<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to __________
Commission file number 0-28064
eBAY INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 77-0430924
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2125 Hamilton Ave
San Jose, California 95125
(Address of principal executive offices) (Zip Code)
</TABLE>
(408) 558-7400
(Registrant's telephone number, including area code)
____________________________________________
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
---- _______
As of July 31, 1999, there were 128,620,235 shares of the Registrant's Common
Stock outstanding.
================================================================================
<PAGE>
- --------------------------------------------------------------------------------
FORM 10-Q
eBAY INC.
INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
PART I FINANCIAL INFORMATION Number
<S> <C>
ITEM 1: Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheet as of December 31, 1998 and June
30, 1999.................................................................... 2
Condensed Consolidated Statement of Income for the three and six months
ended June 30, 1998 and 1999................................................ 3
Condensed Consolidated Statement of Cash Flows for the six months ended
June 30, 1998 and 1999...................................................... 4
Notes to Condensed Consolidated Financial Statements.......................... 5
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 12
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk.................... 32
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings............................................................. 33
ITEM 2: Changes in Securities and Use of Proceeds..................................... 33
ITEM 3: Defaults Upon Senior Securities............................................... 33
ITEM 4: Submission of Matters to a Vote of Security Holders........................... 33
ITEM 5: Other Information............................................................. 34
ITEM 6: Exhibits and Reports on Form 8-K.............................................. 35
Signatures.............................................................................. 36
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
eBAY INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts; unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 37,285 $ 347,553
Short-term investments.................................................. 40,401 76,771
Accounts receivable, net................................................ 12,425 23,908
Other current assets.................................................... 7,479 24,623
------------ ----------
Total current assets............................................... 97,590 472,855
Property and equipment, net.................................................. 44,062 72,319
Investments.................................................................. -- 358,724
Deferred tax asset........................................................... -- 11,231
Intangible and other assets, net............................................. 7,884 7,080
------------ ----------
$ 149,536 $ 922,209
============ ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $ 9,997 $ 31,578
Accrued expenses.......................................................... 6,577 16,124
Notes payable, current.................................................... 4,047 13,305
Income taxes payable...................................................... 1,380 7,570
Other current liabilities................................................. 2,655 3,791
------------ ----------
Total current liabilities............................................. 24,656 72,368
Notes payable, long-term..................................................... 18,361 5,521
Other liabilities............................................................ 5,981 6,108
------------ ----------
48,998 83,997
------------ ----------
Stockholders' equity:
Common Stock, $0.001 par value; 195,000 shares authorized;
123,715 and 128,441 shares issued and outstanding...................... 123 128
Additional paid-in capital.............................................. 87,779 804,709
Notes receivable from stockholders...................................... (1,130) (361)
Unearned compensation................................................... (4,139) (7,501)
Retained earnings....................................................... 17,905 18,541
Accumulated other comprehensive income.................................. -- 22,696
------------ ----------
Total stockholders' equity............................................ 100,538 838,212
------------ ----------
$ 149,536 $ 922,209
============ ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
eBAY INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share amounts; unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------- -------------------------------------
1998 1999 1998 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net revenues:
Fees and services........................... $ 18,494 $ 48,451 $ 31,327 $ 90,195
Real estate rentals......................... 986 1,028 2,141 2,085
--------- --------- --------- ---------
Total net revenues......................... 19,480 49,479 33,468 92,280
--------- --------- --------- ---------
Cost of net revenues:
Fees and services........................... 2,878 10,635 4,688 18,134
Real estate rentals......................... 408 310 1,089 788
--------- --------- --------- ---------
Total cost of net revenues................. 3,286 10,945 5,777 18,922
--------- --------- --------- ---------
Gross profit........................... 16,194 38,534 27,691 73,358
--------- --------- --------- ---------
Operating expenses:
Sales and marketing......................... 6,324 22,916 11,903 39,874
Product development......................... 1,030 5,476 1,548 7,639
General and administrative.................. 4,492 10,088 6,800 17,702
Amortization of acquired intangibles........ 150 327 150 655
Merger related costs........................ -- 4,359 -- 4,359
--------- --------- --------- ---------
Total operating expenses............... 11,996 43,166 20,401 70,229
--------- --------- --------- ---------
Income (loss) from operations................. 4,198 (4,632) 7,290 3,129
Interest and other income, net................ 16 6,562 496 7,356
Interest expense.............................. (448) (523) (928) (1,042)
--------- --------- --------- ---------
Income before income taxes.................... 3,766 1,407 6,858 9,443
Provision for income taxes.................... (1,037) (591) (2,685) (4,862)
--------- --------- --------- ---------
Net income.................................... $ 2,729 $ 816 $ 4,173 $ 4,581
========= ========= ========= =========
Net income per share:
Basic....................................... $ 0.07 $ 0.01 $ 0.12 $ 0.04
========= ========= ========= =========
Diluted..................................... $ 0.02 $ 0.01 $ 0.04 $ 0.03
========= ========= ========= =========
Weighted average shares:
Basic....................................... 39,447 106,855 34,248 102,343
========= ========= ========= =========
Diluted..................................... 109,929 136,614 104,808 134,525
========= ========= ========= =========
Supplemental pro forma information:
Income before income taxes.................. $ 3,766 $ 1,407 $ 6,858 $ 9,443
Provision for income taxes as reported...... (1,037) (591) (2,685) (4,862)
Pro forma adjustment to provision for (1,043) (1,137) (1,513) (677)
income taxes (Note 4)...................... --------- --------- --------- ---------
Pro forma net income (loss)................... $ 1,686 $ (321) $ 2,660 $ 3,904
========= ========= ========= =========
Pro forma net income (loss) per share:
Basic.................................... $ 0.04 $ 0.00 $ 0.08 $ 0.04
========= ========= ========= =========
Diluted.................................. $ 0.02 $ 0.00 $ 0.03 $ 0.03
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
eBAY INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
1998 1999
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................... $ 4,173 $ 4,581
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts and authorized credits................. 1,254 2,843
Depreciation and amortization.......................................... 1,051 4,935
Amortization of unearned compensation.................................. 1,499 2,275
Series B Preferred stock issued in exchange for services............... 139 --
Minority interest in deficit of combined companies..................... 719 127
Loss on impairment of asset held for sale.............................. -- 100
Charitable contribution of Common Stock................................ 1,215 --
Equity in partnership net loss......................................... 72 (61)
Loss on sale of property............................................... (200) --
Amortization of acquired intangibles................................... 150 655
Changes in assets and liabilities:
Accounts receivable.................................................. (7,966) (14,326)
Other current assets................................................. (129) (17,144)
Accounts payable..................................................... 2,526 21,581
Accrued expenses..................................................... (1,036) 3,968
Income taxes payable................................................. 965 3,712
Other liabilities.................................................... 2,955 6,715
------- ---------
Net cash provided by operating activities................................. 7,387 19,961
------- ---------
Cash flows from investing activities:
Purchases of property and equipment.................................... (3,071) (33,058)
Purchases of short-term investments, net............................... -- (36,370)
Purchases of long-term investments..................................... -- (335,995)
Proceeds from sale of property and equipment........................... 390 --
Purchases of intangible assets......................................... (677) (3)
Purchases of other non-current assets.................................. 125 (121)
------- ---------
Net cash used in investing activities..................................... (3,233) (405,547)
------- ---------
Cash flows from financing activities:
Proceeds from issuance of Series B Preferred Stock, net.................. 2,000 --
Proceeds from issuance of Common Stock, net.............................. 3,203 702,685
Stockholder loan repayments.............................................. -- 769
Principal payments on long-term debt and leases.......................... (3,791) (3,582)
Stockholder contributions................................................ 1,201 --
Stockholder distributions................................................ (2,188) (4,018)
------- ---------
Net cash provided by financing activities................................. 425 695,854
------- ---------
Net increase in cash and cash equivalents................................. 4,579 310,268
Cash and cash equivalents at beginning of period.......................... 12,109 37,285
------- ---------
Cash and cash equivalents at end of period................................ $16,688 $ 347,553
======= =========
Supplemental cash flow disclosures:
Cash paid for interest................................................. $ 1,375 $ 1,455
Cash paid for income taxes............................................. $ 3,650 $ 8,574
Non-cash investing and financing activities:
Common Stock issued for notes receivable............................... $ 1,468 $ --
Common Stock issued for acquisition.................................... $ 2,000 $ --
</TABLE>
<PAGE>
eBAY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1--The Company and Summary of Significant Accounting Policies:
The Company
eBay Inc. ("eBay" or the "Company") was incorporated in California in May
1996, and reincorporated in Delaware in April 1998. 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 online 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. eBay also engages in the traditional auction business through
its subsidiaries, Butterfield & Butterfield ("B&B") and Kruse International
("Kruse") and in online payment processing through its Billpoint Inc.
("Billpoint") subsidiary.
Basis of presentation
The accompanying condensed consolidated financial statements as of December
31, 1998 and June 30, 1999, and for the three and six months ended June 30, 1998
and 1999, are unaudited. The unaudited interim condensed 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, 1999 and for the three and six months ended June 30, 1998 and 1999. These
condensed consolidated financial statements and notes thereto are unaudited and
should be read in conjunction with the Company's audited consolidated financial
statements and related notes included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 and the separate financial
statements of B&B, Kruse and Billpoint included in the Company's Current Report
on Form 8-K/A filed July 26, 1999. The results for the three and six months
ended June 30, 1999 are not necessarily indicative of the expected results for
the year ending December 31, 1999.
In May and June of 1999, the Company acquired four businesses, each of which
were accounted for as pooling of interests (see Note 3 -"Acquisitions").
Accordingly, all financial information included herein has been restated to
reflect the combined operations of eBay and the acquired companies. Certain
prior period balances have been reclassified to conform to the current period
presentation.
Principles of consolidation
The condensed consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Revenue recognition
Kruse auction revenues are derived primarily from entry fees on auction items,
bidder registration fees and commission fees calculated as a percentage of the
final auction sales transaction value. Revenues related to these fees are
recognized upon the completion of an auction. Revenues are also derived from
sponsorship fees paid by various corporations. Sponsorship fee revenues are
recognized over the term of the sponsorship agreement. Advertising revenues and
auctioneer tuition fees do not represent a significant source of revenues and
are recognized as advertising and auctioneer training services are provided.
B&B auction revenues are derived primarily from auction commissions and fees
from the sale of property through the auction process. Revenue from these
sources are recognized at the date the related auction is concluded. Services
revenues are derived from financial, appraisal and other related services and
are recognized as such services are rendered. Rental revenues are derived from
property rentals to third parties.
Fair value of financial instruments
The Company's financial instruments, including cash, 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. Short and long-term investments which include marketable
equity securities, municipal, government and corporate bonds are classified as
available-for-sale and reported at fair value. Unrealized gains and losses are
excluded from earnings and reported as a component of Stockholders' equity.
Property and equipment
Property and equipment are stated at historical cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the assets, generally five years or less for equipment and
furniture, and up to 31.5 years for buildings and building improvements. Leased
capital assets are depreciated using the straight-line method over the shorter
of the lease term or the estimated useful lives of the assets.
Environmental expenditures
The Company owns or controls real estate properties that are either used in
the auction business or leased to unrelated parties for various commercial
applications. Certain environmental and structural deficiencies have been
identified in the past for which the Company has remediation responsibility. The
amounts accrued to correct these matters are based upon estimates developed in
preliminary studies by external consultants. Due to uncertainties inherent in
the estimation process, the amounts accrued for these matters may be revised in
future periods as additional information is obtained.
Environmental expenditures that relate to current operations are charged to
expense or capitalized as appropriate. Expenditures that relate to an existing
condition caused by past operations, and that do not contribute to current or
future revenue generation, are charged to expense. Liabilities are recorded when
environmental assessments are made and remediation obligations are probable and
the costs can be reasonably estimated. The
5
<PAGE>
eBAY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
timing of these accruals is generally no later than the completion of
feasibility studies. For the periods presented, estimated liabilities of $5.9
million are included within other liabilities.
Investment in general partnerships
Interests in general partnerships in which the Company holds more than 50
percent ownership and exerts control are consolidated. The consolidated accounts
include 100 percent of the assets and liabilities of these general partnerships
and the ownership interests of minority investors are recorded as minority
interests and are included within other liabilities. Investments in general
partnerships in which the Company holds more than 20 percent are accounted for
using the equity method of accounting and are recorded as investment in
partnerships and are included within other liabilities.
Note 2--Net Income Per Share:
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>
Three months ended June 30, Six months ended June 30,
------------------------------------- -------------------------------------
1998 1999 1998 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Numerator:
Net income.................................... $ 2,729 $ 816 $ 4,173 $ 4,581
Accretion of Series B Preferred Stock to
redemption value............................ (23) -- (46) --
------------ ------------- ------------ -------------
Net income available to common stockholders... $ 2,706 $ 816 $ 4 ,127 $ 4,581
============ ============= ============ =============
Denominator:
Weighted average shares....................... 81,793 127,484 78,672 125,529
Weighted average common shares
subject to repurchase agreements............. (42,346) (20,629) (44,424) (23,186)
------------ ------------- ------------ -------------
Denominator for basic calculation............. 39,447 106,855 34,248 102,343
Weighted average effect of dilutive
securities:
Series A Preferred Stock.................... 15,088 -- 15,088 --
Series B Preferred Stock.................... 11,275 -- 10,213 --
Stock warrants.............................. 1,677 32 686 19
Weighted average common shares
subject to repurchase agreements........... 42,346 20,629 44,424 23,186
Employee stock options...................... 96 9,098 149 8,977
------------ ------------- ------------ -------------
Denominator for diluted calculation.......... 109,929 136,614 104,808 134,525
============ ============= ============ =============
Net income per share:
Basic........................................ $ 0.07 $ 0.01 $ 0.12 $ 0.04
============ ============= ============ =============
Diluted...................................... $ 0.02 $ 0.01 $ 0.04 $ 0.03
============ ============= ============ =============
</TABLE>
Note 3--Acquisitions:
Butterfield & Butterfield
6
<PAGE>
eBAY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On May 28, 1999, eBay acquired Butterfield & Butterfield Auctioneers
Corporation, a Delaware corporation and all affiliated entities under common
control including; Butterfield Credit Corporation Inc., 111 Potrero Partners,
LLC and HBJ Partners, LLC. (collectively "B&B" or the "B&B Companies").
Butterfield & Butterfield Auctioneers Corp. ("Butterfield & Buterfield") was
established in 1865, incorporated in California in July 1970 and reincorporated
in the state of Delaware in March 1999. Butterfield & Butterfield conduct
auctions and perform appraisal services of fine art, jewelry, antiques and other
collectibles primarily in San Francisco, Los Angeles and Chicago.
Butterfield Credit Corporation Inc. ("BCCI") is a wholly-owned subsidiary of
Butterfield & Butterfield and is incorporated in California. BCCI operates as a
financing corporation whose sole purpose is serving Butterfield & Butterfield's
clients.
111 Potrero Partners, LLC ("111 Potrero") is a limited liability corporation
organized in May 1996. 111 Potrero owns several commercial properties located in
San Francisco and Los Angeles, which are currently occupied by B&B and third
parties.
HBJ Partners, LLC ("HBJ") is a limited liability corporation organized in
California in September 1996. HBJ owns several commercial properties located in
San Francisco, which are currently occupied by B&B and third parties. HBJ also
has general partnership interests in 111 Santa Fe Avenue Partners, 2959 Victoria
Street Partners and 6700 Cherry Avenue Partners. Ownership interests in the
above partnerships at the date of acquisition were 58%, 60% and 38%,
respectively.
The aggregate consideration exchanged for the merger was 1,327,370 shares of
eBay common stock. The merger has been accounted for as a pooling of interests.
In April 1999, B&B withdrew its registration statement for its initial public
offering. Accordingly, in the second quarter of 1999, the Company recorded a
charge of approximately $2.6 million related to the costs of the withdrawn
offering. Such amounts are included in merger related costs on the condensed
consolidated statement of income.
Kruse International
On May 18, 1999, eBay acquired Kruse, Inc. (d/b/a Kruse International) and all
affiliated entities under common control including; Auburn Cordage, Inc., ACD
Auto Sales, Inc., Reppert School of Auctioneering, Inc. and Classic Advertising
& Promotions, Inc., each an Indiana corporation (collectively, "Kruse" or the
"Kruse Companies").
Kruse International was founded in 1971 and operated as a sole proprietorship
until it was incorporated in the state of Indiana in August 1986. The Kruse
Companies conduct auctions, perform appraisal services and auctioneer training
for classic car auctions in various locations in the United States, England,
Germany and the Netherlands.
The aggregate consideration exchanged for the merger was 787,312 shares of
eBay common stock for all shares of capital stock of the Kruse Companies. The
merger has been accounted for as a pooling of interests.
Billpoint
On May 25, 1999, eBay acquired Billpoint, Inc. ("Billpoint"). Billpoint began
operations on September 1, 1998, and was incorporated in California on September
24, 1998. Billpoint has developed a centralized, turnkey authorization, billing
and payment fulfillment solution that permits individuals and small merchants to
accept credit cards as payment for Internet-based sales transactions.
Billpoint's service is expected to derive revenues based upon a variety of fee
arrangements, including percentage-of-transaction, fixed-fee per transaction and
flat monthly rates.
In connection with the merger, eBay issued a total of approximately 525,000
shares of eBay common stock to the existing Billpoint shareholders as
consideration for all shares of capital stock, and all options and
7
<PAGE>
warrants to purchase shares of common stock of Billpoint outstanding immediately
prior to the consummation of the merger were converted into options and warrants
to purchase shares of eBay common stock. The merger has been accounted for as a
pooling of interests.
alando.de.AG
On June 15, 1999, eBay acquired all of the outstanding stock of
alando.de.AG ("alando"). alando began operations on February 19, 1999 and is
Germany's leading online person-to-person trading community. The aggregate
consideration exchanged for the merger was 316,000 shares of eBay common stock.
The merger has been accounted for as a pooling of interests.
The results of operations previously reported by the acquired entities and
the combined amounts presented in the accompanying condensed consolidated
financial statements are summarized as follows, (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, Three Months
Ended March 31,
1997 1998 1998 1999
---------------- ---------------- ------------- ------------
<S> <C> <C> <C> <C>
Net revenues:
eBay................................................ $ 5,744 $47,352 $ 5,981 $34,010
B&B................................................. 28,106 28,512 5,552 6,240
Kruse............................................... 7,520 10,265 2,455 2,551
Billpoint........................................... -- -- -- --
------- ------- ------- -------
$41,370 $86,129 $13,988 $42,801
======= ======= ======= =======
Net income (loss):
eBay................................................ $ 874 $ 2,398 $ 148 $ 5,896
B&B................................................. 6,424 5,007 1,184 (849)
Kruse............................................... (237) (58) 112 (423)
Billpoint........................................... -- (74) -- (746)
------- ------- ------- -------
$ 7,061 $ 7,273 $ 1,444 $ 3,878
======= ======= ======= =======
</TABLE>
There were no adjustments required to conform the accounting policies of the
acquired entities to those of the Company.
Note 4--Income Taxes:
In connection with the acquisition of B&B, B&B's status as an S
Corporation was terminated, and B&B became subject to federal and state income
taxes. The supplemental pro forma information includes an increase to the
provisions for income taxes based upon a combined federal and state tax rate of
42%, which approximates the statutory tax rates that would have been applied if
B&B had been taxed as a C Corporation prior to its acquisition by eBay.
The following table sets forth, for the periods presented, summary information
concerning deferred tax assets recognized upon consummation of the mergers, (in
thousands):
<TABLE>
<CAPTION>
December 31,
1998 June 30, 1999
------------ -------------
<S> <C> <C>
Deferred tax assets
Change in tax basis..................................................... $ -- $ 8,753
Accruals and reserves................................................... 38 2,478
-------- -------
$ 38 $11,231
======== =======
</TABLE>
A portion of the B&B acquisition was a taxable transaction, accordingly, a
deferred tax asset and a corresponding increase in stockholders' equity of
approximately $8.8 million was recorded for the difference between the financial
statement carrying amounts and tax basis of the related net assets upon the
closing of the transaction. Deferred tax assets associated with certain seismic
and environmental related accruals were also recorded at the completion of the
merger.
Note 5--Comprehensive Income:
The components of comprehensive income are as follows, (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------ ------------------------------------
1998 1999 1998 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income.................................... $2,729 $ 816 $ 4,173 $ 4,581
Unrealized gains on securities................ -- 22,729 -- 22,729
Foreign currency translation losses........... -- (33) -- (33)
------ ------- ------- -------
2,729 23,512 4,173 27,277
Income tax effect related to items of
other comprehensive income................... -- (9,532) -- (9,532)
------ ------- ------- -------
Comprehensive income........................ $2,729 $13,980 $ 4,173 $17,745
====== ======= ======= =======
</TABLE>
Unrealized gains on securities for the three and six months ended June 30,
1999, consists primarily of a net unrealized gain of $ 24.1 million from an
investment in StarMedia, Inc. common stock.
8
<PAGE>
eBAY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT--(Continued)
Note 6--Segment Information:
Effective January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes the standards
for reporting information about operating segments in annual financial
statements and requires that certain selected information about operating
segments be reported in interim financial reports. It also establishes standards
for related disclosures about products and services and geographic areas.
Operating segments are defined as components of an enterprise about which
separate financial information is evaluated regularly by the chief decision-
maker in order to allocate resources and in assessing performance.
eBay has identified two primary operating segments: online services and
offline, traditional auction services. The online services segment consists of
the operations of eBay, Billpoint and alando. The offline, traditional auction
segment consists current operations of B&B and Kruse.
Segment selection is based upon the internal organization structure, the
manner in which these operations are managed and their performance evaluated by
management, the availability of separate financial information, and overall
materiality considerations. Segment performance measurement is based on
operating income before income taxes, amortization of intangibles, stock
compensation and merger related costs. The operating information for the two
segments identified are as follows, (in thousands):
<TABLE>
<CAPTION>
Three months ended June 30, 1998 Three months ended June 30, 1999
Online Offline Consolidated Online Offline Consolidated
-------- --------- ------------ -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues from external customers. $ 8,941 $ 10,539 $ 19,480 $ 38,192 $ 11,287 $ 49,479
======== ========= ============ ======== ========= ============
Operating income (loss) before
amortization of intangibles, stock
compensation, and merger related
costs............................... $ 3,436 $ 3,206 $ 6,642 $ (1,585) $ 3,096 $ 1,511
Interest and other income
(expense), net...................... 65 (49) 16 6,565 (3) 6,562
Interest expense..................... (11) (437) (448) (2) (521) (523)
Amortization of intangibles, stock
compensation, and merger related
costs............................... (2,444) -- (2,444) (1,854) (4,289) (6,143)
-------- --------- ----------- --------- --------- ------------
Income (loss) before income taxes,
as reported......................... $ 1,046 $ 2,720 $ 3,766 $ 3,124 $ (1,717) $ 1,407
======== ========= =========== ========= ========= ============
Total assets......................... $ 19,815 $ 58,402 $ 78,217 $ 853,179 $ 69,030 $ 922,209
======== ========= =========== ========= ========= ============
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 1998 Six months ended June 30, 1999
Online Offline Consolidated Online Offline Consolidated
-------- --------- ------------ -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues from external customers. $ 14,922 $ 18,546 $ 33,468 $ 72,202 $ 20,078 $ 92,280
======== ========= ============ ======== ========= ============
Operating income before amortization
of intangibles, stock compensation,
and merger related costs............ $ 5,556 $ 4,599 $ 10,155 $ 8,341 $ 2,202 $ 10,543
Interest and other income (expense),
net................................. 101 395 496 7,217 139 7,356
Interest expense..................... (25) (903) (928) (2) (1,040) (1,042)
Amortization of intangibles, stock
compensation, and merger related
costs............................... (2,865) -- (2,865) (3,125) (4,289) (7,414)
-------- --------- ------------ -------- --------- ------------
Income (loss) before income taxes, as
reported............................. $2,767 $ 4,091 $ 6,858 $ 12,431 $ (2,988) $ 9,443
======== ========= ============ ======== ========= ============
Total assets......................... $ 19,815 $ 58,402 $ 78,217 $853,179 $ 69,030 $ 922,209
======== ========= ============ ======== ========= ============
</TABLE>
9
<PAGE>
eBAY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT--(Continued)
Note 7--Investments:
At June 30, 1999, short and long-term investments were classified as available-
for-sale securities and are reported at fair value, as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Short-term investments:
Municipal bonds and notes.. $ 46,839 $ -- $ (164) $ 46,675
Other...................... 30,096 -- -- 30,096
-------- ---------- ------- --------
$ 76,935 $ -- $ (164) $ 76,771
======== ========== ======= ========
Long-term investments:
Municipal bonds............ $301,559 $ -- $(1,037) $300,522
Corporate bonds............ 2,289 -- (17) 2,272
Government bonds........... 25,070 -- (188) 24,882
Equity instruments......... 6,900 24,148 -- 31,048
-------- ---------- ------- --------
$335,818 $ 24,148 $(1,242) $358,724
======== ========== ======= ========
</TABLE>
The estimated fair value of investments classified by the date of contractual
maturity is as follows, (in thousands):
<TABLE>
<CAPTION>
Estimated
Fair Value
----------
<S> <C>
Due within one year............................................... $ 76,771
Due after one year ............................................... 358,724
---------
$435,495
=========
</TABLE>
Note 8--Borrowings:
Notes Payable
Notes payable consists of amounts payable to various financial institutions
and a former shareholder, which are secured by specific properties and are
detailed as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
---------------- ----------------
<S> <C> <C>
Revolving line of credit, prime rate............................................ $ 2,991 $ 0
Mortgage notes, prime plus 1%, due September 31, 2002........................... 1,905 1,851
Mortgage notes, LIBOR plus 1.75%, due July 15 2001.............................. 3,638 3,563
Mortgage notes, 8.255%, due May 15, 2000........................................ 12,249 12,142
10.5% loan on foreclosed property due October 2010.............................. 618 603
8.5% loan in connection with Dunnings acquisition due June 30,
2000........................................................................... 500 250
6% note, due May 1999........................................................... 140 140
10% note; due April 2004........................................................ 70 --
8% note, due September 2003..................................................... 43 43
10.5% note, due December 2002................................................... 92 83
7.5% note, due October 2000..................................................... 97 97
7.75%--8.5% automobile notes, due December 1999 through January 2003............ 65 54
------- -------
Subtotal..................................................................... 22,408 18,826
Less: Current portion........................................................... (4,047) (13,305)
------- -------
$18,361 $ 5,521
======= =======
</TABLE>
At December 31, 1998 and June 30, 1999, the Company maintained a revolving
line of credit with a bank that provided for borrowings of up to $4.5 million.
The line of credit accrues interest on outstanding borrowings at a rate equal to
the bank's prime rate.
Mortgage notes outstanding are on property owned by the B&B Companies. The
notes have variable interest rates ranging from 7.34% to 8.75% at December 31,
1998 and are secured by certain land, buildings and improvements. The notes are
repayable in equal monthly installments over six to ten year terms, with final
installments consisting of all remaining unpaid principal and accrued interest
at the end of the term.
During 1997, B&B foreclosed on secured receivables totaling $815,000 and
assumed a related note payable for $668,000, plus unpaid property taxes of
$27,000. The property received in the foreclosure consisted of inventory with
estimated value of $150,000 and real property recorded at the remaining value of
consideration given of $1.4 million, which approximates its fair value. The real
property has been classified as a current asset in the accompanying combined
balance sheet, because B&B has not used the property in its business operations
and has actively listed the property for sale since the foreclosure date. The
related loan bears interest at a fixed rate of 10.5% and is due in monthly
principal and interest installments of $9,000.
In connection with the purchase of Dunnings Auction Services, Inc., by B&B, the
Company assumed a note payable to the prior owners in the original amount of
$500,000. The note carries interest at 8.5%, and is due in two approximately
equal installments on June 30, 1999 and 2000.
Minimum annual repayments on these notes at December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Year ending
December 31, B&B Kruse Combined
- ------------ --- ----- --------
<S> <C> <C> <C>
1999................................................................. $ 3,790 $257 $ 4,047
2000................................................................. 12,739 112 12,851
2001................................................................. 3,479 45 3,524
2002................................................................. 1,618 46 1,664
2003................................................................. 48 13 61
Thereafter........................................................... 227 34 261
------- ---- -------
$21,901 $507 $22,408
======= ==== =======
</TABLE>
Note 9--Leasing Arrangements:
The Company, through its B&B subsidiary, leases certain land and buildings.
These leases are classified as operating leases that expire at various intervals
between 1999 and 2010. Certain of these leases contain renewal options and have
escalation clauses tied to changes in the Consumer Price Index. Under the terms
of the leases, the tenants are generally responsible for the payment of property
taxes, insurance and maintenance costs related to the leased property.
Property on operating leases and property held for lease
The following schedule provides an analysis of the Company's investment in
property under operating leases and property held for lease by major classes at
December 31, 1998 and June 30, 1999:
<TABLE>
<CAPTION>
December 31, June 30,
------------------ ------------------
1998 1999
------------------ ------------------
<S> <C> <C>
Land............................................................ $ 7,265 $ 7,265
Building........................................................ 8,581 8,581
Improvements.................................................... 9,672 9,672
Other........................................................... 37 37
------- -------
25,555 25,555
Less: Accumulated depreciation.................................. (4,249) (4,560)
------- -------
$21,306 $20,995
======= =======
</TABLE>
The following is a schedule by year of minimum future rental income on
noncancellable operating leases as of December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Year ending
December 31
-----------
<S> <C>
1999......................................... $ 3,960
2000......................................... 3,964
2001......................................... 3,967
2002......................................... 3,837
2003......................................... 3,841
Thereafter................................... 21,110
-------
Total minimum future rentals................. $40,679
=======
</TABLE>
Note 10--Stock Based Compensation:
In connection with certain stock option and stock warrant grants during the
years ended December 31, 1997, 1998, and the six months ended June 30, 1999, the
Company recognized unearned compensation totaling $1.4 million, $5.4 million,
and $6.3 million, respectively. These amounts are being amortized over the four-
year vesting periods of the options or the one-year term of the warrants as
applicable. Amortization expense recognized during the years ended December 31,
1997 and 1998 and the six months ended June 30, 1999 were approximately $25,000,
$2.6 million, and $2.3 million, respectively.
Note 11--Contingencies:
Lawsuits
On March 23, 1999, Network Engineering Software, Inc., filed a lawsuit against
the Company in U.S. District Court for the Northern District of California for
our alleged willful and deliberate violation of a patent. The suit seeks
unspecified monetary damages as well as an injunction against the Company's
operations. It also seeks treble damages and attorneys' fees and costs. The
Company has denied these allegations and has filed a motion for summary
judgement with respect to certain of the patent claims on the basis that they
are invalid for lack of novelty. Discovery has commenced. The Company believes
that it has meritorious defenses against this suit and intends to vigorously
defend itself. The Company could be forced to incur material expenses during
this defense and in the event the Company were to lose this suit, the business
would be harmed.
Other Contingencies
From time to time, the Company is involved in disputes which have arisen in
the ordinary course of business. Management believes that the ultimate
resolution of these disputes will not have a material adverse impact on the
Company's financial position or results of operations.
10
<PAGE>
eBAY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT--(Continued)
Note 12--Contractual Agreements with America Online Inc. ("AOL"):
In March 1999, the Company expanded the scope of its strategic relationship
with AOL. Under the amended agreement, eBay will be given a prominent presence
featuring it as the preferred provider of person-to-person trading services on
AOL's proprietary services (both domestic and international), AOL.com, Digital
Cities, ICQ, CompuServe (both domestic and international) and Netscape. In
addition, eBay will develop a co-branded version of its service for each AOL
property which will prominently feature each party's brand. AOL will be entitled
to all advertising revenue from the co-branded site. eBay will pay $75 million
over the four-year term of the contract. At June 30, 1999, the Company had
advanced $18.8 million under the amended agreement. This amount will be
amortized to sales and marketing expense commencing with the launch of the co-
branded program and continuing through the first anniversary of the contract
signing.
In conjunction with the expanded strategic relationship, AOL will terminate
its original contract with the Company in August of 1999. As a result, the
remaining $8.0 million commitment associated with the original agreement has
been waived. AOL will continue to deliver impressions under the original
agreement through August 1999.
Note 13--Follow-on Offering:
On April 16, 1999, the Company completed its follow-on public offering of
Common Stock. A total of 4,250,000 shares were sold by the Company at a price
of $170.00 per share. The offering resulted in net proceeds to the Company of
approximately $696.2 million, net of an underwriting discount of $25.3 million
and estimated offering expenses of $1.0 million.
11
<PAGE>
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
FORWARD LOOKING STATEMENTS
This document 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 document, the words "expects,"
"anticipates," "intends," "plans" and similar expressions are intended to
identify certain of these forward-looking statements. The cautionary statements
made in this document should be read as being applicable to all related forward-
looking statements wherever they appear in this document. The Company's actual
results could differ materially from those discussed in this document. Factors
that could cause or contribute to such differences include those discussed
below, as well as those discussed in the Company's Prospectus dated April 12,
1999.
Overview
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. The Company has extended its online offerings with the
acquisitions of alando, an international online person-to-person trading
community, and Billpoint, a provider of online billing and payment solutions.
Recently, eBay expanded beyond its online origins into the traditional auction
business with its acquisitions of Butterfield & Butterfield and Kruse
International.
Substantially all of the Company's revenues come from fees and commissions
associated with online and traditional offline auction services. Online revenue
is derived from placement and success fees paid by sellers, eBay does not charge
fees to buyers. Sellers pay a nominal placement fee and by paying additional
fees, sellers can have items featured in various ways. Sellers also pay a
success fee based on the final purchase price. To date, online advertising on
the eBay website and online payment solutions provided by Billpoint have not
made significant contributions to net revenue, and no significant revenue
generation is expected in the near future.
eBay's online business model is significantly different from many existing
online auction and other electronic commerce businesses. Because individual
sellers, rather than eBay, sell the items listed, the Company has no
procurement, carrying or shipping costs and no inventory risk. The Company's
rate of expense growth is primarily driven by increases in personnel,
expenditures for advertising and promotion, and depreciation on site hardware
and software. The Company intends to continue investing in site infrastructure
and expects to increase its expenses significantly, in particular its
advertising, promotion and personnel expenses, in an effort to maintain revenue
growth. The Company remains committed to a long-term growth strategy which
combines the best elements of community and e-commerce and will continue to
invest prudently but aggressively to maintain its leadership role in online
personal trading.
Acquisitions
Butterfield & Butterfield
On May 28, 1999, eBay acquired Butterfield & Butterfield Auctioneers
Corporation, a Delaware corporation and all affiliated entities under common
control including; Butterfield Credit Corporation Inc., 111 Potrero Partners,
LLC and HBJ Partners, LLC. (collectively "B&B" or the "B&B Companies"). The
aggregate consideration exchanged for the merger was 1,327,370 shares of eBay
common stock. The merger has been accounted for as a pooling of interests. In
April 1999, B&B withdrew its registration statement for its initial public
offering. Accordingly, in the second quarter of 1999, the Company recorded a
charge of approximately $2.6 million related to the costs of the withdrawn
offering. Such amounts are included in merger related costs on the condensed
consolidated statement of income.
Kruse International
On May 18, 1999, eBay acquired Kruse, Inc. (d/b/a Kruse International) and all
affiliated entities under common control indluding; Auburn Cordage, Inc., ACD
Auto Sales, Inc., Reppert School of Auctioneering, Inc. and Classic Advertising
& Promotions, Inc., each an Indiana corporation (collectively, "Kruse" or the
"Kruse Companies"). Kruse International was founded in 1971 and operated as a
sole proprietorship until it was incorporated in the state of Indiana in August
1986. The Kruse Companies conduct auctions, perform appraisal services and
auctioneering training for classic car auctions in various locations in the
United States, England, Germany and the Netherlands. The aggregate consideration
exchanged for the merger was 787,312 shares of eBay common stock for all shares
of capital stock of the Kruse Companies. The merger has been accounted for as a
pooling of interests.
Billpoint
On May 25, 1999, eBay acquired Billpoint, Inc. ("Billpoint"). Billpoint has
developed a centralized, turnkey authorization, billing and payment
fulfillment solution that permits individuals and small merchants to accept
credit cards as payment for Internet-based sales transactions. Billpoint's
service is expected to derive revenues based upon a variety of fee
arrangements, including percentage-of-transaction, fixed-fee per transaction
and flat monthly rates. In connection with the merger, eBay issued a total of
approximately 525,000 shares of eBay common stock to the existing shareholders
of Billpoint as consideration for all shares of capital stock of Billpoint,
and all options and warrants to purchase shares of common stock of Billpoint
outstanding immediately prior to the consummation of the merger were converted
into options and warrants to purchase shares of eBay common stock. The merger
has been accounted for as a pooling of interests.
alando
One June 15, 1999, eBay acquired alando.de.AG. ("alando"). alando is
Germany's leading online person-to-person trading community. The aggregate
consideration exchanged for the merger was 316,000 shares of eBay stock. The
merger has been accounted for as a pooling of interests.
Results of Operations
The following tables sets forth, for the periods presented, certain data
derived from the Company's unaudited condensed consolidated statement of
income as a percentage of net revenues, certain unaudited supplemental
operating data, and unaudited condensed consolidated sequential quarterly
financial information. The
12
<PAGE>
operating results for the three and six months ended June 30, 1998 and 1999, and
the three months ended March 31, 1999 are not necessarily indicative of the
results that may be expected for any future period.
Historical Results of Operations
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
----------------------------- ------------------------------
1998 1999 1998 1999
--------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Net revenues......................................... 100.0% 100.0% 100.0% 100.0%
Cost of net revenues................................. 16.9 22.1 17.3 20.5
------ ------- ------- -------
Gross profit......................................... 83.1 77.9 82.7 79.5
------ ------- ------- -------
Operating expenses:
Sales and marketing................................. 32.4 46.3 35.6 43.2
Product development................................. 5.3 11.1 4.6 8.3
General and administrative.......................... 23.1 20.4 20.3 19.2
Amortization of acquired intangibles................ 0.8 0.7 0.4 0.7
Merger related costs................................ 0.0 8.8 0.0 4.7
------ ------- ------- -------
Total operating expenses.......................... 61.6 87.3 60.9 76.1
------ ------- ------- -------
Income from operations............................... 21.5 (9.4) 21.8 3.4
Interest and other income (expense), net............. (2.2) 12.2 (1.3) 6.8
------ ------- ------- -------
Income before income taxes........................... 19.3 2.8 20.5 10.2
Provision for income taxes........................... (5.3) (1.2) (8.0) (5.3)
------ ------- ------- -------
Net income........................................... 14.0% 1.6% 12.5% 4.9%
====== ======= ======= =======
Supplemental online operating data (1):
Number of registered users at end of period (in
thousands).......................................... 851 5,585 851 5,585
Gross merchandise sales (2) (in millions)............ $ 140 $ 622 $ 244 $ 1,163
Number of auctions listed (in thousands)............. 6,584 29,321 10,793 52,280
</TABLE>
(1) Represents transactions associated with the eBay site.
(2) Represents the aggregate sales prices of all goods for which an auction was
successfully concluded on the eBay site (i.e., there was at least one bid
above the seller's specified minimum price or reserve price, whichever is
higher).
Sequential Quarterly Financial Information
<TABLE>
<CAPTION>
Three months ended
-------------------------------------
March 31, 1999 June 30, 1999
----------------- ---------------
(in thousands; unaudited)
<S> <C> <C>
Net revenues.......................................................................... $42,801 $49,479
Cost of net revenues.................................................................. 7,977 10,945
------- -------
Gross profit.......................................................................... 34,824 38,534
------- -------
Operating expenses:
Sales and marketing................................................................. 16,958 22,916
Product development................................................................. 2,163 5,476
General and administrative.......................................................... 7,614 10,088
Amortization of acquired intangibles................................................ 328 327
Merger related costs................................................................ -- 4,359
------- -------
Total operating expenses........................................................ 27,063 43,166
------- -------
Income from operations................................................................ 7,761 (4,632)
Interest and other income, net........................................................ 275 6,039
------- -------
Income before income taxes............................................................ 8,036 1,407
Provision for income taxes............................................................ (4,271) (591)
------- -------
Net income............................................................................ $ 3,765 $ 816
======= =======
</TABLE>
13
<PAGE>
It is difficult for the Company to forecast its revenues or earnings
accurately and the operating results in one or more future quarters may fall
below the expectations of securities analysts or investors. Although accurate
forecasts are difficult, the Company has begun to recognize the seasonal nature
of its online business. In particular, the Company has noted strong sequential
quarterly revenue growth between the fourth fiscal quarter and the first fiscal
quarter, and a lower, relatively level growth rate throughout the remainder of
the year. Sequential revenue growth from the fourth quarter of 1997 to the first
quarter of 1998 was 128%, with the remaining quarters showing approximately 50%
sequential growth. For the quarters ended March 31, 1999 and June 30, 1999, the
Company realized 74% and 12% (27% excluding site outage credits of $3.9 million)
sequential quarterly online revenue growth, respectively.
Due to the inherent difficulty in forecasting revenues, it is also
difficult to forecast income statement expense categories as a percentage of
revenues. Quarterly and annual income statement expense categories as a
percentage of revenues may be significantly different from historical or
projected rates. This is especially true as the Company expects to accelerate
investment in equipment and personnel to enhance site stability and scalability
during the next several quarters. As a general note, the Company expects costs
to increase in absolute dollars across all income statement categories. Further,
the Company expects its gross margin will likely decline in the short term due
primarily to the effects of depreciation on equipment and software purchased
during the second quarter of 1999 and in future quarters, increases in site
operations personnel and consulting costs, and growth within the customer
support organization, including the new facility in Salt Lake City.
For the quarter ended June 30, 1999, eBay continued to experience rapid
growth in its online business. To support this new level of activity,
the Company made significant investments in personnel, infrastructure and
marketing programs during the second quarter, which affected costs in all
income statement categories.
Net Revenues
The Company derives revenue from a variety of sources including: listing,
success, and featured item fees for transactions occurring online, and auction
related fees, commissions and rental income in traditional auction operations.
To date, the acquisitions of alando and Billpoint have not made significant
contributions to net revenues, and no significant revenue generation is expected
in the near future. The Company's net revenues increased from $19.5 million and
$33.5 million in the three and six months ended June 30, 1998, to $49.5 million
and $92.3 million in the comparable periods of 1999. This growth was primarily
the result of increased activity on the eBay website, as shown by increases in
total items listed and gross merchandise sales. Net revenues in the second
quarter of 1999 are net of a $3.9 million credit granted to users for the June
10th site outage. The slower online revenue growth in the second quarter of
1999 was offset in part by revenues from B&B during its seasonally strong
second quarter.
The Company has recognized a seasonal trend in online revenue growth, with
strong sequential quarterly revenue growth between the fourth fiscal quarter and
the first fiscal quarter, and a lower, relatively level growth rate throughout
the remainder of the year. Within traditional auction operations, B&B typically
experiences its strongest revenue growth in the second and fourth quarters,
while Kruse International experiences its strongest revenue growth in the third
quarter.
Cost of Net Revenues
Cost of net revenues for online operations consist primarily of costs
associated with customer support and website operations. These costs include;
compensation and allocated overhead for customer support and site operations
personnel, ISP connectivity charges and depreciation on site equipment. Cost of
net revenues in traditional auction operations primarily include; compensation
for auction, appraisal, and customer support personnel and direct auction costs,
such as event site rental. Cost of net revenues increased from $3.3 million and
14
<PAGE>
$5.8 million or 16.9% and 17.3% of net revenues in the three and six months
ended June 30, 1998, to $10.9 million and $18.9 million or 22.1% and 20.5% of
net revenues in the comparable periods of 1999. The increase resulted from the
continued development and expansion of the Company's customer support and site
operations departments, depreciation of the equipment required for the Company's
site operations and ISP connectivity charges. These costs, especially those
related to customer support and depreciation in the online business, are
expected to continue to increase rapidly as the Company invests in its
infrastructure in advance of demand, resulting in lower gross margins in the
near term.
Sales and Marketing
The Company's sales and marketing expenses for both the online and
traditional auction businesses are comprised primarily of compensation for the
Company's sales and marketing personnel, advertising, tradeshow and other
promotional costs, expenses for creative design of the Company's website and an
allocation of overhead. Sales and marketing expense increased from $6.3 million
and $11.9 million or 32.4% and 35.6% of net revenues in the three and six months
ended June 30, 1998, to $22.9 million and $39.9 million or 46.3% and 43.2% of
net revenues in the comparable periods of 1999. The increases resulted primarily
from continued growth in the number of personnel, increases in online, radio,
and international advertising and third party services. Online sales and
marketing expenses are expected to increase in the near term, due to the
commencement of advertising impressions delivered under the strategic alliance
with AOL, the expansion of international advertising and incremental expenses
associated with personnel additions made in the current quarter and those
expected in future quarters. Sales and marketing expenses in the traditional
auction businesses are expected to remain comparable with historical levels.
Product Development
The Company's product development expenses for both eBay and Billpoint
consist primarily of compensation for the Company's product development staff,
payments to outside contractors, depreciation on equipment used for development
and an allocation of overhead. The Company's product development expenses
increased from $1.0 million and $1.5 million or 5.3% and 4.6% of net revenues in
the three and six months ended June 30, 1998, to $5.5 million and $7.6 million
or 11.1% and 8.3% of net revenues in the comparable periods of 1999. The
increase in absolute dollars resulted primarily from depreciation on newly
acquired site equipment, the increased size of the product development staff and
payments to outside contractors. The sequential quarterly increase from $2.2
million or 5% of net revenues to $5.5 million or 11.31% of net revenues from the
first to second quarter of 1999 was particularly impacted with the addition of
Billpoint and its site development efforts in the second quarter. Product
development expenses are expected to increase in future periods primarily from
personnel additions and additional depreciation costs as the Company continues
to purchase equipment to improve and expand its operations both domestically and
internationally.
General and Administrative
The Company's general and administrative expenses consist primarily of
compensation for personnel and, to a lesser extent, fees for external
professional advisors, provisions for doubtful accounts and an allocation of
overhead. The Company's general and administrative expenses increased from $4.5
million and $6.8 million or 23.1% and 20.3% of net revenues in the three and six
months ended June 30, 1998, to $10.1 million and $17.7 million or 20.4% and
19.2% of net revenues in the comparable periods of 1999. The increases in
absolute dollars resulted primarily from additional personnel-related expenses,
including those associated with the SafeHarbor(TM) program, fees for
professional services and allocations of overhead. General and administrative
expenses decreased as a percentage of net revenues in the related periods as
eBay's online business became a progressively larger portion of the consolidated
business. Such expenses in the online business are typically lower as a
percentage of revenue than the traditional auction businesses.
Amortization of Acquired Intangibles
During the three and six months ended June 30, 1998, the Company
recognized a $150,000 charge associated with intangible assets acquired in the
acquisition of Jump, Inc. ("Jump"), compared to expenses of $327,000 and
$655,000 in the comparable periods of 1999. The majority of the acquired
intangibles will be amortized during the third quarter of 1999, with the
remainder continuing through the third quarter of 2000.
15
<PAGE>
Merger Related Costs
During the three and six months ended June 30, 1999, the Company incurred
direct merger related transaction costs of $4.4 million which were charged to
operations. There were no comparable expenses in the same periods of 1998. As
opportunities present themselves, the Company may continue to acquire new
companies; such acquisitions could lead to additional direct and indirect
expenses which would negatively affect the Company's result of operations.
Interest and Other Income, Net
The Company's interest and other income, net, increased from $16,000 and
$496,000 in the three and six months ended June 30, 1998, to $6.6 million and
$7.4 million in the comparable periods of 1999. The increase was primarily the
result of interest earned on cash, cash equivalents, and investments,
particularly the interest earned on the net proceeds from the Company's
secondary offering completed in April 1999. The Company expects that interest
income will increase during the third quarter of 1999 as the result of a full
quarter of interest being earned on the secondary offering proceeds.
Provision for Income Taxes
The Company's effective federal and state income tax rate was 27.5% and
39.2% in the three and six months ended June 30, 1998 compared to 42.0% and
51.5% in the comparable periods of 1999. The fluctuation in the effective tax
rate from 1998 to 1999 resulted from changes in certain non-cash, non-deductible
expenses as a percentage of pre-tax income, and to the impact of net operating
losses of certain acquired entities. Additionally, in connection with its
acquisition, B&B's status as an S Corporation was terminated, and B&B became
subject to federal and state income taxes. The supplemental pro forma
financial information presented includes an increase to the provisions for
income taxes based upon a combined federal and state tax rate which
approximates the statutory tax rates that would have applied if B&B had been
taxed as a C Corporation during the periods prior to its acquisition by eBay.
The Company expects the consolidated effective tax rate to be at or near 42%
throughout the remainder of 1999.
Stock-Based Compensation
In connection with the grant of certain stock options and warrants from May
1997 through May 1999, the Company recorded aggregate unearned compensation
totaling $13.1 million, which is being amortized over the four-year vesting
period of the options and the one-year term of the warrant, respectively. Of the
total unearned compensation, approximately $1.1 million and $1.5 million was
amortized in the three and six months ended June 30, 1998 compared to $1.5
million and $2.3 million in the comparable periods of 1999. The Company
expects quarterly amortization of approximately $1.5 million to $1.3 million
during the third and fourth quarters of 1999.
Liquidity and Capital Resources
Since inception, the Company has financed its operations primarily from net
cash generated from operating activities. The Company has obtained additional
financing from the sale of preferred stock and warrants, proceeds from the
exercise of those warrants, proceeds from the exercise of stock options,
proceeds from its initial public offering, and the Company's secondary stock
offering, completed in April 1999.
Net cash provided by operating activities was $7.4 million in the six
months ended June 30, 1998 compared to $20.0 million in the same period of
1999. The change in the comparable periods resulted primarily from increases
in accounts payable and accrued liabilities, offset by an $18.8 million
payment advanced to AOL in connection with the strategic relationship, and a
$4.3 million increase in accounts receivable and accounts payable. The change
was affected to a lesser degree by non-cash charges for amortization of
unearned compensation, the provision for doubtful accounts, depreciation and
amortization and increases in various liability categories.
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Net cash used in investing activities totaled $3.2 million in the six
months ended June 30, 1998 and $405.5 million in the same period of 1999. Net
cash used in investing activities in 1998 was primarily the result of purchases
of property and equipment totaling $3.1 million. Net cash used in investing
activities in 1999 primarily resulted from the purchase of investments and to a
lesser extent by purchases of property and equipment.
Net cash provided by financing activities was $425,000 in the six months
ended June 30, 1998, compared to $695.9 million in the same period of 1999.
Net cash provided by financing activities in 1998 resulted primarily from the
sale of Common and Preferred Stock, and was partially offset by the repayment
of long-term debt. Net cash provided by financing activities in 1999 resulted
almost entirely from sales of Common Stock.
eBay had no material commitments for capital expenditures at June 30,
1999, but expects such expenditures to be at least $14.0 million through the
remainder of 1999. Such expenditures will primarily be for computer equipment,
furniture and fixtures and leasehold improvements. eBay also has total minimum
lease obligations of $25.1 million through November 2004 under certain
noncancellable operating leases. In March 1999, eBay and AOL expanded the scope
of their strategic relationship. Under this new agreement eBay will pay AOL $75
million over the four-year term of the contract. Of this amount, $18.8 million
had been advanced at June 30, 1999.
The Company believes that its existing cash, cash equivalents and
investments, and any cash generated from operations will be sufficient to fund
its operating activities, capital expenditures and other obligations for the
foreseeable future. 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, the Company's business could suffer.
Year 2000 Issues
Many currently 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. The Company has completed
modifications to its internal systems to fix identified Year 2000 issues in an
attempt to ensure Year 2000 compliance. The costs of these modifications have
not been material and have involved a reallocation of internal resources rather
than incremental expenditures. Although the Company believes that its own
software is Year 2000 compliant, the Company may be wrong. If the Company is
wrong, it could face unexpected expenses to fix the problem or unanticipated
website outages, either of which would harm its business. The Company uses
third-party equipment and software that may not be Year 2000 compliant.
Following a website outage in June 1999, the Company undertook a comprehensive
site review including a further review of its website for year 2000 compliance.
This review identified certain software "patches" for third party software that
needed to be implemented for Year 2000 compliance. The process of implementing
these patches has commenced and it is expected to be completed shortly after the
end of the third quarter. The cost of this implementation is not expected to be
material and is being accomplished through a reallocation of internal resources.
The Company is also conducting a further review of third party software and
embedded systems used in its online auction business. In connection with its
acquisitions of each of its newly acquired businesses, the Company received
representations and warranties that the systems and software of these businesses
are Year 2000 compliant. While the Company has no reason to doubt these
assurances, it is reviewing the Year 2000 status of the software and systems of
its newly acquired businesses. The Company expects that the incremental cost of
all of these reviews will not exceed $200,000. The cost of any necessary
upgrades or changes cannot currently be precisely estimated. The Company may be
harmed if necessary upgrades or changes are not identified, or if identified are
not timely and successfully implemented at an acceptable cost. The Company also
may be harmed by Year 2000 problems at its vendors and business partners. For
example, the Company relies on credit card companies to collect the majority of
its revenues from users. Due to the nature of the credit card system, some
industry analysts have questioned the effect of the year 2000 on credit card
processing and billing. Failure of the Company's credit card vendors or other
third-party equipment or software vendors to properly process dates for the year
2000 and thereafter could require the Company to incur unanticipated expenses in
seeking alternative means of payment or hardware or software replacements. It
also could result in loss of
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revenues or unanticipated eBay website outages. The Company's marketing efforts
are also dependent on the continued operation of Internet portals and other
Internet sites on which it advertises.
Although the Company has developed contingency plans with respect to
collecting payment under these circumstances, the Company is unable to make
contingency plans if any significant number of the computers constituting the
Internet fail to process dates properly for the year 2000 and there is a
systemwide slowdown or breakdown. The Company's business is dependent on the
continued successful operation of the Internet. Any interruption or significant
degradation of Internet operations due to Year 2000 problems could harm the
Company's business.
Risk Factors that may Affect Results of Operations and Financial Condition
Our operating results may fluctuate.
Our operating results have varied on a quarterly basis during our short
operating history. Our operating results may fluctuate significantly as a result
of a variety of factors, many of which are outside our control. Factors that may
affect our quarterly operating results include the following:
. our ability to retain an active user base, to attract new users who list
items for sale and who complete transactions through our service and to
maintain customer satisfaction;
. our ability to keep our website operational and to manage the number of
items listed on our service;
. federal, state or local government regulation, including investigations
prompted by items improperly listed or sold by our users;
. the introduction of new sites, services and products by us or our
competitors;
. volume, size, timing and completion rate of trades on our website;
. seasonal effects on revenue in our online service and our land-based
auction business;
. our ability to integrate, manage and grow our recent acquisitions;
. the success of our brand building and marketing campaigns;
. the amount and timing of operating costs and capital expenditures
relating to maintaining and expanding our business, operations and
infrastructure;
. our ability to upgrade and develop our systems and infrastructure to
accommodate growth;
. our ability to attract new personnel in a timely and effective manner;
. our ability to retain key employees in both our historical online
business and our recent acquisitions;
. the timing, cost and availability of advertising in traditional media
and on other websites and online services;
. the ability of our land-based auction businesses to acquire high quality
properties;
. the timing of marketing expenses under existing contracts;
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. consumer trends and popularity of some categories of collectible items;
. the level of use of the Internet and online services;
. increasing consumer acceptance of the Internet and other online services
for commerce and, in particular, the trading of products such as those
listed on our website;
. consumer confidence in the security of transactions on our website; and
. general economic conditions and economic conditions specific to the
Internet and electronic commerce industries.
Our limited operating history and the emerging nature of the markets in
which we compete make it difficult for us to forecast our revenues or earnings
accurately. We believe that period-to-period comparisons of our operating
results may not be meaningful and you should not rely upon them as an indication
of future performance. We do not have backlog, and almost all of our net
revenues each quarter come from auctions that are completed during that quarter.
Our operating results in one or more future quarters may fall below the
expectations of securities analysts and investors. In that event, the trading
price of our common stock would almost certainly decline.
Our failure to manage growth could harm us.
We currently are experiencing a period of significant expansion in our
headcount, facilities and infrastructure and we anticipate that further
expansion will be required to address potential growth in our customer base and
market opportunities. This expansion has placed, and we expect it will continue
to place, a significant strain on our management, operational and financial
resources. The areas that are put under severe strain by our rate of growth
include the following:
. The website. We must constantly add new hardware, update software and add
new engineering personnel to accommodate the increased use of our
website. If we are unable to increase the capacity of our systems at
least as fast as the growth in demand for this capacity, our website
may become unstable and may cease to operate for periods of time. We
have experienced periodic unscheduled downtime. Continued unscheduled
downtime would harm our business and also would discourage users of our
website and reduce future revenues.
. Customer Support. We must expand our customer support operations to
accommodate the increased number of users and transactions on our
website. If we are unable to hire and successfully train sufficient
employees or contractors in this area, users of our website may have
negative experiences and current and future revenues could suffer.
. Customer Accounts. Our revenues are dependent on prompt and accurate
billing processes. If we are unable to grow our transaction processing
abilities to accommodate the increasing number of transactions that
must be billed, our ability to collect revenue will be harmed.
We must continue to hire, train and manage new employees at a rapid rate.
The majority of our employees today have been with us less than one year and we
expect that our rate of hiring will continue at a very high pace. To manage the
expected growth of our operations and personnel, we will need to improve our
transaction processing, operational and financial systems, procedures and
controls. Our current and planned personnel, systems, procedures and controls
may not be adequate to support our future operations. We may be unable to hire,
train, retain and manage required personnel or to identify and take advantage of
existing and potential strategic relationships and market opportunities.
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The inability to expand our systems may limit our growth.
We seek to generate a high volume of traffic and transactions on our
service. The satisfactory performance, reliability and availability of our
website, processing systems and network infrastructure are critical to our
reputation and our ability to attract and retain large numbers of users. Our
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. If the volume of traffic on our website or the number of auctions being
conducted by customers continues to increase, we will need to expand and upgrade
our technology, transaction processing systems and network infrastructure. Such
expansion will be costly and is expected to eventually require an expensive re-
architecting of our technology. We may not be able to accurately project the
rate or timing of increases, if any, in the use of our service or to timely
expand and upgrade our systems and infrastructure to accommodate any increases.
We use internally developed systems to operate our service and for
transaction processing, including billing and collections processing. We must
continually improve these systems in order to accommodate the level of use of
our website. In addition, we may add new features and functionality to our
services that would result in the need to develop or license additional
technologies. Our inability to add additional software and hardware or to
upgrade our technology, transaction processing systems or network infrastructure
to accommodate increased traffic or transaction volume could have adverse
consequences. These consequences include unanticipated system disruptions,
slower response times, degradation in levels of customer support, impaired
quality of the users' experience on our service and delays in reporting accurate
financial information. Our failure to provide new features or functionality also
could result in these consequences. We may be unable to effectively upgrade and
expand our systems in a timely manner or to integrate smoothly any newly
developed or purchased technologies with our existing systems. These
difficulties could harm or limit our ability to expand our business.
System failures could harm our business.
We have experienced system failures from time to time. Our website has been
interrupted for periods of up to 22 hours. In addition to placing increased
burdens on our engineering staff, these outages create a flood of user questions
and complaints that must be responded to by our customer support personnel. Any
unscheduled interruption in our service results in an immediate loss of revenue
that can be substantial. If we experience frequent or persistent system
failures, our reputation and brand could be permanently harmed. We are currently
taking steps to increase the reliability and redundancy of our system. These
steps are expensive and may not be successful in reducing the frequency or
duration of unscheduled downtime.
Substantially all of our computer hardware for operating our service
currently is 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 and similar events. They are also subject to break-
ins, sabotage, intentional acts of vandalism and similar misconduct. We do not
have fully redundant systems, a formal disaster recovery plan or alternative
providers of hosting services, and we do not carry business interruption
insurance to compensate us for losses that may occur. Despite any precautions we
may take, the occurrence of a natural disaster or other unanticipated problems
at the Exodus facility could result in interruptions in our services. In
addition, the failure by Exodus to provide our required data communications
capacity could result in interruptions in our service. Any damage to or failure
of our systems could result in interruptions in our service. Such interruptions
will reduce our revenues and profits, and our future revenues and profits will
be harmed if our users believe that our system is unreliable.
We may not maintain profitability.
We believe that our continued profitability and growth will depend in large
part on our ability to do the following:
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. increase our brand name awareness;
. provide our customers with superior community and trading experiences;
. maintain sufficient transaction volume to attract buyers and sellers;
and
. manage the costs of our business, including the costs associated with
maintaining and developing our site, customer support, and
international expansion.
We are investing heavily in marketing and promotion, customer support,
further development of our website, including stability, redundancy and more
advanced architecture and operating infrastructure development. We have
significant ongoing commitments in some of these areas. As a result, we may be
unable to adjust our spending rapidly enough to compensate for any unexpected
revenue shortfall, which would harm our profitability. The emergence of
competitors, many of whom are offering free auctions to users, may limit our
ability to raise user fees in response to declines in profitability or require
us to reduce our fees. In addition, we are spending in advance of anticipated
growth, which may also harm our profitability. Our historic growth rates are not
sustainable and in the near future we expect our costs, including those related
to growing our infrastructure and our new initiatives internationally,
regionally, and with respect to premium items, to increase. In view of the
rapidly evolving nature of our business and our limited operating history, we
believe that period-to-period comparisons of our operating results are not
necessarily meaningful. You should not rely upon our historical results as
indications of our future performance.
Our business has been seasonal.
Our results of operations historically have been somewhat seasonal in nature
because many of our users reduce their activities on our website during the
Thanksgiving and Christmas holidays and with the onset of good weather. We
expect the growth rate of our revenue in the second and subsequent quarters will
be significantly below our first quarter growth rate. Both B&B and Kruse have
significant quarter to quarter variations in their results depending on the
timing of auctions and the availability of high quality items from large
collections and estates. B&B typically has its best operating results in the
traditional fall and spring auction seasons and has historically incurred
operating losses in the first and third quarters. Kruse typically sees a
seasonal peak in operations in the third quarter. Seasonal or cyclical
variations in our business may become more pronounced over time and may harm our
results of operations in the future.
Acquisitions could result in operating difficulties and other harmful
consequences.
If appropriate opportunities present themselves, we intend to acquire
businesses, technologies, services or products that we believe are strategic. We
recently completed four acquisitions. The process of integrating any acquisition
may create unforeseen operating difficulties and expenditures and is itself
risky. The areas where we may face difficulties include:
. diversion of management time (both ours and at the acquired companies)
during the period of negotiation through closing and further diversion
of such time after closing from focus on operating the businesses to
issues of integration and future products;
. decline in employee morale and retention issues resulting from changes in
compensation, reporting relationships, future prospects, or the
direction of the business;
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. the need to integrate each company's accounting, management information,
human resource and other administrative systems to permit effective
management and the lack of control if such integration is delayed or
not implemented; and
. the need to implement controls, procedures and policies appropriate for a
larger public company at companies that prior to acquisition had been
smaller, private companies.
We have almost no experience in managing this integration process. Moreover, the
anticipated benefits of any or all of these acquisitions may not be realized.
Future acquisitions could result in potentially dilutive issuances of equity
securities, the incurrence of debt, contingent liabilities or amortization
expenses related to goodwill and other intangible assets, any of which could
harm our business. Future acquisitions may require us to obtain additional
equity or debt financing, which may not be available on favorable terms or at
all. Even if available, this financing may be dilutive.
Our business may be harmed by the listing or sale by our users of illegal
items.
The law relating to the liability of providers of online services for the
activities of their users on their service is currently unsettled. We are aware
that certain goods, such as firearms, other weapons, adult material, tobacco
products, alcohol and other goods that may be subject to regulation by local,
state or federal authorities, have been listed and traded on our service. We may
be unable to prevent the sale of unlawful goods, or the sale of goods in an
unlawful manner, by users of our service, and we may be subject to civil or
criminal liability for unlawful activities carried out by users through our
service. In order to reduce our exposure to this liability, we have prohibited
the listing of certain items and increased the number of personnel reviewing
questionable items. We may in the future implement other protective measures
that could require us to spend substantial resources and/or to reduce revenues
by prohibiting additional categories of listings. These actions could harm our
financial results. Any costs incurred as a result of liability or asserted
liability relating to the sale of unlawful goods or the unlawful sale of goods,
could harm our business. In addition, we have from time to time received
significant media attention relating to the listing or sale of unlawful goods on
our website. A continuation of this negative publicity could damage our
reputation and diminish the value of our brand name. It also could make users
reluctant to continue to use our services.
Our business may be harmed by the listing or sale by our users of pirated
items.
We have received in the past, and we anticipate we will receive in the
future, communications alleging that certain items listed or sold through our
service by our users infringe third-party copyrights, trademarks and tradenames
or other intellectual property rights. Although we have actively sought to work
with the content community to eliminate infringing listings on our website, some
content owners have expressed the view that our efforts are insufficient. An
allegation of infringement of third-party intellectual property rights may
result in litigation against us. Any such litigation could be costly for us,
could result in increased costs of doing business through adverse judgment or
settlement, could require us to change our business practices in expensive ways,
or could otherwise harm our business.
Our business may be harmed by fraudulent activities on our website.
Our future success will depend largely upon sellers reliably delivering and
accurately representing their listed goods and buyers paying the agreed purchase
price. We do not take responsibility for delivery of payment or goods to any
user of our service. We have received in the past, and anticipate that we 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 we can
suspend the accounts of users who fail to fulfill their delivery obligations to
other users, we do not have the ability to require users to make payments or
deliver goods or otherwise make users whole, other than through our limited
insurance program. Other than through this program, we do not compensate users
who believe
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they have been defrauded by other users. We also periodically
receive complaints from buyers as to the quality of the goods purchased. Any
negative publicity generated as a result of fraudulent or deceptive conduct by
users of our service could damage our reputation and diminish the value of our
brand name. We may in the future receive additional requests from users
requesting reimbursement or threatening legal action against us if no
reimbursement is made. Any resulting litigation could be costly for us, divert
management attention, result in increased costs of doing business, lead to
adverse judgments or could otherwise harm our business.
Government inquiries may lead to charges or penalties.
On January 29, 1999, we received requests to produce certain records and
information to the federal government relating to an investigation of possible
illegal transactions in connection with our website. We have been informed that
the inquiry includes an examination of our practices with respect to these
transactions. We are fully cooperating with the inquiry. In order to protect the
investigation, the court has ordered that no further public disclosures be made
with respect to the matter at this time. Should this or any other investigation
lead to civil or criminal charges against us, we would likely be harmed by
negative publicity, the costs of litigation, the diversion of management time
and other negative effects, even if we ultimately prevail. Our business would
certainly suffer if we were not to prevail in any action like this. Even the
process of providing records and information could be expensive, time consuming
and result in the diversion of management attention.
A large number of transactions occur on our website. As a result, we believe
that government regulators have received a substantial number of consumer
complaints about us which, while small as a percentage of our total
transactions, are large in aggregate numbers. We have from time to time been
contacted by various federal, state and local regulatory agencies and been told
that they have questions with respect to the adequacy of the steps we take to
protect our users from fraud. For example, the City of New York--Department of
Consumer Affairs received complaints from users about transactions on our
website. In investigating these complaints, the Department of Consumer Affairs
requested information about us and these transactions. We have provided the
requested information. We are likely to receive additional inquiries from
regulatory agencies in the future, which may lead to action against us. We have
responded to all inquiries from regulatory agencies by describing our current
and planned antifraud efforts. If one or more of these agencies is not satisfied
with our response to current or future inquiries, the resultant investigations
and potential fines, changes in business practices, or other penalties could
harm our business.
Some of our businesses are subject to regulation; others may be.
Both B&B and Kruse are subject to regulation in some jurisdictions governing
the manner in which auctions are conducted. Both are required to obtain
licensure in certain jurisdictions with respect to their business or to permit
the sale of certain properties (e.g. wine, automobiles, real estate). Such
licenses must generally be regularly renewed and are subject to revocation for
violation of law, violation of the regulations governing auctions in general or
the sale of the particular item and other events. If either company was unable
to renew a license or had a license revoked it would be harmed. In addition,
changes to the regulations or the licensure requirements could increase the
complexity and the cost of doing auctions, thereby harming us.
As our activities and the types of goods listed on our site expand, state
regulatory agencies may claim that we are subject to licensure in their
jurisdiction. Such claims could result in costly litigation or may require us to
change our manner of doing business in ways that increase our costs or reduce
our revenues or force us to prohibit listings of certain items. We could also be
subject to fines or other penalties. Any of the above outcomes could harm us.
Furthermore, businesses that handle consumers' funds are potentially subject to
numerous regulations, including those related to banking, credit cards, escrow,
fair credit reporting and others. Billpoint is a new business with a relatively
novel approach to facilitating payments. It is not yet known how regulatory
agencies will treat Billpoint. The cost and complexity of Billpoint's business
may increase if certain regulations are deemed to apply to its business.
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We are subject to risks associated with information disseminated through our
service.
The law relating to the liability of online services companies for information
carried on or disseminated through their services is currently unsettled. Claims
could be made against online services companies under both 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. A number of private lawsuits
seeking to impose liability upon other online services companies currently are
pending. In addition, federal, state and foreign legislation have been proposed
that impose liability for or prohibit the transmission over the Internet of
certain types of information. Our service features a Feedback Forum, which
includes information from users regarding other users. Although all such
feedback is generated by users and not by us, it is possible that a claim of
defamation or other injury could be made against us for content posted in the
Feedback Forum. Such claims are more likely and have a greater probability of
success as we expand internationally. If we become liable for information
provided by our users and carried on our service, we could be directly harmed
and we may be forced to implement new measures to reduce our exposure to this
liability. This may require us to expend substantial resources 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 harm our reputation or otherwise impact the growth of our
business. We carry liability insurance, but it may not be adequate to fully
compensate us if we become liable for information carried on or through our
service. Any costs incurred as a result of this liability or asserted liability
could harm our business.
We are subject to intellectual property litigation.
On March 23, 1999 we were sued by Network Engineering Software, Inc. in the
U.S. District Court for the Northern District of California for our alleged
willful and deliberate violation of a patent. The suit seeks unspecified
monetary damages as well as an injunction against our operations. It also seeks
treble damages and attorneys' fees and costs. We have answered, denying these
allegations and alleging that the patent is invalid. Discovery has commenced
and we have filed a summary judgement motion seeking to invalidate certain
claims in the patent. We believe that we have meritorious defenses against this
suit and intend to vigorously defend ourselves. We could be forced to incur
material expenses during this defense and in the event we were to lose this
suit, our business would be harmed.
Other third parties have from time to time claimed and may claim in the future
that we have infringed their past, current or future technologies. We expect
that participants in our markets increasingly will be subject to infringement
claims as the number of services and competitors in our industry segment grows.
Any claim like this, whether meritorious or not, could be time-consuming, result
in costly litigation, cause service upgrade delays or require us to enter into
royalty or licensing agreements. These royalty or licensing agreements might not
be available on acceptable terms or at all. As a result, any claim like this
could harm our business.
Unauthorized break-ins to our service could harm our business.
Our servers are 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, unauthorized
persons may improperly access our data. We have experienced an unauthorized
break-in by a "hacker" who stated that he can in the future damage or change our
system or take confidential information. Any such actions by this or any other
individual could harm us. Such actions may be very expensive to remedy and could
damage our reputation and discourage new and existing users from using our
service.
Our stock price has been and may continue to be extremely volatile.
The trading price of our common stock has been and is likely to be extremely
volatile. Our stock price could be subject to wide fluctuations in response to a
variety of factors, including the following:
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. actual or anticipated variations in our quarterly operating results;
. unscheduled system downtime;
. additions or departures of key personnel;
. announcements of technological innovations or new services by us or our
competitors;
. changes in financial estimates by securities analysts;
. conditions or trends in the Internet and online commerce industries;
. the emergence of online securities trading;
. changes in the market valuations of other Internet or online service
companies;
. developments in Internet regulation;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
. sales of our common stock or other securities in the open market; and
. other events or factors that may be beyond our control.
In addition, the trading price of Internet stocks in general, and ours in
particular, have experienced extreme price and volume fluctuations in recent
months. These fluctuations often have been unrelated or disproportionate to the
operating performance of these companies. The valuations of many Internet
stocks, including ours, are extraordinarily high based on conventional valuation
standards such as price to earnings and price to sales ratios. The trading price
of our common stock has increased enormously from the initial public offering
price. These trading prices and valuations may not be sustained. Any negative
change in the public's perception of the prospects of Internet or e-commerce
companies could depress our stock price regardless of our results. Other broad
market and industry factors may decrease the market price of our common stock,
regardless of our operating performance. Market fluctuations, as well as general
political and economic conditions such as recession or interest rate or currency
rate fluctuations, also may decrease the market price of our common stock. In
the past, following declines in the market price of a company's securities,
securities class-action litigation often has been instituted against the
company. Litigation of this type, if instituted, could result in substantial
costs and a diversion of management's attention and resources.
New and existing regulations could harm our business.
We are subject to the same federal, state and local laws as other companies
conducting business on the Internet. Today there are relatively few laws
specifically directed towards online services. However, due to the increasing
popularity and use of the Internet and online services, it is possible that laws
and regulations will be adopted with respect to the Internet or online services.
These laws and regulations could cover issues such as online contracts, user
privacy, freedom of expression, pricing, fraud, content and quality of products
and services, taxation, advertising, intellectual property rights and
information security. 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 these laws were adopted prior to the advent of the Internet and
related technologies and, as a result, do not contemplate or address the unique
issues of the Internet and related technologies. Those laws that do reference
the Internet, such as the recently passed Digital Millennium Copyright Act, have
not yet been interpreted by the courts and their applicability and reach are
therefore uncertain. In addition, numerous states, including the State of
California, where our headquarters are located, have regulations regarding how
"auctions" may be conducted and the liability of "auctioneers" in conducting
such auctions. No legal determination has been made with respect to the
applicability of the California regulations to our business to date and little
precedent exists in this area. One or more states may attempt to impose these
regulations upon us in the
25
<PAGE>
future, which could harm our business. In addition, as the nature of the
products listed by our users change, we may become subject to new regulatory
restrictions. See "Some of our businesses are subject to regulation; others may
be."
Several states and Congress have 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 also has 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 could
directly affect the way we do business or could create uncertainty in the
marketplace. This could reduce demand for our services, increase the cost of
doing business as a result of litigation costs or increased service delivery
costs, or otherwise harm our business. In addition, because our services are
accessible worldwide, and we facilitate sales of goods to users worldwide,
foreign jurisdictions may claim that we are required to comply with their laws.
As we expand our international activities, we will be obligated to comply with
such laws. Our failure to comply with foreign laws could subject us to penalties
ranging from fines to bans on our ability to offer our services.
In the United States, companies are required to qualify as foreign
corporations in states where they are conducting business. As an Internet
company, it is unclear in which states we are actually conducting business. Our
failure to qualify as a foreign corporation in a jurisdiction where we are
required to do so could subject us to taxes and penalties for the failure to
qualify and could result in our inability to enforce contracts in those
jurisdictions. Any new legislation or regulation, or the application of laws or
regulations from jurisdictions whose laws do not currently apply to our
business, could harm our business.
We are dependent on the continued growth of the 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. Our future revenues and
profits will be substantially dependent upon the widespread acceptance of the
Internet and online services as a medium for commerce by consumers. Rapid growth
in the use of and interest in the Web, the Internet and online services is a
recent phenomenon. This acceptance and use may not continue. Even if the
Internet is accepted, concerns about fraud, privacy and other problems may mean
that a sufficiently broad base of consumers will not adopt the Internet as a
medium of commerce. In particular, our website requires users to make publicly
available their e-mail addresses and other personal information that some
potential users may be unwilling to provide. These concerns may increase as
additional publicity over privacy issues on eBay or generally over the Internet
increase. Market acceptance for recently introduced services and products over
the Internet is highly uncertain, and there are few proven services and
products. In order to expand our user base, we must appeal to and acquire
consumers who historically have used traditional means of commerce to purchase
goods.
There are many risks associated with international operations.
We are expanding internationally. We recently acquired alando, a leading
German person-to-person trading company. Expansion into international markets
will require management attention and resources. We have limited experience in
localizing our service to conform to local cultures, standards and policies. We
may have to compete with local companies who understand the local market better
than we do. We may not be successful in expanding into international markets or
in generating revenues from foreign operations. As we continue to expand
internationally, we are subject to risks of doing business internationally,
including the following:
. regulatory requirements that may limit or prevent the offering of our
services in local jurisdictions;
. legal uncertainty regarding liability for the listings of our users,
including less Internet-friendly basic law and unique local laws;
26
<PAGE>
. government-imposed limitations on the public's access to the Internet;
. difficulties in staffing and managing foreign operations;
. longer payment cycles, different accounting practices and problems in
collecting accounts receivable;
. cultural nonacceptance of online auctions;
. political instability;
. seasonal reductions in business activity;
. potentially adverse tax consequences; and
. administrative burdens in collecting local taxes, including value-added
taxes.
Some of these factors may cause our international costs to exceed our domestic
costs of doing business. To the extent we expand our international operations
and have additional portions of our international revenues denominated in
foreign currencies, we also could become subject to increased difficulties in
collecting accounts receivable and risks relating to foreign currency exchange
rate fluctuations.
Our business may be subject to sales and other taxes.
We do not collect sales or other similar taxes on goods sold by users through
our service. One or more states may seek to impose sales tax collection
obligations on companies such as ours that engage in or facilitate online
commerce. Several 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. These proposals, if adopted, could substantially impair the growth of
electronic commerce, and could diminish our opportunity to derive financial
benefit from our activities. The U.S. federal government recently enacted
legislation prohibiting states or other local authorities from imposing new
taxes on Internet commerce for a period of three years. This tax moratorium will
last only for a limited period and does not prohibit states or the Internal
Revenue Service from collecting taxes on our income, if any, or from collecting
taxes that are due under existing tax rules. A successful assertion by one or
more states or any foreign country that we should collect sales or other taxes
on the exchange of merchandise on our system could harm our business.
We are dependent on key personnel.
Our future performance will be substantially dependent on the continued services
of our senior management and other key personnel. Our future performance also
will depend on our ability to retain and motivate our other officers and key
employees. The loss of the services of any of our executive officers or other
key employees could harm our business. We do not have long-term employment
agreements with any of our key personnel and we do not maintain any "key person"
life insurance policies. Our new businesses are all dependent on attracting and
retaining key employees. The land-based auction businesses are particularly
dependent on specialists and senior management because of the relationships
these individuals have established with sellers who consign property for sale at
auction. Dean Kruse is particularly important to Kruse. The loss of any of these
individuals could result in the loss of significant future business and would
harm us. Such personnel are in great demand by other auction companies. In
addition, employee turnover frequently increases during the period following an
acquisition as employees evaluate possible changes in compensation, culture,
reporting relationships, and the direction of the business. Such increased
turnover could increase our costs and reduce our future revenues. Our future
success also will depend on our ability to attract, train, retain and motivate
highly skilled technical, managerial, marketing and customer support personnel.
Competition for these personnel is intense, especially for engineers and
especially in the San Francisco Bay Area, and we may be unable to successfully
attract, integrate or retain sufficiently qualified personnel. In making
employment decisions, particularly in the Internet and high-technology
industries, job candidates often consider the
27
<PAGE>
value of the stock options they are to receive in connection with their
employment. The recent decrease in our stock price may make it more difficult to
retain and motivate employees whose stock option strike prices are now
substantially above current market prices.
Our new land-based auction businesses need to continue to acquire properties.
The businesses of B&B and Kruse are both dependent on the continued
acquisition of high quality auction properties from sellers. Their future
success will depend in part on their ability to maintain an adequate supply of
high quality auction property, particularly fine and decorative arts and
collectibles and collectible automobiles, respectively. There is intense
competition for these pieces with other auction companies and dealers. In
addition, a small number of key senior management and specialists maintain the
relationships with the primary sources of auction property and the loss of any
of these individuals could adversely affect the business of B&B and Kruse. See
"We are dependent on key personnel."
Our new land-based auction businesses could suffer losses from price
guarantees, advances or rescissions of sales.
In order to secure high quality auction properties from sellers, B&B and Kruse
may give a guaranteed minimum price or a cash advance to a seller, based on the
estimated value of the property. If the auction proceeds are less than the
amount guaranteed, or less than the amount advanced and the seller does not
repay the difference, the company involved will suffer a loss. In addition,
under certain circumstances a buyer who believes that an item purchased at
auction does not have good title, provenance or authenticity may rescind the
purchase. Under such circumstances, the company involved will lose its
commissions and fees on the sale even if the seller, in accordance with the
terms and conditions of sale, in turn accepts back the item and returns the
funds he or she received from the sale.
We acquired real property with some of our new businesses.
In connection with the acquisition of Kruse and B&B we acquired real property
including land, buildings and interests in partnerships holding land and
buildings. We have no experience in managing real property. Ownership of this
property subjects us to new risks, including:
. the possibility of environmental contamination and the costs associated with
fixing any environmental problems;
. the possible need for structural improvements in order to comply with
zoning, seismic, disability act or other requirements; and
. possible disputes with tenants, partners or others.
Our market is intensely competitive.
The market for person-to-person trading over the Internet is new, rapidly
evolving and intensely competitive, and we expect competition to intensify 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. We currently or potentially compete with a number of other
companies. Our direct competitors include various online person-to-person
auction services, including Yahoo! Auctions, Amazon.com, Excite, Inc., Auction
Universe and a number of other small services, including those that serve
specialty or regional markets such as CityAuction. We also compete indirectly
with business-to-consumer online auction services such as Onsale, First Auction,
Surplus Auction and uBid. Lycos, Inc. Dell Computers and Priceline, Inc. have
all recently announced plans to enter the person-to-person trading arena.
Traditional auction companies such as Sotheby's are offering or have announced
plans to create Internet auction sites. We potentially face 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. Some of these potential competitors, including AOL and Microsoft
Corporation, currently offer business-to-consumer trading services and
classified ad services. Some of these companies also may introduce person-to-
person trading to their large user populations. Other large companies with
strong brand recognition and experience in
28
<PAGE>
online commerce, such as Cendant Corporation, QVC, USA Network and large
newspaper or media companies, also may seek to compete in the online auction
market. The principal competitive factors in our market include the following:
. volume of transactions and selection of goods;
. community cohesion and interaction;
. system reliability;
. customer service;
. reliability of delivery and payment by users;
. brand recognition;
. website convenience and accessibility;
. level of service fees; and
. quality of search tools.
Some current and many potential competitors have longer company operating
histories, larger customer bases and greater brand recognition in other business
and Internet markets than we do. Some of these competitors also have
significantly greater financial, marketing, technical and other resources. Other
online trading services may be acquired by, receive investments from or enter
into other commercial relationships with larger, well established and well
financed companies. As a result, some of our competitors with other revenue
sources may be able to devote more resources to marketing and promotional
campaigns, adopt more aggressive pricing policies and devote substantially more
resources to website and systems development than we are able to. Increased
competition may result in reduced operating margins, loss of market share and
diminished value of our brand. Some of our competitors have offered services for
free and others may do this as well. We may be unable to compete successfully
against current and future competitors.
In order to respond to changes in the competitive environment, we may, from
time to time, make pricing, service or marketing decisions or acquisitions that
could harm our business. For example, we implemented an insurance program that
generally insures items up to a value of $200, with a $25 deductible, for users
with a non-negative feedback rating at no cost to the user. The financial impact
of this insurance program is not yet known. New technologies may increase the
competitive pressures by enabling our competitors to offer a lower cost service.
Some Web-based applications that direct Internet traffic to certain websites may
channel users to trading services that compete with us.
Although we have established Internet traffic arrangements with several large
online services and search engine companies, these arrangements may not be
renewed on commercially reasonable terms. Even if these arrangements are
renewed, they may not result in increased usage of our service. In addition,
companies that control access to transactions through network access or Web
browsers could promote our competitors or charge us substantial fees for
inclusion.
The land-based auction business is intensely competitive. B&B competes with
two larger and better known auction companies, Sotheby's Holdings, Inc. and
Christie's International plc, as well as numerous regional auction companies. To
the extent that these companies increase their focus on the middle market
properties that form the core of B&B's business, its business may suffer. Kruse
is subject to competition from numerous regional competitors. In addition,
competition with Internet based auctions may harm the land-based auction
business.
29
<PAGE>
Although Billpoint's business is new, several companies are beginning to enter
this market and large competitors, including banks and credit card companies,
may become competitors.
Our business is dependent on the development and maintenance of the Web
infrastructure.
The success of our service will depend largely on the development and
maintenance of the Web infrastructure. This includes maintenance of a reliable
network backbone with the necessary speed, data capacity and security, as well
as timely development of complementary products 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, we cannot predict whether
the Web will prove to be a viable commercial marketplace in the long term. The
Web has experienced, and is likely to continue to experience, significant growth
in the numbers of users and amount of traffic. If the Web continues to
experience increased numbers of users, increased frequency of use or increased
bandwidth requirements, the Web infrastructure may be unable to support the
demands placed on it. In addition, the performance of the Web may be harmed by
increased users or bandwidth requirements.
The Web has experienced a variety of outages and other delays as a result of
damage to portions of its infrastructure, and it could face outages and delays
in the future. This might include outages and delays resulting from the "Year
2000" problem. See "Management's Discussion and Analysis, Year 2000." These
outages and delays could reduce the level of Web usage as well as the level of
traffic and the processing of auctions on our service. 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. The infrastructure and complementary products
or services necessary to make the Web a viable commercial marketplace for the
long term may not be developed successfully or in a timely manner. Even if these
products or services are developed, the Web may not become a viable commercial
marketplace for services such as those that we offer.
Our business is subject to online commerce security risks.
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. Our security
measures may not prevent security breaches. Our failure to prevent security
breaches could harm our business. Currently, a significant number of our users
authorize us to bill their credit card accounts directly for all transaction
fees charged by us. We rely 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. Advances in computer capabilities, new discoveries in the
field of cryptography, or other developments may result in a compromise or
breach of the technology used by us to protect customer transaction data. Any
such compromise of our security could harm our reputation and, therefore, our
business. In addition, a party who is able to circumvent our security measures
could misappropriate proprietary information or cause interruptions in our
operations. An individual has claimed to have misappropriated some of our
confidential information by breaking into our computer system. We may need to
expend significant resources to protect against security breaches or to address
problems caused by breaches. Security breaches like the recent one could damage
our reputation and expose us to a risk of loss or litigation and possible
liability. Our insurance policies carry low coverage limits, which may not be
adequate to reimburse us for losses caused by security breaches.
We must keep pace with rapid technological change to remain competitive.
The market in which we compete is characterized by rapidly changing
technology, evolving industry standards, frequent new service and product
introductions and enhancements and changing customer demands. These market
characteristics are worsened by the emerging nature of the Internet and the
apparent need of companies from a multitude of industries to offer Web-based
products and services. Our future success therefore will depend on our ability
to adapt to rapidly changing technologies, to adapt our services to evolving
industry standards and to continually improve the performance, features and
reliability of our service. Our failure to adapt to such changes
30
<PAGE>
would harm our business. In addition, the widespread adoption of new Internet,
networking or telecommunications technologies or other technological changes
could require substantial expenditures to modify or adapt our services or
infrastructure.
We need to develop new services, features and functions in order to expand.
We plan to expand our operations by developing new or complementary services,
products or transaction formats or expanding the breadth and depth of services.
We may be unable to expand our operations in a cost-effective or timely manner.
Even if we do expand, we may not maintain or increase our overall market
acceptance. If we launch a new business or service that is not favorably
received by consumers, it could damage our reputation and diminish the value of
our brand. We anticipate that future services may include pre- and post-trade
services, including the following:
. the scanning and uploading of photographs of listed items;
. authentication and appraisal; and
. arrangements to facilitate shipment of products.
We may pursue strategic relationships with third parties to provide many of
these services. By using third parties to deliver these services, we may be
unable to control the quality of these services and our ability to address
problems if any of these third parties fails to perform adequately will be
reduced. Expanding our operations in this manner also will require significant
additional expenses and development, operations and other resources and will
strain our management, financial and operational resources. The lack of market
acceptance of any new services could harm our business.
Our growth will depend on our ability to develop our brand.
We believe that our historical growth has been largely attributable to word of
mouth. We have benefited from frequent and high visibility media exposure both
nationally and locally. We do not expect the frequency or quality of this media
exposure to continue. However, we believe that continuing to strengthen our
brand will be critical to achieving widespread acceptance of our service.
Promoting and positioning our brand will depend largely on the success of our
marketing efforts and our ability to provide high quality services. In order to
promote our brand, we will need to increase our marketing budget and otherwise
increase our financial commitment to creating and maintaining brand loyalty
among users. Brand promotion activities may not yield increased revenues, and
even if they do, any increased revenues may not offset the expenses we incurred
in building our brand. If we do attract new users to our service, they may not
conduct transactions over our service on a regular basis. If we fail to promote
and maintain our brand or incur substantial expenses in an unsuccessful attempt
to promote and maintain our brand, our business would be harmed.
We may be unable to adequately protect or enforce our intellectual property
rights.
We regard the protection of our copyrights, service marks, trademarks, trade
dress and trade secrets as critical to our success. We rely on a combination of
patent, copyright, trademark, service mark and trade secret laws and contractual
restrictions to protect our proprietary rights in products and services. We have
entered into confidentiality and invention assignment agreements with our
employees and contractors, and nondisclosure agreements with parties with which
we conduct business in order to limit access to and disclosure of our
proprietary information. These contractual arrangements and the other steps
taken by us to protect our intellectual property may
31
<PAGE>
not prevent misappropriation of our technology or deter independent third-party
development of similar technologies. We pursue the registration of our
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 our services are made available online. We
have licensed in the past, and expect to license in the future, certain of our
proprietary rights, such as trademarks or copyrighted material, to third
parties. These licensees may take actions that might diminish the value of our
proprietary rights or harm our reputation. We also rely on certain technologies
that we license from third parties, such as Oracle Corporation, Microsoft and
Sun Microsystems Inc., the suppliers of key database technology, the operating
system and specific hardware components for our service. These third-party
technology licenses may not continue to be available to us on commercially
reasonable terms. The loss of this technology could require us to obtain
substitute technology of lower quality or performance standards or at greater
cost.
Our business is subject to consumer trends and discretionary consumer
spending.
We derive most of our revenues from fees received from sellers for listing
products for sale on our service and fees received from successfully completed
auctions. Our future revenues will depend upon continued demand for the types of
goods that are listed by users of our 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. A decline in the popularity of, or demand for,
certain collectibles or other items sold through our service could reduce the
overall volume of transactions on our service, resulting in reduced revenues. In
addition, consumer "fads" may temporarily inflate the volume of certain types of
items listed on our service, placing a significant strain upon our
infrastructure and transaction capacity. These trends also may cause significant
fluctuations in our operating results from one quarter to the next. Any decline
in demand for the goods offered through our service as a result of changes in
consumer trends could harm our business. A decline in consumer spending would
harm our new land-based auction businesses. Sales of fine and decorative art,
collectable cars and other collectibles would be adversely affected by a decline
in discretionary consumer spending, especially for luxury items. Changes in
buyer's tastes, economic conditions or consumer trends could cause declines in
the number or dollar volume of items auctioned and thereby harm the business of
these companies.
- ----------------------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------------------------
Interest Rate Risk
The primary objective of eBay's investment activities is to preserve principal
while at the same time maximizing yields without significantly increasing risk.
To achieve this objective, the Company maintains its portfolio of cash
equivalents, short-term and long-term investments in a variety of securities,
including both government and corporate obligations and money market funds.
The following table presents the fair value balances of the Company's cash
equivalents and short-term and long-term investments that are subject to
interest rate risk by year of expected maturity and average interest rates as of
June 30, 1999, (dollars in thousands):
<TABLE>
1999 2000 2001 2002 Total
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Cash equivalents $320,844
Average interest rates............................. 3.9%
</TABLE>
32
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Investments excluding equity investments........... $ 39,393 $120,865 $98,484 $145,706
Average interest rates............................. 3.3% 4.2% 3.7% 4.25%
Equity investments................................. $32,035
</TABLE>
Equity investments are subject to considerable market risk due to their
volatility. The balance at June 30, 1999 includes unrealized gains of $24.1
million. Based on the closing market prices on August 3, 1999, the unrealized
gain had declined to $8.6 million.
eBay did not hold derivative financial instruments as of June 30, 1999, and
has never held such instruments in the past. In addition, eBay had outstanding
debt as of June 30, 1999 of $18.8 million.
Foreign Currency Risk
Currently the majority of eBay's sales and expenses are denominated in U.S.
dollars and as a result the foreign exchange gains and losses to date have not
been significant. While the Company is effecting some transactions in foreign
currencies during 1999, it does not expect that foreign exchange gains or losses
will be significant. As the Company expands internationally, foreign currency
risks will become more important. The Company has not engaged in foreign
currency hedging to date.
- --------------------------------------------------------------------------------
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
On March 23, 1999, the Company was sued by Network Engineering Software,
Inc. in the U.S. District Court for the Northern District of California for the
Company's alleged willful and deliberate violation of a patent. The suit seeks
unspecified monetary damages as well as an injunction against the Company's
operations. It also seeks treble damages and attorneys' fees and costs. The
Company has denied these allegations and has filed a motion for summary
judgement with respect to certain of the patent claims on the basis that they
are invalid for the lack of novelty. The Company believes that it has
meritorious defenses against this suit and intends to vigorously defend itself.
The Company could be forced to incur material expenses during this defense and
in the event it were to lose this suit, its business would be harmed.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The effective date of the Company's first registration statement, filed on
Form S-1 under the Securities Act of 1933 (No. 333-59097) relating to the
Company's initial public offering of its Common Stock, was September 23, 1998.
A total of 12,042,825 shares of Company's Common Stock were sold at a price of
$6.00 per share to an underwriting syndicate led by Goldman, Sachs & Co.,
Donaldson, Lufkin & Jenrette Securities Corporation, BancBoston Robertson
Stephens Inc. and BT Alex. Brown Incorporated. The offering commenced on
September 24, 1998, and closed on September 29, 1998. An additional 32,175
shares of Common stock were sold on behalf of a selling stockholder as part of
the same offering. The initial public offering resulted in gross proceeds of
$72.5 million, $5.1 million of which was applied toward the underwriting
discount. Expenses related to the offering totaled approximately $1.2 million.
Net proceeds to the Company and selling stockholder were $66.1 million and
$180,000, respectively. From the time of receipt through June 30, 1999, all
proceeds were all applied toward:
. Purchases and installation of machinery and equipment, $34,587,000
. Repayments of indebtedness, $414,000; and
. Temporary investments in municipal bonds and notes, $31,099,000.
33
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 28, 1999. The
following is a brief description of each matter voted upon at the meeting and
the number of votes cast for, withheld, or against and the number of
abstentions with respect to each matter. Each director proposed by the Company
was elected and the two management proposals were approved by the stockholders.
(a) The stockholders reelected the two nominees for the Company's Board of
Directors:
Director Shares voted for Shares Withheld Authority
Scott D. Cook 113,260,713 65,523
Robert C. Kagle 113,261,420 64,816
(b) The stockholders approved the proposed amendment to the Certificate of
Incorporation:
Shares voted for: 101,133,710
Shares voted against: 3,766,541
Shares abstaining: 112,006
Broker Non-Votes: 8,313,979
(c) The stockholders approved the appointment of the auditors:
Shares voted for: 113,273,128
Shares voted against: 21,756
Shares abstaining: 31,352
ITEM 5. OTHER INFORMATION
Not applicable.
34
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
27.01 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K.
(1) On May 25, 1999, the Company filed a report on Form 8-K reporting
the acquisition of Kruse International.
(2) On June 6, 1999, the Company filed a report on Form 8-K reporting
the acquisition of Billpoint Inc.
(3) On June 6, 1999, the Company filed a report on Form 8-K reporting
the acquisition of Butterfield & Butterfield Auctioneers
Corporation.
(4) On July 26, 1999, the Company filed a report on Form 8-K/A which
amended the report on Form 8-K filed on May 25, 1999 and the
reports on Form 8-K filed on June 6, 1999.
35
<PAGE>
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
eBAY INC.
Date: August 6, 1999 By: /s/ Margaret C. Whitman
--------------------------------------------
Margaret C. Whitman
President and Chief Executive Officer
By: /s/ Gary F. Bengier
--------------------------------------------
Gary F. Bengier
Chief Financial Officer and
Vice President of Operations
36
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EBAY INC.'S
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001065088
<NAME> EBAY INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> JUN-30-1998 JUN-30-1999
<EXCHANGE-RATE> 1 1
<CASH> 37,285 347,553
<SECURITIES> 40,401 76,771
<RECEIVABLES> 16,056 30,382
<ALLOWANCES> (3,631) (6,474)
<INVENTORY> 1,139 543
<CURRENT-ASSETS> 97,590 472,855
<PP&E> 57,770 90,728
<DEPRECIATION> (13,708) (18,409)
<TOTAL-ASSETS> 149,536 922,209
<CURRENT-LIABILITIES> 24,656 72,368
<BONDS> 0 0
0 0
0 0
<COMMON> 123 128
<OTHER-SE> 100,415 838,084
<TOTAL-LIABILITY-AND-EQUITY> 149,536 922,209
<SALES> 0 0
<TOTAL-REVENUES> 33,468 92,280
<CGS> 0 0
<TOTAL-COSTS> 5,777 18,922
<OTHER-EXPENSES> 20,401 70,229
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (928) (1,042)
<INCOME-PRETAX> 6,858 9,443
<INCOME-TAX> 2,685 4,862
<INCOME-CONTINUING> 4,173 4,581
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,173 4,581
<EPS-BASIC> 0.12 0.04
<EPS-DILUTED> 0.04 0.03
</TABLE>
