<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-59097
3,500,000 SHARES
EBAY INC.
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
[LOGO OF EBAY] --------------
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. For factors 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.
The shares of Common Stock have been approved for quotation on the Nasdaq
National Market under the symbol "EBAY," subject to official notice of
issuance.
--------------
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......... $18.00 $1.26 $16.74 $16.74
Total (3)......... $63,000,000 $4,410,000 $58,410,463 $179,537
</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 $72,450,000, $5,071,500 and $67,198,963, 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 September
29, 1998, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
BANCBOSTON ROBERTSON STEPHENS
BT ALEX. BROWN
--------------
The date of this Prospectus is September 24, 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]
www.ebay.com
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.
"The buyers set the price!"
With more than 1,000 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.
"That's a lot of stuff!"
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.
"Just the tip of the iceberg" [indicating the twelve major categories]
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?)
"Great to do business with. Highly recommended. Honest and quick.
A+++++++++++"
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?
come for a visit
www.ebay.com
You can talk to people who like the same stuff you do!! (You might even make
a friend!)
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 effected in August 1998 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, based on the number of items listed, number of
unique eBay users and minutes of usage per month. 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. As of August
31, 1998, the Company had over 1.0 million registered users and over 600,000
auctions listed in 1,085 categories. 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 600,000 items for sale, many of which are unique or otherwise hard to
find, organized across 1,085 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. Upon completion of this offering (assuming no exercise of the
Underwriters' over-allotment option), new public investors purchasing shares in
this offering will hold approximately 8.8% of the outstanding Common Stock of
the Company and 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.
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 39,739,073 shares(1)
this offering........................
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- "EBAY"
bol..................................
</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 2,691
Net income.................................... 148 874 486 215
Net income per share(2):
Basic........................................ $ 0.07 $ 0.11 $ 0.08 $ 0.02
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 $ 0.01
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 $67,720
Working capital........................ 8,803 8,803 66,079
Total assets........................... 19,815 19,815 76,819
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 71,714
</TABLE>
- --------
(1) Based on shares of Common Stock outstanding as of June 30, 1998. Excludes
(i) 1,071,162 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 increased the number of shares reserved under the
1997 Plan by 500,000 and granted options to purchase an additional
2,053,752 shares of Common Stock. These grants included all of the 961,500
shares available for future grant at June 30, 1998, and 600,000 shares
issued outside the plans. An aggregate of 5,007,748 shares are available
for future grant or issuance under the Company's various benefit plans. 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, after deducting the 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."
7
<PAGE>
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
8
<PAGE>
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
9
<PAGE>
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 Yahoo!
Auctions Powered by 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") and Microsoft Corporation ("Microsoft"), 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 companies may also seek to
10
<PAGE>
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 and greater brand recognition in
other business and Internet markets 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."
11
<PAGE>
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
12
<PAGE>
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
13
<PAGE>
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
14
<PAGE>
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")
15
<PAGE>
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. In
April 1998, the Company was informally contacted by a member of the California
State Attorney General's Office regarding the applicability of California's
auction regulations to the Company. The Company informed the regulator that it
does not believe that such regulations, which were adopted prior to the advent
of the Internet, govern the operations of the Company's business and that no
state has filed a claim implying that the Company is subject to such
legislation. Although the Company has received no further communications from
the State of California or any other state, no legal determination has been
made with respect to the applicability of the California regulations to the
Company's business to date and little precedent exists in this area. 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."
16
<PAGE>
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.
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."
17
<PAGE>
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 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."
18
<PAGE>
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 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
19
<PAGE>
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."
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 36,239,073 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, 24,549,579 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 September 24, 1998,
there were outstanding options to purchase 3,124,914 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 8,132,662
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
20
<PAGE>
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 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
$57.4 million (approximately $66.2 million if the over-allotment option is
exercised in full), after deducting the 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 was 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 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 $16.25 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
$57.4 million (approximately $66.2 million if the over-allotment option is
exercised in full), after deducting the 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, after deducting the 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,
36,249,798 shares issued and outstanding; pro
forma as adjusted--195,000,000 shares
authorized, 39,739,073 shares issued and
outstanding(2)............................... 27 36 40
Additional paid-in capital.................... 15,211 20,363 77,794
Notes receivable from stockholders............ (1,536) (1,536) (1,536)
Unearned compensation......................... (5,729) (5,729) (5,729)
Retained earnings............................. 1,145 1,145 1,145
------- ------- -------
Total stockholders' equity.................. 9,122 14,279 71,714
------- ------- -------
Total capitalization...................... $14,446 $14,446 $71,722
======= ======= =======
</TABLE>
- --------
(1) See Note 5 of Notes to Consolidated Financial Statements.
(2) Excludes (i) 1,071,162 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 increased the number of shares
reserved under the 1997 Plan by 500,000 and granted options to purchase
an additional 2,053,752 shares of Common Stock. These grants included all
of the 961,500 shares available for future grant at June 30, 1998, and
600,000 shares issued outside the plans. An aggregate of 5,007,748 shares
are available for future grant or issuance under the Company's various
benefit plans. 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 (after deducting the 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 $69.5 million, or $1.75 per share. This
represents an immediate increase in pro forma net tangible book value of $1.42
per share to existing stockholders and an immediate dilution of $16.25 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>
Initial public offering price per share....................... $18.00
Pro forma net tangible book value per share as of June 30,
1998........................................................ $0.33
Increase per share attributable to new investors............. 1.42
-----
Pro forma net tangible book value per share after the offer-
ing.......................................................... 1.75
------
Dilution per share to new investors........................... $16.25
======
</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 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......... 36,249,798 91.2% $ 9,771,222 13.5% $ 0.27
New investors(1).............. 3,489,275 8.8 62,806,950 86.5 18.00
---------- ----- ------------ -----
Total......................... 39,739,073 100.0% $ 72,578,172 100.0%
========== ===== ============ =====
</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
36,239,073, 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 1,071,162 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
2,053,752 shares of Common Stock. 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(2)............ 32 1,730 212 4,610
Product development............... 28 831 209 1,548
General and administrative........ 45 950 233 4,187
Acquired research and
development...................... -- -- -- 150
-------- --------- --------- ----------
Total operating expenses.......... 105 3,511 654 10,495
-------- --------- --------- ----------
Income from operations............. 253 1,487 844 2,691
Interest and other income, net..... 1 56 4 76
-------- --------- --------- ----------
Income before income taxes......... 254 1,543 848 2,767
Provision for income taxes......... (106) (669) (362) (2,552)
-------- --------- --------- ----------
Net income......................... $ 148 $ 874 $ 486 $ 215
======== ========= ========= ==========
Net income per share(3):
Basic............................. $ 0.07 $ 0.11 $ 0.08 $ 0.02
======== ========= ========= ==========
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(4)......... $ 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) In August 1998, the Company entered into a marketing agreement with AOL
that will require the Company to make aggregate payments of $12.0 million
to AOL over the next three years. These payments will be recognized as
sales and marketing expenses. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Business--Marketing"
and Note 11 of Notes to Consolidated Financial Statements.
(3) 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.
(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 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 4,208
Amortization of intangible
assets......................... 1,810 354
------------------ ------------------
Total operating expenses........ 5,505 10,563
------------------ ------------------
Income (loss) from operations.... (505) 2,632
Interest and other income, net... 56 75
------------------ ------------------
Income (loss) before income tax-
es.............................. (449) 2,707
Provision for income taxes....... (600) (2,483)
------------------ ------------------
Net income (loss)................ $ (1,049) $ 224
================== ==================
Pro forma net income (loss) per
share(1):
Basic........................... $ (0.07) $ .01
================== ==================
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, based on the number of items listed, number of
unique eBay users and minutes of usage per month. 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 1,028 3,159
Acquired research and
development.......... -- -- -- -- -- 150
------ ------- ------- ------- -------- --------
Total operating ex-
penses.............. 236 418 886 1,971 3,652 6,843
------ ------- ------- ------- -------- --------
Income from operations.. 335 509 320 323 1,699 992
Interest and other in-
come, net.............. 2 2 26 26 22 54
------ ------- ------- ------- -------- --------
Income before income
taxes.................. 337 511 346 349 1,721 1,046
Provision for income
taxes.................. (144) (218) (147) (160) (1,573) (979)
------ ------- ------- ------- -------- --------
Net income.............. $ 193 $ 293 $ 199 $ 189 $ 148 $ 67
====== ======= ======= ======= ======== ========
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 17.2 35.3
Acquired research and
development.......... -- -- -- -- -- 1.7
------ ------- ------- ------- -------- --------
Total operating ex-
penses.............. 39.0 39.7 60.8 75.0 61.1 76.5
------ ------- ------- ------- -------- --------
Income from operations.. 55.5 48.3 21.9 12.3 28.4 11.1
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 28.8 11.7
Provision for income
taxes.................. (23.8) (20.7) (10.1) (6.1) (26.3) (11.0)
------ ------- ------- ------- -------- --------
Net income.............. 32.0% 27.8% 13.6% 7.2% 2.5% 0.7%
====== ======= ======= ======= ======== ========
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. In addition, the Company is obligated to
make aggregate payments to AOL of $12.0 million over the three year term of
the marketing agreement it entered into with AOL in August 1998. See Note 11
of Notes to Consolidated Financial Statements.
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 35.3% 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 92.2% 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 resulted 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 $6.8 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, $421,000 and $650,000 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 $790,000 during the
remainder of 1998, between $440,000 and $700,000 during 1999 and between
$270,000 and $400,000 during 2000 and annual amortization of $720,000 during
2001 and $80,000 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, $291,000 and $404,000 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 28.1
Acquired research and development......... -- -- -- 1.0
------ ------ -------- --------
Total operating expenses................ 28.2 61.1 39.4 70.4
------ ------ -------- --------
Income from operations...................... 68.0 25.9 50.9 18.0
Interest and other income, net.............. 0.3 1.0 0.2 0.5
------ ------ -------- --------
Income before income taxes.................. 68.3 26.9 51.1 18.5
Provision for income taxes.................. (28.5) (11.7) (21.8) (17.1)
------ ------ -------- --------
Net income.................................. 39.8% 15.2% 29.3% 1.4%
====== ====== ======== ========
</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
33
<PAGE>
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. In addition, the Company is obligated to make aggregate
payments to AOL of $12.0 million over the three-year term of the marketing
agreement it entered into with AOL in August 1998. See Note 11 of Notes to
Consolidated Financial Statements.
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 $4.2 million, or 28.1% 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.
34
<PAGE>
PROVISION FOR INCOME TAXES
The Company's effective federal and state income tax rate was 41.7% in 1996,
43.4% in 1997 and 92.2% in the first six months of 1998. The variations in the
effective tax rate for 1996, 1997 and the first six months of 1998 reflect the
impact of applying the annual effective tax rate to the respective periods
that is reflective of the Company's current and deferred tax liability. The
increase in the effective tax rate from 1997 to 1998 resulted 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 1997 and 1998, the Company recorded aggregate unearned compensation
totaling $6.8 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 $1.1 million 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 $695,000 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
35
<PAGE>
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 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.
36
<PAGE>
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.
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. As a result of its August 1998 marketing
agreement with AOL, the Company is obligated to make aggregate payments to AOL
of $12.0 million over the three-year term of the agreement. See Note 11 of
Notes to Consolidated Financial Statements. 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.
37
<PAGE>
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 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.
38
<PAGE>
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, based on the number of items listed, number of
unique eBay users and minutes of usage per month. 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. As of August 31, 1998, the Company had over 1.0 million
registered users and over 600,000 auctions listed in 1,085 categories. 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
39
<PAGE>
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.
40
<PAGE>
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 August 31, 1998, eBay had over 1.0 million
registered users and was offering 1,085 product categories with over 600,000
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.
41
<PAGE>
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. To this end, in August 1998 the Company entered into a three-year
marketing relationship with AOL whereby eBay will be prominently featured in
areas of AOL's proprietary service and on AOL.com. 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
42
<PAGE>
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]
43
<PAGE>
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.
44
<PAGE>
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.
45
<PAGE>
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 1,085 categories as of August 31, 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 August 31, 1998, these product categories were
organized under the following headings:
Antiques Jewelry, Gemstones
Books, Movies, Music Photo & Electronics
Coins & Stamps Pottery & Glass
Collectibles Sports Memorabilia
Computers Toys & Beanie Babies
Dolls, Figures Miscellaneous
Each category has numerous subcategories. Today eBay offers a selection of
over 600,000 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
46
<PAGE>
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. In August 1998, eBay and AOL entered
into a three-year marketing agreement whereby eBay will be featured as the
preferred provider of person-to-person auction services in the "Classifieds"
and "Interest" areas of AOL's proprietary service. In addition, eBay will
receive placement and promotions on AOL.com, AOL's Web site. Over the term of
this agreement, the Company will pay AOL $12.0 million. 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 1.0 million registered users,
over 600,000 simultaneous, open auctions, and over 2 million closed, but
viewable, auctions from the previous 30 days. During August 1998, the eBay
service served over 15 million page views per day, processed over 1.9 million
searches per day, received over 95,000 new listings per day and received over
340,000 bids per day. During that month, eBay also sent out more than 550,000
registration- and auction-related emails per day to users. The eBay system
also handles
47
<PAGE>
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. 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 Yahoo!
Auctions Powered by Onsale; Auction Universe, a Times-Mirror Company; Excite;
and a number of other small services, including those that serve specialty
markets. The
48
<PAGE>
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 and Microsoft 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 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 and greater brand recognition in
other business and Internet markets 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
49
<PAGE>
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, 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
50
<PAGE>
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. In April 1998, the Company was
informally contacted by a member of the California State Attorney General's
Office regarding the applicability of California's auction regulations to the
Company. The Company informed the regulator that it does not believe that such
regulations, which were adopted prior to the advent of the Internet, govern
the operations of the Company's business and that no state has filed a claim
implying that the Company is subject to such legislation. Although the Company
has received no further communications from the State of California or any
other state, no legal determination has been made with respect to the
applicability of the California regulations to the Company's business to date
and little precedent exists in this area. 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
51
<PAGE>
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 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.
52
<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..... 42 President, Chief Executive Officer and a director
Gary F. Bengier......... 43 Chief Financial Officer and Vice President Operations
Michael R. Jacobson..... 44 Vice President, Legal Affairs, General Counsel and Secretary
Jeffrey S. Skoll........ 33 Vice President Strategic Planning and Analysis
Brian T. Swette......... 43 Senior Vice President of Marketing
Steven P. Westly........ 42 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)... 45 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 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
53
<PAGE>
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.
Michael R. Jacobson has served as the Company's Vice President, General
Counsel and Secretary since August 1998. From 1986 to August 1998, Mr.
Jacobson was a partner with the law firm of Cooley Godward LLP, specializing
in securities law, mergers and acquisitions and other transactions. Mr.
Jacobson has an A.B. degree in Economics from Harvard College and a J.D.
degree from Stanford University.
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
54
<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 re-election or election at the 2000 annual meeting of
stockholders and the Class III director, initially Ms. Whitman, will stand for
re-election or 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.
56
<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. Jacobson, 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, $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.
57
<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>
PERCENTAGE OF
TOTAL OPTIONS
NUMBER OF GRANTED TO POTENTIAL REALIZABLE VALUE AT
SECURITIES EMPLOYEES ASSUMED ANNUAL RATES OF STOCK PRICE
UNDERLYING FROM EXERCISE APPRECIATION FOR OPTION TERM(3)
OPTIONS 1/1/97 TO PRICE EXPIRATION ------------------------------------
NAME GRANTED(1) 6/30/98(2) PER SHARE DATE 0% 5% 10%
---- ---------- ------------- --------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Margaret C. Whitman..... 2,400,000 31.7% $0.20 1/20/2008 $42,720,000 $69,888,248 $111,569,674
Gary F. Bengier......... 525,000 6.9 0.10 12/3/2007 9,397,500 15,340,554 24,458,366
Steven P. Westly........ 792,000 10.5 0.10 10/30/2007 14,176,800 23,142,322 36,897,193
9,000 0.1 0.20 1/20/2008 160,200 262,081 418,386
12,000 0.2 0.67 3/4/2008 207,960 343,801 552,208
9,000 0.1 2.00 4/13/2008 144,000 245,881 402,186
6,000 0.1 9.33 6/8/2008 52,020 119,941 224,144
Michael K. Wilson....... 600,000 7.9 0.02 1/13/2007 10,788,000 17,580,062 28,000,419
300,000 4.0 0.10 10/30/2007 5,370,000 8,766,031 13,976,209
</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 by the Board 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 exercise price of options 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 the initial public
offering price of $18.00 per share, (ii) assuming that the aggregate stock
value derived from that calculation compounds at the annual 0%, 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.
58
<PAGE>
In August 1998, the Company granted Brian Swette an option to purchase
600,000 shares of Common Stock and Michael Jacobson an option to purchase
250,002 shares of Common Stock, each 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 the initial public offering price of $18.00 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) $42,720,000 -- -- -- --
Gary F. Bengier......... 525,000 9,397,500 -- -- -- --
Steven P. Westly........ 828,000 14,741,000 -- -- -- --
Michael K. Wilson....... 600,000(4) 10,788,000 300,000 -- $5,370,000(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 the initial public offering price per share of $18.00, 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 $18.00, the 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.
59
<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 and to 7,094,000 in August
1998. 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. In August 1998, the
Board adopted, and the Company"s stockholders approved, an increase in the
number of shares reserved for issuance under the 1997 Plan of 500,000.
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
60
<PAGE>
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 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
61
<PAGE>
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 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, is scheduled to lapse
with respect to 570,000 shares on February 14, 1999 and is scheduled to 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
are scheduled to 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 is scheduled to lapse 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
62
<PAGE>
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 is scheduled
to 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 is scheduled
to lapse 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 is scheduled to lapse 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 are
scheduled to 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 is scheduled to vest at a rate of 12,500 per month through the
termination date.
Mr. Jacobson's employment offer letter of August 20, 1998 provides for an
initial annual base salary of $150,000 and a $50,000 signing bonus. Mr.
Jacobson was also granted options to purchase an aggregate of 250,002 shares
of Common Stock under the Company's 1997 Plan at an exercise price of $15 per
share. The first option for 15,000 shares is scheduled to vest in full on
January 24, 1999. The second option for 235,002 shares vests with respect to
58,750 shares on August 24, 1999 and with respect to 4,895 shares at the end
of each month thereafter, provided, however, that in the event Mr. Jacobson's
employment is terminated without cause prior to August 24, 1999, such option
is scheduled to vest at a rate of 4,895 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
63
<PAGE>
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 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.
64
<PAGE>
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 are scheduled to 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 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
65
<PAGE>
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 are scheduled to 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 are scheduled to vest 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."
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
66
<PAGE>
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.
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
67
<PAGE>
"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 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
68
<PAGE>
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.
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 36,249,798 shares of Common Stock held of
record by 71 stockholders and options to purchase 1,071,162 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
69
<PAGE>
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 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.
70
<PAGE>
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.
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.
71
<PAGE>
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is
ChaseMellon Shareholder Services, L.L.C.
LISTING
The shares of Common Stock have been approved for quotation on the Nasdaq
National Market under the trading symbol "EBAY," subject to official notice of
issuance.
72
<PAGE>
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
39,739,073 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, 24,549,579 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 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.
73
<PAGE>
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 8,132,662 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.
74
<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.
75
<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.
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 1,482 15,211 20,363
Notes receivable from stockholders.... (68) (68) (1,536) (1,536)
Unearned compensation................. -- (1,399) (5,729) (5,729)
Retained earnings..................... 148 976 1,145 1,145
----- ------- ------- -------
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 4,187
Acquired research and development....... -- -- -- 150
------- ------- -------- --------
Total operating expenses.............. 105 3,511 654 10,495
------- ------- -------- --------
Income from operations.................... 253 1,487 844 2,691
Interest and other income, net............ 1 59 6 101
Interest expense.......................... -- (3) (2) (25)
------- ------- -------- --------
Income before income taxes................ 254 1,543 848 2,767
Provision for income taxes................ (106) (669) (362) (2,552)
------- ------- -------- --------
Net income................................ $ 148 $ 874 $ 486 $ 215
======= ======= ======== ========
Net income per share:
Basic................................... $ 0.07 $ 0.11 $ 0.08 $ 0.02
======= ======= ======== ========
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 $ 0.01
======= ========
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.. -- -- -- -- 1,424 -- (1,424) -- --
Amortization of
unearned
compensation.......... -- -- -- -- -- -- 25 -- 25
Net income............. -- -- -- -- -- -- -- 874 874
-------- ------- ------ ---- ------- ------- ------- ------ ------
Balance at
December 31, 1997...... 1,676 4 20,400 20 1,482 (68) (1,399) 976 1,015
Accretion of Series B
Mandatorily Redeemable
Convertible Preferred
Stock to redemption
value (Unaudited)..... -- -- -- -- -- -- -- (46) (46)
Unearned compensation
(Unaudited)........... -- -- -- -- 5,831 -- (5,831) -- --
Amortization of
unearned compensation
(Unaudited)........... -- -- -- -- -- -- 1,501 -- 1,501
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)........... -- -- -- -- -- -- -- 215 215
-------- ------- ------ ---- ------- ------- ------- ------ ------
Balance at
June 30, 1998
(Unaudited)............ 1,676 $ 4 26,974 $ 27 $15,211 $(1,536) $(5,729) $1,145 $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 $ 215
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 -- 1,501
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 $ 215
Accretion of Series B Mandatorily
Redeemable Convertible Preferred Stock
to redemption value.................... -- (46) -- (46)
------ ------- -------- --------
Net income available to common
stockholders........................... $ 148 $ 828 $ 486 $ 169
====== ======= ======== ========
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 $ 0.02
====== ======= ======== ========
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) 1,641
Net loss............................................. (1,199) (698)
Net loss per share:
Basic and diluted.................................. $ (0.16) $ (0.07)
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 $ 941
Permanent differences:
Acquisition costs.............................. -- -- -- 295
Stock compensation............................. -- -- -- 750
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 $1.4 million and $5.4 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 $1.1 million (unaudited), respectively.
F-20
<PAGE>
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--SUBSEQUENT EVENTS (UNAUDITED):
STOCK SPLIT
In August 1998, the Company's Board of Directors effected 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 September 24, 1998, the Company
granted options to purchase 2,053,752 shares of Common Stock to new employees
at exercise prices of $14 and $15 per share.
In August 1998, the Board adopted, and the Company's stockholders approved,
an increase in the number of shares reserved for issuance under the Company's
1997 Stock Option Plan by an additional 500,000 shares.
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.
MARKETING AGREEMENT
In August 1998, the Company entered into a three-year marketing agreement
with America Online, Inc. ("AOL"). Under the terms of the agreement the
Company will be provided with a specific number of advertising impressions
featuring it as the preferred provider of person to person auction services on
AOL's service. In consideration, the Company has committed to pay $12.0
million over the three-year term of the agreement. The Company will recognize
these fees as sales and marketing expenses as the advertising impressions are
delivered by AOL.
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 4,187 21 -- 4,208
Amortization of
intangible assets..... -- -- 1,810(A)(B) 1,810 -- -- 354(B) 354
------ ---- ------- ------- ------- ---- ----- -------
Total operating
expenses.............. 3,511 19 1,975 5,505 10,180 29 354 10,563
------ ---- ------- ------- ------- ---- ----- -------
Income from
operations............ 1,487 (17) (1,975) (505) 3,006 (20) (354) 2,632
------ ---- ------- ------- ------- ---- ----- -------
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) 3,082 (21) (354) 2,707
------ ---- ------- ------- ------- ---- ----- -------
Provision for income
taxes.................. (669) -- 69(C) (600) (2,483) -- -- (2,483)
------ ---- ------- ------- ------- ---- ----- -------
Net income (loss)....... $ 874 $(17) $(1,906) $(1,049) $ 599 $(21) $(354) $ 224
====== ==== ======= ======= ======= ==== ===== =======
Pro forma net income per
share (D):
Basic.................. $ (0.07) $ .01
======= =======
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, BancBoston Robertson Stephens Inc. 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............................................... 1,190,000
Donaldson, Lufkin & Jenrette Securities Corporation............... 595,000
BancBoston Robertson Stephens Inc................................. 595,000
BT Alex. Brown Incorporated....................................... 595,000
Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated..................................................... 175,000
E*TRADE Securities, Inc........................................... 175,000
Volpe Brown Whelan & Company, LLC................................. 175,000
---------
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 $0.70 per share. The Underwriters may allow,
and such dealers may reallow, a concession of not in excess of $0.10 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, the Company's registered users and other 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 was negotiated among the Company and the
representatives of the Underwriters. Among the factors considered in the
determining the initial public offering price of the Common Stock, in addition
to prevailing market conditions, were 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.
The shares of Common Stock have been approved for quotation on the Nasdaq
National Market under the symbol "EBAY," subject to official notice of
issuance.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.
U-2
<PAGE>
DESCRIPTION OF ARTWORK:
[Inside back cover includes screen shots of the eBay homepage as well as
eBay's Web pages for several categories of items sold on eBay--stamps,
computers, toys and photo equipment. This page also includes pictures of
sample items available for auction by community members of eBay].
At the bottom of the page is the following text:
Search less. Find more.
Searching may be fun--for a while. But thousands and thousands of people have
discovered that eBay is the place where they actually find! Sometimes you even
find stuff you didn't know you were looking for. The eBay home page clearly
shows you how to get to the 12 main category specific home pages for the major
categories. These are then broken down to a heck of a lot more additional
categories. Right now, there are more than 1,000 categories, so the search
isn't going to be an all-day activity. eBay seems to be the internet treasure
hunt where a lot of people are actually finding the treasure.
eBay
The world's personal trading community
<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....................................... 65
Principal and Selling Stockholders....................................... 67
Description of Capital Stock............................................. 69
Shares Eligible for Future Sale.......................................... 73
Legal Matters............................................................ 74
Experts.................................................................. 74
Additional Information................................................... 75
Index to Consolidated Financial Statements............................... F-1
Underwriting............................................................. U-1
</TABLE>
THROUGH AND INCLUDING OCTOBER 19, 1998 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PRO-
SPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PRO-
SPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT-
MENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,500,000 SHARES
EBAY INC.
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
-----------
[LOGO OF eBAY]
-----------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
BANCBOSTON ROBERTSON STEPHENS
BT ALEX. BROWN
REPRESENTATIVES OF THE UNDERWRITERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
