eBay 2001 Annual Report Download - page 19

Payments under our lease are based on the $126.4 million cost of the property funded by the third-party
and are adjusted as the London Interbank Offering Rate (""LIBOR'') fluctuates. Under the terms of the
lease agreement, the lease terminates on March 1, 2005, unless extended to September 1, 2006. At any time
prior to the final 12 months of the lease term, we may, at our option, purchase the property for
approximately $126.4 million. If we elect not to purchase the property, we will undertake to sell the facility
to one or more third parties and have guaranteed to the lessor a residual value equal to approximately 88%
of the $126.4 million cost of the property. We may also be liable to the lessor for the entire amount of
$126.4 million if we default on any of certain lease obligations and financial covenants. If this payment were
made, we would then receive title to the property. At December 31, 2001, we had not made a decision with
respect to which option we will pursue at the end of the lease term, although it is likely that we will decide
to continue to occupy the property. Management believes that the contingent liability relating to the residual
value guarantee will not have a material adverse effect on our financial condition or results of operations. See
""Note 9 Ì Operating Lease Arrangements to the Consolidated Financial Statements.''
In addition, we are required to place $126.4 million of cash and investment securities as collateral for
the term of the lease and to maintain certain Ñnancial covenants. The cash and investment securities are
restricted as to their withdrawal from a third party trustee and are classiÑed as long-term restricted cash
and investments in the accompanying balance sheet. In the event of a default under the lease, the
collateral could be used to pay the purchase price of the property and the lease would be terminated. At
December 31, 2001, we were in compliance with our Ñnancial covenants under the lease.
If our lease were terminated, and we became obligated to pay the purchase price of the land and
buildings, we would show the cost as an asset on our balance sheet and our restricted cash and
investments position would be reduced by the amount of the purchase price. Currently, we reÖect rent
payments as an expense on our statement of income. In the event we were required to purchase the land
and buildings, our rent expense would cease and we would subsequently record depreciation expense for
the buildings over their estimated useful lives.
We entered into two interest rate swaps on June 19, 2000, and July 20, 2000, to reduce the impact of
changes in interest rates on a portion of the Öoating rate operating lease for our facilities. See ""Note 6 Ì
Derivative Instruments to the Consolidated Financial Statements.''
Our San Jose lease consists of approximately 460,000 square feet of oÇce space. As of December 31,
2001, we occupied approximately 230,000 square feet of this total oÇce space for our online businesses
and subleased additional space in the facility to third parties.
We lease an additional 301,000 square feet of oÇce space for our customer call center in Utah and
for the other oÇces related to our online businesses that we maintain in the U.S. and abroad. Our other
domestic oÇces are generally located where our domestic subsidiaries are based. Our international oÇces
are generally located where we have international websites.
As the result of our 1999 acquisitions of ButterÑelds and Kruse, we own commercial real estate in
California and Indiana with an aggregate of approximately 1,168,000 square feet. Of the 1,168,000 square
feet, we are the majority interest holder in 187,000 square feet of oÇce space and the sole owner of the
remaining balance.
We believe that our existing facilities are adequate to meet our needs for the immediate future and
future growth can be accommodated by leasing additional or alternative space.
ITEM 3: LEGAL PROCEEDINGS
On April 25, 2000, we were served with a lawsuit, Gentry et.al. v. eBay, Inc. et.al, Ñled in Superior
Court in San Diego, California. The lawsuit was Ñled on behalf of a purported class of eBay users who
purchased allegedly forged autographed sports memorabilia on eBay. The lawsuit claims we were negligent
in permitting certain named (and other unnamed) defendants to sell allegedly forged autographed sports
memorabilia on eBay. In addition, the lawsuit claims we violated California unfair competition law and a
section of the California Civil Code, which prohibits ""dealers'' from selling sports memorabilia without a
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