again adding new plaintiffs. We filed a motion to
strike and a demurrer regarding the plaintiffs second
amended complaint. In July 2005, the court again sustained a
portion of the demurrer and again granted the plaintiffs leave
to amend their complaint, and the plaintiffs filed a third
amended complaint. We have filed an answer to the
plaintiffs third amended complaint, and are currently in
the initial phase of discovery. We believe that we have
meritorious defenses and intend to defend ourselves vigorously.
In February 2005, eBay was sued in Superior Court of the State
of California, County of Santa Clara (No. 105CV035930)
in a purported class action alleging that certain bidding
features of our site constitute shill bidding for
the purpose of artificially inflating bids placed by buyers on
the site. The complaint alleges violations of Californias
Auction Act, Californias Consumer Remedies Act, and unfair
competition. The complaint seeks injunctive relief, damages, and
a constructive trust. In April 2005, we filed a demurrer seeking
to dismiss the complaint. We have agreed to stay the demurrer
and participate in a mediation with the plaintiffs, which is
scheduled to take place in October 2005. We believe that we have
meritorious defenses and intend to defend ourselves vigorously.
In March 2005, eBay, PayPal, and an eBay seller were sued in
Supreme Court of the State of New York, County of Kings
(No. 6125/05) in a purported class action alleging that
certain disclosures regarding PayPals Buyer Protection
Policy, users chargeback rights, and the effects of
users choice of funding mechanism are deceptive and/or
misleading. The complaint alleged misrepresentation on the part
of eBay and PayPal, breach of contract and deceptive trade
practices by PayPal, and that PayPal and eBay have jointly
violated the civil RICO statute (18 U.S.C.
Section 1961(4)). In April 2005, eBay and PayPal removed
the case to the U.S. District Court for the Eastern
District of New York and the plaintiffs filed an amended
complaint in the U.S. District Court (No. 05-CV-01720)
repeating the allegations of the initial complaint but dropping
the civil RICO allegations. The complaint seeks injunctive
relief, compensatory damages, and punitive damages. The parties
agreed to stay further proceedings pending a mediation hearing,
which took place in July 2005. The parties are continuing
mediation discussions, though the stay of proceedings has
expired. We believe that eBay and PayPal have meritorious
defenses and intend to defend ourselves vigorously.
In January 2005, 51 former shareholders of Epinions, Inc.
common stock including founders and former employees of that
company filed a lawsuit in Superior Court of the State of
California, County of San Francisco (No. CGC 05-437906) related
to the April 2003 merger of Epinions and DealTime, Ltd. The
lawsuit was filed against certain of Epinions former
officers and directors and preferred shareholders and the
company that resulted from the merger, Shopping.com Ltd. eBay
completed its acquisition of Shopping.com Ltd. on
August 30, 2005. The lawsuit contended that the defendants
were responsible for breaches of fiduciary duty and material
misstatements and omissions, that defendants undervalued the
DealTime stock that Epinions shareholders received in
connection with the merger, and that plaintiffs common
stock of Epinions was wrongfully cancelled without compensation.
Defendants disputed the contentions of the case and denied any
allegations of wrongdoing. In September 2005, the parties
tentatively reached agreement as to the monetary terms for
settlement of the dispute. The settlement remains subject to the
final written approval of the parties. The tentative settlement
amount has been accounted for as an assumed liability in
connection with our acquisition of Shopping.com.
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 notified 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 and
communications businesses. We have in the past been forced to
litigate such claims. We may also become more vulnerable to
third-party claims as laws such as the Digital Millennium
Copyright Act, the Lanham Act and the Communications Decency Act
are interpreted by the courts and as we expand geographically
into jurisdictions where the underlying laws with respect to the
potential liability of online intermediaries like ourselves are
either unclear or less favorable. These claims, whether
meritorious or not, could be time consuming and costly to
resolve, cause service upgrade delays, require expensive changes
in our methods of doing business, or could require us to enter
into costly royalty or licensing agreements.
75
From time to time, we are involved in other disputes or
regulatory inquiries that arise in the ordinary course of
business. The number and significance of these disputes and
inquiries are increasing as our business expands and our company
grows larger. Any claims or regulatory actions against us,
whether meritorious or not, could be time consuming, result in
costly litigation, require significant amounts of management
time, and result in the diversion of significant operational
resources. While we currently believe that the ultimate
resolution of these unresolved matters will not have a material
adverse impact on our financial position, results of operations
or cash flows, the litigation, inquiries and other claims noted
specifically or generally above are subject to inherent
uncertainties and our view of these matters may change in the
future. Were an unfavorable final outcome to occur, there exists
the possibility of a material adverse impact on our financial
position, results of operations or cash flows for the period in
which the effect becomes reasonably estimable. We are unable to
determine what potential losses we may incur if these matters
were to have an unfavorable outcome.
|
|
Item 2: |
Unregistered Sales of Equity Securities and Use of
Proceeds |
We reported unregistered sales of equity securities on a Current
Report Form 8-K filed on September 15, 2005, and
amended by Amendment No. 1 on Form 8-K/A filed on
October 13, 2005, and on a Current Report Form 8-K
filed on October 14, 2005.
|
|
Item 3: |
Defaults Upon Senior Securities |
Not applicable.
|
|
Item 4: |
Submission of Matters to a Vote of Security Holders |
None.
|
|
Item 5: |
Other Information |
Audit Committee Pre-Approvals of Non-Audit Engagements
The Audit Committee of our Board of Directors has adopted a
policy requiring the pre-approval of any non-audit engagement of
PricewaterhouseCoopers LLP, or PwC, our independent registered
public accounting firm. 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 registered public accounting firm, our internal
finance 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. We intend to disclose all approved non-audit
engagements in the appropriate quarterly report on
Form 10-Q or annual report on Form 10-K.
During the quarter ended September 30, 2005, our Audit
Committee approved the non-audit engagement of PwC to perform
due diligence services related to certain potential acquisitions.
76
Item 6: Exhibits
|
|
|
|
|
|
Exhibit 2.1. |
|
|
Sale and Purchase Agreement dated as of September 11, 2005,
by and among eBay Inc., Skype Technologies S.A. and the parties
identified on Schedule 1 thereto.* |
|
Exhibit 2.2. |
|
|
Earn Out Agreement dated as of September 11, 2005, by and
among eBay Inc., Skype Technologies S.A. and the parties
identified on Schedule I thereto.* |
|
Exhibit 2.3. |
|
|
Form of Option Assumption Agreement.** |
|
Exhibit 2.4. |
|
|
Form of EMI Rollover Agreement.** |
|
Exhibit 10.1. |
|
|
Registration Rights Agreement dated as of September 11,
2005, by and among eBay Inc. and the parties identified on
Schedule I thereto.* |
|
Exhibit 10.2. |
|
|
Separation Agreement dated October 18, 2005 between eBay
Inc. and Lynn M. Reedy.*** |
|
Exhibit 31.01. |
|
|
Certification of eBays Chief Executive Officer, as
required by Section 302 of the Sarbanes-Oxley Act of 2002. |
|
Exhibit 31.02. |
|
|
Certification of eBays Chief Financial Officer, as
required by Section 302 of the Sarbanes-Oxley Act of 2002. |
|
Exhibit 32.01. |
|
|
Certification of eBays Chief Executive Officer, as
required by Section 906 of the Sarbanes-Oxley Act of 2002. |
|
Exhibit 32.02. |
|
|
Certification of eBays Chief Financial Officer, as
required by Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
* |
Previously filed as an exhibit to eBays Current Report on
Form 8-K filed on September 15, 2005. |
|
|
** |
Previously filed as an exhibit to eBays Current Report on
Form 8-K filed on October 18, 2005. |
|
|
*** |
Previously filed as an exhibit to eBays Current Report on
Form 8-K filed on October 19, 2005. |
77
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
|
|
|
eBay Inc. |
|
Principal Executive Officer: |
|
|
|
|
By: |
/s/ Margaret C. Whitman |
|
|
|
|
|
Margaret C. Whitman |
|
President and Chief Executive Officer |
Date: October 25, 2005
|
|
|
Principal Financial Officer: |
|
|
|
|
|
Rajiv Dutta |
|
Senior Vice President and Chief Financial Officer |
Date: October 25, 2005
|
|
|
Principal Accounting Officer: |
|
|
|
|
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Douglas Jeffries |
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Vice President, Chief Accounting Officer |
Date: October 25, 2005
78
INDEX TO EXHIBITS
|
|
|
|
|
Number |
|
Description |
|
|
|
|
2 |
.1 |
|
Sale and Purchase Agreement dated as of September 11, 2005,
by and among eBay Inc., Skype Technologies S.A. and the parties
identified on Schedule 1 thereto.* |
|
2 |
.2 |
|
Earn Out Agreement dated as of September 11, 2005, by and
among eBay Inc., Skype Technologies S.A. and the parties
identified on Schedule I thereto.* |
|
2 |
.3 |
|
Form of Option Assumption Agreement.** |
|
2 |
.4 |
|
Form of EMI Rollover Agreement.** |
|
10 |
.1 |
|
Registration Rights Agreement dated as of September 11,
2005, by and among eBay Inc.* |
|
10 |
.2 |
|
Separation Agreement dated September 18, 2005 between eBay
Inc. and Lynn M. Reedy.*** |
|
31 |
.01 |
|
Certification of eBays Chief Executive Officer as required
by Section 302 of the Sarbanes-Oxley Act of 2002 |
|
31 |
.02 |
|
Certification of eBays Chief Financial Officer, as
required by Section 302 of the Sarbanes-Oxley Act of 2002 |
|
32 |
.01 |
|
Certification of eBays Chief Executive Officer, as
required by Section 906 of the Sarbanes-Oxley Act of 2002 |
|
32 |
.02 |
|
Certification of eBays Chief Financial Officer, as
required by Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
* |
Previously filed as an exhibit to eBays Current Report on
Form 8-K filed on September 15, 2005. |
|
|
** |
Previously filed as an exhibit to eBays Current Report on
Form 8-K filed on October 18, 2005. |
|
|
*** |
Previously filed as an exhibit to eBays Current Report on
Form 8-K filed on October 19, 2005. |