This excerpt taken from the EBAY 10-Q filed Apr 25, 2007.
Liquidity and Capital Resources
We generated cash from operating activities in amounts greater than net income in the three months ended March 31, 2007 and 2006, mainly due to non-cash charges to earnings and tax benefits on the exercise of employee stock options resulting from personal gains recognized by our employees. Non-cash charges to earnings included depreciation and amortization on our long-term assets, stock-based compensation expense related to stock options, restricted stock units and employee stock purchases, 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. As a substantial portion of the companys net operating losses and tax credits have now been utilized, cash is now required for tax payments in the U.S. For the remainder of 2007, total U.S. and foreign income tax payments will be dependent on our taxable income and are estimated to be in the range of $550 to $600 million. For the remainder of 2007, we expect net cash provided by operating activities to increase primarily from higher net income.
Net cash used in investing activities during the first three months of 2007 totaled $62.7 million and related mainly to the purchases of StubHub for $258.6 million, the purchase of computer equipment and software to support our site operations, customer support and international expansion for $85.4 million, offset by cash generated from the sale of investments of $280.2 million. Net cash used in investing activities during the first three months of 2006 consisted primarily of the cash payment for computer equipment and software to support our site operations, customer support and international expansion. For the remainder of 2007, we expect to continue to purchase property and equipment and we may acquire other businesses for cash, thereby impacting investing cash flows.
The net cash flows used in financing activities of $225.2 million during the first three months of 2007 was primarily due to the repurchase of approximately 10.2 million shares of common stock for an aggregate purchase price of approximately $333.5 million, offset by proceeds from the exercise of stock options of $92.2 million and the excess tax benefits from stock-based compensation of $13.8 million. Net cash provided by financing activities of $104.0 million during the first three months of 2006 was due to proceeds from the exercise of stock options of $80.6 million and the excess tax benefits from stock-based compensation of $23.4 million. For the remainder of 2007, we may continue to repurchase stock, thereby impacting financing cash flows.
The positive effect of exchange rates on cash and cash equivalents during the three months ended March 31, 2007 and 2006 was due to the weakening of the U.S. dollar during the quarter against other foreign currencies, primarily the Euro.
As of March 31, 2007, we have repurchased approximately $2.0 billion of our common stock since the inception of our stock repurchase program and we have been authorized by the Board to purchase an additional $2.0 billion of our common stock under our stock repurchase program through January 2009.
Off-Balance Sheet Arrangements
As of March 31, 2007, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources. All customer funds held by PayPal as an agent or custodian on behalf of our customers are not reflected in our consolidated balance sheets. These funds include funds held in the U.S. that are deposited in bank accounts insured by the Federal Deposit Insurance Corporation and funds that customers choose to invest in PayPals Money Market Fund totaling approximately $1.7 billion and $1.5 billion as of March 31, 2007 and December 31, 2006, respectively.
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 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, we have provided an indemnity for other types of third-party claims, substantially all of which are indemnities related to copyrights, trademarks, and patents. In our PayPal business, we have provided an indemnity to our payment processors in the event of certain third-party claims or card association fines against the processor arising out of conduct by PayPal. It is not possible to determine the maximum potential loss under these indemnification provisions due to our limited history of prior indemnification claims and the unique facts and circumstances involved in each particular provision. To date, no significant costs have been incurred, either individually or collectively, in connection with our indemnification provisions.
Liquidity and Capital Resource Requirements
We believe that existing cash, cash equivalents and investments of approximately $3.5 billion, together with cash generated from operations and cash available through our $1.0 billion credit facility, will be sufficient to fund our operating activities, capital expenditures, stock repurchases and other obligations for the foreseeable future.
Recent Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115 which is effective for fiscal years beginning after November 15, 2007. This statement permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. We are currently evaluating the potential impact of this statement.