<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 19, 1998
REGISTRATION NO. 333-59097
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1 TO FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
EBAY INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7389 77-0430924
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
---------------
2005 HAMILTON AVENUE, SUITE 350
SAN JOSE, CALIFORNIA 95125
(408) 369-4830
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
GARY F. BENGIER
CHIEF FINANCIAL OFFICER AND VICE PRESIDENT OPERATIONS
2005 HAMILTON AVENUE, SUITE 350
SAN JOSE, CALIFORNIA 95125
(408) 369-4830
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
LAIRD H. SIMONS III, ESQ. WILLIAM H. HINMAN, JR., ESQ.
MATTHEW P. QUILTER, ESQ. SHEARMAN & STERLING
JEFFREY R. VETTER, ESQ. 555 CALIFORNIA STREET
TYLER R. COZZENS, ESQ. SAN FRANCISCO, CALIFORNIA 94104
DOROTHY L. HINES, ESQ. (415) 616-1100
FENWICK & WEST LLP
TWO PALO ALTO SQUARE
PALO ALTO, CALIFORNIA 94306
(650) 494-0600
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 19, 1998
3,500,000 SHARES
[LOGO]
EBAY INC.
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
-----------
Of the 3,500,000 shares of Common Stock offered hereby, 3,489,275 shares are
being sold by eBay Inc. and 10,725 shares are being sold by a Selling
Stockholder on behalf of a charitable foundation established by the Company.
See "Principal and Selling Stockholders". The Company will not receive any of
the proceeds from the sale of the shares being sold by the Selling Stockholder.
Prior to the offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $14.00 and $16.00 per share. For factors to be considered
in determining the initial public offering price, see "Underwriting".
SEE "RISK FACTORS" ON PAGE 6 FOR MATERIAL RISKS RELEVANT TO AN INVESTMENT IN
THE COMMON STOCK.
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "EBAY".
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO
OFFERING PRICE DISCOUNT (1) COMPANY (2) SELLING STOCKHOLDER
--------------- ------------ ----------- -------------------
<S> <C> <C> <C> <C>
Per Share......... $ $ $ $
Total (3)......... $ $ $ $
</TABLE>
- -----
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $975,000 payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 525,000 shares at the initial public offering price
per share, less the underwriting discount, solely to cover over-
allotments. If such option is exercised in full, the total initial public
offering price, underwriting discount and proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting".
-----------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that the
shares will be ready for delivery in New York, New York on or about , 1998,
against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
BANCAMERICA ROBERTSON STEPHENS
BT ALEX. BROWN
-----------
The date of this Prospectus is , 1998.
<PAGE>
[Picture of sample items available for auction by community members of eBay
with the following text at bottom of page: Still Searching the Internet?]
eBay(TM), the eBay logo, SafeHarbor(TM), Up4Sale(TM) and the "World's
Personal Trading Community(TM)" are trademarks of the Company. This Prospectus
also includes trade dress, trade names and trademarks of other companies. Use
or display by eBay of other parties' trademarks, trade dress or products is
not intended to and does not imply a relationship with, or endorsement or
sponsorship of eBay by, the trademark or trade dress owners.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN
CONNECTION WITH THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
DESCRIPTION OF ARTWORK:
The gatefold includes a sample picture of the eBay homepage with the following
caption: "Welcome to eBay. It's where millions have already found success.
www.ebay.com."
The following text is contained on this gatefold:
[Two page screen shot of eBay home page with textual descriptions of eBay
service attributes, surrounded by the following text flowed to both sides]
Welcome to the place where buyers and sellers deal with each other directly.
This is eBay. It's an online auction community where over a million people
visit every month. And they certainly seem to love their eBay (some have
called it the thrill of the hunt)! In fact, in the first six months of 1998
alone, more than 500,000 new users have joined eBay--that's nearly 3,000 new
users just like you every day.
With a total of 846 categories, and about half a million items available on
any given day, eBay is already the largest and most popular person-to-person
trading community on the Internet--and there are an average of over 70,000 new
items every day. All kinds of people are turning to eBay to find all kinds of
stuff that was costly or difficult to find before.
Collectors and people with small businesses have often been able to expand
in ways they'd never thought they could before coming to eBay (boundaries,
geography, and distribution are kind of irrelevant on eBay).
It doesn't seem to matter whether they're buying, selling, devoted to a
hobby or collection or even running a little business--a lot of people are
talking about the kind of success they're finding on eBay.
When you buy or sell on eBay, you're dealing with another individual--
someone who knows exactly what they're selling or what they're looking for.
Everyone is encouraged to (and most do) talk about what it's like to trade
with someone. This feedback and rating system is an efficient way to check out
the integrity of sellers and buyers. A positive eBay rating is worth its
weight in gold...but beware...get too many negative ratings, and nobody in the
community is going to do business with you. (Wouldn't it be nice if the rest
of life was this clear cut?)
So whether you're looking for a rare 1922 Hamilton pocket watch or a retired
Chilly the Polar Bear Beanie Baby(R), give it a try--and see if you'd like to
make eBay your personal trading community--because even if you could find it
somewhere else...what fun would that be?
The world's personal trading community.
(C)1998 eBay Inc. All rights reserved. Registered trademarks and brands are
the property of their respective owners.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Pro Forma Financial Information and
Notes thereto appearing elsewhere in this Prospectus, including the information
under "Risk Factors." Unless otherwise indicated, all information in this
Prospectus (i) reflects the conversion of all outstanding shares of Preferred
Stock of the Company into shares of Common Stock upon the consummation of this
offering, (ii) reflects a three-for-one stock split of the Company's Common
Stock to be effected prior to the effectiveness of the Registration Statement
of which this Prospectus forms a part and (iii) assumes the Underwriters' over-
allotment option will not be exercised. See "Description of Capital Stock" and
"Underwriting." Unless otherwise indicated, the terms "Company" and "eBay"
refer to eBay Inc., its California predecessor and its consolidated subsidiary.
THE COMPANY
eBay is the world's largest and most popular person-to-person trading
community on the Internet. eBay pioneered online person-to-person trading by
developing a Web-based community in which buyers and sellers are brought
together in an efficient and entertaining auction format to buy and sell
personal items such as antiques, coins, collectibles, computers, memorabilia,
stamps and toys. The eBay service permits sellers to list items for sale,
buyers to bid on items of interest and all eBay users to browse through listed
items in a fully-automated, topically-arranged, intuitive and easy-to-use
online service that is available 24 hours a day, seven days a week. From
inception through June 30, 1998, eBay hosted over 15 million auctions resulting
in gross merchandise sales in excess of $340 million. During the first half of
1998, the number of registered eBay users grew from approximately 340,000 to
over 850,000 and the number of simultaneous auctions being conducted through
eBay increased from approximately 200,000 to over 500,000. The Company believes
that this critical mass of buyers, sellers and items listed for sale creates a
cycle that helps eBay continue to grow its user base. Sellers are attracted to
eBay as a result of the large number of potential buyers, and buyers in turn
are attracted to eBay by the broad selection of goods listed on eBay. eBay
provides buyers and sellers a place to socialize, to discuss topics of common
interest and, ultimately, to conduct business in a compelling trading
environment, thus fostering a large and growing commerce-oriented online
community.
The Internet offers for the first time the opportunity to create a compelling
global marketplace for person-to-person trading--the exchange of goods between
individuals. This trading has traditionally been conducted through trading
forums, such as classified advertisements, collectibles shows, garage sales and
flea markets, or through intermediaries, such as auction houses and local
dealer shops. These markets are highly inefficient because: (i) their
fragmented, regional nature makes it difficult and expensive for buyers and
sellers to meet, exchange information and complete transactions; (ii) they
offer a limited variety and breadth of goods; (iii) they often have high
transaction costs from intermediaries; and (iv) they are information
inefficient, as buyers and sellers lack a reliable and convenient means of
setting prices for sales or purchases. Despite these inefficiencies, the
Company believes that the market for traditional person-to-person trading in
the U.S. through auctions and classified ads exceeded $50 billion in goods sold
in 1997. An Internet-based centralized trading place can overcome the
inefficiencies associated with traditional person-to-person trading by
facilitating buyers and sellers meeting, listing items for sale, exchanging
information, interacting with each other and, ultimately, consummating
transactions. Through such a trading place, buyers can access a significantly
broader selection of goods to purchase and sellers have the opportunity to sell
their goods efficiently to a broader base of buyers. As a result, a significant
market opportunity exists for an Internet-based centralized trading place that
applies the unique attributes of the Internet to facilitate person-to-person
trading.
3
<PAGE>
eBay offers Web users the opportunity to join the world's largest Internet-
based, person-to-person trading community. Any visitor to eBay can browse among
over 500,000 items for sale, many of which are unique or otherwise hard to
find, organized across 846 product categories, facilitating easy exploration.
Browsers and buyers can also search auction listings for specific items or
search by category, keyword, seller name, recently-commenced auctions or
auctions about to end. eBay's auction format fosters a sense of urgency among
buyers to bid for goods and creates an entertaining and compelling trading
environment. Within minutes of registering as an eBay user, a seller can
immediately list an item for sale, identify a minimum price for opening bids
and specify how long the auction will last. Sellers pay a nominal placement fee
for an item based on the seller's minimum price for the item, ranging from
$0.25 to $2.00, and can highlight their auction for additional fees, ranging
from $2.00 to $49.95. At the end of the auction period, if a bid exceeds the
seller's minimum price, eBay automatically notifies the buyer and seller via
email and then the buyer and seller consummate the transaction independently of
eBay. At the time of notification, eBay charges the seller a success fee that
steps down from 5% to 1.25% based on the closing price of the item. Buyers are
not charged for making bids or purchases through eBay. At no point during the
process does the Company take possession of either the item being sold or the
buyer's payment for the item. Following completion of a transaction, each user
is encouraged to submit compliments or criticism to the trading profile of his
or her trading partner on eBay's "Feedback Forum." This Feedback Forum, which
was pioneered by eBay, is intended to reduce the anonymity and uncertainty of
dealing with an unknown trading partner and to help overcome initial user
hesitancy when trading over the Web. eBay's Feedback Forum and comprehensive
community services, such as chat rooms, bulletin boards and email, are designed
to foster safe, direct interaction between buyers and sellers with similar
interests, thus promoting a sense of community among users and encouraging
consumer loyalty and repeat usage. These benefits have contributed to the
successful completion of well over 50% of all auctions listed on eBay since
inception.
eBay's objective is to enhance its position as the world's leading online
person-to-person trading community. Key elements of the Company's strategy
include: (i) growing the eBay community and eBay brand, both to attract new
members and to maintain the vitality of the eBay community; (ii) broadening
eBay's trading platform by growing existing product categories, promoting new
product categories and expanding internationally; (iii) fostering eBay
community affinity; (iv) enhancing eBay site features and functionality through
the introduction of personalization features, new auction formats and category-
specific content; (v) introducing pre- and post-trade value-added services,
such as shipping and third-party escrow services; and (vi) building on its
unique business model, which does not require it to carry inventory or maintain
a sales force, to grow its business.
The Company was formed as a sole proprietorship in September 1995,
incorporated in California in May 1996 and reincorporated in Delaware in April
1998. The Company's principal executive offices are located at 2005 Hamilton
Avenue, Suite 350, San Jose, California 95125. The Company's telephone number
is (408) 369-4830 and its Web site is located at www.ebay.com. Information
contained on the Company's Web site shall not constitute a part of this
Prospectus.
EBAY FOUNDATION
In June 1998, the Company established a charitable fund known as the eBay
Foundation, which is administered by the Community Foundation Silicon Valley.
To capitalize this foundation, eBay donated 107,250 shares of Common Stock to
the Community Foundation Silicon Valley on behalf of the eBay Foundation. The
Community Foundation Silicon Valley is selling 10,725 shares of Common Stock in
this offering on behalf of the eBay Foundation. Through the Community
Foundation Silicon Valley, the eBay Foundation will make grants to charitable
organizations. The Company intends to involve the members of the eBay community
in determining the charitable purposes to which proceeds from the sale of these
shares will be devoted. See "Business--The eBay Service--Community Service."
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company... 3,489,275 shares
Common Stock offered by the Selling
Stockholder on behalf of the eBay
Foundation........................... 10,725 shares
Common Stock to be outstanding after
this offering........................ 39,739,076 shares(1)
Use of proceeds....................... For capital expenditures, to repay
indebtedness and for general corporate
purposes, including working capital.
See "Use of Proceeds."
Proposed Nasdaq National Market sym-
bol.................................. "EBAY"
</TABLE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
-------------- ----------------
1996 1997 1997 1998
------ ------- ------- --------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues................................... $ 372 $ 5,744 $ 1,658 $ 14,922
Gross profit................................... 358 4,998 1,498 13,186
Income from operations......................... 253 1,487 844 2,824
Net income..................................... 148 874 486 348
Net income per share(2):
Basic......................................... $ 0.07 $ 0.11 $ 0.08 $ 0.03
Weighted average shares--basic................ 2,125 7,438 6,163 10,711
Diluted....................................... $ 0.01 $ 0.03 $ 0.02 $ 0.01
Weighted average shares--diluted.............. 14,315 27,553 25,811 34,231
Pro forma net income per share(3):
Basic......................................... $ 0.06 $ 0.02
Weighted average shares--basic................ 14,591 19,145
Diluted....................................... $ 0.03 $ 0.01
Weighted average shares--diluted.............. 27,553 34,231
SUPPLEMENTAL OPERATING DATA:
Number of registered users at end of period.... 41 341 150 851
Gross merchandise sales(4)..................... $7,279 $95,271 $26,967 $243,746
Number of auctions listed...................... 289 4,394 1,237 10,793
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA(5) AS ADJUSTED(5)(6)
------- ------------ -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............. $10,716 $10,716 $57,985
Working capital........................ 8,803 8,803 56,344
Total assets........................... 19,815 19,815 67,084
Debt and leases, long-term portion..... 167 167 8
Series B Mandatorily Redeemable Con-
vertible Preferred Stock.............. 5,157 -- --
Total stockholders' equity............. 9,122 14,279 61,979
</TABLE>
- --------
(1) Based on shares of Common Stock outstanding as of June 30, 1998. Excludes
(i) 1,071,159 shares of Common Stock issuable upon the exercise of stock
options outstanding as of June 30, 1998, at a weighted average per share
exercise price of $3.52, under the Company's 1996 Stock Option Plan (the
"1996 Plan"), the Company's 1997 Stock Option Plan (the "1997 Plan") and
option grants outside of the 1996 Plan and 1997 Plan, (ii) 961,500 shares
of Common Stock available for future grant as of June 30, 1998 under the
1997 Plan, (iii) an additional 4,700,000 shares available for future grant
or issuance under the Company's 1998 Equity Incentive Plan (the "Equity
Incentive Plan") and 1998 Directors Stock Option Plan (the "Directors
Plan") and (iv) 300,000 shares available for issuance under the Company's
1998 Employee Stock Purchase Plan (the "Purchase Plan") which number is
subject to automatic annual increases up to a maximum of an aggregate
1,500,000 shares during the term of the Purchase Plan. Subsequent to June
30, 1998, the Company granted options to purchase an additional 1,389,750
shares of Common Stock, of which options to purchase 789,750 shares of
Common Stock were granted from the 961,500 shares of Common Stock available
for future grant as of June 30, 1998 under the 1997 Plan. The Company also
intends to increase the number of shares reserved under the 1997 Plan by
500,000, which will mean that an aggregate of 5,671,750 shares will be
available for future grant or issuance under the Company's various employee
benefit plans immediately following this offering. See "Capitalization,"
"Management--Director Compensation," "Management--Employee Benefit Plans,"
"Description of Capital Stock" and Notes 8, 9, 10 and 11 of Notes to
Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for a description
of the method used to compute basic and diluted net income per share.
(3) Pro forma net income per share gives effect to the conversion of all
outstanding shares of the Company's Series A Convertible Preferred Stock
and Series B Mandatorily Redeemable Convertible Preferred Stock into Common
Stock upon the closing of this offering as if such conversion had occurred
on January 1, 1997, or the date of original issuance, if later. See Note 1
of Notes to Consolidated Financial Statements for a description of the
method used to compute pro forma basic and diluted net income per share.
(4) Represents the aggregate sales prices of all goods for which an auction
was successfully concluded (i.e., there was at least one bid above the
seller's specified minimum price or reserve price, whichever was higher).
(5) Gives effect to the conversion of all outstanding shares of the Company's
Series A Convertible Preferred Stock and Series B Mandatorily Redeemable
Convertible Preferred Stock into Common Stock upon the closing of this
offering. See "Capitalization."
(6) Adjusted to give effect to the sale of the 3,489,275 shares of Common Stock
offered by the Company hereby, at an assumed initial public offering price
of $15.00 per share and after deducting the estimated underwriting discount
and estimated offering expenses, and the application of the net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
5
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. In addition to the other
information set forth in this Prospectus, the following risk factors should be
considered carefully in evaluating the Company and its business before
purchasing any of the shares of Common Stock of the Company. This Prospectus
contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. When used in this Prospectus, the words
"expects," "anticipates," "intends" and "plans" and similar expressions are
intended to identify certain of these forward-looking statements. The
cautionary statements made in this Prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this Prospectus. The Company's actual results could differ materially from
those discussed in this Prospectus. Factors that could cause or contribute to
such differences include those discussed below, as well as those discussed
elsewhere in this Prospectus.
LIMITED OPERATING HISTORY
The Company was formed as a sole proprietorship in September 1995 and
incorporated in May 1996. Thus, it has only a limited operating history on
which to base an evaluation of its business and prospects. The Company's
prospects must be considered in light of the risks, uncertainties, expenses
and difficulties frequently encountered by companies in their early stages of
development, particularly companies in new and rapidly evolving markets such
as online commerce. To address these risks and uncertainties, the Company
must, among other things, maintain and increase the number of its registered
users, items listed on its service, completed auctions, maintain and enhance
its brand, implement and execute its business and marketing strategy
successfully, continue to develop and upgrade its technology and information-
processing systems, continue to enhance the eBay service to meet the needs of
a changing market, provide superior customer service, respond to competitive
developments and attract, integrate, retain and motivate qualified personnel.
There can be no assurance that the Company will be successful in accomplishing
all of these things, and the failure to do so could have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
NO ASSURANCE OF CONTINUED PROFITABILITY
The Company believes that its continued growth and profitability will depend
in large part on its ability to (i) increase its brand name awareness, (ii)
provide its customers with superior community and trading experiences and
(iii) maintain sufficient transaction volume to attract buyers and sellers.
Accordingly, the Company intends to invest heavily in marketing and promotion,
further development of the eBay auction Web site, technology and operating
infrastructure development. Although the Company has experienced significant
revenue growth and significant growth in the number of its registered users
and items listed for auction in recent periods, such growth rates are not
sustainable and will decrease in the future. In view of the rapidly evolving
nature of the Company's business and its limited operating history, the
Company believes that period-to-period comparisons of its operating results
are not necessarily meaningful and should not be relied upon as indications of
future performance. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
POTENTIAL FLUCTUATIONS IN RESULTS OF OPERATIONS
The Company's operating results have varied on a quarterly basis during its
short operating history and may fluctuate significantly as a result of a
variety of factors, many of which are outside the Company's control. Factors
that may affect the Company's quarterly operating results include: (i) the
Company's ability to retain an active user base, attract new users who list
items for sale and who
6
<PAGE>
complete transactions through its service, and maintain customer satisfaction;
(ii) the Company's ability to manage the number of items listed on its
service; (iii) the announcement or introduction of new sites, services and
products by the Company or its competitors; (iv) the success of the Company's
brand building and marketing campaigns; (v) price competition; (vi) the level
of use of the Internet and online services; (vii) increasing consumer
confidence in and acceptance of the Internet and other online services for
commerce and, in particular, the trading of products such as those listed on
eBay; (viii) consumer confidence in the security of transactions over the
Internet; (ix) the Company's ability to upgrade and develop its systems and
infrastructure to accommodate growth; (x) the Company's ability to attract new
personnel in a timely and effective manner; (xi) the volume of items listed on
the Company's Web site; (xii) the timing, cost and availability of advertising
in traditional media and on other Web sites and online services; (xiii)
technical difficulties or service interruptions; (xiv) the amount and timing
of operating costs and capital expenditures relating to expansion of the
Company's business, operations and infrastructure; (xv) consumer trends and
popularity of certain categories of collectible items; (xvi) volume, size,
timing and completion rate of trades on eBay; (xvii) governmental regulation
by Federal or local governments; and (xviii) general economic conditions as
well as economic conditions specific to the Internet and online commerce
industries.
As a result of the Company's limited operating history and the emerging
nature of the markets in which it competes, it is difficult for the Company to
forecast its revenues or earnings accurately. In addition, the Company has no
backlog and a significant portion of the Company's net revenues for a
particular quarter are derived from auctions that are listed and completed
during that quarter. The Company's current and future expense levels are based
largely on its investment plans and estimates of future revenues and are, to a
large extent, fixed. The Company may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. Accordingly, any
significant shortfall in revenues relative to the Company's planned
expenditures would have an immediate adverse effect on the Company's business,
results of operations and financial condition. Further, as a strategic
response to changes in the competitive environment, the Company may from time
to time make certain pricing, service or marketing decisions that could have a
material adverse effect on its business, results of operations and financial
condition.
Due to the foregoing factors, the Company's quarterly revenues and operating
results are difficult to forecast. The Company believes that period-to-period
comparisons of its operating results may not be meaningful and should not be
relied upon as an indication of future performance. In addition, it is likely
that in one or more future quarters the Company's operating results will fall
below the expectations of securities analysts and investors. In such event,
the trading price of the Common Stock would almost certainly be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SEASONAL FLUCTUATIONS IN RESULTS OF OPERATIONS
The Company believes that its results of operations are somewhat seasonal in
nature, with fewer auctions listed around the Thanksgiving and Christmas
holidays in the fourth quarter. The Company's limited operating history,
however, makes it difficult to fully assess the impact of these seasonal
factors or whether or not its business is susceptible to cyclical fluctuations
in the U.S. economy. In addition, the Company believes that its rapid growth
may have overshadowed whatever seasonal or cyclical factors might have
influenced its business to date. There can be no assurance that seasonal or
cyclical variations in the Company's operations will not become more
pronounced over time or that they will not materially adversely affect its
results of operations in the future. Moreover, consumer "fads" and other
changes in consumer trends may cause significant fluctuations in the Company's
operating results from one quarter to the next. See "--Risks Related to
Consumer Trends."
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MANAGEMENT OF POTENTIAL GROWTH
The Company is currently experiencing a period of significant expansion and
anticipates that further expansion will be required to address potential
growth in its customer base and market opportunities. This expansion has
placed, and is expected to continue to place, a significant strain on the
Company's management, operational and financial resources. From inception to
June 30, 1998, the Company expanded from one to 76 employees. Certain members
of the Company's management, including the Company's President and Chief
Executive Officer and Senior Vice President of Marketing have joined the
Company in 1998. The Company's new employees include a number of key
managerial, marketing, planning, technical and operations personnel who have
not yet been fully integrated into the Company, and the Company expects to add
additional key personnel in the near future. To manage the expected growth of
its operations and personnel, the Company will be required to improve existing
and implement new transaction processing, operational and financial systems,
procedures and controls, and to expand, train and manage its growing employee
base. The Company also will be required to expand its finance, administrative
and operations staff. Further, the Company may be required to enter into
relationships with various strategic partners, Web sites and other online
service providers and other third parties necessary to the Company's business.
There can be no assurance that the Company's current and planned personnel,
systems, procedures and controls will be adequate to support the Company's
future operations, that management will be able to hire, train, retain,
motivate and manage required personnel or that Company management will be able
to identify, manage and exploit existing and potential strategic relationships
and market opportunities. The failure of the Company to manage growth
effectively could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business--
Employees."
DEPENDENCE ON KEY PERSONNEL
The Company's performance is substantially dependent on the continued
services and on the performance of its senior management and other key
personnel. The Company's performance also depends on the Company's ability to
retain and motivate its other officers and key employees. The loss of the
services of any of its executive officers or other key employees could have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company does not have long-term employment agreements
with any of its key personnel and maintains no "key person" life insurance
policies. The Company's future success also depends on its ability to
identify, attract, hire, train, retain and motivate other highly skilled
technical, managerial, marketing and customer service personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
will be able to successfully attract, integrate or retain sufficiently
qualified personnel. In particular, the Company has encountered difficulties
in attracting a sufficient number of qualified software developers for its Web
site and transaction processing systems, and there can be no assurance that
the Company will be able to retain and attract such developers. The failure to
retain and attract the necessary personnel could have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Business--Employees" and "Management."
DEPENDENCE ON CONTINUED GROWTH OF DEVELOPING ONLINE PERSON-TO-PERSON COMMERCE
MARKET
The market for the sale of goods over the Internet, particularly through
person-to-person trading, is a new and emerging market. The Company's future
revenues and profits are substantially dependent upon the widespread
acceptance and use of the Internet and other online services as a medium for
commerce by consumers. Rapid growth in the use of and interest in the Web, the
Internet and other online services is a recent phenomenon and there can be no
assurance that this acceptance and use will continue to develop or that a
sufficiently broad base of consumers will adopt, and continue to use, the
Internet as a medium of commerce. Demand and market acceptance for recently
introduced services and products over the Internet are subject to a high level
of uncertainty, and there exist few
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proven services and products. Growth in the Company's user base relies on
obtaining consumers who have historically used traditional means of commerce
to purchase goods. For the Company to be successful, these consumers must
accept and use novel ways of conducting business and exchanging information.
In addition, the Internet may not be commercially viable in the long term
for a number of reasons, including potentially inadequate development of the
necessary network infrastructure or delayed development of enabling
technologies, performance improvements and security measures. To the extent
that the Internet continues to experience significant growth in the number of
users, their frequency of use or their bandwidth requirements, there can be no
assurance that the infrastructure for the Internet and other online services
will be able to support the demands placed upon them. In addition, the
Internet or other online services could lose their viability due to delays in
the development or adoption of new standards and protocols required to handle
increased levels of Internet or other online service activity, or due to
increased governmental regulation. Changes in or insufficient availability of
telecommunications services to support the Internet or other online services
also could result in slower response times and adversely affect usage of the
Internet and other online services generally and the eBay service in
particular. If use of the Internet and other online services does not continue
to grow or grows more slowly than expected, if the infrastructure for the
Internet and other online services does not effectively support growth that
may occur, or if the Internet and other online services do not become a viable
commercial marketplace, the Company's business, results of operations and
financial condition would be materially adversely affected.
RISK OF CAPACITY CONSTRAINTS
The Company seeks to generate a high volume of traffic and transactions on
the eBay service. Accordingly, the satisfactory performance, reliability and
availability of the Company's Web site, processing systems and network
infrastructure are critical to the Company's reputation and its ability to
attract and retain large numbers of users who bid for or sell items on its
service while maintaining adequate customer service levels. The Company's
revenues depend on the number of items listed by users, the volume of user
auctions that are successfully completed and the final prices paid for the
items listed. Any system interruptions that result in the unavailability of
the Company's service or reduced customer activity would reduce the volume of
items listed and auctions completed and could affect the average selling price
of the items. Interruptions of service may also diminish the attractiveness of
the Company and its services. The Company has experienced periodic system
interruptions, which it believes will continue to occur from time to time. Any
substantial increase in the volume of traffic on the Company's Web site or in
the number of auctions being conducted by customers will require the Company
to expand and upgrade its technology, transaction processing systems and
network infrastructure. There can be no assurance that the Company will be
able to accurately project the rate or timing of increases, if any, in the use
of the eBay service or timely expand and upgrade its systems and
infrastructure to accommodate such increases in a timely manner. Any failure
to expand or upgrade its systems could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company uses internally developed systems to operate its service and for
transaction processing, including billing and collections processing. The
Company must continually enhance and improve these systems in order to
accommodate the level of use of eBay. Furthermore, in the future, the Company
may add additional features and functionality to its services that would
result in the need to develop or license additional technologies. The
Company's inability to add additional software and hardware or to develop and
further upgrade its existing technology, transaction processing systems or
network infrastructure to accommodate increased traffic on the eBay service or
increased transaction volume through its processing systems or to provide new
features or functionality may cause unanticipated system disruptions, slower
response times, degradation in levels of customer service, impaired quality of
the user's experience on the eBay service, and delays in reporting accurate
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financial information. There can be no assurance that the Company will be able
in a timely manner to effectively upgrade and expand its systems or to
integrate smoothly any newly developed or purchased technologies with its
existing systems. Any inability to do so would have a material adverse effect
on the Company's business, results of operations and financial condition. See
"--Risk of System Failures" and "Business--Operations and Technology."
RISK OF SYSTEM FAILURES
The Company's success, and in particular its ability to facilitate trades
successfully and provide high quality customer service, depends on the
efficient and uninterrupted operation of its computer and communications
hardware systems. Substantially all of the Company's computer hardware for
operating the eBay service is currently located at the facilities of Exodus
Communications, Inc. ("Exodus") in Santa Clara, California. These systems and
operations are vulnerable to damage or interruption from earthquakes, floods,
fires, power loss, telecommunication failures, break-ins, sabotage,
intentional acts of vandalism and similar events. The Company does not
presently have fully redundant systems, a formal disaster recovery plan or
alternative providers of hosting services and does not carry sufficient
business interruption insurance to compensate it for losses that may occur.
Despite any precautions taken by, and planned to be taken by the Company, the
occurrence of a natural disaster or other unanticipated problems at the Exodus
facility could result in interruptions in the services provided by the
Company. In addition, the failure by Exodus to provide the data communications
capacity required by the Company, as a result of human error, natural disaster
or other operational disruption, could result in interruptions in the
Company's service. Any damage to or failure of the systems of the Company
could result in reductions in, or terminations of, the eBay service, which
could have a material adverse effect on the Company's business, results of
operations and financial condition.
In the case of frequent or persistent system failures, the Company's
reputation and name brand could be materially adversely affected. Although the
Company has implemented certain network security measures, its servers are
also vulnerable to computer viruses, physical or electronic break-ins and
similar disruptions, which could lead to interruptions, delays, loss of data
or the inability to complete customer auctions. In addition, although the
Company works to prevent unauthorized access to Company data, it is impossible
to eliminate this risk completely. The occurrence of any and all of these
events could have a material adverse effect on the Company's business, results
of operations and financial condition. See "Business--Operations and
Technology" and "--Facilities."
INTENSE COMPETITION
The market for person-to-person trading over the Internet is new, rapidly
evolving and intensely competitive, and the Company expects competition to
intensify further in the future. Barriers to entry are relatively low, and
current and new competitors can launch new sites at a relatively low cost
using commercially-available software. The Company currently or potentially
competes with a number of other companies. The Company's direct competitors
include various online person-to-person auction services, including Onsale
Exchange, a division of Onsale, Inc. ("Onsale"); Auction Universe, a Times-
Mirror Company; Excite, Inc. ("Excite"); and a number of other small services,
including those that serve specialty markets. The Company also competes
indirectly with business-to-consumer online auction services such as Onsale,
First Auction, ZAuction and Surplus Auction. The Company potentially faces
competition from a number of large online communities and services that have
expertise in developing online commerce and in facilitating online person-to-
person interaction. Certain of these potential competitors, including
Amazon.com, America Online, Inc. ("AOL"), Microsoft Corporation ("Microsoft")
and Yahoo! Inc. ("Yahoo!"), currently offer a variety of business-to-consumer
trading services and classified ad services and certain of these companies may
introduce person-to-person trading to their large user populations. Other
large companies with strong brand recognition and experience in online
commerce, such as Cendant Corporation, QVC and large newspaper or media
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companies may also seek to compete in the online auction market. Competitive
pressures created by any one of these companies, or by the Company's
competitors collectively, could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company believes that the principal competitive factors in its market
are volume and selection of goods, population of buyers and sellers, community
cohesion and interaction, customer service, reliability of delivery and
payment by users, brand recognition, Web site convenience and accessibility,
price, quality of search tools and system reliability. Certain of the
Company's current and many of the Company's potential competitors have longer
operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing, technical and other resources than
the Company. In addition, 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 use of the Internet
and other online services increases. Therefore, certain of the Company's
competitors with other revenue sources may be able to devote greater resources
to marketing and promotional campaigns, adopt more aggressive pricing policies
and devote substantially more resources to Web site and systems development
than the Company or may try to attract traffic by offering services for free.
Increased competition may result in reduced operating margins, loss of market
share and diminished value in the Company's brand. There can be no assurance
that the Company will be able to compete successfully against current and
future competitors. Further, as a strategic response to changes in the
competitive environment, the Company may, from time to time, make certain
pricing, service or marketing decisions or acquisitions that could have a
material adverse effect on its business, results of operations and financial
condition. New technologies and the expansion of existing technologies may
increase the competitive pressures on the Company by enabling the Company's
competitors to offer a lower-cost service. Certain Web-based applications that
direct Internet traffic to certain Web sites may channel users to trading
services that compete with the Company. Although the Company has established
Internet traffic arrangements with several large online services and search
engine companies, there can be no assurance that these arrangements will be
renewed on commercially reasonable terms or that they will otherwise continue
to result in increased usage of the eBay service. In addition, companies that
control access to transactions through network access or Web browsers could
promote the Company's competitors or charge the Company substantial fees for
inclusion. Any and all of these events could have a material adverse effect on
the Company's business, results of operations and financial condition. See
"Business--Competition."
RISKS ASSOCIATED WITH BRAND DEVELOPMENT
The Company believes that its historical growth has been largely
attributable to word-of-mouth. Despite this historical organic growth, the
Company believes that continuing to strengthen its brand is critical to
achieving widespread acceptance of eBay, particularly in light of the
competitive nature of the Company's market. Promoting and positioning its
brand will depend largely on the success of the Company's marketing efforts
and the ability of the Company to provide high quality services. In order to
promote its brand, the Company will need to increase its marketing budget and
otherwise increase its financial commitment to creating and maintaining brand
loyalty among users. There can be no assurance that brand promotion activities
will yield increased revenues or that any such revenues would offset the
expenses incurred by the Company in building its brand. Further, there can be
no assurance that any new users attracted to eBay will conduct transactions
over eBay on a regular basis. If the Company fails to promote and maintain its
brand or incurs substantial expenses in an attempt to promote and maintain its
brand or if the Company's existing or future strategic relationships fail to
promote the Company's brand or increase brand awareness, the Company's
business, results of operations and financial condition would be materially
adversely affected. See "Business--eBay Strategy."
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RAPID TECHNOLOGICAL CHANGE
The market in which the Company competes is characterized by rapidly
changing technology, evolving industry standards, frequent new service and
product announcements, introductions and enhancements and changing customer
demands. These market characteristics are exacerbated by the emerging nature
of the Web and the apparent need of companies from a multitude of industries
to offer Web-based products and services. Accordingly, the Company's future
success will depend on its ability to adapt to rapidly changing technologies,
to adapt its services to evolving industry standards and to continually
improve the performance, features and reliability of its service in response
to competitive service and product offerings and evolving demands of the
marketplace. The failure of the Company to adapt to such changes would have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, the widespread adoption of new Internet,
networking or telecommunications technologies or other technological changes
could require substantial expenditures by the Company to modify or adapt its
services or infrastructure, which could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business--Operations and Technology."
RISKS ASSOCIATED WITH NEW SERVICES, FEATURES AND FUNCTIONS
The Company plans to expand its operations by developing and promoting new
or complementary services, products or transaction formats or expanding the
breadth and depth of services. There can be no assurance that the Company
would be able to expand its operations in a cost-effective or timely manner or
that any such efforts would maintain or increase overall market acceptance.
Furthermore, any new business or service launched by the Company that is not
favorably received by consumers could damage the Company's reputation and
diminish the value of its brand name. Expansion of the Company's operations in
this manner would also require significant additional expenses and
development, operations and other resources and would strain the Company's
management, financial and operational resources. The lack of market acceptance
of such services or the Company's inability to generate satisfactory revenues
from such expanded services to offset their cost could have a material adverse
effect on the Company's business, results of operations and financial
condition.
RISKS RELATED TO CONSUMER TRENDS
The Company derives substantially all of its revenues from fees from sellers
for listing products for sale on its service and fees from successfully
completed auctions. The Company's future revenues will depend upon continued
demand for the types of goods that are listed by users of the eBay service.
The popularity of certain categories of items, such as toys, dolls and
memorabilia, among consumers may vary over time due to perceived scarcity,
subjective value, and societal and consumer trends in general. For example
during the three months ended June 30, 1998, the Company had, at times, over
30,000 simultaneous auctions listed in its "Beanie Babies" category. A decline
in the popularity of, or demand for, certain collectibles or other items sold
through the eBay service could reduce the overall volume of transactions on
the eBay service, resulting in reduced revenues. In addition, certain consumer
"fads" may temporarily inflate the volume of certain types of items listed on
the eBay service, placing a significant strain upon the Company's
infrastructure and transaction capacity. These trends may also cause
significant fluctuations in the Company's operating results from one quarter
to the next. Any decline in demand for the goods offered through the eBay
service as a result of changes in consumer trends could have a material
adverse effect on the Company's business, results of operations and financial
condition.
RISKS ASSOCIATED WITH CERTAIN ACTIVITIES ON THE COMPANY'S SERVICE
The law relating to the liability of providers of online services for
activities of their users on the service is currently unsettled. While the
Company does not pre-screen the types of goods offered on eBay, the Company is
aware that certain goods, such as alcohol, tobacco, firearms, adult material
and
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other goods that may be subject to regulation by local, state or federal
authorities have been traded on the eBay service. There can be no assurance
that the Company will be able to prevent the unlawful exchange of goods on its
service or that it will successfully avoid civil or criminal liability for
unlawful activities carried out by users through the Company's service. The
imposition upon the Company of potential liability for unlawful activities of
users of the eBay service could require the Company to implement measures to
reduce its exposure to such liability, which may require, among other things,
the Company to spend substantial resources and/or or to discontinue certain
service offerings. Any costs incurred as a result of such liability or
asserted liability could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Business--
Government Regulation."
In addition, the Company's success depends largely upon sellers reliably
delivering and accurately representing the listed goods and buyers paying the
agreed purchase price. The Company takes no responsibility for delivery of
payment or goods to any user of the eBay service. The Company has received in
the past, and anticipates that it will receive in the future, communications
from users who did not receive the purchase price or the goods that were to
have been exchanged. While the Company can suspend the accounts of users who
fail to fulfill their delivery obligations to other users, the Company, beyond
crediting sellers with the amount of their fees in certain circumstances, does
not have the ability to otherwise require users to make payments or deliver
goods and the Company does not compensate users who believe they have been
defrauded by other users. The Company also from time to time receives
complaints from buyers as to the quality of the goods purchased. Although the
Company has attempted to reduce its liability to buyers for unfulfilled
transactions or other claims related to the quality of the purchased goods and
although the average transaction size is approximately $40.00, the Company may
in the future receive additional requests from users requesting reimbursement
or threatening legal action against the Company if no reimbursement is made.
Any resulting litigation could be costly for the Company, divert management
attention and could result in increased costs of doing business, or otherwise
have a material adverse effect on the Company's business, results of
operations and financial condition. Any negative publicity generated as a
result of fraudulent or deceptive conduct by users of eBay could damage the
Company's reputation and diminish the value of its brand name, which could
have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company does not pre-screen the goods that are listed by users on eBay
or the contents of their listings, which may include text and images. The
Company has received in the past, and anticipates that it will receive in the
future, communications alleging that certain items sold through the eBay
service infringe third-party copyrights, trademarks or other intellectual
property rights. While the Company's user policy prohibits the sale of goods
which may infringe third-party intellectual property rights and the Company is
empowered to suspend the account of any user who infringes third-party
intellectual property rights, there can be no assurance that an allegation of
infringement will not result in litigation against the Company. Any such
litigation could be costly for the Company and could result in increased costs
of doing business, or could in some other manner have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Business--The eBay Service."
ONLINE COMMERCE SECURITY RISKS
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. Currently, a
significant number of eBay users authorize the Company to bill their credit
card accounts directly for all transaction fees charged by the Company. The
Company relies on encryption and authentication technology licensed from third
parties to provide the security and authentication technology to effect secure
transmission of confidential information, including customer credit card
numbers. There can be no assurance that advances in computer capabilities, new
discoveries in the field of cryptography, or other events or developments will
not result in a compromise or breach of the technology used by the Company to
protect customer transaction
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data. If any such compromise of the Company's security were to occur, it could
have a material adverse effect on the Company's reputation and, therefore, on
its business, results of operations and financial condition. Furthermore, a
party who is able to circumvent the Company's security measures could
misappropriate proprietary information or cause interruptions in the Company's
operations. The Company may be required to expend significant capital and
other resources to protect against such security breaches or to alleviate
problems caused by such breaches. Concerns over the security of transactions
conducted on the Internet and other online services and the privacy of users
may also inhibit the growth of the Internet and other online services
generally, and the Web in particular, especially as a means of conducting
commercial transactions. To the extent that activities of the Company involve
the storage and transmission of proprietary information, such as credit card
numbers, security breaches could damage the Company's reputation and expose
the Company to a risk of loss or litigation and possible liability. The
Company's insurance policies carry low coverage limits, which may not be
adequate to reimburse the Company for losses caused by security breaches.
There can be no assurance that the Company's security measures will prevent
security breaches or that failure to prevent such security breaches will not
have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business--Operations and Technology."
RISKS ASSOCIATED WITH ACQUISITIONS
If appropriate opportunities present themselves, the Company intends to
acquire businesses, technologies, services or products that the Company
believes are strategic. For example, the Company recently acquired Jump
Incorporated ("Jump") the developer and operator of Up4Sale, an advertising-
supported online trading service for an aggregate transaction value of
approximately $2.3 million. The Company currently has no understandings,
commitments or agreements with respect to any other material acquisition and
no other material acquisition is currently being pursued. There can be no
assurance that the Company will be able to identify, negotiate or finance
future acquisitions successfully, or to integrate such acquisitions with its
current business. The process of integrating an acquired business, technology,
service or product into the Company may result in unforeseen operating
difficulties and expenditures and may absorb significant management attention
that would otherwise be available for ongoing development of the Company's
business. Moreover, there can be no assurance that the anticipated benefits of
any acquisition, including Jump, will be realized. Future acquisitions could
result in potentially dilutive issuances of equity securities, the incurrence
of debt, contingent liabilities and/or amortization expenses related to
goodwill and other intangible assets, which could materially adversely affect
the Company's business, results of operations and financial condition. Any
such future acquisitions of other businesses, technologies, services or
products might require the Company to obtain additional equity or debt
financing, which might not be available on terms favorable to the Company, or
at all, and such financing, if available, might be dilutive. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Acquisition of Jump."
DEPENDENCE ON THE WEB INFRASTRUCTURE
The success of the eBay service will depend in large part upon the
development and maintenance of the Web infrastructure, such as a reliable
network backbone with the necessary speed, data capacity and security, or
timely development of complementary products such as high speed modems, for
providing reliable Web access and services. Because global commerce and the
online exchange of information is new and evolving, it is difficult to predict
with any assurance whether the Web will prove to be a viable commercial
marketplace in the long term. The Web has experienced, and is expected to
continue to experience, significant growth in the numbers of users and amount
of traffic. To the extent that the Web continues to experience increased
numbers of users, frequency of use or increased bandwidth requirements of
users, there can be no assurance that the Web infrastructure will continue to
be able to support the demands placed on it by this continued growth or that
the performance or reliability of the Web will not be adversely affected.
Furthermore, the Web has
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experienced a variety of outages and other delays as a result of damage to
portions of its infrastructure, and could face such outages and delays in the
future, including outages and delays resulting from the inability of certain
computers or software to distinguish dates in the 21st century from dates in
the 20th century. See "--Year 2000 Implications." These outages and delays
could adversely affect the level of Web usage and also the level of traffic
and the processing of auctions on eBay. In addition, the Web could lose its
viability due to delays in the development or adoption of new standards and
protocols to handle increased levels of activity or due to increased
governmental regulation. There can be no assurance that the infrastructure or
complementary products or services necessary to make the Web a viable
commercial marketplace for the long term will be developed or that if they are
developed, that the Web will become a viable commercial marketplace for
services such as those offered by the Company. If the necessary
infrastructure, standard or protocols or complementary products, services or
facilities are not developed, or if the Web does not become a viable
commercial marketplace, the Company's business, results of operations and
financial condition will be materially and adversely affected. Even if the
infrastructure, standards or protocols or complementary products, services or
facilities are developed and the Web becomes a viable commercial marketplace
in the long term, the Company might be required to incur substantial
expenditures in order to adapt its service to changing Web technologies, which
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business--Industry Background."
RISKS ASSOCIATED WITH INFORMATION DISSEMINATED THROUGH THE COMPANY'S SERVICE
The law relating to the liability of online services companies for
information carried on or disseminated through their services is currently
unsettled. It is possible that claims could be made against online services
companies under both United States 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 such liability upon
other online services companies are currently pending. In addition,
legislation has been proposed that imposes liability for or prohibits the
transmission over the Internet of certain types of information. The eBay
service features a Feedback Forum, which includes information from users
regarding the reliability of other users in promptly paying or delivering
goods sold in an auction transaction. Although all such feedback is generated
by users and not by the Company, it is possible that a claim of defamation or
other injury could be made against the Company for content posted in the
Feedback Forum. The imposition upon the Company and other online services
providers of potential liability for information carried on or disseminated
through their services could require the Company to implement measures to
reduce its exposure to such liability, which may require the Company to expend
substantial resources and/or to discontinue certain service offerings. In
addition, the increased attention focused upon liability issues as a result of
these lawsuits and legislative proposals could impact the growth of Internet
use. While the Company carries liability insurance, it may not be adequate to
fully compensate the Company in the event the Company becomes liable for
information carried on or disseminated through its service. Any costs not
covered by insurance incurred as a result of such liability or asserted
liability could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Business--Government
Regulation" and "--Privacy Policy."
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES
The Company is not currently subject to direct federal, state or local
regulation, and laws or regulations applicable to access to or commerce on the
Internet, other than regulations applicable to businesses generally. However,
due to the increasing popularity and use of the Internet and other online
services, it is possible that a number of laws and regulations may be adopted
with respect to the Internet or other online services covering issues such as
user privacy, freedom of expression, pricing, content and quality of products
and services, taxation, advertising, intellectual property rights and
information security. Although sections of the Communications Decency Act of
1996 (the "CDA")
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that, among other things, proposed to impose criminal penalties on anyone
distributing "indecent" material to minors over the Internet, were held to be
unconstitutional by the U.S. Supreme Court, there can be no assurance that
similar laws will not be proposed and adopted. Certain members of Congress
have recently discussed proposing legislation that would regulate the
distribution of "indecent" material over the Internet in a manner that they
believe would withstand challenge on constitutional grounds. The nature of
such similar legislation and the manner in which it may be interpreted and
enforced cannot be fully determined and, therefore, legislation similar to the
CDA could subject the Company and/or its customers to potential liability,
which in turn could have an adverse effect on the Company's business, results
of operations and financial condition. The adoption of any such laws or
regulations might also decrease the rate of growth of Internet use, which in
turn could decrease the demand for the eBay service or increase the cost of
doing business or in some other manner have a material adverse effect on the
Company's business, results of operations and financial condition. In
addition, applicability to the Internet of existing laws governing issues such
as property ownership, copyrights and other intellectual property issues,
taxation, libel, obscenity and personal privacy is uncertain. The vast
majority of such 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. In addition, numerous
states, including the State of California in which the Company's headquarters
are located, have regulations regarding the manner in which "auctions" may be
conducted and the liability of "auctioneers" in conducting such auctions. The
Company does not believe that such regulations, which were adopted prior to
the advent of the Internet, govern the operations of the Company's business
nor have any claims been filed by any state implying that the Company is
subject to such legislation. There can be no assurance, however, that a state
will not attempt to impose these regulations upon the Company in the future or
that such imposition will not have a material adverse effect on the Company's
business, results of operations and financial condition.
Several states have also proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has also recently
settled a proceeding with one online service regarding the manner in which
personal information is collected from users and provided to third parties.
Changes to existing laws or the passage of new laws intended to address these
issues, including some recently proposed changes, could create uncertainty in
the marketplace that could reduce demand for the services of the Company or
increase the cost of doing business as a result of litigation costs or
increased service delivery costs, or could in some other manner have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, because the Company's services are
accessible worldwide, and the Company facilitates sales of goods to users
worldwide, other jurisdictions may claim that the Company is required to
qualify to do business as a foreign corporation in a particular state or
foreign country. The Company is qualified to do business in two states in the
United States, and failure by the Company to qualify as a foreign corporation
in a jurisdiction where it is required to do so could subject the Company to
taxes and penalties for the failure to qualify and could result in the
inability of the Company to enforce contracts in such jurisdictions. Any such
new legislation or regulation, or the application of laws or regulations from
jurisdictions whose laws do not currently apply to the Company's business,
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business--Government Regulation" and
"--Privacy Policy."
By letter dated August 3, 1998, the Company was notified by a state attorney
general's office that it had received certain consumer complaints regarding
the Company's advertising procedures. These complaints revolved around whether
the Company was adequately informing its customers that it is merely a venue
for online person-to-person auctions and does not act as a guarantor regarding
the completion of such transactions on its site. Although the Company believes
that it has made adequate disclosures on this point, there can be no assurance
that this, or similar inquiries, will not ultimately
16
<PAGE>
result in the Company's incurring fines or penalties that could have a
material adverse effect on its business or results of operations.
SALES AND OTHER TAXES
The Company does not collect sales or other similar taxes in respect of
goods sold by users through the eBay service. However, one or more states may
seek to impose sales tax collection obligations on out-of-state companies such
as the Company which engage in or facilitate online commerce, and a number of
proposals have been made at the state and local level that would impose
additional taxes on the sale of goods and services through the Internet. Such
proposals, if adopted, could substantially impair the growth of electronic
commerce, and could adversely affect the Company's opportunity to derive
financial benefit from such activities. Moreover, a successful assertion by
one or more states or any foreign country that the Company should collect
sales or other taxes on the exchange of merchandise on its system could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Legislation limiting the ability of the states to impose taxes on Internet-
based transactions has been proposed in the U.S. Congress. There can be no
assurance that this legislation will ultimately be enacted into law or that
the final version of this legislation will not contain a limited time period
in which such tax moratorium will apply. In the event that the tax moratorium
is imposed for a limited time period, there can be no assurance that the
legislation will be renewed at the end of such period. Failure to enact or
renew this legislation could allow various states to impose taxes on Internet-
based commerce and the imposition of such taxes could have a material adverse
affect on the Company's business, results of operations and financial
condition.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
A component of the Company's strategy is to expand internationally.
Expansion into the international markets will require management attention and
resources. The Company has limited experience in localizing its service, and
the Company believes that many of its competitors are also undertaking
expansion into foreign markets. There can be no assurance that the Company
will be successful in expanding into international markets. In addition to the
uncertainty regarding the Company's ability to generate revenues from foreign
operations and expand its international presence, there are certain risks
inherent in doing business on an international basis, including, among others,
regulatory requirements, legal uncertainty regarding liability, tariffs, and
other trade barriers, difficulties in staffing and managing foreign
operations, longer payment cycles, different accounting practices, problems in
collecting accounts receivable, political instability, seasonal reductions in
business activity and potentially adverse tax consequences, any of which could
adversely affect the success of the Company's international operations. To the
extent the Company expands its international operations and has additional
portions of its international revenues denominated in foreign currencies, the
Company could become subject to increased risks relating to foreign currency
exchange rate fluctuations. There can be no assurance that one or more of the
factors discussed above will not have a material adverse effect on the
Company's future international operations and, consequently, on the Company's
business, results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--eBay Strategy."
PROTECTION AND ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS
The Company regards the protection of its copyrights, service marks,
trademarks, trade dress and trade secrets as critical to its future success
and relies on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect its
proprietary rights in products and services. The Company has entered into
confidentiality and invention assignment agreements with its employees and
contractors, and nondisclosure agreements with
17
<PAGE>
parties with which it conducts business in order to limit access to and
disclosure of its proprietary information. There can be no assurance that
these contractual arrangements or the other steps taken by the Company to
protect its intellectual property will prove sufficient to prevent
misappropriation of the Company's technology or to deter independent third-
party development of similar technologies. The Company pursues the
registration of its trademarks and service marks in the U.S. and
internationally. Effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which the Company's
services are made available online. The Company has licensed in the past, and
expects that it may license in the future, certain of its proprietary rights,
such as trademarks or copyrighted material, to third parties. While the
Company attempts to ensure that the quality of the eBay brand is maintained by
such licensees, there can be no assurance that such licensees will not take
actions that might materially adversely affect the value of the Company's
proprietary rights or reputation, which could have a material adverse effect
on the Company's business, results of operations and financial condition. The
Company also relies on certain technologies that it licenses from third
parties, such as Oracle Corporation ("Oracle"), Microsoft and Sun Microsystems
Inc. ("Sun"), the suppliers of key database technology, the operating system
and specific hardware components for the eBay service. There can be no
assurance that these third-party technology licenses will continue to be
available to the Company on commercially reasonable terms. The loss of such
technology could require the Company to obtain substitute technology of lower
quality or performance standards or at greater cost, which could materially
adversely affect the Company's business, results of operations and financial
condition.
To date, the Company has not been notified that its technologies infringe
the proprietary rights of third parties, but there can be no assurance that
third parties will not claim infringement by the Company with respect to past,
current or future technologies. The Company expects that participants in its
markets will be increasingly subject to infringement claims as the number of
services and competitors in the Company's industry segment grows. Any such
claim, whether meritorious or not, could be time-consuming, result in costly
litigation, cause service upgrade delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements might
not be available on terms acceptable to the Company or at all. As a result,
any such claim could have a material adverse effect upon the Company's
business, results of operations and financial condition. See "Business--
Intellectual Property Rights."
YEAR 2000 IMPLICATIONS
Many current installed computer systems and software products are coded to
accept only two-digit entries in the date code field and cannot reliably
distinguish dates beginning on January 1, 2000 from dates prior to the year
2000. Many companies' software and computer systems may need to be upgraded or
replaced in order to correctly process dates beginning in 2000 and to comply
with the "Year 2000" requirements. The Company has reviewed its internal
programs and has determined that there are no significant Year 2000 issues
within the Company's systems or services. However, although the Company
believes that its systems are Year 2000 compliant, the Company utilizes third-
party equipment and software that may not be Year 2000 compliant. Failure of
such third-party equipment or software to properly process dates for the year
2000 and thereafter could require the Company to incur unanticipated expenses
to remedy any problems, which could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
POSSIBLE VOLATILITY OF STOCK PRICE
The trading price of the Common Stock is likely to be highly volatile and
could be subject to wide fluctuations in response to factors such as actual or
anticipated variations in the Company's quarterly operating results,
announcements of technological innovations, or new services by the Company or
its competitors, changes in financial estimates by securities analysts,
conditions or trends in the Internet
18
<PAGE>
and online commerce industries, changes in the market valuations of other
Internet or online service companies, announcements by the Company or its
competitors of significant acquisitions, strategic partnerships, joint
ventures or capital commitments, additions or departures of key personnel,
sales of Common Stock or other securities of the Company in the open market
and other events or factors, many of which are beyond the Company's control.
Further, the stock markets in general, and The Nasdaq National Market and the
market for Internet-related and technology companies in particular, have
experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of such companies.
The trading prices of many technology companies' stocks are at or near
historical highs and reflect valuations substantially above historical levels.
There can be no assurance that these trading prices and valuations will be
sustained. These broad market and industry factors may materially and
adversely affect the market price of the Common Stock, regardless of the
Company's operating performance. Market fluctuations, as well as general
political and economic conditions such as recession or interest rate or
currency rate fluctuations, may also adversely affect the market price of the
Common Stock. In the past, following periods of volatility in the market price
of a company's securities, securities class-action litigation has often been
instituted against such company. Such litigation, if instituted, could result
in substantial costs and a diversion of management's attention and resources,
which would have a material adverse effect on the Company's business, results
of operations and financial condition.
CONTROL BY PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS
Upon completion of this offering, the Company's executive officers and
directors (and their affiliates) will, in the aggregate, own approximately
86.6% of the Company's outstanding Common Stock (85.5% if the Underwriters'
over-allotment option is exercised in full). As a result, such persons, acting
together, will have the ability to control all matters submitted to
stockholders of the Company for approval (including the election and removal
of directors and any merger, consolidation or sale of all or substantially all
of the Company's assets) and to control the management and affairs of the
Company. Accordingly, such concentration of ownership may have the effect of
delaying, deferring or preventing a change in control of the Company, impede a
merger, consolidation, takeover or other business combination involving the
Company or discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of the Company, which in turn could
have an adverse effect on the market price of the Company's Common Stock. See
"Management" and "Principal and Selling Stockholders."
FUTURE CAPITAL NEEDS
The Company currently anticipates that the net proceeds of this offering,
together with its available funds, will be sufficient to meet its anticipated
needs for working capital, capital expenditures and business expansion through
at least the next 18 months. Thereafter, the Company may need to raise
additional funds. The Company may need to raise additional funds sooner in
order to fund more rapid expansion, to develop new or enhanced services or
products, to respond to competitive pressures or to acquire complementary
products, businesses or technologies. If additional funds are raised through
the issuance of equity or convertible debt securities, the percentage
ownership of the stockholders of the Company will be reduced, stockholders may
experience additional dilution and such securities may have rights,
preferences and privileges senior to those of the Company's Common Stock.
There can be no assurance that additional financing will be available on terms
favorable to the Company or at all. If adequate funds are not available or are
not available on acceptable terms, the Company may not be able to fund its
expansion, take advantage of unanticipated acquisition opportunities, develop
or enhance services or products or respond to competitive pressures. Such
inability could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations--Liquidity and Capital Resources."
19
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Company's Common Stock (including shares
issued upon the exercise of outstanding options) in the public market after
this offering could adversely affect the market price of the Common Stock.
Such sales also might make it more difficult for the Company to sell equity or
equity-related securities in the future at a time and price that the Company
deems appropriate. In addition to the 3,500,000 shares of Common Stock offered
hereby (assuming no exercise of the Underwriters' over-allotment option), as
of the date of this Prospectus, there will be 36,239,076 shares of Common
Stock outstanding, all of which are restricted securities ("Restricted
Securities") under the Securities Act of 1933, as amended (the "Securities
Act"). As of such date, no Restricted Securities will be eligible for sale in
the public market, and Restricted Securities will remain subject to the
Company's right to repurchase such shares at the original purchase price.
Following the expiration of 120-day lock-up agreements with the
representatives of the Underwriters, 24,549,582 Restricted Securities will be
available for sale in the public market (excluding those that remain subject
to the right of repurchase) and the remaining Restricted Securities will be
eligible for sale from time to time thereafter upon expiration of applicable
holding periods under Rule 144 under the Securities Act and the Company's
right to repurchase unvested shares. In addition, as of August 18, 1998, there
were outstanding options to purchase 2,460,909 shares of the Company's Common
Stock. Substantially, all of the shares issuable upon exercise of such options
will be subject to lock-up agreements. The representatives of the several
underwriters acting together may, in their sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-
up agreements. In addition, the holders of 29,629,425 Restricted Securities
are entitled to certain rights with respect to registration of such shares for
sale in the public market. If such holders sell in the public market, such
sales could have a material adverse effect on the market price of the
Company's Common Stock.
Immediately after this offering, the Company intends to register
approximately 8,132,659 shares of Common Stock subject to outstanding options
and reserved for issuance under its stock option and purchase plans. See
"Shares Eligible for Future Sale."
CERTAIN ANTI-TAKEOVER PROVISIONS
Upon the closing of this offering, the Company's Board of Directors will
have the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of delaying, deferring or
preventing a change in control of the Company, may discourage bids for the
Company's Common Stock at a premium over the market price of the Common Stock,
and may adversely affect the market price of, and the voting and other rights
of the holders of, the Common Stock. The Company has no current plans to issue
shares of Preferred Stock. In addition, certain provisions of the Company's
Amended and Restated Certificate of Incorporation and Bylaws, including
provisions that divide the Board of Directors into three classes to serve
staggered three-year terms, prohibit the stockholders from taking action by
written consent and restrict the ability of stockholders to call special
meetings, may also make it more difficult for a third party to acquire a
majority of the Company's voting stock or effect a change in control of the
Company. The Company is also subject to certain provisions of Delaware law
that could have the effect of delaying, deterring or preventing a change in
control of the Company, including Section 203 of the Delaware General
Corporation Law, which prohibits a Delaware corporation 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. In addition, the Company's certificate of incorporation
and bylaws contain certain provisions that, together with the ownership
position of the Company's executive officers and directors and their
affiliates, could
20
<PAGE>
discourage potential takeover attempts and make more difficult attempts by
stockholders to change management which could adversely affect the market
price of the Company's Common Stock. See "Description of Capital Stock."
BROAD MANAGEMENT DISCRETION OVER ALLOCATION OF PROCEEDS
The net proceeds to the Company from the sale of the 3,489,275 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$47.7 million (approximately $55.0 million if the over-allotment option is
exercised in full) at an assumed initial public offering price of $15.00 per
share and after deducting the estimated underwriting discount and estimated
offering expenses. The primary purposes of this offering are to obtain
additional capital, create a public market for the Common Stock and facilitate
future access to public markets. The Company intends to use at least $6.0
million of the net proceeds of this offering for capital expenditures prior to
the end of 1999 and to use a portion of the net proceeds to repay all
outstanding indebtedness under a bank credit line ($431,000 at June 30, 1998).
This credit line matures on January 5, 2000 and bears interest at the bank's
prime rate plus 1.25% (9.75% at June 30, 1998). The Company intends to use the
remainder of the net proceeds, over time, for general corporate purposes,
including working capital. The Company may also use a portion of the net
proceeds, currently intended for general corporate purposes, to acquire or
invest in businesses, technologies, products or services that are
complementary to the Company's business. Accordingly, the Company's management
will retain broad discretion as to the allocation of the proceeds of this
offering. The failure of management to apply such funds effectively could have
a material adverse effect on the Company's business, results of operations and
financial condition. See "Use of Proceeds."
NO PRIOR MARKET FOR COMMON STOCK
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market will
develop or be sustained after this offering or that investors will be able to
sell the Common Stock should they desire to do so. The initial public offering
price will be determined by negotiations between the Company and the
representatives of the Underwriters and may bear no relationship to the price
at which the Common Stock will trade upon completion of this offering. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price is substantially higher than the net
tangible book value per outstanding share of Common Stock. Purchasers of the
Common Stock in this offering will suffer immediate and substantial dilution
of $13.50 per share in the net tangible book value of the Common Stock from
the initial public offering price. To the extent that outstanding options to
purchase the Company's Common Stock are exercised, there may be further
dilution. See "Dilution."
21
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,489,275 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$47.7 million (approximately $55.0 million if the over-allotment option is
exercised in full) at an assumed initial public offering price of $15.00 per
share and after deducting the estimated underwriting discount and estimated
offering expenses. The primary purposes of this offering are to obtain
additional capital, create a public market for the Common Stock and facilitate
future access to public markets. The Company will not receive any proceeds
from the sale of the Common Stock by the Selling Stockholder.
The Company intends to use at least $6.0 million of the net proceeds of this
offering for capital expenditures prior to the end of 1999 and to use a
portion of the net proceeds to repay all outstanding indebtedness under a bank
credit line ($431,000 at June 30, 1998). This credit line matures on
January 5, 2000 and bears interest at the bank's prime rate plus 1.25% (9.75%
at June 30, 1998). The Company intends to use the remainder of the net
proceeds, over time, for general corporate purposes, including working
capital. The Company may also use a portion of the net proceeds, currently
intended for general corporate purposes, to acquire or invest in businesses,
technologies, products or services that are complementary to the Company's
business. The Company has no present plans or commitments and is not currently
engaged in any negotiations with respect to such transactions that are
material. Pending such uses, the Company intends to invest the net proceeds
from this offering in short-term, interest-bearing, investment-grade
securities. The Company will have significant discretion as to the use of the
net proceeds from this offering. See "Risk Factors--Future Capital Needs" and
"--Broad Management Discretion Over Allocation of Proceeds."
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its capital stock
and does not anticipate paying any cash dividends in the foreseeable future.
In addition, the terms of the Company's credit line prohibit the payment of
cash dividends on its capital stock. Prior to this offering, holders of the
Company's Series A and Series B Preferred Stock were entitled to certain
preferences and priorities in the payment of dividends on such Preferred
Stock. Upon the consummation of this offering, these holders will no longer be
entitled to such preferences and privileges as all of such shares of Preferred
Stock will automatically convert into Common Stock on the consummation of this
offering. See Note 8 of Notes to Consolidated Financial Statements.
22
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company as of June 30, 1998: (i) on an actual basis; (ii) on a pro forma basis
to reflect the conversion of all outstanding shares of Preferred Stock into
Common Stock upon the closing of this offering; and (iii) on a pro forma as
adjusted basis to reflect this conversion and the application of the net
proceeds from the sale of the 3,489,275 shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $15.00 per share
and after deducting the estimated underwriting discount and estimated offering
expenses.
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Debt and leases, current portion(1)............. $ 314 $ 314 $ 42
======= ======= =======
Debt and leases, long-term portion(1)........... $ 167 $ 167 $ 8
------- ------- -------
Series B Mandatorily Redeemable Convertible Pre-
ferred Stock................................... 5,157 -- --
------- ------- -------
Stockholders' equity:
Series A Preferred Stock, $0.001 par value per
share; actual--1,676,475 shares authorized,
1,676,475 shares issued and outstanding; pro
forma--6,000,000 shares authorized, no shares
issued and outstanding; pro forma as
adjusted--5,000,000 shares authorized, no
shares issued and outstanding................ 4 -- --
Common Stock, $0.001 par value per share;
actual--60,000,000 shares authorized,
26,974,128 shares issued and outstanding; pro
forma--60,000,000 shares authorized,
36,249,801 shares issued and outstanding; pro
forma as adjusted--195,000,000 shares
authorized, 39,739,076 shares issued and
outstanding(2)............................... 27 36 40
Additional paid-in capital.................... 14,150 19,302 66,998
Notes receivable from stockholders............ (1,536) (1,536) (1,536)
Unearned compensation......................... (4,801) (4,801) (4,801)
Retained earnings............................. 1,278 1,278 1,278
------- ------- -------
Total stockholders' equity.................. 9,122 14,279 61,979
------- ------- -------
Total capitalization...................... $14,446 $14,446 $61,987
======= ======= =======
</TABLE>
- --------
(1) See Note 5 of Notes to Consolidated Financial Statements.
(2) Excludes (i) 1,071,159 shares of Common Stock issuable upon the exercise
of stock options outstanding as of June 30, 1998, at a weighted average
per share exercise price of $3.52, under the 1996 Plan, the 1997 Plan and
outside the 1996 Plan and the 1997 Plan, (ii) 961,500 shares of Common
Stock available for future grant as of June 30, 1998 under the 1997 Plan,
(iii) an additional 4,700,000 shares available for future grant or
issuance immediately after the offering under the Equity Incentive Plan
and the Directors Plan and (iv) 300,000 shares initially available for
issuance immediately after the offering under the Purchase Plan which
number is subject to automatic annual increases, up to a maximum of an
aggregate 1,500,000 shares during the term of the Purchase Plan.
Subsequent to June 30, 1998, the Company granted options to purchase an
additional 1,389,750 shares of Common Stock, of which options to purchase
789,750 shares of Common Stock were granted from the 961,500 shares of
Common Stock available for future grant as of June 30, 1998 under the
1997 Plan. The Company also intends to increase the number of shares
reserved under the 1997 Plan by 500,000, which will mean that an
aggregate of 5,671,750 shares of Common Stock will be available for
future grant or issuance under the Company's various employee benefit
plans immediately following this offering. See "Management--Director
Compensation," "Management--Employee Benefit Plans," "Description of
Capital Stock" and Notes 8, 9, 10 and 11 of Notes to Consolidated
Financial Statements.
23
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1998 was
$12.1 million, or $0.33 per share of Common Stock. "Pro forma net tangible
book value per share" is determined by dividing the pro forma number of
outstanding shares of Common Stock (assuming the conversion of all outstanding
shares of Preferred Stock into shares of Common Stock) into the net tangible
book value of the Company (total tangible assets less total liabilities).
After giving effect to the receipt of the estimated net proceeds from the sale
by the Company of the 3,489,275 shares of Common Stock offered by the Company
hereby (based upon an assumed initial public offering price of $15.00 per
share and after deducting the estimated underwriting discount and estimated
offering expenses), the pro forma net tangible book value of the Company as of
June 30, 1998 would have been approximately $59.8 million, or $1.50 per share.
This represents an immediate increase in pro forma net tangible book value of
$1.17 per share to existing stockholders and an immediate dilution of $13.50
per share to new investors purchasing shares at the initial public offering
price. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $15.00
Pro forma net tangible book value per share as of June 30,
1998........................................................ $0.33
Increase per share attributable to new investors............. 1.17
-----
Pro forma net tangible book value per share after the offer-
ing.......................................................... 1.50
------
Dilution per share to new investors........................... $13.50
======
</TABLE>
The following table summarizes as of June 30, 1998, on the pro forma basis
described above, the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price per
share paid by existing stockholders and by investors purchasing shares of
Common Stock in this offering (before deducting the estimated underwriting
discount and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ -------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 36,249,801 91.2% $ 9,771,222 15.7% $ 0.27
New investors(1).............. 3,489,275 8.8 52,339,125 84.3 15.00
---------- ----- ------------ -----
Total......................... 39,739,076 100.0% $ 62,110,347 100.0%
========== ===== ============ =====
</TABLE>
- --------
(1) The sale by the Selling Stockholder in this offering will reduce the
number of shares of Common Stock held by existing stockholders to
36,239,076, or approximately 91.2% of the total shares of Common Stock
outstanding immediately after this offering, and will increase the number
of shares of Common Stock held by new investors to 3,500,000, or 8.8% of
the total number of shares of Common Stock outstanding immediately after
this offering. See "Principal and Selling Stockholders."
The foregoing discussion and tables assume no exercise of any stock options
outstanding as of June 30, 1998. As of June 30, 1998, there were options
outstanding to purchase a total of 1,071,159 shares of Common Stock with a
weighted average exercise price of $3.52 per share. In addition, subsequent to
June 30, 1998, the Company issued options to purchase an aggregate of 584,250
shares of Common Stock under the 1997 Plan. To the extent that any of these
options are exercised, there will be further dilution to new public investors.
See "Capitalization," "Management--Employee Benefit Plans" and Note 10 of
Notes to Consolidated Financial Statements.
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with, and are qualified by reference to, the Consolidated
Financial Statements and Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this Prospectus. The consolidated statement of income data for the years
ended December 31, 1996 and 1997 and the consolidated balance sheet data at
December 31, 1996 and 1997, are derived from, and are qualified by reference
to, the audited consolidated financial statements of the Company included
elsewhere in this Prospectus. The consolidated statement of income data for
the six months ended June 30, 1997 and 1998 and the consolidated balance sheet
data at June 30, 1998 have been derived from the unaudited consolidated
financial statements included elsewhere in this Prospectus. The unaudited
consolidated financial statements have been prepared on substantially the same
basis as the audited consolidated financial statements and include all
adjustments, consisting only of normal recurring adjustments that the Company
considers necessary for a fair presentation of the financial position and
results of operations for the period. Operating results for the six months
ended June 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- ---------------------
1996(1) 1997 1997 1998
-------------------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME
DATA:
Net revenues....................... $ 372 $ 5,744 $ 1,658 $ 14,922
Cost of net revenues............... 14 746 160 1,736
-------- --------- --------- ----------
Gross profit....................... 358 4,998 1,498 13,186
-------- --------- --------- ----------
Operating expenses:
Sales and marketing............... 32 1,730 212 4,610
Product development............... 28 831 209 1,548
General and administrative........ 45 950 233 4,054
Acquired research and
development...................... -- -- -- 150
-------- --------- --------- ----------
Total operating expenses.......... 105 3,511 654 10,362
-------- --------- --------- ----------
Income from operations............. 253 1,487 844 2,824
Interest and other income, net..... 1 56 4 76
-------- --------- --------- ----------
Income before income taxes......... 254 1,543 848 2,900
Provision for income taxes......... (106) (669) (362) (2,552)
-------- --------- --------- ----------
Net income......................... $ 148 $ 874 $ 486 $ 348
======== ========= ========= ==========
Net income per share(2):
Basic............................. $ 0.07 $ 0.11 $ 0.08 $ 0.03
======== ========= ========= ==========
Weighted average shares--basic.... 2,125 7,438 6,163 10,711
======== ========= ========= ==========
Diluted........................... $ 0.01 $ 0.03 $ 0.02 $ 0.01
======== ========= ========= ==========
Weighted average shares--diluted.. 14,315 27,553 25,811 34,231
======== ========= ========= ==========
SUPPLEMENTAL OPERATING DATA:
Number of registered users at end
of period......................... 41 341 150 851
Gross merchandise sales(3)......... $ 7,279 $ 95,271 $ 26,967 $ 243,746
Number of auctions listed.......... 289 4,394 1,237 10,793
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1996 1997 1998
------------- --------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 103 $ 3,723 $10,716
Working capital........................................ 194 3,843 8,803
Total assets........................................... 308 5,619 19,815
Debt and leases, long-term portion..................... -- 305 167
Series B Mandatorily Redeemable Convertible Preferred
Stock and Series B warrants........................... -- 3,018 5,157
Total stockholders' equity............................. 162 1,015 9,122
</TABLE>
- --------
(1) Includes the results of operations for the Company's predecessor sole
proprietorship from September 1995 to December 1995. The sole
proprietorship had no revenues and immaterial expenses prior to January
1, 1996.
(2) See Note 1 of Notes to Consolidated Financial Statements for a
description of the method used to compute basic and diluted net income
per share, respectively.
(3) Represents the aggregate sales prices of all goods for which an auction
was successfully concluded (i.e., there was at least one bid above the
seller's specified minimum price or reserve price, whichever is higher).
25
<PAGE>
SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA
Effective June 30, 1998, the Company acquired all the outstanding shares of
Jump Incorporated ("Jump"), the developer and operator of Up4Sale, an
advertising-supported online trading service in an auction format. The
acquisition has been accounted for using the purchase method of accounting,
and accordingly the purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date. The total purchase price of
approximately $2.3 million consisted of 142,848 shares of the Company's Common
Stock with an estimated fair value of approximately $2.0 million and other
acquisition-related expenses of approximately $335,000, consisting primarily
of payments for non-compete agreements totaling approximately $208,000 and
legal and other professional fees. Of the total purchase price, approximately
$150,000 was allocated to in-process technology and was immediately charged to
operations as the technology had not reached technological feasibility as of
the acquisition date and had no alternative future use. The remainder of the
purchase price was allocated to net tangible liabilities assumed ($31,000) and
intangible assets, including completed technology ($500,000), the customer
list ($1.5 million), covenants not to compete ($208,000) and goodwill
($24,000). The intangible assets will be amortized over their estimated useful
lives, which range from eight to 24 months. The unaudited pro forma
consolidated statement of income data reflects the acquisition of Jump as if
such acquisition had occurred on January 1, 1997. The pro forma consolidated
statement of income data is presented for informational purposes only and may
not be indicative of the results of operations had the acquisition occurred on
January 1, 1997, nor do they purport to indicate the future results of
operations of the Company.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, 1997 ENDED JUNE 30, 1998
------------------ -------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
PRO FORMA CONSOLIDATED STATEMENT
OF INCOME DATA:
Net revenues..................... $ 5,755 $ 14,934
Cost of net revenues............. 755 1,739
------------------ ------------------
Gross profit..................... 5,000 13,195
------------------ ------------------
Operating expenses:
Sales and marketing............. 1,897 4,445
Product development............. 841 1,556
General and administrative...... 957 4,075
Amortization of intangible
assets......................... 1,810 354
------------------ ------------------
Total operating expenses........ 5,505 10,430
------------------ ------------------
Income (loss) from operations.... (505) 2,765
Interest and other income, net... 56 75
------------------ ------------------
Income (loss) before income tax-
es.............................. (449) 2,840
Provision for income taxes....... (600) (2,483)
------------------ ------------------
Net income (loss)................ $ (1,049) $ 357
================== ==================
Pro forma net income (loss) per
share(1):
Basic........................... $ (0.07) $ .02
================== ==================
Weighted average shares--basic.. 14,734 19,287
================== ==================
Diluted......................... $ (0.07) $ .01
================== ==================
Weighted average shares--dilut-
ed............................. 14,734 34,374
================== ==================
</TABLE>
- --------
(1) See Note D of Notes to Consolidated Pro Forma Financial Information for a
description of the method used to compute basic and diluted net income per
share, respectively.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
eBay is the world's largest and most popular person-to-person trading
community on the Internet. eBay pioneered online person-to-person trading by
developing a Web-based community in which buyers and sellers are brought
together in an efficient and entertaining auction format to buy and sell
personal items such as antiques, coins, collectibles, computers, memorabilia,
stamps and toys. The eBay service permits sellers to list items for sale,
buyers to bid on items of interest and all eBay users to browse through listed
items in a fully-automated, topically-arranged, intuitive and easy-to-use
online service that is available 24 hours a day, seven days a week.
eBay was formed as a sole proprietorship in September 1995 and operated its
online auction service under the name of "Auction Web." In order to build a
critical mass of customers, it offered this service without charge until
February 1996. The Company was incorporated in May 1996, but had no employees
other than the founder until July 1996 and, at December 31, 1996, had only six
employees. During its first two years, eBay attracted buyers and sellers
almost exclusively through word of mouth. In September 1997, the Company began
to target potential customers and to build and promote its brand through
online banner ads and promotions and advertisements in targeted publications.
Also in September 1997, the Company renamed its auction service "eBay" and
launched a second generation of this service with a substantially redesigned
user interface and a new robust, scalable "backend" transaction processing
architecture. The Company's total headcount grew to 41 by December 31, 1997
and to 76 by June 30, 1998. From December 31, 1997 to June 30, 1998, the
number of registered eBay users grew from approximately 340,000 to over
850,000 and the number of simultaneous auctions being conducted through eBay
increased from approximately 200,000 to over 500,000. During the same period,
cumulative gross merchandise sales (the aggregate sales prices of all goods
for which an auction was successfully concluded since the Company's inception)
grew from approximately $100 million to over $340 million.
Substantially all of the Company's revenues come from placement and success
fees paid by sellers; eBay charges no fees to buyers and, to date, has chosen
to sell almost no advertising on its Web site. Sellers pay a nominal placement
fee to list items for sale: $0.25 for an auction with a minimum starting price
of less than $10.00; $0.50 for a minimum starting price of $10.00 to $24.99;
$1.00 for a minimum starting price of $25.00 to $49.99; and $2.00 for a
minimum starting price of $50.00 or more. By paying additional placement fees,
sellers can have items featured in various ways. Sellers can highlight their
auctions by utilizing a bold font for the auction heading for an additional
fee of $2.00. Sellers with a favorable feedback rating can have their auctions
featured as "Super Featured Auctions" for $49.95, which allows their items to
be rotated on the eBay home page, or as "Category Featured Auctions" for
$9.95, which allows their items to be featured within a particular eBay
product category. Sellers for whom a three, five or seven day auction is
successfully concluded (i.e., there is at least one bid above the seller's
specified minimum or reserve price, whichever is higher) also pay a success
fee for each item sold that is equal to 5% of the first $25 of the purchase
price, 2.5% of any purchase price between $25.01 and $1,000 and 1.25% of any
purchase price over $1,000. Revenues from placement fees are recognized at the
time that the item is listed; revenues related to success fees are recognized
at the time that the auction is successfully concluded. At no point during the
auction process does the Company take possession of either the item being sold
or the buyer's payment for the item. Fees to sellers are aggregated and billed
on a monthly basis. A substantial majority of customer accounts are settled by
directly charging credit card numbers provided by sellers. Provisions for
estimated uncollectible accounts and authorized credits are recorded as
percentages of revenues and are provided for at the time of revenue
recognition. To date, the Company has not incurred a material amount of
customer credits. In certain instances, customers will deposit funds with eBay
in anticipation of future transactions; these prepayments appear on the
Company's balance sheet as
27
<PAGE>
customer advances. For the six months ended June 30, 1998, the average sales
price of goods sold through eBay was approximately $40.00.
The Company's business model is significantly different from many existing
online auction and other electronic commerce businesses. Because individual
sellers and not the Company sell the items listed, the Company has no product
cost of goods sold, no procurement, carrying or shipping costs and no
inventory risk. The Company's rate of expense growth is primarily driven by
increases in headcount and expenditures on advertising and promotion. Since
neither of these types of expenses is directly linked to revenue growth, the
Company has operated profitably since the first full quarter that it charged
fees for its auction service and the Company's business model has the
potential for significant additional operating leverage. However, in the short
term, the Company intends to increase its expenses significantly, and in
particular its advertising and promotion expenses, in an effort to maintain a
high level of revenue growth.
Effective June 30, 1998, the Company acquired all the outstanding shares of
Jump Incorporated ("Jump"), the developer and operator of Up4Sale, an
advertising-supported online trading service in an auction format. The
acquisition has been accounted for using the purchase method of accounting,
and accordingly the purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date. The fair value of intangible
assets was determined using a combination of methods, including replacement
cost estimates for acquired research and development and completed technology,
a risk-adjusted income approach for the acquired customer list and the amounts
paid for covenants not to compete. The total purchase price of approximately
$2.3 million consisted of 142,848 shares of the Company's Common Stock with an
estimated fair value of approximately $2.0 million and other acquisition
related expenses of approximately $335,000, consisting primarily of payments
for non-compete agreements totaling approximately $208,000 and legal and other
professional fees. Of the total purchase price, approximately $150,000 was
allocated to in-process technology and was immediately charged to operations
as the technology had not reached technological feasibility as of the
acquisition date and had no alternative future use. The remainder of the
purchase price was allocated to net tangible liabilities assumed ($31,000) and
intangible assets, including completed technology ($500,000), the customer
list ($1.5 million), covenants not to compete ($208,000) and goodwill
($24,000). The intangible assets will be amortized over their estimated useful
lives which range from eight to 24 months.
The Company has only a limited operating history on which to base an
evaluation of its business and prospects. The Company's prospects must be
considered in light of the risks, uncertainties, expenses and difficulties
frequently encountered by companies in their early stages of development,
particularly companies in new and rapidly evolving markets such as online
commerce.
28
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, certain data from
the Company's consolidated statement of income, such data as a percentage of
net revenues and certain supplemental operating data. The consolidated
statement of income data has been derived from the Company's unaudited
consolidated financial statements, which, in management's opinion, have been
prepared on substantially the same basis as the audited consolidated financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial information
for the periods presented. This information should be read in conjunction with
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Prospectus. The operating results in any quarter are not necessarily
indicative of the results that may be expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1997 1997 1997 1997 1998 1998
-------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 604 $ 1,054 $ 1,459 $ 2,627 $ 5,981 $ 8,941
Cost of net revenues.... 33 127 253 333 630 1,106
------ ------- ------- ------- -------- --------
Gross profit............ 571 927 1,206 2,294 5,351 7,835
------ ------- ------- ------- -------- --------
Operating expenses:
Sales and marketing... 83 129 369 1,149 2,106 2,504
Product development... 58 151 257 365 518 1,030
General and adminis-
trative.............. 95 138 260 457 962 3,092
Acquired research and
development.......... -- -- -- -- -- 150
------ ------- ------- ------- -------- --------
Total operating ex-
penses.............. 236 418 886 1,971 3,586 6,776
------ ------- ------- ------- -------- --------
Income from operations.. 335 509 320 323 1,765 1,059
Interest and other in-
come, net.............. 2 2 26 26 22 54
------ ------- ------- ------- -------- --------
Income before income
taxes.................. 337 511 346 349 1,787 1,113
Provision for income
taxes.................. (144) (218) (147) (160) (1,573) (979)
------ ------- ------- ------- -------- --------
Net income.............. $ 193 $ 293 $ 199 $ 189 $ 214 $ 134
====== ======= ======= ======= ======== ========
AS A PERCENTAGE OF NET
REVENUES:
Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of net revenues.... 5.5 12.0 17.3 12.7 10.5 12.4
------ ------- ------- ------- -------- --------
Gross profit............ 94.5 88.0 82.7 87.3 89.5 87.6
------ ------- ------- ------- -------- --------
Operating expenses:
Sales and marketing... 13.7 12.3 25.3 43.7 35.2 28.0
Product development... 9.6 14.3 17.6 13.9 8.7 11.5
General and adminis-
trative.............. 15.7 13.1 17.9 17.4 16.1 34.6
Acquired research and
development.......... -- -- -- -- -- 1.7
------ ------- ------- ------- -------- --------
Total operating ex-
penses.............. 39.0 39.7 60.8 75.0 60.0 75.8
------ ------- ------- ------- -------- --------
Income from operations.. 55.5 48.3 21.9 12.3 29.5 11.8
Interest and other in-
come, net.............. 0.3 0.2 1.8 1.0 0.4 0.6
------ ------- ------- ------- -------- --------
Income before income
taxes.................. 55.8 48.5 23.7 13.3 29.9 12.4
Provision for income
taxes.................. (23.8) (20.7) (10.1) (6.1) (26.3) (10.9)
------ ------- ------- ------- -------- --------
Net income.............. 32.0% 27.8% 13.6% 7.2% 3.6% 1.5%
====== ======= ======= ======= ======== ========
SUPPLEMENTAL OPERATING
DATA (IN THOUSANDS):
Number of registered us-
ers at end of period... 88 150 223 341 580 851
Gross merchandise sales
(1).................... $9,337 $17,630 $24,281 $44,023 $104,113 $139,633
Number of auctions list-
ed..................... 443 794 1,178 1,979 4,209 6,584
</TABLE>
- --------
(1) Represents the aggregate sales prices of all goods for which an auction
was successfully concluded (i.e., there was at least one bid above the
seller's specified minimum price or reserve price, whichever is higher).
29
<PAGE>
NET REVENUES
The Company's net revenues increased sequentially each quarter throughout
the comparison periods. Substantially all of these increases resulted from
growth in the number of items of merchandise listed by sellers for auction on
the Company's Web site and from the number of auction transactions
successfully concluded. The Company did not increase the amounts of its basic
placement fees or success fees during the comparison periods. Increases in
fees for specific featured placements and in average transaction size did not
have a material impact on net revenue growth. The Company expects that the
rate of its net revenue growth in future periods will decline significantly
from the rates of net revenue growth experienced in recent quarters.
COST OF NET REVENUES
Cost of net revenues primarily represents costs for customer support and Web
site operations, including fees for independent contractors, compensation for
Company customer support and site operations personnel and, to a lesser
extent, ISP connectivity charges, bank processing charges for customer fees
paid by credit cards and depreciation of the equipment required for the
Company's Web site operations. The Company's cost of net revenues increased
substantially each quarter throughout the comparison periods. Cost of net
revenues increased rapidly from the first quarter of 1997 through the third
quarter of 1997 due to significantly increased expenditures for contractors
and for new employees as the Company began to build an in-house customer
support group. The Company also incurred substantial additional ISP
connectivity charges in anticipation of launching the Company's renamed "eBay"
person-to-person trading service in the third quarter of 1997. Bank processing
charges for customer fees paid by credit cards also increased from the first
quarter of 1997 through the third quarter of 1997 as the number of placements
and successfully completed auctions increased. These rapid increases, coupled
with slower growth in net revenues from the second quarter to the third
quarter of 1997, caused cost of net revenues to peak at 17.3% of net revenues
in the third quarter of 1997. Thereafter, extremely rapid net revenue growth
and the partially fixed nature of certain components of cost of net revenues
caused cost of net revenues to decline to 10.5% of net revenues in the first
quarter of 1998. With a slowing of the Company's net revenue growth rate in
the second quarter of 1998 and significant increases in bank processing
charges for customer fees paid by credit cards, depreciation of the equipment
required for the Company's Web site operations, and ISP connectivity charges,
cost of net revenues again increased as a percentage of net revenues to 12.4%.
The Company anticipates that its costs of net revenues will vary, and may
increase, as a percentage of net revenues in future quarters as the Company
expands its Web site operations group and pays royalties for software licenses
to enhance its Web site.
SALES AND MARKETING
The Company's sales and marketing expenses are comprised primarily of
compensation for the Company's sales and marketing personnel, advertising,
trade show and other promotional costs, expenses for creative design of the
Company's Web site and an allocation of the Company's occupancy costs and
other overhead. Sales and marketing expenses increased substantially each
quarter throughout the comparison periods driven by increases in compensation
associated with additional headcount and, in the last two quarters of 1997 and
the first quarter of 1998, increases in advertising and promotional expenses.
The rapid growth in personnel-related expenses in the third and fourth
quarters of 1997, together with the significant increases in advertising and
promotional expenses in the third and especially the fourth quarters of 1997,
resulted in sales and marketing expenses increasing from 12.3% of net revenues
in the second quarter of 1997 to 43.7% of net revenues in the fourth quarter
of 1997. A reduction in the growth rate of personnel costs, coupled with the
128% growth in net revenues from the fourth quarter of 1997 to the first
quarter of 1998, caused sales and marketing expenses to decline to 35.2% of
net revenues. A reduction in advertising and promotional expenses and an
increase in net revenues from the first quarter of 1998 to the second quarter
of 1998 caused
30
<PAGE>
sales and marketing expenses to decline to 28.0% of net revenues in the second
quarter of 1998. The Company expects to increase its sales and marketing
expenses substantially in future quarters, particularly for advertising and
promotion, and, as a result, expects that its sales and marketing expenses
will increase both in absolute dollars and as a percentage of net revenues for
at least the next several quarters.
PRODUCT DEVELOPMENT
The Company's product development expenses consist primarily of compensation
for the Company's product development staff and payments to outside
contractors and, to a lesser extent, of depreciation on equipment used for
development and an allocation of the Company's occupancy costs and other
overhead. The Company expenses product development costs as they are incurred.
Product development expenses increased substantially each quarter throughout
the comparison periods. Compensation and other personnel-related expenses grew
most rapidly on a percentage basis between the first quarter of 1997 and the
second quarter of 1997 and net revenues grew most slowly between the second
and third quarters of 1997, causing product development expenses as a
percentage of net revenues to increase from 9.6% in the first quarter of 1997
to 17.6% in the third quarter of 1997. With accelerating net revenue growth
rates, product development expenses declined to 8.7% of net revenues by the
first quarter of 1998. Product development expenses increased to 11.5% of net
revenues in the second quarter of 1998 as the Company significantly increased
its engineering staff and use of outside contractors and the rate of net
revenue growth again declined. The Company anticipates that product
development expenses will increase as a percentage of net revenues in the
third and fourth quarters of 1998 due to significant additional hiring.
Thereafter, the Company expects that product development expenses will
increase in absolute dollars but may begin to decline as a percentage of net
revenues.
GENERAL AND ADMINISTRATIVE
The Company's general and administrative expenses consist primarily of
compensation for personnel and, to a lesser extent, fees for outside
professional advisors and an allocation of the Company's occupancy costs and
other overhead. General and administrative expenses increased as a percentage
of net revenues from 13.1% in the second quarter of 1997 to 17.9% in the third
quarter of 1997 as personnel-related costs increased and the rate of net
revenue growth declined, and declined as a percentage of net revenues in the
fourth quarter of 1997 and first quarter of 1998 as a result of the extremely
rapid growth in net revenues. General and administrative expenses increased as
a percentage of net revenues to 34.6% in the second quarter of 1998 because,
in that quarter, the Company donated 107,250 shares of its Common Stock, with
an estimated fair value of $1.2 million, to a charitable foundation and
recorded compensation expense of $429,000 associated with purchases of
restricted Common Stock by its outside directors. The Company expects that
general and administrative expenses will continue to grow in absolute dollars
but may decline gradually as a percentage of net revenues, and fluctuate from
quarter to quarter depending on the rate of net revenue growth.
ACQUIRED RESEARCH AND DEVELOPMENT
During the quarter ended June 30, 1998, the Company recognized $150,000 for
in-process technology acquired in the acquisition of Jump and charged it to
operations because such in-process technology had not reached the stage of
technological feasibility at the acquisition date and had no alternative
future use. See Note 2 of Notes to Consolidated Financial Statements and the
Notes to Pro Forma Consolidated Financial Information included elsewhere in
this Prospectus.
31
<PAGE>
INTEREST AND OTHER INCOME, NET
Interest and other income, net, in each quarter resulted primarily from
interest on cash and cash equivalents offset in part by interest expense on
the Company's borrowings under its line of credit. The increase in interest
and other income, net between the second and third quarters of 1997 was a
result of interest earned on the net proceeds from the Company's sale of
Series B Mandatorily Redeemable Convertible Preferred Stock ("Series B
Preferred Stock") and warrants to purchase such shares of stock (the "Series B
Warrants") in June 1997. The decrease in the first quarter of 1998 was due to
increased interest expense, partially offset by increased interest income
earned on proceeds from employee stock option exercises. The increase in the
second quarter of 1998 was a result of interest earned on proceeds from the
May 1998 exercise of the Series B Warrants and employee stock option
exercises.
PROVISION FOR INCOME TAXES
The Company's effective federal and state income tax rate was approximately
43.0% in each quarter of 1997 and 88.0% in the first two quarters of 1998. The
variations in the effective tax rate for the quarters ended December 31, 1997,
March 31, 1998 and June 30, 1998 reflect the impact of applying the annual
effective tax rate to the individual quarters and subsequent adjustments
thereto to derive an annual rate that is reflective of the Company's current
and deferred tax liability. The increase in the effective tax rate from 1997
to 1998 results primarily from non-deductible charges for stock-based
compensation and expenses related to the acquisition of Jump. See Note 7 of
Notes to Consolidated Financial Statements.
STOCK-BASED COMPENSATION
In the quarters ended June 30, September 30 and December 31, 1997 and March
31 and June 30, 1998, the Company recorded aggregate unearned compensation
totalling $5.8 million in connection with the grant of certain stock options
subsequent to April 1997, which amount is being amortized over the four-year
vesting period of such options. Of the total unearned compensation,
approximately $25,000, $355,000 and $583,000 was amortized in the quarters
ended December 31, 1997 and March 31 and June 30, 1998, respectively. The
Company expects per quarter amortization of approximately $750,000 during the
remainder of 1998, between $370,000 and $630,000 during 1999 and between
$200,000 and $330,000 during 2000 and annual amortization of $450,000 during
2001 and $75,000 during 2002 related to these options. These amortization
amounts were allocated among the operating expense categories based upon the
primary activity of the related employee, resulting in charges in the quarters
ended December 31, 1997, March 31, 1998 and June 30, 1998 of approximately $0,
$5,000 and $23,000 to cost of net revenues, $0, $45,000 and $141,000 to
product development expenses, $0, $80,000 and $82,000 to sales and marketing
expenses, and $25,000, $225,000 and $337,000 to general and administrative
expenses, respectively. See Note 10 of Notes to Consolidated Financial
Statements.
32
<PAGE>
YEARS ENDED DECEMBER 31, 1996 AND 1997 AND SIX MONTHS ENDED JUNE 30, 1997 AND
1998.
The following table sets forth, for the periods presented, certain data from
the Company's consolidated statement of income as a percentage of net
revenues. The information for the six-month periods has been derived from the
Company's unaudited consolidated financial statements, which, in management's
opinion, have been prepared on substantially the same basis as the audited
consolidated financial statements and include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
financial information for the periods presented. This information should be
read in conjunction with the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------- ------------------
1996 1997 1997 1998
------ ------ -------- --------
<S> <C> <C> <C> <C>
Net revenues................................ 100.0% 100.0% 100.0% 100.0%
Cost of net revenues........................ 3.8 13.0 9.7 11.6
------ ------ -------- --------
Gross profit................................ 96.2 87.0 90.3 88.4
------ ------ -------- --------
Operating expenses:
Sales and marketing....................... 8.6 30.1 12.8 30.9
Product development....................... 7.5 14.5 12.6 10.4
General and administrative................ 12.1 16.5 14.0 27.2
Acquired research and development......... -- -- -- 1.0
------ ------ -------- --------
Total operating expenses................ 28.2 61.1 39.4 69.5
------ ------ -------- --------
Income from operations...................... 68.0 25.9 50.9 18.9
Interest and other income, net.............. 0.3 1.0 0.2 0.5
------ ------ -------- --------
Income before income taxes.................. 68.3 26.9 51.1 19.4
Provision for income taxes.................. (28.5) (11.7) (21.8) (17.1)
------ ------ -------- --------
Net income.................................. 39.8% 15.2% 29.3% 2.3%
====== ====== ======== ========
</TABLE>
NET REVENUES
The Company's net revenues increased from $372,000 in 1996 to $5.7 million
in 1997 and from $1.7 million in the first six months of 1997 to $14.9 million
in the first six months of 1998. The increases between the comparison periods
were primarily the result of growth in the number of items of merchandise
listed by sellers for auction on the Company's Web site and from the number of
auction transactions successfully concluded by the Company. The increase from
1996 to 1997 was, to a lesser extent, the result of small increases in average
transaction size and certain increases in the placement fees for various forms
of featured placements for listed items. The total number of items listed grew
from approximately 289,000 in 1996 to approximately 4.4 million in 1997 and
from approximately 1.2 million in the first six months of 1997 to
approximately 10.8 million in the first six months of 1998.
COST OF NET REVENUES
Cost of net revenues increased from $14,000, or 3.8% of net revenues, in
1996 to $746,000, or 13.0% of net revenues, in 1997. Cost of net revenues
increased from $160,000, or 9.7% of net revenues, in the first six months of
1997 to $1.7 million, or 11.6% of net revenues, in the first six months of
1998. The increase in absolute dollars and percentages between the comparison
periods resulted primarily from the Company's building of a customer support
organization, increases in bank processing charges for customer fees paid by
credit cards, depreciation of the equipment required for the Company's Web
site operations and ISP connectivity charges.
SALES AND MARKETING
The Company's sales and marketing expenses increased from $32,000, or 8.6%
of net revenues, in 1996 to $1.7 million, or 30.1% of net revenues, in 1997.
Sales and marketing expenses increased
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from $212,000, or 12.8% of net revenues, in the first six months of 1997 to
$4.6 million, or 30.9% of net revenues, in the first six months of 1998. The
increases from 1996 to 1997 resulted primarily from the building of a sales
and marketing organization, which began late in the fourth quarter of 1996,
and the decision to begin substantial advertising and promotional activities,
which occurred in the third quarter of 1997. The increases from the first six
months of 1997 to the first six months of 1998 resulted primarily from
continued growth in the number of sales and marketing personnel and from
increases in advertising and promotional expenses, which were less than
$20,000 in the first six months of 1997 and over $2.6 million in the first six
months of 1998.
PRODUCT DEVELOPMENT
The Company's product development expenses increased from $28,000, or 7.5%
of net revenues, in 1996 to $831,000, or 14.5% of net revenues, in 1997.
Product development expenses increased in absolute dollars but decreased as a
percentage of net revenues from $209,000, or 12.6% of net revenues, in the
first six months of 1997 to $1.5 million, or 10.4 % of net revenues, in the
first six months of 1998. The increases in absolute dollars between the
comparison periods resulted primarily from increases in salaries, benefits and
other personnel-related expenses as the Company significantly increased the
size of its research and development staff.
GENERAL AND ADMINISTRATIVE
The Company's general and administrative expenses increased from $45,000, or
12.1% of net revenues, in 1996 to $950,000, or 16.5% of net revenues, in 1997.
General and administrative expenses increased from $233,000, or 14.0% of net
revenues, in the first six months of 1997 to $4.1 million, or 27.2% of net
revenues, in the first six months of 1998. The increases from 1996 to 1997
resulted primarily from increases in salaries, benefits and other personnel-
related expenses and, to a lesser extent, from increases in the allowance for
doubtful accounts (which is increased based upon a percentage of revenues
reflecting the Company's historical experience), fees for professional
services and allocations of occupancy costs and other overhead. The increases
from the first six months of 1997 to the first six months of 1998 resulted
primarily from the Company's contribution in June 1998 of 107,250 shares of
the Company's Common Stock with an estimated fair value of $1.2 million to a
charitable foundation. In June 1998 the Company also recorded compensation
expense of $429,000 associated with purchases of restricted shares of Common
Stock by its outside directors. Increases in personnel-related expenses, the
allowance for doubtful accounts, fees for professional services and
allocations of occupancy costs and other overhead also contributed to the
increase.
ACQUIRED RESEARCH AND DEVELOPMENT
During the six months ended June 30, 1998, the Company recognized $150,000
for in-process technology acquired in the acquisition of Jump and charged it
to operations because such in-process technology had not reached the stage of
technological feasibility at the acquisition date and had no alternative
future use. See Note 2 of Notes to Consolidated Financial Statements and the
Notes to Pro Forma Consolidated Financial Information included elsewhere in
this Prospectus.
INTEREST AND OTHER INCOME, NET
The Company's interest and other income, net increased from $1,000 in 1996
to $56,000 in 1997 and from $4,000 in the first six months of 1997 to $76,000
in the first six months of 1998. Substantially all of the increases between
the comparison periods were a result of increased cash and cash equivalents,
which resulted from interest earned on the net proceeds from the Company's
sales of Series B Preferred Stock and Series B Warrants in June 1997 and, in
the case of the six-month comparison periods, the exercise of those warrants
in May 1998 and the exercise of employee stock options.
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PROVISION FOR INCOME TAXES
The Company's effective federal and state income tax rate was 41.7% in 1996,
43.4% in 1997 and 88.0% in the first six months of 1998. The Company's
effective tax rate during the comparison periods varied significantly as a
result of non-deductible stock compensation and the tax-free acquisition of
Jump.
STOCK-BASED COMPENSATION
In 1997 and 1998, the Company recorded aggregate unearned compensation
totaling $5.8 million in connection with the grant of certain stock options
subsequent to April 1997, which amount is being amortized over the four-year
vesting period of such options. Of the total unearned compensation,
approximately $25,000 and $938,000 was amortized in 1997 and the first six
months of 1998, respectively. These amortization amounts were allocated among
the operating expense categories based upon the primary activity of the
related employee, resulting in charges in the year ended December 31, 1997 and
the six months ended June 30, 1998 of approximately $0 and $28,000 to cost of
net revenues, $0 and $186,000 to product development expenses, $0 and $162,000
to sales and marketing expenses, and $25,000 and $562,000 to general and
administrative expenses, respectively. See Note 10 of Notes to Consolidated
Financial Statements.
FACTORS AFFECTING RESULTS OF OPERATIONS AND FINANCIAL CONDITION
eBay was formed as a sole proprietorship in September 1995 and incorporated
in May 1996. Thus, it has only a limited operating history on which to base an
evaluation of its business and prospects. The Company's prospects must be
considered in light of the risks, uncertainties, expenses and difficulties
frequently encountered by companies in their early stages of development,
particularly companies in new and rapidly evolving markets such as online
commerce. To address these risks and uncertainties, the Company must, among
other things, maintain and increase the number of its registered users, items
listed on its service and completed auctions, maintain and enhance its brand,
implement and execute its business and marketing strategy successfully,
continue to develop and upgrade its technology and information-processing
systems, continue to enhance the eBay service to meet the needs of a changing
market, provide superior customer service, respond to competitive
developments, and attract, integrate, retain and motivate qualified personnel.
There can be no assurance that the Company will be successful in accomplishing
all of these things, and the failure to do so could have a material adverse
effect on the Company's business, results of operations and financial
condition.
The Company believes that its continued growth will depend in large part on
its ability to: (i) increase its brand name awareness, (ii) provide its
customers with superior community and trading experiences and (iii) maintain
sufficient transaction volume to attract buyers and sellers. Accordingly, the
Company intends to invest heavily in marketing and promotion, site
development, technology and operating infrastructure development. Although the
Company has experienced significant revenue growth and significant growth in
the number of its registered users and items listed for auction by its users
in recent periods, such growth rates are not sustainable and will decrease in
the future. In view of the rapidly evolving nature of the Company's business
and its limited operating history, the Company believes that period-to-period
comparisons of its operating results are not necessarily meaningful and should
not be relied upon as indications of future performance.
The Company's operating results have varied on a quarterly basis during its
short operating history and may fluctuate significantly as a result of a
variety of factors, many of which are outside the Company's control. Factors
that may affect the Company's quarterly operating results include: (i) the
Company's ability to retain an active user base, attract new users who effect
transactions through its service and maintain customer satisfaction; (ii) the
Company's ability to manage the number of items listed on its service; (iii)
the announcement or introduction of new sites, services and products by the
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Company or its competitors; (iv) the success of the Company's brand building
and marketing campaigns; (v) price competition; (vi) the level of use of the
Internet and online services; (vii) increasing consumer confidence in and
acceptance of the Internet and other online services for commerce and, in
particular, the trading of products such as those listed on eBay; (viii)
consumer confidence in the security of transactions over the Internet; (ix)
the Company's ability to upgrade and develop its systems and infrastructure to
accommodate growth; (x) the Company's ability to attract new personnel in a
timely and effective manner; (xi) the volume of items listed on the Company's
Web site; (xii) the timing, cost and availability of advertising in
traditional media and on other Web sites and online services; (xiii) technical
difficulties or service interruptions; (xiv) the amount and timing of
operating costs and capital expenditures relating to expansion of the
Company's business, operations and infrastructure; (xv) consumer trends and
popularity of certain categories of collectible items; (xvi) volume, size,
timing and completion rate of trades on eBay; (xvii) governmental regulation
by Federal or local governments; and (xviii) general economic conditions and
economic conditions specific to the Internet and online commerce industries.
As a result of the Company's limited operating history and the emerging
nature of the markets in which it competes, it is difficult for the Company to
forecast its revenues or earnings accurately. In addition, the Company has no
backlog and a significant portion at the Company's net revenues for a
particular quarter are derived from auctions that are listed and completed
during that quarter. The Company's current and future expense levels are based
largely on its investment plans and estimates of future revenues and are, to a
large extent, fixed. The Company may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. Accordingly, any
significant shortfall in revenues relative to the Company's planned
expenditures would have an immediate adverse effect on the Company's business,
results of operations and financial condition. Further, as a strategic
response to changes in the competitive environment, the Company may from time
to time make certain pricing, service or marketing decisions that could have a
material adverse effect on its business, results of operations and financial
condition.
The Company believes that its results of operations are somewhat seasonal in
nature, with fewer auctions around the Thanksgiving and Christmas holidays in
the fourth quarter. The Company's limited operating history, however, makes it
difficult to fully assess the impact of these seasonal factors or whether or
not its business is susceptible to cyclical fluctuations in the U.S. economy.
In addition, the Company believes that its rapid growth may have overshadowed
whatever seasonal or cyclical factors might have influenced its business to
date. There can be no assurance that seasonal or cyclical variations in the
Company's operations will not become more pronounced over time or that they
will not materially adversely affect its results of operations in the future.
Moreover, consumer "fads" and other changes in consumer trends may cause
significant fluctuations in the Company's operating results from one quarter
to the next.
Due to the foregoing factors, the Company's quarterly revenues and operating
results are difficult to forecast. The Company believes that period-to-period
comparisons of its operating results may not be meaningful and should not be
relied upon as an indication of future performance. In addition, it is likely
that in one or more future quarters the Company's operating results will fall
below the expectations of securities analysts and investors. In such event,
the trading price of the Common Stock would almost certainly be materially
adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily from net
cash generated from operating activities and, to a lesser extent, from the
sale of Series B Preferred Stock and Series B Warrants, proceeds from the
exercise of those warrants and proceeds from the exercise of stock options.
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Net cash provided by operating activities was $113,000, $789,000 and $5.2
million in 1996, 1997 and the first six months of 1998, respectively. Net cash
provided by operating activities resulted primarily from the Company's net
income before non-cash charges for amortization of unearned compensation, the
provision for doubtful accounts and depreciation and amortization, as well as
increases in various liability categories, offset in part by increases in
accounts receivable.
Net cash used in investing activities was $25,000, $680,000 and $3.3 million
in 1996, 1997 and the first six months of 1998, respectively. Net cash used in
investing activities in each of these periods was entirely the result of
purchases of property and equipment, primarily computer equipment and
furniture and fixtures.
Net cash provided by financing activities was $15,000, $3.5 million and $5.1
million in 1996, 1997 and the first six months of 1998, respectively. Net cash
provided by financing activities in 1996 resulted almost entirely from sales
of Common Stock and Series A Preferred Stock. Net cash provided by financing
activities in 1997 resulted primarily from the sale of $3.0 million of Series
B Preferred Stock and Series B Warrants and borrowings of $545,000 against a
bank line of credit. See Notes 5 and 8 of Notes to Consolidated Financial
Statements. Net cash provided by financing activities in the first six months
of 1998 resulted primarily from proceeds from the exercise of Series B
Warrants of $2.0 million and proceeds from the sale of restricted Common Stock
in the aggregate amount of $3.2 million.
At June 30, 1998, the principal source of liquidity for the Company was
$10.7 million of cash and cash equivalents. As of that date, the Company also
had a line of credit in the amount of $750,000, none of which remained
available for borrowing. Borrowings under the line of credit accrue interest
at a variable rate determined by the bank, are repayable in 24 monthly
installments of principal and interest through January 2000 and are secured by
certain assets of the Company. Under the line of credit, the Company is
required to maintain certain financial covenants. The Company was in
compliance with all of these covenants at June 30, 1998. See Note 5 of Notes
to Consolidated Financial Statements.
The Company had no material commitments for capital expenditures at June 30,
1998 but expects such expenditures to be at least $1.1 million in the second
half of 1998 and at least $6.1 million in 1999. Such expenditures will
primarily be for computer equipment, furniture and fixtures and leasehold
improvements. In addition, the Company anticipates implementing a mirrored Web
site outside of California during the second half of 1998 and moving to a new
facility in the second half of 1999. The Company also has total minimum lease
obligations of $1.7 million under certain noncancellable operating leases and
$23,000 under certain capital leases. The Company believes that its existing
cash and cash equivalents, the net proceeds from this offering and any cash
generated from operations will be sufficient to fund its operating activities,
capital expenditures and other obligations through at least the next 18
months. However, if during that period or thereafter the Company is not
successful in generating sufficient cash flow from operations or in raising
additional capital when required in sufficient amounts and on terms acceptable
to the Company, these failures could have a material adverse effect on the
Company's business, results of operations and financial condition. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of its then-current stockholders would be reduced.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standard Board ("FASB") recently issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components in financial statements. Comprehensive
income, as defined, includes all changes to equity (net assets) during a
period from non-owner sources. SFAS No. 130 is effective for financial
statements for fiscal
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years beginning after December 15, 1997. To date, the Company has not had any
transactions that are required to be reported in comprehensive income.
The FASB recently issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
the way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to
report selected information about operating segments in interim financial
reports. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. The Company has determined that it does not
have any separately reportable business segments.
The American Institute of Certified Public Accountants issued Statement of
Position ("SOP") No. 98-1, "Software for Internal Use," which provides
guidance on accounting for the cost of computer software developed or obtained
for internal use. SOP No. 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company does not expect
that the adoption of SOP No. 98-1 will have a material impact on its financial
statements.
YEAR 2000 ISSUES
Many current installed computer systems and software products are coded to
accept only two-digit entries in the date code field and cannot reliably
distinguish dates beginning on January 1, 2000 from dates prior to the year
2000. Many companies' software and computer systems may need to be upgraded or
replaced in order to correctly process dates beginning in 2000 and to comply
with the "Year 2000" requirements. The Company has reviewed its internal
programs and has determined that there are no significant Year 2000 issues
within the Company's systems or services. However, the Company utilizes third-
party equipment and software that may not be Year 2000 compliant although the
Company believes that the third-party systems that are material to its
business are Year 2000 compliant based on representations made by these
suppliers. Failure of such third-party equipment or software to process
properly dates for the year 2000 and thereafter could require the Company to
incur unanticipated expenses to remedy any problems, which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
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BUSINESS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in these forward-looking statements. Factors that may cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
THE COMPANY
eBay is the world's largest and most popular person-to-person trading
community on the Internet. eBay pioneered online person-to-person trading by
developing a Web-based community in which buyers and sellers are brought
together in an efficient and entertaining auction format to buy and sell
personal items such as antiques, coins, collectibles, computers, memorabilia,
stamps and toys. The eBay service permits sellers to list items for sale,
buyers to bid on items of interest and all eBay users to browse through listed
items in a fully-automated, topically-arranged, intuitive and easy-to-use
online service that is available 24 hours a day, seven days a week. From
inception through June 30, 1998, eBay hosted over 15 million auctions
resulting in gross merchandise sales in excess of $340 million. During the
first half of 1998, the number of registered eBay users grew from
approximately 340,000 to over 850,000 and the number of simultaneous auctions
being conducted through eBay increased from approximately 200,000 to over
500,000. The Company believes that this critical mass of buyers, sellers and
items listed for sale creates a cycle that helps eBay to continue to grow its
user base. Sellers are attracted to eBay as a result of the large number of
potential buyers, and buyers in turn are attracted to eBay by the broad
selection of goods listed on eBay. eBay provides buyers and sellers a place to
socialize, to discuss topics of common interest and, ultimately, to conduct
business in a compelling trading environment, thus fostering a large and
growing commerce-oriented online community.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET AND ONLINE COMMERCE
The Internet has emerged as a global medium enabling millions of people
worldwide to share information, communicate and conduct business
electronically. International Data Corporation ("IDC") estimates that the
number of Web users will grow from approximately 69 million worldwide in 1997
to approximately 320 million worldwide by the end of 2002. This growth is
expected to be driven by the large and growing number of PCs installed in
homes and offices, the decreasing cost of PCs, easier, faster and cheaper
access to the Internet, improvements in network infrastructure, the
proliferation of Internet content and the increasing familiarity and
acceptance of the Internet by businesses and consumers. The Internet possesses
a number of unique characteristics that differentiate it from traditional
media: users communicate or access information without geographic or temporal
limitations; users access dynamic and interactive content on a real-time
basis; and users communicate and interact instantaneously with a single
individual or with entire groups of individuals. As a result of these
characteristics, Web usage is expected to continue to grow rapidly.
The growing adoption of the Web represents an enormous opportunity for
businesses to conduct commerce over the Internet. IDC estimates that commerce
over the Internet will increase from approximately $32 billion worldwide in
1998 to approximately $130 billion worldwide in 2000. While companies
initially focused on facilitating and conducting transactions between
businesses over the Internet, a number of companies more recently have focused
on facilitating a wide variety of business-to-consumer transactions. These
companies typically use the Internet to offer standard products and services
that can be easily described with graphics and text and do not necessarily
require physical presence for purchase, such as books, CDs, videocassettes,
automobiles, home loans, airline tickets and online banking and stock trading.
The Internet gives these companies the opportunity to develop one-to-one
relationships with customers worldwide from a central location without having
to make the
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significant investments required to build a number of local retail presences,
manage a worldwide distribution infrastructure or develop the printing and
mailing infrastructure associated with traditional direct marketing
activities. While companies have generally focused on applying these benefits
in business-to-business and business-to-consumer transactions, a significant
market opportunity exists to apply these same advantages to facilitate person-
to-person trading over the Internet.
THE PERSON-TO-PERSON TRADING MARKET OPPORTUNITY
The exchange of goods between individuals--person-to-person trading--has
traditionally been conducted through trading forums such as classified
advertisements, collectibles shows, garage sales and flea markets or through
intermediaries, such as auction houses and local dealer shops. These markets
are highly inefficient, making person-to-person trading difficult for buyers
and sellers. Their fragmented, regional nature makes it difficult and
expensive for buyers and sellers to meet, exchange information and complete
transactions. The localized nature of these markets also results in a limited
variety and breadth of goods available in any one location. Buyers are limited
to searching through local classified ads or to traveling to numerous
geographically-dispersed flea markets, trade shows or dealer shops in order to
find items of interest. These markets often have high transaction costs
because intermediaries either mark up goods for resale or charge a commission.
Because these markets are information inefficient, buyers and sellers lack a
reliable and convenient means of setting prices for sales or purchases.
Despite these inefficiencies, the Company believes that the market for
traditional person-to-person trading in the U.S. through auctions and
classified ads exceeded $50 billion in goods sold in 1997.
The Internet offers for the first time the opportunity to create a
compelling global marketplace that overcomes the inefficiencies associated
with traditional person-to-person trading while offering the benefits of
Internet-based commerce to the person-to-person trading market. An Internet-
based centralized trading place facilitates buyers and sellers meeting,
listing items for sale, exchanging information, interacting with each other
and, ultimately, consummating transactions. It allows buyers and sellers to
trade directly, bypassing traditional intermediaries and lowering costs for
both parties. This trading place is global in reach, offering buyers a
significantly broader selection of goods to purchase and providing sellers the
opportunity to sell their goods efficiently to a broader base of buyers. It
offers significant convenience, allowing trading at all hours and providing
continually-updated information. By leveraging the interactive nature of the
Internet, this trading place also facilitates a sense of community through
direct buyer and seller communication, thereby enabling the interaction
between individuals with mutual interests. In addition, this community
orientation, facilitation of direct buyer and seller communication and
efficient access to information on a particular buyer or seller's trading
history can help alleviate the risks of anonymous trading. As a result, there
exists a significant market opportunity for an Internet-based centralized
trading place that applies the unique attributes of the Internet to facilitate
person-to-person trading.
THE EBAY SOLUTION
eBay pioneered person-to-person trading of a wide range of goods over the
Internet using an efficient and entertaining auction format and has grown into
the largest and most popular person-to-person trading community on the
Internet. The core eBay service permits sellers to list items for sale, buyers
to bid for and purchase items of interest and all eBay users to browse through
listed items from any place in the world at any time. eBay offers buyers a
large selection of new and used items that can be difficult and costly to find
through traditional means such as classified advertisements, collectibles
shows, garage sales and flea markets or through intermediaries, such as
auction houses and local dealer shops. eBay also enables sellers to reach a
larger number of buyers more cost-effectively than traditional person-to-
person trading forums.
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The eBay service was originally introduced in September 1995 to create an
efficient marketplace for individuals to trade with one another. Begun as a
grassroots online trading community, eBay primarily attracted buyers and
sellers through word-of-mouth and by providing buyers and sellers with a place
to socialize, to discuss topics of common interest and ultimately to trade
goods with one another. The number of categories under which eBay users list
goods for auction has grown from 10, when eBay was first introduced, to 846 as
of June 30, 1998. Categories on eBay currently include antiques, coins,
collectibles, computers, memorabilia, stamps and toys. From inception through
June 30, 1998, eBay hosted over 15 million auctions, resulting in cumulative
gross merchandise sales of over $340 million. From December 31, 1997 to June
30, 1998, the number of registered eBay users grew from approximately 340,000
to over 850,000 and the number of simultaneous auctions being conducted
through eBay increased from approximately 200,000 to over 500,000.
The principal reasons for eBay's success are the following:
LARGEST ONLINE TRADING MARKET. Unlike traditional person-to-person trading
forums, eBay has aggregated a critical mass of buyers, sellers and items
listed for sale. As a result, eBay has become the largest online person-to-
person trading market. As of June 30, 1998, eBay had over 850,000 registered
users and was offering 846 product categories with over 500,000 items for
auction, many of which were unique or otherwise hard to find. The Company
believes that this critical mass of buyers, sellers and items listed for sale
creates a cycle that helps eBay to continue to grow its user base. Sellers are
attracted to eBay as a result of the large number of potential buyers and
buyers in turn are attracted to eBay by the broad selection of goods listed on
eBay.
COMPELLING TRADING ENVIRONMENT. eBay has created a distinctive trading
environment by utilizing an entertaining auction format, establishing
procedural rules and promoting community values that are designed to
facilitate trade and communications between buyers and sellers, without the
need for eBay to intervene and play a significant role in the trading process.
The auction format creates a sense of urgency among buyers to bid for goods
because of the uncertain future availability of a unique item on the site.
Similarly, by accepting multiple bids at increasing prices, its auction format
provides sellers a more efficient means of obtaining a maximum price for their
products. To date, well over 50% of auctions listed on eBay have been
successfully completed. The Company encourages every eBay user to provide
comments and feedback on other eBay users with whom they interact and offers
user profiles that provide feedback ratings and incorporate these comments.
The Company believes that this Feedback Forum helps make users more
comfortable with dealing with an unknown trading partner over the Web. In
addition, the Company's SafeHarbor program provides guidelines for trade,
helps provide information to resolve user disputes, responds to reports of
misuse of the eBay service and, if necessary, suspends users who violate the
terms of the Company's user agreement.
COST EFFECTIVE, CONVENIENT TRADING. eBay allows its buyers and sellers to
bypass traditionally expensive, regionally-fragmented intermediaries and
transact business on a 24 hour a day, seven day a week basis. Because eBay
carries no inventory, sellers bypass costly traditional intermediaries, thus
allowing for lower selling costs and increasing the sellers' likelihood of
finding buyers willing to pay his or her target price. To list an item on
eBay, sellers pay only a nominal placement fee ranging from $0.25 to $2.00 and
then pay an additional success fee that steps down from 5% to 1.25% of the
transaction value only if an auction is concluded with a successful bid. As a
result, sellers for the first time can sell relatively inexpensive items which
had previously been prohibitively expensive to list through most traditional
trading forums. By allowing sellers to conveniently reach a broad range of
buyers, eBay also ameliorates the time-consuming, logistical inconvenience of
individual selling. Buyers have access to a broad selection of items and avoid
the need to pay expensive markups or commissions to intermediaries. Buyers are
not charged for trading through eBay. The critical mass of items listed on
eBay provides a mutual benefit for buyers and sellers to more effectively
determine an appropriate price for an item.
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STRONG COMMUNITY AFFINITY. The Company believes that fostering direct
interaction between buyers and sellers with similar interests has enabled it
to create a loyal, active community of users. eBay has introduced a variety of
features and services designed to strengthen this sense of community among
eBay users. The Company facilitates communications between buyers and sellers
by offering chat rooms, bulletin boards and customer support assistance from
eBay personnel and other eBay users and by providing community features that
are designed to encourage consumer loyalty and repeat usage.
INTUITIVE USER EXPERIENCE. The eBay service is a fully-automated, topically-
arranged, intuitive and easy-to-use online service that is available on a 24
hour a day, seven day a week basis. Within minutes of completing a simple
online form, a seller can immediately list items for sale on the service, and
buyers can submit bids for items quickly and easily. Buyers can easily search
the hundreds of thousands of items listed by category or specific item. During
the course of the auction, bidders are notified by email of the status of
their bids on a daily basis and are notified immediately if they are outbid.
Sellers and successful bidders are automatically notified when an auction is
completed. To assist users further, the Company offers customer support via
email and support bulletin boards staffed on a 24 hour a day, seven day a week
basis.
EBAY STRATEGY
The Company's objective is to build upon its position as the world's leading
online person-to-person trading community. The key elements of eBay's strategy
are:
GROW THE EBAY COMMUNITY AND THE EBAY BRAND. The Company believes that
building greater awareness of the eBay brand within and beyond the eBay
community is critical to expanding its user base and to maintaining the
vitality of the eBay community. Although the Company's historical growth has
been largely attributable to word-of-mouth, the Company intends to build its
user base and its brand name aggressively. The Company has prepared a
substantial national advertising campaign, both in traditional media and
online, that is designed to attract new eBay users. The campaign will include
advertising in targeted publications, strategic advertising and sponsorship
placements on high-traffic Web sites, radio and television advertising
campaigns and active participation in other forums such as selected trade
shows. The Company intends to focus on reinforcing its brand within the
existing eBay community through marketing programs on eBay and sales of eBay-
branded merchandise.
BROADEN THE EBAY TRADING PLATFORM. The Company intends to pursue a multi-
pronged strategy for growing the eBay platform within existing product
categories, across new product categories and internationally. The Company
will target key vertical markets in its user programs and marketing
activities. The Company also intends to grow existing product categories by
introducing category-specific bulletin boards and chat rooms, integrating
category-specific content, advertising its service in targeted publications
and participating in targeted trade shows. In addition, the Company intends to
broaden the range of products offered on its trading platform by seeking to
attract new users from the general audience of Internet users and adding
product categories, content and other services or features to meet this new
user demand. The Company believes that there are significant opportunities for
person-to-person trading worldwide and therefore intends to leverage the eBay
service and brand name internationally by developing eBay for selected
international markets and marketing and promoting these services actively.
FOSTER EBAY COMMUNITY AFFINITY. The Company believes that it has developed
the largest and one of the most loyal person-to-person trading communities on
the Web and that enhancing the eBay community experience will help the Company
foster further growth and a greater sense of loyalty among eBay users. The
Company seeks to maintain a critical mass of frequent buyers and sellers with
a vested interest in the eBay community so that sellers will continue to be
attracted to the service by
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the large number of potential buyers and buyers will be attracted to eBay by
the large number of items listed by these sellers. Consistent with its desire
to foster community, the Company has organized a charitable fund, known as the
eBay Foundation, and intends to involve the members of the eBay community in
determining to which charitable purposes the eBay Foundation's funds will be
applied. See "--The eBay Service--Community Services."
ENHANCE FEATURES AND FUNCTIONALITY. The Company intends to update and
enhance the features and functionality of eBay frequently in order to continue
to improve the user trading experience through eBay. The Company recently
introduced personalization features such as My eBay, a customizable user
interface that tracks a user's recent auction activity and account balance
information and highlights auctions of specified items. The Company intends to
introduce other features, such as new auction formats, category-specific
content and other features designed to enhance the eBay experience. The
Company will continue to provide rapid system response and transaction
processing time by investing in its infrastructure in order to accommodate
additional users, content and auctions.
EXPAND VALUE-ADDED SERVICES. In order to offer an "end-to-end" person-to-
person trading service, the Company intends to offer a variety of pre- and
post-trade services to enhance the user experience. The Company intends to
introduce services to facilitate the exchange of goods so that buyers and
sellers will feel more comfortable sending money or goods to an unknown
trading partner. It is anticipated that these services may include pre-trade
services, such as services to facilitate scanning and uploading of photographs
of listed items, and post-trade services, such as third-party escrow services
and arrangements with shippers to help sellers ship their products more
easily. The Company may pursue strategic relationships with third parties to
provide many of these value-added services.
BUILD ON UNIQUE BUSINESS MODEL. The Company believes that its business
model, which does not require it to carry an inventory or to maintain a sales
force, provides a number of competitive advantages. The Company intends to
devote the capital that would otherwise be used for those purposes towards
growing eBay's business, enhancing its person-to-person trading services,
building brand awareness and pursuing other strategic opportunities.
THE EBAY SERVICE
The eBay trading platform is a robust, Internet-based, person-to-person
centralized trading place that facilitates buying and selling of a wide
variety of items.
[DIAGRAM OF BUYING-SELLING PROCESS]
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REGISTRATION. While any visitor to eBay can browse through the eBay service
and view the items listed for auction, in order to bid for an item or to list
an item for sale, buyers and sellers must first register with eBay. Users
register by completing a short online form and thereafter can immediately bid
for an item or list an item for sale.
BUYING ON EBAY. Buyers typically enter eBay through its home page, which
contains a listing of product categories that allows for easy exploration of
current auctions. Bidders can search for specific items by browsing through a
list of auctions within a category or subcategory and then "click through" to
a detailed description for a particular item. Bidders can also search specific
categories or the entire database of auction listings using keywords to
describe the types of products in which they are interested, and eBay's search
engine will generate a list of relevant auctions with links to the detailed
descriptions. Each auction is assigned a unique identifier so that users can
easily search for and track specific auctions. Users can also search for a
particular bidder or seller by name in order to review his or her auction and
feedback history. Within each category section eBay highlights auctions
commenced within the past 24 hours in a "New Today" section; auctions ending
on that day in an "Ending Today" section; and auctions ending within three
hours under a "Going, Going, Gone" section. Once a bidder has found an item of
interest and registered with eBay, the bidder enters the maximum amount he or
she is willing to pay at that time. In the event of competitive bids, the eBay
service automatically increases bidding in increments based upon the then
current highest bid for the item, up to the bidder's maximum price. As eBay
encourages direct interaction between buyers and sellers, bidders wishing
additional information about a listed item can access the seller's email
address and contact the seller for additional information. The Company
believes that this interaction between bidders and sellers leverages the
personal, one-to-one nature of person-to-person trading on the Web and is an
important element of the eBay experience. Once each bid is made, a
confirmation is sent to the bidder via email, an outbid notice is sent to the
next highest bidders and the item's auction status is automatically updated.
During the course of the auction, bidders are notified of the status of their
bids via email on a daily basis and are notified immediately after they are
outbid. Bidders are not charged for making bids or purchases through eBay.
SELLING ON EBAY. A seller registered with eBay can list a product for
auction by completing a short online form. The seller selects a minimum price
for opening bids for the item and chooses whether the auction will last three,
five or seven days. Additionally, a seller may select a reserve price for an
item, which is the minimum price at which the seller is willing to sell the
item and is typically higher than the minimum price set for opening bids. The
reserve price is not disclosed to bidders. A seller can elect to sell items in
individual auctions or, if he or she has multiple identical items, can elect
to hold a "Dutch Auction." For example, an individual wishing to sell 10
identical watches could hold 10 individual auctions or hold a Dutch Auction in
which the 10 highest bidders would each receive a watch and all lower bids
would be rejected. A seller may also specify that an auction will be a private
auction. With this format, bidders' e-mail addresses are not disclosed on the
item screen or bidding history screen. Sellers pay a nominal placement fee to
list items for sale--$0.25 for an auction with a minimum starting price of
less than $10.00, $0.50 for a minimum starting price of $10.00 to $24.99,
$1.00 for a minimum starting price of $25.00 to $49.99 and $2.00 for a minimum
starting price of $50.00 or more. By paying incremental placement fees,
sellers can have items featured in various ways. The seller can highlight his
or her auctions by utilizing a bold font for the auction heading for an
additional fee of $2.00. A seller with a favorable feedback rating can have
his or her auction featured as a "Super Featured Auction" for $49.95, which
allows the seller's item to be rotated on the eBay home page, or as a
"Category Featured Auction" for $9.95, which allows the seller's item to be
featured within a particular eBay category. A seller can also include a
description of the product with links to the seller's Web site. In addition,
the seller can include a photograph in the description if the seller posts the
photograph on a Web site and provides eBay with the appropriate Web address.
During the course of an auction, sellers are notified of the status of their
auctions on a daily basis via email.
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HOW TRANSACTIONS ARE COMPLETED. At the end of an auction period, if a bid
exceeds the minimum price and, if one is set, the reserve price, eBay
automatically notifies the buyer and seller via email and the buyer and seller
can then consummate the transaction independently of eBay. At the time of the
email notification, eBay charges the seller a success fee equal to 5% of the
first $25 of the purchase price, 2.5% of any purchase price between $25.01 and
$1,000 and 1.25% of any purchase price over $1,000. At no point during the
process does the Company take possession of either the item being sold or the
buyer's payment for the item. Rather, the buyer and seller must independently
arrange for the shipment of and payment for the item, with the buyer typically
paying for shipping. A seller can view the buyer's feedback rating and then
determine the manner of payment, such as personal check, cashier's check or
credit card, and also whether to ship the item before or after the payment is
received. Under the terms of the Company's user agreement, if a seller
receives one or more bids above the stated minimum or reserve price, whichever
is higher, the seller is obligated to complete a transaction although the
Company has no power to force the seller or bidder to complete the transaction
other than to suspend them from using the eBay service. In the event the buyer
and seller are unable to complete the transaction, eBay credits the seller the
amount of the success fee. Invoices for placement fees, additional listing
fees and success fees are sent via email to sellers on a monthly basis.
Typically, sellers have a credit card account on file with eBay and that
account is charged shortly after the invoice is sent.
FEEDBACK FORUM. eBay pioneered this feature to facilitate the establishment
of reputations within its community by encouraging individuals to record
comments about their trading partners on each transaction or other eBay users
with whom they have interacted. Every registered eBay user is issued a trading
profile, on which users who have conducted business or interacted with the
person may submit compliments or criticism. This information is recorded in a
feedback profile that includes a feedback rating for the person and indicates
comments from other eBay users who have interacted with that person over the
past seven days, the past month, the past six months and beyond. Users who
have developed positive reputations over time will have a star symbol
displayed next to their user name, which is color coded to indicate the amount
of positive feedback as compared to negative feedback received by the user.
eBay users may review a person's feedback profile to check on the person's
reputation within the eBay community before deciding to bid on an item listed
by that person or in determining how to complete the payment for and delivery
of the item.
The terms of the Company's user agreement prohibit actions that would
undermine the integrity of the Feedback Forum, such as a person's leaving
positive feedback about himself or herself through other accounts or leaving
negative feedback for others through other accounts. The Feedback Forum system
has several automated features designed to detect and prevent some forms of
abuse. For example, feedback posting from the same account, positive or
negative, cannot affect a user's net feedback rating (i.e., the number of
positive postings, less the number of negative postings) by more than one
point, no matter how many comments an individual makes. Furthermore, in order
to discourage users from registering for the purpose of leaving excessive
positive or negative feedback, a user must be registered with eBay for at
least five days in order to leave feedback. Users who receive a sufficiently
negative net feedback rating have their registrations suspended and are unable
to bid on or list items for sale. The Company believes its Feedback Forum is
extremely useful in overcoming initial user hesitancy when trading over the
Web as it reduces the anonymity and uncertainty of dealing with an unknown
trading partner.
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WHAT CAN BE PURCHASED OR SOLD ON EBAY. The eBay service has grown from
offering 10 product categories when it was first introduced in September 1995
to offering over 846 categories as of June 30, 1998. As the number of product
categories has grown, the Company periodically organizes the categories under
different headings to reflect the major types of items currently listed. As of
June 30, 1998, these product categories were organized under the following
headings:
Antiques Memorabilia
Dolls, Figures Books, Magazines
Collectibles Trading Cards
Coins Jewelry, Gemstones
Computers Toys
Stamps Miscellaneous
Each category has numerous subcategories. Today eBay offers a selection of
over 500,000 items, with the most popular items sold on eBay being those that
are relatively standardized or are well-represented with a photo (and
therefore can be evaluated to some degree without a physical inspection), are
small and easily shippable, and are relatively inexpensive. As the eBay
community grows and additional items are listed, the Company will continue to
organize auctions under additional categories to respond to the needs of the
eBay community.
COMMUNITY SERVICES. Beyond providing a convenient means of trading, eBay has
devoted substantial resources to building an online person-to-person trading
community, which the Company believes is one of the strongest on the Web. Key
components of the Company's community philosophy are maintaining an honest and
open marketplace and treating individual users with respect. The Company
offers a variety of community and support features that are designed to
solidify the growth of the eBay community and to build eBay user affinity and
loyalty. eBay facilitates email communications between buyers and sellers and
offers category-specific chat rooms, the eBay Cafe (a chat room for the entire
eBay community), question and answer sections, a bulletin board devoted to
user feedback on new features, an announcements section that covers new
features on eBay or other eBay news, customer support boards and "items
wanted" listings where users can post notices seeking specific items. eBay
also offers My eBay, which permits users to receive a report of their recent
activity on eBay, including bidding activity, selling activity, account
balances, favorite categories and recent feedback. Users with their own Web
pages can also post link buttons from the user's page to eBay and to a list of
items the user has for sale on eBay. In addition, in June 1998, the Company
donated 107,250 shares of Common Stock to the Community Foundation Silicon
Valley, a tax-exempt donor-advised public charity and established a fund,
known as the "eBay Foundation." Through the Community Foundation Silicon
Valley, the eBay Foundation will make grants to charitable organizations. The
Company intends to involve the members of the eBay community in determining
the charitable purposes to which proceeds from the sale of these shares will
be devoted. The Company may solicit user suggestions for worthwhile charities
or post listings of suggested charities in one of the eBay chat rooms or
bulletin boards to determine the eBay community's views regarding the
charities to which the eBay Foundation should contribute.
CUSTOMER SUPPORT. The Company devotes significant resources to providing
personalized, timely customer service and support. eBay offers customer
support on a 24 hour a day, seven day a week basis. Most customer support
inquiries are handled via email, with customer email inquiries typically being
answered within 24 hours after submission. The Company offers an online
tutorial for new eBay users and maintains two live customer support bulletin
boards, where users can post questions that will be answered by eBay customer
support personnel or other eBay users.
In addition, the Company offers the SafeHarbor program which provides
guidelines for trade, helps provide information to resolve user disputes and
responds to reports of misuses of the eBay service. The Company's SafeHarbor
staff investigates users' complaints of possible misuse of eBay and takes
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appropriate action, including issuing warnings to users or suspending users
from bidding on or listing items for sale. Some of the complaints the
SafeHarbor program investigates include various forms of bid manipulation,
malicious posting of negative feedback and posting illegal items for sale. The
SafeHarbor staff also provides information to assist users with disputes over
the quality of the goods sold or other fraudulent activity and, upon receipt
of a written claim of fraud from a user, will suspend the offending user from
eBay. Also, upon receipt of a written claim of intellectual property
infringement, the Company will remove the offending item from eBay.
ACQUISITION OF JUMP
On June 30, 1998, the Company acquired Jump, the developer and operator of
Up4Sale, an advertising-supported online trading service in an auction format.
The Company acquired Jump primarily for its technology and its established
customer base. Additionally, the acquisition will provide the Company with an
additional environment in which to introduce complementary future services. In
order to bid or sell on Up4Sale, users must first register and neither buyers
nor sellers currently pay any fees to bid on or list items for auction. Once
an auction is successfully completed, the buyer and seller independently
complete the sale. In connection with the acquisition of Jump, which was
accounted for under the purchase method of accounting, the Company issued
142,848 shares of its Common Stock in exchange for all of the outstanding
capital stock of Jump. In addition, the four principal employees of Jump each
entered into a four-year employment agreement with the Company. The Company
currently operates Up4Sale as an independent service, but may, in the future,
integrate Up4Sale and its users into the eBay service.
MARKETING
eBay's marketing strategy is to promote its brand and attract buyers and
sellers to the eBay service. To attract users to its site, eBay historically
has relied primarily on word-of-mouth and, to a lesser extent, on distribution
or sponsorship relationships with high traffic Web sites. Today, the Company
employs a variety of methods to promote its brand and attract potential buyers
and sellers. Currently, eBay utilizes strategic purchases of online
advertising to place advertisements in areas in which it believes it can reach
its target audience. The Company also engages in a number of marketing
activities in traditional media such as advertising in print media and at
trade shows and other events. eBay also advertises in a number of targeted
publications. The Company recently began a substantial national advertising
campaign, both in traditional media and online, that is designed to attract
new eBay users. This campaign will include print, radio and television
campaigns, strategic advertising and sponsorship placements on high-traffic
Web sites and advertising in other media. eBay also engages in a number of on-
site marketing programs, including offering a variety of eBay-branded
merchandise through the online "eBay Store."
OPERATIONS AND TECHNOLOGY
eBay has built a robust, scalable user interface and transaction processing
system that is based on internally-developed proprietary software. The
Company's system maintains data records for over 850,000 registered users,
over 500,000 simultaneous, open auctions, and over 2 million closed, but
viewable, auctions from the previous 30 days. During June 1998, the eBay
service served over 11 million page views per day, processed over 1.2 million
searches per day, received over 80,000 new listings per day and received over
280,000 bids per day. During that month, eBay also sent out more than 500,000
registration- and auction-related emails per day to users. The eBay system
also handles all other aspects of the auction process including notifying
users via email when they initially register for the service, they place a
successful bid, they are outbid, they place an item for sale and an auction
ends. Furthermore, the system sends daily status updates to any active sellers
and bidders regarding the state of their current auctions. The system
maintains user registration information, billing accounts, current auctions
and historical listings. All information is regularly archived to a data
warehouse.
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Complete listings of all items for sale are generated every hour. The system
updates a text-based search engine hourly with the titles and descriptions of
new items, as well as pricing and bidding updates for active items. Every time
an item is listed on the service, a listing enhancement option is selected by
a seller, or an auction closes with a bid in excess of the seller-specified
minimum bid, the system makes an entry into the seller's billing account. The
system sends electronic invoices to all sellers via email on a monthly basis.
For convenience, sellers may place a credit card account number on file with
eBay and their account balance is billed directly. In addition to these
features, the eBay service also supports a number of community bulletin board
and chat areas where users and eBay support personnel can interact.
The Company's system has been designed around industry standard
architectures and has been designed to reduce downtime in the event of outages
or catastrophic occurrences. The eBay service provides 24 hour a day, seven
day a week availability, subject to a short maintenance period for a few hours
during one night per week. eBay's system hardware is hosted at the Exodus
facility in Santa Clara, California, which provides redundant communications
lines and emergency power backup. The Company's system consists of Sun
database servers running Oracle relational database management systems and a
suite of Pentium-based Microsoft Internet servers running on the Windows NT
operating system. The Company's Internet servers also utilize VeriSign Inc.
digital certificates to help it conduct secure communications and
transactions. The Company uses Resonate Inc.'s load balancing systems and its
own redundant servers to provide for fault tolerance.
As of June 30, 1998, the Company had 23 personnel on its development staff.
The Company incurred $28,000, $831,000 and $1.5 million in product development
expenses in 1996, 1997 and the six months ended June 30, 1998, respectively.
The Company anticipates that it will continue to devote significant resources
to product development in the future as it adds new features and functionality
to the eBay service. The market in which the Company competes is characterized
by rapidly changing technology, evolving industry standards, frequent new
service and product announcements, introductions and enhancements and changing
customer demands. Accordingly, the Company's future success will depend on its
ability to adapt to rapidly changing technologies, to adapt its services to
evolving industry standards and to continually improve the performance,
features and reliability of its service in response to competitive service and
product offerings and evolving demands of the marketplace. The failure of the
Company to adapt to such changes would have a material adverse effect on the
Company's business, results of operations and financial condition. In
addition, the widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could require
substantial expenditures by the Company to modify or adapt its services or
infrastructure which could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Risk Factors--
Rapid Technological Change; Risks Associated with New Services, Features and
Functions."
COMPETITION
The market for person-to-person trading over the Internet is new, rapidly
evolving and intensely competitive, and the Company expects competition to
intensify further in the future. Barriers to entry are relatively low, and
current and new competitors can launch new sites at a relatively low cost
using commercially available software. The Company currently or potentially
competes with a number of other companies. The Company's direct competitors
include various online person-to-person auction services, including Onsale
Exchange, a division of Onsale; Auction Universe, a Times-Mirror Company;
Excite; and a number of other small services, including those that serve
specialty markets. The Company also competes indirectly with business-to-
consumer online auction services such as Onsale, First Auction, ZAuction and
Surplus Auction. The Company potentially faces competition from a number of
large online communities and services that have expertise in developing online
commerce and in facilitating online person-to-person interaction. Certain of
these potential competitors, including Amazon.com, AOL, Microsoft and Yahoo!
currently offer a variety of business-to-consumer trading
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services and classified ad services, and certain of these companies may
introduce person-to-person trading to their large user populations. Other
large companies with strong brand recognition and experience in online
commerce, such as Cendant Corporation, QVC and large newspaper or media
companies may also seek to compete in the online auction market. Competitive
pressures created by any one of these companies, or by the Company's
competitors collectively, could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company believes that the principal competitive factors in its market
are volume and selection of goods, population of buyers and sellers, community
cohesion and interaction, customer service, reliability of delivery and
payment by users, brand recognition, Web site convenience and accessibility,
price, quality of search tools and system reliability. Certain of the
Company's current and many of the Company's potential competitors have longer
operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing, technical and other resources than
the Company. In addition, 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 use of Internet and
other online services increases. Therefore, certain of the Company's
competitors may be able to devote greater resources to marketing and
promotional campaigns, adopt more aggressive pricing policies or may try to
attract traffic by offering services for free and devote substantially more
resources to Web site and systems development than the Company. Increased
competition may result in reduced operating margins, loss of market share and
diminished value in the Company's brand. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors. Further, as a strategic response to changes in the competitive
environment, the Company may, from time to time, make certain pricing, service
or marketing decisions or acquisitions that could have a material adverse
effect on its business, results of operations and financial condition. New
technologies and the expansion of existing technologies may increase the
competitive pressures on the Company by enabling the Company's competitors to
offer a lower-cost service. Certain Web-based applications that direct
Internet traffic to certain Web sites may channel users to trading services
that compete with the Company. Although the Company has established Internet
traffic arrangements with several large online services and search engine
companies, there can be no assurance that these arrangements will be renewed
on commercially reasonable terms or that they will otherwise continue to
result in increased users of the eBay service. In addition, companies that
control access to transactions through network access or Web browsers could
promote the Company's competitors or charge the Company substantial fees for
inclusion. Any and all of these events could have a material adverse effect on
the Company's business, results of operations and financial condition. See
"Risk Factors--Intense Competition."
INTELLECTUAL PROPERTY
The Company regards the protection of its copyrights, service marks,
trademarks, trade dress and trade secrets as critical to its future success
and relies on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect its
proprietary rights in products and services. The Company has entered into
confidentiality and invention assignment agreements with its employees and
contractors, and nondisclosure agreements with its suppliers and strategic
partners in order to limit access to and disclosure of its proprietary
information. There can be no assurance that these contractual arrangements or
the other steps taken by the Company to protect its intellectual property will
prove sufficient to prevent misappropriation of the Company's technology or to
deter independent third-party development of similar technologies. The Company
pursues the registration of its trademarks and service marks in the U.S. and
internationally. Effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which the Company's
services are made available online. The Company has licensed in the past, and
expects that it may license in the future, certain of its proprietary rights,
such as trademarks or copyrighted material, to third parties. While the
Company attempts to ensure that the quality of the
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eBay brand is maintained by such licensees, there can be no assurance that
such licensees will not take actions that might materially adversely affect
the value of the Company's proprietary rights or reputation, which could have
a material adverse effect on the Company's business, results of operations and
financial condition. The Company also relies on certain technologies that it
licenses from third parties, such as Oracle, Microsoft and Sun, the suppliers
of key database technology, the operating system and specific hardware
components for the eBay service. There can be no assurance that these third-
party technology licenses will continue to be available to the Company on
commercially reasonable terms. The loss of such technology could require the
Company to obtain substitute technology of lower quality or performance
standards or at greater cost, which could materially adversely affect the
Company's business, results of operations and financial condition.
To date, the Company has not been notified that its technologies infringe
the proprietary rights of third parties, but there can be no assurance that
third parties will not claim infringement by the Company with respect to past,
current or future technologies. The Company expects that participants in its
markets will be increasingly subject to infringement claims as the number of
services and competitors in the Company's industry segment grows. Any such
claim, whether meritorious or not, could be time-consuming, result in costly
litigation, cause service upgrade delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements might
not be available on terms acceptable to the Company or at all. As a result,
any such claim could have a material adverse effect upon the Company's
business, results of operations and financial condition. See "Risk Factors--
Protection and Enforcement of Intellectual Property Rights."
PRIVACY POLICY
The Company believes that issues relating to privacy and use of personal
information relating to Internet users are becoming increasingly important as
the Internet and its commercial use grow. The Company has adopted a detailed
privacy policy that outlines how eBay uses information concerning its users
and the extent to which other registered eBay users may have access to this
information. Users must acknowledge and agree to this policy when registering
for the eBay service. The Company does not sell or rent any personally
identifiable information about its users to any third party, however, the
Company does disclose information to sellers and winning bidders that contains
the seller's and winning bidder's name, email address and telephone number.
The Company also uses information about its users for internal purposes only
in order to improve marketing and promotional efforts, to analyze site usage
statistically, and to improve content, product offerings and site layout. eBay
is a member of the TRUSTe program, a non-profit independent organization which
audits Web sites' privacy statements and audits their adherence thereto.
GOVERNMENT REGULATION
The Company is not currently subject to direct federal, state or local
regulation, and laws or regulations applicable to access to or commerce on the
Internet, other than regulations applicable to businesses generally. However,
due to the increasing popularity and use of the Internet and other online
services, it is possible that a number of laws and regulations may be adopted
with respect to the Internet or other online services covering issues such as
user privacy, freedom of expression, pricing, content and quality of products
and services, taxation, advertising, intellectual property rights and
information security. Although sections of the CDA that, among other things,
proposed to impose criminal penalties on anyone distributing "indecent"
material to minors over the Internet, were held to be unconstitutional by the
U.S. Supreme Court, there can be no assurance that similar laws will not be
proposed and adopted. Certain members of Congress have recently discussed
proposing legislation that would regulate the distribution of "indecent"
material over the Internet in a manner that they believe would withstand
challenge on constitutional grounds. The nature of such similar legislation
and the manner in which it may be interpreted and enforced cannot be fully
determined and, therefore, legislation similar to the CDA could subject the
Company and/or its customers to potential liability,
50
<PAGE>
which in turn could have an adverse effect on the Company's business, results
of operations and financial condition. The adoption of any such laws or
regulations might also decrease the rate of growth of Internet use, which in
turn could decrease the demand for the eBay service or increase the cost of
doing business or in some other manner have a material adverse effect on the
Company's business, results of operations and financial condition. In
addition, applicability to the Internet of existing laws governing issues such
as property ownership, copyrights and other intellectual property issues,
taxation, libel, obscenity and personal privacy is uncertain. The vast
majority of such 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. In addition, numerous
states, including the State of California in which the Company's headquarters
are located, have regulations regarding the manner in which "auctions" may be
conducted and the liability of "auctioneers" in conducting such auctions. The
Company does not believe that such regulations, which were adopted prior to
the advent of the Internet, govern the operations of the Company's business
nor have any claims been filed by any state implying that the Company is
subject to such legislation. There can be no assurance, however, that a state
will not attempt to impose these regulations upon the Company in the future or
that such imposition will not have a material adverse effect on the Company's
business, results of operations and financial condition.
Several states have also proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has also initiated
action against at least one online service regarding the manner in which
personal information is collected from users and provided to third parties.
Changes to existing laws or the passage of new laws intended to address these
issues, including some recently proposed changes, could create uncertainty in
the marketplace that could reduce demand for the services of the Company or
increase the cost of doing business as a result of litigation costs or
increased service delivery costs, or could in some other manner have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, because the Company's services are
accessible worldwide and the Company facilitates sales of goods to users
worldwide, other jurisdictions may claim that the Company is required to
qualify to do business as a foreign corporation in a particular state or
foreign country. The Company is qualified to do business in two states in the
United States, and failure by the Company to qualify as a foreign corporation
in a jurisdiction where it is required to do so could subject the Company to
taxes and penalties for the failure to qualify and could result in the
inability of the Company to enforce contracts in such jurisdictions. Any such
new legislation or regulation, or the application of laws or regulations from
jurisdictions whose laws do not currently apply to the Company's business,
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Risk Factors--Governmental Regulation
and Legal Uncertainties."
By letter dated August 3, 1998, the Company was notified by a state attorney
general's office that it had received certain consumer complaints regarding
the Company's advertising procedures. These complaints revolved around whether
the Company was adequately informing its customers that it is merely a venue
for online person-to-person auctions and does not act as a guarantor regarding
the completion of such transactions on its site. Although the Company believes
that it has made adequate disclosures on this point, there can be no assurance
that this, or similar inquiries, will not ultimately result in the Company's
incurring fines or penalties that could have a material adverse effect on its
business or results of operations.
EMPLOYEES
As of June 30, 1998, the Company had 76 employees, including 11 in customer
support, 23 in product development, 19 in sales, marketing and business
development, and 23 in administration. The Company has never had a work
stoppage, and no employees are represented under collective
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<PAGE>
bargaining agreements. The Company considers its relations with its employees
to be good. The Company believes that its future success will depend in part
on its continued ability to attract, integrate, retain and motivate highly
qualified technical and managerial personnel, and upon the continued service
of its senior management and key technical personnel, none of whom is bound by
an employment agreement. Competition for qualified personnel in the Company's
industry and geographical location is intense, and there can be no assurance
that the Company will be successful in attracting, integrating, retaining and
motivating a sufficient number of qualified personnel to conduct its business
in the future. See "Risk Factors--Dependence on Key Personnel."
FACILITIES
The Company's principal administrative, marketing and product development
facilities are located in approximately 22,148 square feet of office space in
San Jose, California. Currently, 12,733 square feet of this facility are
occupied under a sub-lease expiring in December 1999, 2,978 square feet are
occupied under a lease expiring in October 1999 and 6,437 square feet are
occupied under a lease expiring in June 2001. Neither the sub-lease nor the
leases provide for a renewal option. As a result of the Company's recent
acquisition of Jump, the Company also has facilities in Cincinnati, Ohio that
are leased on a month to month basis. The Company intends to obtain additional
office space in 1999 to accommodate its anticipated growth. The Company
believes that this additional space will be available and that its current
facilities, together with this additional space, will be adequate to meet its
needs for the foreseeable future.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Pierre M. Omidyar....... 31 Founder, Chairman of the Board and a director
Margaret C. Whitman..... 41 President, Chief Executive Officer and a director
Gary F. Bengier......... 43 Chief Financial Officer and Vice President Operations
Jeffrey S. Skoll........ 33 Vice President Strategic Planning and Analysis
Brian T. Swette......... 43 Senior Vice President of Marketing
Steven P. Westly........ 41 Vice President Marketing and Business Development
Michael K. Wilson....... 41 Vice President Product Development and Site Operations
Scott D. Cook (1)....... 45 Director
Robert C. Kagle (1)(2).. 42 Director
Howard D. Schultz (2)... 44 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Pierre M. Omidyar founded the Company as a sole proprietorship in September
1995. He has been a director and Chairman of the Board since the Company's
incorporation in May 1996 and also served as its Chief Executive Officer,
Chief Financial Officer and President from inception to February 1998,
November 1997 and August 1996, respectively. Prior to founding eBay, Mr.
Omidyar was a developer services engineer at General Magic, a mobile
communication platform company from December 1994 to July 1996. Mr. Omidyar
co-founded Ink Development Corp. (later renamed eShop) in May 1991 and served
as a software engineer there from May 1991 to September 1994. Prior to co-
founding Ink, Mr. Omidyar was a developer for Claris, a subsidiary of Apple
Computer, and for other Macintosh-oriented software development companies. Mr.
Omidyar holds a B.S. degree in Computer Science from Tufts University.
Margaret C. Whitman has served as President and Chief Executive Officer of
the Company since February 1998 and a director since March 1998. From January
1997 to February 1998, she was General Manager of the Preschool Division of
Hasbro Inc., a toy company. From February 1995 to December 1997, Ms. Whitman
was employed by FTD, Inc. ("FTD"), a floral products company, most recently as
President, Chief Executive Officer and a director. From October 1992 to
February 1995, Ms. Whitman was employed by The Stride Rite Corporation, in
various capacities, including President, Stride Rite Children's Group and
Executive Vice President, Product Development, Marketing & Merchandising, Keds
Division. From May 1989 to October 1992, Ms. Whitman was employed by The Walt
Disney Company ("Disney"), an entertainment company, most recently as Senior
Vice President, Marketing, Disney Consumer Products. Before joining Disney,
Ms. Whitman was at Bain & Co., a consulting firm, most recently as a Vice
President. Ms. Whitman holds an A.B. degree in Economics from Princeton
University and an M.B.A. degree from the Harvard Business School.
Gary F. Bengier has served as Chief Financial Officer and Vice President
Operations of the Company since November 1997. From February 1997 to October
1997, Mr. Bengier was Vice President and Chief Financial Officer of VXtreme,
Inc. a developer of Internet video streaming products. Prior to that time, Mr.
Bengier was Corporate Controller at Compass Design Automation, a publisher of
electronic circuit design software, from February 1993 to February 1997. Mr.
Bengier has
53
<PAGE>
also held senior financial positions at Kenetech Corp., an energy services
company, and Qume Corp., a computer peripherals company, where he participated
in numerous debt and equity financing transactions. Prior to joining Qume in
1989, Mr. Bengier spent six years at Bio-Rad Laboratories and held varied
financial management roles. Mr. Bengier also spent several years as a
management consultant for Touche Ross & Co. Mr. Bengier holds a B.B.A. degree
in Computer Science and Operations Research from Kent State University and an
M.B.A. degree from the Harvard Business School.
Jeffrey S. Skoll has served as the Company's Vice President Strategic
Planning and Analysis since February 1998, its President from August 1996 to
February 1998 and as a director from December 1996 to March 1998. From July
1995 to July 1996, Mr. Skoll served as Channel Marketing Manager for Knight-
Ridder Information Inc., an online information services company and from
September 1993 to July 1995 was a student at the Stanford Graduate School of
Business. Prior to that time, Mr. Skoll was President of Skoll Engineering, a
systems consulting firm that he founded, from September 1987 to August 1993.
Mr. Skoll also co-founded Micros on the Move Ltd., a computer rentals company,
as an adjunct to Skoll Engineering in 1990. Mr. Skoll has a B.a.S.C. degree in
Electrical Engineering from the University of Toronto and an M.B.A. degree
from the Stanford Graduate School of Business.
Brian T. Swette has served as the Company's Senior Vice President of
Marketing since August 1998. From 1981 to June 1998, Mr. Swette was employed
by Pepsi-Cola Beverages, a global beverage company, in various capacities
including Executive Vice President and Chief Marketing Officer--Global
Beverages from March 1996 to June 1998, Executive Vice President Marketing--
North America from September 1994 to March 1996, Senior Vice President and
General Manager of New Business from February 1992 to September 1994, Senior
Vice President Marketing and Strategy--North America from 1990 to 1991, Vice
President North Latin America--General Manager from 1986 to 1989, Director of
Marketing Planning and Development--Pepsi International from 1984 to 1986 and
Country Manager--Brazil from 1981 to 1984. Before joining Pepsi-Cola
Beverages, Mr. Swette worked in various capacities for Proctor & Gamble from
1977 to 1981. Mr. Swette holds a B.S. degree in Economics from Arizona State
University.
Steven P. Westly has served as the Company's Vice President Marketing and
Business Development since August 1997. From July 1996 to August 1997, Mr.
Westly was Vice President, Business Development of WhoWhere?, an Internet
directory and Web-based email company. Prior to that time, Mr. Westly was
Director of Sales for Netcom, an Internet service provider, from August 1995
to July 1996 and was Deputy Director of Office of Economic Development, City
of San Jose, California, from April 1991 to August 1995. Before joining the
Office of Economic Development, Mr. Westly served as President of Codd and
Date International, a relational database consulting firm, from January 1990
to March 1992 and was the Managing Director of Bridgemere Capital, an
investment banking firm, from 1987 to 1990. Mr. Westly holds a B.A. degree in
History from Stanford University and an M.B.A. degree from the Stanford
Graduate School of Business.
Michael K. Wilson has served as the Company's Vice President Product
Development and Site Operations since January 1997. From October 1995 to
January 1997, Mr. Wilson was Vice President of WELL Engaged, L.L.C., a wholly-
owned subsidiary of The Well, a software company. Prior to that time, Mr.
Wilson was an engineer for daVinci Time and Space, a television company, from
February 1995 to October 1995, an engineer for eShop, a software company, from
February 1992 to August 1994 and a Director of Mainframe Engineering for
Neuron Data, an engineering company, from 1987 to 1991. Before joining Neuron
Data, Mr. Wilson worked in several capacities at Oracle Corporation from 1982
to 1987, Chevron from 1979 to 1983, and Macy's, a retailer, from 1975 to 1979.
Scott D. Cook has served as a director of the Company since June 1998. Mr.
Cook is the founder of Intuit Inc. ("Intuit") and has been a director of
Intuit, a financial software developer, since March
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<PAGE>
1984 and its Chairman of the Board since March 1993. From March 1984 to April
1994, Mr. Cook served as President and Chief Executive Officer of Intuit. Mr.
Cook also serves on the board of directors of Amazon.com and Broderbund
Software, Inc. Mr. Cook holds a Bachelor of Arts degree in Economics and
Mathematics from the University of Southern California and an M.B.A. degree
from the Harvard Business School.
Robert C. Kagle has served as a director of the Company since June 1997. Mr.
Kagle has been a Member of Benchmark Capital Management Co., L.L.C.
("Benchmark"), the General Partner of Benchmark Capital Partners, L.P. and
Benchmark Founders' Fund, L.P., since its founding in May 1995. Mr. Kagle also
has been a General Partner of Technology Venture Investors since January 1984.
Mr. Kagle holds a B.S. degree in Electrical and Mechanical Engineering from
the General Motors Institute (renamed Kettering University in January 1998)
and an M.B.A. degree from the Stanford Graduate School of Business.
Howard D. Schultz has served as a director of the Company since June 1998.
Mr. Schultz is the founder of Starbucks Corp ("Starbucks"), a provider of
gourmet coffee, and has been its Chairman of the Board and Chief Executive
Officer since its inception in 1985. From 1985 to June 1994, Mr. Schultz was
also President of Starbucks. Mr. Schultz was the director of Retail Operations
and Marketing for Starbucks Coffee Company, a predecessor to Starbucks from
September 1982 to December 1985 and was the Chairman of the Board, Chief
Executive Officer and President of Il Giornale Coffee Company, a predecessor
to Starbucks, from January 1986 to July 1987. Mr. Schultz is also one of two
founding members of Maveron LLC, a company providing advisory services to
consumer-based businesses, and is one of two members of a limited liability
company that serves as a general partner of its affiliated venture capital
fund, Maveron Equity Partners, L.P. (together, "Maveron").
The Company's Amended and Restated Certificate of Incorporation and Amended
and Restated Bylaws, which will become effective upon the completion of this
offering, provide that the Board of Directors (the "Board") will be divided
into three classes, Class I, Class II and Class III, with each class serving
staggered three-year terms. The Class I directors, initially Messrs. Cook and
Kagle, will stand for reelection or election at the 1999 annual meeting of
stockholders. The Class II directors, initially Messrs. Omidyar and Schultz,
will stand for reelection or election at the 2000 annual meeting of
stockholders and the Class III director, initially Ms. Whitman, will stand for
election at the 2001 annual meeting of stockholders.
BOARD COMMITTEES
The Audit Committee of the Board consists of Robert C. Kagle and Scott D.
Cook. The Audit Committee reviews the Company's financial statements and
accounting practices, makes recommendations to the Board regarding the
selection of independent auditors and reviews the results and scope of the
audit and other services provided by the Company's independent auditors. The
Compensation Committee of the Board consists of Robert C. Kagle and Howard D.
Schultz. The Compensation Committee makes recommendations to the Board
concerning salaries and incentive compensation for the Company's officers and
employees and administers the Company's employee benefit plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee of the Board was at any
time since the formation of the Company an officer or employee of the Company.
No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving on the Company's Board or Compensation Committee.
55
<PAGE>
DIRECTOR COMPENSATION
Directors of the Company do not receive cash compensation for their services
as directors but are reimbursed for their reasonable expenses for attending
Board and Board committee meetings. In June 1998, Mr. Cook and Mr. Schultz
were each granted an option to purchase 150,000 shares of Common Stock of the
Company at an exercise price of $9.33 per share in connection with their
service on the Board. Such options were immediately exercisable. Prior to
exercise, Mr. Schultz assigned the beneficial interest in his option to
acquire 112,500 of these shares to his affiliate, Maveron (see Mr. Schultz's
biography above). Mr. Schultz thereafter exercised his option to acquire
37,500 shares in exchange for a full recourse fifty-five month promissory note
for $350,000 at an interest rate of 8% per year. Interest on the note is
payable annually and the principal is due on December 1, 2002. In addition,
Mr. Schultz exercised, on behalf of Maveron, the assigned portion of the
option to acquire the remaining 112,500 shares in exchange for $1.05 million
in cash. The shares of Common Stock received are subject to the Company's
right of repurchase at termination of service at a repurchase price equal to
the exercise price of the option that lapses as to 25% of the shares on the
first anniversary of the date of grant and 2.08% each full succeeding month
thereafter. Also in June 1998, each of Mr. Cook and Maveron purchased an
additional 107,250 shares of Common Stock at a price of $9.33 per share for
cash. The Company subsequently concluded that the fair market value of the
Company's Common Stock on the date that the Company agreed to make the sale
was $11.33 and consequently recognized $2.00 per share, or an aggregate
$429,000, as general and administrative expense in the six months ended June
30, 1998.
In July 1998, the Board adopted, and in August 1998 the Company's
stockholders approved, the Directors Plan and reserved a total of 200,000
shares of the Company's Common Stock for issuance thereunder. Members of the
Board who are not employees of the Company, or any parent, subsidiary or
affiliate of the Company, are eligible to participate in the Directors Plan.
The option grants under the Directors Plan are automatic and nondiscretionary,
and the exercise price of the options must be 100% of the fair market value of
the Common Stock on the date of grant. Each eligible director who first
becomes a member of the Board on or after the effective date of the
Registration Statement of which this Prospectus forms a part (the "Effective
Date") will initially be granted an option to purchase 30,000 shares (an
"Initial Grant") on the date such director first becomes a director.
Immediately following each Annual Meeting of the Company, each eligible
director will automatically be granted an additional option to purchase 5,000
shares if such director has served continuously as a member of the Board since
the date of such director's Initial Grant or, if such director was ineligible
to receive an Initial Grant, since the Effective Date. The term of such
options is ten years, provided that they will terminate seven months following
the date on which the director ceases to be a director of or a consultant to
the Company (12 months if the termination is due to death or disability). All
options granted under the Directors Plan will vest as to 25% of the shares on
the first anniversary of the date of grant and as to 2.08% of the shares each
month thereafter, provided the optionee continues as a member of the Board or
as a consultant to the Company.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid for services rendered to the Company in all capacities by the Company's
Chief Executive Officer (the "Named Executive Officer") during 1997. No other
executive officer who held office at December 31, 1997 received total annual
compensation in excess of $100,000 in 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
---------------------------- AND
OTHER ANNUAL OTHER
NAME AND PRINCIPAL POSITIONS SALARY(1) BONUS COMPENSATION COMPENSATION
- ---------------------------- --------- ----- ------------ ------------
<S> <C> <C> <C> <C>
Pierre Omidyar(2).................... $65,446 -- -- --
Founder and Chief Executive Officer
</TABLE>
- --------
(1) Ms. Whitman and Messrs. Swette, Bengier, Westly and Wilson, currently the
executive officers of the Company with the highest annual rates of
compensation, are compensated at annual salary rates of $175,000,
$150,000, $125,000, $120,000 and $120,000, respectively.
(2) Mr. Omidyar was the Chief Executive Officer of the Company at December 31,
1997. In February 1998, Margaret C. Whitman was hired as the Company's
Chief Executive Officer.
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<PAGE>
The Named Executive Officer has never been granted options by the Company.
The following executive officers received grants of options during the period
from January 1, 1997 to June 30, 1998 pursuant to the 1996 Plan or the 1997
Plan.
OPTION GRANTS FROM JANUARY 1, 1997 TO JUNE 30, 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENTAGE OF VALUE AT ASSUMED
NUMBER OF TOTAL OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES FROM FOR OPTION TERM(3)
OPTIONS 1/1/97 TO EXERCISE PRICE EXPIRATION -----------------------
NAME GRANTED(1) 6/30/98(2) PER SHARE DATE 5% 10%
---- ---------- -------------- -------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Margaret C. Whitman..... 2,400,000 31.7% $0.20 1/20/2008 $58,160,203 $92,894,722
Gary F. Bengier......... 525,000 6.9 0.10 12/3/2007 12,775,041 20,373,220
Steven P. Westly........ 792,000 10.5 0.10 10/30/2007 19,272,063 30,734,458
9,000 0.1 0.20 1/20/2008 218,100 348,355
12,000 0.2 0.67 3/4/2008 285,201 458,874
9,000 0.1 2.00 4/13/2008 201,901 332,155
6,000 0.1 9.33 6/8/2008 90,600 177,437
Michael K. Wilson....... 600,000 7.9 0.02 1/13/2007 14,650,047 23,331,680
300,000 4.0 0.10 10/30/2007 7,300,024 11,641,840
</TABLE>
- -------
(1) Options granted in 1997 and 1998 were granted under either the 1996 Plan
or the 1997 Plan. All options granted were immediately exercisable and
were either incentive stock options or nonqualified stock options that
were granted at fair market value as determined by the Board on the date
of grant and generally vest over four years at the rate of 25% of the
shares subject to the option on the first anniversary of the vesting base
date specified in the Stock Option Agreement if the option was granted
under the 1996 Plan or the first vesting date specified in the Stock
Option Agreement if the option was granted under the 1997 Plan and 2.08%
per month thereafter. Upon certain changes in control of the Company, this
vesting schedule will accelerate as to all shares that are then unvested.
Unvested shares are subject to the Company's right of repurchase upon
termination of employment. Options expire ten years from the date of
grant. In determining the fair market value of the Company's Common Stock
on each grant date, the Board considered, among other things, the price of
arms'-length sales of the Company's Common Stock and Series B Mandatorily
Redeemable Convertible Preferred Stock, the Company's absolute and
relative levels of revenues and other operating results, the state of the
Company's auction Web site development, the entry into the Company's
market of certain potentially significant competitors and the appreciation
of stock values of a number of generally comparable Internet companies.
See "--Employee Benefit Plans" and "--Compensation Arrangements" for a
description of the material terms of these options.
(2) Based on granted options to purchase 7,564,500 shares of Common Stock of
the Company during the period from January 1, 1997 to June 30, 1998.
(3) Potential realizable values are computed by (i) multiplying the number of
shares of Common Stock subject to a given option by an assumed initial
public offering price of $15.00 per share, (ii) assuming that the
aggregate stock value derived from that calculation compounds at the
annual 5% or 10% rate shown in the table for the entire ten-year term of
the option and (iii) subtracting from that result the aggregate option
exercise price. The 5% and 10% assumed annual rates of stock price
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
future Common Stock prices.
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<PAGE>
In August 1998, the Company granted Brian Swette an option to purchase
600,000 shares of Common Stock with an exercise price of $15.00 per share.
The following table sets forth the number of shares acquired and the value
realized upon exercise of stock options during the period from January 1, 1997
to June 30, 1998 and the number of shares of Common Stock subject to
exercisable and unexercisable stock options held as of June 30, 1998 by each
of the executive officers of the Company described in footnote (1) to the
previous table. Also reported are values of "in-the-money" options, which
represent the positive spread between the respective exercise prices of
outstanding stock options and an assumed initial public offering price of
$15.00 per share.
AGGREGATE OPTION EXERCISES FROM JANUARY 1, 1997 TO JUNE 30, 1998 AND VALUES AT
JUNE 30, 1998
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT JUNE 30, 1998 JUNE 30, 1998
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE(1) REALIZED(2) EXERCISABLE(1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Margaret C. Whitman..... 2,400,000(3) $35,520,000 -- -- -- --
Gary F. Bengier......... 525,000 7,822,500 -- -- -- --
Steven P. Westly........ 828,000 12,257,000 -- -- -- --
Michael K. Wilson....... 600,000(4) 8,990,000 300,000 -- $4,470,000(5) --
</TABLE>
- -------
(1) Except as otherwise noted, all of the shares acquired were unvested as of
June 30, 1998 and subject to the Company's right of repurchase upon
termination of employment at a price equal to the exercise price of the
option pursuant to which the shares were acquired.
(2) Based on an assumed initial public offering price per share of $15.00,
minus the per share exercise price, multiplied by the number of shares
issued upon exercise of the option.
(3) As of June 30, 1998, 30,000 shares of the 2,400,000 shares acquired were
vested and 2,370,000 shares were unvested and subject to the Company's
right of repurchase upon termination of employment.
(4) As of June 30, 1998, 212,499 shares of the 600,000 shares acquired were
vested and 387,501 shares were unvested and subject to the Company's right
of repurchase upon termination of employment. All of the 300,000 shares
underlying the immediately exercisable option are unvested as of June 30,
1998 and are subject to the Company's right of repurchase upon termination
of Mr. Wilson's employment.
(5) Based on a value of $15.00, the assumed initial public offering price per
share, minus the per share exercise price, multiplied by the number of
shares issuable upon exercise of the option.
EMPLOYEE BENEFIT PLANS
1996 STOCK OPTION PLAN. In December 1996, the Board adopted, and in December
1997 the Company's stockholders approved, the 1996 Plan. Originally, 5,100,000
shares of Common Stock were reserved for issuance under the 1996 Plan, which
number was decreased to 2,100,000 in June 1997 and further decreased to
1,506,000 in December 1997. Shares covered by any option granted under the
1996 Plan that expires unexercised become available again for grant under the
1996 Plan. As of June 30, 1998, options to purchase 1,473,375 shares had been
exercised and options to purchase 32,625 of Common Stock were outstanding with
exercise prices of $0.03 and no shares were available for future grants.
Following the closing of this offering, no additional options will be granted
under the 1996 Plan. Options granted under the 1996 Plan are subject to terms
substantially similar to those described below with respect to options to be
granted under the 1998 Equity Incentive Plan. The 1996 Plan does not provide
for issuance of restricted stock or stock bonus awards.
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<PAGE>
1997 STOCK OPTION PLAN. In June 1997, the Board adopted, and in December
1997 the Company's stockholders approved, the 1997 Plan. Originally, 6,000,000
shares of Common Stock were reserved for issuance under the 1997 Plan, which
number was increased to 6,594,000 in December 1997. As of June 30, 1998,
options to purchase 4,868,961 shares of Common Stock had been exercised (of
which 382,806 had been repurchased from terminated employees), options to
purchase 888,534 shares of Common Stock were outstanding under the 1997 Plan
with a weighted average exercise price of $2.66 and 961,500 shares were
available for future grants. Following the closing of this offering, no
additional options will be granted under the 1997 Plan. Options granted under
the 1997 Plan are subject to terms substantially similar to those described
below with respect to options to be granted under the 1998 Equity Incentive
Plan. The 1997 Plan does not provide for issuance of restricted stock or stock
bonus awards.
1998 EQUITY INCENTIVE PLAN. In July 1998, the Board adopted, and in August
1998 the Company's stockholders approved, the Equity Incentive Plan and
reserved 4,500,000 shares for issuance thereunder. The Equity Incentive Plan
will become effective on the Effective Date and will serve as the successor to
the 1996 Plan and the 1997 Plan (the "Prior Plans"). Options granted under the
Prior Plans before their termination will remain outstanding according to
their terms, but no further options will be granted under the Prior Plans
after the Effective Date. Shares that: (a) are subject to issuance upon
exercise of an option granted under the Equity Incentive Plan that cease to be
subject to such option for any reason other than exercise of such option; (b)
have been issued pursuant to the exercise of an option granted under the
Equity Incentive Plan that are subsequently forfeited or repurchased by the
Company at the original purchase price; (c) are subject to an award granted
pursuant to a restricted stock purchase agreement under the Equity Incentive
Plan that are subsequently forfeited or repurchased by the Company at the
original issue price; or (d) are subject to stock bonuses granted under the
Equity Incentive Plan that otherwise terminate without shares being issued,
will again be available for grant and issuance under the Equity Incentive
Plan. In addition, any shares reserved for issuance under the Prior Plans but
not issued or subject to outstanding options on the Effective Date and any
shares issued under the Prior Plans that are forfeited or repurchased by the
Company or that are issuable upon exercise of options granted pursuant to the
Prior Plans that expire or become unexercisable for any reason without having
been exercised in full, will no longer be available for grant and issuance
under the Prior Plans but will be available for grant and issuance under the
Equity Incentive Plan. The Equity Incentive Plan will terminate in July 2008,
unless sooner terminated in accordance with the terms of the Equity Incentive
Plan. The Equity Incentive Plan authorizes the award of options, restricted
stock awards and stock bonuses (each an "Award"). No person will be eligible
to receive more than 1,000,000 shares in any calendar year pursuant to Awards
under the Equity Incentive Plan other than a new employee of the Company who
will be eligible to receive no more than 2,000,000 shares in the calendar year
in which such employee commences employment. The Equity Incentive Plan is
administered by the Compensation Committee, which currently consists of
Messrs. Kagel and Schultz, both of whom are "non-employee directors" under
applicable federal securities laws and "outside directors" as defined under
applicable federal tax laws. The Compensation Committee has the authority to
construe and interpret the Equity Incentive Plan and any agreement made
thereunder, grant Awards and make all other determinations necessary or
advisable for the administration of the Equity Incentive Plan.
The Equity Incentive Plan provides for the grant of both incentive stock
options ("ISOs") that qualify under Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), and nonqualified stock options ("NQSOs").
ISOs may be granted only to employees of the Company or of a parent or
subsidiary of the Company. NQSOs (and all other Awards other than ISOs) may be
granted to employees, officers, directors, consultants, independent
contractors and advisors of the Company or any parent or subsidiary of the
Company, provided such consultants, independent contractors and advisors
render bona fide services not in connection with the offer and sale of
securities in a capital-raising transaction ("Eligible Service Providers").
The exercise price of ISOs must be at least equal to
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the fair market value of the Company's Common Stock on the date of grant. (The
exercise price of ISOs granted to 10% stockholders must be at least equal to
110% of that value.) The exercise price of NQSOs must be at least equal to 85%
of the fair market value of the Company's Common Stock on the date of grant.
The maximum term of options granted under the Equity Incentive Plan is ten
years. Awards granted under the Equity Incentive Plan may not be transferred
in any manner other than by will or by the laws of descent and distribution
and may be exercised during the lifetime of the optionee only by the optionee
(unless otherwise determined by the Compensation Committee and set forth in
the Award agreement with respect to Awards that are not ISOs). Options granted
under the Equity Incentive Plan generally expire three months after the
termination of the optionee's service to the Company or a parent or subsidiary
of the Company, except in the case of death or disability, in which case the
options generally may be exercised up to 12 months following the date of death
or termination of service. Options will generally terminate immediately upon
termination for cause. In the event of the Company's dissolution or
liquidation or a "change in control" transaction, outstanding Awards may be
assumed or substituted by the successor corporation (if any). In the
discretion of the Compensation Committee the vesting of such Awards may
accelerate upon such transaction.
1998 EMPLOYEE STOCK PURCHASE PLAN. In July 1998, the Board adopted, and in
August 1998 the Company's stockholders approved, the Purchase Plan and
reserved a total of 300,000 shares of the Company's Common Stock for issuance
thereunder. On each January 1, the aggregate number of shares reserved for
issuance under the Purchase Plan will be increased automatically by the number
of shares purchased under the Purchase Plan in the preceding calendar year.
The aggregate number of shares reserved for issuance under the Purchase Plan
will not exceed 1,500,000 shares over the term of the Purchase Plan. The
Purchase Plan will be administered by the Compensation Committee of the Board.
The Compensation Committee will have the authority to construe and interpret
the Purchase Plan, and its decision in such capacity will be final and
binding. The Purchase Plan will become effective on the first business day on
which price quotations for the Company's Common Stock are available on the
Nasdaq National Market. Employees generally will be eligible to participate in
the Purchase Plan if they are customarily employed by the Company (or its
parent or any subsidiaries that the Company designates) for more than 20 hours
per week and more than five months in a calendar year and are not (and would
not become as a result of being granted a right to participate in the Purchase
Plan) 5% stockholders of the Company (or its designated parent or
subsidiaries). Under the Purchase Plan, eligible employees will be permitted
to acquire shares of the Company's Common Stock through payroll deductions.
Eligible employees may select a rate of payroll deduction between 2% and 10%
of their W-2 cash compensation and are subject to certain maximum purchase
limitations described in the Purchase Plan. A participant may change the rate
of payroll deductions or withdraw from an Offering Period by notifying the
Company in writing. Participation in the Purchase Plan will end automatically
upon termination of employment for any reason. Each Offering Period under the
Purchase Plan will be for two years and consist of four six-month Purchase
Periods. The first Offering Period is expected to begin on the first business
day on which price quotations for the Company's Common Stock are available on
the Nasdaq National Market. Depending on the Effective Date, the first
Purchase Period may be more or less than six months long. Offering Periods and
Purchase Periods thereafter will begin on May 1 and November 1. The purchase
price for the Company's Common Stock purchased under the Purchase Plan will be
85% of the lesser of the fair market value of the Company's Common Stock on
the first day of the applicable Offering Period or the last day of each
Purchase Period. The Compensation Committee will have the power to change the
duration of Offering Periods without stockholder approval, if such change is
announced at least 15 days prior to the beginning of the Offering Period to be
affected. The Purchase Plan is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Code. Rights granted under the
Purchase Plan will not be transferable by a participant other than by will or
the laws of descent and distribution. The Purchase Plan provides that, in the
event of the proposed dissolution or liquidation of the Company, each Offering
Period that commenced prior to the closing of such proposed transaction will
continue for the duration of such Offering Period, provided that the
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Compensation Committee may fix a different date for termination of the
Purchase Plan. The Purchase Plan will terminate in July 2008, unless earlier
terminated pursuant to the terms of the Purchase Plan. The Board will have the
authority to amend, terminate or extend the term of the Purchase Plan, except
that no such action may adversely affect any outstanding options previously
granted under the Purchase Plan and stockholder approval is required to
increase the number of shares that may be issued or to change the terms of
eligibility under the Purchase Plan. Notwithstanding the foregoing, the Board
may make such amendments to the Purchase Plan as the Board determines to be
advisable if the financial accounting treatment for the Purchase Plan is
different than the financial accounting treatment in effect on the date the
Purchase Plan was adopted by the Board.
401(K) PLAN. The Company sponsors the eBay, Inc. 401(k) Savings Plan (the
"401(k) Plan"), a defined contribution plan intended to qualify under Section
401 of the Internal Revenue Code of 1986, as amended. All employees who are 21
years old are eligible to participate and may enter the 401(k) Plan as of the
first day of any month ("Participants"). Participants may make pre-tax
contributions to the 401(k) Plan of up to 25% of their eligible earnings,
subject to a statutorily prescribed annual limit. The Company may make
matching contributions on a discretionary basis to the 401(k) Plan. Each
Participant is fully vested in his or her contributions, any Company matching
contributions, and the investment earnings thereon. Contributions by the
participants or the Company to the 401(k) Plan, and the income earned on such
contributions, are generally not taxable to the participants until withdrawn.
Contributions by the Company, if any, are generally deductible by the Company
when made. Participant and Company contributions are held in trust as required
by law. Individual Participants may direct the trustee to invest their
accounts in authorized investment alternatives. The Company had made no
matching contributions to the 401(k) Plan as of June 30, 1998.
COMPENSATION ARRANGEMENTS
Ms. Whitman's employment offer letter of January 16, 1998 provides for an
initial annual base salary of $175,000 and an initial bonus of up to $100,000.
It also provides that, in the event Ms. Whitman's employment is terminated for
other than cause, she will continue to receive her salary compensation for six
months and, if at the end of such period Ms. Whitman remains unemployed, she
will be eligible to receive additional salary compensation for the lesser of
six months or until she becomes employed. Ms. Whitman was also granted an
immediately exercisable option to purchase 2,400,000 shares of Common Stock.
As described under "Certain Transactions," Ms. Whitman exercised this option.
The shares issued to her remain subject to the Company's right to repurchase
"unvested" shares upon the termination of her employment. This right to
repurchase has lapsed with respect to 30,000 shares, will lapse with respect
to 570,000 shares on February 14, 1999 and will lapse with respect to 50,000
shares at the end of each month thereafter; provided, however, that if
Ms. Whitman's employment with the Company is terminated by the Company without
cause prior to February 14, 1999, such repurchase rights will lapse at a rate
of 50,000 shares at the end of each full month following February 14, 1998.
Mr. Bengier's employment offer letter of September 15, 1997 provides for an
initial annual base salary of $125,000. Mr. Bengier was also granted an
immediately exercisable option to purchase 525,000 shares of Common Stock,
which he exercised in full in January 1998. The shares are subject to the
Company's right to repurchase unvested shares upon termination of employment,
which right lapses as to 131,250 shares on the first anniversary of his
employment and 10,937 shares at the end of each month thereafter. Upon the
occurrence of certain change-in-control transactions during Mr. Bengier's
first year of employment, such repurchase rights will lapse at the rate of one
forty-eighth of the total shares originally subject to the option at the end
of each full month following the date of grant.
Mr. Westly's employment offer letter of August 8, 1997 provides for an
initial annual base salary of $120,000 and a $25,000 signing bonus. Mr. Westly
was also granted immediately exercisable
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options to purchase 828,000 shares (792,000 shares on employment and an
additional 36,000 shares during his first year of employment) of Common Stock
which he exercised in full in January, May and June 1998 subject to the
Company's right to repurchase unvested shares upon termination of employment,
which lapses at a rate of 25% of the shares originally subject to the option
on the first anniversary of his employment or the date of grant, depending on
the option, and one forty-eighth of the shares at the end of each month
thereafter; provided, however, that in the event Mr. Westly's employment is
terminated by the Company without cause during his first year of employment
then one forty-eighth of the total shares subject to the option will vest at
the end of each full month following the date of his employment or the date of
grant. During his first year of employment, Mr. Westly received an additional
$30,000 bonus.
Mr. Wilson's employment offer letter of December 9, 1996 provides for an
initial annual base salary of $78,000. Mr. Wilson was also granted an
immediately exercisable option to purchase 600,000 shares of Common Stock
which he exercised in full in January 1998 subject to the Company's right to
repurchase unvested shares upon termination of employment, which lapses as to
150,000 shares on the first anniversary of his employment and 12,500 shares at
the end of each month thereafter. During his first year of employment, Mr.
Wilson received an additional option to purchase 300,000 shares of Common
Stock.
Mr. Skoll's employment offer letter of October 16, 1996 provided for an
initial annual salary of $30,000 and a 30-day right to purchase the 10,200,000
shares of Common Stock that he currently owns subject to the Company's right
of repurchase through June 30, 2000. The right of repurchase lapsed with
respect to seven forty-eighths of the total shares purchased on February 1,
1997 and with respect to an additional one forty-eighth of the shares on the
first day of each month thereafter. In the event of an acquisition of the
Company or other similar transaction, the right of repurchase will expire with
respect to all of the shares subject to the Company's right of repurchase.
Mr. Swette's employment offer letter of August 14, 1998 provides for an
initial annual base salary of $150,000 and a $25,000 signing bonus. Mr. Swette
was also granted an option to purchase 600,000 shares of Common Stock outside
of the 1997 Plan at an exercise price of $15 per share. These options vest
with respect to 150,000 shares in August 1999 and with respect to 12,500
shares at the end of each month thereafter. In the event Mr. Swette's
employment is terminated without cause prior to August 14, 1999, such option
will become vested at a rate of 12,500 per month through the termination date.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF
LIABILITY
Section 145 of the Delaware General Corporation Law ("DGCL") authorizes a
court to award, or a corporation's board of directors to grant indemnity to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act.
As permitted by the DGCL, the Company's Amended and Restated Certificate of
Incorporation, which will become effective upon the closing of this offering,
includes a provision that eliminates the personal liability of its directors
for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) under
section 174 of the DGCL (regarding unlawful dividends and stock purchases) or
(iv) for any transaction from which the director derived an improper personal
benefit.
As permitted by the DGCL, the Company's Amended and Restated Bylaws, which
will become effective upon the closing of this offering, provide that (i) the
Company is required to indemnify its directors and officers to the fullest
extent permitted by the Delaware General Corporation Law, subject to certain
very limited exceptions, (ii) the Company is required to indemnify its other
employees to the extent that it indemnifies its officers and directors, unless
otherwise required by law, its Amended and
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Restated Certificate of Incorporation, its Amendment and Restated Bylaws or
agreements, (iii) the Company is required to advance expenses, as incurred, to
its directors and officers in connection with a legal proceeding to the
fullest extent permitted by the Delaware General Corporation Law, subject to
certain very limited exceptions, and (iv) the rights conferred in the Amended
and Restated Bylaws are not exclusive.
Prior to the completion of this offering, the Company intends to enter into
Indemnity Agreements with each of its current directors and officers to give
such directors and officers additional contractual assurances regarding the
scope of the indemnification set forth in the Company's Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws and to provide
additional procedural protections. At present, there is no pending litigation
or proceeding involving a director, officer or employee of the Company
regarding which indemnification is sought, nor is the Company aware of any
threatened litigation that may result in claims for indemnification.
The Registrant, with approval by the Registrant's Board of Directors,
expects to obtain directors' and officers' liability insurance.
CERTAIN RELATED PARTY TRANSACTIONS
Since inception (May 13, 1996), there has not been, nor is there currently
proposed, any transaction or series of similar transactions to which the
Company was or is to be a party in which the amount involved exceeds $60,000
and in which any director, executive officer or holder of more than 5% of the
Common Stock of the Company had or will have a direct or indirect interest
other than (i) compensation arrangements, which are described where required
under "Management," and (ii) the transactions described below.
For clarity of presentation, share numbers and per share prices for all
transactions described below are adjusted for a three-for-one stock split to
be effected prior to the effective date of the Registration Statement of which
this Prospectus forms a part since, although not actually split, each share of
Preferred Stock will automatically convert into three shares of Common Stock
upon the closing of this offering.
COMMON STOCK AT FORMATION. Pursuant to a Stock Purchase and Restriction
Agreement dated May 20, 1996, the Company sold an aggregate of 14,700,000
shares of Common Stock to Pierre M. Omidyar, the Company's founder. Mr.
Omidyar has served as a director of the Company since its inception and was
the Company's Chief Executive Officer from its inception until February 1998.
In consideration for the shares issued, Mr. Omidyar transferred to the Company
cash of $10,167 and accounts receivable valued at $4,095. Of the 14,700,000
shares, 4,500,000 were subsequently exchanged for shares of the Company's
Series A Preferred Stock as discussed below.
All of Mr. Omidyar's remaining 10,200,000 shares of Common Stock are subject
to a Stock Restriction Agreement dated December 12, 1996 between Mr. Omidyar
and the Company (the "Stock Restriction Agreement") and a Stock Restriction
and Co-Sale Agreement dated as of June 20, 1997 among Benchmark Capital
Partners, L.P. and Benchmark Founders' Fund, L.P. (collectively, the
"Investors"), Pierre Omidyar and Jeffrey Skoll (collectively, the "Founders")
and the Company (the "Co-Sale Agreement"). Under the Stock Restriction
Agreement, all of the 10,200,000 shares of Common Stock are subject to the
Company's right to repurchase unvested shares if Mr. Omidyar's employment
terminates. The 10,200,000 shares vested as to 3,612,501 shares on February 1,
1997 and vest as to 212,499.99 shares on the first day of each month
thereafter through the close of business on September 1, 1999, at which time
all of the shares will be vested. The vesting of shares accelerates such that
any unvested shares become fully vested in the event of a sale of the Company,
which includes a sale, lease or disposition of substantially all of the
Company's assets, any merger or
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consolidation of the Company into another entity, or any other corporate
reorganization where the stockholders immediately prior to such event do not
retain at least 50% of the voting power of and interest in the successor
entity or any transaction or series of related transactions in which more than
50% of the Company's voting power is transferred ("Sale of the Company"). In
addition to the foregoing, under the Co-Sale Agreement, the vesting of shares
will accelerate upon termination of employment, such that immediately prior to
such termination an additional 1,275,000 shares will become vested and not
subject to repurchase by the Company. See "Principal and Selling
Stockholders."
SERIES A PREFERRED STOCK AND RECAPITALIZATION. In December 1996, the Company
created a class of Preferred Stock and designated 4,500,000 shares of such
Preferred Stock as Series A Preferred Stock, all of which stock the Company
issued to Mr. Omidyar in exchange for 4,500,000 shares of his Common Stock. In
June 1997, pursuant to an Anti-Dilution Agreement dated December 30, 1996
between the Company, Pierre Omidyar and Jeffrey Skoll, Mr. Omidyar's Series A
Preferred Stock holdings were increased to 5,029,425 shares.
In December 1996, pursuant to a Restricted Stock Purchase Agreement dated
December 12, 1996 between the Company and Mr. Skoll ("Restricted Stock
Agreement"), the Company sold 10,200,000 shares of its Common Stock to Mr.
Skoll at a purchase price of $0.0067 per share or an aggregate of $68,000,
which price was determined by the Board to be the fair market value of the
Common Stock. Mr. Skoll, the first full-time employee of the Company and its
President from August 1996 to February 1998, has served as the Company's Vice
President Strategic Planning and Analysis since February 1998. Mr. Skoll
acquired the shares of Common Stock with the proceeds from a full recourse
loan governed by a Loan and Pledge Agreement between Mr. Skoll and the
Company. Under such agreement, Mr. Skoll must repay the entire principal of
the loan by December 31, 2002 and pay interest, which accrues at the rate of
6% per year, simple interest, on the first anniversary of the exercise date
and on each subsequent anniversary until all principal and accrued interest
are paid in full.
All of Mr. Skoll's 10,200,000 shares of Common Stock are subject to the
Restricted Stock Agreement. Under the Restricted Stock Agreement, Mr. Skoll's
shares of Common Stock are subject to the Company's right to repurchase
unvested shares if his employment terminates. The 10,200,000 shares vested as
to 1,487,499 shares on February 1, 1997 and vest as to 212,499.99 shares on
the first day of each month thereafter through the close of business on June
30, 2000, at which time all of the shares will be vested. The vesting of
shares accelerates such that any unvested shares become fully vested in the
event of a Sale of the Company. In addition to the foregoing, under the Co-
Sale Agreement, the vesting of shares will accelerate upon termination of
employment, such that immediately prior to such termination an additional
1,275,000 shares will become vested and not subject to repurchase by the
Company. See "Principal and Selling Stockholders."
SERIES B PREFERRED STOCK. In June 1997, the Company sold an aggregate of
2,632,122 shares and 367,878 shares of Series B Preferred Stock at a purchase
price of $1.00 per share and issued warrants to purchase 1,052,850 and 147,150
shares of Series B Preferred Stock at an exercise price of $1.67 per share to
Benchmark Capital Partners, L.P. and Benchmark Founders' Fund, L.P.,
respectively, for an aggregate purchase price of $3,000,000, which amount was
paid in cash. Benchmark Capital Partners, L.P. and Benchmark Founders' Fund,
L.P. each exercised all of their warrants to purchase Series B Preferred Stock
in May 1998 for an aggregate purchase price of $2,000,000, which amount was
paid in cash. See "Principal and Selling Stockholders."
INVESTOR RIGHTS AGREEMENT. In June 1997, the Company, the Investors and the
Founders entered into an Investor Rights Agreement under which the Investors
and Founders have certain registration rights with respect to their shares of
Common Stock following this offering. See "Description of Capital Stock--
Registration Rights."
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OFFICER LOANS. In December 1996, as discussed above, Mr. Skoll purchased
10,200,000 shares of the Company's Common Stock for $68,000 under the terms of
a Loan and Pledge Agreement effective as of December 1996 between Mr. Skoll
and the Company.
From January 1998 through June 1998, in connection with the exercise of
stock options granted under the 1996 Plan and the 1997 Plan, the Company
permitted Margaret C. Whitman, the Company's President and Chief Executive
Officer since February 1998, to purchase 2,400,000 shares of Common Stock in
exchange for a $60,000 cash payment, a $180,000 Secured Full Recourse
Promissory Note dated February 3, 1998 and a $240,000 Secured Non-Recourse
Promissory Note dated February 3, 1998; Steven P. Westly, the Company's Vice
President Marketing and Business Development since August 1997, to purchase
828,000 shares of Common Stock in exchange for cash payments totaling $17,920
and Secured Full Recourse Promissory Notes dated January 27, 1998, May 21,
1998, May 26, 1998 and June 26, 1998 in the amounts of $71,280, $16,200,
$7,200 and $50,400, respectively; Michael K. Wilson, the Company's Vice
President Product Development and Site Operations since January 1997, to
purchase 600,000 shares of Common Stock in exchange for a $1,000 cash payment
and a Secured Full Recourse Promissory Note dated January 28, 1998 in the
amount of $9,000 and Gary F. Bengier, the Company's Chief Financial Officer
and Vice President Operations since November 1997, to purchase 525,000 shares
of Common Stock in exchange for a $5,250 cash payment and a Secured Full
Recourse Promissory Note dated January 26, 1998 in the amount of $47,250. Each
note is secured by the Common Stock purchased with the note except for Ms.
Whitman's notes which are each secured by all the shares purchased with both
the full recourse and the non-recourse notes. Each note bears interest at the
rate of 8%, compounded semi-annually. Interest on the unpaid principal is due
on December 1 of each year and the principal balance is due in full on
December 1, 2002. See "Principal and Selling Stockholders."
STOCK TO SERVICE PROVIDER. In connection with the recruiting of its Chief
Executive Officer, the Company engaged the services of an executive search
firm affiliated with Benchmark Capital Partners, L.P. and Benchmark Founders'
Fund, L.P. As partial payment for its services, the Company issued to this
firm 46,248 shares of Series B Mandatorily Redeemable Convertible Preferred
Stock, which was valued at $2.00 per share.
EBAY FOUNDATION. In June 1998, the Company established a fund known as the
eBay Foundation, which is administered by the Community Foundation Silicon
Valley, and donated 107,250 shares of Common Stock to the Community Foundation
Silicon Valley on behalf of the eBay Foundation. The Community Foundation
Silicon Valley is selling 10,725 shares of Common Stock in this offering on
behalf of the eBay Foundation.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's Common Stock as of June 30,
1998 by (i) each stockholder known by the Company to be the beneficial owner
of more than 5% of the Company's Common Stock, (ii) each director of the
Company, (iii) the Named Executive Officer, (iv) all executive officers and
directors as a group and (v) the Selling Stockholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED
OWNED PRIOR TO OFFERING(1) NUMBER OF AFTER OFFERING(1)
------------------------------ SHARES ---------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT BEING OFFERED NUMBER PERCENT(2)
- ------------------------ ---------------- ------------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Pierre M. Omidyar(3).... 15,229,425 42.0% -- 15,229,425 38.3
Jeffrey S. Skoll(4)..... 10,200,000 28.1 -- 10,200,000 25.7
Robert C. Kagle
Benchmark Funds(5)..... 8,791,836 24.3 -- 8,791,836 22.1
Margaret C. Whitman(6).. 2,400,000 6.6 -- 2,400,000 6.0
Scott D. Cook(7)........ 257,250 * -- 257,250 *
Howard D. Schultz(8).... 257,250 * -- 257,250 *
Community Foundation
Silicon Valley(9)...... 107,250 * 10,725 96,525 *
All directors and
executive officers as a
group (9 persons)(10).. 34,796,925 94.8 -- 34,796,925 86.6
</TABLE>
- --------
* Represents beneficial ownership of less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Unless otherwise indicated
below, the persons and entities named in the table have sole voting and
sole investment power with respect to all shares beneficially owned,
subject to community property laws where applicable. Shares of Common
Stock subject to options that are currently exercisable or exercisable
within 60 days of June 30, 1998 are deemed to be outstanding and to be
beneficially owned by the person holding such options for the purpose of
computing the percentage ownership of such person but are not treated as
outstanding for the purpose of computing the percentage ownership of any
other person.
(2) Assumes that the Underwriters' over-allotment option to purchase up to
525,000 shares from the Company is not exercised.
(3) Mr. Omidyar is the Founder and Chairman of the Board of the Company.
Included in the number of shares he beneficially owns are 2,014,378.5
shares pledged to Benchmark Capital Partners, L.P. and 281,539.5 shares
pledged to Benchmark Founders' Fund, L.P. (collectively, the "Omidyar
Pledged Shares") to secure a $749,999.88 full recourse loan made to Mr.
Omidyar pursuant to a Loan and Pledge Agreement dated June 27, 1997. All
of the Omidyar Pledged Shares are also subject to an immediately
exercisable call option pursuant to a Call Option Agreement dated June
27, 1997 among the Benchmark Funds and Mr. Omidyar and are covered by a
put option pursuant to a Put Option Agreement dated June 27, 1997 among
the same parties. Also included in the number of shares Mr. Omidyar
beneficially owns are (i) approximately 3,187,500 shares that were
unvested as of June 30, 1998 and subject to the Company's right of
repurchase at $.0067 per share, (ii) 150,000 shares held of record by The
Cyrus Omidyar Income Trust dated May 4, 1998 and (iii) 150,000 shares
held of record by The Elahe Mir-Djalali Income Trust dated May 4, 1998.
See "Certain Transactions" and "Description of Capital Stock." The
address for Mr. Omidyar is 2005 Hamilton Avenue, Suite 350, San Jose,
California 95125.
(4) Mr. Skoll is the Vice President Strategic Planning and Analysis of the
Company. Included in the number of shares he beneficially owns are
2,014,378.5 shares pledged to Benchmark Capital
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Partners, L.P. and 281,539.5 shares pledged to Benchmark Founders' Fund,
L.P. (collectively, the "Skoll Pledged Shares") to secure a $749,999.88
full recourse loan made to Mr. Skoll pursuant to a Loan and Pledge
Agreement dated June 27, 1997. All of the Skoll Pledged Shares are also
subject to an immediately exercisable call option pursuant to a Call
Option Agreement dated June 27, 1997 among the Benchmark Funds and Mr.
Skoll and are covered by a put option pursuant to a Put Option Agreement
dated June 27, 1997 among the same parties. Also included in the number of
shares Mr. Skoll beneficially owns are (i) approximately 5,312,502 shares
that were unvested as of June 30, 1998 and subject to the Company's right
of repurchase at their original purchase price of $0.0067 per share and
(ii) 60,000 shares held of record by The Skoll Family 1998 Trust. See
"Certain Transactions" and "Description of Capital Stock." The address for
Mr. Skoll is 2005 Hamilton Avenue, Suite 350, San Jose, California 95125.
(5) Represents 3,684,972 shares held of record and 4,028,757 shares held
beneficially by Benchmark Capital Partners, L.P. and 515,028 shares held
of record and 563,079 shares held beneficially by Benchmark Founders'
Fund, L.P. (collectively, the "Benchmark Funds"). Of the shares held
beneficially by the Benchmark Funds, 4,591,836 of such shares are also
included in the above table as shares held of record by Messrs. Omidyar
and Skoll. Messrs. Omidyar and Skoll pledged such shares to secure full
recourse loans obtained from the Benchmark Funds pursuant to separate
Loan and Pledge Agreements each dated June 27, 1997 between the Benchmark
Funds and each Founder individually. Such shares are also covered by put
options and immediately exercisable call options pursuant to Put Option
Agreements and Call Option Agreements, each of which is dated June 27,
1997, between the Benchmark Funds and each Founder individually. See
"Description of Capital Stock." Mr. Kagle, a director of the Company, is
a Member of Benchmark Capital Management Co., L.L.C., which is the
General Partner of Benchmark Capital Partners, L.P. and Benchmark
Founders' Fund, L.P. Mr. Kagle disclaims beneficial ownership of shares
held by such entities except for his proportional interest therein. The
address for Mr. Kagle and these entities is c/o Benchmark Capital
Management Co., L.L.C., 2480 Sand Hill Road, Suite 200, Menlo Park,
California 94025.
(6) Ms. Whitman is the President and Chief Executive Officer of the Company.
All of the shares owned by Ms. Whitman were unvested as of June 30, 1998
and subject to the Company's right of repurchase at their original
purchase price of $0.20 per share. Includes 27,000 shares held by eight
relatives of Ms. Whitman. The address for Ms. Whitman is 2005 Hamilton
Avenue, Suite 350, San Jose, California 95125.
(7) Includes 150,000 shares subject to an immediately exercisable option
outstanding at June 30, 1998. See "Management--Director Compensation."
(8) Includes 107,250 shares held of record by Maveron. Also includes 150,000
shares issued to Mr. Schultz upon exercise of an option that were
unvested as of June 30, 1998 and subject to the Company's right of
repurchase at their original purchase price of $9.33 per share. Of these
150,000 unvested shares, Mr. Schultz has transferred 112,500 shares to
Maveron. See "Management--Director Compensation."
(9) In June 1998, the Company established a fund known as the eBay
Foundation, which is administered by the Community Foundation Silicon
Valley, and to capitalize this foundation donated 107,250 shares to the
Community Foundation Silicon Valley. The Community Foundation Silicon
Valley is selling 10,725 shares in this offering.
(10) Includes the shares described in footnotes (3)-(8), 300,000 shares
subject to an immediately exercisable option outstanding as of June 30,
1998 that was held by one executive officer not named in the table and
1,740,501 unvested shares as of June 30, 1998 subject to the Company's
right of repurchase at such shares' original purchase price held by
executive officers not named in this table.
68
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering, the authorized capital
stock of the Company will consist of 195,000,000 shares of Common Stock,
$0.001 par value per share, and 5,000,000 shares of Preferred Stock, $0.001
par value per share. As of June 30, 1998, and assuming the conversion of all
outstanding Preferred Stock into Common Stock upon the closing of this
offering, there were outstanding 36,249,801 shares of Common Stock held of
record by 67 stockholders and options to purchase 1,071,159 shares of Common
Stock.
COMMON STOCK
Subject to preferences that may apply to shares of Preferred Stock
outstanding at the time, the holders of outstanding shares of Common Stock are
entitled to receive dividends out of assets legally available therefor at such
times and in such amounts as the Board of Directors may from time to time
determine. Each stockholder is entitled to one vote for each share of Common
Stock held on all matters submitted to a vote of stockholders. Cumulative
voting for the election of directors is not provided for in the Company's
Certificate of Incorporation, which means that the holders of a majority of
the shares voted can elect all of the directors then standing for election.
The Common Stock is not entitled to preemptive rights and is not subject to
conversion or redemption. Upon a liquidation, dissolution or winding-up of the
Company, the assets legally available for distribution to stockholders are
distributable ratably among the holders of the Common Stock and any
participating Preferred Stock outstanding at that time after payment of
liquidation preferences, if any, on any outstanding Preferred Stock and
payment of other claims of creditors. Each outstanding share of Common Stock
is, and all shares of Common Stock to be outstanding upon completion of this
offering will be, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, each outstanding share of Preferred Stock
(the "Convertible Preferred" ) will be converted into shares of Common Stock.
See Note 8 of Notes to Consolidated Financial Statements for a description of
the Convertible Preferred. Following the offering, the Company will be
authorized, subject to limitations prescribed by Delaware law, to provide for
the issuance of Preferred Stock in one or more series, to establish from time
to time the number of shares to be included in each such series, to fix the
rights, preferences and privileges of the shares of each wholly unissued
series and any qualifications, limitations or restrictions thereon, and to
increase or decrease the number of shares of any such series (but not below
the number of shares of such series then outstanding) without any further vote
or action by the stockholders. The Board may authorize the issuance of
Preferred Stock with voting or conversion rights that could adversely affect
the voting power or other rights of the holders of the Common Stock. The
issuance of Preferred Stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could, among other things,
have the effect of delaying, deferring or preventing a change in control of
the Company and may adversely affect the market price of the Common Stock and
the voting and other rights of the holders of Common Stock. The Company has no
current plans to issue any shares of Preferred Stock.
REGISTRATION RIGHTS
Pursuant to an Investor Rights Agreement dated June 20, 1997 between the
Company, the Founders and the Investors (the "Rights Agreement"), the
Investors, holding an aggregate of 4,200,000 shares of Common Stock of the
Company issuable upon conversion of the Series B Preferred Stock, and the
Founders, holding an aggregate of 25,429,425 shares of Common Stock of the
Company, 5,029,425 shares of which are issuable upon conversion of the Series
A Preferred Stock (collectively the "Registrable Securities"), have certain
registration rights for the Registrable Securities
69
<PAGE>
at any time after six months following the closing of this offering. Under the
Rights Agreement, the Investors, by written request of at least two-thirds of
the holders of the Investors' Registrable Securities then outstanding, may
demand that the Company file a registration statement under the Securities Act
covering all or a portion of the Investors' Registrable Securities, provided
that, in the case of a registration on a form other than a Form S-3, the
offering is for at least 50% of the then outstanding Investors' Registrable
Securities, or in the case of a registration on a Form S-3, there is a
reasonably anticipated aggregate offering price to the public of at least
$1,000,000. The Investors have the right to demand two registrations on a form
other than Form S-3 and not more than one Form S-3 registration in any six-
month period. These registration rights are subject to the Company's right to
delay the filing of a registration statement, not more than once in a 12-month
period, for not more than 90 days, in the case of a registration on a form
other than a Form S-3, and 60 days, in the case of a registration on a Form S-
3, after receiving the registration demand.
In addition, the Investors and Founders have certain "piggyback"
registration rights. If the Company proposes to register any of its Common
Stock under the Securities Act (other than pursuant to the Investors' demand
registration rights noted above), the Investors or Founders may require the
Company to include all or a portion of their Registrable Securities in such
registration; provided, however, that the managing underwriter, if any, of any
such offering has certain rights to limit the number of, or in the case of the
Company's initial public offering, to exclude all or a portion of the
Registrable Securities proposed to be included in such registration.
All registration expenses incurred in connection with the above
registrations would be borne by the Company. The selling Investor or Founder
would pay all underwriting discounts, selling commissions and stock transfer
taxes applicable to the sale of his or its Registrable Securities.
Demand and piggyback registration rights under the Rights Agreement
terminate with respect to each Investor or Founder, as applicable, seven years
after the closing date of this offering; provided, however, that each
Investor's and Founder's rights under the Rights Agreement will terminate
earlier when such Investor or Founder may sell all its or his shares in a
three-month period under Rule 144 promulgated under the Securities Act.
PUT/CALL OPTIONS ON COMMON STOCK
In June 1997, each Founder entered into a separate Loan and Pledge Agreement
with the Investors under which he obtained a full recourse loan of
$749,999.88, of which $658,030.39 was made by Benchmark Capital Partners, L.P.
and $91,969.49 was made by Benchmark Founders' Fund, L.P. Each Founder secured
his loan with a pledge of 2,295,918 shares of Common Stock for an aggregate of
4,591,836 shares, of which 4,028,757 shares were pledged to Benchmark Capital
Partners, L.P. and 563,079 shares were pledged to Benchmark Founders' Fund,
and a security interest in such Founder's rights under the Put Option
Agreement and the Call Option Agreement each dated June 27, 1997 among the
Investors and each Founder individually. The loans are due June 27, 2002 and
bear interest, compounded annually, at a rate of 7% per annum.
Under his Call Option Agreement, each Founder granted the Investors an
option to call all of the shares covered by the option at any time from the
date of the agreement up to June 27, 2001 at an exercise price equal to an
aggregate of $749,999.88 together with the aggregate amount of interest
accrued through the date of exercise under the applicable Loan and Pledge
Agreement of even date. Under each Put Option Agreement, the Investors granted
to each Founder an option to put all of the shares covered by the option to
the Investors at any time during the six-month period that follows the four
year and six-month "blackout period" commencing on the date of the agreement.
70
<PAGE>
ANTI-TAKEOVER PROVISIONS
DELAWARE LAW
Upon the closing of this offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law (the "Anti-
Takeover Law") regulating corporate takeovers. The Anti-Takeover Law prevents
certain Delaware corporations, including those whose securities are listed on
the Nasdaq National Market, from engaging, under certain circumstances, in a
"business combination" (which includes a merger or sale of more than 10% of
the corporation's assets) with any "interested stockholder" (a stockholder who
owns 15% or more of the corporation's outstanding voting stock, as well as
affiliates and associates of any such person) for three years following the
date that such stockholder became an "interested stockholder" unless (i) the
transaction that resulted in the stockholders' becoming an "interested
stockholder" was approved by the board of directors prior to the date the
"interested stockholder" attained such status, (ii) upon consummation of the
transaction that resulted in the stockholder's becoming an "interested
stockholder," the "interested stockholder" owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced
(excluding those shares owned by (a) persons who are directors and also
officers and (b) employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer), or (iii) on or
subsequent to such date the "business combination" is approved by the board of
directors and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least two-thirds of the outstanding voting stock
that is not owned by the "interested stockholder." A Delaware corporation may
"opt out" of the Anti-Takeover Law with an express provision in its original
certificate of incorporation or an express provision in its certificate or
incorporation or bylaws resulting from a stockholders' amendment approved by
at least a majority of the outstanding voting shares. The Company has not
"opted out" of the provisions of the Anti-Takeover Law. The statute could
prohibit or delay mergers or other takeover or change-in-control attempts with
respect to the Company and, accordingly, may discourage attempts to acquire
the Company.
CHARTER AND BYLAW PROVISIONS
The Company's Amended and Restated Bylaws, which will be in effect upon the
completion of this offering, will provide for the division of the Board into
three classes as nearly equal in size as possible with staggered three-year
terms. The classification of the Board could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of the Company. In addition, the Amended and Restated
Bylaws will provide that any action required or permitted to be taken by the
stockholders of the Company at an annual meeting or a special meeting of the
stockholders may be taken only if it is properly brought before such meeting
and may not be taken by written action in lieu of a meeting. The Amended and
Restated Bylaws also will provide that special meetings of the stockholders
may be called only by the Chairman of the Board, the Chief Executive Officer
or, if none, the President or the Board.
The Company's Amended and Restated Certificate of Incorporation and its
Amended and Restated Bylaws will provide that the Company will indemnify
officers and directors against losses that they may incur in investigations
and legal proceedings resulting from their services to the Company, which may
include services in connection with takeover defense measures. Such provisions
may have the effect of preventing changes in the management of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is
ChaseMellon Shareholder Services, L.L.C.
71
<PAGE>
LISTING
The Company has applied to list its Common Stock on the Nasdaq National
Market under the trading symbol "EBAY."
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company, and there can be no assurance that a significant public market for
the Common Stock will develop or be sustained after this offering. Future
sales of substantial amounts of Common Stock (including shares issued upon
exercise of outstanding options) in the public market after this offering
could adversely affect market prices prevailing from time to time and could
impair the Company's ability to raise capital through the sale of its equity
securities. As described below, no shares currently outstanding will be
available for sale immediately after this offering due to certain contractual
restrictions on resale. Sales of substantial amounts of Common Stock of the
Company in the public market after the restrictions lapse could adversely
affect the prevailing market price and the ability of the Company to raise
equity capital in the future.
Upon completion of this offering, the Company will have outstanding
39,739,076 shares of Common Stock, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
the 3,500,000 shares sold in this offering will be freely tradable without
restriction under the Securities Act unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act. The
remaining shares held by existing stockholders are subject to lock-up
agreements generally providing that, with certain limited exceptions, the
stockholder will not (i) offer to sell, sell, contract to sell, pledge or
otherwise dispose of any shares of Common Stock owned of record or
beneficially prior to the offering or any securities convertible into or
exchangeable for such shares of Common Stock, (ii) establish a "put equivalent
position" with respect to such Common Stock within the meaning of Rule 16a-
1(h) under the Securities Exchange Act of 1934, as amended, or (iii) publicly
announce an intention to take any of the actions set forth in (i) or (ii) for
a period of 120 days following the date of the final Prospectus for this
offering without the prior written consent of Goldman Sachs & Co. acting alone
or each of the above listed representatives acting together. As a result of
these lock-up agreements, notwithstanding possible earlier eligibility for
sale under the provisions of Rules 144, 144(k) and 701, none of these shares
will be saleable until 121 days after the date of the final Prospectus.
Beginning 121 days after the date of the final Prospectus, 24,549,582 of these
shares will be eligible for sale in the public market, although a portion of
such shares will be subject to certain volume limitations pursuant to Rule
144. The remaining Restricted Shares will become eligible for sale from time
to time thereafter upon expiration of applicable holding periods under Rule
144 under the Securities Act and the Company's right to repurchase unvested
shares. Holders of options to purchase Common Stock of the Company are also
subject to 120-day lock-up agreements.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an affiliate) would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (i) 1% of the number of shares of Common Stock then outstanding
(which will equal approximately 397,000 shares immediately after this
offering) or (ii) the average weekly trading volume of the Common Stock during
the four calendar weeks preceding the filing of a Form 144 with respect to
such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed
to have been an affiliate of the Company at any time during the three months
preceding a sale, and who has beneficially owned the shares proposed to be
sold
72
<PAGE>
for at least two years (including the holding period of any prior owner except
an affiliate), is entitled to sell such shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period
requirement, of Rule 144. Any employee, officer or director of or consultant
to the Company who purchased his or her shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirements of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. All holders
of Rule 701 shares are required to wait until 90 days after the date of this
Prospectus before selling such shares. However, all shares issued pursuant to
Rule 701 are subject to lock-up agreements and will only become eligible for
sale at the earlier of the expiration of the 120-day lock-up agreements or no
sooner than 90 days after the offering upon obtaining the prior written
consent of Goldman Sachs & Co. or the representatives of the Underwriters.
Immediately after this offering, the Company intends to file a registration
statement under the Securities Act covering shares of Common Stock subject to
outstanding options under the 1996 Plan or the 1997 Plan or reserved for
issuance under the Equity Incentive Plan, the Directors Plan or the Purchase
Plan. Based on the number of shares subject to outstanding options at June 30,
1998 and currently reserved for issuance under all such plans, such
registration statement would cover approximately 8,132,659 shares. Such
registration statement will automatically become effective upon filing.
Accordingly, shares registered under such registration statement will be
available for sale in the open market immediately after the 120-day lock-up
agreements expire. Also beginning six months after the date of this offering,
certain holders of shares of Common Stock will be entitled to certain rights
with respect to registration of such shares of Common Stock for offer and sale
to the public. See "Description of Capital Stock--Registration Rights."
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Fenwick & West LLP, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Shearman & Sterling, San Francisco,
California.
EXPERTS
The financial statements included in this Prospectus have been audited by
PricewaterhouseCoopers LLP, independent accountants. The companies and periods
covered by these audits are indicated in the individual reports of
PricewaterhouseCoopers LLP. Such financial statements have been so included in
reliance on the reports of PricewaterhouseCoopers LLP given on the authority
of said firm as experts in auditing and accounting.
73
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act
with respect to the shares of Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration
Statement and the exhibits thereto. For further information with respect to
the Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits thereto. Statements contained in this
Prospectus regarding the contents of any contract or any other document to
which reference is made are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement and the
exhibits thereto may be inspected without charge at the offices of the
Commission at Judiciary Plaza, 450 Fifth Street, Washington, D.C. 20549, and
copies of all or any part of the Registration Statement may be obtained from
the Public Reference Section of the Commission, Washington, D.C. 20549 upon
the payment of the fees prescribed by the Commission. The Commission maintains
a Web site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants, such as the Company,
that file electronically with the Commission.
74
<PAGE>
EBAY INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EBAY INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheet............................................... F-3
Consolidated Statement of Income......................................... F-4
Consolidated Statement of Stockholders' Equity........................... F-5
Consolidated Statement of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements............................... F-7
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Overview................................................................. F-23
Pro Forma Consolidated Statement of Operations........................... F-24
Notes to Pro Forma Consolidated Financial Information.................... F-25
JUMP INCORPORATED FINANCIAL STATEMENTS
Report of Independent Accountants........................................ F-26
Balance Sheet............................................................ F-27
Statement of Operations.................................................. F-28
Statement of Shareholders' Deficit....................................... F-29
Statement of Cash Flows.................................................. F-30
Notes to Financial Statements............................................ F-31
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
eBay Inc.
The stock split described in Note 11 to the consolidated financial
statements has not been consummated at August 19, 1998. When it has been
consummated, we will be in a position to furnish the following report:
"In our opinion, the accompanying balance sheet and the related
statements of income, of stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of eBay Inc. at
December 31, 1996 and 1997, and the results of its operations and its cash
flows for the years ended December 31, 1996 and 1997, in conformity with
generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above."
Price Waterhouse LLP
San Jose, California
March 31, 1998
F-2
<PAGE>
EBAY INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, STOCKHOLDERS'
-------------- JUNE 30, EQUITY AT
1996 1997 1998 JUNE 30, 1998
------ ------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $103 $ 3,723 $10,716
Accounts receivable, net.............. 166 1,024 2,846
Other current assets.................. 16 220 453
----- ------- -------
Total current assets................ 285 4,967 14,015
Property and equipment, net............. 23 652 3,584
Intangible assets, net.................. -- -- 2,216
----- ------- -------
$308 $ 5,619 $19,815
===== ======= =======
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Debt and leases, current portion...... $ 1 $ 258 $ 314
Accounts payable...................... 23 252 1,841
Customer advances..................... -- 128 390
Income taxes payable.................. 50 169 1,033
Other current liabilities............. 17 317 1,634
----- ------- -------
Total current liabilities........... 91 1,124 5,212
Debt and leases, long-term portion...... -- 305 167
Deferred tax liabilities................ 55 157 157
----- ------- -------
146 1,586 5,536
----- ------- -------
Series B Mandatorily Redeemable
Convertible Preferred Stock and Series
B warrants (Notes 8 and 11)............ -- 3,018 5,157 $ --
----- ------- ------- -------
Commitments (Note 6)
Stockholders' equity:
Series A Convertible Preferred Stock,
$0.001 par value; 1,676 shares
authorized, 1,676 shares issued and
outstanding, no shares pro forma
(unaudited).......................... 4 4 4 --
Common Stock, $0.001 par value, 60,000
shares authorized; 20,400, 20,400 and
26,974 (unaudited) shares issued and
outstanding; 36,250 (unaudited)
shares issued and outstanding pro
forma................................ 20 20 27 36
Additional paid-in capital............ 58 877 14,150 19,302
Notes receivable from stockholders.... (68) (68) (1,536) (1,536)
Unearned compensation................. -- (794) (4,801) (4,801)
Retained earnings..................... 148 976 1,278 1,278
----- ------- ------- -------
Total stockholders' equity.......... 162 1,015 9,122 $14,279
===== ======= ======= =======
$308 $ 5,619 $19,815
===== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
EBAY INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------- ------------------
1996 1997 1997 1998
------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues.............................. $ 372 $ 5,744 $ 1,658 $ 14,922
Cost of net revenues...................... 14 746 160 1,736
------- ------- -------- --------
Gross profit.......................... 358 4,998 1,498 13,186
Operating expenses:
Sales and marketing..................... 32 1,730 212 4,610
Product development..................... 28 831 209 1,548
General and administrative.............. 45 950 233 4,054
Acquired research and development....... -- -- -- 150
------- ------- -------- --------
Total operating expenses.............. 105 3,511 654 10,362
------- ------- -------- --------
Income from operations.................... 253 1,487 844 2,824
Interest and other income, net............ 1 59 6 101
Interest expense.......................... -- (3) (2) (25)
------- ------- -------- --------
Income before income taxes................ 254 1,543 848 2,900
Provision for income taxes................ (106) (669) (362) (2,552)
------- ------- -------- --------
Net income................................ $ 148 $ 874 $ 486 $ 348
======= ======= ======== ========
Net income per share:
Basic................................... $ 0.07 $ 0.11 $ 0.08 $ 0.03
======= ======= ======== ========
Weighted average shares--basic.......... 2,125 7,438 6,163 10,711
======= ======= ======== ========
Diluted................................. $ 0.01 $ 0.03 $ 0.02 $ 0.01
======= ======= ======== ========
Weighted average shares--diluted........ 14,315 27,553 25,811 34,231
======= ======= ======== ========
Pro forma net income per share:
Basic................................... $ 0.06 $ 0.02
======= ========
Weighted average shares--basic.......... 14,591 19,145
======= ========
Diluted................................. $ 0.03 $ 0.01
======= ========
Weighted average shares--diluted........ 27,553 34,231
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
EBAY INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE TOTAL
----------------- ------------- PAID-IN FROM UNEARNED RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION EARNINGS EQUITY
-------- ------- ------ ------ ---------- ------------ ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Common
Stock for cash and
note.................. -- $ -- 20,400 $ 20 $ 58 $ (68) $ -- $ -- $ 10
Issuance of Preferred
Stock................. 1,676 4 -- -- -- -- -- -- 4
Net income............. -- -- -- -- -- -- -- 148 148
-------- ------- ------ ---- ------- ------- ------- ------ ------
Balance at
December 31, 1996...... 1,676 4 20,400 20 58 (68) -- 148 162
Accretion of Series B
Mandatorily Redeemable
Convertible Preferred
Stock to redemption
value................. -- -- -- -- -- -- -- (46) (46)
Unearned compensation.. -- -- -- -- 819 -- (819) -- --
Amortization of
unearned
compensation.......... -- -- -- -- -- -- 25 -- 25
Net income............. -- -- -- -- -- -- -- 874 874
-------- ------- ------ ---- ------- ------- ------- ------ ------
Balance at
December 31, 1997...... 1,676 4 20,400 20 877 (68) (794) 976 1,015
Accretion of Series B
Mandatorily Redeemable
Convertible Preferred
Stock to redemption
value (Unaudited)..... -- -- -- -- -- -- -- (46) (46)
Unearned compensation
(Unaudited)........... -- -- -- -- 5,375 -- (5,375) -- --
Amortization of
unearned compensation
(Unaudited)........... -- -- -- -- -- -- 1,368 -- 1,368
Issuance of Common
Stock for cash and
notes (Unaudited)..... -- -- 6,324 7 4,683 (1,468) -- -- 3,222
Issuance of Common
Stock for acquisition
of Jump Incorporated
(Unaudited)........... -- -- 143 -- 2,000 -- -- -- 2,000
Contribution of Common
Stock to charitable
foundation
(Unaudited)........... -- -- 107 -- 1,215 -- -- -- 1,215
Net income
(Unaudited)........... -- -- -- -- -- -- -- 348 348
-------- ------- ------ ---- ------- ------- ------- ------ ------
Balance at
June 30, 1998
(Unaudited)............ 1,676 $ 4 26,974 $ 27 $14,150 $(1,536) $(4,801) $1,278 $9,122
======== ======= ====== ==== ======= ======= ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
EBAY INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------- -----------------
1996 1997 1997 1998
----- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................. $ 148 $ 874 $ 486 $ 348
Adjustments to reconcile net income to net
cash
provided by operating activities:
Provision for doubtful accounts............ 18 290 30 765
Depreciation and amortization.............. 2 74 3 388
Amortization of unearned compensation...... -- 25 -- 1,368
Charitable contribution of Common Stock.... -- -- -- 1,215
Series B Preferred Stock issued for servic-
es........................................ -- -- -- 93
Acquired research and development.......... -- -- -- 150
Changes in current assets and liabilities:
Accounts receivable....................... (184) (1,148) (301) (2,575)
Other current assets...................... (16) (204) (9) (233)
Accounts payable.......................... 23 229 33 1,574
Customer advances......................... -- 128 28 262
Income taxes payable...................... 50 119 261 864
Other current liabilities................. 17 300 137 980
Deferred tax liabilities.................. 55 102 55 --
----- ------- ------- --------
Net cash provided by operating activities... 113 789 723 5,199
----- ------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment........ (25) (680) (72) (3,311)
----- ------- ------- --------
Net cash used in investing activities....... (25) (680) (72) (3,311)
----- ------- ------- --------
Cash flows from financing activities:
Proceeds from Series A Preferred Stock..... 4 -- -- --
Proceeds from Series B Preferred Stock and
Series B warrants......................... -- 2,972 2,972 2,000
Proceeds from Common Stock................. 10 -- -- 3,222
Proceeds from debt issuance................ 1 545 -- --
Principal payments on debt and leases...... -- (6) (2) (117)
----- ------- ------- --------
Net cash provided by financing activities... 15 3,511 2,970 5,105
----- ------- ------- --------
Net increase in cash and cash equivalents... 103 3,620 3,621 6,993
Cash and cash equivalents at beginning of
period..................................... -- 103 103 3,723
----- ------- ------- --------
Cash and cash equivalents at end of period.. $ 103 $ 3,723 $ 3,724 $ 10,716
===== ======= ======= ========
Supplemental cash flow disclosures:
Cash paid for interest..................... $ -- $ 3 $ 2 $ 22
Cash paid for income taxes................. $ 1 $ 452 $ 48 $ 1,684
Non-cash investing and financing activities:
Property and equipment leases.............. $ -- $ 23 $ 23 $ --
Common Stock issued for notes receivable... $ 68 $ -- $ -- $ 1,468
Common Stock issued for acquisition........ $ -- $ -- $ -- $ 2,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
eBay Inc. (the "Company") was incorporated in California in May 1996 and
operates an online person-to-person trading community. eBay pioneered online
person-to-person trading by developing a Web-based community in which buyers
and sellers are brought together in an auction format to trade personal items
such as antiques, coins, collectibles, computers, memorabilia, stamps and
toys. The eBay service permits sellers to list items for sale, buyers to bid
on items of interest and all eBay users to browse through listed items in a
fully-automated, topically-arranged service that is available online 24 hours
a day, seven days a week. The Company operates in one business segment.
REINCORPORATION
In March 1998, the Company's Board of Directors authorized the
reincorporation of the Company in the State of Delaware. As a result of the
reincorporation, the Company is authorized to issue 60,000,000 shares of $.001
par value Common Stock and 6,000,000 shares of $.001 par value Preferred
Stock. The Board of Directors has the authority to issue the undesignated
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof.
USE OF ESTIMATES
The preparation of 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The financial statements as of June 30, 1998 and for the six months then
ended are consolidated and include the accounts of the Company and its wholly
owned subsidiary. All significant intercompany balances and transactions have
been eliminated in consolidation.
From September 1995 ("Inception") through May 1996, eBay operated as a sole
proprietorship. The sole proprietorship recognized no revenues and incurred no
expenses during the period from Inception to December 31, 1995. The sole
proprietorship recognized revenue totaling $30,000 and incurred expenses
totaling $14,000 during the period from January 1, 1996 until incorporation in
May 1996. The results of operations for this period have been included in the
1996 financial statements to facilitate presentation.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents
consist primarily of deposits in money market funds.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and accounts
receivable. Cash and cash equivalents are deposited with high credit quality
financial institutions. The Company's accounts receivable are derived from
revenue earned from customers located in the U.S. and throughout the world and
are denominated in U.S.
F-7
<PAGE>
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
dollars. Accounts receivable balances are typically settled through customer
credit cards and, as a result, the majority of accounts receivable are
collected upon processing of credit card transactions. The Company maintains
an allowance for doubtful accounts receivable based upon the expected
collectibility of accounts receivable.
During the years ended December 31, 1996 and 1997, and the six months ended
June 30, 1997 and 1998 (unaudited), no customers accounted for more than 10%
of net revenues or net accounts receivable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and capital lease obligations are
carried at cost, which approximates their fair value because of the short-term
maturity of these instruments.
PROPERTY AND EQUIPMENT
Property and equipment are stated at historical cost. Depreciation and
amortization is computed using the straight-line method over the estimated
useful lives of the assets, generally three years or less, or the shorter of
the lease term or the estimated useful lives of the assets, if applicable.
INTANGIBLE ASSETS
Goodwill and other intangible assets resulting from the acquisition of Jump
Incorporated were estimated by management to be primarily associated with the
acquired customer list, workforce and technological know how. As a result of
the rapid technological changes occurring in the Internet industry and the
intense competition for qualified Internet professionals, recorded goodwill
and other intangible assets are amortized on a straight-line basis over the
estimated periods of benefit, which range from 8 to 24 months. See Note 2--
Acquisition.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of its intangible assets in
accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" ("SFAS No. 121"). SFAS No. 121 requires recognition of
impairment of long-lived assets in the event the net book value of such assets
exceeds the future undiscounted cash flows attributable to such assets.
REVENUE RECOGNITION
Revenues are derived primarily from placement fees charged for the listing
of items for auction and success fees calculated as a percentage of the final
sales transaction value. Revenues related to placement fees are recognized at
the time the item is listed, while those related to success fees are
recognized at the time that the auction is successfully concluded. An auction
is considered successfully concluded when there is at least one bid above the
seller's specified minimum price or reserve price, whichever is higher, at the
end of the auction term, which is generally three to seven days. Provisions
for doubtful accounts and authorized credits to sellers are provided at the
time of revenue recognition based upon the Company's historical experience.
F-8
<PAGE>
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PRODUCT DEVELOPMENT COSTS
Product development costs include expenses incurred by the Company to
develop, enhance, manage, monitor and operate the Company's Web site. Product
development costs are expensed as incurred.
ADVERTISING EXPENSE
Advertising costs are expensed as incurred and totaled $0, $478,000, $0
(unaudited) and $2.0 million (unaudited) during the years ended December 31,
1996 and 1997 and the six months ended June 30, 1997 and 1998, respectively.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25,
compensation expense is based on the difference, if any, on the date of the
grant, between the fair value of the Company's stock and the exercise price.
The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123 and EITF 96-18.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets
are based on provisions of the enacted tax law; the effects of future changes
in tax laws or rates are not anticipated. The measurement of deferred tax
assets is reduced, if necessary, by the amount of any tax benefits that, based
on available evidence, are not expected to be realized.
NET INCOME PER SHARE
The Company computes net income per share in accordance with SFAS No. 128,
"Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98").
Under the provisions of SFAS No. 128 and SAB 98, basic net income per share is
computed by dividing the net income available to common stockholders for the
period by the weighted average number of common shares outstanding during the
period. Diluted net income per share is computed by dividing the net income
for the period by the weighted average number of common and common equivalent
shares outstanding during the period. Common equivalent shares, composed of
unvested restricted Common Stock and incremental common shares issuable upon
the exercise of stock options and warrants and upon conversion of Series A and
Series B Convertible Preferred Stock, are included in diluted net income per
share to the extent such shares are dilutive.
F-9
<PAGE>
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------- ------------------
1996 1997 1997 1998
------ ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Numerator:
Net income.............................. $ 148 $ 874 $ 486 $ 348
Accretion of Series B Mandatorily
Redeemable Convertible Preferred Stock
to redemption value.................... -- (46) -- (46)
------ ------- -------- --------
Net income available to common
stockholders........................... $ 148 $ 828 $ 486 $ 302
====== ======= ======== ========
Denominator:
Weighted average shares................. 10,200 20,400 20,400 25,519
Weighted average unvested common shares
subject to repurchase agreements....... (8,075) (12,962) (14,237) (14,808)
------ ------- -------- --------
Denominator for basic calculation....... 2,125 7,438 6,163 10,711
Weighted average effect of dilutive
securities:
Series A Preferred Stock.............. 4,115 5,029 5,029 5,029
Series B Preferred Stock.............. -- 2,124 166 3,404
Series B Preferred Stock warrants..... -- -- -- 229
Unvested common shares subject to
repurchase agreements................ 8,075 12,962 14,237 14,808
Employee stock options................ -- -- 216 50
------ ------- -------- --------
Denominator for diluted calculation..... 14,315 27,553 25,811 34,231
====== ======= ======== ========
Net income per share:
Basic................................... $ 0.07 $ 0.11 $ 0.08 $ 0.03
====== ======= ======== ========
Diluted................................. $ 0.01 $ 0.03 $ 0.02 $ 0.01
====== ======= ======== ========
</TABLE>
PRO FORMA NET INCOME PER SHARE (UNAUDITED)
Pro forma net income per share for the year ended December 31, 1997 and the
six months ended June 30, 1998 is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's Series A and Series B Convertible Preferred Stock
into shares of the Company's Common Stock effective upon the closing of the
Company's initial public offering as if such conversion occurred on January 1,
1997, or at date of original issuance, if later. The resulting pro forma
adjustment includes an increase in the weighted average shares used to compute
basic net income per share of 7,153,000 and 8,434,000 for the year ended
December 31, 1997 and the six months ended June 30, 1998, respectively. Pro
forma diluted net income per share is computed using the pro forma weighted
average number of common and common equivalent shares outstanding. Pro forma
common equivalent shares, composed of unvested restricted Common Stock and
incremental common shares issuable upon the exercise of stock options and
warrants, are included in diluted net income per share to the extent such
shares are dilutive.
F-10
<PAGE>
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED)
Effective upon the closing of this Offering, the outstanding shares of
Series A and Series B Convertible Preferred Stock will automatically convert
into 5,029,425 and 4,246,248 shares, respectively, of Common Stock. The pro
forma effects of these transactions are unaudited and have been reflected in
the accompanying pro forma consolidated balance sheet at June 30, 1998. See
Note 11--Subsequent Events.
UNAUDITED INTERIM RESULTS
The accompanying interim consolidated financial statements as of June 30,
1998, and for the six months ended June 30, 1997 and 1998, are unaudited. The
unaudited interim consolidated financial statements have been prepared on the
same basis as the annual consolidated financial statements and, in the opinion
of management, reflect all adjustments, which include only normal recurring
adjustments, necessary to present fairly the Company's financial position,
results of operations and cash flows as of June 30, 1998 and for the six
months ended June 30, 1997 and 1998. The financial data and other information
disclosed in these notes to consolidated financial statements related to these
periods are unaudited. The results for the six months ended June 30, 1998 are
not necessarily indicative of the results to be expected for the year ending
December 31, 1998.
COMPREHENSIVE INCOME
Effective January 1, 1998 the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current period presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. The disclosures prescribed by SFAS No. 131 will be
effective for the year ending December 31, 1998. The Company has determined
that it does not have any separately reportable business segments as of June
30, 1998.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1, "Software for Internal Use," which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP No. 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. The Company does not
expect that the adoption of SOP No. 98-1 will have a material impact on its
consolidated financial statements.
F-11
<PAGE>
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--ACQUISITION (UNAUDITED):
Effective June 30, 1998, the Company acquired all the outstanding shares of
Jump Incorporated ("Jump"), which provides a forum where Internet users can
buy and sell items in an online auction format. The acquisition has been
accounted for using the purchase method of accounting and accordingly, the
purchase price has been allocated to the tangible and intangible assets
acquired and liabilities assumed on the basis of their respective fair values
on the acquisition date. The fair value of intangible assets was determined
using a combination of methods, including replacement cost estimates for
acquired research and development and completed technology, a risk-adjusted
income approach for the acquired customer list and the amounts paid for
covenants not to compete.
The total purchase price of approximately $2.3 million consisted of 142,848
shares of the Company's Common Stock with an estimated fair value of
approximately $2.0 million and other acquisition related expenses of
approximately $335,000, consisting primarily of payments for non-compete
agreements totaling approximately $208,000 and legal and other professional
fees. Of the total purchase price, approximately $150,000 was allocated to in-
process technology and was immediately charged to operations because such in-
process technology had not reached the stage of technological feasibility at
the acquisition date and had no alternative future use. The remainder of the
purchase price was allocated to net tangible liabilities assumed ($31,000) and
intangible assets, including completed technology ($500,000), customer list
($1.5 million), covenants not to compete ($208,000) and goodwill ($24,000).
The intangible assets will be amortized over their estimated useful lives of 8
to 24 months.
The acquisition has been structured as a tax free exchange of stock,
therefore, the differences between the recognized fair values of the acquired
assets, including tangible assets, and their historical tax bases are not
deductible for tax purposes.
The following unaudited pro forma consolidated financial information
reflects the results of operations for the year ended December 31, 1997 and
the six months ended June 30, 1998, as if the acquisition had occurred on
January 1, 1997 and 1998, respectively, and after giving effect to purchase
accounting adjustments. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what
operating results would have been had the acquisitions actually taken place on
January 1, 1997 or 1998, and may not be indicative of future operating
results, (in thousands, except per share amounts).
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
1997 JUNE 30, 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
Revenues............................................. $ 5,755 $14,934
Income (loss) from operations........................ (655) 1,774
Net loss............................................. (1,199) (565)
Net loss per share:
Basic and diluted.................................. $ (0.16) $ (0.06)
Weighted average shares............................ 7,581 10,854
</TABLE>
F-12
<PAGE>
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997 JUNE 30, 1998
------ ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable, net:
Accounts receivable............................ $ 184 $ 1,385 $ 4,482
Less: Allowance for doubtful accounts.......... (18) (308) (1,073)
Allowance for authorized credits............. -- (53) (563)
----- ------- -------
$ 166 $ 1,024 $ 2,846
===== ======= =======
Property and equipment, net:
Computer equipment............................. $ 25 $ 608 $ 3,784
Furniture and fixtures......................... -- 115 226
Leasehold improvements......................... -- 5 38
----- ------- -------
25 728 4,048
Less: Accumulated depreciation and amortiza-
tion.......................................... (2) (76) (464)
----- ------- -------
$ 23 $ 652 $ 3,584
===== ======= =======
Property and equipment includes $0, $23,000 and $23,000 (unaudited) of
equipment under capital leases at December 31, 1996 and 1997 and June 30,
1998, respectively. Accumulated depreciation of assets under capital leases
totaled $0, $7,000 and $11,000 (unaudited) at December 31, 1996 and 1997, and
June 30, 1998, respectively.
<CAPTION>
DECEMBER 31,
--------------
1996 1997 JUNE 30, 1998
------ ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Intangible assets, net:
Purchased technology........................... $ -- $ -- $ 500
Covenants not to compete....................... -- -- 208
Customer list.................................. -- -- 1,484
Goodwill....................................... -- -- 24
----- ------- -------
-- -- 2,216
Less: Accumulated amortization................. -- -- --
----- ------- -------
$ -- $ -- $ 2,216
===== ======= =======
Other current liabilities:
Accrued compensation and related benefits...... $ 17 $ 68 $ 213
Advertising accruals........................... -- -- 546
Other accruals................................. -- 249 875
----- ------- -------
$ 17 $ 317 $ 1,634
===== ======= =======
</TABLE>
F-13
<PAGE>
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--RELATED PARTY TRANSACTIONS:
NOTES RECEIVABLE FROM STOCKHOLDERS
At December 31, 1996 and 1997 and June 30, 1998 (unaudited), the Company
held a note receivable from an officer of the Company totaling $68,000. The
note is full recourse, is secured by Common Stock and bears simple interest at
6% per annum. Interest is due and payable on each anniversary date of the
note. The principal is due on or before December 31, 2002. At June 30, 1998,
the Company also held notes receivable from employees and a director totaling
$1.5 million (unaudited) representing amounts owed to the Company from the
exercise of stock options. These notes include full recourse and non-recourse
obligations, are secured by Common Stock and bear interest at a rate of 8% per
annum. Interest is due and payable on December 1st of each year, and the
principal is due on or before December 1, 2002.
PROFESSIONAL SERVICES
In connection with the recruitment of its Chief Executive Officer, the
Company engaged the services of an executive search firm affiliated with a
holder of the Company's Series B Mandatorily Redeemable Convertible Preferred
Stock. During the six months ended June 30, 1998, the Company paid total fees
for services performed of $93,000 (unaudited) and issued 46,248 shares
(unaudited) of Series B Mandatorily Redeemable Convertible Preferred Stock
with a fair value on the date earned of $93,000 (unaudited). The amount paid
for the services and the fair value of the shares are included in general and
administrative expenses in the consolidated statement of income for the six
months ended June 30, 1998.
NOTE 5--DEBT:
LINE OF CREDIT
At December 31, 1997 and June 30, 1998, the Company had $545,000 and
$431,000 (unaudited), respectively, outstanding under a line of credit with a
financial institution. The line of credit provides for a revolving line,
including an equipment sub-limit facility, of up to $750,000 and is secured by
certain assets of the Company. Advances under the equipment sub-limit facility
were limited to specific property and equipment acquisitions through January
5, 1998. The line of credit accrues interest at a variable rate determined by
the bank (9.75% at December 31, 1997 and June 30, 1998 (unaudited)) and is
repayable in twenty-four monthly installments of principal and accrued
interest through January 5, 2000. Under the line of credit, the Company is
required to comply with certain financial covenants. The Company was in
compliance with all such covenants at December 31, 1997 and June 30, 1998,
(unaudited).
As of December 31, 1997, the future payments under the line of credit were
as follows, (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998................................................................ $ 251
1999................................................................ 272
2000................................................................ 22
-----
545
Less current portion................................................ (251)
-----
Long-term portion................................................... $ 294
=====
</TABLE>
F-14
<PAGE>
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--COMMITMENTS:
LEASES
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through the year 2001. Rent
expense for the years ended December 31, 1996 and 1997, and for the six months
ended June 30, 1997 and 1998, totaled $9,000, $223,000, $32,000 (unaudited)
and $271,000 (unaudited), respectively.
Future minimum lease payments under non-cancelable operating leases and
capital leases, including lease commitments entered into subsequent to
December 31, 1997, are as follows, (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ ------- ---------
<S> <C> <C>
1998..................................................... $10 $ 653
1999..................................................... 10 701
2000..................................................... 3 247
2001..................................................... -- 108
--- ------
Total minimum lease payments............................. 23 $1,709
======
Less amount representing interest........................ (5)
---
Present value of capital lease obligations............... 18
Less current portion..................................... (7)
---
Long-term portion........................................ $11
===
</TABLE>
LETTER OF CREDIT
At December 31, 1997 and June 30, 1998 (unaudited), the Company maintained a
$202,000 letter of credit to secure the lease deposit on its office facility.
The letter of credit expires December 1, 1999, and is secured by the line of
credit.
ADVERTISING
At December 31, 1997 the Company had $750,000 committed under certain non-
cancelable advertising agreements extending into fiscal 1998.
NOTE 7--INCOME TAXES:
The provision for income taxes consists of the following, (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------- ---------------
1996 1997 1997 1998
------ ------ ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal......................................... $ 40 $ 450 $ 294 $ 2,020
State and local................................. 11 117 68 532
------ ------ ------ --------
51 567 362 2,552
------ ------ ------ --------
Deferred:
Federal......................................... 47 87 -- --
State and local................................. 8 15 -- --
------ ------ ------ --------
55 102 -- --
------ ------ ------ --------
$ 106 $ 669 $ 362 $ 2,552
====== ====== ====== ========
</TABLE>
F-15
<PAGE>
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a reconciliation of the difference between the actual
provision for income taxes and the provision computed by applying the federal
statutory rate of 34% to income before income taxes, (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------- ---------------
1996 1997 1997 1998
------ ------ ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Provision at statutory rate...................... $ 87 $ 525 $ 288 $ 986
Permanent differences:
Acquisition costs.............................. -- -- -- 295
Stock compensation............................. -- -- -- 705
Other.......................................... -- 12 6 34
State taxes, net of federal benefit.............. 19 132 68 532
------ ------ ------ --------
$ 106 $ 669 $ 362 $ 2,552
====== ====== ====== ========
</TABLE>
Under SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences of differences between the carrying amounts of
assets and liabilities and their respective tax bases using enacted tax rates
in effect for the year in which the differences are expected to reverse.
Deferred tax liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1996 1997 1998
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax liabilities:
Accruals and reserves............................... $ 54 $ 154 $154
Depreciation........................................ 1 3 3
----- ------ ----
$ 55 $ 157 $157
===== ====== ====
</TABLE>
NOTE 8--CONVERTIBLE PREFERRED STOCK:
Convertible Preferred Stock at December 31, 1997 was composed of the
following (in thousands):
<TABLE>
<CAPTION>
SHARES
---------------------- LIQUIDATION REDEMPTION
AUTHORIZED OUTSTANDING AMOUNT AMOUNT
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Series A.......................... 1,676 1,676 $1,000 $ --
Series B.......................... 1,415 1,000 4,500 3,000
Undesignated...................... 2,909 -- -- --
----- ----- ------ ------
6,000 2,676 $5,500 $3,000
===== ===== ====== ======
</TABLE>
At June 30, 1998, the redemption amount of the Series B Mandatorily
Redeemable Convertible Preferred Stock was $5.1 million (unaudited) based on
1.4 million shares outstanding. See Note 11--Subsequent Events.
The holders of Preferred Stock have various rights and preferences as
follows:
VOTING
Each share of Series A and Series B has voting rights equal to the number of
shares of Common Stock into which it is convertible and votes together as one
class with the Common Stock.
F-16
<PAGE>
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As long as shares of Series B remain outstanding, the Company must obtain
the approval of the holders of not less than two-thirds of the shares of
Series B to alter the articles of incorporation as related to Series B, change
the number of shares of Preferred Stock or Series B Preferred Stock, authorize
or issue shares of any class of stock having rights and privileges superior to
or in parity with Series B, authorize a liquidation event, increase the
authorized number of directors, pay or declare dividends, or repurchase or
acquire any shares of Common Stock other than pursuant to the terms of an
equity incentive agreement giving the Company the right to repurchase the
shares upon termination of the agreement.
DIVIDENDS
Holders of Series B are entitled to receive cumulative dividends at the per
annum rate of $0.30 per share, payable as and when declared by the Board of
Directors in preference and priority to payment of any dividend on any shares
of Series A Preferred or Common Stock. Holders of Series A are entitled to
receive non-cumulative dividends at the per annum rate of $0.05 per share,
payable as and when declared by the Board of Directors in preference and
priority to any payment of any dividend on any shares of Common Stock. No
dividends have been declared or paid from Inception through December 31, 1997,
or during the six months ended June 30, 1998 (unaudited).
LIQUIDATION
In the event of any liquidation, dissolution or winding up of the Company,
including a merger, acquisition or sale of assets where the beneficial owners
of the Company's Common Stock and Preferred Stock own less than 51% of the
resulting voting power of the surviving entity, the holders of Series B are
entitled to receive an amount equal to $4.50 per share plus any declared but
unpaid dividends prior and in preference to any distribution to the holders of
Series A or the holders of Common Stock. If the assets and funds thus
distributed are insufficient to permit full payment to holders of Series B,
all assets and funds will be distributed ratably among the holders of Series
B.
After payment has been made to the holders of Series B, the holders of
Series A are entitled to receive an amount equal to $0.5965 per share plus any
declared but unpaid dividends prior and in preference to the holders of Common
Stock. If the assets and funds thus distributed are insufficient to permit
full payment to holders of Series A, all remaining assets and funds will be
distributed ratably among the holders of all classes of stock based on the
number of shares held by each holder.
After payment has been made to the holders of Series B and Series A, the
remaining assets of the Company will be distributed ratably among the holders
of all classes of stock based on the number of shares held by each holder.
Distribution rights for the holders of Series B, as described, will cease at
such time as the holders receive an aggregate of $9.00 per share.
REDEMPTION
Upon the request of holders of at least two-thirds of the outstanding shares
of Series B, the shares may be redeemed in three annual installments beginning
not earlier than January 1, 2003 and continuing thereafter on the first and
second anniversaries of the initial redemption date. The shares may be
redeemed at a price equal to the original issue price, subject to adjustment
for dilution and declared but unpaid dividends. The difference between the
Series B carrying value and its redemption value (resulting primarily from the
value attributed to the Series B warrants) is being accreted ratably as a
charge to retained earnings through January 1, 2003.
F-17
<PAGE>
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Series A Convertible Preferred Stock has no redemption privileges.
CONVERSION
Each share of Series A and Series B is convertible, at the option of the
holder, according to a conversion ratio which is three-for-one, subject to
adjustment for dilution. Each share of Series A and Series B automatically
converts into the number of shares of Common Stock into which such shares are
convertible at the then effective conversion ratio upon either the closing of
a public offering of Common Stock at a per share price of at least $4.00 per
share with gross proceeds of at least $7,500,000, or the date upon which a
total of two-thirds of the number of shares of such series of Preferred Stock
originally issued have been converted into shares of Common Stock.
WARRANTS FOR SERIES B MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
In connection with the issuance of Series B, the Company issued warrants to
purchase 400,000 additional shares of Series B with an exercise price of $5.00
per share. The warrants can be exercised up to the earlier of the closing of a
public offering, the proceeds of which exceed $7,500,000, or June 2000. The
Company determined that the fair value of the warrants approximated $278,000
on the date of grant. See Note 11--Subsequent Events.
NOTE 9--COMMON STOCK:
The Company's Certificate of Incorporation, as amended, authorizes the
Company to issue 60,000,000 shares of Common Stock. A portion of the shares
are subject to repurchase by the Company over a four year period from the
earlier of the issuance date or employee hire date, as applicable. At December
31, 1997 and June 30, 1998, there were 11,050,000 and 14,115,442 (unaudited)
shares, respectively, subject to repurchase rights at an average price of
$0.01 and $0.19 (unaudited), respectively, per share.
At June 30, 1998, the Company had reserved shares of Common Stock for future
issuance as follows, (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------
(UNAUDITED)
<S> <C>
Conversion of Series A Preferred Stock......................... 5,029
Conversion of Series B Preferred Stock......................... 4,246
Exercise of options under stock option plans................... 2,033
------
11,308
======
</TABLE>
NOTE 10--EMPLOYEE BENEFIT PLANS:
401(K) SAVINGS PLAN
The Company has a savings plan (the "Savings Plan") that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a percentage (not to
exceed 25%) of their eligible pretax earnings up to the Internal Revenue
Service's annual contribution limit. All employees on the United States
payroll of the Company are eligible to participate in the Plan. The Company is
not required to contribute to the Savings Plan and has made no contributions
since the inception of the Savings Plan.
F-18
<PAGE>
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STOCK OPTION PLANS
In December 1996, the Company's Board of Directors adopted the 1996 Stock
Option Plan, and in June 1997, adopted the 1997 Stock Option Plan
(collectively, the "Plans"). The Plans provide for the granting of stock
options to employees and consultants of the Company. Options granted under the
Plans may be either incentive stock options ("ISO") or nonqualified stock
options ("NSO"). ISOs may be granted only to Company employees (including
officers and directors who are also employees). NSOs may be granted to Company
employees and consultants.
Options under the Plans may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date
of grant as determined by the Board of Directors, provided, however, that (i)
the exercise price of an ISO may not be less than 100% of the estimated fair
value of the shares on the date of grant, and (ii) the exercise price of an
ISO granted to a 10% shareholder may not be less than 110% of the estimated
fair value of the shares on the date of grant. Options are exercisable
immediately, subject to repurchase rights held by the Company which lapse over
a maximum period of ten years, at such times and under such conditions as
determined by the Board of Directors, generally four years.
The following table summarizes activity under the Plans for the years ended
December 31, 1996 and 1997 and the six months ended June 30, 1998 (shares in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------- SIX MONTHS ENDED
1996 1997 JUNE 30, 1998
--------------- ---------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period................ -- $ -- 225 $0.01 3,930 $ 0.07
Granted................... 225 0.01 3,864 0.07 3,702 1.74
Exercised................. -- -- -- -- (6,492) 0.43
Cancelled................. -- -- (159) 0.03 (69) 1.88
--- ----- --------
Outstanding at end of
period................... 225 0.01 3,930 0.07 1,071 3.52
=== ===== ========
Options exercisable at
period end............... 225 3,930 0.07 1,071 3.52
=== ===== ========
Weighted average minimum
value of
options granted during
period................... 0.01 0.29 3.20
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1997 (shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT OPTIONS EXERCISABLE AT
DECEMBER 31, 1997 DECEMBER 31, 1997
---------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
RANGE OF EXERCISE SHARES CONTRACTUAL EXERCISE SHARES EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------------- ----------- ----------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
$0.01-$0.02............. 872 9.0 years $0.01 872 $ 0.01
0.03- 0.10............. 3,058 9.7 0.09 3,058 0.09
----- -----------
3,930 9.6 0.07 3,930 0.07
===== ===========
</TABLE>
F-19
<PAGE>
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about fixed stock options
outstanding at June 30, 1998 (unaudited) (shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT OPTIONS EXERCISABLE AT
JUNE 30, 1998 JUNE 30, 1998
---------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
RANGE OF EXERCISE SHARES CONTRACTUAL EXERCISE SHARES EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------------- ----------- ----------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
$0.03-$0.20............. 429 9.3 years $0.10 429 $ 0.10
0.67- 2.00............. 244 9.8 1.97 244 1.97
3.00- 3.00............. 75 9.9 3.00 75 3.00
9.33- 9.33............. 323 9.9 9.33 323 9.33
----- -----------
1,071 9.6 3.52 1,071 3.52
===== ===========
</TABLE>
FAIR VALUE DISCLOSURES
The Company calculated the minimum fair value of each option grant on the
date of grant using the Black-Scholes option pricing model as prescribed by
SFAS No. 123 using the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
--------------- JUNE 30,
1996 1997 1998
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Risk-free interest rates....................... 6.0% 5.9% 5.5%
Expected lives (in years)...................... 5.0 5.0 3.5
Dividend yield................................. 0% 0% 0%
Expected volatility............................ 0% 0% 0%
</TABLE>
The compensation cost associated with the Company's stock-based compensation
plans, determined using the minimum value method prescribed by SFAS No. 123,
did not result in a material difference from the reported net income for the
years ended December 31, 1996 and 1997 and for the six months ended June 30,
1997 and 1998 (unaudited).
UNEARNED STOCK-BASED COMPENSATION
In connection with certain stock option grants during the year ended
December 31, 1997 and the six months ended June 30, 1998, the Company
recognized unearned compensation totaling $819,000 and $4.9 million
(unaudited), respectively, which is being amortized over the four year vesting
periods of the related options. Amortization expense recognized during the
year ended December 31, 1997 and the six months ended June 30, 1998 totaled
approximately $25,000 and $938,000 (unaudited), respectively.
F-20
<PAGE>
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--SUBSEQUENT EVENTS (UNAUDITED):
STOCK SPLIT
Prior to the effectiveness of the Company's initial public offering, the
Company's Board of Directors intends to effect a three-for-one stock split of
the outstanding shares of Common Stock. All share and per share information
included in these consolidated financial statements have been retroactively
adjusted to reflect this stock split.
SERIES B WARRANTS
In May 1998, the Series B Warrants were exercised, resulting in the issuance
of 400,000 shares of Series B Mandatorily Redeemable Convertible Preferred
Stock in exchange for cash proceeds totaling $2.0 million. See Note 8--
Convertible Preferred Stock.
SALE OF COMMON STOCK
In June 1998, in connection with the appointment of two outside directors,
the Company sold an aggregate of 214,500 shares of Common Stock to two
directors and realized net proceeds of $2.0 million. The Company recognized
the $429,000 difference between the estimated fair value of the stock and the
price paid by the two directors as general and administrative expense during
the six months ended June 30, 1998.
STOCK OPTION GRANTS
During the period from July 1, 1998 through August 14, 1998, the Company
granted options to purchase 1,389,750 shares of Common Stock to new employees
at exercise prices of $14 and 15 per share.
EMPLOYEE STOCK PURCHASE PLAN
In July 1998, the Board adopted, and in August 1998 the Company's
stockholders approved, the 1998 Employee Stock Purchase Plan (the "Purchase
Plan") and reserved 300,000 shares of Common Stock for issuance thereunder. On
each January 1, the aggregate number of shares reserved for issuance under the
Purchase Plan will be increased automatically by the number of shares
purchased under the Purchase Plan in the preceding calendar year. The
aggregate number of shares reserved for issuance under the Purchase Plan shall
not exceed 1,500,000 shares. The Purchase Plan will become effective on the
first business day on which price quotations for the Company's Common Stock
are available on the Nasdaq National Market. Employees generally will be
eligible to participate in the Purchase Plan if they are customarily employed
by the Company for more than 20 hours per week and more than five months in a
calendar year and are not (and would not become as a result of being granted
an option under the Purchase Plan) 5% stockholders of the Company. Under the
Purchase Plan, eligible employees may select a rate of payroll deduction
between 2% and 10% of their W-2 cash compensation subject to certain maximum
purchase limitations. Each offering period will have a maximum duration of two
years and consists of four six-month Purchase Periods. The first Offering
Period is expected to begin on the first business day on which price
quotations for the Company's Common Stock are available on the Nasdaq National
Market. Depending on the Effective Date, the first Purchase Period may be more
or less than six months long. Offering Periods and Purchase Periods thereafter
will begin on April 1 and November 1. The price at which the Common Stock is
purchased under the Purchase Plan is 85% of the lesser of the fair market
value of the Company's Common Stock on the first day of the applicable
offering period or on the last day of that purchase period. The Purchase Plan
will terminate after a period of ten years unless terminated earlier as
permitted by the Purchase Plan.
F-21
<PAGE>
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1998 EQUITY INCENTIVE PLAN
In July 1998, the Board adopted, and in August 1998 the Company's
stockholders approved, the 1998 Equity Incentive Plan (the "1998 Plan") and
reserved 4,500,000 shares of Common Stock for issuance thereunder. The 1998
Plan authorized the award of options, restricted stock awards and stock
bonuses (each an "Award"). No person will be eligible to receive more than
1,000,000 shares in any calendar year pursuant to Awards under the 1998 Plan
other than a new employee of the Company who will be eligible to receive no
more than 2,000,000 shares in the calendar year in which such employee
commences employment. Options granted under the 1998 Plan may be either
incentive stock options ("ISO") or nonqualified stock options ("NSO"). ISOs
may be granted only to Company employees (including officers and directors who
are also employees). NSOs may be granted to Company employees, officers,
directors, consultants, independent contractors and advisors of the Company.
Options under the Plan may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date
of grant as determined by the Board of Directors, provided, however, that (i)
the exercise price of an ISO may not be less than 100% of the estimated fair
value of the shares on the date of grant, and (ii) the exercise price of an
ISO granted to a 10% shareholder may not be less than 110% of the estimated
fair value of the shares on the date of grant. The maximum term of options
granted under the 1998 Plan is ten years.
1998 DIRECTORS STOCK OPTION PLAN
In July 1998, the Board adopted, and in August 1998 the Company's
stockholders approved, the Directors Plan and reserved a total of 200,000
shares of the Company's Common Stock for issuance thereunder. Members of the
Board who are not employees of the Company, or any parent, subsidiary or
affiliate of the Company, are eligible to participate in the Directors Plan.
The option grants under the Directors Plan are automatic and nondiscretionary,
and the exercise price of the options must be 100% of the fair market value of
the Common Stock on the date of grant. Each eligible director who first
becomes a member of the Board on or after the effective date of the
Registration Statement of which this Prospectus forms a part (the "Effective
Date") will initially be granted an option to purchase 30,000 shares (an
"Initial Grant") on the date such director first becomes a director.
Immediately following each Annual Meeting of the Company, each eligible
director will automatically be granted an additional option to purchase 5,000
shares if such director has served continuously as a member of the Board since
the date of such director's Initial Grant or, if such director was ineligible
to receive an Initial Grant, since the Effective Date. The term of such
options is ten years, provided that they will terminate 7 months following the
date the director ceases to be a director or a consultant of the Company
(twelve months if the termination is due to death or disability). All options
granted under the Directors Plan will vest as to 25% of the shares on the
first anniversary of the date of grant and as to 2.08% of the shares each
month thereafter, provided the optionee continues as a member of the Board or
as a consultant to the Company.
F-22
<PAGE>
EBAY INC.
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
OVERVIEW
Effective June 30, 1998, the Company acquired all the outstanding shares of
Jump Incorporated ("Jump"), which provides a forum where Internet users can
buy and sell items in an online auction format. The acquisition has been
accounted for using the purchase method of accounting and accordingly, the
purchase price has been allocated to the tangible and intangible assets
acquired and liabilities assumed on the basis of their respective fair values
on the acquisition date. The fair value of intangible assets was determined
using a combination of methods, including replacement cost estimates for
acquired research and development and completed technology, a risk-adjusted
income approach for the acquired customer list and the amounts paid for
covenants not to compete.
The total purchase price of approximately $2.3 million consisted of 142,848
shares of the Company's Common Stock with an estimated fair value of
approximately $2.0 million and other acquisition related expenses of
approximately $335,000, consisting primarily of payments for non-compete
agreements totaling approximately $208,000 and legal and other professional
fees. Of the total purchase price, approximately $150,000 was allocated to in-
process technology and immediately charged to operations because such in-
process technology had not reached the stage of technological feasibility at
the acquisition date and had no alternative future use. The remainder of the
purchase price was allocated to net tangible liabilities assumed ($31,000) and
intangible assets, including completed technology ($500,000), customer list
($1.5 million), covenants not to compete ($208,000) and goodwill ($24,000).
The acquired intangible assets will be amortized over their estimated useful
lives of 8 to 24 months.
The acquisition has been structured as a tax free exchange of stock,
therefore, the differences between the recognized fair values of acquired
assets, including tangible assets, and their historical tax bases are not
deductible for tax purposes.
The following unaudited pro forma consolidated financial statement of
operations gives effect to this acquisition as if it had occurred on January
1, 1997, by consolidating the results of operations of Jump with the results
of operations of eBay Inc. for the year ended December 31, 1997 and the six
months ended June 30, 1998.
The unaudited pro forma consolidated statement of operations are not
necessarily indicative of the operating results that would have been achieved
had the transactions been in effect as of the beginning of the periods
presented and should not be construed as being representative of future
operating results.
The historical financial statements of the Company and Jump are included
elsewhere in this Prospectus and the unaudited pro forma consolidated
financial information presented herein should be read in conjunction with
those financial statements and related notes.
F-23
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 SIX MONTHS ENDED JUNE 30, 1998
------------------------------------------------ --------------------------------------------
JUMP JUMP
EBAY INC. INCORPORATED ADJUSTMENTS PRO FORMA EBAY INC. INCORPORATED ADJUSTMENTS PRO FORMA
--------- ------------ ----------- --------- --------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $5,744 $ 11 $ -- $ 5,755 $14,922 $ 12 $ -- $14,934
Cost of net revenues.... 746 9 -- 755 1,736 3 -- 1,739
------ ---- ------- ------- ------- ---- ----- -------
Gross profit........... 4,998 2 -- 5,000 13,186 9 -- 13,195
------ ---- ------- ------- ------- ---- ----- -------
Operating expenses:
Sales and marketing.... 1,730 2 165(C) 1,897 4,445 -- -- 4,445
Product development.... 831 10 841 1,548 8 -- 1,556
General and
administrative........ 950 7 957 4,054 21 -- 4,075
Amortization of
intangible assets..... -- -- 1,810(A)(B) 1,810 -- -- 354(B) 354
------ ---- ------- ------- ------- ---- ----- -------
Total operating
expenses.............. 3,511 19 1,975 5,505 10,047 29 354 10,430
------ ---- ------- ------- ------- ---- ----- -------
Income from
operations............ 1,487 (17) (1,975) (505) 3,139 (20) (354) 2,765
------ ---- ------- ------- ------- ---- ----- -------
Interest and other
income, net............ 59 -- -- 59 101 -- -- 101
Interest expense........ (3) -- -- (3) (25) (1) -- (26)
------ ---- ------- ------- ------- ---- ----- -------
Income (loss) before
income taxes........... 1,543 (17) (1,975) (449) 3,215 (21) (354) 2,840
------ ---- ------- ------- ------- ---- ----- -------
Provision for income
taxes.................. (669) -- 69(C) (600) (2,483) -- -- (2,483)
------ ---- ------- ------- ------- ---- ----- -------
Net income (loss)....... $ 874 $(17) $(1,906) $(1,049) $ 732 $(21) $(354) $ 357
====== ==== ======= ======= ======= ==== ===== =======
Pro forma net income per
share (D):
Basic.................. $ (0.07) $ .02
======= =======
Weighted average
shares--basic......... 14,734 19,287
======= =======
Diluted................ $ (0.07) $ .01
======= =======
Weighted average
shares--diluted....... 14,734 34,374
======= =======
</TABLE>
See accompanying notes to Pro Forma Consolidated Financial Information
F-24
<PAGE>
EBAY INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
(IN THOUSANDS)
The following adjustments were applied to the Company's historical financial
statements and those of Jump to arrive at the pro forma consolidated financial
information. The pro forma consolidated financial information excludes the
non-recurring charge for acquired in-process technology associated with the
acquisition totaling $150,000.
(A) To record amortization of acquired completed technology totaling
$500,000 over the estimated period of benefit of 8 months.
(B) To record amortization of: acquired customer list totaling $1.5
million over the estimated period of benefit of 15 months, covenants not to
compete totaling $208,000 over the estimated period of benefit of 24
months, and acquired goodwill totaling $24,000 over the estimated period of
benefit of 15 months.
(C) To record employment agreement signing bonuses and related income tax
effect totaling $165,000 and $69,000, respectively, for employees of Jump
subsequently retained by the Company.
(D) Pro forma basic net income per share for the year ended December 31,
1997 and the six months ended June 30, 1998 is computed using the weighted
average number of common shares outstanding, including the pro forma
effects of the automatic conversion of the Company's Series A and Series B
Convertible Preferred Stock into shares of the Company's Common Stock
effective upon the closing of this Offering as if such conversion occurred
on January 1, 1997, or at date of original issuance, if later. Pro forma
diluted net income per share is computed using the pro forma weighted
average number of common and common equivalent shares outstanding. Pro
forma common equivalent shares, composed of unvested restricted Common
Stock and incremental common shares issuable upon the exercise of stock
options and warrants, are included in diluted net income per share to the
extent such shares are dilutive. Differences between historical weighted
average shares outstanding and pro forma weighted average shares
outstanding used to compute net income per share result from the inclusion
of shares issued in conjunction with the acquisition as if such shares were
outstanding from January 1, 1997 and from the automatic conversion of the
Company's Series A and Series B Convertible Preferred Stock effective upon
the close of this Offering.
F-25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Jump Incorporated
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Jump Incorporated at December 31,
1997, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
July 10, 1998
F-26
<PAGE>
JUMP INCORPORATED
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................. $ 1,112 $ 1,200
Accounts receivable.................................. 5,344 12,243
-------- --------
Total current assets............................... 6,456 13,443
Property and equipment, net............................ 8,997 8,668
-------- --------
$ 15,453 $ 22,111
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable..................................... $ 3,475 $ 18,148
Accrued interest on notes payable to shareholders.... 435 1,093
Notes payable to shareholders........................ 21,786 34,128
-------- --------
25,696 53,369
-------- --------
Shareholders' deficit
Common Stock, no par value; 500 shares authorized;
300 issued and outstanding.......................... 6,900 6,900
Accumulated deficit.................................. (17,143) (38,158)
-------- --------
Total shareholders' deficit........................ (10,243) (31,258)
-------- --------
$ 15,453 $ 22,111
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
JUMP INCORPORATED
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR SIX MONTHS
ENDED ENDED
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Revenues:
Advertising.......................................... $ -- $ 12,243
Consulting services.................................. 11,344 --
-------- --------
Total revenues..................................... 11,344 12,243
-------- --------
Cost of revenues:
Advertising.......................................... -- 3,000
Consulting services.................................. 8,766 --
-------- --------
Total cost of revenues............................. 8,766 3,000
-------- --------
Gross profit........................................... 2,578 9,243
Operating expenses:
General and administrative........................... 7,314 21,223
Product development.................................. 10,410 8,377
Sales and marketing.................................. 1,562 --
-------- --------
Total operating expenses........................... 19,286 29,600
-------- --------
Loss from operations................................... (16,708) (20,357)
Interest expense....................................... (435) (658)
-------- --------
Net loss............................................... $(17,143) $(21,015)
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
JUMP INCORPORATED
STATEMENT OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------ ------ ----------- --------
<S> <C> <C> <C> <C>
Issuance of Common Stock................... 300 $6,900 $ -- $ 6,900
Net loss................................... -- -- (17,143) (17,143)
--- ------ -------- --------
Balance at December 31, 1997............... 300 6,900 (17,143) (10,243)
Net loss (Unaudited)....................... -- -- (21,015) (21,015)
--- ------ -------- --------
Balance at June 30, 1998 (Unaudited)....... 300 $6,900 $(38,158) $(31,258)
=== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
JUMP INCORPORATED
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(17,143) $(21,015)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization..................... 1,365 1,896
Changes in current assets and liabilities:
Accounts receivable.............................. (5,344) (6,899)
Accounts payable................................. 3,475 14,673
Accrued interest on notes payable to sharehold-
ers............................................. 435 658
-------- --------
Net cash used in operating activities................. (17,212) (10,687)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment.................. (10,362) (1,567)
-------- --------
Net cash used in investing activities................. (10,362) (1,567)
-------- --------
Cash flows from financing activities:
Proceeds for issuance of Common Stock............... 6,900 --
Proceeds from notes payable to shareholders......... 21,786 12,342
-------- --------
Net cash provided by financing activities............. 28,686 12,342
-------- --------
Net increase in cash.................................. 1,112 88
Cash at beginning of period........................... -- 1,112
-------- --------
Cash at end of period................................. $ 1,112 $ 1,200
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
JUMP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Jump Incorporated (the "Company") was incorporated in Ohio in October 1996.
The Company provides a forum where Internet users can buy and sell items in an
online auction format.
For the period from inception (October 1996) through December 31, 1996, the
Company had no revenues and incurred expenses of less than $2,000. The results
of operations for this period have been included in the 1997 financial
statements to facilitate presentation.
USE OF ESTIMATES
The preparation of 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 financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and accounts receivable. Cash is
deposited with high credit quality financial institutions. The Company's
accounts receivable are derived from revenue earned from customers located in
the U.S. and are denominated in U.S. dollars.
The Company had a single customer for the year ended December 31, 1997 that
accounted for all of the consulting revenue and accounts receivable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash, accounts receivable,
accounts payable and accrued interest to shareholders are carried at cost,
which approximates their fair value because of the short-term maturity of
these instruments.
PROPERTY AND EQUIPMENT
Property and equipment are stated at historical cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, generally three years.
PRODUCT DEVELOPMENT COST
Product development costs include expenses incurred by the Company to
develop, enhance, manage, monitor and operate the Company's Web site. Product
development costs are expensed as incurred.
REVENUE RECOGNITION
Advertising revenue is derived from the sale of advertising space on the
Company's Web site. Advertising revenue is recognized over the period the
advertisement is displayed.
F-31
<PAGE>
JUMP INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Consulting revenue was derived from a single time and material agreement and
was recognized and billed as services were provided.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets
are based on provisions of the enacted tax law; the effects of future changes
in tax laws or rates are not anticipated. The measurement of deferred tax
assets is reduced, if necessary, by the amount of any tax benefits that, based
on available evidence, are not expected to be realized.
UNAUDITED INTERIM RESULTS
The accompanying interim financial statements as of June 30, 1998, and for
the six months ended June 30, 1998, are unaudited. The unaudited interim
financial statements have been prepared on the same basis as the annual
financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the Company's financial position, results of operations and its
cash flows as of June 30, 1998 and for the six months ended June 30, 1998. The
financial data and other information disclosed in these notes to financial
statements related to these periods are unaudited. The results for the six
months ended June 30, 1998 are not necessarily indicative of the results to be
expected for the year ending December 31, 1998.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting comprehensive income
and its components in financial statements. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from nonowner
sources. To date, the Company has not had any transactions that are required
to be reported in comprehensive income.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. The disclosures prescribed by SFAS No. 131 will be
effective for the year ending December 31, 1998. The Company has determined
that it does not have any separately reportable business segments as of June
30, 1998.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1, "Software for Internal Use," which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP No. 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. The Company does not
expect that the adoption of SOP No. 98-1 will have a material impact on its
consolidated financial statements.
F-32
<PAGE>
JUMP INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Property and equipment,
net:
Computer equipment...... $10,362 $11,929
Less: Accumulated depre-
ciation and amortiza-
tion................... (1,365) (3,261)
------- -------
$ 8,997 $ 8,668
======= =======
</TABLE>
The Company had no allowances for doubtful accounts at December 31, 1997 or
June 30, 1998 (unaudited).
NOTE 3--INCOME TAXES:
No deferred provision or benefit for income taxes has been recorded as the
Company is in a net deferred tax asset position as a result of net operating
losses for which a full valuation has been provided as management believes
that it is more likely than not, based on available evidence, that the
deferred tax assets will not be realized.
At June 30, 1998, the Company has federal net operating loss carryforwards
of approximately $16,000, which expire in 2012. The income tax benefit from
the utilization of net operating loss carryforwards may be limited in certain
circumstances including, but not limited to, cumulative stock ownership
changes of more than 50% over a three year period.
NOTE 4--BORROWINGS:
NOTES PAYABLE
At December 31, 1997 and June 30, 1998, notes payable consists of amounts
payable to shareholders of the Company totaling 21,786 and 34,128 (unaudited),
respectively. The notes are payable upon demand by the holders and bear simple
interest from 5.6% to 6.2% per annum.
NOTE 5--SUBSEQUENT EVENTS (UNAUDITED):
On June 30, 1998, eBay Inc. acquired all of the Company's outstanding shares
of Common Stock, at which time the Company became a wholly owned subsidiary of
eBay Inc.
F-33
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the
Underwriters named below (the "Underwriters"), and each of such Underwriters,
for whom Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities
Corporation, BancAmerica Robertson Stephens and BT Alex. Brown Incorporated
are acting as representatives, has severally agreed to purchase from the
Company and the Selling Stockholders, the respective number of shares of
Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
----------- ---------
<S> <C>
Goldman, Sachs & Co...............................................
Donaldson, Lufkin & Jenrette Securities Corporation...............
BancAmerica Robertson Stephens....................................
BT Alex. Brown Incorporated.......................................
---------
Total......................................................... 3,500,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $ per share. The Underwriters may allow,
and such dealers may reallow, a concession of not in excess of $ per share
to certain brokers and dealers. After the shares of Common Stock are released
for sale to the public, the offering price and other selling terms may from
time to time be varied by the representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 525,000
additional shares of Common Stock at the initial public offering price per
share, less the underwriting discount, solely to cover over-allotments, if
any. If the Underwriters exercise their over-allotment option, the
Underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares to be
purchased by each of them, as shown in the foregoing table, bears to the
3,500,000 shares of Common Stock offered hereby.
The Company has agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the date 120 days after the
date of the final Prospectus for this offering, it will not offer, sell,
contract to sell or otherwise dispose of any securities of the Company (other
than pursuant to employee stock option or stock purchase plans existing, or on
the conversion or exchange of convertible or exchangeable securities
outstanding, on the date of this Prospectus) which are substantially similar
to the Common Stock or which are convertible into or exchangeable for
securities which are substantially similar to the Common Stock without the
prior written consent of the representatives, except for the shares of Common
Stock offered in connection with the offering.
U-1
<PAGE>
In addition, the Company's officers and directors and substantially all
holders of shares of capital stock of the Company, including the Selling
Stockholder, have agreed that, subject to certain limited exceptions, they
will not (i) offer to sell, sell, contract to sell, pledge or otherwise
dispose of any shares of Common Stock owned of record or beneficially prior to
the offering or any securities convertible into or exchangeable for such
shares of Common Stock, (ii) establish a "put equivalent position" with
respect to such Common Stock within the meaning of Rule 16a-1(h) under the
Securities Exchange Act of 1934, as amended, or (iii) publicly announce an
intention to take any of the actions set forth in (i) or (ii) for a period of
120 days following the date of the final Prospectus for this offering without
the prior written consent of the representatives.
At the request of the Company, the Underwriters have reserved up to 350,000
shares of Common Stock for sale, at the initial public offering price, to
employees and friends of the Company through a directed share program. The
number of shares of Common Stock available for sale to the general public in
the public offering will be reduced to the extent such persons purchase such
reserved shares.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed 5% of the total number of shares of Common
Stock offered by them.
Prior to the offering, there has been no public market for the shares. The
initial public offering price will be negotiated among the Company and the
representatives of the Underwriters. Among the factors to be considered in the
determining the initial public offering price of the Common Stock, in addition
to prevailing market conditions, will be the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuation of companies in related business.
In connection with the offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created by the Underwriters in connection with the offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of
preventing or retarding a decline in the market price of the Common Stock; and
syndicate short positions created by the Underwriters involve the sale by the
Underwriters of a greater number of shares of Common Stock than they are
required to purchase from the Company in the offering. The Underwriters also
may impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the securities sold in the
offering for their account may be reclaimed by the syndicate if such shares of
Common Stock are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Common Stock which may be higher than the price that might
otherwise prevail in the open market; and these activities, if commenced, may
be discontinued at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "EBAY."
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.
U-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFOR-
MATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 22
Dividend Policy.......................................................... 22
Capitalization........................................................... 23
Dilution................................................................. 24
Selected Consolidated Financial Data..................................... 25
Selected Pro Forma Consolidated
Financial Data.......................................................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
Business................................................................. 39
Management............................................................... 53
Certain Related Party Transactions....................................... 64
Principal and Selling Stockholders....................................... 67
Description of Capital Stock............................................. 69
Shares Eligible for Future Sale.......................................... 72
Legal Matters............................................................ 73
Experts.................................................................. 73
Additional Information................................................... 74
Index to Consolidated Financial Statements............................... F-1
Underwriting............................................................. U-1
</TABLE>
THROUGH AND INCLUDING , 1998 (THE 25TH DAY AFTER THE DATE OF THIS PROSPEC-
TUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,500,000 SHARES
EBAY INC.
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
-----------
[LOGO]
-----------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
BANCAMERICA ROBERTSON STEPHENS
BT ALEX. BROWN
REPRESENTATIVES OF THE UNDERWRITERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses to be paid by the
Company in connection with the sale of the shares of Common Stock being
registered hereby. All amounts are estimates except for the Securities and
Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $ 18,998
NASD filing fee.................................................... 6,940
Nasdaq National Market filing fee.................................. 50,000
Accounting fees and expenses....................................... 200,000
Legal fees and expenses............................................ 400,000
Printing and engraving expenses.................................... 175,000
Blue sky fees and expenses......................................... 10,000
Transfer agent and registrar fees and expenses..................... 5,000
Miscellaneous...................................................... 109,062
--------
Total............................................................ $975,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL") authorizes a
court to award, or a corporation's board of directors to grant, indemnity to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act").
As permitted by the DGCL, the Registrant's Amended and Restated Certificate
of Incorporation, which will become effective upon the closing of this
offering, includes a provision that eliminates the personal liability of its
directors for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the Registrant or its stockholders, (ii) for acts or omissions not in good
faith or that involve intentional misconduct or a knowing violation of law,
(iii) under section 174 of the DGCL (regarding unlawful dividends and stock
purchases) or (iv) for any transaction from which the director derived an
improper personal benefit.
As permitted by the DGCL, the Registrant's Amended and Restated Bylaws,
which will become effective upon the closing of this offering, provide that
(i) the Registrant is required to indemnify its directors and officers to the
fullest extent permitted by the DGCL, subject to certain very limited
exceptions, (ii) the Registrant is required to indemnify its other employees
to the extent that it indemnifies its officers and directors, unless otherwise
required by law, its Amended and Restated Certificate of Incorporation, its
Amended and Restated Bylaws or agreements, (iii) the Registrant is required to
advance expenses, as incurred, to its directors and officers in connection
with a legal proceeding to the fullest extent permitted by the DGCL, subject
to certain very limited exceptions and (iv) the rights conferred in the
Amended and Restated Bylaws are not exclusive.
Prior to the completion of this offering, the Registrant intends to enter
into Indemnity Agreements with each of its current directors and officers to
give such directors and officers additional contractual assurances regarding
the scope of the indemnification set forth in the Registrant's Amended and
Restated Certificate of Incorporation and Amended and Restated Bylaws and to
provide additional procedural protections. At present, there is no pending
litigation or proceeding involving a director, officer or employee of the
Registrant regarding which indemnification is sought, nor is the Registrant
aware of any threatened litigation that may result in claims for
indemnification.
II-1
<PAGE>
Reference is also made to Section 8 of the Underwriting Agreement, which
provides for the indemnification of officers, directors and controlling
persons of the Registrant against certain liabilities. The indemnification
provision in the Registrant's Amended and Restated Certificate of
Incorporation, Amended and Restated Bylaws and the Indemnity Agreements
entered into between the Registrant and each of its directors and officers may
be sufficiently broad to permit indemnification of the Registrant's directors
and officers for liabilities arising under the Securities Act.
The Registrant, with approval by the Registrant's Board of Directors,
expects to obtain directors' and officers' liability insurance.
See also the undertakings set out in response to Item 17.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
EXHIBIT
DOCUMENT NUMBER
-------- ------
<S> <C>
Form of Underwriting Agreement........................................ 1.01
Registrant's Amended and Restated Certificate of Incorporation........ 3.01
Registrant's Amended and Restated Bylaws.............................. 3.05
Investor Rights Agreement dated June 20, 1997......................... 4.02
Form of Indemnity Agreement........................................... 10.01
</TABLE>
II-2
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following table sets forth information regarding all securities sold by
the Registrant since its inception on May 13, 1996. All share numbers reflect
a 3-for-1 stock split to be effected immediately prior to the effectiveness of
this offering. For clarity of presentation, share numbers for the transactions
described below are adjusted for this proposed stock split and reflect a split
of both Common and Preferred Stock since, although not actually split, each
share of Preferred Stock will convert into three shares of Common Stock upon
the closing of this offering.
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PURCHASE PRICE
CLASS OF PURCHASERS DATE OF SALE TITLE OF SECURITIES SECURITIES AND FORM OF CONSIDERATION
------------------- ------------ --------------------- ---------- -------------------------
<S> <C> <C> <C> <C>
Pierre M. Omidyar 5/20/96 Common Stock 14,700,000(1) $14,262 consisting of
cash of $10,167 and
accounts receivable
of $4,095 from
Founder's sole
proprietorship.
Pierre M. Omidyar 12/12/96 Series A Preferred 5,029,425 In exchange for
Stock 4,500,000 of the
above listed shares
of Common Stock
Jeffrey S. Skoll 12/12/96 Common Stock 10,200,000 $68,000 Promissory
Note due December 31,
2002 with simple
interest at 6% per
year
Benchmark Capital 6/27/97 Series B Preferred 3,000,000 $3,000,000 cash
Partners, L.P. and Stock and Warrants to
Benchmark Founders' purchase 1,200,000
Fund, L.P. shares of Series B
Preferred Stock at
$1.67 per share
Ramsey/Beirne 3/13/98 Series B Preferred 46,248 In exchange for
Associates, Inc. Stock certain executive
recruiting services
provided to the
Company valued at
$92,496.
Benchmark Capital 5/7/98 Series B Preferred 1,200,000 $2,000,000 cash
Partners, L.P. and Stock (Warrant
Benchmark Founders' Exercise)
Fund, L.P.
Scott D. Cook 6/30/98 Common Stock 107,250 $1,001,000 cash
Howard D. Schultz 6/30/98 Common Stock (option 150,000 $1,050,000 cash and
exercise) $350,000 Promissory
Note due June 30,
2003 with interest at
8% per year
Maveron Equity Partners, 6/30/98 Common Stock 107,250 $1,001,000 cash
L.P.
Walter Carroll 6/30/98 Common Stock 142,848 Issued in exchange
Thomas Duvall for all of the
Robert Ratterman outstanding shares of
Christopher Downie Jump Incorporated
acquired by
Registrant
Employees/optionees 1/23/98- Common Stock (option 6,342,336(2) $1,410,544 cash and
6/30/98 exercises) Promissory Notes
</TABLE>
- --------
(1) In December 1996, 4,500,000 of these shares were exchanged for shares of
Series A Preferred Stock.
(2) Of these shares, 382,806 have been repurchased by the Registrant for an
aggregate purchase price of $123,584.
II-3
<PAGE>
All sales of Common Stock made pursuant to the exercise of stock options
granted under the 1996 Plan and the 1997 Plan to Registrant's officers,
directors, employees and consultants were made in reliance on Rule 701 under
the Securities Act or on Section 4(2) of the Securities Act.
All other sales were made in reliance on Section 4(2) of the Securities Act
and/or Regulation D promulgated under the Securities Act. These sales were
made without general solicitation or advertising. Each purchaser was a
sophisticated investor with access to all relevant information necessary to
evaluate the investment and represented to the Registrant that the shares were
being acquired for investment.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
1.01 Form of Underwriting Agreement.
2.01 Agreement and Plan of Merger by and between eBay, Inc., a California
corporation, and Registrant.*
2.02 Agreement and Plan of Merger and Reorganization among Registrant, Jump
Acquisition Sub, Inc., Jump Incorporated and certain shareholders of
Jump Incorporated dated as of June 30, 1998.*
3.01 Registrant's Certificate of Incorporation.*
3.02 Registrant's Certificate of Designation of Preferred Stock.*
3.03 Form of Registrant's Certificate of Amendment of Certificate of
Incorporation.
3.04 Form of Registrant's Amended and Restated Certificate of Incorporation
to be effective upon the closing of this offering.
3.05 Registrant's Bylaws.*
3.06 Form of Registrant's Amended and Restated Bylaws to be effective
immediately upon the closing of this offering.
3.07 Form of Certificate of Elimination of Series A, Series B and Series B1
Preferred Stock.
4.01 Form of Specimen Certificate for Registrant's Common Stock.
4.02 Investor Rights Agreement, dated June 20, 1997, between the Registrant
and certain stockholders named therein.*
5.01 Opinion of Fenwick & West LLP regarding legality of the securities
being registered.**
10.01 Form of Indemnity Agreement entered into by Registrant with each of
its directors and executive officers.*
10.02 Registrant's 1996 Stock Option Plan and related documents.*
10.03 Registrant's 1997 Stock Option Plan and related documents.*
10.04 Registrant's 1998 Equity Incentive Plan and related documents.*
10.05 Registrant's 1998 Directors Stock Option Plan and related documents.*
10.06 Registrant's 1998 Employee Stock Purchase Plan.*
10.07 Office Lease between Connecticut General Life Insurance Company, a
Connecticut corporation, and the Registrant dated September 30, 1996,
as amended through March 1998.*
10.08 Sublease between Information Storage Devices, Inc., a California
corporation, and Registrant dated August 4, 1997.*
10.09 Office Lease between Connecticut General Life Insurance Company, a
Connecticut corporation, and the Registrant dated April 10, 1998, as
amended June 9, 1998.*
10.10 Imperial Bank Starter Kit Loan and Security Agreement dated July 20,
1997 between Imperial Bank and Registrant.*
10.11 Intellectual Property Security Agreement dated July 20, 1997 between
Imperial Bank and Registrant.*
10.12 Exodus Communications, Inc. Internet Services and Products Agreement
and Co-Location Addendum effective as of May 1, 1997.
10.13 License Agreement between Thunderstone Software and Registrant.*
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
10.14 Employment Letter Agreement dated October 16, 1996 between Jeffrey
Skoll and Registrant.*
10.15 Employment Letter Agreement dated December 9, 1996 between Michael
Wilson and Registrant.*
10.16 Employment Letter Agreement dated August 8, 1997 between Steven Westly
and Registrant.*
10.17 Employment Letter Agreement dated September 15, 1997 between Gary
Bengier and Registrant.*
10.18 Employment Letter Agreement dated January 16, 1998 between Margaret C.
Whitman and Registrant.
10.19 Employment Letter Agreement dated August 14, 1998 between Brian Swette
and Registrant.
21.01 List of Subsidiaries.*
23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).**
23.02 Consent of PricewaterhouseCoopers LLP, independent accountants.
24.01 Power of Attorney.*
27.01 Financial Data Schedule.*
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES.
No financial statement schedules are provided because the information called
for is not required or is shown either in the consolidated financial
statements or the notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SAN JOSE, STATE OF
CALIFORNIA, ON THE 18TH DAY OF AUGUST, 1998.
eBay Inc.
By: /s/ Margaret C. Whitman
--------------------------------
MARGARET C. WHITMAN PRESIDENT AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT TO
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ Margaret C. Whitman President and Chief August 18, 1998
- ------------------------------------- Executive Officer
MARGARET C. WHITMAN
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:
/s/ Gary F. Bengier Chief Financial August 18, 1998
- ------------------------------------- Officer and Vice
GARY F. BENGIER President Operations
ADDITIONAL DIRECTORS:
Pierre M. Omidyar* Director August 18, 1998
- -------------------------------------
PIERRE M. OMIDYAR
Scott D. Cook* Director August 18, 1998
- -------------------------------------
SCOTT D. COOK
Robert C. Kagle* Director August 18, 1998
- -------------------------------------
ROBERT C. KAGLE
Howard D. Schultz* Director August 18, 1998
- -------------------------------------
HOWARD D. SCHULTZ
* By /s/ Gary F. Bengier
---------------------------------
GARY F. BENGIER
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
1.01 Form of Underwriting Agreement.
2.01 Agreement and Plan of Merger by and between eBay, Inc., a California
corporation, and Registrant.*
2.02 Agreement and Plan of Merger and Reorganization among Registrant, Jump
Acquisition Sub, Inc., Jump Incorporated and certain shareholders of
Jump Incorporated dated as of June 30, 1998.*
3.01 Registrant's Certificate of Incorporation.*
3.02 Registrant's Certificate of Designation of Preferred Stock.*
3.03 Form of Registrant's Certificate of Amendment of Certificate of
Incorporation.
3.04 Form of Registrant's Amended and Restated Certificate of Incorporation
to be effective upon the closing of this offering.
3.05 Registrant's Bylaws.*
3.06 Form of Registrant's Amended and Restated Bylaws to be effective
immediately upon the closing of this offering.
3.07 Form of Certificate of Elimination of Series A, Series B and Series B1
Preferred Stock.
4.01 Form of Specimen Certificate for Registrant's Common Stock.
4.02 Investor Rights Agreement, dated June 20, 1997, between the Registrant
and certain stockholders named therein.*
5.01 Opinion of Fenwick & West LLP regarding legality of the securities
being registered.**
10.01 Form of Indemnity Agreement entered into by Registrant with each of
its directors and executive officers.*
10.02 Registrant's 1996 Stock Option Plan and related documents.*
10.03 Registrant's 1997 Stock Option Plan and related documents.*
10.04 Registrant's 1998 Equity Incentive Plan and related documents.*
10.05 Registrant's 1998 Directors Stock Option Plan and related documents.*
10.06 Registrant's 1998 Employee Stock Purchase Plan.*
10.07 Office Lease between Connecticut General Life Insurance Company, a
Connecticut corporation, and the Registrant dated September 30, 1996,
as amended through March 1998.*
10.08 Sublease between Information Storage Devices, Inc., a California
corporation, and Registrant dated August 4, 1997.*
10.09 Office Lease between Connecticut General Life Insurance Company, a
Connecticut corporation, and the Registrant dated April 10, 1998, as
amended June 9, 1998.*
10.10 Imperial Bank Starter Kit Loan and Security Agreement dated July 20,
1997 between Imperial Bank and Registrant.*
10.11 Intellectual Property Security Agreement dated July 20, 1997 between
Imperial Bank and Registrant.*
10.12 Exodus Communications, Inc. Internet Services and Products Agreement
and Co-Location Addendum effective as of May 1, 1997.
10.13 License Agreement between Thunderstone Software and Registrant.*
10.14 Employment Letter Agreement dated October 16, 1996 between Jeffrey
Skoll and Registrant.*
10.15 Employment Letter Agreement dated December 9, 1996 between Michael
Wilson and Registrant.*
10.16 Employment Letter Agreement dated August 8, 1997 between Steven Westly
and Registrant.*
10.17 Employment Letter Agreement dated September 15, 1997 between Gary
Bengier and Registrant.*
10.18 Employment Letter Agreement dated January 16, 1998 between Margaret C.
Whitman and Registrant.
10.19 Employment Letter Agreement dated August 14, 1998 between Brian Swette
and Registrant.
21.01 List of Subsidiaries.*
23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).**
23.02 Consent of PricewaterhouseCoopers LLP, independent accountants.
24.01 Power of Attorney.*
27.01 Financial Data Schedule.*
</TABLE>
- -------
* Previously filed.
** To be filed by amendment.
<PAGE>
EXHIBIT 1.01
EBAY INC.
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
September ___, 1998
Goldman, Sachs & Co.
Donaldson, Lufkin & Jenrette Securities Corporation
BancAmerica Robertson Stephens
BT Alex. Brown Incorporated
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.
85 Broad Street,
New York, New York 10004
Ladies and Gentlemen:
eBay Inc., a Delaware corporation (the "Company"), proposes, subject to the
terms and conditions stated herein, to issue and sell to the Underwriters named
in Schedule I hereto (the "Underwriters") an aggregate of ____________________
shares and, at the election of the Underwriters, up to ______________________
additional shares of Common Stock, par value $.001 ("Stock"), of the Company,
and Community Foundation Silicon Valley (the "Selling Stockholder") proposes,
subject to the terms and conditions stated herein, to sell to the Underwriters
_________________ shares of Stock. The aggregate of the _________________ shares
to be sold by the Company and the Selling Stockholder is herein called the "Firm
Shares" and the ______________________ additional shares to be sold by the
Company are herein called the "Optional Shares". The Firm Shares and the
Optional Shares that the Underwriters elect to purchase pursuant to Section 2
hereof are herein collectively called the "Shares".
1. (a) The Company represents and warrants to, and agrees with, each of
the Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-59097)
(the "Initial Registration Statement") in respect of the Shares has been
filed with the Securities and Exchange Commission (the "Commission"); the
Initial Registration Statement and any post-effective amendment thereto,
each in the form heretofore delivered to you, and, excluding exhibits
thereto, to you for each of the other Underwriters, have been declared
effective by the Commission in such form; other than a registration
statement, if any, increasing the size of the offering (a "Rule 462(b)
Registration Statement"), filed pursuant to Rule 462(b) under the
Securities Act of 1933, as amended (the "Act"), which became effective upon
filing, no other document with respect to the Initial Registration
Statement has heretofore been filed with the Commission; and no stop order
suspending the effectiveness of the Initial Registration Statement, any
post-effective amendment thereto or the Rule 462(b) Registration Statement,
if
1
<PAGE>
any, has been issued and no proceeding for that purpose has been initiated
or threatened by the Commission (any preliminary prospectus included in the
Initial Registration Statement or filed with the Commission pursuant to
Rule 424(a) of the rules and regulations of the Commission under the Act is
hereinafter called a "Preliminary Prospectus"; the various parts of the
Initial Registration Statement and the Rule 462(b) Registration Statement,
if any, including all exhibits thereto and including the information
contained in the form of final prospectus filed with the Commission
pursuant to Rule 424(b) under the Act in accordance with Section 5(a)
hereof and deemed by virtue of Rule 430A under the Act to be part of the
Initial Registration Statement at the time it was declared effective or
such part of the Rule 462(b) Registration Statement, if any, became or
hereafter becomes effective, each as amended at the time such part of the
Initial Registration Statement became effective, are hereinafter
collectively called the "Registration Statement"; and such final
prospectus, in the form first filed pursuant to Rule 424(b) under the Act,
is hereinafter called the "Prospectus";
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the rules and regulations of
the Commission thereunder, and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter through
Goldman, Sachs & Co. expressly for use therein or by the Selling
Stockholder expressly for use in the preparation of the answers therein to
Items 7 and 11(m) of Form S-1;
(iii) The Registration Statement conforms, and the Prospectus
and any further amendments or supplements to the Registration Statement or
the Prospectus will conform, in all material respects to the requirements
of the Act and the rules and regulations of the Commission thereunder and
do not and will not, as of the applicable effective date as to the
Registration Statement and any amendment thereto and as of the applicable
filing date as to the Prospectus and any amendment or supplement thereto,
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in reliance
upon and in conformity with information furnished in writing to the Company
by an Underwriter through Goldman, Sachs & Co. expressly for use therein or
by the Selling Stockholder expressly for use in the preparation of the
answers therein to Items 7 and 11(m) of Form S-1;
(iv) The Company has not sustained since the date of the latest
audited financial statements included in the Prospectus any material loss
or interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as set forth
or contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the
Prospectus, there has not been any change in the capital stock (other than
in connection with the exercise of outstanding stock options described in
the Prospectus under the caption "Capitalization" ) or long-term debt of
the Company or any material adverse change, or any development involving a
prospective material adverse change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of
operations of the Company, otherwise than as set forth or contemplated in
the Prospectus;
2
<PAGE>
(v) The Company owns no real property and has good and marketable
title to all personal property owned by it, in each case free and clear of
all liens, encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of such property
and do not interfere with the use made and proposed to be made of such
property by the Company; and any real property and buildings held under
lease by the Company are held by it under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere with
the use made and proposed to be made of such property and buildings by the
Company;
(vi) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the Delaware,
with power and authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus, and has been duly
qualified as a foreign corporation for the transaction of business and is
in good standing under the laws of each other jurisdiction in which it owns
or leases properties or conducts any business so as to require such
qualification, or is subject to no material liability or disability by
reason of the failure to be so qualified in any such jurisdiction; the
Company has no material subsidiaries;
(vii) The Company will have an authorized capitalization as of
the First Time of Delivery (as defined in Section 4 hereof) as set forth in
the Prospectus for "pro forma as adjusted" under the caption
"Capitalization", and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are fully paid
and non-assessable and conform to the description of the Stock contained in
the Prospectus;
(viii) The unissued Shares to be issued and sold by the Company
to the Underwriters hereunder have been duly and validly authorized and,
when issued and delivered against payment therefor as provided herein, will
be duly and validly issued and fully paid and non-assessable and will
conform to the description of the Stock contained in the Prospectus;
(ix) The issue and sale of the Shares to be sold by the Company
and the compliance by the Company with all of the provisions of this
Agreement and the consummation of the transactions herein contemplated will
not conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed
of trust, loan agreement or other agreement or instrument to which the
Company is a party or by which the Company is bound or to which any of the
property or assets of the Company is subject, nor will such action result
in any violation of the provisions of the Certificate of Incorporation or
By-laws of the Company or any statute or any order, rule or regulation of
any court or governmental agency or body having jurisdiction over the
Company or any of its properties; and no consent, approval, authorization,
order, registration or qualification of or with any such court or
governmental agency or body is required for the issue and sale of the
Shares or the consummation by the Company of the transactions contemplated
by this Agreement, except the registration under the Act of the Shares and
such consents, approvals, authorizations, registrations or qualifications
as may be required under state securities or Blue Sky laws or the bylaws,
rules and regulations of the National Association Securities Dealers, Inc.
(the "NASD") in connection with the purchase and distribution of the Shares
by the Underwriters;
(x) The Company is not in violation of its Certificate of
Incorporation or By-laws or in default in the performance or observance of
any material obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust, loan agreement,
3
<PAGE>
lease or other agreement or instrument to which it is a party or by which
it or any of its properties may be bound;
(xi) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock, are accurate, complete and fair;
(xii) Other than as set forth in the Prospectus, there are no
legal or governmental proceedings pending to which the Company is a party
or of which any property of the Company is the subject which, if determined
adversely to the Company, would individually or in the aggregate have a
material adverse effect on the current or future consolidated financial
position, stockholders' equity or results of operations of the Company;
and, to the best of the Company's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened by
others;
(xiii) The Company is not and, after giving effect to the
offering and sale of the Shares, will not be an "investment company", as
such term is defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act");
(xiv) Pricewaterhouse Coopers LLP, who have certified certain
financial statements of the Company are independent public accountants as
required by the Act and the rules and regulations of the Commission
thereunder;
(xv) The Company owns or possesses, or can acquire on reasonable
terms, all licenses, inventions, copyrights, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service marks
and trade names, patents and patent rights necessary to carry on its
business as described in the Prospectus, and, except as set forth in the
Prospectus, the Company has not received any correspondence relating to any
of the foregoing or notice of infringement of or conflict with asserted
rights of others with respect to any of the foregoing which the Company
believes would, singly or in the aggregate, have a material adverse effect
on the Company;
(xvi) No material labor dispute with the employees of the
Company exists, or, to the knowledge of the Company, is imminent;
(xvii) The Company is insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts
as are prudent and customary in the business in which it is engaged; the
Company has not been refused any insurance coverage sought or applied for;
and the Company has no reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not have a material adverse
effect on the Company;
(xviii) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (i) transactions
are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and
4
<PAGE>
appropriate action is taken with respect to any differences;
(xix) All United States federal income tax returns of the
Company required by law to be filed have been filed and all taxes shown by
such returns or otherwise assessed, which are due and payable, have been
paid, except assessments against which appeals have been or will be
promptly taken and as to which adequate reserves have been provided. The
Company has filed all other tax returns that are required to have been
filed by it pursuant to applicable foreign, state, local or other law and
has paid all taxes due pursuant to such returns or pursuant to any
assessment received by the Company, except for such taxes, if any, as are
being contested in good faith and as to which adequate reserves have been
provided. The charges, accruals and reserves on the books of the Company
in respect of any income and corporation tax liability for any years not
finally determined are adequate to meet any assessments or re-assessments
for additional income tax for any years not finally determined.
(xx) Any certificate signed by any officer of the Company
delivered to the Underwriters or to counsel for the Underwriters shall be
deemed a representation and warranty by the Company to the Underwriters as
to the matters covered thereby.
(b) The Selling Stockholder represents and warrants to, and agrees
with, each of the Underwriters and the Company that:
(i) All consents, approvals, authorizations and orders necessary
for the execution and delivery by the Selling Stockholder of this Agreement
and for the sale and delivery of the Shares to be sold by the Selling
Stockholder hereunder, have been obtained; and the Selling Stockholder has
full right, power and authority to enter into this Agreement and to sell,
assign, transfer and deliver the Shares to be sold by the Selling
Stockholder hereunder;
(ii) The sale of the Shares to be sold by the Selling Stockholder
hereunder and the compliance by the Selling Stockholder with all of the
provisions of this Agreement and the consummation of the transactions
herein contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Selling Stockholder is a party or by
which the Selling Stockholder is bound or to which any of the property or
assets of the Selling Stockholder is subject, nor will such action result
in any violation of the Certificate of Incorporation or By-laws of the
Selling Stockholder or any statute or any order, rule or regulation of any
court or governmental agency or body having jurisdiction over the Selling
Stockholder or the property of the Selling Stockholder;
(iii) The Selling Stockholder has, and immediately prior to the
Time of Delivery (as defined in Section 4 hereof) for the Firm Shares the
Selling Stockholder will have, good and valid title to the Shares to be
sold by the Selling Stockholder hereunder, free and clear of all liens,
encumbrances, equities or claims; and, upon delivery of such Shares and
payment therefor pursuant hereto, good and valid title to such Shares, free
and clear of all liens, encumbrances, equities or claims, will pass to the
several Underwriters;
(iv) During the period beginning from the date hereof and
continuing to and including the date 120 days after the date of the
Prospectus, the Selling Stockholder will not, without the prior written
consent of either Goldman, Sachs & Co. acting alone or the Underwriters
acting together, directly or indirectly, (i) offer to sell, sell, contract
to sell, pledge or otherwise dispose of any shares of Stock or any
securities convertible into or exchangeable for Stock, or (ii) establish a
"put equivalent position" with respect to the Stock within the meaning of
5
<PAGE>
Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended, or
(iii) publicly announce an intention to take any of the actions set forth
in (i) or (ii) above.
(v) The Selling Stockholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Shares;
(vi) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto are made in reliance upon and in conformity
with written information furnished to the Company by the Selling
Stockholder expressly for use therein, such Preliminary Prospectus and the
Registration Statement did, and the Prospectus and any further amendments
or supplements to the Registration Statement and the Prospectus, when they
become effective or are filed with the Commission, as the case may be,
will, conform in all material respects to the requirements of the Act and
the rules and regulations of the Commission thereunder and will not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading; and
(vii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, the Selling Stockholder will deliver to you prior to or at
the First Time of Delivery (as defined in Section 4 hereof) a properly
completed and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations
in lieu thereof);
2. Subject to the terms and conditions herein set forth, (a) the Company
and the Selling Stockholder agree, severally and not jointly, to sell to each of
the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company and the Selling Stockholder, at a purchase
price per share of $____________________________, the number of Firm Shares (to
be adjusted by you so as to eliminate fractional shares) determined by
multiplying the aggregate number of Shares to be sold by the Company and the
Selling Stockholder by a fraction, the numerator of which is the aggregate
number of Firm Shares to be purchased by such Underwriter as set forth opposite
the name of such Underwriter in Schedule I hereto and the denominator of which
is the aggregate number of Firm Shares to be purchased by all of the
Underwriters from the Company and the Selling Stockholder hereunder and (b) in
the event and to the extent that the Underwriters shall exercise the election to
purchase Optional Shares as provided below, the Company agrees to sell to each
of the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company, at the purchase price per share set forth
in clause (a) of this Section 2, that portion of the number of Optional Shares
as to which such election shall have been exercised (to be adjusted by you so as
to eliminate fractional shares) determined by multiplying such number of
Optional Shares by a fraction the numerator of which is the maximum number of
Optional Shares which such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in Schedule I hereto and the denominator
of which is the maximum number of Optional Shares that all of the Underwriters
are entitled to purchase hereunder.
6
<PAGE>
The Company hereby grants to the Underwriters the right to purchase at
their election up to ________ Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the Company,
given within a period of 30 calendar days after the date of this Agreement and
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by you but
in no event earlier than the First Time of Delivery (as defined in Section 4
hereof) or, unless you and the Company otherwise agree in writing, earlier than
two or later than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company and the Selling Stockholder, shall be delivered by or on
behalf of the Company and the Selling Stockholder through the facilities of the
Depository Trust Company ("DTC"), to Goldman, Sachs & Co., for the account of
such Underwriter, against payment by or on behalf of such Underwriter of the
purchase price therefor by wire transfer of Federal (same-day) funds to the
account specified by the Company and the Selling Stockholder, as their interests
may appear, to Goldman Sachs & Co. at least forty-eight hours in advance. The
Company will cause the certificates representing the Shares to be made available
for checking and packaging at least twenty-four hours prior to the Time of
Delivery (as defined below) with respect thereto at the office of DTC or its
designated custodian (the "Designated Office"). The time and date of such
delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m., New
York time, on ____________________________, 19_____ or such other time and date
as Goldman, Sachs & Co. and, the Company and the Selling Stockholder may agree
upon in writing, and, with respect to the Optional Shares, 9:30 a.m., New York
time, on the date specified by Goldman, Sachs & Co. in the written notice given
by Goldman, Sachs & Co. of the Underwriters' election to purchase such Optional
Shares, or such other time and date as Goldman, Sachs & Co. and the Company may
agree upon in writing. Such time and date for delivery of the Firm Shares is
herein called the "First Time of Delivery", such time and date for delivery of
the Optional Shares, if not the First Time of Delivery, is herein called the
"Second Time of Delivery", and each such time and date for delivery is herein
called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or on
behalf of the parties hereto pursuant to Section 7 hereof, including the cross
receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(l) hereof, will be delivered at the offices
of Fenwick & West LLP, Two Palo Alto Square, Palo Alto, California (the "Closing
Location"), and the Shares will be delivered at the Designated Office, all at
such Time of Delivery. A meeting will be held at the Closing Location at 7:00
p.m., New York City time, on the New York Business Day next preceding such Time
of Delivery, at which meeting the final drafts of the documents to be delivered
pursuant to the preceding sentence will be available for review by the parties
hereto. For the purposes of this Section 4, "New York Business Day" shall mean
each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which
banking institutions in New York are generally authorized or obligated by law or
executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business
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on the second business day following the execution and delivery of this
Agreement, or, if applicable, such earlier time as may be required by Rule
430A(a)(3) under the Act; to make no further amendment or any supplement to the
Registration Statement or Prospectus prior to the last Time of Delivery which
shall be disapproved by you promptly after reasonable notice thereof; to advise
you, promptly after it receives notice thereof, of the time when any amendment
to the Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been filed and to
furnish you with copies thereof; to advise you, promptly after it receives
notice thereof, of the issuance by the Commission of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or
Prospectus, of the suspension of the qualification of the Shares for offering or
sale in any jurisdiction, of the initiation or threatening of any proceeding for
any such purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for additional
information; and, in the event of the issuance of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus or Prospectus or
suspending any such qualification, promptly to use its best efforts to obtain
the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may reasonably request and to
comply with such laws so as to permit the continuance of sales and dealings
therein in such jurisdictions for as long as may be necessary to complete the
distribution of the Shares, provided that in connection therewith the Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction;
(c) Prior to 12:00 P.M., New York City time, on the New York Business
Day next succeeding the date of this Agreement and from time to time, to furnish
the Underwriters with copies of the Prospectus in New York City in such
quantities as you may reasonably request, and, if the delivery of a prospectus
is required at any time prior to the expiration of nine months after the time of
issue of the Prospectus in connection with the offering or sale of the Shares
and if at such time any events shall have occurred as a result of which the
Prospectus as then amended or supplemented would include an untrue statement of
a material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made when such Prospectus is delivered, not misleading, or, if for any other
reason it shall be necessary during such period to amend or supplement the
Prospectus, to notify you and upon your request to prepare and furnish without
charge to each Underwriter and to any dealer in securities as many copies as you
may from time to time reasonably request of an amended Prospectus or a
supplement to the Prospectus which will correct such statement or omission or
effect such compliance, and in case any Underwriter is required to deliver a
prospectus in connection with sales of any of the Shares at any time nine months
or more after the time of issue of the Prospectus, upon your request but at the
expense of such Underwriter, to prepare and deliver to such Underwriter as many
copies as you may request of an amended or supplemented Prospectus complying
with Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the effective
date of the Registration Statement (as defined in Rule 158(c) under the Act), an
earnings statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Act and the rules and regulations
of the Commission thereunder (including, at the option of the Company, Rule
158);
(e) During the period beginning from the date hereof and continuing to
and including the date 120 days after the date of the Prospectus, not to offer,
sell, contract to sell or otherwise dispose of, except as provided hereunder,
any securities of the Company that are substantially similar to the Shares,
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock or any such
substantially similar securities (other than (i)
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pursuant to employee stock plans or agreements described in the Prospectus and
adopted prior to, or upon the conversion or exchange of convertible or
exchangeable securities outstanding as of, the date of this Agreement or (ii)
any shares of Stock or securities convertible into or exchangeable for Stock
issued as consideration for or to otherwise finance an acquisition of a business
or substantially all the assets of a business, provided, in each case that such
shares of Stock or other security (when taken together with all such other
securities previously issued pursuant to this exception) do not, or would not
upon conversion or exchange, represent more than 20% of the Company's then
outstanding shares of Stock, that such securities are issued in connection with
a transaction not requiring registration under the Act and that such shares are
subject to the same restriction on sale provided by this Section 5(e)).
(f) To furnish to its stockholders as soon as practicable after the
end of each fiscal year an annual report (including a balance sheet and
statements of income, stockholders' equity and cash flows of the Company and its
consolidated subsidiaries certified by independent public accountants) and to
make available to its stockholders as soon as practicable after the end of each
of the first three quarters of each fiscal year (beginning with the fiscal
quarter ending after the effective date of the Registration Statement),
consolidated summary financial information of the Company and its subsidiaries
for such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders generally, and to
deliver to you (i) as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission or any national
securities exchange on which any class of securities of the Company is listed;
and (ii) such additional information concerning the business and financial
condition of the Company as you may from time to time reasonably request (such
financial statements to be on a consolidated basis to the extent the accounts of
the Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the Shares
pursuant to this Agreement in the manner specified in the Prospectus under the
caption "Use of Proceeds";
(i) To use its best efforts to list for quotation the Shares on the
National Association of Securities Dealers Automated Quotations National Market
("NASDAQ");
(j) To file with the Commission such information on Form 10-Q or Form
10-K as may be required by Rule 463 under the Act; and
(k) If the Company elects to rely upon Rule 462(b), to file a Rule
462(b) Registration Statement with the Commission in compliance with Rule 462(b)
by 10:00 P.M., Washington, D.C. time, on the date of this Agreement, and at the
time of filing either to pay to the Commission the filing fee for the Rule
462(b) Registration Statement or to give irrevocable instructions for the
payment of such fee pursuant to Rule 111(b) under the Act.
6. The Company and the Selling Stockholder covenant and agree with the
several Underwriters that (a) the Company will pay or cause to be paid the
following: (i) the fees, disbursements and expenses of the Company's counsel
and accountants in connection with the registration of the Shares under the Act
and all other expenses in connection with the preparation, printing and filing
of the Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum,
closing documents (including any compilations thereof) and
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any other documents in connection with the offering, purchase, sale and delivery
of the Shares; (iii) all expenses in connection with the qualification of the
Shares for offering and sale under state securities laws as provided in Section
5(b) hereof, including the fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection with the
Blue Sky survey; (iv) all fees and expenses in connection with listing the
Shares on NASDAQ; (v) the filing fees incident to, and the fees and
disbursements of counsel for the Underwriters in connection with, securing any
required review by the National Association of Securities Dealers, Inc. of the
terms of the sale of the Shares; (vi) the cost of preparing stock certificates;
(vii) the cost and charges of any transfer agent or registrar; (viii) all other
costs and expenses incident to the performance of its obligations hereunder
which are not otherwise specifically provided for in this Section; and (ix) any
fees and expenses of counsel for the Selling Stockholder; and (b) the Selling
Stockholder will pay or cause to be paid all costs and expenses incident to the
performance of the Selling Stockholder's obligations hereunder which are not
otherwise specifically provided for in this Section, including all expenses and
taxes incident to the sale and delivery of the Shares to be sold by the Selling
Stockholder to the Underwriters hereunder. In connection with clause (b) of the
preceding sentence, Goldman, Sachs & Co. agrees to pay New York State stock
transfer tax, and the Selling Stockholder agrees to reimburse Goldman, Sachs &
Co. for associated carrying costs if such tax payment is not rebated on the day
of payment and for any portion of such tax payment not rebated. It is
understood, however, that the Company shall bear, and the Selling Stockholder
shall not be required to pay or to reimburse the Company for, the cost of any
other matters not directly relating to the sale and purchase of the Shares
pursuant to this Agreement, and that, except as provided in this Section, and
Sections 8 and 11 hereof, the Underwriters will pay all of their own costs and
expenses, including the fees of their counsel, stock transfer taxes on resale of
any of the Shares by them, and any advertising expenses connected with any
offers they may make. The Underwriters also agree to pay all travel and related
expenses in connection with the "road show" for the initial public offering of
the shares sold hereby.
7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company and of the Selling Stockholder herein are, at and as of such Time of
Delivery, true and correct, the condition that the Company and the Selling
Stockholder shall have performed all of their respective obligations hereunder
theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant
to Rule 424(b) within the applicable time period prescribed for such filing by
the rules and regulations under the Act and in accordance with Section 5(a)
hereof; if the Company has elected to rely upon Rule 462(b), the Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., Washington,
D.C. time, on the date of this Agreement; no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Shearman & Sterling, counsel for the Underwriters, shall have
furnished to you such written opinion or opinions (a draft of each such opinion
is attached as Annex II(a) hereto), dated such Time of Delivery, with respect to
the matters covered in paragraphs (i), (ii), (vi), (x) and (xii) of subsection
(c) below as well as such other related matters as you may reasonably request,
and such counsel shall have received such papers and information as they may
reasonably request to enable them to pass upon such matters;
(c) Fenwick & West LLP, counsel for the Company, shall have furnished
to you their written opinion (a draft of such opinion is attached as Annex II(b)
hereto), dated such Time of Delivery,
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in form and substance reasonably satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with corporate power and corporate authority to own its
properties and conduct its business as described in the Prospectus;
(ii) The Company has an authorized capitalization as set forth in
the Prospectus for "pro forma as adjusted" under the caption
"Capitalization", and all of the issued and outstanding shares of capital
stock of the Company (including the Shares being delivered at such Time of
Delivery) described therein have been duly and validly authorized and
issued and are fully paid and non-assessable; and the Shares conform in all
material respects to the description of the Stock contained in the
Prospectus;
(iii) The Company either has been duly qualified within the
United States as a foreign corporation for the transaction of business and
is in good standing under the laws of each other jurisdiction within the
United States in which it owns or leases properties or conducts any
business so as to require such qualification, or is subject to no material
liability or disability by reason of failure to be so qualified in any such
jurisdiction (such counsel being entitled to rely in respect of the opinion
in this clause upon opinions of local counsel and in respect of matters of
fact upon certificates of officers of the Company, provided that such
counsel shall state that they believe that both you and they are justified
in relying upon such opinions and certificates);
(iv) Any real property and buildings held under lease by the
Company that are subject to leases filed as exhibits to the Registration
Statement are held by them under valid and enforceable leases with such
exceptions as are not material and do not interfere with the use made and
proposed to be made of such property and buildings by the Company (in
giving the opinion in this clause, such counsel may state that they are
relying upon opinions of local counsel or upon opinions of counsel to the
lessors of such property, provided that such counsel shall state that they
believe that both you and they are justified in relying upon such
opinions);
(v) To such counsel's knowledge and other than as set forth in
the Prospectus, there are no legal (within the meaning of Item 103 of
Regulation S-K under the Act) or governmental proceedings pending to which
the Company is a party or of which any property of the Company is the
subject which, if determined adversely to the Company, would individually
or in the aggregate have a material adverse effect on the current or future
consolidated financial position, stockholders' equity or results of
operations of the Company; and, to such counsel's knowledge, no such
proceedings are contemplated or overtly threatened by governmental
authorities or overtly threatened by others;
(vi) This Agreement has been duly authorized, executed and
delivered by the Company;
(vii) The issue and sale of the Shares being delivered at such
Time of Delivery to be sold by the Company and the compliance by the
Company with all of the provisions of this Agreement and the consummation
of the transactions herein set forth will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument filed as an exhibit to the Registration
Statement, which such counsel believes constitute the only such agreements
required to be filed as exhibits to the Registration
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Statement, nor will such action result in any violation of the provisions
of the Certificate of Incorporation or By-laws of the Company or any
material violation of any statute or any order, rule or regulation known to
such counsel of any court or governmental agency or body having
jurisdiction over the Company or any of its properties;
(viii) To such counsel's knowledge, no consent, approval,
authorization, order, registration or qualification of or with any such
court or governmental agency or body is required for the issue and sale of
the Shares or the consummation by the Company of the transactions set forth
in this Agreement, except the registration under the Act of the Shares, and
such consents, approvals, authorizations, registrations or qualifications
as may be required under state securities or Blue Sky laws or the bylaws,
rules and regulations of the NASD (as to which such counsel need express no
opinion) in connection with the purchase and distribution of the Shares by
the Underwriters;
(ix) The Company is not in violation of its Certificate of
Incorporation or By-laws or to such counsel's knowledge in default in the
performance or observance of any material obligation, agreement, covenant
or condition contained in any indenture, mortgage, deed of trust, loan
agreement, or lease or agreement or other instrument filed as an exhibit to
the Registration Statement, which such counsel believes constitute the only
such agreements required to be so filed;
(x) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock and under the caption "Underwriting",
insofar as they purport to describe the provisions of the laws and
documents referred to therein, are accurate and complete in all material
respects;
(xi) The Company is not an "investment company", as such term is
defined in the Investment Company Act; and
(xii) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior to
such Time of Delivery (other than the financial statements, related
schedules and other financial data therein, as to which such counsel need
express no opinion) comply as to form in all material respects with the
requirements of the Act and the rules and regulations thereunder; and such
counsel does not know of any amendment to the Registration Statement
required to be filed or of any contracts or other documents of a character
required to be filed as an exhibit to the Registration Statement or
required to be described in the Registration Statement or the Prospectus
which are not filed or described as required;
In addition, such counsel shall state that, although they are not
passing upon and do not assume any responsibility for nor have they
independently verified, the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus,
except to the extent set forth in the opinion in subsection (x) of this
Section 7(c), they have no cause to believe that, as of its effective date,
the Registration Statement or any further amendment thereto made by the
Company prior to such Time of Delivery (other than the financial
statements, related schedules and other financial data therein, as to which
such counsel need
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express no opinion) contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading or that, as of its date, the
Prospectus or any further amendment or supplement thereto made by the
Company prior to such Time of Delivery (other than the financial
statements, related schedules and other financial data therein, as to which
such counsel need express no opinion) contained an untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading or that, as of such Time of Delivery, either the
Registration Statement or the Prospectus or any further amendment or
supplement thereto made by the Company prior to such Time of Delivery
(other than the financial statements, related schedules and other financial
data therein, as to which such counsel need express no opinion) contains an
untrue statement of a material fact or omits to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(d) The counsel for the Selling Stockholder shall have furnished
to you its written opinion with respect to the Selling Stockholder (a draft
of such opinion is attached as Annex II(c) hereto), dated such Time of
Delivery, in form and substance satisfactory to you, to the effect that:
(i) This Agreement has been duly executed and delivered by or on
behalf of the Selling Stockholder; and the sale of the Shares to be sold by
the Selling Stockholder hereunder and the compliance by the Selling
Stockholder with all of the provisions of this Agreement and the
consummation of the transactions herein and therein contemplated will not,
to such counsel's knowledge, materially conflict with or result in a
material breach or material violation of any terms or provisions of, or
constitute a default under, any statute, indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument known to such
counsel to which the Selling Stockholder is a party or by which the Selling
Stockholder is bound or to which any of the property or assets of the
Selling Stockholder is subject, nor will such action result in any
violation of the provisions of the Certificate of Incorporation or By-laws
of the Selling Stockholder or any order, rule or regulation known to such
counsel of any court or governmental agency or body having jurisdiction
over the Selling Stockholder or the property of the Selling Stockholder;
(ii) To such counsel's knowledge, no consent, approval,
authorization or order of any court or governmental agency or body is
required for the consummation of the transactions contemplated by this
Agreement in connection with the Shares to be sold by the Selling
Stockholder hereunder, except such as have been obtained under the Act and
such as may be required under state securities or Blue Sky laws or the
bylaws, rules or regulations of the NASD in connection with the purchase
and distribution of such Shares by the Underwriters;
(iii) Immediately prior to such Time of Delivery, the Selling
Stockholder had, to the best of such counsel's knowledge, good and valid
title to the Shares to be sold at such Time of Delivery by the Selling
Stockholder under this Agreement, free and clear of all liens,
encumbrances, equities or claims, and full right, power and authority to
sell, assign, transfer and deliver the Shares to be sold by the Selling
Stockholder hereunder; and
(iv) Upon delivery of and payment for the Shares to be sold by
the Selling Stockholder as provided in this Agreement, and upon
registration of such Shares in the stock records of the Company in the
names of the Underwriters or their nominees, the Underwriters will be the
owners of such Shares, free and clear of any adverse claim, provided that
(a) neither the Underwriters nor their nominees grant any right, title or
interest in or to such Shares to any person or entity prior to sale of such
Shares to the public, (b) the Underwriters are purchasing such Shares in
good faith and (c) the Underwriters, together with their nominees (if any),
hold such Shares without notice of any adverse claim.
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In rendering the opinion in paragraph (iii), such counsel may rely
upon a certificate of the Selling Stockholder in respect of matters of fact as
to ownership of, and liens, encumbrances, equities or claims on, the Shares sold
by the Selling Stockholder, provided that such counsel shall state that they
believe that both you and they are justified in relying upon such certificate
provided that such counsel shall provide you with copies of any such
certificates;
(e) On the date of the Prospectus at a time prior to the execution of
this Agreement, at 9:30 a.m., New York City time, on the effective date of any
post-effective amendment to the Registration Statement filed subsequent to the
date of this Agreement and also at each Time of Delivery, Pricewaterhouse
Coppers LLP shall have furnished to you a letter or letters, dated the
respective dates of delivery thereof, in form and substance satisfactory to you,
to the effect set forth in Annex I hereto (the executed copy of the letter
delivered prior to the execution of this Agreement is attached as Annex I(a)
hereto and a draft of the form of letter to be delivered on the effective date
of any post-effective amendment to the Registration Statement and as of each
Time of Delivery is attached as Annex I(b) hereto);
(f) (i) Neither the Company nor any subsidiary shall have sustained
since the date of the latest audited financial statements included in the
Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus, and (ii) since the respective dates as
of which information is given in the Prospectus there shall not have been any
change in the capital stock or long-term debt of the Company or its subsidiary
or any change, or any development involving a prospective change, in or
affecting the general affairs, management, financial position, stockholders'
equity or results of operations of the Company and its subsidiary, otherwise
than as set forth or contemplated in the Prospectus, the effect of which, in any
such case described in Clause (i) or (ii), is in the reasonable judgment of the
Representatives so material and adverse as to make it impracticable or
inadvisable to proceed with the public offering or the delivery of the Shares
being delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
(g) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange or on NASDAQ; (ii) a suspension or
material limitation in trading in the Company's securities on NASDAQ; (iii) a
general moratorium on commercial banking activities declared by either Federal
or New York or California State authorities; or (iv) the outbreak or escalation
of hostilities involving the United States or the declaration by the United
States of a national emergency or war, if the effect of any such event specified
in this Clause (iv) in the reasonable judgment of the Representatives makes it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Shares being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
(h) The Shares at such Time of Delivery shall have been duly listed
for quotation on NASDAQ; and
(i) The Company has obtained and delivered to the Underwriters
executed copies of an agreement from each director and executive officer of the
Company and the Selling Stockholder,, substantially to the effect set forth in
Subsection 1(b)(iv) hereof in form and substance satisfactory to you;
(j) The Company shall have complied with the provisions of Section
5(c) hereof with respect to the furnishing of prospectuses on the New York
Business Day next succeeding the date of this Agreement;
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(k) The Company and the Selling Stockholder shall have furnished or
caused to be furnished to you at such Time of Delivery certificates of officers
of the Company and of the Selling Stockholder, respectively, satisfactory to you
as to the accuracy of the representations and warranties of the Company and the
Selling Stockholder, respectively, herein at and as of such Time of Delivery, as
to the performance by the Company and the Selling Stockholder of all of their
respective obligations hereunder to be performed at or prior to such Time of
Delivery, and as to such other matters as you may reasonably request, and the
Company shall have furnished or caused to be furnished certificates as to the
matters set forth in subsections (a) and (f) of this Section; and
(m) The Company shall not have received any notice of infringement of
or conflict with asserted rights of others with respect to any patents,
trademarks, service marks, trade names, copyrights,, mask work rights,
technology or know-how which individually or in the aggregate, is reasonably
likely to have a material adverse effect on the Company.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein.
(b) The Selling Stockholder will indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement in reliance upon
and in conformity with written information furnished to the Company by such
Selling Stockholder expressly for use therein; and will reimburse each
Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such action or
claim as such expenses are incurred; provided, however, that the liability of
the Selling Stockholder pursuant to this subsection (b) shall not exceed the
product of (i) the number of Shares deemed sold by the Selling Stockholder as
set forth in the Prospectus under the caption "Principal and Selling
Stockholders" and (ii) the initial public offering price of the Shares as set
forth in the Prospectus.
(c) Each Underwriter will indemnify and hold harmless the Company and
the Selling
15
<PAGE>
Stockholder against any losses, claims, damages or liabilities to which the
Company or the Selling Stockholder may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement in reliance upon
and in conformity with written information furnished to the Company by such
Underwriter through Goldman, Sachs & Co. expressly for use therein; and will
reimburse the Company and the Selling Stockholder for any legal or other
expenses reasonably incurred by the Company or the Selling Stockholder in
connection with investigating or defending any such action or claim as such
expenses are incurred.
(d) Promptly after receipt by an indemnified party under subsection
(a), (b) or (c) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation. No indemnifying party shall, without the
written consent of the indemnified party, effect the settlement or compromise
of, or consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified party is an actual or
potential party to such action or claim) unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of any indemnified party.
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in
16
<PAGE>
respect thereof) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Selling Stockholder on the one hand and
the Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under subsection (d) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and the Selling Stockholder on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Stockholder on the one hand and
the Underwriters on the other shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses) received by
the Company and the Selling Stockholder bear to the total underwriting discounts
and commissions received by the Underwriters, in each case as set forth in the
table on the cover page of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the Selling
Stockholder on the one hand or the Underwriters on the other and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company, the Selling Stockholder and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this subsection (e) were determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable considerations
referred to above in this subsection (e). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this subsection (e) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this subsection (e), no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission and the Selling
Stockholder shall not be required to contribute any amount in excess of the
product of the number of Shares deemed sold by the Selling Stockholder as set
forth in the Prospectus under the caption "Principal and Selling Stockholders"
and the initial public offering price of the Shares as set forth in the
Prospectus. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (e) to contribute are several in proportion to
their respective underwriting obligations and not joint.
(f) The obligations of the Company and the Selling Stockholder under
this Section 8 shall be in addition to any liability which the Company and the
Selling Stockholder may otherwise have and shall extend, upon the same terms and
conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section 8
shall be in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
officer and director of the Company and the Selling Stockholder and to each
person, if any, who controls the Company or the Selling Stockholder within the
meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase the
Shares which it has agreed to purchase hereunder at a Time of Delivery, you may
in your discretion arrange for you or another party or other parties to purchase
such Shares on the terms contained herein. If within thirty-six hours after such
default by any Underwriter you do not arrange for the purchase of such Shares,
then the Company and the Selling Stockholder shall be entitled to a further
period of thirty-six hours within which to procure another party or other
parties satisfactory to you to purchase such Shares on such terms. In the event
that, within the respective prescribed periods, you notify the Company and the
Selling Stockholder that you have so arranged for the purchase of such Shares,
or
17
<PAGE>
the Company and the Selling Stockholder notify you that they have so arranged
for the purchase of such Shares, you or the Company and the Selling Stockholder
shall have the right to postpone a Time of Delivery for a period of not more
than seven days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your opinion
may thereby be made necessary. The term "Underwriter" as used in this Agreement
shall include any person substituted under this Section with like effect as if
such person had originally been a party to this Agreement with respect to such
Shares.
(b) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you and the Company
and the Selling Stockholder as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased does not exceed one-eleventh of
the aggregate number of all the Shares to be purchased at such Time of Delivery,
then the Company and the Selling Stockholder shall have the right to require
each non-defaulting Underwriter to purchase the number of Shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to purchase
hereunder) of the Shares of such defaulting Underwriter or Underwriters for
which such arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you and the Company
and the Selling Stockholder as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased exceeds one-eleventh of the
aggregate number of all of the Shares to be purchased at such Time of Delivery,
or if the Company and the Selling Stockholder shall not exercise the right
described in subsection (b) above to require non-defaulting Underwriters to
purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement
(or, with respect to the Second Time of Delivery, the obligations of the
Underwriters to purchase and of the Company to sell the Optional Shares) shall
thereupon terminate, without liability on the part of any non-defaulting
Underwriter or the Company or the Selling Stockholder, except for the expenses
to be borne by the Company and the Selling Stockholder and the Underwriters as
provided in Section 6 hereof and the indemnity and contribution agreements in
Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company, the Selling Stockholder and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of any Underwriter or any controlling person of any
Underwriter, or the Company, or the Selling Stockholder, or any officer or
director or controlling person of the Company, or any controlling person of any
Selling Stockholder, and shall survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
neither the Company nor the Selling Stockholder shall then be under any
liability to any Underwriter except as provided in Sections 6 and 8 hereof; but,
if for any other reason any Shares are not delivered by or on behalf of the
Company and the Selling Stockholder as provided herein, the Company and the
Selling Stockholder pro rata (based on the number of Shares to be sold by the
Company and the Selling Stockholder hereunder) will reimburse the Underwriters
through you for all out-of-pocket expenses approved in writing by you, including
fees and disbursements of counsel, reasonably incurred by the Underwriters in
making preparations for the purchase, sale and delivery of the Shares not so
delivered, but the
18
<PAGE>
Company and the Selling Stockholder shall then be under no further liability to
any Underwriter in respect of the Shares not so delivered except as provided in
Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives; and in all dealings with the Selling Stockholder hereunder, you
and the Company shall be entitled to act and rely upon any statement, request,
notice or agreement on behalf of the Selling Stockholder made or given by any or
all representatives of the Selling Stockholder.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives at in care of Goldman,
Sachs & Co., 32 Old Slip, 9/th/ Floor, New York, New York 10004, Attention:
Registration Department; if to the Selling Stockholder shall be delivered or
sent by mail, telex or facsimile transmission to Susan Leunbergur, Esq.
Community Foundation Silicon Valley, [____________________________________]; and
if to the Company shall be delivered or sent by mail, telex or facsimile
transmission to the address of the Company set forth in the Registration
Statement, Attention: Secretary with a copy to Laird H. Simmons III, Esq.,
Fenwick & West LLP, Two Palo Alto Square, Palo Alto, California 94306; provided,
however, that any notice to an Underwriter pursuant to Section 8(d) hereof shall
be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its Underwriters' Questionnaire or telex
constituting such Questionnaire, which address will be supplied to the Company
or the Selling Stockholder by you on request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and the Selling Stockholder and, to the extent
provided in Sections 8 and 10 hereof, the officers and directors of the Company
and each person who controls the Company, the Selling Stockholder or any
Underwriter, and their respective heirs, executors, administrators, successors
and assigns, and no other person shall acquire or have any right under or by
virtue of this Agreement. No purchaser of any of the Shares from any
Underwriter shall be deemed a successor or assign by reason merely of such
purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
19
<PAGE>
If the foregoing is in accordance with your understanding, please sign and
return to us one for the Company and each of the Representatives plus one for
each counsel, and upon the acceptance hereof by you, on behalf of each of the
Underwriters, this letter and such acceptance hereof shall constitute a binding
agreement among each of the Underwriters, the Company and the Selling
Stockholder. It is understood that your acceptance of this letter on behalf of
each of the Underwriters is pursuant to the authority set forth in a form of
Agreement among Underwriters, the form of which shall be submitted to the
Company and the Selling Stockholder for examination, upon request, but without
warranty on your part as to the authority of the signers thereof.
Very truly yours,
EBAY INC.
By:
Name:
Title:
COMMUNITY FOUNDATION SILICON VALLEY
By:
Name:
Title:
Accepted as of the date hereof [AT ....,
.................................]
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
BANCAMERICA ROBERTSON STEPHENS
BT ALEX. BROWN INCORPORATED
BY:
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
20
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
UNDERWRITER TOTAL NUMBER OF NUMBER OF
FIRM SHARES TO BE OPTIONAL SHARES TO
PURCHASED BE PURCHASED IF
MAXIMUM OPTION
EXERCISED
<S> <C> <C>
Goldman, Sachs & Co.
Donaldson, Lufkin & Jenrette Securities Corporation
BancAmerica Robertson Stephens
BT Alex. Brown Incorporated
Total
</TABLE>
21
<PAGE>
ANNEX I
[FORM OF ANNEX I DESCRIPTION OF COMFORT LETTER
FOR REGISTRATION STATEMENTS ON FORM S-1]
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect to
the Company and its subsidiaries within the meaning of the Act and the
applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any supplementary
financial information and schedules (and, if applicable, financial
forecasts and/or pro forma financial information) examined by them and
included in the Prospectus or the Registration Statement comply as to form
in all material respects with the applicable accounting requirements of the
Act and the related published rules and regulations thereunder; and, if
applicable, they have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of
the unaudited consolidated interim financial statements, selected financial
data, pro forma financial information, financial forecasts and/or condensed
financial statements derived from audited financial statements of the
Company for the periods specified in such letter, as indicated in their
reports thereon, copies of which have been separately furnished to the
representatives of the Underwriters (the "Representatives");
(iii) They have made a review in accordance with standards established
by the American Institute of Certified Public Accountants of the unaudited
condensed consolidated statements of income, consolidated balance sheets
and consolidated statements of cash flows included in the Prospectus as
indicated in their reports thereon copies of which have been separately
furnished to the Representatives and on the basis of specified procedures
including inquiries of officials of the Company who have responsibility for
financial and accounting matters regarding whether the unaudited condensed
consolidated financial statements referred to in paragraph (vi)(A)(i) below
comply as to form in all material respects with the applicable accounting
requirements of the Act and the related published rules and regulations,
nothing came to their attention that caused them to believe that the
unaudited condensed consolidated financial statements do not comply as to
form in all material respects with the applicable accounting requirements
of the Act and the related published rules and regulations;
(iv) The unaudited selected financial information with respect to the
consolidated results of operations and financial position of the Company
for the five most recent fiscal years included in the Prospectus agrees
with the corresponding amounts (after restatements where applicable) in the
audited consolidated financial statements for such five fiscal years which
were included or incorporated by reference in the Company's Annual Reports
on Form 10-K for such fiscal years;
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K and on
the basis of limited procedures specified in such letter nothing came to
their attention as a result of the foregoing procedures that caused them to
believe that this information does not conform in all material respects
with
22
<PAGE>
the disclosure requirements of Items 301, 302, 402 and 503(d),
respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not
23
<PAGE>
constituting an examination in accordance with generally accepted auditing
standards, consisting of a reading of the unaudited financial statements
and other information referred to below, a reading of the latest available
interim financial statements of the Company and its subsidiaries,
inspection of the minute books of the Company and its subsidiaries since
the date of the latest audited financial statements included in the
Prospectus, inquiries of officials of the Company and its subsidiaries
responsible for financial and accounting matters and such other inquiries
and procedures as may be specified in such letter, nothing came to their
attention that caused them to believe that:
(A) (i) the unaudited consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus do not comply as to form in all material
respects with the applicable accounting requirements of the Act and
the related published rules and regulations, or (ii) any material
modifications should be made to the unaudited condensed consolidated
statements of income, consolidated balance sheets and consolidated
statements of cash flows included in the Prospectus for them to be in
conformity with generally accepted accounting principles;
(B) any other unaudited income statement data and balance sheet
items included in the Prospectus do not agree with the corresponding
items in the unaudited consolidated financial statements from which
such data and items were derived, and any such unaudited data and
items were not determined on a basis substantially consistent with the
basis for the corresponding amounts in the audited consolidated
financial statements included in the Prospectus;
(C) the unaudited financial statements which were not included in
the Prospectus but from which were derived any unaudited condensed
financial statements referred to in Clause (A) and any unaudited
income statement data and balance sheet items included in the
Prospectus and referred to in Clause (B) were not determined on a
basis substantially consistent with the basis for the audited
consolidated financial statements included in the Prospectus;
(D) any unaudited pro forma consolidated condensed financial
statements included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the
Act and the published rules and regulations thereunder or the pro
forma adjustments have not been properly applied to the historical
amounts in the compilation of those statements;
(E) as of a specified date not more than five days prior to the
date of such letter, there have been any changes in the consolidated
capital stock (other than issuances of capital stock upon exercise of
options and stock appreciation rights, upon earn-outs of performance
shares and upon conversions of convertible securities, in each case
which were outstanding on the date of the latest financial statements
included in the Prospectus) or any increase in the consolidated long-
term debt of the Company and its subsidiaries, or any decreases in
consolidated net current assets or stockholders' equity or other items
specified by the Representatives, or any increases in any items
specified by the Representatives, in each case as compared with
amounts shown in the latest balance sheet included in the Prospectus,
except in each case for changes, increases or decreases
24
<PAGE>
which the Prospectus discloses have occurred or may occur or which are
described in such letter; and
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date referred
to in Clause (E) there were any decreases in consolidated net revenues
or operating profit or the total or per share amounts of consolidated
net income or other items specified by the Representatives, or any
increases in any items specified by the Representatives, in each case
as compared with the comparable period of the preceding year and with
any other period of corresponding length specified by the
Representatives, except in each case for decreases or increases which
the Prospectus discloses have occurred or may occur or which are
described in such letter; and
(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraphs (iii) and
(vi) above, they have carried out certain specified procedures, not
constituting an examination in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Representatives, which are derived from the
general accounting records of the Company and its subsidiaries, which
appear in the Prospectus, or in Part II of, or in exhibits and schedules
to, the Registration Statement specified by the Representatives, and have
compared certain of such amounts, percentages and financial information
with the accounting records of the Company and its subsidiaries and have
found them to be in agreement.
25
<PAGE>
EXHIBIT 3.03
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
eBAY INC.
eBay Inc., a Delaware corporation, does hereby certify that the following
amendment to the corporation's Certificate of Incorporation has been duly
adopted in accordance with the provisions of Section 242 and Section 228 of the
Delaware General Corporation Law:
The first paragraph of Article IV of this corporation's Certificate of
Incorporation shall be amended and restated to read in its entirety as follows:
"The total number of shares of all classes of stock which the
corporation has the authority to issue is EIGHTY-FOUR MILLION
(84,000,000) shares, consisting of two classes: SEVENTY-EIGHT
MILLION (78,000,000) shares of Common Stock, $0.001 par value
per share, and Six Million (6,000,000) shares of Preferred Stock,
$0.001 par value per share. Upon the filing of this Certificate
of Amendment of Certificate of Incorporation, each outstanding
share of the corporation's Common Stock shall be subdivided and
split into three (3) shares of Common Stock of the corporation."
IN WITNESS WHEREOF, said corporation has caused this Certificate of
Amendment to be signed by its duly authorized officer this _____ day of
________, 1998.
eBAY INC.
a Delaware corporation
_________________________________
Margaret C. Whitman, President
ATTEST:
_____________________________
Matthew P. Quilter, Secretary
<PAGE>
Exhibit 3.04
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
eBAY INC.
ARTICLE I
The name of the corporation is eBay Inc.
ARTICLE II
The address of the registered office of the corporation in the State of
Delaware is 15 East North Street, City of Dover, County of Kent. The name of
its registered agent at that address is Incorporating Services, Ltd..
ARTICLE III
The purpose of the corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
ARTICLE IV
The total number of shares of all classes of stock which the corporation
has the authority to issue is Two Hundred Million (200,000,000) shares,
consisting of two classes: One Hundred Ninety-Five Million (195,000,000) shares
of Common Stock, $0.001 par value per share, and Five Million (5,000,000) shares
of Preferred Stock, $0.001 par value per share.
The Board of Directors is authorized, subject to any limitations prescribed
by the law of the State of Delaware, to provide for the issuance of the shares
of Preferred Stock in one or more series, and, by filing a Certificate of
Designation pursuant to the applicable law of the State of Delaware, to
establish from time to time the number of shares to be included in each such
series, to fix the designation, powers, preferences and rights of the shares of
each such series and any qualifications, limitations or restrictions thereof,
and to increase or decrease the number of shares of any such series (but not
below the number of shares of such series then outstanding). The number of
authorized shares of Preferred Stock may also be increased or decreased (but not
below the number of shares thereof then outstanding) by the affirmative vote of
the holders of a majority of the stock of the corporation entitled to vote,
unless a vote of any other holders is required pursuant to a Certificate or
Certificates establishing a series of Preferred Stock.
Except as otherwise expressly provided in any Certificate of Designation
designating any series of Preferred Stock pursuant to the foregoing provisions
of this Article IV, any new series of Preferred Stock may be designated, fixed
and determined as provided herein by the Board of Directors without approval of
the holders of Common Stock or the holders of Preferred Stock, or any series
thereof, and any such new series may have powers, preferences and rights,
including, without limitation, voting rights, dividend rights, liquidation
rights, redemption rights and
<PAGE>
conversion rights, senior to, junior to or pari passu with the rights of the
Common Stock, the Preferred Stock, or any future class or series of Preferred
Stock or Common Stock.
ARTICLE V
The Board of Directors of the corporation shall have the power to adopt,
amend or repeal Bylaws of the corporation.
ARTICLE VI
A. Election of directors need not be by written ballot unless the Bylaws
of the corporation shall so provide.
B. The directors, other than those who may be elected by the holders of
Preferred Stock under specified circumstances, shall be divided into three
classes with the term of office of the first class (Class I) to expire at the
annual meeting of the stockholders held in 1999; the term of office of the
second class (Class II) to expire at the annual meeting of stockholders held in
2000; the term of office of the third class (Class III) to expire at the annual
meeting of stockholders held in 2001; and thereafter for each such term to
expire at each third succeeding annual meeting of stockholders after such
election. All directors shall hold office until the expiration of the term for
which elected, and until their respective successors are elected, except in the
case of the death, resignation, or removal of any director.
C. Subject to the rights of the holders of any series of Preferred Stock
then outstanding, newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation or other cause may be filled (a) by the
stockholders at any meeting, (b) by a majority of the directors, although less
than a quorum, or (c) by a sole remaining director, and directors so chosen
shall hold office for a term expiring at the next annual meeting of stockholders
at which the term of office of the class to which they have been elected
expires, and until their respective successors are elected, except in the case
of the death, resignation, or removal of any director. No decrease in the
number of directors constituting the Board of Directors shall shorten the term
of any incumbent director.
D. Any action required or permitted to be taken by the stockholders of the
corporation must be effected at a duly called annual or special meeting of
stockholders of the corporation and may not be effected by any consent in
writing by such stockholders.
E. Special meetings of stockholders of the corporation may be called only
by either the Board of Directors pursuant to a resolution adopted by a majority
of the total number of authorized directors (whether or not there exist any
vacancies in previously authorized directorships at the time any such resolution
is presented to the Board for adoption), the Chairman of the Board or the Chief
Executive Officer.
2
<PAGE>
ARTICLE VII
A. To the fullest extent permitted by law, no director of the corporation
shall be personally liable for monetary damages for breach of fiduciary duty as
a director. Without limiting the effect of the preceding sentence, if the
Delaware General Corporation Law is hereafter amended to authorize the further
elimination or limitation of the liability of a director, then the liability of
a director of the corporation shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law, as so amended.
B. To the fullest extent permitted by applicable law, this corporation is
also authorized to provide indemnification of (and advancement of expenses to)
agents (and any other persons to which Delaware law permits this corporation to
provide indemnification) through bylaw provisions, agreements with such agents
or other persons, vote of stockholders or disinterested directors or otherwise,
in excess of the indemnification and advancement otherwise permitted by Section
145 of the Delaware General Corporation Law, subject only to limits created by
applicable Delaware law (statutory or non-statutory), with respect to actions
for breach of duty to the corporation, its stockholders, and others.
C. Neither any amendment nor repeal of this Article VII, nor the adoption
of any provision of this Amended and Restated Certificate of Incorporation
inconsistent with this Article VII, shall eliminate, reduce or otherwise
adversely affect any limitation on the personal liability of a director of the
corporation existing at the time of such amendment, repeal or adoption of such
an inconsistent provision.
IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation
of eBay, Inc. has been signed and attested as of this ______ day of ___________,
1998.
_______________________________________
Margaret C. Whitman,
President and Chief Executive Officer
ATTEST:
_________________________________
Matthew P. Quilter, Secretary
3
<PAGE>
EXHIBIT 3.06
AMENDED AND RESTATED BYLAWS
OF
eBAY INC.
(A DELAWARE CORPORATION)
ARTICLE I
STOCKHOLDERS
Section 1.1: Annual Meetings. An annual meeting of stockholders shall be
----------- ---------------
held for the election of directors at such date, time and place, either within
or without the State of Delaware, as the Board of Directors shall each year fix.
Any other proper business may be transacted at the annual meeting.
Section 1.2: Special Meetings. Special meetings of the stockholders, for
----------- ----------------
any purpose or purposes described in the notice of the meeting, may be called
only by (i) the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors (whether or not there exist
any vacancies in previously authorized directorships at the time any such
resolution is presented to the Board of Directors for adoption), (ii) the
Chairman of the Board or (iii) the Chief Executive Officer and shall be held at
such place, on such date, and at such time as they shall fix. Business
transacted at special meetings shall be confined to the purpose or purposes
stated in the notice.
Section 1.3: Notice of Meetings. Written notice of all meetings of
----------- ------------------
stockholders shall be given stating the place, date and time of the meeting and,
in the case of a special meeting, the purpose or purposes for which the meeting
is called. Unless otherwise required by applicable law or the Certificate of
Incorporation of the Corporation as currently in effect (the "Certificate of
Incorporation"), such notice shall be given not less than ten (10) nor more than
sixty (60) days before the date of the meeting to each stockholder entitled to
vote at such meeting, by leaving such notice with him or her or at his or her
residence or usual place of business, or by depositing it postage prepaid in the
United States mail, directed to each stockholder at his or her address as it
appears on the records of the corporation. An affidavit of the Secretary,
Assistant Secretary, or transfer agent of the corporation that the notice has
been given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. No notice need be given to any person with whom communication
is unlawful or to any person who has waived such notice either (a) in writing
(which writing need not specify the business to be transacted at, or the purpose
of, the meeting) signed by such person before or after the time of the meeting
or (b) by attending the meeting except for the express purpose of objecting, at
the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened.
Section 1.4: Adjournments. Any meeting of stockholders may adjourn from
----------- ------------
time to time to reconvene at the same or another place, and notice need not be
given of any such adjourned meeting if the time, date and place thereof are
announced at the meeting at which the adjournment is taken; provided, however,
-------- -------
that if the adjournment is for more than thirty (30)
<PAGE>
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, then a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting. At the adjourned meeting
the Corporation may transact any business that might have been transacted at the
original meeting.
Section 1.5: Quorum. At each meeting of stockholders the holders of a
----------- ------
majority of the shares of stock entitled to vote at the meeting, present in
person or represented by proxy, shall constitute a quorum for the transaction of
business, except if otherwise required by applicable law. Where a separate vote
by a class or classes is required, a majority of the shares of such class or
classes then outstanding and entitled to vote present in person or by proxy
shall constitute a quorum entitled to take action with respect to that vote on
that matter. If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares entitled to vote who are
present, in person or by proxy, at the meeting may adjourn the meeting. Shares
of the Corporation's stock belonging to the Corporation (or to another
corporation, if a majority of the shares entitled to vote in the election of
directors of such other corporation are held, directly or indirectly, by the
Corporation), shall neither be entitled to vote nor be counted for quorum
purposes; provided, however, that the foregoing shall not limit the right of the
-------- -------
Corporation or any other corporation to vote any shares of the Corporation's
stock held by it in a fiduciary capacity.
Section 1.6: Organization. Meetings of stockholders shall be presided
----------- ------------
over by such person as the Board of Directors may designate, or, in the absence
of such a person, the Chairman of the Board, or, in the absence of such person,
the President of the Corporation, or, in the absence of such person, such person
as may be chosen by the holders of a majority of the shares entitled to vote who
are present, in person or by proxy, at the meeting. Such person shall be
chairman of the meeting and, subject to Section 1.11 hereof, shall determine the
order of business and the procedure at the meeting, including such regulation of
the manner of voting and the conduct of discussion as seems to him or her to be
in order. The Secretary of the Corporation shall act as secretary of the
meeting, but in his or her absence the chairman of the meeting may appoint any
person to act as secretary of the meeting.
Section 1.7: Voting; Proxies. Unless otherwise provided by law or the
----------- ---------------
Certificate of Incorporation, and subject to the provisions of Section 1.8 of
these Bylaws, each stockholder shall be entitled to one (1) vote for each share
of stock held by such stockholder of record according to the records of the
corporation. Persons holding stock in a fiduciary capacity shall be entitled to
vote the shares so held. Persons whose stock is pledged shall be entitled to
vote unless the pledgor in a transfer on the books of the corporation has
expressly empowered the pledgee to vote the pledged shares, in which case only
the pledgee or his or her proxy shall be entitled to vote. Each stockholder
entitled to vote at a meeting of stockholders may authorize another person or
persons to act for such stockholder by proxy. Such a proxy may be prepared,
transmitted and delivered in any manner permitted by applicable law. Voting at
meetings of stockholders need not be by written ballot unless such is demanded
at the meeting before voting begins by a stockholder or stockholders holding
shares representing at least one percent (1%) of the votes entitled to vote at
such meeting, or by such stockholder's or stockholders' proxy; provided,
--------
however, that an election of directors shall be by written ballot if demand is
- -------
so made
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<PAGE>
by any stockholder at the meeting before voting begins. If a vote is to
be taken by written ballot, then each such ballot shall state the name of the
stockholder or proxy voting and such other information as the chairman of the
meeting deems appropriate. Unless otherwise provided in the Certificate of
Incorporation or a Certificate of Designation relating to a series of Preferred
Stock, directors shall be elected by a plurality of the votes of the shares
present in person or represented by proxy at the meeting and entitled to vote on
the election of directors. Unless otherwise provided by applicable law, the
Certificate of Incorporation or these Bylaws, every matter other than the
election of directors shall be decided by the affirmative vote of the holders of
a majority of the shares of stock entitled to vote thereon that are present in
person or represented by proxy at the meeting and are voted for or against the
matter.
Section 1.8 Action at Meeting. When a quorum is present at any meeting,
----------- -----------------
action of the stockholders on any matter properly brought before such meeting,
other than the election of directors, shall require, and may be effected by, the
affirmative vote of the holders of a majority in interest of the stock present
or represented by proxy and entitled to vote on the subject matter, except where
a different vote is expressly required by law, the Certificate of Incorporation
or these Bylaws, in which case such express provision shall govern and control.
The election of directors shall be determined by a plurality of votes cast. If
the Certificate of Incorporation so provides, no ballot shall be required for
the election of directors unless requested by a stockholder present or
represented at the meeting and entitled to vote in the election.
Section 1.9: Fixing Date for Determination of Stockholders of Record.
----------- -------------------------------- ----------------------
(a) Generally. In order that the Corporation may determine the
---------
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not precede the date upon which the resolution fixing the record
date is adopted by the Board of Directors and which shall not be more than sixty
(60) nor less than ten (10) days before the date of such meeting, nor more than
sixty (60) days prior to any other action. If no record date is fixed by the
Board of Directors, then the record date shall be as provided by applicable law.
A determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
--------
however, that the Board of Directors may fix a new record date for the adjourned
- -------
meeting.
Section 1.10: List of Stockholders Entitled to Vote. A complete list of
------------ -------------------------------------
stockholders entitled to vote at any meeting of stockholders, arranged in
alphabetical order and showing the address of each stockholder and the number of
shares registered in the name of each stockholder, shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof and may be inspected by any stockholder who is present at the meeting.
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<PAGE>
Section 1.11: Inspectors of Elections.
------------ -----------------------
(a) Applicability. Unless otherwise provided in the Corporation's
-------------
Certificate of Incorporation or required by the Delaware General Corporation
Law, the following provisions of this Section 1.11 shall apply only if and when
the Corporation has a class of voting stock that is: (i) listed on a national
securities exchange; (ii) authorized for quotation on an interdealer quotation
system of a registered national securities association; or (iii) held of record
by more than 2,000 stockholders; in all other cases, observance of the
provisions of this Section 1.11 shall be optional, and at the discretion of the
Corporation.
(b) Appointment. The Corporation shall, in advance of any meeting of
-----------
stockholders, appoint one or more inspectors of election to act at the meeting
and make a written report thereof. The Corporation may designate one or more
persons as alternate inspectors to replace any inspector who fails to act. If
no inspector or alternate is able to act at a meeting of stockholders, the
person presiding at the meeting shall appoint one or more inspectors to act at
the meeting.
(c) Inspector's Oath. Each inspector of election, before entering upon the
----------------
discharge of his duties, shall take and sign an oath faithfully to execute the
duties of inspector with strict impartiality and according to the best of his
ability.
(d) Duties of Inspectors. At a meeting of stockholders, the inspectors of
--------------------
election shall (i) ascertain the number of shares outstanding and the voting
power of each share, (ii) determine the shares represented at a meeting and the
validity of proxies and ballots, (iii) count all votes and ballots, (iv)
determine and retain for a reasonable period of time a record of the disposition
of any challenges made to any determination by the inspectors, and (v) certify
their determination of the number of shares represented at the meeting, and
their count of all votes and ballots. The inspectors may appoint or retain
other persons or entities to assist the inspectors in the performance of the
duties of the inspectors.
(e) Opening and Closing of Polls. The date and time of the opening and the
----------------------------
closing of the polls for each matter upon which the stockholders will vote at a
meeting shall be announced by the inspectors at the meeting. No ballot, proxies
or votes, nor any revocations thereof or changes thereto, shall be accepted by
the inspectors after the closing of the polls unless the Court of Chancery upon
application by a stockholder shall determine otherwise.
(f) Determinations. In determining the validity and counting of proxies
--------------
and ballots, the inspectors shall be limited to an examination of the proxies,
any envelopes submitted with those proxies, any information provided in
connection with proxies in accordance with Section 212(c)(2) of the Delaware
General Corporation Law, ballots and the regular books and records of the
Corporation, except that the inspectors may consider other reliable information
for the limited purpose of reconciling proxies and ballots submitted by or on
behalf of banks, brokers, their nominees or similar persons which represent more
votes than the holder of a proxy is authorized by the record owner to cast or
more votes than the stockholder holds of record. If the inspectors consider
other reliable information for the limited purpose permitted herein, the
inspectors at the time they make their certification of their determinations
pursuant to this Section 1.11 shall
-4-
<PAGE>
specify the precise information considered by them, including the person or
persons from whom they obtained the information, when the information was
obtained, the means by which the information was obtained and the basis for the
inspectors' belief that such information is accurate and reliable.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1: Number; Qualifications. The Board of Directors shall consist
----------- ----------------------
of one or more members. The initial number of directors shall be five (5), and
thereafter shall be fixed from time to time by resolution of the Board of
Directors. No decrease in the authorized number of directors constituting the
Board of Directors shall shorten the term of any incumbent director. Directors
need not be stockholders of the Corporation.
Section 2.2: Election; Resignation; Removal; Vacancies. The directors
----------- -----------------------------------------
shall be divided into three classes, with the term of office of the first class,
which class initially consists of two directors, to expire at the annual meeting
of stockholders held in 1999; the term of office of the second class, which
class initially consists of two directors, to expire at the annual meeting of
stockholders held in 2000, the term of office of the third class, which class
initially consists of one director, to expire at the annual meeting of
stockholders held in 2001; and thereafter for each such term to expire at each
third succeeding annual meeting of stockholders after such election. Each
Director shall serve until his or her successor is elected and qualified, or
until his or her earlier resignation or removal. Any director may resign at any
time upon written notice to the Corporation. Subject to the rights of any
holders of Preferred Stock then outstanding: (i) any director or the entire
Board of Directors may be removed, with or without cause, by the holders of a
majority of the shares then entitled to vote at an election of directors and
(ii) any vacancy occurring in the Board of Directors for any cause, and any
newly created directorship resulting from any increase in the authorized number
of directors to be elected by all stockholders having the right to vote as a
single class, may be filled by the stockholders, by a majority of the directors
then in office, although less than a quorum, or by a sole remaining director.
Section 2.3: Regular Meetings. Regular meetings of the Board of Directors
----------- ----------------
may be held at such places, within or without the State of Delaware, and at such
times as the Board of Directors may from time to time determine. Notice of
regular meetings need not be given if the date, times and places thereof are
fixed by resolution of the Board of Directors.
Section 2.4: Special Meetings. Special meetings of the Board of Directors
----------- ----------------
may be called by the Chairman of the Board, the President or a majority of the
members of the Board of Directors then in office and may be held at any time,
date or place, within or without the State of Delaware, as the person or persons
calling the meeting shall fix. Notice of the time, date and place of such
meeting shall be given, orally or in writing, by the person or persons calling
the meeting to all directors at least four (4) days before the meeting if the
notice is mailed, or at least forty-eight (48) hours before the meeting if such
notice is given by telephone, hand delivery,
-5-
<PAGE>
telegram, telex, mailgram, facsimile or similar communication method. Unless
otherwise indicated in the notice, any and all business may be transacted at a
special meeting.
Section 2.5: Telephonic Meetings Permitted. Members of the Board of
----------- -----------------------------
Directors, or any committee of the Board, may participate in a meeting of the
Board or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to
conference telephone or similar communications equipment shall constitute
presence in person at such meeting.
Section 2.6: Quorum; Vote Required for Action. At all meetings of the
----------- --------------------------------
Board of Directors a majority of the total number of authorized directors shall
constitute a quorum for the transaction of business. Except as otherwise
provided herein or in the Certificate of Incorporation, or required by law, the
vote of a majority of the directors present at a meeting at which a quorum is
present shall be the act of the Board of Directors.
Section 2.7: Organization. Meetings of the Board of Directors shall be
----------- ------------
presided over by the Chairman of the Board, or in his or her absence by the
President, or in his or her absence by a chairman chosen at the meeting. The
Secretary shall act as secretary of the meeting, but in his or her absence the
chairman of the meeting may appoint any person to act as secretary of the
meeting.
Section 2.8: Written Action by Directors. Any action required or
----------- ---------------------------
permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting if all members of the Board or
such committee, as the case may be, consent thereto in writing, and the writing
or writings are filed with the minutes of proceedings of the Board or committee,
respectively.
Section 2.9: Powers. The Board of Directors may, except as otherwise
------------ ------
required by law or the Certificate of Incorporation, exercise all such powers
and do all such acts and things as may be exercised or done by the Corporation.
Section 2.10: Compensation of Directors. Directors, as such, may receive,
------------ -------------------------
pursuant to a resolution of the Board of Directors, fees and other compensation
for their services as directors, including without limitation their services as
members of committees of the Board of Directors.
ARTICLE III
COMMITTEES
Section 3.1: Committees. The Board of Directors may, by resolution passed
----------- ----------
by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of the committee, the
member or members thereof present at any meeting of such committee who are not
-6-
<PAGE>
disqualified from voting, whether or not he, she or they constitute a quorum,
may unanimously appoint another member of the Board of Directors to act at the
meeting in place of any such absent or disqualified member. Any such committee,
to the extent provided in a resolution of the Board of Directors, shall have and
may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation and may authorize the
seal of the Corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority in reference to amending the
Certificate of Incorporation (except that a committee may, to the extent
------
authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the Board of Directors as provided in subsection (a) of
Section 151 of the Delaware General Corporation Law, fix the designations and
any of the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the Corporation, or the
conversion into, or the exchange of such shares for, shares of any other class
or classes or any other series of the same or any other class or classes of
stock of the Corporation, or fix the number of shares of any series of stock or
authorize the increase or decrease of the shares of any series), adopting an
agreement of merger or consolidation under Sections 251 or 252 of the Delaware
General Corporation Law, recommending to the stockholders the sale, lease or
exchange of all or substantially all of the Corporation's property and assets,
recommending to the stockholders a dissolution of the Corporation or a
revocation of a dissolution, or amending the Bylaws of the Corporation; and
unless the resolution of the Board of Directors expressly so provides, no such
committee shall have the power or authority to declare a dividend, authorize the
issuance of stock or adopt a certificate of ownership and merger pursuant to
section 253 of the Delaware General Corporation Law.
Section 3.2: Committee Rules. Unless the Board of Directors otherwise
----------- ---------------
provides, each committee designated by the Board may make, alter and repeal
rules for the conduct of its business. In the absence of such rules each
committee shall conduct its business in the same manner as the Board of
Directors conducts its business pursuant to Article II of these Bylaws.
ARTICLE IV
OFFICERS
Section 4.1: Generally. The officers of the Corporation shall consist of
----------- ---------
a Chief Executive Officer and/or a President, one or more Vice Presidents, a
Secretary, a Treasurer and such other officers, including a Chairman of the
Board of Directors and/or Chief Financial Officer, as may from time to time be
appointed by the Board of Directors. All officers shall be elected by the Board
of Directors; provided, however, that the Board of Directors may empower the
-------- -------
Chief Executive Officer of the Corporation to appoint officers other than the
Chairman of the Board, the Chief Executive Officer, the President, the Chief
Financial Officer or the Treasurer. Each officer shall hold office until his or
her successor is elected and qualified or until his or her earlier resignation
or removal. Any number of offices may be held by the same person. Any officer
may resign at any time upon written notice to the Corporation. Any vacancy
occurring in any office of the Corporation by death, resignation, removal or
otherwise may be filled by the Board of Directors.
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<PAGE>
Section 4.2: Chief Executive Officer. Subject to the control of the Board
----------- -----------------------
of Directors and such supervisory powers, if any, as may be given by the Board
of Directors, the powers and duties of the Chief Executive Officer of the
Corporation are:
(a) To act as the general manager and, subject to the control of the Board
of Directors, to have general supervision, direction and control of the business
and affairs of the Corporation;
(b) To preside at all meetings of the stockholders;
(c) To call meetings of the stockholders to be held at such times and,
subject to the limitations prescribed by law or by these Bylaws, at such places
as he or she shall deem proper; and
(d) To affix the signature of the Corporation to all deeds, conveyances,
mortgages, guarantees, leases, obligations, bonds, certificates and other papers
and instruments in writing which have been authorized by the Board of Directors
or which, in the judgment of the Chief Executive Officer, should be executed on
behalf of the Corporation; to sign certificates for shares of stock of the
Corporation; and, subject to the direction of the Board of Directors, to have
general charge of the property of the Corporation and to supervise and control
all officers, agents and employees of the Corporation.
The President shall be the Chief Executive Officer of the Corporation unless the
Board of Directors shall designate another officer to be the Chief Executive
Officer. If there is no President, and the Board of Directors has not
designated any other officer to be the Chief Executive Officer, then the
Chairman of the Board shall be the Chief Executive Officer.
Section 4.3: Chairman of the Board. The Chairman of the Board shall have
----------- ---------------------
the power to preside at all meetings of the Board of Directors and shall have
such other powers and duties as provided in these Bylaws and as the Board of
Directors may from time to time prescribe.
Section 4.4: President. The President shall be the Chief Executive
----------- ---------
Officer of the Corporation unless the Board of Directors shall have designated
another officer as the Chief Executive Officer of the Corporation. Subject to
the provisions of these Bylaws and to the direction of the Board of Directors,
and subject to the supervisory powers of the Chief Executive Officer (if the
Chief Executive Officer is an officer other than the President), and subject to
such supervisory powers and authority as may be given by the Board of Directors
to the Chairman of the Board, and/or to any other officer, the President shall
have the responsibility for the general management the control of the business
and affairs of the Corporation and the general supervision and direction of all
of the officers, employees and agents of the Corporation (other than the Chief
Executive Officer, if the Chief Executive Officer is an officer other than the
President) and shall perform all duties and have all powers that are commonly
incident to the office of President or that are delegated to the President by
the Board of Directors.
Section 4.5: Vice President. Each Vice President shall have all such
----------- --------------
powers and duties as are commonly incident to the office of Vice President, or
that are delegated to him or her by the Board of Directors or the Chief
Executive Officer. A Vice President may be designated by
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<PAGE>
the Board to perform the duties and exercise the powers of the Chief Executive
Officer in the event of the Chief Executive Officer's absence or disability.
Section 4.6: Chief Financial Officer. Subject to the direction of the
----------- -----------------------
Board of Directors and the President, the Chief Financial Officer shall perform
all duties and have all powers that are commonly incident to the office of chief
financial officer.
Section 4.7: Treasurer. The Treasurer shall have custody of all monies
----------- ---------
and securities of the Corporation. The Treasurer shall make such disbursements
of the funds of the Corporation as are authorized and shall render from time to
time an account of all such transactions. The Treasurer shall also perform such
other duties and have such other powers as are commonly incident to the office
of Treasurer, or as the Board of Directors or the President may from time to
time prescribe.
Section 4.8: Secretary. The Secretary shall issue or cause to be issued
----------- ---------
all authorized notices for, and shall keep, or cause to be kept, minutes of all
meetings of the stockholders and the Board of Directors. The Secretary shall
have charge of the corporate minute books and similar records and shall perform
such other duties and have such other powers as are commonly incident to the
office of Secretary, or as the Board of Directors or the President may from time
to time prescribe.
Section 4.9: Delegation of Authority. The Board of Directors may from
----------- -----------------------
time to time delegate the powers or duties of any officer to any other officers
or agents, notwithstanding any provision hereof.
Section 4.10: Removal. Any officer of the Corporation shall serve at the
------------ -------
pleasure of the Board of Directors and may be removed at any time, with or
without cause, by the Board of Directors. Such removal shall be without
prejudice to the contractual rights of such officer, if any, with the
Corporation.
ARTICLE V
STOCK
Section 5.1: Certificates. Every holder of stock shall be entitled to
----------- ------------
have a certificate signed by or in the name of the Corporation by the Chairman
or Vice-Chairman of the Board of Directors, or the President or a Vice
President, and by the Treasurer or an Assistant Treasurer, or the Secretary or
an Assistant Secretary, of the Corporation, certifying the number of shares
owned by such stockholder in the Corporation. Any or all of the signatures on
the certificate may be a facsimile.
Section 5.2: Lost, Stolen or Destroyed Stock Certificates; Issuance of New
----------- -------------------------------------------------------------
Certificates. The Corporation may issue a new certificate of stock in the place
- ------------
of any certificate previously issued by it, alleged to have been lost, stolen or
destroyed, and the Corporation may require the owner of the lost, stolen or
destroyed certificate, or such owner's legal representative, to agree to
indemnify the Corporation and/or to give the Corporation a bond sufficient to
indemnify it,
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<PAGE>
against any claim that may be made against it on account of the alleged loss,
theft or destruction of any such certificate or the issuance of such new
certificate.
Section 5.3: Other Regulations. The issue, transfer, conversion and
----------- -----------------
registration of stock certificates shall be governed by such other regulations
as the Board of Directors may establish.
ARTICLE VI
INDEMNIFICATION
Section 6.1 Indemnification of Officers and Directors. Each person who
----------- -----------------------------------------
was or is made a party to, or is threatened to be made a party to, or is
involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "proceeding"), by reason of the fact that he
----------
or she (or a person of whom he or she is the legal representative), is or was a
director, officer or employee of the Corporation or a Reincorporated Predecessor
(as defined below) or is or was serving at the request of the Corporation or a
Reincorporated Predecessor (as defined below) as a director, officer or employee
of another corporation, or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, shall be
indemnified and held harmless by the Corporation to the fullest extent permitted
by the Delaware General Corporation Law, against all expenses, liability and
loss (including attorneys' fees, judgments, fines, ERISA excise taxes and
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such person in connection therewith, and such indemnification shall
continue as to a person who has ceased to be a director or officer and shall
inure to the benefit of his or her heirs, executors and administrators;
provided, however, that the Corporation shall indemnify any such person seeking
- -------- -------
indemnity in connection with a proceeding (or part thereof) initiated by such
person only if such proceeding (or part thereof) was authorized by the Board of
Directors of the Corporation. As used herein, the term "Reincorporated
--------------
Predecessor" means a corporation that is merged with and into the Corporation in
- -----------
a statutory merger where (a) the Corporation is the surviving corporation of
such merger; (b) the primary purpose of such merger is to change the corporate
domicile of the Reincorporated Predecessor to Delaware.
Section 6.2: Advance of Expenses. The Corporation shall pay all expenses
----------- -------------------
(including attorneys' fees) incurred by such a director or officer in defending
any such proceeding as they are incurred in advance of its final disposition;
provided, however, that if the Delaware General Corporation Law then so
- -------- -------
requires, the payment of such expenses incurred by such a director or officer in
advance of the final disposition of such proceeding shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of such director
or officer, to repay all amounts so advanced if it should be determined
ultimately that such director or officer is not entitled to be indemnified under
this Article VI or otherwise; and provided, further, that the Corporation shall
-------- -------
not be required to advance any expenses to a person against whom the Corporation
directly brings a claim, in a proceeding, alleging that such person has breached
his or her duty of loyalty to the Corporation, committed an act or omission not
in good faith or that
-10-
<PAGE>
involves intentional misconduct or a knowing violation of law, or derived an
improper personal benefit from a transaction.
Section 6.3: Non-Exclusivity of Rights. The rights conferred on any
------------ -------------------------
person in this Article VI shall not be exclusive of any other right that such
person may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, Bylaw, agreement, vote or consent of stockholders
or disinterested directors, or otherwise. Additionally, nothing in this Article
VI shall limit the ability of the Corporation, in its discretion, to indemnify
or advance expenses to persons whom the Corporation is not obligated to
indemnify or advance expenses pursuant to this Article VI.
Section 6.4: Indemnification Contracts. The Board of Directors is
----------- -------------------------
authorized to cause the Corporation to enter into indemnification contracts with
any director, officer, employee or agent of the Corporation, or any person
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, including employee benefit plans, providing indemnification rights
to such person. Such rights may be greater than those provided in this Article
VI.
Section 6.5: Effect of Amendment. Any amendment, repeal or modification
----------- -------------------
of any provision of this Article VI shall be prospective only, and shall not
adversely affect any right or protection conferred on a person pursuant to this
Article VI and existing at the time of such amendment, repeal or modification.
ARTICLE VII
NOTICES
Section 7.1: Notice. Except as otherwise specifically provided herein or
----------- ------
required by law, all notices required to be given pursuant to these Bylaws shall
be in writing and may in every instance be effectively given by hand delivery
(including use of a delivery service), by depositing such notice in the mail,
postage prepaid, or by sending such notice by prepaid telegram, telex, overnight
express courier, mailgram or facsimile. Any such notice shall be addressed to
the person to whom notice is to be given at such person's address as it appears
on the records of the Corporation. The notice shall be deemed given (i) in the
case of hand delivery, when received by the person to whom notice is to be given
or by any person accepting such notice on behalf of such person, (ii) in the
case of delivery by mail, upon deposit in the mail, (iii) in the case of
delivery by overnight express courier, on the first business day after such
notice is dispatched, and (iv) in the case of delivery via telegram, telex,
mailgram, or facsimile, when dispatched.
Section 7.2: Waiver of Notice. Whenever notice is required to be given
----------- ----------------
under any provision of these Bylaws, a written waiver of notice, signed by the
person entitled to notice, whether before or after the time stated therein,
shall be deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting at the beginning of the meeting to
the transaction of any business because the meeting is not lawfully called or
convened. Neither
-11-
<PAGE>
the business to be transacted at, nor the purpose of, any regular or special
meeting of the stockholders, directors or members of a committee of directors
need be specified in any written waiver of notice.
ARTICLE VIII
INTERESTED DIRECTORS
Section 8.1: Interested Directors; Quorum. No contract or transaction
----------- ----------------------------
between the Corporation and one or more of its directors or officers, or between
the Corporation and any other corporation, partnership, association or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board or committee thereof that authorizes
the contract or transaction, or solely because his, her or their votes are
counted for such purpose, if: (i) the material facts as to his, her or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the Board or committee
in good faith authorizes the contract or transaction by the affirmative votes of
a majority of the disinterested directors, even though the disinterested
directors be less than a quorum; (ii) the material facts as to his, her or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of the stockholders;
or (iii) the contract or transaction is fair as to the Corporation as of the
time it is authorized, approved or ratified by the Board of Directors, a
committee thereof, or the stockholders. Common or interested directors may be
counted in determining the presence of a quorum at a meeting of the Board of
Directors or of a committee which authorizes the contract or transaction.
ARTICLE IX
MISCELLANEOUS
Section 9.1: Fiscal Year. The fiscal year of the Corporation shall be
----------- -----------
determined by resolution of the Board of Directors.
Section 9.2: Seal. The Board of Directors may provide for a corporate
----------- ----
seal, which shall have the name of the Corporation inscribed thereon and shall
otherwise be in such form as may be approved from time to time by the Board of
Directors.
Section 9.3: Form of Records. Any records maintained by the Corporation
----------- ---------------
in the regular course of its business, including its stock ledger, books of
account and minute books, may be kept on, or be in the form of, magnetic tape,
diskettes, photographs, microphotographs or any other information storage
device, provided that the records so kept can be converted into clearly legible
form within a reasonable time. The Corporation shall so convert any records so
kept upon the request of any person entitled to inspect the same.
-12-
<PAGE>
Section 9.4: Reliance Upon Books and Records. A member of the Board of
----------- -------------------------------
Directors, or a member of any committee designated by the Board of Directors
shall, in the performance of his or her duties, be fully protected in relying in
good faith upon records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of the Corporation's
officers or employees, or committees of the Board of Directors, or by any other
person as to matters the member reasonably believes are within such other
person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Corporation.
Section 9.5: Certificate of Incorporation Governs. In the event of any
----------- ------------------------------------
conflict between the provisions of the Corporation's Certificate of
Incorporation and Bylaws, the provisions of the Certificate of Incorporation
shall govern.
Section 9.6: Severability. If any provision of these Bylaws shall be held
----------- ------------
to be invalid, illegal, unenforceable or in conflict with the provisions of the
Corporation's Certificate of Incorporation, then such provision shall
nonetheless be enforced to the maximum extent possible consistent with such
holding and the remaining provisions of these Bylaws (including without
limitation, all portions of any section of these Bylaws containing any such
provision held to be invalid, illegal, unenforceable or in conflict with the
Certificate of Incorporation, that are not themselves invalid, illegal,
unenforceable or in conflict with the Certificate of Incorporation) shall remain
in full force and effect.
ARTICLE X
AMENDMENT
Section 10.1: Amendments. Stockholders of the Corporation holding a
------------ ----------
majority of the Corporation's outstanding voting stock shall have the power to
adopt, amend or repeal Bylaws. To the extent provided in the Corporation's
Certificate of Incorporation, the Board of Directors of the Corporation shall
also have the power to adopt, amend or repeal Bylaws of the Corporation, except
insofar as Bylaws adopted by the stockholders shall otherwise provide.
-13-
<PAGE>
CERTIFICATION OF BYLAWS
OF
EBAY INC.
(A DELAWARE CORPORATION)
KNOW ALL BY THESE PRESENTS:
I, Matthew P. Quilter, certify that I am Secretary of eBay Inc., a Delaware
corporation (the "Company"), that I am duly authorized to make and deliver this
certification, that the attached Bylaws are a true and correct copy of the
Bylaws of the Company in effect as of the date of this certificate.
Dated: _____________, 1998
______________________________
Matthew P. Quilter, Secretary
<PAGE>
EXHIBIT 3.07
CERTIFICATE OF ELIMINATION
OF
SERIES A, SERIES B AND SERIES B1 PREFERRED STOCK
OF
eBAY INC.
(PURSUANT TO SECTION 151(g)
OF THE DELAWARE GENERAL CORPORATION LAW)
eBay Inc., a Delaware corporation, hereby certifies that the following
resolution was duly adopted by the Board of Directors of the corporation as
required by Section 151(g) of the Delaware General Corporation Law on
____________, 1998:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation and in accordance with the
provisions of the Certificate of Incorporation, as amended, the Board
of Directors hereby states and declares that none of the 1,676,475
authorized shares of the series of stock designated "Series A Preferred
Stock", the 1,415,416 authorized shares of the series of stock
designated "Series B Preferred Stock" and the 1,415,416 authorized
shares of the series of stock designated "Series B1 Preferred Stock" are
outstanding and none will be issued subject to the Certificate of
Designation previously filed with respect to such series; and when a
certificate setting forth this resolution becomes effective, it shall
have the effect of eliminating from the Certificate of Incorporation all
matters set forth in the Certificate with respect to the Series A
Preferred Stock, the Series B Preferred Stock and the Series B1
Preferred Stock.
IN WITNESS WHEREOF, said corporation caused this Certificate of
Elimination to be executed and attested by its duly authorized officers this
____ day of _________, 1998.
eBAY INC.
By: __________________________________
Margaret C. Whitman, President and
Chief Executive Officer
ATTEST:
_______________________________
Matthew P. Quilter, Secretary
<PAGE>
Exhibit 4.01
Common Stock Common Stock
Number Shares
eBay
THIS CERTIFICATE IS INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN
TRANSFERABLE IN OF THE STATE OF DELAWARE DEFINITIONS AND A
NEW YORK, NY AND STATEMENT RELATING TO
RIDGEFIELD, NJ RIGHTS, PREFERENCES,
PRIVILEGES AND
RESTRICTIONS ON SHARES
This Certifies that CUSIP 278642 10 3
is the record owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK,
PAR VALUE $0.001 PER SHARE, OF
eBAY INC.
transferable only on the books of the Corporation by the holder hereof in
person or by duly authorized Attorney upon surrender of this certificate
properly endorsed. This certificate is not valid until countersigned and
registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
[corporate seal]
/s/ Gary Bengier /s/ Pierre Omidyar
TREASURER CHAIRMAN
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
eBAY INC.
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of designation, the
number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge at
the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as through they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ______________ Custodian _____________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as Act ________________________________
tenants in common (State)
UNIF TRF MIN ACT -- _________ Custodian (until age _________)
(Cust)
________________ under Uniform Transfers
(Minor)
to Minors and _______________________
(State)
Additional abbreviations may also be used though not in the above list.
</TABLE>
FOR VALUE RECEIVED, ________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________________________
| |
|____________________________________________________|
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated____________________
X_________________________________________________
X_________________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
Signature(s) Guaranteed
By______________________________________________________________________
THE SIGNATURE(S) MUST BE GUARATNEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-16.
<PAGE>
EXHIBIT 10.12
EXODUS COMMUNICATIONS, INC.
INTERNET SERVICES AND PRODUCTS AGREEMENT
This Agreement defines the terms and conditions between Exodus Communications,
Inc., (hereafter referred to as "EXODUS") and eBay (hereafter referred to as
"CUSTOMER") whereby Exodus provides value-added Internet services and related
products to Customer.
1. Exodus will provide the following services and products at the prices shown
(see Addenda for additional services):
<TABLE>
<S> <C> <C>
Connection Type__________ Usage Level____ Price________ Billing Period________
One Time Installation Cost Price________
Telco Connection provided by:______________ Price________ Billing Period________
One Time Installation Cost Price________
Other:____________________________ Price________ Billing Period________
Other:____________________________ Price________ Billing Period________
Equipment: see Attachment A (if applicable) Price________
Request for Service _____________________ SEE CO-LOCATION ADDENDUM
Date
</TABLE>
Exodus will not increase prices for services provided during the Billing Period
identified above. Exodus reserves the right to change prices beyond the billing
period upon notice to Customer 30 days in advance of any change. All prices are
exclusive of any tax, levy customs duty, import tax or similar governmental
charge that may be assesses by any jurisdiction. All such taxes are the
responsibility of Customer.
2. The term of this Agreement is for one year from the date Internet access is
connected, Customer may cancel within the first 30 days without penalty,
thereafter it is non cancelable, and will automatically renew yearly
thereafter, unless 60 day advanced notice is given by either party prior to
this agreement's anniversary date. Customer may cancel with 30 day advance
notice if Customer can show that Exodus has failed to provide commercially
reasonable service levels or price increases (if any) are not acceptable to
Customer. At that time Exodus connection service is installed or product is
shipped, Exodus will invoice the Customer. Payments for subsequent billing
periods will be issued in advance of the provision of service. Invoices are
due upon receipt.
3. Exodus makes no warranty of any kind with respect to services and products
provided under this Agreement. Exodus DISCLAIMS ALL WARRANTIES, EXPRESS AND
IMPLIED, INCLUDING THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE AND NON-INFRINGEMENT WITH RESPECT TO THE DOMAIN NAMES
OBTAINED FOR CUSTOMERS, SERVICES, OR ANY
1
<PAGE>
INFORMATION OBTAINED THROUGH THE SERVICES. In situation involving
performance or nonperformance of services or products furnished under this
Agreement, Customer's sole remedy shall be: in the case of products,
repair, or return of the defective product to Exodus for refund, at the
discretion of Exodus. In the case of services, refund of a prorata potion
of the price paid for services which were not provided. Credit will only be
issued for periods of lost service greater than 24 hours.
4. Exodus will not be liable for any damages Customer may suffer arising out
of acts of God, use or inability to use, Exodus' Internet services or
related products unless such damages are caused by an intentional and
willful act of Exodus. In no event shall Exodus be liable for unauthorized
access to Customer's transmission facilities or Customer premise equipment
or for unauthorized access to or alteration, theft or destruction of
Customer's data files, programs, procedure or information through accident,
fraudulent means or devices, or any other method. Exodus will not be liable
for indirect, incidental, special or consequential damages for any lost
property or data of Customer. Exodus' liability for damages to Customer for
any cause whatsoever, regardless of form of action, including negligence,
shall not exceed and amount equal to the price of products and services
purchased by Customer during the twelve month period preceding the event
which caused the damages or injury.
5. Exodus will indemnify and hold Customer harmless against any claims or
demand by any third party that any hardware or software provided by Exodus
to Customer hereunder, infringes any U.S. copyright or patent. Except for
such indemnity, Customer agrees to indemnify and hold Exodus harmless
against any claim or demand by any third party due to or arising out of the
use by Customer of Internet services and related products provided
hereunder.
6. Customer is solely responsible for the content of any transmissions any
Customer and any third party utilizing customer's facilities or Exodus'
facilities. Use of other organization's network or computing resources are
subject to their respective permission and usage policies. Customer agrees
to comply with all applicable laws with regard to the transmission and use
of information and content, solicitation of any activity that is prohibited
by applicable law over Internet. Customer further agrees not to use the
Internet service for illegal purposes, to interfere with or disrupt other
network users, network services or network equipment. Customer shall be
liable for and shall indemnify and defend EXODUS from and against any
claims in anyway arising from or related to (i) the alleged infringement of
patent, trademark, design, copyright or any other intellectual property
rights in relation to the Customer's use of the services and (ii) Customer
use or inclusion of any information, photographs, art work or other content
(including without limitation claims based on invasion of privacy, right of
publicity, the Communications Decency Act of 1996, obscenity or
pornography, and the violation of any states or ordinances or other laws).
7. Customer understands that Internet use, and related products and services
provided under this Agreement, may require registration and related
administrative reports which are public in nature. In addition Customer
agrees Exodus may include its name in directories of Exodus customers.
2
<PAGE>
8. Unless otherwise authorized in writing by Exodus and attached as an Addenda
to this agreement, Customer shall limit access to and use of the Internet
connecting services to its employees solely for Customer's business
purposes and shall not resell or otherwise generate income by providing
access to the Internet service to third parties. Customer's right to use
the Internet services and products provided hereunder is limited to
Customer and is nontransferable.
9. Failure by the Customer to comply with the terms of this agreement will
result in immediate termination of Exodus Internet services.
10. Customer agrees not to export or re-export (including by way of electronic
transmission), directly or indirectly, any software or technical data
through the Internet services without first obtaining any required export
license or governmental approval.
11. This Agreement, together with any Addenda, constitute the entire agreement
of the parties with respect to the services and product provided hereunder
and supersede any prior agreements. These terms and conditions shall
prevail notwithstanding any different or additional terms and conditions in
any forms provided by Customer. No waiver of any rights hereunder shall be
deemed to be a waiver of the same right on any other occasion. This
Agreement shall be governed by the laws of the State of California without
regards to conflicts of law principles.
THESE TERMS AND CONDITIONS HAVE BEEN READ, ARE UNDERSTOOD, AND ARE HEREBY
ACCEPTED.
/s/ MICHAEL K. WILSON 5/2/97 /s/ ILLEGIBLE
- ----------------------------------- ------------------------------------
Customer Representative Date Exodus Representative Date
(Signature) (Signature)
MICHAEL K. WILSON
- ----------------------------------- ------------------------------------
Name Name
VP PRODUCT DEVELOPMENT
- ----------------------------------- ------------------------------------
Title Title
EXODUS COMMUNICATIONS
REGISTRATION FORM
3
<PAGE>
EXODUS COMMUNICATIONS, INC.
CO-LOCATION ADDENDUM
TO
INTERNET SERVICES AND PRODUCTS AGREEMENT
This CO-LOCATION ADDENDUM is part of the INTERNET SERVICES AND PRODUCTS
AGREEMENT ("Internet Services Agreement") effective as of May 1, 1997, between
--------------------------- -----------
Exodus Communications, Inc. ("Exodus") and you ("Customer").
------ --------
The following additional terms and conditions apply under this Addendum.
1. Co-Located Equipment and Fees
-----------------------------
"Equipment" Description _______________________________
---------
"Facility" Description 1 Full Rack
-------- -----------
Co-location Connection Type 10M Dedicated
-------------
Connection Fee $1,000.00 NRC/$5,000.00 Billing Period: Monthly
------------ -------- -------
Facility Fee $750.00 NRC/$750.00 MRC Billing Period: Monthly
---------- ---------- -------
# Access Cards (3 max) 3 @ $100/card
-
Other Charges $_________________________________
Request for Service 5/7/97
---------------
Date
2. Installation; Maintenance; Removal. Exodus agrees to allow Customer to
----------------------------------
place the Equipment in the Facility subject and subordinate to the terms and
provisions of Exodus' lease with its landlord. Such placement shall be subject
to this Addendum and Exodus' installation and maintenance specifications (the
"Specifications"), which Exodus shall provide to Customer from time to time and
--------------
Customer agrees to comply therewith. Customer agrees that it will be solely
responsible, and at Exodus' request will reimburse Exodus, for all costs and
expenses associated with placing, installing, maintaining, operating and
removing the Equipment and related materials, including but not limited to, all
necessary preparations required to comply with the Specifications, costs
associated including but not limited to, all necessary preparations required to
comply with the Specifications, costs associated with relocation or removal of
the Equipment once installed, all electric, telephone and other utility charges
attributable to the Equipment and related use of the Facility, and all taxes or
other government fees arising from or related to the performance of Exodus'
obligations under this Addendum. Customer further agrees that upon termination
of this Addendum, Customer will leave the Facility in as good condition as it
was in at the beginning of the term of this Addendum, and will remove the
Equipment and any property which is obligated or permitted to remove prior to
the termination date.
3. Security. Exodus will maintain the Facility at its premises which will
--------
be staffed by an Exodus employee at all times. The Exodus employee will require
all visitors to the premises to sign a sign-in sheet and specify the reason for
their visit. Customer acknowledges that Exodus will allow representatives of Co-
location customers unlimited and unsupervised access to their respective
facilities, and such facilities may be located with and immediately accessible
to other customer's facilities, including Customer's Facility.
4
<PAGE>
Exodus will take reasonable measures to protect the security of each customer's
facility and equipment, including the measures described in this Section 3.
Notwithstanding such actions, EXODUS ASSUMES NO LIABILITY FOR ANY DAMAGE OR LOSS
TO CUSTOMER'S FACILITY AND/OR EQUIPMENT RESULTING FROM ANY OTHER CUSTOMER'S
ACCESS TO ITS FACILITY OR EXODUS' PREMISES. ANY SUCH DAMAGE OR LOSS WILL BE THE
EXCLUSIVE RESPONSIBILITY OF THE CUSTOMER WHO CAUSED AND THE CUSTOMER WHO
INCURRED SUCH LOSS OR DAMAGE. Exodus will provide reasonable assistance to
resolve any disputes regarding such losses or damages.
4. Access. Exodus hereby grants Customer's representatives listed below
------
(the "Representatives") unlimited access, twenty-four (24) hours per day, seven
---------------
(7) days per week, to the Facility. Access will be via Access Cards and is
limited to the Representatives. Whenever Customer requires access to the
Facility for persons other than its Representatives, Customer shall give Exodus
twenty-four (24) hours prior notice by calling Exodus at a phone number to be
provided by Exodus and requesting Exodus to arrange for such access. Customer
shall reimburse Exodus for all extraordinary costs incurred by Exodus in
arranging such access. EACH REPRESENTATIVES AND ANY OTHER PERSONS ACCESSING THE
FACILITY MUST SIGN A SIGN-IN SHEET AND ACCESS THE FACILITY AT THEIR OWN RISK AND
EXODUS ASSUMES NO LIABILITY WHATSOEVER FOR ANY HARM TO SUCH PERSONS OR DAMAGE TO
PROPERTY BROUGHT BY SUCH PERSONS TO THE FACILITY. Customer's Representatives
are:
Name: PIERRE OMIDYAR Title: CEO
-------------- ---
Name: MICHAEL WILSON Title: VP PRODUCT DEVELOPMENT
-------------- ----------------------
Name: PETE HELME Title: ENGINEER
---------- --------
1. Condition of Premises/Limitation of Liability. CUSTOMER HEREBY ACCEPTS
---------------------------------------------
THE FACILITY IN AN "AS IS" CONDITION at the commencement of the term of this
Addendum, and acknowledges that Exodus has no obligation to make alterations,
improvements or additions, decorations or changes within the Facility or any
part thereof. Exodus may be required to relocate the Equipment within its
premises during the term of this Addendum, and Customer authorizes Exodus to
take such action provided Exodus does not disrupt or otherwise impair Customer's
service without first notifying Customer of such planned relocation. CUSTOMER
ACKNOWLEDGES AND AGREES THAT EXODUS SHALL NOT BE LIABLE FOR ANY COSTS, EXPENSES
OR OTHER DAMAGES INCURRED BY CUSTOMER OR ANY THIRD PARTY AS A RESULT OF THE
PERFORMANCE OF EXODUS' OBLIGATIONS PURSUANT TO THIS ADDENDUM OR OTHERWISE
RELATED TO THE EQUIPMENT, EXCEPT AS A RESULT OF EXODUS' GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT. IN NO EVENT WILL EXODUS BE LIABLE TO CUSTOMER FOR ANY
DAMAGES OR LOSSES DUE TO THE FAILURE OR MALFUNCTION OF THE EQUIPMENT LOCATED IN
THE FACILITY. Notwithstanding the foregoing, and without imposing any duty or
obligation on Exodus, Exodus will endeavor to protect the Facility and Equipment
from damage and will notify Customer promptly of any problems or anticipated
5
<PAGE>
problems related thereto and identified by Exodus. TO THE EXTENT EXODUS IS
LIABLE FOR ANY DAMAGE TO CUSTOMER'S EQUIPMENT FOR ANY REASON, SUCH LIABILITY
WILL BE LIMITED SOLELY TO THE EQUIPMENT LISTED ABOVE.
2. Rights to Equipment; Insurance. Customer represents, warrants and
------------------------------
covenants that it owns or has the legal right and authority, and will continue
to own or secure the legal right and authority, during the term of this
Addendum, to use the Equipment and Facility as contemplated by this Addendum.
Customer further covenants and agrees to keep in force and effect during the
term of this Addendum for the benefit of Exodus, Exodus' landlord and Customer,
a policy of comprehensive liability insurance conforming to the requirements of
the applicable provisions of Exodus' lease of the premises containing the
Facility, as presented by Exodus to Customer from time to time.
3. Customer's Responsibility for Losses or Damages; Indemnification.
----------------------------------------------------------------
Customer will be liable to Exodus, Exodus' landlord, other co-location
customers, their respective officers, directors, suppliers, agents, employees
and consultants, for any losses, damages or costs resulting from Customer's
actions or inactions relating to or arising under this Addendum, including
damage caused by Customer's Equipment or resulting from Customer's access to the
Facility. Customer covenants and agrees to indemnify, defend and hold Exodus,
Exodus' landlord, other co-location customers, their respective officers,
directors, suppliers, agents, employees and consultants harmless from and
against any and all costs, liabilities, suits, actions, claims, damages, charges
and expenses, including reasonable attorney fees, resulting from Customer's
Equipment or use of or access to the Facility, unless arising from the willful
misconduct of Exodus.
4. Casualty or Eminent Domain. In the event of taking by eminent domain or
--------------------------
damage by fire or other casualty to the Facility, Customer shall acquiesce and
be bound by any action taken by or agreement entered into between Exodus and its
landlord with respect thereto.
5. Not a Lease. This Co-location Addendum is a services agreement and is
-----------
not intended to and will not constitute a lease of real property. Customer
acknowledges and agrees that it has no rights as a tenant or otherwise under any
real property and/or landlord/tenant laws, regulations or ordinances. Upon
termination of this Addendum for any reason, Exodus will have the right to
remove immediately all of Customer's Equipment located at the Facility.
6. Entire Agreement. Exodus and Customer agree that the terms and
----------------
conditions of the Internet Services Agreement and any prior addenda thereto are
hereby incorporated by reference and made a part hereof to the same extent as if
such terms and conditions were set forth in full herein. To the extent that any
terms and conditions in this Addendum conflict with the terms and conditions in
the Internet Services Agreement or prior addenda thereto, the terms and
conditions of this Addendum will supersede any conflicting prior terms and
conditions.
6
<PAGE>
THESE TERMS AND CONDITIONS HAVE BEEN READ, ARE UNDERSTOOD, AND ARE HEREBY
ACCEPTED.
CUSTOMER EXODUS COMMUNICATIONS, INC.
By: /s/ MICHAEL K. WILSON By: /s/ ILLEGIBLE
------------------------------ ------------------------------
Authorized Signature
Name: MICHAEL WILSON Name:
------------------------------ ------------------------------
Title: VP PRODUCT DEVELOPMENT Title:
------------------------------ ------------------------------
Date: 5/2/97 Date:
------------------------------ ------------------------------
(This is the effective date of this
addendum) 10/96
eBay, Inc.
- ------------------------------
Customer Business Name
7
<PAGE>
EXHIBIT 10.18
eBay 2005 HAMILTON AVENUE, SUITE 350
San Jose, CA 95125
PHONE 408 369-4830
FAX 408 369-4839
WWW.eBAY.COM
January 16, 1998
Ms. Margaret C. Whitman
204 Warren Street
Brookline, MA 02146
Dear Meg:
eBay, Inc. (the "Company" or "eBay") is pleased to offer you a position
as Chief Executive Officer, at a salary, payable twice per month, which is
equivalent to a yearly salary of $175,000.00. In addition, you will be eligible
for an annual bonus up to $100,000.00, solely at the discretion of the Board of
Directors. eBay will also compensate you for reasonable out-of-pocket expenses
incurred for the relocation of your family and your belongings.
You will also be entitled to the benefits that eBay customarily makes
available to employees in positions comparable to yours and it will be
recommended to the Board of Directors that you be granted an option for the
purchase of 800,000 shares of the Company's Common Stock. The option will be
granted under the Company's 1996 Stock Option Plan and, assuming you remain an
employee, will vest with respect to 25% of the shares subject to the option one
year after the commencement of your employment and, at the end of each month
thereafter, with respect to an additional 1/48 of the shares subject to the
option; provided, however, that if your employment is terminated by the Company
other than for "Cause"'. during your first year of employment, the option will
vest, at the end of each month, with respect to 1/48 of the shares subject to
the option. No other acceleration of vesting will occur in connection with any
termination of your employment or any acquisition of eBay. At least 100,000 of
the shares underlying the stock option must be purchased for cash at the option
exercise price, as soon as possible after the grant is approved; these shares
will be subject to a repurchase option in favor of the Company to the extent
they are "Unvested".
If your employment is terminated by the Company other than for "Cause" at
any time during your employment, you will continue to receive salary
compensation for an additional six months and, if at the end of such period you
remain unemployed, you will be eligible for additional salary compensation for
the lesser of (i) six months, or (ii) until you find other employment.
The Company asks that you complete the enclosed "Employee Information and
Inventions Agreement" prior to commencing employment. In part, this Agreement
requests that a departing
_______________
/1/ Definition included in this letter.
<PAGE>
eBay 2005 HAMILTON AVENUE, SUITE 350
San Jose, CA 95125
PHONE 408 369-4830
FAX 408 369-4839
WWW.eBAY.COM
employee refrain from using or disclosing eBay's Confidential Information (as
defined in the Agreement) in any manner which might be detrimental to or
conflict with the business interests of eBay or its employees. This Agreement
does not prevent a former employee from using his or her general knowledge and
- --------
experience no matter when or how gained in any new field or position. If you
should have any questions about the "Employee Confidential Information and
Inventions Agreement," please call me.
Under federal immigration laws, the Company is required to verify each new
employee's identity and legal authority to work in the United States.
Accordingly, please be prepared to furnish appropriate documents satisfying
those requirements; this offer of employment is conditioned on submission of
satisfactory documentation.
We hope that you and eBay will find mutual satisfaction with your
employment. All of us at eBay are very excited about your joining our team and
look forward to a beneficial and fruitful relationship. Nevertheless, employees
have the right to terminate their employment at any time with or without cause
or notice, and the Company reserves for itself an equal right. We both agree
that any dispute arising with respect to your employment, the termination of
that employment, or a breach of any covenant of good faith and fair dealing
related to your employment, shall be conclusively settled by final and binding
arbitration in accordance with the Voluntary Labor Arbitration Rules of the
American Arbitration Association (AAA) at the AAA office in San Jose.
This letter and the "Employee Confidential Information and Inventions
Agreement" contain the entire agreement with respect to your employment. The
terms of this offer may only be changed by written agreement, although the
Company may from time to time, in its sole discretion, adjust the salaries and
benefits paid to you and its other employees. Should you have any questions
with regard to any of the items indicated above, please call me. Kindly
indicate your consent to this employment agreement by signing and returning a
copy of this letter and a completed "Employee Confidential Information and
Inventions Agreement" to me by the close of business January 16, 1998. Upon
your signature below, this will become our binding agreement with respect to
your employment and its terms merging and superseding in their entirety all
other or prior agreements and communications by you and eBay as to the specific
subjects of this letter.
Very truly yours,
/s/ Pierre Omidyar
- -----------------------
Pierre Omidyar
Chief Executive Officer
ACCEPTED:
/s/ Margaret C. Whitman 1/16/98
- ----------------------- -------
Margaret Whitman Date
<PAGE>
eBay 2005 HAMILTON AVENUE, SUITE 350
San Jose, CA 95125
PHONE 408 369-4830
FAX 408 369-4839
WWW.eBAY.COM
"CAUSE"
For the purposes of this offer, the term "Cause" means (i) the conviction of any
felony or any crime involving moral terpitude or dishonesty; (ii) participation
in a fraud or act of dishonesty against the Company which adversely affects the
Company in a material way; (iii) willful breach of the Company's policies which
adversely affects the Company in a material way; (iv) causing intentional damage
to the Company's property or business; (v) conduct which constitutes gross
insubordination or incompetence; (vi) habitual neglect of duties; or (vii)
conduct which demonstrates gross unfitness to serve; provided that the action or
conduct described in clauses (iii), (v) and (vii) above will constitute "Cause"
only if such action or conduct continues after the Company has provided Employee
with written notice thereof and a reasonable opportunity (to be not less than 30
days nor more than 90 days) to cure the same. For the above purposes, a
termination by the Company without Cause includes a termination of employment by
the Employee within 30 days following any of the following events: (x) the
assignment of any duties to Employee inconsistent with, or reflecting a
materially adverse change in, Employee's position, duties, responsibilities or
status with the Company, or the removal of Employee from, or failure to reelect
Employee to, any of such positions; or (y) the relocation of the Company's
principal executive offices, or relocating Employee's principal place of
business, in excess of fifty (50) miles from the Company's current executive
offices.
<PAGE>
EXHIBIT 10.19
August 14, 1998
Brian Swette
55 Upland Drive
Greenwich, CT 06831
Dear Brian:
eBay Inc. (the "Company" or "eBay") is pleased to offer you the exempt
position of Senior Vice President of Marketing, reporting directly to me, at a
salary of $6,250, payable twice per month, which is equivalent to an annual
salary of $150,000. You shall also receive a one-time employment bonus of
$25,000 upon acceptance of this offer. The employment bonus will be non-
refundable as long as you remain an employee for at least one year. In the event
that your employment ceases prior to completion of one year, the employment
bonus shall be refundable pro-rata to eBay Inc. In addition, the company may
award you discretionary bonuses from time to time.
You will be entitled to the benefits that eBay customarily makes available
to employees in positions comparable to yours and it will be recommended to the
Board of Directors that you be granted an option for the purchase of 200,000
shares of the Company's Common Stock (based on the three for one forward split
anticipated upon the effective date of the Company's proposed Initial Public
Offering your option for 200,000 shares would automatically become an option for
600,000 shares). The option will contain terms and conditions substantially
similar to those found in the Company's current Stock Option Plan; and, assuming
you remain an employee, will vest with respect to 25% of the shares subject to
the option one year after the commencement of your employment and, at the end of
each month thereafter, with respect to an additional 1/48 of the shares subject
to the option; provided, however, that if your employment is terminated by the
Company other than for "Cause" during your first year of employment, the option
will vest, at the end of each month, with respect to 1/48 of the shares subject
to the option. No other acceleration of vesting will occur in connection with
acquisition of eBay, but you would be treated like others in the management
group if such a change in control were to occur.
<PAGE>
A relocation package will be provided to you in order to pay your
reasonable, pre-approved, and documented moving expenses as specified in the
enclosed relocation policy. Upon acceptance of our offer, please contact Liz
Frostig, Recruiter at eBay at (408)558-4816 or email at [email protected]. Your
------------
acceptance of this offer of employment confirms your understanding and agreement
with the terms of the guidelines.
As a condition of your employment, you must complete the "Employee
Proprietary Information and Inventions Agreement" prior to commencing
employment. In part, this Agreement requires that a departing employee refrain
unauthorized use or disclosure of eBay's confidential information (as defined in
the Agreement). This Agreement does not prevent a former employee from using
--------
know-how and expertise in any new field or position. If you should have any
questions about the "Employee Proprietary Information and Inventions Agreement,"
please call me.
Under federal immigration laws, the Company is required to verify each new
employee's identity and legal authority to work in the United States.
Accordingly, please be prepared to furnish appropriate documents satisfying
those requirements; this offer of employment is conditioned on submission of
satisfactory documentation. Enclosed is a list of the required documents.
All of us at eBay are very excited about you joining our team and look
forward to a beneficial and fruitful relationship. However, should any dispute
arise with respect to your employment or the termination of that employment, we
both agree that such dispute shall be conclusively resolved by final, binding
and confidential arbitration in accordance with the Voluntary Labor Arbitration
Rules of the American Arbitration Association (AAA) at the AAA office in San
Jose, rather than by a jury court or administrative agency. The Company will
bear all AAA administrative costs and fees of any such arbitration.
This letter and the "Employee Proprietary Information and Inventions
Agreement" contain the entire agreement with respect to your employment. The
terms of this offer may only be changed by written agreement, although the
Company may from time to time, in its sole discretion, adjust the salaries and
benefits paid to you and its other employees. Should you have any questions
with regard to any of the items indicated above, please call me. Kindly indicate
your consent to this employment agreement by signing and returning a copy of
this letter and a completed "Employee Proprietary
<PAGE>
Information and Inventions Agreement" to me by the close of business on
Wednesday, August 19, 1998. Upon your signature below, this will become our
binding agreement with respect to your employment and its terms merging and
superseding in their entirety all other or prior agreements and communications
by you and eBay as to the specific subjects of this letter.
Very truly yours,
/s/ Meg Whitman /s/ Pierre Omidyar
_________________________________ ________________________________
Meg Whitman Pierre Omidyar
President and CEO Founder and Chairman
CC: Leslie Kornblum, HR Manager
ACCEPTED:
/s/ Brian Swette 8/14/98
_________________________ _______________
Brian Swette Date
Anticipated Start Date: 8/14/98
___________
<PAGE>
IMMIGRATION REFORM & CONTROL ACT REQUIREMENTS
The Immigration Reform & Control Act requires employers to receive documentation
verifying an employee's identity and legal right to work in the United States.
Please review the list below and bring the appropriate documentation (originals
only - no copies please) with you on your first day of work.
ONE DOCUMENT FROM LIST A:
LIST A
U.S. Passport
Certificate of U.S. Citizenship
Certificate of Naturalization
Unexpired foreign passport with employment authorization
Alien Registration Card with photograph
OR ONE DOCUMENT FROM LIST B AND FROM LIST C:
---
LIST B LIST C
State driver's license Original Social Security Card
Or ID with photo and
Personal data
U.S. military card Birth certificate bearing state, county
Or municipal authority seal
Unexpired INS employment
authorization
<PAGE>
EXHIBIT 23.02
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 (File No. 333-59097) of our reports dated
March 31, 1998, relating to the financial statements of eBay Inc. and July 10,
1998, relating to the financial statements of Jump Incorporated, which appear
in such Prospectus. We also consent to the references to us under the headings
"Experts" and "Selected Consolidated Financial Data" in such Prospectus.
However, it should be noted that PricewaterhouseCoopers LLP has not prepared
or certified such "Selected Consolidated Financial Data."
PricewaterhouseCoopers LLP
San Jose, California
August 19, 1998
