<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 September 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)
</TABLE>
<TABLE>
<S> <C>
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 November 1, 1999, there were 129,338,498 shares of the Registrant's
Common Stock outstanding.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
FORM 10-Q
eBAY INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<C> <S> <C>
PART I FINANCIAL INFORMATION
ITEM 1: Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheet as of December 31, 1998
and September 30, 1999...................................... 1
Condensed Consolidated Statement of Income for the three and
nine months ended September 30, 1998 and 1999............... 2
Condensed Consolidated Statement of Cash Flows for the three
and nine months ended September 30, 1998 and 1999........... 3
Notes to Condensed Consolidated Financial Statements......... 4
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk... 35
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings............................................ 36
ITEM 2: Changes in Securities and Use of Proceeds.................... 36
ITEM 3: Defaults Upon Senior Securities.............................. 36
ITEM 4: Submission of Matters to a Vote of Security Holders.......... 36
ITEM 5: Other Information............................................ 36
ITEM 6: Exhibits and Reports on Form 8-K............................. 36
Signatures............................................................ 37
</TABLE>
i
<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, September 30,
1998 1999
------------ -------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents......................... $ 37,285 $246,538
Short-term investments............................ 40,401 139,406
Accounts receivable, net.......................... 12,425 27,589
Other current assets.............................. 7,479 25,692
-------- --------
Total current assets............................ 97,590 439,225
Property and equipment, net......................... 44,062 82,102
Investments......................................... -- 367,711
Deferred tax asset.................................. -- 11,277
Intangible and other assets, net.................... 7,884 9,327
-------- --------
$149,536 $909,642
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.................................. $ 9,997 $ 22,821
Accrued expenses.................................. 6,577 23,043
Debt and leases, current.......................... 4,047 12,447
Income taxes payable.............................. 1,380 10,665
Other current liabilities......................... 2,655 3,391
-------- --------
Total current liabilities....................... 24,656 72,367
Debt and leases, long-term.......................... 18,361 5,856
Other liabilities................................... 5,981 6,114
-------- --------
48,998 84,337
-------- --------
Stockholders' equity:
Common Stock, $0.001 par value; 195,000 shares
authorized; 123,715 and 129,102 shares issued and
outstanding...................................... 123 129
Additional paid-in capital........................ 87,779 807,183
Notes receivable from stockholders................ (1,130) (361)
Unearned compensation............................. (4,139) (5,461)
Retained earnings................................. 17,905 19,804
Accumulated other comprehensive income............ -- 4,011
-------- --------
Total stockholders' equity...................... 100,538 825,305
-------- --------
$149,536 $909,642
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
<PAGE>
eBAY INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share amounts; unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
---------------- -----------------
1998 1999 1998 1999
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net revenues:
Fees and services....................... $20,816 $57,632 $52,143 $147,827
Real estate rentals..................... 915 893 3,056 2,978
------- ------- ------- --------
Total net revenues.................... 21,731 58,525 55,199 150,805
------- ------- ------- --------
Cost of net revenues:
Fees and services....................... 3,947 16,687 8,635 34,821
Real estate rentals..................... 420 394 1,509 1,182
------- ------- ------- --------
Total cost of net revenues............ 4,367 17,081 10,144 36,003
------- ------- ------- --------
Gross profit........................ 17,364 41,444 45,055 114,802
------- ------- ------- --------
Operating expenses:
Sales and marketing..................... 9,414 27,230 21,317 67,104
Product development..................... 1,514 6,851 3,062 14,490
General and administrative.............. 4,249 11,779 11,049 29,481
Amortization of acquired intangibles.... 327 328 477 983
Merger related costs.................... -- -- -- 4,359
------- ------- ------- --------
Total operating expenses............ 15,504 46,188 35,905 116,417
------- ------- ------- --------
Income (loss) from operations............. 1,860 (4,744) 9,150 (1,615)
Interest and other income, net............ 190 7,524 686 14,880
Interest expense.......................... (351) (449) (1,279) (1,491)
------- ------- ------- --------
Income before income taxes................ 1,699 2,331 8,557 11,774
Provision for income taxes................ (1,238) (979) (3,923) (5,841)
------- ------- ------- --------
Net income................................ $ 461 $ 1,352 $ 4,634 $ 5,933
======= ======= ======= ========
Net income per share:
Basic................................... $ 0.01 $ 0.01 $ 0.12 $ 0.06
======= ======= ======= ========
Diluted................................. $ 0.00 $ 0.01 $ 0.04 $ 0.04
======= ======= ======= ========
Weighted average shares:
Basic................................... 48,385 115,980 39,002 105,864
======= ======= ======= ========
Diluted................................. 113,619 140,082 109,625 135,358
======= ======= ======= ========
Supplemental pro forma information:
Income before income taxes.............. $ 1,699 $ 2,331 $ 8,557 $ 11,774
Provision for income taxes as reported.. (1,238) (979) (3,923) (5,841)
Pro forma adjustment to provision for
income taxes (Note 3).................. 274 -- (1,239) (677)
------- ------- ------- --------
Pro forma net income...................... $ 735 $ 1,352 $ 3,395 $ 5,256
======= ======= ======= ========
Pro forma net income per share:
Basic................................... $ 0.02 $ 0.01 $ 0.09 $ 0.05
======= ======= ======= ========
Diluted................................. $ 0.01 $ 0.01 $ 0.03 $ 0.04
======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
eBAY INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1998 1999
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 4,634 $ 5,933
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for doubtful accounts and authorized
credits.............................................. 2,335 5,458
Depreciation.......................................... 2,219 9,556
Amortization of unearned compensation................. 2,317 3,653
Series B Preferred stock issued in exchange for
services............................................. 93 --
Employer portion of non-qualified tax expense......... -- (365)
Minority interest in deficit of combined companies.... 816 133
Loss on impairment of asset held for sale............. -- 100
Charitable contribution of Common Stock............... 1,215 --
Equity in partnership net loss........................ (3,099) --
Loss on sale of property.............................. (200) --
Amortization of acquired intangibles.................. 506 1,291
Changes in assets and liabilities:
Accounts receivable................................. (5,278) (20,622)
Other current assets................................ (3,028) (18,213)
Other non-current assets............................ (71) (6,215)
Accounts payable.................................... (2,029) 12,824
Accrued expenses.................................... 2,736 16,466
Income taxes payable................................ 322 9,285
Other liabilities................................... 307 736
-------- ---------
Net cash provided by operating activities................. 3,995 20,020
-------- ---------
Cash flows from investing activities:
Purchases of property and equipment..................... (10,031) (47,536)
Purchases of short-term investments, net................ -- (99,005)
Purchases of long-term investments...................... -- (363,700)
Purchases of intangible assets.......................... (887) (2,625)
-------- ---------
Net cash used in investing activities..................... (10,918) (512,866)
-------- ---------
Cash flows from financing activities:
Proceeds from issuance of Stock, net.................... 71,446 706,109
Stockholder loan repayments............................. 3 712
Principal proceeds /(payments) on long-term debt and
leases................................................. 2,008 (4,105)
Stockholder contributions............................... 5,643 3,275
Stockholder distributions............................... (3,071) (3,892)
-------- ---------
Net cash provided by financing activities................. 76,029 702,099
-------- ---------
Net increase in cash and cash equivalents................. 69,016 209,253
Cash and cash equivalents at beginning of period.......... 12,109 37,285
-------- ---------
Cash and cash equivalents at end of period................ $ 81,215 $ 246,538
======== =========
Non-cash investing and financing activites:
Common Stock issued for notes receivable................ $ 1,468 $ --
Common Stock issued for acquisition..................... $ 2,000 $ --
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<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 September 30, 1999, and for the three and nine months ended
September 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 September 30, 1999 and for the three and nine
months ended September 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 Report on Form 8-K for the year ended
December 31, 1998 filed on September 14, 1999, 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 nine
months ended September 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. 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. Revenues 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.
4
<PAGE>
eBAY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair value of financial instruments
The Company's financial instruments, including cash, cash equivalents,
accounts receivable and accounts payable are carried at cost, which
approximates their fair value because of the short-term maturity of these
instruments. Debt and capital lease obligations are carried at cost, which
approximates fair value due to the proximity of the implicit rates of the
financial instruments and the prevailing rates of similar instruments. Short
and long-term investments which include marketable equity securities and
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, remediation obligations are probable
and the costs can be reasonably estimated. The 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 included within other liabilities.
5
<PAGE>
eBAY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 Nine Months
Ended Ended
September 30, September 30,
---------------- ----------------
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income............................... $ 461 $ 1,352 $ 4,634 $ 5,933
Accretion of Series B Preferred Stock to
redemption value........................ -- -- (46) --
------- ------- ------- -------
Net income available to common
stockholders............................ $ 461 $ 1,352 $4 ,588 $ 5,933
======= ======= ======= =======
Denominator:
Weighted average shares.................. 85,637 131,681 81,035 126,555
Weighted average common shares subject to
repurchase agreements................... (37,252) (15,701) (42,033) (20,691)
------- ------- ------- -------
Denominator for basic calculation.......... 48,385 115,980 39,002 105,864
Weighted average effect of dilutive
securities:
Series A Preferred Stock................. 14,104 -- 14,757 --
Series B Preferred Stock................. 11,908 -- 10,686 --
Stock warrants........................... -- -- 1,356 --
Weighted average common shares subject to
repurchase agreements................... 37,252 15,701 42,033 20,691
Employee stock options................... 1,970 8,401 1,791 8,803
======= ======= ======= =======
Denominator for diluted calculation........ 113,619 140,082 109,625 135,358
======= ======= ======= =======
Net income per share:
Basic.................................... $ 0.01 $ 0.01 $ 0.12 $ 0.06
======= ======= ======= =======
Diluted.................................. $ 0.00 $ 0.01 $ 0.04 $ 0.04
======= ======= ======= =======
</TABLE>
Note 3--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.
6
<PAGE>
eBAY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4--Comprehensive Income:
The components of comprehensive income are as follows, (in thousands):
<TABLE>
<CAPTION>
Nine Months
Three Months Ended Ended
September 30, September 30,
------------------ --------------
1998 1999 1998 1999
------------------ ------ -------
<S> <C> <C> <C> <C>
Net income................................ $ 461 $ 1,352 $4,634 $ 5,933
Unrealized gains on securities............ -- 11,691 -- 11,691
Unrealized loses on securities............ -- (2,783) -- (2,783)
Foreign currency translation gains........ -- 13 -- 13
------- ---------- ------ -------
461 10,273 4,634 14,854
Income tax effect related to gains on
items of other comprehensive income...... -- (4,910) -- (4,910)
------- ---------- ------ -------
Comprehensive income.................. $ 461 $ 5,363 $4,634 $ 9,944
======= ========== ====== =======
</TABLE>
Unrealized gains on securities for the three and nine months ended September
30, 1999, consists of a net unrealized gain from an investment in StarMedia,
Inc. common stock.
Note 5--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 of the current operations of B&B and Kruse.
7
<PAGE>
eBAY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 Three Months Ended
September 30, 1998 September 30, 1999
------------------------------ -------------------------------
Online Offline Consolidated Online Offline Consolidated
------- ------- ------------ -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues from
external customers..... $12,935 $ 8,796 $ 21,731 $ 49,496 $ 9,029 $ 58,525
======= ======= ======== ======== ======= ========
Operating income (loss)
before amortization of
acquired intangibles,
stock compensation, and
merger related costs... $ 2,733 $ 460 $ 3,193 $ (2,738) $ (199) $ (2,937)
Interest and other
income, net............ 122 68 190 7,401 123 7,524
Interest expense........ (11) (340) (351) (30) (419) (449)
Amortization of
intangibles, stock
compensation, and
merger related costs... (1,333) -- (1,333) (1,705) (102) (1,807)
------- ------- -------- -------- ------- --------
Income (loss) before
income taxes, as
reported............... $ 1,511 $ 188 $ 1,699 $ 2,928 $ (597) $ 2,331
======= ======= ======== ======== ======= ========
Total assets............ $89,500 $58,191 $147,691 $837,079 $72,563 $909,642
======= ======= ======== ======== ======= ========
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1999
------------------------------ -------------------------------
Online Offline Consolidated Online Offline Consolidated
------- ------- ------------ -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues from
external customers..... $27,857 $27,345 $ 55,199 $121,698 $29,107 $150,805
======= ======= ======== ======== ======= ========
Operating income before
amortization of
acquired intangibles,
stock compensation, and
merger related costs... $ 8,289 $ 5,059 $ 13,348 $ 5,603 $ 2,003 $ 7,606
Interest and other
income, net............ 223 463 686 14,618 262 14,880
Interest expense........ (36) (1,243) (1,279) (32) (1,459) (1,491)
Amortization of
intangibles, stock
compensation,
charitable contribution
of Common Stock and
merger related costs... (4,198) -- (4,198) (4,830) (4,391) (9,221)
------- ------- -------- -------- ------- --------
Income (loss) before
income taxes, as
reported............... $ 4,278 $ 4,279 $ 8,557 $ 15,359 $(3,585) $ 11,774
======= ======= ======== ======== ======= ========
Total assets............ $89,500 $58,191 $147,691 $837,079 $72,563 $909,642
======= ======= ======== ======== ======= ========
</TABLE>
8
<PAGE>
eBAY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6--Investments:
At September 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....... $ 69,171 $ -- $ (54) $ 69,117
Corporate bonds................. 38,210 -- (29) 38,181
Government bonds................ 32,071 -- (252) 31,819
Other........................... 289 -- -- 289
-------- ------ ------- --------
$139,741 $ -- $ (335) $139,406
======== ====== ======= ========
Long-term investments:
Municipal bonds and notes....... $328,683 $ -- $(2,159) $326,524
Corporate bonds................. 2,321 -- (16) 2,305
Government bonds................ 25,433 -- (232) 25,201
Equity instruments.............. 6,900 6,781 -- 13,681
-------- ------ ------- --------
$363,337 $6,781 $(2,407) $367,711
======== ====== ======= ========
</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................................................ $139,406
Due after one year................................................. 367,711
--------
$507,117
========
</TABLE>
Note 7--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, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Revolving line of credit, prime rate............ $ 2,991 $ --
Mortgage notes, prime plus 1%, due September 31,
2002........................................... 1,905 1,824
Mortgage notes, LIBOR plus 1.75%, due July 15,
2001........................................... 3,638 3,537
Mortgage notes, 8.25%, due May 15, 2000......... 12,249 12,028
10.5% loan on foreclosed property due October
2010........................................... 618 576
8.5% loan in connection with Dunnings
acquisition due June 30, 2000.................. 500 --
6%-10.5% notes, due December 1999 through
January 2003................................... 507 338
------- --------
Subtotal...................................... 22,408 18,303
Less: Current portion........................... (4,047) (12,447)
------- --------
$18,361 $ 5,856
======= ========
</TABLE>
9
<PAGE>
eBAY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1998, 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
accrued interest on outstanding borrowings at a rate equal to the bank's prime
rate. The line of credit expired and was not renewed at September 30, 1999.
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. At September 30, 1999, the note had been paid in full.
Note 8--Contingencies:
Lawsuits
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
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 answered, denying these allegations and alleging that the patent
is invalid. Discovery has commenced and the Company has filed a summary
judgment motion seeking to invalidate certain claims in the patent. The court
has determined that this motion was not timely filed and the Company have
filed a new summary judgment motion seeking to invalidate the patent. 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 was to lose
this lawsuit, our business would be harmed.
On September 1, 1999, the Company was served with a lawsuit filed by Randall
Stoner, on behalf of the general public, in San Francisco Superior Court (No.
305666). The lawsuit alleges that the Company violated Section 17200 of the
California Business & Professions Code, a statute that relates to unfair
competition, based upon the listing of "bootleg" or "pirate" recordings by the
Company's users, allegedly in violation of California penal statutes relating
to the sale of unauthorized audio recordings. The lawsuit seeks declaratory
and injunctive relief, restitution and legal fees. The Company has filed a
general demurrer which has been sustained by the court with leave to amend.
The plaintiff has filed an amended complaint. Discovery has commenced. The
Company believes it has meritorious defenses to this lawsuit and intends to
defend itself vigorously. However, even if successful, this defense could be
costly and, if the Company was to lose this lawsuit, our business could 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.
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eBAY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9--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 was granted 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 has developed or 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. The
Company is recognizing these fees as sales and marketing expense over the
greater of: i) the ratio of the number of impressions delivered over the total
number of contracted impressions, or ii) a straight-line basis beginning with
the initial delivery of impressions and extending over the term of the
contract. At September 30, 1999, the Company had advanced $18.8 million under
the amended agreement, and had recognized $2.6 million as advertising expense
commencing with the launch of the co-branded program and delivery of
advertising impressions.
In conjunction with the expanded strategic relationship, AOL terminated 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 continued to deliver impressions under the original agreement
through August 1999.
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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 October 27, 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
revenues are 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 revenues, 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.
During 1999, B&B withdrew its registration statement for its initial public
offering. Accordingly, the Company recorded a charge of approximately $2.6
million related to the costs of the
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<PAGE>
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 conduct 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 an 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
On 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 common
stock. The merger has been accounted for as a pooling of interests.
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Results of Operations
The following tables set 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 operating results for the three and nine months
ended September 30, 1998 and 1999 are not necessarily indicative of the
results that may be expected for any future period.
Historical Results of Operations
<TABLE>
<CAPTION>
Nine Months
Three Months Ended Ended
September 30, September 30,
------------------- --------------
1998 1999 1998 1999
--------- --------- ------ ------
<S> <C> <C> <C> <C>
Net revenues.............................. 100.0% 100.0% 100.0% 100.0%
Cost of net revenues...................... 20.1 29.2 18.4 23.9
-------- --------- ------ ------
Gross profit.............................. 79.9 70.8 81.6 76.1
-------- --------- ------ ------
Operating expenses:
Sales and marketing..................... 43.3 46.5 38.6 44.5
Product development..................... 7.0 11.7 5.5 9.6
General and administrative.............. 19.5 20.1 20.0 19.5
Amortization of acquired intangibles.... 1.5 0.6 0.9 0.7
Merger related costs.................... 0.0 0.0 0.0 2.9
-------- --------- ------ ------
Total operating expenses.............. 71.3 78.9 65.0 77.2
-------- --------- ------ ------
Income from operations.................... 8.6 (8.1) 16.6 (1.1)
Interest and other income (expense), net.. (0.8) 12.1 (1.1) 8.9
-------- --------- ------ ------
Income before income taxes................ 7.8 4.0 15.5 7.8
Provision for income taxes................ (5.7) (1.7) (7.1) (3.9)
-------- --------- ------ ------
Net income................................ 2.1% 2.3% 8.4% 3.9%
======== ========= ====== ======
Supplemental online operating data(1):
Number of registered users at end of
period (in thousands).................. 1,265 7,701 1,265 7,701
Gross merchandise sales(2) (in
millions).............................. $ 195 $ 741 $ 438 $1,904
Number of auctions listed (in
thousands)............................. 9,236 36,210 20,029 88,490
</TABLE>
- --------
(1) Represents transactions conducted by users on 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).
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<PAGE>
Sequential Quarterly Financial Information
<TABLE>
<CAPTION>
Three months ended
---------------------------------
March 31, June 30, September 30,
1999 1999 1999
--------- -------- -------------
(in thousands; unaudited)
<S> <C> <C> <C>
Net revenues................................... $42,801 $49,479 $58,525
Cost of net revenues........................... 7,977 10,945 17,081
------- ------- -------
Gross profit................................... 34,824 38,534 41,444
------- ------- -------
Operating expenses:
Sales and marketing.......................... 16,958 22,916 27,230
Product development.......................... 2,163 5,476 6,851
General and administrative................... 7,614 10,088 11,779
Amortization of acquired intangibles......... 328 327 328
Merger related costs......................... -- 4,359 --
------- ------- -------
Total operating expenses................... 27,063 43,166 46,188
------- ------- -------
Income from operations......................... 7,761 (4,632) (4,744)
Interest and other income, net................. 275 6,039 7,075
------- ------- -------
Income before income taxes..................... 8,036 1,407 2,331
Provision for income taxes..................... (4,271) (591) (979)
------- ------- -------
Net income..................................... $ 3,765 $ 816 $ 1,352
======= ======= =======
</TABLE>
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 business. In the online business, 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. With traditional auction operations, B&B typically
experiences its peak revenue in the second and fourth quarters, while Kruse
experiences its peak revenue in the third quarter.
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 that during the next several quarters its gross margin
will likely remain at levels lower than those experienced historically,
primarily due to the effects of depreciation on equipment and software
purchases, 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 September 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 third quarter, which affected absolute dollar
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
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<PAGE>
increased from $21.7 million and $55.2 million in the three and nine months
ended September 30, 1998, to $58.5 million and $150.8 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 nine months ended September 30,
1999 include a $3.9 million credit granted to users for the June 10th site
outage. The seasonally lower offline net revenues at B&B during the third
quarter of 1999 were offset in part by the seasonally strong third quarter at
Kruse with the completion of its annual Auburn auction.
The Company expects that online net revenues will continue to grow in the
fourth quarter. As experienced during the third quarter of 1999, the
correlation between the number of registered users and gross merchandise sales
may vary from historical relationships as new users fail to display the
efficacy of those seen historically.
Cost of Net Revenues
Cost of net revenues for online operations consist primarily of costs
associated with customer support and website operations. These costs are
composed primarily of 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
consists primarily of compensation for auction, appraisal, and customer
support personnel and direct auction costs, such as event site rental. Cost of
net revenues increased from $4.4 million and $10.1 million or 20.1% and 18.4%
of net revenues in the three and nine months ended September 30, 1998, to
$17.1 million and $36.0 million or 29.2% and 23.9% of net revenues in the
comparable periods of 1999. The increases 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. During the third
quarter of 1999, the Company realized the full quarter effect of depreciation
on assets purchased during the second quarter, as well as incremental
depreciation expense related to the $8.8 million of capital expenditures made
during the current period. Cost of net revenues, 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. As a result, the Company may experience gross margins at
lower levels than those seen historically.
Sales and Marketing
The Company's sales and marketing expenses for both the online and
traditional auction businesses consist 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 $9.4
million and $21.3 million or 43.3% and 38.6% of net revenues in the three and
nine months ended September 30, 1998, to $27.2 million and $67.1 million or
46.5% and 44.5% of net revenues in the comparable periods of 1999. The
increases resulted primarily from continued growth in the number of personnel,
increases in online advertising including impressions delivered under the AOL
agreement, expenses associated with Kruse's Auburn auction, and other
promotional expenses. Net advertising costs were largely unchanged as the
Company shifted advertising expenditures from its national radio campaign
during the second quarter of 1999 to online advertising during the third
quarter. Online sales and marketing expenses are expected to increase in the
near term, due to a full quarter effect 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
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<PAGE>
equipment used for development and an allocation of overhead. The Company's
product development expenses increased from $1.5 million and $3.1 million or
7.0% and 5.5% of net revenues in the three and nine months ended September 30,
1998, to $6.9 million and $14.5 million or 11.7% and 9.6% of net revenues in
the comparable periods of 1999. The increase in absolute dollars resulted
primarily from depreciation on newly acquired equipment, the increase in the
number of product development staff and payments to outside contractors. The
year to year increase from 1998 to 1999 was particularly impacted with the
addition of Billpoint and its development efforts during 1999. 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 that improves and expands 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 in
absolute dollars from $4.2 million and $11.0 million or 19.5% and 20.0% of net
revenues in the three and nine months ended September 30, 1998, to $11.8
million and $29.5 million or 20.1% and 19.5% 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, public company
expenses including SEC filing fees and allocations of overhead. The Company
anticipates that general and administrative expenses will increase in absolute
dollars and decrease as a percentage of net revenues in future periods as
eBay's online business becomes a progressively larger portion of the
consolidated business. Such expenses in the online business are typically
lower as a percentage of net revenues than the traditional auction businesses.
Amortization of Acquired Intangibles
During the three and nine months ended September 30, 1998, the Company
recognized $327,000 and $477,000 in amortization associated with intangible
assets acquired in the acquisition of Jump, Inc. ("Jump"), compared to
expenses of $328,000 and $983,000 in the comparable periods of 1999. The
majority of the Jump acquired intangibles were fully amortized during the
third quarter of 1999, with the remainder continuing through the third quarter
of 2000. Other acquisition related intangibles will be amortized at varying
rates through 2009. From time to time the Company has, and expects to
continue, purchasing assets or businesses in order to maintain its leadership
role in online personal trading. These purchases may result in the creation of
intangible assets and lead to corresponding increases in the amortization of
acquired intangibles in future periods.
Merger Related Costs
During the nine months ended September 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 results of operations.
Interest and Other Income, Net
The Company's interest and other income, net, increased from $190,000 and
$686,000 in the three and nine months ended September 30, 1998, to $7.5
million and $14.9 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. Sequential quarterly
growth relates to a full quarter of interest being earned on the secondary
offering proceeds. The Company expects that interest income will decrease
during the fourth quarter of 1999 as more invested cash is used to fund
operations.
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<PAGE>
Provision for Income Taxes
The Company's effective federal and state income tax rate was 72.9% and
45.8% in the three and nine months ended September 30, 1998 compared to 42.0%
and 49.6% 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 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 $818,000 and $2.3 million was
amortized in the three and nine months ended September 30, 1998 compared to
$1.4 million and $3.7 million in the comparable periods 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 $4.0 million in the nine
months ended September 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, accrued expenses and taxes payable, offset by
increase in prepaid assets including the payment advanced to AOL in connection
with the strategic relationship, and a $15.3 million increase in accounts
receivable. 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.
Net cash used in investing activities totaled $10.0 million in the nine
months ended September 30, 1998 and $512.9 million in the same period of 1999.
Net cash used in investing activities in the 1998 period was primarily the
result of purchases of property and equipment totaling $10.0 million. Net cash
used in investing activities in the 1999 period 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 $76.0 million in the nine
months ended September 30, 1998, compared to $702.1 million in the same period
of 1999. Net cash provided by financing activities in 1998 resulted primarily
from proceeds from the Company's initial public offering of its Common Stock.
Net cash provided by financing activities in 1999 resulted almost entirely
from sales of Common Stock during the Company's secondary offering.
eBay expects capital expenditures for the remainder of 1999 to be at least
as high as those seen in the third quarter of 1999. Such expenditures will
primarily be for computer equipment, furniture and fixtures and leasehold
improvements. In March 1999, eBay and AOL expanded the scope of their
strategic relationship. Under this new agreement eBay will pay AOL $75.0
million over the four-year term of the contract. Of this amount, $18.8 million
had been advanced through September 30, 1999.
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<PAGE>
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 made 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. The Company is engaged in a testing program to
further ensure Year 2000 compliance. This program may identify additional
modifications to the Company's internal systems which will need to be made
prior to December. If any such modifications are not made, or if problems
exist that are not identified, the Company 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 is well underway and it
is expected to be completed in 1999. 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. The Company
is reviewing the Year 2000 status of the software and systems of its newly
acquired businesses. The Company expects that the incremental cost of the
reviews of software and systems will not exceed $200,000. Internal testing of
the Company's website is expected to be completed in November 1999. The cost
of a full test of the Company's site and of any necessary upgrades or changes
cannot currently be precisely estimated but is not currently expected to
exceed $1.0 million. 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 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.
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Risk Factors that may Affect Results of Operations and Financial Condition
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also may impair our business
operations. If any of the following risks actually occur, our business could
be harmed. References in this document to "we," "our," and "us" refer to Ebay
Inc., and its consolidated subsidiaries.
We have a limited operating history
Our company was formed as a sole proprietorship in September 1995 and we
incorporated in May 1996. We have only a limited operating history on which
you can base an evaluation of our business and prospects. As an online
commerce company in the early stage of development, we face increased risks,
uncertainties, expenses and difficulties. You should consider an investment in
our company in light of these risks, uncertainties, expenses and difficulties.
To address these risks and uncertainties, we must do the following:
. maintain and increase our number of registered users, items listed on
our service and completed auctions;
. maintain and grow our website and customer support operations;
. continue to make trading through our service safer for users;
. maintain and enhance our brand;
. successfully execute our business and marketing strategy;
. continue to develop and upgrade our technology and information
processing systems;
. continue to enhance our service to meet the needs of a changing market;
. provide superior customer service;
. respond to competitive developments; and
. attract, integrate, retain and motivate qualified personnel.
We may be unable to accomplish one or more of these things, which could
cause our business to suffer. In addition, accomplishing one or more of these
things might be very expensive, which could harm our financial results.
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;
. consumer confidence in the security of transactions on our website;
. our ability to upgrade and develop our systems and infrastructure to
accommodate growth;
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. technical difficulties or service interruptions;
. the amount and timing of operating costs and capital expenditures
relating to expansion of our business, operations and infrastructure;
. our ability to attract new personnel in a timely and effective manner;
. our ability to retain key employees in both our online businesses and
our new acquisitions;
. the ability of our land-based auction businesses to acquire high quality
properties for auction;
. the timing, cost and availability of advertising in traditional media
and on other websites and online services;
. the timing of marketing expenses under existing contracts;
. consumer trends and popularity of some categories of collectible items;
. the success of our brand building and marketing campaigns;
. 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; 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 listed and 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 could harm our business and also could anger 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.
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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. If our
new hires are not good hires, or if we are unsuccessful in training and
integrating these new employees, our business may be harmed. 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.
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:
. maintain sufficient transaction volume to attract buyers and sellers;
. manage the costs of our business, including the costs associated with
maintaining and developing our website, customer support and
international expansion;
. increase our brand name awareness; and
. provide our customers with superior community and trading experiences.
We are investing heavily in marketing and promotion, customer support,
further development of our website, technology and operating infrastructure
development. The costs of these investments have reduced our margins and are
expected to remain significant into the future. In addition, 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 may harm our profitability. The emergence of
competitors, many of whom are offering free auctions to users, limits our
ability to raise user fees in response to declines in profitability. In
addition, we are spending in advance of anticipated growth, which may also
harm our profitability. Our historic growth rates are not sustainable and we
expect in the near term that our costs, particularly those related to site
operations, customer support, other infrastructure and our international,
regional and premium initiatives, will increase substantially. 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.
Acquisitions could result in dilution, 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 the four acquisitions described earlier in this
document. 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;
. 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.
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We have almost no experience in managing this integration process. Most of
our acquisitions to date have involved either family run companies or very
early stage companies, which may exacerbate these integration issues.
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.
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. We may be unable 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 revenues that can be substantial and may cause some users to switch to
our competitors. 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. in Santa
Clara, California and AboveNet in San Jose, 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 either the Exodus or AboveNet facility could
result in interruptions in our services. In addition, the failure by Exodus or
AboveNet 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
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service. Interruptions in our service will reduce our revenues and profits,
and our future revenues and profits will be harmed if our users believe that
our system is unreliable.
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 has stated that he can in the future
damage or change our system or take confidential information. We have also
experienced other types of attacks on our system. Any actions like these could
harm us. Actions like these may be very expensive to remedy and could damage
our reputation and discourage new and existing users from using our service.
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 discontinuing certain service offerings. 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 received significant and continuing 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 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 they have been defrauded by other users. We also periodically
receive complaints from buyers as to the quality of the goods purchased.
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 expect to continue to receive requests from users requesting
reimbursement or threatening legal action against us if no reimbursement is
made. This sort of litigation could be costly for us, divert
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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 have provided further information in connection with
this ongoing inquiry. In order to protect the investigation, the court has
ordered that no further public disclosures be made with respect to the matter.
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 can 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. As a result, 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 or other penalties could harm
our business.
Some of our businesses are subject to regulation and others may be in the
future
Both B&B and Kruse are subject to regulation in some jurisdictions governing
the manner in which live auctions are conducted. Both are required to obtain
licensure in these jurisdictions with respect to their business or to permit
the sale of categories of items (e.g. wine, automobiles, real estate). These
licenses generally must be renewed regularly 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, its business 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. These claims could result in costly litigation or could 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 these 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.
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
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United States and foreign law for defamation, libel, invasion of privacy,
negligence, copyright or trademark infringement, or other theories based on
the nature and content of the materials disseminated through their services.
Several private lawsuits seeking to impose liability upon other online
services companies currently are pending. In addition, federal, state and
foreign legislation has been proposed that imposes liability for or prohibits
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. Claims like these
become more likely and have a higher 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 judgment motion seeking to invalidate
certain claims in the patent. The court has determined that this motion was
not timely filed and we have filed a new summary judgment motion seeking to
invalidate 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.
On September 1, 1999, we were served with a lawsuit filed by Randall Stoner,
on behalf of the general public, in San Francisco Superior Court (No. 305666).
The lawsuit alleges that we violated Section 17200 of the California Business
& Professions Code, a statute that relates to unfair competition, based upon
the listing of "bootleg" or "pirate" recordings by our users, allegedly in
violation of California penal statutes relating to the sale of unauthorized
audio recordings. The lawsuit seeks declaratory and injunctive relief,
restitution and legal fees. We have filed a general demurrer which was
sustained by the court with leave to amend. The plaintiff has filed an amended
complaint. Discovery has commenced. We believe we have meritorious defenses to
this lawsuit and intend to defend ourselves vigorously. However, even if
successful, this defense could be costly and, if we were to lose this lawsuit,
our business could 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.
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:
. actual or anticipated variations in our quarterly operating results;
. unscheduled system downtime;
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. 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 regulations;
. 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 future, which could
harm our business. In addition, as the nature of the products listed by our
users changes, we may become subject to new regulatory restrictions.
Several states 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 recently
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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
become obligated to comply with these laws. Compliance may be more costly or
may require us to change our business practices or restrict our service
offerings relative to those in the United States. 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.
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. 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.
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 net
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. Even if we are
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successful, the costs of operating internationally are expected to exceed our
international net revenues for at least 12 months in most countries. As we
continue to expand internationally, we are subject to risks of doing business
internationally, including the following:
. regulatory requirements, including regulation of "auctions," 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;
. 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. In 1998 the U.S. federal government
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 would 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
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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 value of the stock
options they are to receive in connection with their employment. Fluctuations
in our stock price may make it more difficult to retain and motivate employees
whose stock option strike prices are 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 harm the business of B&B and Kruse.
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 these 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, the Fairmarket
Auction Network, Disney/Infoseek and a number of other small services,
including those that serve specialty or regional markets such as CityAuction.
We currently believe that more than 500 companies are using an auction format
for
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consumer-to-consumer or business-to-consumer sales. In mid-September,
Fairmarket, a provider of auction software and services, announced that it had
assembled an auction network including Microsoft's MSN, Excite@Home, Dell
Computer, ZD Net, Lycos and more than 100 others. Listings from all of these
companies would be aggregated and available at each member's site. We also
compete indirectly with business-to-consumer online auction services such as
Onsale, First Auction, Surplus Auction and uBid. 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. Other large companies
with strong brand recognition and experience in 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. Finally, some companies
are "aggregating" our auction listings with those of our competitors thereby
indirectly competing with us.
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.
Current and 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.
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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. 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
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. 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 could be harmed by Year 2000 compliance 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. We have reviewed our internal programs and
have determined that there are no significant Year 2000 issues within our
systems or services. We have made modifications to our 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. We
are engaged in a testing program to further ensure year 2000 compliance. This
program may identify additional modifications to our internal systems which
will need to be made prior to the end of December. If any such modifications
are not made, or if problems exist that are not identified, we could face
unexpected expenses to fix the problem or unanticipated website outages,
either of which would harm our business. We use third-party equipment and
software that may not be Year 2000 compliant. Following a website outage in
June 1999, we undertook a comprehensive site review including a further review
of our 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 is ongoing and
it is expected to be completed during 1999. The cost of this implementation is
not expected to be material and is being accomplished through a reallocation
of internal resources. We are also conducting a further review of third party
software and embedded systems used in our online auction business.
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In connection with our acquisitions of each of our newly acquired
businesses, we received representations and warranties that the systems and
software of these businesses are Year 2000 compliant. We are reviewing the
Year 2000 status of the software and systems of our newly acquired businesses.
We expect that the incremental cost of the reviews of software and systems
will not exceed $200,000. The cost of a full test of our site and of any
necessary upgrades or changes cannot currently be precisely estimated but is
not currently expected to exceed $1,000,000. Internal testing of our website
is expected to be completed in November 1999. We may be harmed if necessary
upgrades or changes are not identified, or if identified are not timely and
successfully implemented at an acceptable cost. We also may be harmed by Year
2000 problems at our vendors and business partners. For example, we rely on
credit card companies to collect the majority of our 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 our credit card vendors or other third-party equipment or software
vendors to properly process dates for the year 2000 and thereafter could
require us to incur unanticipated expenses in seeking alternative means of
payment or hardware or software replacements. It also could result in loss of
revenues or unanticipated eBay website outages. Our marketing efforts are also
dependent on the continued operation of Internet portals and other Internet
sites on which we advertise.
Although we have developed contingency plans with respect to collecting
payment under these circumstances, we are 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. Our 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 our business.
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 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 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-
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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 protect or enforce our intellectual property rights
adequately
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 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
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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 September 30, 1999, (dollars in thousands):
<TABLE>
<CAPTION>
1999 2000 2001 2002 Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash equivalents............. $246,538 $246,538
Average interest rates....... 3.9%
Investments excluding equity
investments................. $ 51,841 $156,019 $130,026 $155,550 $493,436
Average interest rates....... 3.3% 4.2% 3.7% 4.3%
Equity investments........... $ 13,681
</TABLE>
Equity investments are subject to considerable market risk due to their
volatility. The balance at September 30, 1999 includes unrealized gains of
$6.8 million.
eBay did not hold derivative financial instruments as of September 30, 1999,
and has never held such instruments in the past. In addition, eBay had
outstanding debt as of September 30, 1999 of $18.2 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 judgment motion seeking to invalidate
certain claims in the patent. The court has determined that this motion was
not timely filed and we have filed a new summary judgment motion seeking to
invalidate 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.
On September 1, 1999, we were served with a lawsuit filed by Randall Stoner,
on behalf of the general public, in San Francisco Superior Court (No. 305666).
The lawsuit alleges that we violated Section 17200 of the California Business
& Professions Code, a statute that relates to unfair competition, based upon
the listing of "bootleg" or "pirate" recordings by our users, allegedly in
violation of California penal statutes relating to the sale of unauthorized
audio recordings. The lawsuit seeks declaratory and injunctive relief,
restitution and legal fees. We have filed a general demurrer which has been
sustained by the court with leave to amend. The plaintiff has filed an amended
complaint. Discovery has commenced. We believe we have meritorious defenses to
this lawsuit and intend to defend ourselves vigorously. However, even if
successful, this defense could be costly and, if we were to lose this lawsuit,
our business could be harmed.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
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 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.
(2) On September 18, 1999, the Company filed a report on Form 8-K,
reporting the consolidated financial statements and management's discussion
and analysis of financial condition and results of operations for the years
ended December 31, 1996, 1997 and 1998, restated to reflect the combined
operations of the Company and each of the entities acquired during May and
June 1999 accounted for using the pooling of interests methodology.
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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: November 12, 1999
/s/ Margaret C. Whitman
By: _________________________________
Margaret C. Whitman
President and Chief Executive
Officer
/s/ Gary F. Bengier
By: _________________________________
Gary F. Bengier
Chief Financial Officer and
Vice President of Operations
37
<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 September 30, 1999 and is
qualified in its entirely by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> SEP-30-1998 SEP-30-1999
<CASH> 37,285 246,538
<SECURITIES> 40,401 139,406
<RECEIVABLES> 16,056 36,678
<ALLOWANCES> (3,631) (9,089)
<INVENTORY> 1,139 610
<CURRENT-ASSETS> 97,590 439,225
<PP&E> 57,770 105,306
<DEPRECIATION> (13,708) (23,204)
<TOTAL-ASSETS> 149,536 909,642
<CURRENT-LIABILITIES> 24,656 72,367
<BONDS> 0 0
0 0
0 0
<COMMON> 123 129
<OTHER-SE> 100,415 825,076
<TOTAL-LIABILITY-AND-EQUITY> 149,536 909,642
<SALES> 0 0
<TOTAL-REVENUES> 55,199 150,805
<CGS> 0 0
<TOTAL-COSTS> 10,144 36,003
<OTHER-EXPENSES> 35,905 116,417
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,279 1,491
<INCOME-PRETAX> 8,557 11,774
<INCOME-TAX> 3,923 5,841
<INCOME-CONTINUING> 4,634 5,933
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,634 5,933
<EPS-BASIC> .12 .06
<EPS-DILUTED> .04 .04
</TABLE>
