<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 March 31, 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)
Delaware 77-0430924
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2005 Hamilton Ave, Suite 350
San Jose, California 95125
(Address of principal executive offices) (Zip Code)
(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 April 30, 1999, there were 125,242,245 shares of the Registrant's Common
Stock outstanding.
================================================================================
<PAGE>
- --------------------------------------------------------------------------------
FORM 10-Q
eBAY INC.
INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
PART I FINANCIAL INFORMATION Number
<S> <C>
ITEM 1: Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheet as of December 31, 1998
and March 31, 1999.................................................................. 2
Condensed Consolidated Statement of Income for the three months ended
March 31, 1998 and 1999............................................................. 3
Condensed Consolidated Statement of Cash Flows for the three months
ended March 31, 1998 and 1999....................................................... 4
Notes to Condensed Consolidated Financial Statements................................. 5
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 9
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk........................... 27
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings.................................................................... 28
ITEM 2: Changes in Securities and Use of Proceeds............................................ 28
ITEM 3: Defaults Upon Senior Securities...................................................... 28
ITEM 4: Submission of Matters to a Vote of Security Holders.................................. 28
ITEM 5: Other Information.................................................................... 28
ITEM 6: Exhibits and Reports on Form 8-K..................................................... 29
Signatures.................................................................................... 30
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
eBAY INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts; unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
---------------- ----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................... $31,790 $ 24,850
Short-term investments....................................................... 40,401 32,121
Accounts receivable, net..................................................... 6,369 12,104
Other current assets......................................................... 4,825 23,588
------- --------
Total current assets..................................................... 83,385 92,663
Property and equipment, net..................................................... 7,831 16,235
Intangible and other assets, net................................................ 1,267 814
------- --------
$92,483 $109,712
======= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 1,385 $ 3,748
Customer advances............................................................ 727 1,022
Income taxes payable......................................................... -- 2,713
Deferred tax liabilities..................................................... 1,682 1,682
Other current liabilities.................................................... 4,244 8,947
------- --------
Total current liabilities................................................ 8,038 18,112
------- --------
Stockholders' equity:
Preferred Stock, $0.001 par value; 5,000 shares authorized;
no shares issued or outstanding.............................................. -- --
Common Stock, $0.001 par value, 195,000 shares authorized;
120,760 and 120,770 shares issued and outstanding............................ 121 121
Additional paid-in capital................................................... 86,265 86,089
Notes receivable from stockholders........................................... (1,130) (510)
Unearned compensation........................................................ (4,139) (3,324)
Retained earnings............................................................ 3,328 9,224
------- --------
Total stockholders' equity............................................... 84,445 91,600
------- --------
$92,483 $109,712
======= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
eBAY INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share amounts; unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------
1998 1999
---------------- ----------------
<S> <C> <C>
Net revenues.................................................................. $ 5,981 $ 34,010
Cost of net revenues.......................................................... 630 5,121
------- --------
Gross profit........................................................... 5,351 28,889
------- --------
Operating expenses:
Sales and marketing........................................................ 2,106 12,067
Product development........................................................ 518 1,924
General and administrative................................................. 1,028 5,043
Amortization of acquired intangibles....................................... -- 328
------- --------
Total operating expenses............................................... 3,652 19,362
------- --------
Income from operations........................................................ 1,699 9,527
Interest and other income, net................................................ 22 639
------- --------
Income before income taxes.................................................... 1,721 10,166
Provision for income taxes.................................................... (1,573) (4,270)
------- --------
Net income.................................................................... $ 148 $ 5,896
======= ========
Net income per share:
Basic...................................................................... $0.00 $0.06
======= ========
Weighted average shares--basic............................................. 26,936 95,047
======= ========
Diluted.................................................................... $0.00 $0.05
======= ========
Weighted average shares--diluted........................................... 97,614 127,979
======= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
eBAY INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------
1998 1999
---------------- ----------------
Cash flows from operating activities:
<S> <C> <C>
Net income .............................................................. $ 148 $ 5,896
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for doubtful accounts and authorized credits ................ 610 1,849
Depreciation and amortization ......................................... 107 1,203
Amortization of unearned compensation ................................. 421 666
Series B Preferred Stock issued for services .......................... 93 --
Amortization of acquired intangibles .................................. -- 452
Changes in assets and liabilities:
Accounts receivable ................................................. (1,800) (7,584)
Other current assets ................................................ (47) (18,763)
Accounts payable .................................................... 357 2,363
Customer advances ................................................... 64 295
Income taxes payable ................................................ 1,547 2,713
Other current liabilities ........................................... 727 4,704
------- --------
Net cash provided by (used in) operating activities ...................... 2,227 (6,206)
------- --------
Cash flows from investing activities:
Purchases of property and equipment ................................... (884) (9,607)
Purchases of short-term investments ................................... -- (514)
Sale and maturity of short-term investments ........................... -- 8,794
------- --------
Net cash used in investing activities .................................... (884) (1,327)
------- --------
Cash flows from financing activities:
Proceeds from Common Stock, net ......................................... 114 84
Repayment of stockholder loans .......................................... -- 509
Principal payments on debt and leases ................................... (48) --
------- --------
Net cash provided by financing activities ................................ 66 593
------- --------
Net increase (decrease) in cash and cash equivalents ..................... 1,409 (6,940)
Cash and cash equivalents at beginning of period ......................... 3,723 31,790
------- --------
Cash and cash equivalents at end of period ............................... $ 5,132 $ 24,850
======= ========
Supplemental cash flow disclosures:
Cash paid for interest ................................................ $ 10 $ --
Cash paid (refund received) for income taxes .......................... $ (473) $ 25
Non-cash investing and financing activities:
Common Stock issued for notes receivable .............................. $ 637 $ --
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--The Company and Summary of Significant Accounting Policies:
The Company
eBay Inc. (the "Company") was incorporated in California in May 1996, and
reincorporated in Delaware in April 1998. The Company operates an online person-
to-person trading community. eBay pioneered online person-to-person trading by
developing a Web-based community in which buyers and sellers are brought
together in an auction format to trade personal items such as antiques, coins,
collectibles, computers, memorabilia, stamps and toys. The eBay service permits
sellers to list items for sale, buyers to bid on items of interest and all eBay
users to browse through listed items in a fully-automated, topically-arranged
service that is available online 24-hours-a-day, seven-days-a-week.
Basis of presentation
The accompanying condensed consolidated financial statements as of December
31, 1998 and March 31, 1999, and the three months ended March 31, 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 March
31, 1999 and for the three months ended March 31, 1998 and 1999. These condensed
consolidated financial statements and notes thereto are unaudited and should be
read in conjunction with the Company's audited consolidated financial statements
and related notes included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998. The results for the three months ended March 31,
1999 are not necessarily indicative of the expected results for the year ending
December 31, 1999. Certain prior period balances have been reclassified to
conform to the current period presentation.
Principles of consolidation
The condensed consolidated financial statements as of March 31, 1999, and for
the three months then ended include the accounts of the Company and its wholly
owned subsidiary. All significant intercompany balances and transactions have
been eliminated in consolidation.
Advertising expense
The Company recognizes advertising expenses in accordance with Statement of
Position ("SOP") No. 93-7, "Reporting on Advertising Costs." As such, the
Company expenses the costs of producing advertisements at the time production
occurs, and expenses the costs of communicating advertisements in the period in
which the advertising space or airtime is used. Internet advertising expenses
are recognized based on the terms of the individual agreements, but generally
using the greater of the ratio of the number of impressions delivered over the
total number of contracted impressions or on a straight-line basis over the term
of the contract.
Stock split
During January 1999, the Company's Board of Directors approved a three-for-one
Common Stock split. Shareholders of record on February 9, 1999 received two
additional shares for every one share held on March 1, 1999. All share and per
share amounts in these condensed consolidated financial statements and notes
thereto for all periods presented have been retroactively adjusted to reflect
the stock split.
Net income per share
The Company computes net income per share in accordance with SFAS No. 128,
"Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under
the provisions of SFAS No. 128 and SAB 98, basic net
5
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
income per share is computed by dividing the net income available to common
stockholders for the period by the weighted average number of common shares
outstanding during the period. Diluted net income per share is computed by
dividing the net income for the period by the weighted average number of common
and common equivalent shares outstanding during the period. Common equivalent
shares, composed of unvested restricted Common Stock and incremental common
shares issuable upon the exercise of stock options, are included in diluted net
income per share to the extent such shares are dilutive.
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;
unaudited):
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------
1998 1999
---------------- ----------------
<S> <C> <C>
Numerator:
Net income..................................................................... $ 148 $ 5,896
Accretion of Series B Mandatorily Redeemable Convertible Preferred Stock to
redemption value............................................................. (23) --
-------- --------
Net income available to common stockholders.................................... $ 125 $ 5,896
======== ========
Denominator:
Weighted average shares........................................................ 73,436 120,790
Weighted average unvested common shares subject to repurchase agreements....... (46,500) (25,743)
-------- --------
Denominator for basic calculation.............................................. 26,936 95,047
Weighted average effect of dilutive securities:
Series A Preferred Stock...................................................... 15,088 --
Series B Preferred Stock...................................................... 9,090 --
Weighted average unvested common shares subject to repurchase agreements...... 46,500 25,743
Employee stock options...................................................... -- 7,189
-------- --------
Denominator for diluted calculation............................................ 97,614 127,979
======== ========
Net income per share:
Basic.......................................................................... $ 0.00 $ 0.06
======== ========
Diluted........................................................................ $ 0.00 $ 0.05
======== ========
</TABLE>
Note 2--Balance Sheet Components:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
---------------- ----------------
<S> <C> <C>
Other current assets:
Prepaid expenses............................................................. $3,240 $23,452
Prepaid taxes................................................................ 1,532 --
Deposits - current........................................................... 33 111
Other current assets......................................................... 20 25
------ -------
Total other current assets............................................... $4,825 $23,588
====== =======
</TABLE>
The most significant elements of prepaid expenses at December 31, 1998 and
March 31, 1999 were payments to America Online, Inc. ("AOL") for future
marketing efforts. At December 31, 1998 and March 31, 1999, those pre-payments
totaled $2.3 million and $20.1 million respectively.
6
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 3--Credit Facilities:
Line of credit
At December 31, 1998, the Company had $0 outstanding under a line of credit
facility with a financial institution. The facility provided a revolving line,
including an equipment sub-limit facility of up to $750,000 and expired on
January 5, 1999. Under the line of credit, the Company was required to comply
with certain financial covenants. The Company was in compliance with all such
covenants at December 31, 1998.
Letter of credit
At December 31, 1998, the Company maintained a $202,000 letter of credit with
a financial institution to secure the lease deposit on its office facility.
During the quarter ended March 31, 1999, the Company amended its existing office
leases and entered into new lease agreements. As a result of the amendment the
original letter of credit was terminated. In conjunction with the new lease
agreements, the Company established a $500,000 letter of credit with another
financial institution to secure the lease deposit. The letter of credit expires
September 1, 2000, and is secured by funds held on deposit at a financial
institution.
Note 4--Contingencies:
On March 23, 1999, the Company was sued by Network Engineering Software, Inc.
in the U.S. District Court for the Northern District of California for the
Company's alleged willful and deliberate violation of a patent. The suit seeks
unspecified monetary damages as well as an injunction against the Company's
operations. It also seeks treble damages and attorneys' fees and costs. The
Company believes that it has meritorious defenses against this suit and intends
to vigorously defend itself. The Company could be forced to incur material
expenses during this defense and in the event it were to lose this suit, its
business would be harmed.
Note 5--Joint Venture:
On February 17, 1999, eBay entered into a joint venture agreement with an
Australian company, PBL Online PTY Limited ("PBLO"), for the formation of a
company that will provide on-line trading services to Internet users based
primarily in Australia and New Zealand (combined, the "Territory"). PBLO is part
of the Publishing & Broadcasting Limited group of companies which provide a wide
range of media services in the Territory, including magazine publishing,
television broadcasting, on-line services, broadcast programs and electronic
commerce services. The joint venture company will be based in Australia and will
combine eBay's technical and software experience, market knowledge and
reputation with PBLO's publishing, distribution, advertising and marketing
channels. Operations for the joint venture company are expected to commence
during 1999. Through March 31, 1999, no significant revenue, costs, or expenses
had been incurred related to the agreement.
Note 6--Contractual Agreements:
AOL
During 1998, the Company entered into a three-year marketing agreement with
AOL. Under the terms of the agreement the Company will be provided with a
specific number of advertising impressions featuring it as the preferred
provider of person-to-person auction services on AOL's service. In
consideration, the Company committed to pay $12.0 million over the three-year
term of the agreement. The Company is recognizing these fees as sales and
marketing expenses over the greater of the ratio of the number of impressions
delivered over the total number of contracted impressions, or a straight-line
basis over the term of the contract. At March 31, 1999, the Company had paid
$4.0 million to AOL under this agreement, of which $2.7 million was recognized
as sales and marketing expense.
7
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
In March 1999, the Company expanded the scope of its strategic relationship
with AOL. Under the amended agreement, eBay will be given a prominent presence
featuring it as the preferred provider of person-to-person trading services on
AOL's proprietary services (both domestic and international), AOL.com, Digital
Cities, ICQ, CompuServe (both domestic and international) and Netscape. In
addition, eBay will develop a co-branded version of its service for each AOL
property which will prominently feature each party's brand. AOL will be entitled
to all advertising revenue from the co-branded site. eBay will pay $75 million
over the four-year term of the contract. At March 31, 1999, the Company had
advanced $18.8 million under the amended agreement, which will be amortized to
sales and marketing expense over the first year of the contract.
In conjunction with the amended agreement, AOL will terminate the original
contract at the end of the first year. As such, the remaining $8.0 million
commitment during years two and three has been waived. AOL will continue to
deliver impressions under the original agreement through August of 1999.
Insurance
On March 1, 1999, eBay began an insurance program for eBay users. The program
provides coverage on qualified transactions for fraud that occurs when a winning
bidder of an auction sends money to a seller, in good faith, and does not
receive the item or receives an item materially different that described in
the eBay auction. To qualify for benefits under the program, the winning bidder
must be an eBay buyer in "good standing" and the seller must be "registered"
with a Feedback Rating of zero (0) or above. eBay has entered into a contract
with Lloyd's of London to underwrite the program for an initial period of six
months at a minimum cost of $525,000. Expenses related to the minimum cost are
being recognized ratably over the initial offering period, and all costs in
excess of the minimum are expensed as incurred. At March 31, 1999, no expenses
beyond the minimum had been recognized.
Note 7--Subsequent Events:
Secondary Offering
On April 16, 1999, the Company completed its secondary public offering of
Common Stock. A total of 4,250,000 shares were sold at a price of $170.00 per
share to an underwriting syndicate led by Goldman, Sachs & Co. and Morgan
Stanley Dean Witter. The offering resulted in net proceeds to the Company of
approximately $696.2 million, net of an underwriting discount of $25.3 million
and estimated offering expenses of $1.0 million.
Butterfield & Butterfield
On April 26, 1999, the Company agreed to acquire Butterfield & Butterfield,
one of the world's largest auction houses. The transaction will be accounted
for as a tax-free pooling of interests. The number of shares to be issued in
the transaction will be determined by a formula involving the average price of
eBay common stock during a period prior to the closing of the transaction. The
approximate value of the transaction is expected to be $260 million. The
Company expects to recognize certain one-time expenses related to the
transaction in the quarter of closing. Closing is subject to certain
conditions, including regulatory approvals, and is expected to take place in the
second quarter.
8
<PAGE>
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
FORWARD LOOKING STATEMENTS
This document contains certain forward-looking statements that involve risks
and uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. When used in this document, the words "expects,"
"anticipates," "intends" and "plans" and similar expressions are intended to
identify certain of these forward-looking statements. The cautionary statements
made in this document should be read as being applicable to all related forward-
looking statements wherever they appear in this document. The Company's actual
results could differ materially from those discussed in this document. Factors
that could cause or contribute to such differences include those discussed
below, as well as those discussed in the Company's Prospectus dated April 12,
1999.
Overview
eBay pioneered online person-to-person trading by developing a Web-based
community in which buyers and sellers are brought together in an efficient and
entertaining auction format to buy and sell personal items such as antiques,
coins, collectibles, computers, memorabilia, stamps and toys. The eBay service
permits sellers to list items for sale, buyers to bid on items of interest and
all eBay users to browse through listed items in a fully-automated, topically-
arranged, intuitive and easy-to-use online service that is available 24-hours-a-
day, seven-days-a-week.
Substantially all of the Company's revenues come from placement and success
fees paid by sellers; eBay charges no fees to buyers and, to date, has chosen to
sell almost no advertising on its website. Sellers pay a nominal placement fee
and by paying additional fees, sellers can have items featured in various ways.
Sellers for whom a three, five or seven day auction is successfully concluded
(i.e., there is at least one bid above the seller's specified minimum or reserve
price, whichever is higher) also pay a success fee based on the final purchase
price. Revenues from placement fees are recognized at the time that the item is
listed; revenues related to success fees are recognized at the time that the
auction is successfully concluded. At no point during the auction process does
the Company take possession of either the item being sold or the buyer's payment
for the item. Fees to sellers are aggregated and billed on a monthly basis. A
substantial majority of customer accounts are settled by directly charging
credit card numbers provided by sellers. Provisions for estimated uncollectible
accounts and authorized credits are recorded as percentages of revenues and are
provided for at the time of revenue recognition. In certain instances,
customers will deposit funds with eBay in anticipation of future transactions;
these prepayments appear on the Company's balance sheet as customer advances.
eBay's 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 cost of goods sold,
no procurement, carrying or shipping costs and no inventory risk. The Company's
rate of expense growth is primarily driven by increases in personnel,
expenditures for advertising and promotion, and depreciation on site hardware
and software. The Company intends to continue investing in site infrastructure
and 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.
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 particular, the Company has noted strong sequential
quarterly revenue growth between the fourth fiscal quarter and the first fiscal
quarter, and a lower, relatively level growth rate throughout the remainder of
the year. Sequential revenue growth from the fourth quarter of 1997 to the
first quarter of 1998 was 128%, with the remaining quarters showing
approximately 50% sequential growth. For the quarter ended March 31, 1999, the
Company recognized 74% sequential quarterly
9
<PAGE>
revenue growth. The Company expects this growth rate to drop significantly
during the second quarter based on the seasonal nature of historical revenue
trends.
Because of the inherent difficulty in forecasting revenue, it is also
difficult to forecast income statement expense categories as a percentage of
revenue. Quarterly and annual income statement expense categories as a
percentage of revenue may be significantly different from historical or
projected rates. As a general note, the Company expects costs to increase in
absolute dollars across all income statement categories and vary as a percentage
of revenue based on quarterly revenue growth.
On April 26, 1999, the Company agreed to acquire Butterfield & Butterfield,
one of the world's largest auction houses. The transaction will be accounted
for as a tax-free pooling of interests. The number of shares to be issued in
the transaction will be determined by a formula involving the average price of
eBay common stock during a period prior to the closing of the transaction. The
approximate value of the transaction is expected to be $260 million. The
Company expects to recognize certain one-time expenses related to the
transaction in the quarter of closing. Closing is subject to certain
conditions, including regulatory approvals, and is expected to take place in the
second quarter. The Company has not had an opportunity to evaluate the specific
effect the transaction will have on its results of operations. As such, the
transaction has been omitted from the forward looking comments in the discussion
of the results of operations.
Results of Operations
Sequential Quarterly Trends and Results of Operations
The following table sets forth, for the periods presented, certain data from
eBay's condensed consolidated statement of income. The condensed consolidated
statement of income data has been derived from eBay's unaudited consolidated
financial statements, which, in management's opinion, have been prepared on
substantially the same basis as the audited consolidated financial statements
and include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial information for the periods
presented. The operating results in any quarter are not necessarily indicative
of the results that may be expected for any future period (in thousands,
unaudited).
<TABLE>
<CAPTION>
Three months ended
---------------------------------------
Dec 31, 1998 Mar 31, 1999
----------------- -----------------
<S> <C> <C>
(in thousands, unaudited)
Net revenues............................................................................... $19,495 $34,010
Cost of net revenues....................................................................... 3,020 5,121
------- -------
Gross profit............................................................................... 16,475 28,889
------- -------
Operating expenses:
Sales and marketing....................................................................... 9,755 12,067
Product development....................................................................... 1,544 1,924
General and administrative................................................................ 2,778 5,043
Amortization of acquired intangibles...................................................... 328 328
------- -------
Total operating expenses................................................................ 14,405 19,362
------- -------
Income from operations..................................................................... 2,070 9,527
Interest and other income, net............................................................. 682 639
------- -------
Income before income taxes................................................................. 2,752 10,166
Provision for income taxes................................................................. (1,232) (4,270)
------- -------
Net income................................................................................. $ 1,520 $ 5,896
======= =======
</TABLE>
10
<PAGE>
For the quarter ended March 31, 1999, the Company made significant investments
in its internal infrastructure, primarily in personnel and site equipment, which
affected costs in all income statement categories. Cost of net revenues
increased during the first quarter largely due to labor and related costs
associated with the Company's expansion of its customer support department and
depreciation of recently acquired site equipment. The Company expects that it
will continue to invest in these areas in advance of revenue growth, resulting
in lower gross margins in the near future. The Company realized additional
increases in cost of revenues due to volume-driven transactional expenses such
as ISP connectivity charges and bank processing charges for customer fees paid
by credit cards. The increase in sales and marketing expenses in the first
quarter over the prior period was primarily due to personnel growth, the
expansion of online advertising, tradeshow programs and international marketing.
Product development expenses increased due to additional headcount and the use
of consultants, but were otherwise relatively unchanged compared to the fourth
quarter of 1998. General and administrative expenses increased substantially
over the previous quarter again primarily due to the Company's investment in
personnel, increases in professional service fees and incremental costs
associated with being a public company.
For the first quarter of 1999, eBay recorded certain non-cash charges of
$666,000 and $453,000 related to the amortization of stock compensation and
acquisition-related expenses, respectively, and recorded a tax provision of $4.3
million, representing an effective tax rate of 42 percent of first quarter pre-
tax income.
As previously noted, the Company expects costs to increase across all income
statement expense categories during the second quarter. The quarter ending June
30, 1999 will include an entire quarter of costs associated with the investment
in personnel and site equipment during the first quarter, and the Company will
continue to invest in internal infrastructure to meet user demand.
Historical Trends and Results of Operations
The following table sets forth, for the periods presented, certain data
derived from the Company's unaudited condensed consolidated statement of income
as a percentage of net revenues and certain unaudited supplemental operating
data. The operating results for the three months ended March 31, 1998 and 1999,
are not necessarily indicative of the results that may be expected for any
future period.
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------------
1998 1999
----------------- -----------------
(in thousands, except percentages)
<S> <C> <C>
Net revenues............................................................................... 100.0% 100.0%
Cost of net revenues....................................................................... 10.5 15.1
-------- --------
Gross profit............................................................................... 89.5 84.9
-------- --------
Operating expenses:
Sales and marketing....................................................................... 35.2 35.5
Product development....................................................................... 8.7 5.7
General and administrative................................................................ 17.2 14.8
Amortization of acquired intangibles...................................................... -- 0.9
-------- --------
Total operating expenses................................................................ 61.1 56.9
-------- --------
Income from operations..................................................................... 28.4 28.0
Interest and other income, net............................................................. 0.4 1.9
-------- --------
Income before income taxes................................................................. 28.8 29.9
Provision for income taxes................................................................. (26.3) (12.6)
-------- --------
Net income................................................................................. 2.5% 17.3%
======== ========
Supplemental operating data (in thousands):
Number of registered users at end of period................................................ 580 3,825
Gross merchandise sales (1)................................................................ $104,113 $540,748
</TABLE>
11
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<TABLE>
<S> <C> <C>
Number of auctions listed............................................................... 4,209 22,959
</TABLE>
- -----------------
(1) Represents the aggregate sales prices of all goods for which an auction was
successfully concluded (i.e., there was at least one bid above the seller's
specified minimum price or reserve price, whichever is higher).
Net Revenues
The Company's net revenues increased from $6.0 million in the three months
ended March 31, 1998, to $34.0 million in the comparable period of 1999. The
strong growth was primarily the result of increased activity on the eBay
website, as shown by increases in total items listed and gross merchandise
sales. Neither increased fees for specific featured placements nor changes in
average transaction size had a material impact on net revenue growth.
Cost of Net Revenues
Cost of net revenues are primarily derived from costs associated with customer
support and website operations. These include: fees for independent
contractors, compensation for Company customer support and site operations
personnel and, to a lesser extent, ISP connectivity charges, bank processing
charges for customer fees paid by credit cards, depreciation of the equipment
required for the Company's website operations, and amortization of acquired
technology. Cost of net revenues increased from $630,000 or 10.5% of net
revenues in the three months ended March 31, 1998, to $5.1 million or 15.1% of
net revenues in the comparable period of 1999. The increase resulted from the
continued development and expansion of the Company's customer support
organization, increases in bank processing charges for customer fees paid by
credit cards, depreciation of the equipment required for the Company's website
operations, and ISP connectivity charges. These costs, especially those related
to customer support and depreciation, are expected to continue to increase
rapidly as the Company invests in its infrastructure in advance of demand,
resulting in lower gross margins in the near term.
Sales and Marketing
The Company's sales and marketing expenses are comprised primarily of
compensation for the Company's sales and marketing personnel, advertising,
tradeshow and other promotional costs, expenses for creative design of the
Company's website and an allocation of overhead. Sales and marketing expenses
increased from $2.1 million or 35.2% of net revenues in the three months ended
March 31, 1998, to $12.1 million or 35.5% of net revenues in the comparable
period of 1999. The increases resulted primarily from continued growth in the
number of personnel, increases in advertising and promotional expenses and
expenses related to the Company's agreement with AOL. At March 31, 1999, the
Company had advanced $18.8 million to AOL for future marketing efforts as part
of the expanded strategic alliance initiated in March 1999. Sales and marketing
expenses are expected to increase in the second quarter, due in part to the
commencement of advertising impressions delivered under the strategic alliance
with AOL, in part due to expanded radio advertising, and in part to incremental
expense associated with personnel additions made in the first quarter and those
planned for the second quarter.
Product Development
The Company's product development expenses consist primarily of compensation
for the Company's product development staff, payments to outside contractors
and, to a lesser extent, depreciation on equipment used for development and an
allocation of overhead. The Company's product development expenses increased in
absolute dollars from $518,000 or 8.7% of net revenues in the three months ended
March 31, 1998, to $1.9 million or 5.7% of net revenues in the comparable period
of 1999. The increase in absolute dollars resulted primarily from the increased
size of the product development staff and payments to outside contractors.
Product development expenses are expected to increase in the second quarter
primarily as the result of personnel additions in the first quarter and those
planned in the second quarter.
General and Administrative
The Company's general and administrative expenses consist primarily of
compensation for personnel and, to a lesser extent, provisions for doubtful
accounts, fees for external professional advisors and an allocation of overhead.
The Company's general and administrative expenses increased in absolute dollars
from $1.0 million or 17.2% of net revenues in the three months ended March 31,
1998, to $5.0 million or 14.8% of net revenues in the comparable
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<PAGE>
period of 1999. The increases in absolute dollars resulted primarily from
additional personnel-related expenses, the provision for doubtful accounts
(based upon a percentage of revenues reflecting the Company's historical
experience), fees for professional services an allocation of overhead.
Amortization of Acquired Intangibles
During the three months ended March 31, 1999, the Company recorded a $328,000
expense associated with intangible assets acquired in the acquisition of Jump
Inc. ("Jump"), there were no such expenses in the comparable periods of 1998.
Interest and Other Income, Net
The Company's interest and other income, net, increased from $22,000 in the
three months ended March 31, 1998, to $639,000 in the comparable period of 1999.
Substantially all of the increase was the result of interest earned on cash,
cash equivalents, and short-term investments, particularly the interest earned
on the net proceeds from the Company's initial public offering completed in
September 1998. The Company expects that interest income will increase
significantly during the second quarter of 1999, following the completion of its
secondary offering in April 1999.
Provision for Income Taxes
The Company's effective federal and state income tax rate was 91.4% in the
first three months of 1998 compared to 42.0% in the comparable period of 1999.
The decrease in the effective tax rate from 1998 to 1999 resulted from the
decline in certain non-cash, non-deductible expenses as a percentage of pre-tax
income.
Stock-Based Compensation
In connection with the grant of certain stock options from May 1997 through
June 30, 1998, the Company recorded aggregate unearned compensation totaling
$6.8 million, which is being amortized over the four-year vesting period
of such options. Of the total unearned compensation, approximately $421,000 and
$666,000 was amortized in the three months ended March 31, 1998 and 1999,
respectively. The Company expects quarterly amortization of between
approximately $700,000 and $440,000 during the remainder of 1999, between
approximately $400,000 and $270,000 during 2000 and annual amortization of
approximately $720,000 during 2001 and approximately $80,000 during 2002 related
to these options. These amortization amounts were allocated among the
operational expense categories based upon the primary activity of the related
employees.
Liquidity and Capital Resources
Since eBay's 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, and in September 1998, net proceeds of $66.1 million from its initial
public offering. The Company's secondary stock offering, completed in April
1999, provided approximately $696.2 million in net proceeds.
Net cash provided by operating activities was $2.2 million in the three months
ended March 31, 1998 compared to $6.2 million used in operating activities in
the same period of 1999. The change in the comparable periods resulted
primarily from an $18.8 million payment advanced to AOL in connection with the
strategic relationship, and was affected to a lesser degree by net income before
non-cash charges for amortization of unearned compensation, the provision for
doubtful accounts and depreciation and amortization, increases in various
liability categories, and increases in accounts receivable.
Net cash used in investing activities totaled $884,000 in the three months
ended March 31, 1998 and $1.3 million in the same period of 1999. Net cash used
in investing activities in both 1998 and 1999 was the result of purchases of
property and equipment, primarily computer equipment and furniture and fixtures
totaling $884,000 and $9.6 million, respectively, offset in 1999 by $8.8 million
in cash provided by the sale of short-term investments.
13
<PAGE>
Net cash provided by financing activities was $66,000 in the three months
ended March 31, 1998, and $593,000 in the same period of 1999. Net cash
provided by financing activities in 1998 resulted almost entirely from sales of
Common Stock. Net cash provided by financing activities in 1999 resulted
primarily from the repayment of stockholder loans, and to a lesser degree
through the sale of Common Stock.
eBay had no material commitments for capital expenditures at March 31, 1999,
but expects such expenditures to be at least $14.0 million through the remainder
of 1999. Such expenditures will primarily be for computer equipment, furniture
and fixtures and leasehold improvements. eBay also has total minimum lease
obligations of $25.1 million through November 2004 under certain noncancellable
operating leases. In March 1999, eBay and AOL expanded the scope of their
strategic relationship. Under this new agreement eBay will pay AOL $75 million
over the four-year term of the contract. Of this amount, $18.8 million had been
advanced at March 31, 1999.
The Company believes that its existing cash, cash equivalents and short-term
investments, including the proceeds from the secondary stock offering, and any
cash generated from operations will be sufficient to fund its operating
activities, capital expenditures and other obligations for the foreseeable
future. However, if during that period or thereafter the Company is not
successful in generating sufficient cash flow from operations or in raising
additional capital when required in sufficient amounts and on terms acceptable
to the Company, the Company's business could suffer.
Year 2000 Issues
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field and cannot reliably
distinguish dates beginning on January 1, 2000 from dates prior to the year
2000. Many companies' software and computer systems may need to be upgraded or
replaced in order to correctly process dates beginning in 2000 and to comply
with the "Year 2000" requirements. The Company has reviewed its internal
programs and has determined that there are no significant Year 2000 issues
within the Company's systems or services. The Company has completed
modifications to its internal systems to attempt to ensure Year 2000 compliance.
The costs of these modifications have not been material and have involved a
reallocation of internal resources rather than incremental expenditures.
Although the Company believes that its software is Year 2000 compliant, the
Company may be wrong. If the Company is wrong, it could face unexpected expenses
to fix the problem or unanticipated website outages, either of which would harm
its business. The Company uses third-party equipment and software that may not
be Year 2000 compliant. 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.
Risk Factors that may Affect Results of Operations and Financial Condition
Our operating results may fluctuate.
14
<PAGE>
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;
. 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;
. consumer confidence in the security of transactions on our website;
. our ability to upgrade and develop our systems and infrastructure to
accommodate growth;
. our ability to attract new personnel in a timely and effective manner;
. the volume of items listed on our website;
. 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;
. technical difficulties or service interruptions;
. the amount and timing of operating costs and capital expenditures relating
to expansion of our business, operations and infrastructure;
. consumer trends and popularity of some categories of collectible items;
. volume, size, timing and completion rate of trades 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.
15
<PAGE>
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 discourage users of our website and reduce future
revenues.
. Customer Support. We must expand our customer support operations to
accommodate the increased number of users and transactions on our website.
If we are unable to hire and successfully train sufficient employees or
contractors in this area, users of our website may have negative
experiences and current and future revenues could suffer.
. Customer Accounts. Our revenues are dependent on prompt and accurate
billing processes. If we are unable to grow our transaction processing
abilities to accommodate the increasing number of transactions that must
be billed, our ability to collect revenue will be harmed.
We must continue to hire, train and manage new employees at a rapid rate. The
majority of our employees today have been with us less than one year and we
expect that our rate of hiring will continue at a very high pace. To manage the
expected growth of our operations and personnel, we will need to improve our
transaction processing, operational and financial systems, procedures and
controls. Our current and planned personnel, systems, procedures and controls
may not be adequate to support our future operations. We may be unable to hire,
train, retain and manage required personnel or to identify and take advantage of
existing and potential strategic relationships and market opportunities.
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:
. increase our brand name awareness;
. provide our customers with superior community and trading experiences; and
. maintain sufficient transaction volume to attract buyers and sellers.
We are investing heavily in marketing and promotion, further development of
our website, technology and operating infrastructure development. We have
significant ongoing commitments in some of these areas. As a result, we may be
unable to adjust our spending rapidly enough to compensate for any unexpected
revenue shortfall, which may harm our profitability. The emergence of
competitors, many of whom are offering free auctions to users, may limit our
ability to raise user fees in response to declines in profitability or require
us to reduce our fees. In addition, we are spending in advance of anticipated
growth, which may also harm our profitability. Our growth rates are not
sustainable and we expect growth rates will decrease in the future. In view of
the rapidly evolving nature of our
16
<PAGE>
business and our limited operating history, we believe that period-to-period
comparisons of our operating results are not necessarily meaningful. You should
not rely upon our historical results as indications of our future performance.
Our business has been seasonal.
Our results of operations historically have been somewhat seasonal in nature
because many of our users reduce their activities on our website during the
Thanksgiving and Christmas holidays and with the onset of good weather. Although
our limited operating history makes it difficult to assess the impact of these
seasonal factors, we expect the growth rate of our revenue in the second and
subsequent quarters will be significantly below our first quarter growth rate.
Seasonal or cyclical variations in our business may become more pronounced over
time and may harm our results of operations in the future.
Acquisitions could result in 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 announced an agreement to acquire Butterfield & Butterfield ("B&B"), an
established auction company with several locations and more than 200 employees.
The process of integrating an acquired business into our business and operations
may result in unforeseen operating difficulties and expenditures. Integrating
B&B, or any other business, will require significant management resources that
would otherwise be available for ongoing development of our business. Moreover,
the anticipated benefits of any acquisition, including B&B, may not be realized.
Future acquisitions could result in potentially dilutive issuances of equity
securities, the incurrence of debt, contingent liabilities or amortization
expenses related to goodwill and other intangible assets, any of which could
harm our business. Future acquisitions may require us to obtain additional
equity or debt financing, which may not be available on favorable terms or at
all. Even if available, this financing may be dilutive.
Our business may be harmed by the listing or sale by our users of illegal
items.
The law relating to the liability of providers of online services for the
activities of their users on their service is currently unsettled. We are aware
that certain goods, such as firearms, other weapons, adult material, tobacco
products, alcohol and other goods that may be subject to regulation by local,
state or federal authorities, have been listed and traded on our service. We may
be unable to prevent the sale of unlawful goods, or the sale of goods in an
unlawful manner, by users of our service, and we may be subject to civil or
criminal liability for unlawful activities carried out by users through our
service. In order to reduce our exposure to this liability, we have increased
the number of personnel reviewing potentially illegal items and 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 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
17
<PAGE>
litigation against us. Any such litigation could be costly for us, could result
in increased costs of doing business through adverse judgment or settlement,
could require us to change our business practices in expensive ways, or could
otherwise harm our business.
Our business may be harmed by fraudulent activities on our website.
Our future success will depend largely upon sellers reliably delivering and
accurately representing their listed goods and buyers paying the agreed purchase
price. We do not take responsibility for delivery of payment or goods to any
user of our service. We have received in the past, and anticipate that we will
receive in the future, communications from users who did not receive the
purchase price or the goods that were to have been exchanged. While we can
suspend the accounts of users who fail to fulfill their delivery obligations to
other users, we do not have the ability to require users to make payments or
deliver goods or otherwise make users whole other than through our limited
insurance program. Other than through this program, we do not compensate users
who believe they have been defrauded by other users. We also periodically
receive complaints from buyers as to the quality of the goods purchased. Any
negative publicity generated as a result of fraudulent or deceptive conduct by
users of our service could damage our reputation and diminish the value of our
brand name. We may in the future receive additional requests from users
requesting reimbursement or threatening legal action against us if no
reimbursement is made. Any resulting litigation could be costly for us, divert
management attention, result in increased costs of doing business, lead to
adverse judgments or could otherwise harm our business.
Government inquiries may lead to charges or penalties.
On January 29, 1999, we received requests to produce certain records and
information to the federal government relating to an investigation of possible
illegal transactions in connection with our website. We have been informed that
the inquiry includes an examination of our practices with respect to these
transactions. We are fully cooperating with the inquiry. In order to protect the
investigation, the court has ordered that no further public disclosures be made
with respect to the matter at this time. Should this or any other investigation
lead to civil or criminal charges against us, we would likely be harmed by
negative publicity, the costs of litigation, the diversion of management time
and other negative effects, even if we ultimately prevail. Our business would
certainly suffer if we were not to prevail in any action like this.
A large number of transactions occur on our website. As a result, we believe
that government regulators have received a substantial number of consumer
complaints about us which, while small as a percentage of our total
transactions, are large in aggregate numbers. We have from time to time been
contacted by various federal, state and local regulatory agencies and been told
that they have questions with respect to the adequacy of the steps we take to
protect our users from fraud. For example, the City of New York--Department of
Consumer Affairs received complaints from users about transactions on our
website. In investigating these complaints, the Department of Consumer Affairs
requested information about us and these transactions. We have provided the
requested information. We are likely to receive additional inquiries from
regulatory agencies in the future, which may lead to action against us. We have
responded to all inquiries from regulatory agencies by describing our current
and planned antifraud efforts. If one or more of these agencies is not satisfied
with our response to current or future inquiries, the resultant investigations
and potential fines, changes in business practices, or other penalties could
harm our business.
We are subject to risks associated with information disseminated through our
service.
The law relating to the liability of online services companies for information
carried on or disseminated through their services is currently unsettled. Claims
could be made against online services companies under both United States and
foreign law for defamation, libel, invasion of privacy, negligence, copyright or
trademark infringement, or other theories based on the nature and content of the
materials disseminated through their services.
18
<PAGE>
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. 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 believe that we have
meritorious defenses against this suit and intend to vigorously defend
ourselves. We could be forced to incur material expenses during this defense and
in the event we were to lose this suit, our business would be harmed.
Other third parties have from time to time claimed and may claim in the future
that we have infringed their past, current or future technologies. We expect
that participants in our markets increasingly will be subject to infringement
claims as the number of services and competitors in our industry segment grows.
Any claim like this, whether meritorious or not, could be time-consuming, result
in costly litigation, cause service upgrade delays or require us to enter into
royalty or licensing agreements. These royalty or licensing agreements might not
be available on acceptable terms or at all. As a result, any claim like this
could harm our business.
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
not be able to accurately project the rate or timing of increases, if any, in
the use of our service or to timely expand and upgrade our systems and
infrastructure to accommodate any increases.
We use internally developed systems to operate our service and for transaction
processing, including billing and collections processing. We must continually
improve these systems in order to accommodate the level of use of our website.
In addition, we may add new features and functionality to our services that
would result in the need to develop or license additional technologies. Our
inability to add additional software and hardware or to upgrade our technology,
transaction processing systems or network infrastructure to accommodate
increased traffic or transaction volume could have adverse consequences. These
consequences include unanticipated system disruptions, slower response times,
degradation in levels of customer support, impaired quality of the users'
experience on our service and delays in reporting accurate financial
information. Our failure to provide new features or functionality also could
result in these consequences. We may be unable to effectively upgrade and expand
our systems in a timely manner or to integrate smoothly any newly developed or
purchased technologies with our existing systems. These difficulties could harm
or limit our ability to expand our business.
19
<PAGE>
System failures could harm our business.
Our future success, and in particular our ability to facilitate trades
successfully and provide high quality customer service, will depend on the
efficient and uninterrupted operation of our computer and communications
hardware and software systems. Substantially all of our computer hardware for
operating our service currently is located at the facilities of Exodus
Communications, Inc. ("Exodus") in Santa Clara, California. These systems and
operations are vulnerable to damage or interruption from earthquakes, floods,
fires, power loss, telecommunication failures and similar events. They are also
subject to break-ins, sabotage, intentional acts of vandalism and similar
misconduct. We do not have fully redundant systems, a formal disaster recovery
plan or alternative providers of hosting services, and we do not carry business
interruption insurance to compensate us for losses that may occur. Despite any
precautions we may take, the occurrence of a natural disaster or other
unanticipated problems at the Exodus facility could result in interruptions in
our services. In addition, the failure by Exodus to provide our required data
communications capacity could result in interruptions in our service. Any damage
to or failure of our systems could result in interruptions in our service. Such
interruptions will reduce our revenues and profits, and our future revenues and
profits will be harmed if our users believe that our system is unreliable.
We have experienced system failures from time to time. Our website has been
interrupted for periods ranging from five minutes to five hours. In addition to
placing increased burdens on our engineering staff, these outages create a flood
of user questions and complaints that must be responded to by our customer
support personnel. Any unscheduled interruption in our service results in an
immediate loss of revenue. If we experience frequent or persistent system
failures, our reputation and brand could be permanently harmed.
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 recently 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. Any such actions by this or any
other individual could harm us. Such actions may be very expensive to remedy and
could damage our reputation and discourage new and existing users from using our
service.
Our stock price has been and may continue to be extremely volatile.
The trading price of our common stock has been and is likely to be extremely
volatile. Our stock price could be subject to wide fluctuations in response to a
variety of factors, including the following:
. actual or anticipated variations in our quarterly operating results;
. 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;
. unscheduled system downtime;
20
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. additions or departures of key personnel;
. 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 regulation of the Internet 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 change, we may become subject
to new regulatory restrictions. For example, the sale of real estate is subject
to extensive regulation.
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 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. 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. We
21
<PAGE>
currently are qualified to do business only in California and Ohio. Our failure
to qualify as a foreign corporation in a jurisdiction where we are required to
do so could subject us to taxes and penalties for the failure to qualify and
could result in our inability to enforce contracts in those jurisdictions. Any
new legislation or regulation, or the application of laws or regulations from
jurisdictions whose laws do not currently apply to our business, could harm our
business.
We are dependent on the continued growth of the online person-to-person
commerce market.
The market for the sale of goods over the Internet, particularly through
person-to-person trading, is a new and emerging market. Our future revenues and
profits will be substantially dependent upon the widespread acceptance of the
Internet and online services as a medium for commerce by consumers. Rapid growth
in the use of and interest in the Web, the Internet and online services is a
recent phenomenon. This acceptance and use may not continue. Even if the
Internet is accepted, concerns about fraud, privacy and other problems may mean
that a sufficiently broad base of consumers will not adopt the Internet as a
medium of commerce. In particular, our website requires users to make publicly
available their e-mail addresses and other personal information that some
potential users may be unwilling to provide. These concerns may increase as
additional publicity over privacy issues on eBay or generally over the Internet
increase. Market acceptance for recently introduced services and products over
the Internet is highly uncertain, and there are few proven services and
products. In order to expand our user base, we must appeal to and acquire
consumers who historically have used traditional means of commerce to purchase
goods.
There are many risks associated with international operations.
We are expanding internationally and recently launched separate home pages
dedicated to Canada and the United Kingdom. Expansion into international markets
will require management attention and resources. We have limited experience in
localizing our service to conform to local cultures, standards and policies. We
may have to compete with local companies who understand the local market better
than we do. We may not be successful in expanding into international markets or
in generating revenues from foreign operations. As we continue to expand
internationally, we are subject to risks of doing business internationally,
including the following:
. regulatory requirements that may limit or prevent the offering of our
services in local jurisdictions;
. legal uncertainty regarding liability for the listings of our users,
including less Internet friendly basic law and unique local laws;
. 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.
22
<PAGE>
To the extent we expand our international operations and have additional
portions of our international revenues denominated in foreign currencies, we
also could become subject to increased difficulties in collecting accounts
receivable and risks relating to foreign currency exchange rate fluctuations.
Our business may be subject to sales and other taxes.
We do not collect sales or other similar taxes on goods sold by users through
our service. One or more states may seek to impose sales tax collection
obligations on companies such as ours that engage in or facilitate online
commerce. Several proposals have been made at the state and local level that
would impose additional taxes on the sale of goods and services through the
Internet. These proposals, if adopted, could substantially impair the growth of
electronic commerce, and could diminish our opportunity to derive financial
benefit from our activities. The U.S. federal government recently enacted
legislation prohibiting states or other local authorities from imposing new
taxes on Internet commerce for a period of three years. This tax moratorium will
last only for a limited period and does not prohibit states or the Internal
Revenue Service from collecting taxes on our income, if any, or from collecting
taxes that are due under existing tax rules. A successful assertion by one or
more states or any foreign country that we should collect sales or other taxes
on the exchange of merchandise on our system could harm our business.
We are dependent on key personnel.
Our future performance will be substantially dependent on the continued
services of our senior management and other key personnel. Our future
performance also will depend on our ability to retain and motivate our other
officers and key employees. We have only eight executive officers, and the loss
of the services of any of them 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 future success
also will depend on our ability to attract, train, retain and motivate other
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. As a result of the recent
appreciation in our stock price, we believe that we may be disadvantaged in
competing for these employees with other companies whose stocks have not
similarly appreciated or who have not yet gone public.
Our market is intensely competitive.
The market for person-to-person trading over the Internet is new, rapidly
evolving and intensely competitive, and we expect competition to intensify in
the future. Barriers to entry are relatively low, and current and new
competitors can launch new sites at a relatively low cost using commercially
available software. We currently or potentially compete with a number of other
companies. Our direct competitors include various online person-to-person
auction services, including Yahoo! Auctions, Amazon.com, Excite, Inc., Auction
Universe and a number of other small services, including those that serve
specialty or regional markets such as CityAuction. We also compete indirectly
with business-to-consumer online auction services such as Onsale, First Auction,
Surplus Auction and uBid. Traditional auction companies such as Sotheby's are
offering or have announced plans to create Internet auction sites. We
potentially face competition from a number of large online communities and
services that have expertise in developing online commerce and in facilitating
online person-to-person interaction. Some of these potential competitors,
including AOL, Lycos, Inc. and Microsoft Corporation, currently offer business-
to-consumer trading services and classified ad services. Some of these companies
also may introduce person-to-person trading to their large user populations.
Other large companies with strong brand recognition and experience in online
commerce, such as Cendant Corporation, QVC, USA Network and large newspaper or
media companies, also may seek to compete in the online auction market. The
principal competitive factors in our market include the following:
23
<PAGE>
. volume of transactions and selection of goods;
. community cohesion and interaction;
. system reliability;
. customer service;
. reliability of delivery and payment by users;
. brand recognition;
. website convenience and accessibility;
. level of service fees; and
. quality of search tools.
Some current and many potential competitors have longer company operating
histories, larger customer bases and greater brand recognition in other business
and Internet markets than we do. Some of these competitors also have
significantly greater financial, marketing, technical and other resources. Other
online trading services may be acquired by, receive investments from or enter
into other commercial relationships with larger, well established and well
financed companies. As a result, some of our competitors with other revenue
sources may be able to devote more resources to marketing and promotional
campaigns, adopt more aggressive pricing policies and devote substantially more
resources to website and systems development than we are able to. Increased
competition may result in reduced operating margins, loss of market share and
diminished value of our brand. Some of our competitors have offered services for
free and others may do this as well. We may be unable to compete successfully
against current and future competitors.
In order to respond to changes in the competitive environment, we may, from
time to time, make pricing, service or marketing decisions or acquisitions that
could harm our business. For example, we recently 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.
Our business is dependent on the development and maintenance of the Web
infrastructure.
The success of our service will depend largely on the development and
maintenance of the Web infrastructure. This includes maintenance of a reliable
network backbone with the necessary speed, data capacity and security, as well
as timely development of complementary products such as high speed modems, for
providing reliable Web access and services. Because global commerce and the
online exchange of information is new and evolving, we cannot predict whether
the Web will prove to be a viable commercial marketplace in the long term. The
Web has experienced, and is likely to continue to experience, significant growth
in the numbers of users and amount of
24
<PAGE>
traffic. If the Web continues to experience increased numbers of users,
increased frequency of use or increased bandwidth requirements, the Web
infrastructure may be unable to support the demands placed on it. In addition,
the performance of the Web may be harmed by increased users or bandwidth
requirements.
The Web has experienced a variety of outages and other delays as a result of
damage to portions of its infrastructure, and it could face outages and delays
in the future. This might include outages and delays resulting from the "Year
2000" problem. See "Management's Discussion and Analysis, Year 2000." These
outages and delays could reduce the level of Web usage as well as the level of
traffic and the processing of auctions on our service. In addition, the Web
could lose its viability due to delays in the development or adoption of new
standards and protocols to handle increased levels of activity or due to
increased governmental regulation. The infrastructure and complementary products
or services necessary to make the Web a viable commercial marketplace for the
long term may not be developed successfully or in a timely manner. Even if these
products or services are developed, the Web may not become a viable commercial
marketplace for services such as those that we offer.
Our business is subject to online commerce security risks.
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. Our security
measures may not prevent security breaches. Our failure to prevent security
breaches could harm our business. Currently, a significant number of our users
authorize us to bill their credit card accounts directly for all transaction
fees charged by us. We rely on encryption and authentication technology licensed
from third parties to provide the security and authentication technology to
effect secure transmission of confidential information, including customer
credit card numbers. Advances in computer capabilities, new discoveries in the
field of cryptography, or other developments may result in a compromise or
breach of the technology used by us to protect customer transaction data. Any
such compromise of our security could harm our reputation and, therefore, our
business. In addition, a party who is able to circumvent our security measures
could misappropriate proprietary information or cause interruptions in our
operations. An individual recently claimed to have misappropriated some of our
confidential information by breaking into our computer system. We may need to
expend significant resources to protect against security breaches or to address
problems caused by breaches. Security breaches like the recent one could damage
our reputation and expose us to a risk of loss or litigation and possible
liability. Our insurance policies carry low coverage limits, which may not be
adequate to reimburse us for losses caused by security breaches.
We must keep pace with rapid technological change to remain competitive.
The market in which we compete is characterized by rapidly changing
technology, evolving industry standards, frequent new service and product
introductions and enhancements and changing customer demands. These market
characteristics are worsened by the emerging nature of the Internet and the
apparent need of companies from a multitude of industries to offer Web-based
products and services. Our future success therefore will depend on our ability
to adapt to rapidly changing technologies, to adapt our services to evolving
industry standards and to continually improve the performance, features and
reliability of our service. Our failure to adapt to such changes would harm our
business. In addition, the widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could require
substantial expenditures to modify or adapt our services or infrastructure.
We need to develop new services, features and functions in order to expand.
We plan to expand our operations by developing new or complementary services,
products or transaction formats or expanding the breadth and depth of services.
We may be unable to expand our operations in a cost-effective or timely manner.
Even if we do expand, we may not maintain or increase our overall market
acceptance. If we launch a new business or service that is not favorably
received by consumers, it could damage our reputation
25
<PAGE>
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;
. arrangements to facilitate shipment of products; and
. methods to facilitate buyers' payments to sellers, such as credit card
services.
We may pursue strategic relationships with third parties to provide many of
these services. By using third parties to deliver these services, we may be
unable to control the quality of these services and our ability to address
problems if any of these third parties fails to perform adequately will be
reduced. Expanding our operations in this manner also will require significant
additional expenses and development, operations and other resources and will
strain our management, financial and operational resources. The lack of market
acceptance of any new services could harm our business.
Our growth will depend on our ability to develop our brand.
We believe that our historical growth has been largely attributable to word of
mouth. We have benefited from frequent and high visibility media exposure both
nationally and locally. We do not expect the frequency or quality of this media
exposure to continue. However, we believe that continuing to strengthen our
brand will be critical to achieving widespread acceptance of our service.
Promoting and positioning our brand will depend largely on the success of our
marketing efforts and our ability to provide high quality services. In order to
promote our brand, we will need to increase our marketing budget and otherwise
increase our financial commitment to creating and maintaining brand loyalty
among users. Brand promotion activities may not yield increased revenues, and
even if they do, any increased revenues may not offset the expenses we incurred
in building our brand. If we do attract new users to our service, they may not
conduct transactions over our service on a regular basis. If we fail to promote
and maintain our brand or incur substantial expenses in an unsuccessful attempt
to promote and maintain our brand, our business would be harmed.
We may be unable to adequately protect or enforce our intellectual property
rights.
We regard the protection of our copyrights, service marks, trademarks, trade
dress and trade secrets as critical to our success. We rely on a combination of
patent, copyright, trademark, service mark and trade secret laws and contractual
restrictions to protect our proprietary rights in products and services. We have
entered into confidentiality and invention assignment agreements with our
employees and contractors, and nondisclosure agreements with parties with which
we conduct business in order to limit access to and disclosure of our
proprietary information. These contractual arrangements and the other steps
taken by us to protect our intellectual property may 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.
26
<PAGE>
Our business is subject to consumer trends.
We derive substantially all of our revenues from fees received from sellers
for listing products for sale on our service and fees received from successfully
completed auctions. Our future revenues will depend upon continued demand for
the types of goods that are listed by users of our service. The popularity of
certain categories of items, such as toys, dolls and memorabilia, among
consumers may vary over time due to perceived scarcity, subjective value, and
societal and consumer trends in general. A decline in the popularity of, or
demand for, certain collectibles or other items sold through our service could
reduce the overall volume of transactions on our service, resulting in reduced
revenues. In addition, consumer "fads" may temporarily inflate the volume of
certain types of items listed on our service, placing a significant strain upon
our infrastructure and transaction capacity. These trends also may cause
significant fluctuations in our operating results from one quarter to the next.
Any decline in demand for the goods offered through our service as a result of
changes in consumer trends could harm our business.
- --------------------------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
Interest Rate Risk
The primary objective of eBay's investment activities is to preserve the
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, the Company maintains its portfolio
of cash equivalents and short-term investments in a variety of securities,
including both government and corporate obligations and money market funds. As
of March 31, 1999, approximately 54% of the Company's total portfolio will
mature in one year or less, with the remainder maturing in less than two years.
The following table presents the amounts of the Company's cash equivalents and
short-term investments that are subject to interest rate risk by year of
expected maturity and average interest rates as of March 31, 1999:
<TABLE>
<CAPTION>
Fair
1999 2000 Total Value
------- ------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Cash equivalents and short-term
investments........................................................ $27,164 $23,054 $50,218 $50,218
Average interest rates............................................... 3.3% 3.5%
</TABLE>
eBay did not hold derivative financial instruments as of March 31, 1999, and
has never held such instruments in the past. In addition, eBay had no
outstanding debt as of March 31, 1999.
Foreign Currency Risk
Currently the majority of eBay's sales and expenses are denominated in U.S.
dollars and as a result the Company has experienced no significant foreign
exchange gains and losses to date. While the Company does expect to effect some
transactions in foreign currencies during 1999, it does not expect that foreign
exchange gains or losses will be significant. The Company has not engaged in
foreign currency hedging to date.
- --------------------------------------------------------------------------------
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
27
<PAGE>
ITEM 1. LEGAL PROCEEDINGS
On March 23, 1999, the Company was sued by Network Engineering Software,
Inc. in the U.S. District Court for the Northern District of California for the
Company's alleged willful and deliberate violation of a patent. The suit seeks
unspecified monetary damages as well as an injunction against the Company's
operations. It also seeks treble damages and attorneys' fees and costs. The
Company believes that it has meritorious defenses against this suit and intends
to vigorously defend itself. The Company could be forced to incur material
expenses during this defense and in the event it were to lose this suit, its
business would be harmed.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The effective date of the Company's first registration statement, filed on
Form S-1 under the Securities Act of 1933 (No. 333-59097) relating to the
Company's initial public offering of its Common Stock, was September 23, 1998.
A total of 12,042,825 shares of Company's Common Stock were sold at a price of
$6.00 per share to an underwriting syndicate led by Goldman, Sachs & Co.,
Donaldson, Lufkin & Jenrette Securities Corporation, BancBoston Robertson
Stephens Inc. and BT Alex. Brown Incorporated. The offering commenced on
September 24, 1998, and closed on September 29, 1998. An additional 32,175
shares of Common stock were sold on behalf of a selling stockholder as part of
the same offering. The initial public offering resulted in gross proceeds of
$72.5 million, $5.1 million of which was applied toward the underwriting
discount. Expenses related to the offering totaled approximately $1.2 million.
Net proceeds to the Company and selling stockholder were $66.1 million and
$180,000, respectively. From the time of receipt through March 31, 1999, the
proceeds were all applied toward:
. Purchases and installation of machinery and equipment, $13,581,000
. Repayments of indebtedness, $414,000; and
. Temporary investments in municipal bonds and notes, $28,114,000.
The remaining proceeds are being used as working capital or are included
within cash, cash equivalents and short-term investments.
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.
28
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
27.01 Financial Data Schedule (EDGAR version only)
(b) There were no reports on Form 8-K filed during the quarter ended
March 31, 1999.
29
<PAGE>
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
eBAY INC.
Date: May 13, 1999 By: /s/ Margaret C. Whitman
----------------------------
Margaret C. Whitman
President and Chief Executive Officer
By: /s/ Gary F. Bengier
---------------------------
Gary F. Bengier
Chief Financial Officer and
Vice President of Operations
30
<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 MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRELY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001065088
<NAME> EBAY INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> MAR-31-1998 MAR-31-1999
<EXCHANGE-RATE> 1 1
<CASH> 31,790 24,850
<SECURITIES> 40,401 32,121
<RECEIVABLES> 9,491 17,075
<ALLOWANCES> (3,122) (4,971)
<INVENTORY> 0 0
<CURRENT-ASSETS> 83,385 92,663
<PP&E> 9,595 19,202
<DEPRECIATION> (1,764) (2,967)
<TOTAL-ASSETS> 92,483 109,712
<CURRENT-LIABILITIES> 8,038 18,112
<BONDS> 0 0
0 0
0 0
<COMMON> 121 121
<OTHER-SE> 84,327 91,479
<TOTAL-LIABILITY-AND-EQUITY> 92,483 109,712
<SALES> 0 0
<TOTAL-REVENUES> 5,981 34,010
<CGS> 0 0
<TOTAL-COSTS> 630 5,121
<OTHER-EXPENSES> 3,652 19,362
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 22 639
<INCOME-PRETAX> 1,721 10,166
<INCOME-TAX> 1,573 4,270
<INCOME-CONTINUING> 148 5,896
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 148 5,896
<EPS-PRIMARY> 0.00 0.06
<EPS-DILUTED> 0.00 0.05
</TABLE>
