<PAGE>
As filed with the Securities and Exchange Commission on March 25, 1999
Registration No. 333-
- --------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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eBay Inc.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 7389 77-0430924
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification no.)
</TABLE>
2005 Hamilton Avenue, Suite 350
San Jose, California 95125
(408) 558-7400
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
MICHAEL R. JACOBSON
Vice President, Legal Affairs, General Counsel and Secretary
2005 Hamilton Avenue, Suite 350
San Jose, California 95125
(408) 558-7400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
KENNETH L. GUERNSEY KEVIN P. KENNEDY
MICHAEL J. SULLIVAN Shearman & Sterling
KARYN R. SMITH 1550 El Camino Real
VIRGINIA C. EDWARDS Menlo Park, California 94025
ERIN A. SAWYER (650) 330-2200
Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, California 94111
(415) 693-2000
</TABLE>
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
---------------
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed Proposed
Title of Each Class of Amount Maximum Maximum Amount of
Securities to be to be Offering Price Aggregate Registration
Registered Registered(1) Per Share(2) Offering Price Fee
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<S> <C> <C> <C> <C>
Common Stock, par value
$.001 per share....... 7,475,000 $141.63 $1,058,684,250 $294,315
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</TABLE>
(1) Includes 975,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration pursuant to
Rule 457(c) of the Securities Act of 1933, as amended, and based upon the
average high and low sales prices on March 24, 1999, as reported on the
Nasdaq National Market.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated March 25, 1999.
6,500,000 Shares
eBay Inc.
[eBAY LOGO]
Common Stock
-----------
eBay is offering 4,250,000 shares to be sold in the offering. The selling
stockholders identified in this prospectus are offering an additional 2,250,000
shares. eBay will not receive any of the proceeds for the sale of shares by the
selling stockholders.
eBay's Common Stock is traded on the Nasdaq National Market under the symbol
"EBAY". On March 23, 1999, the last reported sale price for the Common Stock on
the Nasdaq National Market was $146.375 per share.
See "Risk Factors" beginning on page 6 to read about certain factors you
should consider before buying shares of the Common Stock.
-----------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price.................................. $ $
Underwriting discount.......................................... $ $
Proceeds, before expenses, to eBay............................. $ $
Proceeds, before expenses, to the selling stockholders......... $ $
</TABLE>
The underwriters may, under certain circumstances, purchase up to an
additional 975,000 shares from the selling stockholders at the initial public
offering price less the underwriting discount.
-----------
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
Goldman, Sachs & Co. Morgan Stanley Dean Witter
BancBoston Robertson Stephens
BT Alex. Brown
Donaldson, Lufkin & Jenrette
-----------
Prospectus dated , 1999.
<PAGE>
[Picture of sample items available for auction by eBay users with the following
text at bottom of page: "Still searching the Internet?"]
----------------
eBay(TM), the eBay logo, SafeHarbor(TM), Up4Sale(TM) and the "World's
Personal Trading Community"(TM) are trademarks of the Company. This prospectus
also includes trade dress, trade names and trademarks of other companies. Use
or display by eBay of other parties' trademarks, trade dress or products is not
intended to and does not imply a relationship with the trademark or trade dress
owners.
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
2
<PAGE>
DESCRIPTION OF ARTWORK:
The gatefold includes a sample picture of the eBay home page with the following
caption: "Welcome to eBay! It's where millions of people have already found
success. www.ebay.com."
The following text is contained on this gatefold:
[Two page screen shot of eBay home page with textual descriptions of eBay
service attributes, surrounded by the following text flowed to both sides:]
www.ebay.com
This is the place where over two million people from more than 50 different
countries visit every month.
"The buyers set the price!"
This is the online trading community that's much more than just another internet
site. eBay has become a part of millions of people's lives.
With more than 1000 categories, and over one million items available on any
given day, eBay is the largest and most popular person-to-person trading site on
the internet. All kinds of people, from all different walks of life are turning
to eBay to find all kinds of stuff.
"That's a lot of stuff!"
Hobbyists, collectors, even those running small businesses come to eBay to buy,
sell, and sometimes just trade information with other people who share the same
passions. And a lot of them have found their own personal success trading on
eBay.
They're succeeding because they've been able to expand in ways they'd never
imagined before eBay (boundaries, countries, even distribution have become
irrelevant on eBay).
"Just the tip of the iceberg" [indicating the twelve major categories]
When you buy or sell on eBay, you're dealing directly with another individual--
and someone who knows exactly what they're searching for. And everyone in the
eBay community is encouraged to talk about what it's like to do a deal with
someone. This feedback and rating system is a very efficient way to check out
the integrity of both sellers and buyers. Ask anyone who's been here . . . A
positive eBay rating is worth its weight in gold . . . but beware . . . too
many negative ratings, and nobody in the community is going to do business
with you.
"Great to do business with. Highly recommended. Honest and quick. A+++++++++++"
You can talk to people who like the same stuff you do!! (you might even make a
friend!)
So, as we're fond of saying around here at eBay . . . What are you searching
for? A rare 1840's Wedgewood Jasperware bowl? Mark McGwire's rookie year
trading card? A little personal success?
Come to eBay for a little visit. Who knows . . . you might find even more than
you came for. Happy Hunting!
Come for a visit.
www.ebay.com
The world's personal trading community.
(C) 1999 eBay Inc. All rights reserved. Registered trademarks and brands are the
property of their respective owners.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the Common Stock being sold in this
offering and our financial statements and notes to those statements appearing
elsewhere in this prospectus. Unless otherwise indicated, all information in
this prospectus (1) reflects a three-for-one stock split of the Common Stock
effected in March 1999 and (2) assumes the Underwriters' option to purchase
additional shares in the offering will not be exercised. See "Description of
Capital Stock" and "Underwriting." References in this prospectus to "eBay,"
"we," "our," "us" and the "Company" refer to eBay Inc., its California
predecessor and its consolidated subsidiary.
This prospectus contains forward-looking statements based on our current
expectations about our company and our industry. You can identify these
forward-looking statements when you see us using words such as "expect,"
"anticipate," estimate" and other similar expressions. These forward-looking
statements involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of the factors described in the "Risk Factors" section and elsewhere in
this prospectus. We undertake no obligation to publicly update any forward-
looking statements for any reason, even if new information becomes available or
other events occur in the future.
eBay
We are the world's largest and most popular person-to-person trading
community on the Internet, based on the number of items listed, number of users
and minutes of usage per month. We pioneered online person-to-person trading.
We have developed a Web-based community in which buyers and sellers are brought
together in an efficient and entertaining auction format to buy and sell items
such as antiques, coins, collectibles, computers, memorabilia, stamps and toys.
Our service permits sellers to list items for sale, buyers to bid on items of
interest and all eBay users to browse through listed items. Our 24-hour-a-day,
seven-day-a-week service is fully automated, topically arranged, intuitive and
easy to use.
From December 31, 1997 to December 31, 1998, the number of our registered
users grew from approximately 340,000 to over 2.1 million. We hosted over 13.6
million auctions during the fourth quarter of 1998, up from 2.0 million
auctions in the fourth quarter of 1997. As of December 31, 1998, we had over
1.0 million auctions listed in more than 1,000 categories. We believe that this
critical mass of buyers, sellers and items listed for sale creates a cycle that
helps us to continue to grow our user base. Sellers are attracted to our
service as a result of the large number of potential buyers, and buyers in turn
are attracted to our service by the broad selection of goods listed. Browsers
and buyers can search auction listings for specific items or search by
category, key word, seller name, recently commenced auctions or auctions about
to end. Our auction format creates a sense of urgency among buyers to bid for
goods and creates an entertaining and compelling trading environment. We also
provide buyers and sellers a place to socialize and to discuss topics of common
interest. This compelling trading environment fosters a large and growing
commerce-oriented online community.
3
<PAGE>
Our objective is to enhance our position as the world's leading online
person-to-person trading community. Key elements of our strategy include the
following:
. growing the eBay community and strengthening our brand, both to attract
new members and to maintain the vitality of the eBay community;
. broadening our trading platform by growing existing product categories,
promoting new product categories and offering services for specific
regions;
. fostering eBay community affinity and increasing community trust and
safety through services such as user verification and insurance;
. enhancing our website features and functionality through the
introduction of personalization features such as About Me, which permits
users to create their own home page free of charge on our website, and
the Gallery, an opportunity for sellers to showcase their items as
pictures in a photo catalog;
. expanding pre- and post-trade value-added services, such as assistance
with scanning and uploading photographs of listed items, third-party
escrow services and arrangements to make shipping of purchased items
easier; and
. developing international markets by actively marketing and promoting our
website in selected countries.
We were formed as a sole proprietorship in September 1995, incorporated in
California in May 1996 and reincorporated in Delaware in April 1998. Our
principal executive offices are located at 2005 Hamilton Avenue, Suite 350, San
Jose, California 95125. Our telephone number is (408) 558-7400 and our website
is located at www.ebay.com. Information contained on our website is not a part
of this prospectus.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Shares offered by eBay.................. 4,250,000 shares
Shares offered by the selling
stockholders........................... 2,250,000 shares
Shares to be outstanding after the
offering............................... 125,092,222 shares(1)
Use of proceeds......................... For general corporate purposes,
principally working capital and
capital expenditures.
Nasdaq National Market symbol........... "EBAY"
</TABLE>
Summary Financial Information
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1997 1998
------ ------- --------
<S> <C> <C> <C>
Statement of Income Data:
Net revenues........................................... $ 372 $ 5,744 $ 47,352
Gross profit........................................... 358 4,998 40,493
Income from operations................................. 253 1,487 6,161
Net income............................................. 148 874 2,398
Net income per share(2):
Basic................................................ $ 0.02 $ 0.04 $ 0.05
Weighted average shares--basic....................... 6,375 22,313 49,895
Diluted.............................................. $ 0.00 $ 0.01 $ 0.02
Weighted average shares--diluted..................... 42,945 82,660 114,590
Supplemental Operating Data:
Number of registered users at end of period............ 41 341 2,181
Gross merchandise sales(3)............................. $7,279 $95,271 $745,395
Number of auctions listed.............................. 289 4,394 33,668
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
---------------------
Actual As Adjusted(4)
Balance Sheet Data: ------- -------------
<S> <C> <C>
Cash and cash equivalents................................ $31,790 $631,110
Short-term investments................................... 40,401 40,401
Working capital.......................................... 75,347 674,667
Total assets............................................. 92,483 691,803
Debt and leases, long-term portion....................... -- --
Total stockholders' equity............................... 84,445 683,765
</TABLE>
- --------
(1) Based on shares of Common Stock outstanding as of March 1, 1999. Excludes:
. 9,888,294 shares of Common Stock issuable upon the exercise of stock
options outstanding as of March 1, 1999 at a weighted average exercise
price of $11.14; and
. 14,408,168 shares available for future grant or issuance under the
Company's various benefit plans.
See "Capitalization," "Management--Director Compensation," "Description of
Capital Stock" and Notes 9 and 10 of Notes to Consolidated Financial
Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for a description
of the method used to compute basic and diluted net income per share.
(3) Represents the aggregate sales prices of all goods for which an auction
was successfully concluded (i.e., there was at least one bid above the
seller's specified minimum price or reserve price, whichever was higher).
(4) Adjusted to give effect to the sale of the 4,250,000 shares of Common Stock
offered by the Company hereby, at an assumed public offering price of
$146.375, after deducting the estimated underwriting discount and estimated
offering expenses. See "Use of Proceeds" and "Capitalization."
5
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also may impair our business
operations. If any of the following risks actually occur, our business could be
harmed. In such case, the trading price of our Common Stock could decline, and
you may lose all or part of your investment.
We have a limited operating history.
Our company was formed as a sole proprietorship in September 1995 and we
incorporated in May 1996. We have only a limited operating history on which you
can base an evaluation of our business and prospects. As an online commerce
company in the early stage of development, we face increased risks,
uncertainties, expenses and difficulties. You should consider an investment in
our company in light of these risks, uncertainties, expenses and difficulties.
To address these risks and uncertainties, we must do the following:
. maintain and increase our number of registered users, items listed on
our service and completed auctions;
. maintain and grow our website and customer operations;
. continue to make trading through our service safer for users;
. maintain and enhance our brand;
. successfully execute our business and marketing strategy;
. continue to develop and upgrade our technology and information
processing systems;
. continue to enhance our service to meet the needs of a changing market;
. provide superior customer service;
. respond to competitive developments; and
. attract, integrate, retain and motivate qualified personnel.
We may be unable to accomplish one or more of these things, which could
cause our business to suffer. In addition, accomplishing one or more of these
things might be very expensive, which could harm our financial results.
Our operating results may fluctuate.
Our operating results have varied on a quarterly basis during our short
operating history. Our operating results may fluctuate significantly as a
result of a variety of factors, many of which are outside our control. Factors
that may affect our quarterly operating results include the following:
. our ability to retain an active user base, to attract new users who list
items for sale and who complete transactions through our service and to
maintain customer satisfaction;
. our ability to keep our website operational and to manage the number of
items listed on our service;
6
<PAGE>
. 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.
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
7
<PAGE>
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 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 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
8
<PAGE>
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 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. As a result, we have from time to
time been contacted by various federal, state and local regulatory agencies and
been told that they have questions with respect to the adequacy of the steps we
take to protect our users from fraud. For example, the City of New York--
Department of Consumer Affairs received complaints from
9
<PAGE>
users about transactions on our website. In investigating these complaints, the
Department of Consumer Affairs requested information about us and these
transactions. We have provided the requested information. We are likely to
receive additional inquiries from regulatory agencies in the future, which may
lead to action against us. We have responded to all inquiries from regulatory
agencies by describing our current and planned antifraud efforts. If one or
more of these agencies is not satisfied with our response to current or future
inquiries, the resultant investigations and potential fines or other penalties
could harm our business.
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.
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
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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.
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
sufficient 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.
In the quarter ended December 31, 1998, we experienced longer and more
frequent system interruptions than in the first three quarters of 1998. Our
website has been interrupted for periods ranging from five minutes to three
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. 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.
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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;
. 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
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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.
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
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.
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. Our
limited operating history makes it difficult to assess the impact of these
seasonal factors or whether or not our business is susceptible to cyclical
fluctuations in the U.S. economy. In addition, our rapid growth may have
overshadowed whatever seasonal or cyclical factors might have influenced our
business to date. Seasonal or cyclical variations in our business may become
more pronounced over time and may harm our results of operations in the future.
We are dependent on the continued growth of the online person-to-person
commerce market.
The market for the sale of goods over the Internet, particularly through
person-to-person trading, is a new and emerging market. Our future 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
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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.
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
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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 Powered by Onsale and Excite, Inc.,
both of which are free to sellers and buyers, 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. A number of traditional auction companies, including Butterfield &
Butterfield and 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 Amazon.com, America Online, Inc. ("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:
. 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
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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
timely development of complementary products such as high speed modems, for
providing reliable Web access and services. Because global commerce and the
online exchange of information is new and evolving, we cannot predict whether
the Web will prove to be a viable commercial marketplace in the long term. The
Web has experienced, and is likely to continue to experience, significant
growth in the numbers of users and amount of traffic. If the Web continues to
experience increased numbers of users, increased frequency of use or increased
bandwidth requirements, the Web infrastructure may be unable to support the
demands placed on it. In addition, the performance of the Web may be harmed by
increased users or bandwidth requirements.
The Web has experienced a variety of outages and other delays as a result of
damage to portions of its infrastructure, and it could face outages and delays
in the future. This might include outages and delays resulting from the "Year
2000" problem. See "--Our business could be harmed by Year 2000 compliance
issues." These outages and delays could reduce the level of Web usage as well
as the level of traffic and the processing of auctions on our service. In
addition, the Web could lose its viability due to delays in the development or
adoption of new standards and protocols to handle increased levels of activity
or due to increased governmental regulation. The infrastructure and
complementary products or services necessary to make the Web a viable
commercial marketplace for the long term may not be developed successfully or
in a timely manner. Even if these products or services are developed, the Web
may not become a viable commercial marketplace for services such as those that
we offer.
Our business could be harmed by Year 2000 compliance issues.
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Beginning on January 1,
2000, these code fields will need to accept
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four-digit entries to distinguish 21st century dates from 20th century dates.
Many companies' software and/or 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. Although we believe our own software is Year
2000 compliant, we may be wrong. If we are wrong, we could face unexpected
expenses to fix the problem or unanticipated website outages, either of which
could harm our business. We also use third-party equipment and software that
may not be Year 2000 compliant. For example, we rely on credit card companies
to collect the majority of our revenues from our users. Due to the nature of
the credit card system, some industry analysts have questioned the effect of
the year 2000 on credit card processing and billing. Failure of our credit card
vendors or other third-party equipment or software vendors to properly process
dates for the year 2000 and thereafter could require us to incur unanticipated
expenses in seeking alternative means of payment or hardware or software
replacements. It also could result in loss of revenues or unanticipated outages
of our website. Our marketing efforts are also dependent on the continued
operation of Internet portals and other Internet sites on which we advertise.
Although we have developed contingency plans with respect to collecting payment
under these circumstances, we are unable to make contingency plans if any
significant number of the computers constituting the Internet fail to properly
process dates for the year 2000 and there is a systemwide slowdown or
breakdown. Any interruption or significant degradation of Internet operations,
whether due to Year 2000 problems or otherwise, could harm our business.
Our business is subject to online commerce security risks.
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. Our security
measures may not prevent security breaches. Our failure to prevent security
breaches could harm our business. Currently, a significant number of our users
authorize us to bill their credit card accounts directly for all transaction
fees charged by us. We rely on encryption and authentication technology
licensed from third parties to provide the security and authentication
technology to effect secure transmission of confidential information, including
customer credit card numbers. Advances in computer capabilities, new
discoveries in the field of cryptography, or other developments may result in a
compromise or breach of the technology used by us to protect customer
transaction data. Any such compromise of our security could harm our reputation
and, therefore, our business. In addition, a party who is able to circumvent
our security measures could misappropriate proprietary information or cause
interruptions in our operations. An individual 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.
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We need to develop new services, features and functions in order to expand.
We plan to expand our operations by developing new or complementary
services, products or transaction formats or expanding the breadth and depth of
services. We may be unable to expand our operations in a cost-effective or
timely manner. Even if we do expand, we may not maintain or increase our
overall market acceptance. If we launch a new business or service that is not
favorably received by consumers, it could damage our reputation and diminish
the value of our brand. We anticipate that future services may include pre- and
post-trade services, including the following:
. the scanning and uploading of photographs of listed items;
. authentication and appraisal;
. 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
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from third parties, such as Oracle Corporation, Microsoft and Sun Microsystems
Inc., the suppliers of key database technology, the operating system and
specific hardware components for our service. These third-party technology
licenses may not continue to be available to us on commercially reasonable
terms. The loss of this technology could require us to obtain substitute
technology of lower quality or performance standards or at greater cost.
Our business is subject to consumer trends.
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. For example, during the three
months ended December 31, 1998, we had, at times, approximately 7% of our
listings involved in "Beanie Babies." 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.
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.
For example, in June 1998, we acquired Jump Incorporated ("Jump"), the
developer and operator of Up4Sale, an advertising-supported online trading
service. Although the integration of Jump is largely complete, the process of
integrating an acquired business, technology, service or product into our
business and operations may result in unforeseen operating difficulties and
expenditures. Integration of an acquired company also may require significant
management resources that would otherwise be available for ongoing development
of our business. Moreover, the anticipated benefits of any acquisition,
including Jump, may not be realized. We currently do not have any
understandings, commitments or agreements with respect to any other material
acquisition and no other material acquisition currently is being pursued. We
may be unable to identify, negotiate or finance future acquisitions
successfully, or to integrate successfully any acquisitions with our current
business. 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.
We are controlled by certain stockholders, executive officers and directors.
Upon completion of this offering, our executive officers and directors (and
their affiliates) will own approximately 73% of our outstanding common stock.
As a result, they may have the ability to control our company and direct our
affairs and business, including the election of directors and approval of
significant corporate transactions. This concentration of ownership may have
the effect of delaying, deferring or preventing a change in control of our
company and may make some transactions more difficult or impossible without the
support of these stockholders. Any of these events could decrease the market
price of our common stock.
A significant number of shares are eligible for sale and their sale could
depress our stock price.
Sales of substantial amounts of our common stock (including shares issued
upon the exercise of outstanding options) in the public market after this
offering could depress the market price of our
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common stock. These sales also might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate. Upon completion of this offering, we will have outstanding
125,092,222 shares of common stock (based upon shares outstanding as of March
1, 1999), assuming no exercise of the underwriters' over-allotment option. Of
these shares, the 6,500,000 shares sold in this offering are freely tradeable.
Of the remaining 118,592,222 shares, approximately 93,004,323 will be subject
to a 90-day lock-up agreement with representatives of the underwriters. Upon
expiration of these agreements, at the end of the lock-up period or earlier at
the discretion of the representatives of the underwriters, these shares are
generally freely tradeable, subject to repurchase pursuant to time-based
vesting schedules. An exception is that 13,775,508 shares held by Benchmark
Capital Partners, L.P. and Benchmark Founders' Fund, L.P. may not be sold to
the public pursuant to Rule 144 until January 2000.
Some anti-takeover provisions may affect the price of our common stock.
The Board of Directors has the authority to issue up to 5,000,000 shares of
preferred stock and to determine the preferences, rights and privileges of
those shares without any further vote or action by the stockholders. The Board
of Directors is contemplating recommending to our stockholders an increase in
the number of authorized shares of our common stock to 900,000,000 and shares
of our preferred stock to 10,000,000. The rights of the holders of common stock
may be harmed by the rights of the holders of any preferred stock that may be
issued in the future. Some provisions of our certificate of incorporation and
bylaws could have the effect of making it more difficult for a third party to
acquire a majority of our outstanding voting stock. These include provisions
that provide for a classified Board of Directors, prohibit stockholders from
taking action by written consent and restrict the ability of stockholders to
call special meetings. We are also subject to provisions of Delaware law that
prohibit us from engaging in any business combination with any interested
stockholder for a period of three years from the date the person became an
interested stockholder, unless certain conditions are met. This could have the
effect of delaying or preventing a change of control.
Management will have broad discretion over allocation of proceeds from this
offering.
The net proceeds to us from the sale of the 4,250,000 shares of common stock
we are offering are estimated to be approximately $599.3 million after
deducting the estimated underwriting discount and estimated offering expenses.
We currently have no specific plans for a significant portion of our net
proceeds from this offering. Consequently, our management will have the
discretion to allocate the net proceeds to uses that stockholders may not deem
desirable. We may be unable to yield a significant return on any investment of
the proceeds. Substantially all of our proceeds from the offering will be
invested in short-term, interest-bearing, investment grade securities
immediately following the offering.
You will experience immediate and substantial dilution in the net tangible book
value of the stock you purchase.
The assumed public offering price is substantially higher than the net
tangible book value per outstanding share of common stock. Purchasers of our
common stock will incur immediate and substantial dilution of $140.92 per share
in the net tangible book value of our common stock from the assumed public
offering price of $146.375. Additional dilution will occur upon the exercise of
outstanding options.
20
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,250,000 shares of
Common Stock offered by the Company hereby, at an assumed public offering price
of $146.375, are estimated to be approximately $599.3 million after deducting
the estimated underwriting discount and estimated offering expenses. The
Company expects to use the net proceeds from this offering for general
corporate purposes, including working capital. The Company may also use a
portion of the net proceeds, currently intended for general corporate purposes,
to acquire or invest in businesses, technologies, products or services that are
complementary to the Company's business. The Company has no present plans or
commitments and is not currently engaged in any negotiations with respect to
such transactions that are material. Pending such uses, the Company intends to
invest the net proceeds from this offering in short-term, interest-bearing,
investment grade securities. The Company will have significant discretion as to
the use of the net proceeds from this offering. See "Risk Factors--Management
will have broad discretion over allocation of proceeds from this offering." The
Company will not receive any proceeds from the sale of the Common Stock by the
selling stockholders. See "Principal and Selling Stockholders."
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been quoted on the Nasdaq National Market
under the symbol "EBAY" since eBay's initial public offering on September 24,
1998. Prior to such time, there was no public market for the Common Stock of
eBay. The following table sets forth, for the periods indicated, the high and
low prices per share of the Common Stock as reported on the Nasdaq National
Market.
<TABLE>
<CAPTION>
High Low
1998 ------- ------
<S> <C> <C>
Third Quarter (from September 24, 1998)................. $ 18.08 $13.71
Fourth Quarter.......................................... 103.75 8.42
1999
First Quarter (through March 23, 1999).................. 177.38 55.33
</TABLE>
On March 23, 1999, the reported last sale price of the Common Stock on the
Nasdaq National Market was $146.375 per share. As of March 1, 1999, there were
approximately 500 stockholders of record of the Common Stock.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its capital stock
and does not anticipate paying any cash dividends in the foreseeable future.
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1998 on an actual basis and as adjusted to reflect the application
of the net proceeds from the sale of the 4,250,000 shares of Common Stock
offered by the Company hereby, at an assumed public offering price of $146.375
per share, after deducting the estimated underwriting discount and estimated
offering expenses (in thousands, except share and per share data):
<TABLE>
<CAPTION>
December 31, 1998
--------------------
Actual As Adjusted
------- -----------
<S> <C> <C>
Stockholders' equity:
Preferred Stock, $0.001 par value; 5,000,000 shares
authorized; no shares issued or outstanding, actual and
as adjusted............................................ $ -- $ --
Common Stock, $0.001 par value; 195,000,000 shares
authorized; 121,760,080 issued and outstanding, actual;
125,035,080 issued and outstanding, as adjusted (1).... 121 125
Additional paid-in capital.............................. 86,265 685,581
Notes receivable from stockholders...................... (1,130) (1,130)
Unearned compensation................................... (4,139) (4,139)
Retained earnings....................................... 3,328 3,328
------- --------
Total stockholders' equity............................ 84,445 683,765
------- --------
Total capitalization................................ $84,445 $683,765
======= ========
</TABLE>
- --------
(1) Based on Common Stock outstanding as of December 31, 1998. Excludes:
. 9,246,381 shares of Common Stock issuable upon the exercise of stock
options outstanding as of December 31, 1998 at a weighted average exercise
price of $3.68; and
. 15,151,605 shares available for future grant or issuance under the
Company's various benefit plans.
Between December 31, 1998 and March 1, 1999, the Company granted options to
purchase 830,250 shares of Common Stock, cancelled 32,813 options to
purchase Common Stock and repurchased 54,000 shares of Common Stock.
Additionally, option holders exercised options to purchase 111,742 shares of
Common Stock. All option grants made subsequent to December 31, 1998 were
classified as available for future grant at December 31, 1998 and all
cancellations or repurchases made subsequent to December 31, 1998 have been
returned to the option plan as available for future grant. See
"Capitalization," "Management--Director Compensation," "Description of
Capital Stock" and Notes 9 and 10 of Notes to Consolidated Financial
Statements.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with, and are qualified by reference to, the Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
report. The consolidated statement of income data for the years ended
December 31, 1996, 1997 and 1998 and the consolidated balance sheet data at
December 31, 1997 and 1998, are derived from, and are qualified by reference
to, the audited consolidated financial statements of the Company included
elsewhere in this report.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996(1) 1997 1998
-------------------------- -------------
Consolidated Statement of Income Data: (in thousands, except per share data)
<S> <C> <C> <C>
Net revenues.......................... $ 372 $ 5,744 $ 47,352
Cost of net revenues.................. 14 746 6,859
----------- ------------ -------------
Gross profit........................ 358 4,998 40,493
----------- ------------ -------------
Operating expenses:
Sales and marketing................. 32 1,730 19,841
Product development................. 28 831 4,606
General and administrative.......... 45 950 9,080
Amortization of acquired
intangibles........................ -- -- 805
----------- ------------ -------------
Total operating expenses........... 105 3,511 34,332
----------- ------------ -------------
Income from operations................ 253 1,487 6,161
Interest and other income, net........ 1 56 869
----------- ------------ -------------
Income before income taxes............ 254 1,543 7,030
Provision for income taxes............ (106) (669) (4,632)
----------- ------------ -------------
Net income............................ $ 148 $ 874 $ 2,398
=========== ============ =============
Net income per share(2):
Basic............................... $ 0.02 $ 0.04 $ 0.05
=========== ============ =============
Weighted average shares--basic...... 6,375 22,313 49,895
=========== ============ =============
Diluted............................. $ 0.00 $ 0.01 $ 0.02
=========== ============ =============
Weighted average shares--diluted.... 42,945 82,660 114,590
=========== ============ =============
Supplemental Operating Data:
Number of registered users at end of
period............................... 41 341 2,181
Gross merchandise sales(3)............ $ 7,279 $ 95,271 $ 745,395
Number of auctions listed............. 289 4,394 33,668
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
------ -------
Consolidated Balance Sheet Data: (in thousands)
<S> <C> <C>
Cash and cash equivalents...................................... $3,723 $31,790
Short-term investments......................................... -- 40,401
Working capital................................................ 3,843 75,347
Total assets................................................... 5,619 92,483
Debt and leases, long-term portion............................. 305 --
Series B Mandatorily Redeemable Convertible Preferred Stock and
Series B warrants............................................. 3,018 --
Total stockholders' equity..................................... 1,015 84,445
</TABLE>
- --------
(1) Includes the results of operations for the Company's predecessor sole
proprietorship from September 1995 to December 1995. The sole
proprietorship had no revenues and immaterial expenses prior to January 1,
1996.
(2) See Note 1 of Notes to Consolidated Financial Statements for a description
of the method used to compute basic and diluted net income per share,
respectively.
(3) Represents the aggregate sales prices of all goods for which an auction was
successfully concluded (i.e., there was at least one bid above the seller's
specified minimum price or reserve price, whichever is higher).
23
<PAGE>
SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA
Effective June 30, 1998, eBay acquired all the outstanding shares of Jump,
the developer and operator of Up4Sale, an advertising-supported online trading
service in an auction format. The acquisition has been accounted for using the
purchase method of accounting, and accordingly the purchase price has been
allocated to the tangible and intangible assets acquired and liabilities
assumed on the basis of their respective fair values on the acquisition date.
The unaudited pro forma consolidated statement of income data reflects the
acquisition of Jump as if such acquisition had occurred on January 1, 1998. The
pro forma consolidated statement of income data is presented for informational
purposes only and may not be indicative of the results of operations had the
acquisition occurred on January 1, 1998, nor do they purport to indicate the
future results of the operations of eBay.
<TABLE>
<CAPTION>
Year Ended
December 31, 1998
---------------------
(in thousands, except
per share data)
<S> <C>
Pro Forma Consolidated Statement of Income Data:
Net revenues.............................................. $47,364
Cost of net revenues...................................... 6,987
-------
Gross Profit............................................ 40,377
-------
Operating expenses:
Sales and marketing..................................... 19,841
Product development..................................... 4,614
General and administrative.............................. 9,101
Amortization of acquired intangibles.................... 1,310
-------
Total operating expenses.............................. 34,866
-------
Income from operations.................................... 5,511
Interest and other income, net............................ 868
-------
Income before income taxes................................ 6,379
Provision for income taxes................................ (4,632)
-------
Net income ............................................... $ 1,747
=======
Pro forma net income per share (1):
Basic................................................... $ 0.02
=======
Weighted average shares--basic.......................... 88,787
=======
Diluted................................................. $ 0.01
=======
Weighted average shares--diluted........................ 129,491
=======
</TABLE>
- --------
(1) See Note C of Notes to Consolidated Pro Forma Financial Information for a
description of the method used to compute basic and diluted net income per
share.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
eBay is the world's largest and most popular person-to-person trading
community on the Internet, based on the number of items listed, number of users
and minutes of usage per month. eBay pioneered online person-to-person trading
by developing a Web-based community in which buyers and sellers are brought
together in an efficient and entertaining auction format to buy and sell
personal items such as antiques, coins, collectibles, computers, memorabilia,
stamps and toys. The eBay service permits sellers to list items for sale,
buyers to bid on items of interest and all eBay users to browse through listed
items. The Company's 24-hour-a-day, seven-day-a-week service is fully
automated, topically arranged, intuitive and easy to use.
eBay was formed as a sole proprietorship in September 1995 and operated its
online auction service under the name of "Auction Web." In order to build a
critical mass of customers, the Company offered this service without charge
until February 1996. The Company was incorporated in May 1996, but had no
employees other than the founder until July 1996 and, at December 31, 1996, had
only six employees. During its first two years, the Company attracted buyers
and sellers almost exclusively through word of mouth. In September 1997, the
Company began to target potential customers and to build and promote its brand
through online banner ads and promotions and advertisements in targeted
publications. Also in September 1997, the Company renamed its auction service
"eBay" and launched a second generation of this service with a substantially
redesigned user interface and a new robust, scalable "backend" transaction
processing architecture. The Company's total number of employees increased to
41 by December 31, 1997 and to 138 by December 31, 1998. From December 31, 1997
to December 31, 1998, the number of registered eBay users grew from
approximately 340,000 to over 2.1 million and the number of simultaneous
auctions being conducted through eBay increased from approximately 200,000 to
over 1.0 million. Total gross merchandise sales (the aggregate sales prices of
all goods for which an auction was successfully concluded) grew from
approximately $100 million in 1997 to over $740 million in 1998.
Substantially all of the Company's revenues are derived from placement and
success fees paid by sellers. The Company does not charge fees to buyers and,
to date, has chosen to sell almost no advertising on its website. Sellers pay a
nominal placement fee to list items for sale as follows:
. $0.25 for an auction with a minimum starting price of less than $10.00;
. $0.50 for a minimum starting price of $10.00 to $24.99;
. $1.00 for a minimum starting price of $25.00 to $49.99; and
. $2.00 for a minimum starting price of $50.00 or more.
By paying additional placement fees, sellers can have items featured in
various ways. Sellers can highlight their auctions by utilizing a bold font for
the auction heading for an additional fee of $2.00. Sellers with a favorable
feedback rating can have their auctions featured as "Featured Auctions" for
$99.95, which allows their items to be rotated on the eBay home page, or as
"Category Featured Auctions" for $14.95, which allows their items to be
featured within a particular eBay product category. Additionally, sellers can
add seasonal "icons" (such as a shamrock in connection with St. Patrick's Day)
next to their listing for $1.00, include a photograph of their item in the
Gallery section for $0.25 or feature their item in the Gallery section for
$19.95.
Sellers for whom a three-, five- or seven-day auction is successfully
concluded (i.e., there is at least one bid above the seller's specified minimum
or reserve price, whichever is higher) also pay a success fee for each item
sold that is equal to:
. 5% of the first $25 of the purchase price;
25
<PAGE>
. 2.5% of that portion of the purchase price from $25.01 to $1,000; and
. 1.25% of that portion of the purchase price over $1,000.
Revenues from placement fees are recognized at the time that the item is
listed; revenues related to success fees are recognized at the time that the
auction is successfully concluded. At no point during the auction process does
eBay 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 the Company 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 and
expenditures for advertising and promotion. The Company intends to increase its
expenses significantly, and in particular its advertising, promotion and
personnel expenses, in an effort to maintain a high level of revenue growth.
Effective June 30, 1998, eBay acquired all of the outstanding shares of Jump
Incorporated, the developer and operator of Up4Sale, an advertising-supported
online trading service in an auction format. The acquisition was accounted for
using the purchase method of accounting, and accordingly the purchase price was
allocated to the tangible and intangible assets acquired and liabilities
assumed on the basis of their fair values on the acquisition date. The fair
value of intangible assets was determined using a combination of methods,
including replacement cost estimates for acquired research and development and
completed technology, a risk-adjusted income approach for the acquired customer
list and the amounts paid for covenants not to compete. The total purchase
price of approximately $2.3 million consisted of 428,544 shares of eBay's
common stock with an estimated fair value of approximately $2.0 million and
other acquisition related expenses of approximately $335,000, consisting
primarily of payments for non-compete agreements totaling approximately
$208,000 and legal and other professional fees. Of the total purchase price,
approximately $150,000 was allocated to in-process technology and was
immediately charged to operations as the technology had not reached
technological feasibility as of the acquisition date and had no alternative
future use. The remainder of the purchase price was allocated to net tangible
liabilities assumed ($31,000) and intangible assets, including completed
technology ($500,000), the customer list ($1.5 million), covenants not to
compete ($208,000) and goodwill ($24,000). The intangible assets are being
amortized over their estimated useful lives, which range from eight to 24
months.
The Company has operated profitably since the first quarter of 1996, when it
began charging fees for its auction service. The Company has only a limited
operating history on which to base an evaluation of its business and prospects.
eBay's prospects must be considered in light of the risks, uncertainties,
expenses and difficulties frequently encountered by companies in their early
stages of development, particularly companies in new and rapidly evolving
markets such as online commerce.
It is difficult for the Company to forecast its revenues or earnings
accurately. The Company believes that period-to-period comparisons of its
operating results may not be meaningful and should not be relied upon as an
indication of future performance. The Company does not have backlog, and almost
all of its net revenues each quarter are derived from auctions that are listed
and completed during that quarter. In order to respond to competitive
developments, the Company may from time to time make pricing, service or
marketing decisions that could harm its business. The Company's 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 its
common stock would almost certainly decline.
26
<PAGE>
Quarterly Results of Operations
The following table sets forth, for the periods presented, certain data from
eBay's consolidated statement of income, such data as a percentage of net
revenues and certain supplemental operating data. The consolidated statement of
income data has been derived from 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. This
information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this prospectus. The
operating results in any quarter are not necessarily indicative of the results
that may be expected for any future period.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------
Mar. 31, June 30, Sep. 30, Dec. 31, Mar. 31, June 30, Sep. 30, Dec. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands, except percentages; unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 604 $ 1,054 $ 1,459 $ 2,627 $ 5,981 $ 8,941 $ 12,935 $ 19,495
Cost of net revenues.... 33 127 253 333 630 1,106 2,103 3,020
------ ------- ------- ------- -------- -------- -------- --------
Gross profit........... 571 927 1,206 2,294 5,351 7,835 10,832 16,475
------ ------- ------- ------- -------- -------- -------- --------
Operating expenses:
Sales and marketing.... 83 129 369 1,149 2,106 2,504 5,476 9,755
Product development.... 58 151 257 365 518 1,030 1,514 1,544
General and
administrative........ 95 138 260 457 1,028 3,159 2,115 2,778
Amortization of
acquired
intangibles........... -- -- -- -- -- 150 327 328
------ ------- ------- ------- -------- -------- -------- --------
Total operating
expenses............ 236 418 886 1,971 3,652 6,843 9,432 14,405
------ ------- ------- ------- -------- -------- -------- --------
Income from operations.. 335 509 320 323 1,699 992 1,400 2,070
Interest and other
income, net............ 2 2 26 26 22 54 111 682
------ ------- ------- ------- -------- -------- -------- --------
Income before income
taxes.................. 337 511 346 349 1,721 1,046 1,511 2,752
Provision for income
taxes.................. (144) (218) (147) (160) (1,573) (979) (848) (1,232)
------ ------- ------- ------- -------- -------- -------- --------
Net income.............. $ 193 $ 293 $ 199 $ 189 $ 148 $ 67 $ 663 $ 1,520
====== ======= ======= ======= ======== ======== ======== ========
As a percentage of net revenues:
Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of net revenues.... 5.5 12.0 17.3 12.7 10.5 12.4 16.3 15.5
------ ------- ------- ------- -------- -------- -------- --------
Gross profit........... 94.5 88.0 82.7 87.3 89.5 87.6 83.7 84.5
------ ------- ------- ------- -------- -------- -------- --------
Operating expenses:
Sales and marketing.... 13.7 12.3 25.3 43.7 35.2 28.0 42.3 50.1
Product development.... 9.6 14.3 17.6 13.9 8.7 11.5 11.7 7.9
General and
administrative........ 15.7 13.1 17.9 17.4 17.2 35.3 16.4 14.2
Amortization of
acquired
intangibles........... -- -- -- -- -- 1.7 2.5 1.7
------ ------- ------- ------- -------- -------- -------- --------
Total operating
expenses............ 39.0 39.7 60.8 75.0 61.1 76.5 72.9 73.9
------ ------- ------- ------- -------- -------- -------- --------
Income from operations.. 55.5 48.3 21.9 12.3 28.4 11.1 10.8 10.6
Interest and other
income, net............ 0.3 0.2 1.8 1.0 0.4 0.6 0.9 3.5
------ ------- ------- ------- -------- -------- -------- --------
Income before income
taxes.................. 55.8 48.5 23.7 13.3 28.8 11.7 11.7 14.1
Provision for income
taxes.................. (23.8) (20.7) (10.1) (6.1) (26.3) (11.0) (6.6) (6.3)
------ ------- ------- ------- -------- -------- -------- --------
Net income.............. 32.0% 27.8% 13.6% 7.2% 2.5% 0.7% 5.1% 7.8%
====== ======= ======= ======= ======== ======== ======== ========
Supplemental operating
data:
Number of registered
users at end of
period................. 88 150 223 341 580 851 1,265 2,181
Gross merchandise sales
(1).................... $9,337 $17,630 $24,281 $44,023 $104,113 $139,633 $195,046 $306,603
Number of auctions
listed................. 443 794 1,178 1,979 4,209 6,584 9,236 13,639
</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).
27
<PAGE>
Net Revenues
eBay's net revenues increased sequentially during each of the past eight
quarters. Substantially all of these increases resulted from growth in the
number of items of merchandise listed by sellers for auction on the Company's
website and growth in the number of auction transactions successfully
concluded. The Company did not increase the amounts of its basic placement fees
or success fees in any of the past eight quarters. Increases in fees for
specific featured placements and in average transaction size did not have a
material impact on net revenue growth. The Company's growth rates are not
sustainable and it expects growth rates will decline in the future.
Cost of Net Revenues
Cost of net revenues primarily consists of costs for customer support and
website operations, including fees for independent contractors, compensation
for customer support and website operations personnel, ISP connectivity
charges, bank processing charges for customer fees paid by credit cards,
depreciation of the equipment required for eBay's website operations,
amortization of technology acquired in the Jump acquisition in the second
quarter of 1998, and costs associated with revenue sharing agreements. The
Company's cost of net revenues increased substantially in absolute dollars, and
generally increased as a percentage of net revenues, in each of the past eight
quarters. The increases in the 1997 quarters were due primarily to increased
personnel expenses and, to a lesser extent, additional ISP connectivity charges
and increased bank processing charges.
Rapid growth in net revenues and the fixed nature of certain components of
cost of net revenues caused cost of net revenues to decline to 10.5% of net
revenues in the first quarter of 1998 from 12.7% in the fourth quarter of 1997.
In the third quarter of 1998, the Company significantly increased its customer
support personnel, website operations personnel, its use of outside
contractors, and accordingly experienced an increase in personnel-related
costs. Also in the third quarter of 1998, the Company began a significant build
up of its computer network in order to handle the increasing volume of
transactions on the eBay service resulting in increased depreciation expense as
well as increased ISP connectivity charges. All of these factors, combined with
a slowing growth rate of net revenues beginning in the second quarter of 1998,
resulted in increases in cost of net revenues as a percentage of net revenues
from 10.5% in the first quarter of 1998 and 12.4% in the second quarter of
1998, to 16.3% in the third quarter of 1998. The slight increase in the revenue
growth rate in the fourth quarter of 1998 resulted in the decrease of cost of
net revenues to 15.5% in the fourth quarter of 1998. Amortization of technology
acquired in the Jump acquisition also contributed to the absolute dollar
increase in the third and fourth quarters of 1998. The Company anticipates that
its costs of net revenues will vary, and may increase, as a percentage of net
revenues in future quarters as it expands its website operations group, website
facilities and pays royalties for software licenses to enhance the eBay
website.
Sales and Marketing
eBay's sales and marketing expenses primarily consist of compensation for
sales and marketing personnel, advertising, trade show and other promotional
costs, expenses for creative design of the eBay website and overhead costs.
Sales and marketing expenses increased substantially in absolute dollars and
generally increased as a percentage of net revenues in each of the past eight
quarters, primarily due to increases in compensation associated with additional
personnel and, in the last two quarters of 1997 and each quarter of 1998,
increases in advertising and promotional expenses.
A slower expansion of advertising and promotional expenses and an increase
in net revenues from the first quarter of 1998 to the second quarter of 1998
caused sales and marketing expenses to decrease to 28.0% of net revenues in the
second quarter of 1998. Substantial increases in advertising expenses,
including expenses associated with a marketing agreement with AOL, caused sales
and marketing expenses to increase to 42.3% of net revenues in the third
quarter of 1998.
28
<PAGE>
These increased expenses, as well as expenses associated with a national print,
broadcast and online advertising campaign, caused sales and marketing expenses
to increase to 50.1% of net revenues in the fourth quarter of 1998. The Company
expects to increase its sales and marketing expenses substantially in future
quarters, particularly for advertising and promotion, and, as a result, expects
that its sales and marketing expenses will increase in absolute dollars and
will vary as a percentage of net revenues for at least the next several
quarters. In addition, the Company is obligated to make aggregate payments to
AOL of $12.0 million over the three-year term of the marketing agreement it
entered into with AOL in August 1998, of which $4.0 million was paid and $1.7
million was expensed during 1998. 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. Under this agreement,
the Company's remaining payment obligations to AOL were cancelled. See Notes 6
and 11 of Notes to Consolidated Financial Statements.
Product Development
eBay's product development expenses consist primarily of compensation for
product development staff and payments to outside contractors and, to a lesser
extent, of depreciation on equipment used for development and overhead costs.
The Company expenses product development costs as they are incurred. Product
development expenses increased substantially in absolute dollars in each
quarter throughout the past eight quarters. Compensation and other personnel-
related expenses grew most rapidly on a percentage basis between the first
quarter of 1997 and the second quarter of 1997. Product development expenses
increased to 11.5% of net revenues in the second quarter of 1998 from 8.7% in
the first quarter of 1998 as the Company significantly increased its
engineering staff and the use of outside contractors, while the rate of growth
of net revenues declined. Increases in engineering staff were level with net
revenues growth in the third quarter of 1998 and, accordingly, product
development expenses as a percentage of net revenues remained relatively
constant. In the fourth quarter of 1998, product development expenses remained
relatively unchanged from the prior quarter, while net revenues grew. This
resulted in a decline in product development expenses to 7.9% of net revenues
in the fourth quarter of 1998 from 11.7% in the third quarter of 1998. The
Company expects that product development expenses will continue to increase in
absolute dollars and will vary as a percentage of net revenues in future
quarters primarily due to the addition of headcount relative to the rate of net
revenues growth.
General and Administrative
eBay's general and administrative expenses consist primarily of compensation
for personnel and, to a lesser extent, fees for outside professional advisors
and overhead costs. General and administrative expenses increased as a
percentage of net revenues in the third quarter of 1997 as personnel-related
costs increased. General and administrative expenses increased as a percentage
of net revenues to 35.3% in the second quarter of 1998 because, in that
quarter, the Company donated 321,750 shares of its common stock, with an
estimated fair value of $1.2 million, to a charitable foundation, recorded
compensation expense of $429,000 associated with purchases of restricted common
stock by its outside directors and recorded compensation expense of $403,000
associated with the grant of stock options to employees. General and
administrative expenses decreased as a percentage of net revenues to 16.4% in
the third quarter of 1998 and 14.2% in the fourth quarter of 1998 as increases
in personnel related costs and professional fees were more than offset by
increases in net revenues. The Company expects that general and administrative
expenses will continue to increase in absolute dollars in future quarters as
the Company continues to build its
29
<PAGE>
administrative staff and infrastructure, but may eventually decline as a
percentage of net revenues, and fluctuate from quarter to quarter depending on
the rate of net revenue growth.
Amortization of Acquired Intangibles
During the second quarter of 1998, eBay recognized expenses totaling
$150,000 for in-process technology assumed in the acquisition of Jump and
charged it to operations because the technology had not reached the stage of
technological feasibility at the acquisition date and had no alternative future
use. The Company recognized amortization expense of approximately $328,000 in
each of the third and fourth quarters of 1998 associated with the covenants not
to compete, customer list and goodwill assumed in the Jump acquisition.
Amortization associated with these intangible assets is anticipated to be
approximately $328,000 in each of the first three quarters of 1999, and
approximately $26,000 in each of the fourth quarter of 1999 and the first and
second quarters of 2000, assuming no additional acquisitions and no impairment
of value resulting in an acceleration of amortization. See Note 2 of Notes to
Consolidated Financial Statements.
Interest and Other Income, Net
Interest and other income, net, consists of interest earned on cash, cash
equivalents and short-term investments offset by interest expense. Interest and
other income, net, increased in absolute dollars in the third quarter of 1997,
due primarily to interest earned on the proceeds from the June 1997 sale of
Series B Preferred Stock and warrants and remained relatively constant until
the second quarter of 1998. The increase in the second quarter of 1998 was a
result of interest earned on proceeds from the May 1998 exercise of these
warrants and interest earned from loans made to employees in connection with
the exercise of their stock options. The increase in the third quarter of 1998
reflected a full quarter of these earnings. The increase in the fourth quarter
of 1998 resulted from income from investment of the proceeds from the Company's
initial public offering at the end of the third quarter of 1998. In addition,
the Company repaid all borrowings under its line of credit in the fourth
quarter of 1998.
Provision for Income Taxes
eBay's effective federal and state income tax rate was approximately 43.0%
in each quarter of 1997, 92.2% in the first two quarters of 1998 and 48.7% in
the last two quarters of 1998. The 1998 effective tax rate differed from the
combined federal and state statutory rate of approximately 41.8% as a result of
the non-deductibility of charges for stock based compensation and expenses
related to the acquisition of Jump. The variations in the quarterly 1998
effective tax rates resulted from quarterly adjustments to the estimated annual
effective tax rate based on the difference between estimated earnings and
actual earnings reported. See Note 7 of Notes to Consolidated Financial
Statements.
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 amount is being amortized over the four-year vesting period
of such options. Of the total unearned compensation, approximately $25,000,
$421,000, $650,000, $818,000 and $773,000 was amortized in the quarters ended
December 31, 1997 and March 31, June 30, September 30 and December 31, 1998,
respectively. The Company expects quarterly amortization of between
approximately $700,000 and $440,000 during 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. See Note
10 of Notes to Consolidated Financial Statements.
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<PAGE>
Years Ended December 31, 1996, 1997 and 1998
The following table sets forth, for the periods presented, certain data from
eBay's consolidated statement of income as a percentage of net revenues. This
information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Net revenues......................................... 100.0% 100.0% 100.0%
Cost of net revenues................................. 3.8 13.0 14.5
------- ------- -------
Gross profit....................................... 96.2 87.0 85.5
------- ------- -------
Operating expenses:
Sales and marketing................................ 8.6 30.1 41.9
Product development................................ 7.5 14.5 9.7
General and administrative......................... 12.1 16.5 19.2
Amortization of acquired intangibles............... -- -- 1.7
------- ------- -------
Total operating expenses......................... 28.2 61.1 72.5
------- ------- -------
Income from operations............................... 68.0 25.9 13.0
Interest and other income, net....................... 0.3 1.0 1.9
------- ------- -------
Income before income taxes........................... 68.3 26.9 14.9
Provision for income taxes........................... (28.5) (11.7) (9.8)
------- ------- -------
Net income........................................... 39.8% 15.2% 5.1%
======= ======= =======
</TABLE>
Net Revenues
eBay's net revenues increased from $372,000 in 1996 to $5.7 million in 1997
and to $47.4 million in 1998, primarily as a result of growth in the number of
items of merchandise listed by sellers for auction on the eBay website and
growth in the number of auction transactions successfully completed. The
increase from 1996 to 1997 was, to a lesser extent, the result of small
increases in average transaction size and certain increases in the placement
fees for various forms of featured placements for listed items.
Cost of Net Revenues
Cost of net revenues increased from $14,000, or 3.8% of net revenues, in
1996 to $746,000, or 13.0% of net revenues, in 1997, and to $6.9 million, or
14.5% of net revenues, in 1998. The increases primarily resulted from the
Company's expansion of its customer support organization, increases in bank
processing charges for customer fees paid by credit cards, depreciation of the
equipment required for the eBay website operations and ISP connectivity
charges.
Sales and Marketing
eBay's sales and marketing expenses increased from $32,000, or 8.6% of net
revenues, in 1996 to $1.7 million, or 30.1% of net revenues, in 1997, and to
$19.8 million, or 41.9% of net revenues, in 1998. The increases from 1996 to
1997 primarily resulted from the building of a sales and marketing
organization, which began late in the fourth quarter of 1996, and the
commencement of significant advertising and promotional activities, which began
in the third quarter of 1997. The increases from 1997 to 1998 primarily
resulted from substantial increases in advertising and promotional expenses,
including costs associated with a national print, broadcast and online
advertising campaign and expenses associated with a marketing agreement with
AOL, both of which commenced in the second half of 1998, as well as from
continued growth in the number of sales and marketing personnel.
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<PAGE>
Product Development
eBay's product development expenses increased from $28,000, or 7.5% of net
revenues, in 1996 to $831,000, or 14.5% of net revenues, in 1997, and to $4.6
million, or 9.7% of net revenues, in 1998. The increases in absolute dollars
primarily resulted from increases in salaries, benefits and other personnel-
related expenses as the Company significantly increased the size of its
research and development staff, as well as expenses related to contractors and
consultants used to increase the product development department. These
increases were more than offset by increases in net revenues in 1998, resulting
in the decline in development expenses as a percentage of net revenues from
14.5% in 1997 to 9.7% in 1998.
General and Administrative
eBay's general and administrative expenses increased from $45,000, or 12.1%
of net revenues, in 1996 to $950,000, or 16.5% of net revenues, in 1997, and to
$9.1 million, or 19.2% of net revenues, in 1998. The increase from 1996 to 1997
primarily resulted from increases in salaries, benefits and other personnel-
related expenses and, to a lesser extent, from increases in the allowance for
doubtful accounts, fees for professional services and overhead costs. The
increase from 1997 to 1998 primarily resulted from the Company's contribution
in June 1998 of 321,750 shares of common stock with an estimated fair value of
$1.2 million to a charitable foundation. In June 1998, the Company also
recorded compensation expense of $429,000 associated with purchases of
restricted shares of common stock by the Company's outside directors. The
increase from 1997 to 1998 also resulted from the Company recording a
compensation expense of approximately $1.7 million associated with stock
options granted to employees. Increases in personnel-related expenses, the
allowance for doubtful accounts, fees for professional services and overhead
costs also contributed to the increase from 1997 to 1998.
Amortization of Acquired Intangibles
During 1998, eBay recognized expenses totaling $150,000 for in-process
technology assumed in the acquisition of Jump and charged this amount to
operations because the technology had not reached the stage of technological
feasibility at the acquisition date and had no alternative future use. The
Company also recognized amortization expense of approximately $655,000 in 1998
associated with the covenants not to compete, the customer list and goodwill
assumed in the Jump acquisition. See Note 2 of Notes to Consolidated Financial
Statements.
Interest and Other Income, Net
eBay's interest and other income, net increased from $1,000 in 1996 to
$56,000 in 1997 and to $869,000 in 1998. The increase from 1996 to 1997 was a
result of interest earned on increased cash, cash equivalents and short-term
investments, from the net proceeds of the Company's sales of preferred stock
and warrants in June 1997. The increase in 1998 from 1997 resulted from
interest earned on the net proceeds from the Company's initial public offering
in September 1998 and, to a lesser extent, interest earned on proceeds from the
exercise of warrants in May 1998 and interest earned from loans made to
employees in connection with the exercise of their stock options.
Provision for Income Taxes
eBay's effective federal and state income tax rate was 41.7% in 1996, 43.4%
in 1997 and 65.9% in 1998. The 1998 effective tax rate differed from the
combined federal and state statutory rate of approximately 41.8% as a result of
the non-deductibility of charges for stock based compensation and expenses
related to the acquisition of Jump. The variation in the effective tax rates
for 1996 and
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<PAGE>
1997 reflects differences in the deductibility of certain expenses. See Note 7
of Notes to the Consolidated Financial Statements.
Stock-Based Compensation
In connection with the grant of certain stock options from May 1997 through
June 30, 1998, eBay recorded aggregate unearned compensation totaling $6.8
million, which amount is being amortized over the four-year vesting period of
such options. Of the total unearned compensation, approximately $25,000 was
amortized in 1997 and $2.7 million was amortized in 1998. These amortization
amounts were allocated among the operational expense categories based upon the
primary activity of the related employees. See Note 10 of Notes to Consolidated
Financial Statements.
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 acquired
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.
Net cash provided by operating activities was $113,000 in 1996, $789,000 in
1997 and $6.3 million in 1998. Net cash provided by operating activities
resulted primarily from the Company's net income before non-cash charges for
amortization of unearned compensation, the provision for doubtful accounts and
depreciation and amortization, as well as increases in various liability
categories, offset in part by increases in accounts receivable.
Net cash used in investing activities was $25,000 in 1996, $680,000 in 1997
and $49.3 million in 1998. Net cash used in investing activities in each of
1996 and 1997 was the result of purchases of property and equipment, primarily
computer equipment and furniture and fixtures. During 1998, $8.9 million in
cash was used to purchase property and equipment and $40.4 million was used to
purchase short-term investments.
Net cash provided by financing activities was $15,000 in 1996, $3.5 million
in 1997 and $71.0 million in 1998. Net cash provided by financing activities in
1996 resulted almost entirely from sales of common stock and preferred stock.
Net cash provided by financing activities in 1997 resulted primarily from the
sale of $3.0 million of preferred stock and warrants and borrowings of $545,000
against a bank line of credit. See Notes 5 and 8 of Notes to Consolidated
Financial Statements. Net cash provided by financing activities in 1998
resulted primarily from net proceeds of $66.1 million from the Company's
initial public offering in September 1998, the exercise of warrants for $2.0
million and proceeds from sales of restricted common stock in the aggregate
amount of $3.5 million. These proceeds were offset in part by principal
payments of $598,000 on a bank line of credit and equipment leases. At December
31, 1998, the principal source of liquidity for the Company was $72.2 million
of cash, cash equivalents and short-term investments.
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 December 31, 1998, approximately 55% of the Company's total portfolio will
mature in one year or less, with the remainder maturing in less than two years.
See Note 1 of Notes to Consolidated Financial Statements.
33
<PAGE>
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 December 31, 1998:
<TABLE>
<CAPTION>
Fair
1999 2000 Total Value
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Cash equivalents and short-term
investments............................ $34,852 $28,114 $62,966 $62,966
Average interest rates.................. 3.8% 3.5%
</TABLE>
eBay did not hold derivative financial instruments as of December 31, 1998,
and has never held such instruments in the past. In addition, eBay had no
outstanding debt as of December 31, 1998.
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.
eBay had no material commitments for capital expenditures at December 31,
1998 but expects such expenditures to be at least $14.0 million in 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. As a result of eBay's August 1998 marketing agreement with AOL, the
Company is obligated to make aggregate payments to AOL of $12.0 million over
the three-year term of the agreement. Of this amount, $4.0 million was paid in
1998, and $1.7 million was expensed, resulting in a prepaid balance of $2.3
million and remaining obligation of $8.0 million at December 31, 1998. 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. Under this agreement, the Company's remaining payment obligations to
AOL were cancelled. See Notes 6 and 11 of Notes to Consolidated Financial
Statements.
The Company believes that its existing cash, cash equivalents and short-term
investments and any cash generated from operations together with the proceeds
from this offering 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. If additional funds are raised through the
issuance of equity securities, the percentage ownership of the Company's then-
current stockholders would be reduced.
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
34
<PAGE>
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 webside 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.
Recent Accounting Pronouncements
The American Institute of Certified Public Accountants issued Statement of
Position ("SOP") No. 98-1, "Software for Internal Use," which provides guidance
on accounting for the cost of computer software developed or obtained for
internal use. SOP No. 98-1 is effective for financial statements for fiscal
years beginning after December 15, 1998. The Company does not expect that the
adoption of SOP No. 98-1 will have a material impact on its financial
statements.
35
<PAGE>
BUSINESS
This prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in these forward-looking statements. Factors that may cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
The Company
eBay is the world's largest and most popular person-to-person trading
community on the Internet, based on the number of items listed, number of users
and minutes of usage per month. eBay pioneered online person-to-person trading.
The Company has developed a Web-based community in which buyers and sellers are
brought together in an efficient and entertaining auction format to buy and
sell 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. The Company's 24-hour-a-day, seven-day-a-week service is fully
automated, topically arranged, intuitive and easy to use. From December 31,
1997 to December 31 1998, the number of registered eBay users grew from
approximately 340,000 to over 2.1 million. eBay hosted over 13.6 million
auctions during the fourth quarter of 1998, up from 2.0 million auctions in the
fourth quarter of 1997. As of December 31, 1998, the Company had over 1.0
million auctions listed in over 1,000 categories. The Company believes that
this critical mass of buyers, sellers and items listed for sale creates a cycle
that helps eBay to continue to grow its user base. Sellers are attracted to
eBay as a result of the large number of potential buyers, and buyers in turn
are attracted to eBay by the broad selection of goods listed on eBay. Browsers
and buyers can search auction listings for specific items or search by
category, key word, seller name, recently commenced auctions or auctions about
to end. eBay's auction format creates a sense of urgency among buyers to bid
for goods and creates an entertaining and compelling trading environment. eBay
also provides buyers and sellers a place to socialize and to discuss topics of
common interest. This compelling trading environment fosters a large and
growing commerce-oriented online community.
Industry Background
Growth of the Internet and Online Commerce
The Internet has emerged as a global medium enabling millions of people
worldwide to share information, communicate and conduct business
electronically. International Data Corporation ("IDC") estimates that the
number of Web users will grow from approximately 150 million worldwide in 1998
to approximately 500 million worldwide by the end of 2003.
The growing adoption of the Web represents an enormous opportunity for
businesses to conduct commerce over the Internet. IDC estimates that commerce
over the Internet will increase from approximately $40 billion worldwide in
1998 to approximately $900 billion worldwide in 2003. While companies initially
focused on facilitating and conducting transactions between businesses over the
Internet, the business-to-consumer market has also become a significant market
and is rapidly growing. These companies typically use the Internet to offer
standard products and services that can be easily described with graphics and
text and do not necessarily require physical presence for purchase, such as
books, CDs, videocassettes, automobiles, home loans, airline tickets and online
banking and stock trading. The Internet gives these companies the opportunity
to develop one-to-one relationships with customers worldwide from a central
location without having to make the significant investments required to build a
number of local retail presences or develop the printing and mailing
infrastructure associated with traditional direct marketing activities. While
companies have generally focused on applying these benefits in business-to-
business and business-to-consumer transactions, a significant market
opportunity exists to apply these same advantages to facilitate person-to-
person trading over the Internet.
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<PAGE>
The Person-to-Person Trading Market Opportunity
The exchange of goods among individuals and small dealers--person-to-person
trading--traditionally has been conducted through trading forums such as
classified advertisements, collectibles shows, garage sales and flea markets or
through intermediaries, such as auction houses. These markets are highly
inefficient for the following reasons:
. their fragmented, regional nature makes it difficult and expensive for
buyers and sellers to meet, exchange information and complete
transactions;
. they offer a limited variety and breadth of goods;
. they often have high transaction costs from intermediaries; and
. they are information inefficient, as buyers and sellers lack a reliable
and convenient means of setting prices for sales or purchases.
Despite these inefficiencies, the Company believes that the market for
traditional person-to-person trading in the U.S., based upon estimates of the
amounts spent through auctions, classified ads and on collectibles, exceeded
$100 billion in goods sold in 1998.
The Internet offers for the first time the opportunity to create a
compelling global marketplace that overcomes the inefficiencies associated with
traditional person-to-person trading while offering the benefits of Internet-
based commerce to the person-to-person trading market. An Internet-based
centralized trading place offers the following benefits:
. facilitates buyers and sellers meeting, listing items for sale,
exchanging information, interacting with each other and, ultimately,
consummating transactions;
. allows buyers and sellers to trade directly, bypassing traditional
intermediaries and lowering costs for both parties;
. is global in reach, offering buyers a significantly broader selection of
goods to purchase and providing sellers the opportunity to sell their
goods efficiently to a broader base of buyers;
. offers significant convenience, allowing trading at all hours and
providing continually updated information; and
. fosters a sense of community through direct buyer and seller
communication, thereby enabling interaction between individuals with
mutual interests.
In addition, this community orientation, facilitation of direct buyer and
seller communication and efficient access to information on a particular buyer
or seller's trading history can help alleviate the risks of anonymous trading.
As a result, there exists a significant market opportunity for an Internet-
based centralized trading place that applies the unique attributes of the
Internet to facilitate person-to-person trading.
The eBay Solution
eBay pioneered person-to-person trading of a wide range of goods over the
Internet using an efficient and entertaining auction format and has grown into
the largest and most popular person-to-person trading community on the
Internet. The core eBay service permits sellers to list items for sale, buyers
to bid for and purchase items of interest and all eBay users to browse through
listed items from any place in the world at any time. eBay offers buyers a
large selection of new and used items that can be difficult and costly to find
through traditional means. eBay also enables sellers to reach a larger number
of buyers more cost-effectively than traditional person-to-person trading
forums.
The eBay service originally was introduced in September 1995 to create an
efficient marketplace for individuals to trade with one another. Begun as a
grassroots online trading community, eBay
37
<PAGE>
primarily attracted buyers and sellers through word of mouth and by providing
buyers and sellers with a place to socialize, to discuss topics of common
interest and ultimately to trade goods with one another. The number of
categories under which eBay users list goods for auction has grown from 10,
when eBay was first introduced, to more than 1,000 as of December 31, 1998.
Categories on eBay currently include antiques, coins, collectibles, computers,
memorabilia, stamps and toys.
The principal reasons for eBay's success are the following:
Largest Online Trading Market. Unlike traditional person-to-person trading
forums, eBay has aggregated a critical mass of buyers, sellers and items listed
for sale. As a result, eBay has become the largest online person-to-person
trading market. As of December 31, 1998, eBay had over 2.1 million registered
users and offered more than 1,000 product categories with over 1.0 million
items for auction, many of which were unique or otherwise hard to find. The
Company believes that this critical mass of buyers, sellers and items listed
for sale creates a cycle that helps eBay continue to grow its user base.
Sellers are attracted to eBay as a result of the large number of potential
buyers and buyers in turn are attracted to eBay by the broad selection of goods
listed on eBay.
Compelling Trading Environment. eBay has created a distinctive trading
environment by utilizing an entertaining auction format, establishing
procedural rules and promoting community values that are designed to facilitate
trade and communications between buyers and sellers, without the need for eBay
to intervene and play a significant role in the trading process. The auction
format creates a sense of urgency among buyers to bid for goods because of the
uncertain future availability of a unique item on the website. Similarly, by
accepting multiple bids at increasing prices, its auction format provides
sellers a more efficient means of obtaining a maximum price for their products.
To date, well over 50% of auctions listed on eBay have been successfully
completed.
Trust and Safety Programs. The Company has developed a number of programs
designed to make users more comfortable with dealing with an unknown trading
partner over the Web. The Company's Feedback Forum encourages every eBay user
to provide comments and feedback on other eBay users with whom they interact
and offers user profiles that provide feedback ratings and incorporate these
comments. In addition, eBay's recently expanded SafeHarbor program provides
guidelines for trading, helps provide information to resolve user disputes,
responds to reports of misuse of the eBay service and, if necessary, warns or
suspends users who violate the terms of the Company's user agreement. The
Company's recent trust and safety initiatives, including user verifications,
insurance, integrated escrow and authentications and appraisals, are intended
to bolster eBay's reputation as a safe place to trade.
Cost-Effective, Convenient Trading. eBay allows its buyers and sellers to
bypass traditionally expensive, regionally fragmented intermediaries and
transact business on a 24-hour-a-day, seven-day-a-week basis. Because eBay
carries no inventory, sellers bypass costly traditional intermediaries, thus
allowing for lower selling costs and increasing the sellers' likelihood of
finding buyers willing to pay his or her target price. To list an item on eBay,
sellers pay only a nominal placement fee ranging from $0.25 to $2.00 and then
pay an additional success fee that steps down from 5% to 1.25% of the
transaction value only if an auction is concluded with a successful bid. As a
result, sellers for the first time can sell relatively inexpensive items which
had previously been prohibitively expensive to list through most traditional
trading forums. By allowing sellers to conveniently reach a broad range of
buyers, eBay also addresses the time-consuming, logistical inconvenience of
individual selling. Buyers have access to a broad selection of items and avoid
the need to pay expensive markups or commissions to intermediaries. Buyers are
not charged for trading through eBay. The critical mass of items listed on eBay
provides a mutual benefit for buyers and sellers to more effectively determine
an appropriate price for an item.
Strong Community Affinity. The Company believes that fostering direct
interaction between buyers and sellers with similar interests has enabled it to
create a loyal, active community of users.
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eBay has introduced a variety of features and services designed to strengthen
this sense of community among eBay users. The Company facilitates
communications between buyers and sellers by offering chat rooms, bulletin
boards and customer support assistance from eBay personnel and other eBay users
and by providing "About Me" user pages and community features that are designed
to encourage consumer loyalty and repeat usage.
Intuitive User Experience. The eBay service is a fully automated, topically
arranged, intuitive and easy-to-use online service that is available on a 24-
hour-a-day, seven-day-a-week basis. Within minutes of completing a simple
online form, a seller can list items for sale on the service, and buyers can
submit bids for items quickly and easily. Buyers can easily search the hundreds
of thousands of items listed by category or specific item. During the course of
the auction, bidders are notified by email of the status of their bids on a
daily basis and are notified immediately if they are outbid. Sellers and
successful bidders are automatically notified when an auction is completed. To
assist users further, the Company offers customer support via email, staffed on
a 24-hour-a-day, seven-day-a-week basis.
eBay Strategy
The Company's objective is to build upon its position as the world's leading
online person-to-person trading community. The key elements of eBay's strategy
are:
Expand the eBay Community and Strengthen the eBay Brand. The Company
believes that building greater awareness of the eBay brand within and beyond
the eBay community is critical to expanding its user base and to maintaining
the vitality of the eBay community. Although the Company's historical growth
has been largely attributable to word of mouth, the Company has introduced
aggressive marketing efforts to build its user base and its brand name. In
October 1998, the Company launched a substantial ongoing national advertising
campaign, both in traditional media and online, that is designed to attract new
eBay users. The campaign has included advertising in targeted publications,
strategic advertising and sponsorship placements on high traffic websites, a
major radio advertising campaign and active participation in other forums such
as selected trade shows. The Company has benefited from frequent and high
visibility media exposure both nationally and locally. In August 1998, the
Company entered into a three-year marketing relationship with AOL whereby eBay
will be prominently featured in areas of AOL's proprietary service and on
AOL.com. In March 1999, the Company expanded the scope of its strategic
relationship with AOL. Under this new four year 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, AOL.com, Digital Cities, ICQ,
CompuServe and Netscape. The Company is focusing on reinforcing its brand
within the existing eBay community through marketing programs on the eBay
website and sales of eBay-branded merchandise. See "--Marketing."
Broaden the eBay Trading Platform. The Company intends to pursue a multi-
pronged strategy for growing the eBay platform within existing product
categories, across new product categories and regionally. The Company will
target key product categories in its user programs and marketing activities.
The Company has expanded and developed existing product categories by
introducing category-specific bulletin boards and chat rooms, integrating
category-specific content, advertising its service in targeted publications and
participating in targeted trade shows. In addition, the Company intends to
broaden the range of products offered on its trading platform by seeking to
attract new users from the general audience of Internet users and adding
product categories, content and other services or features to meet this new
user demand.
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Foster eBay Community Affinity. The Company believes that it has developed
the largest and one of the most loyal person-to-person trading communities on
the Web and that enhancing the eBay community experience will help the Company
foster further growth and a greater sense of loyalty among eBay users. The
Company seeks to maintain a critical mass of frequent buyers and sellers with a
vested interest in the eBay community so that sellers will continue to be
attracted to the service by the large number of potential buyers and buyers
will be attracted to eBay by the large number of items listed by these sellers.
The Company's recent trust and safety initiatives, including user
verifications, insurance, integrated escrow and authentications and appraisal,
are intended to bolster eBay's reputation as a safe place to trade. Consistent
with its desire to foster community, the Company has organized a charitable
fund, known as the eBay Foundation, and intends to involve the members of the
eBay community in determining to which charitable purposes the eBay
Foundation's funds will be applied. See "--The eBay Service--Community
Services."
Enhance Features and Functionality. The Company intends to update and
enhance the features and functionality of eBay frequently in order to continue
to improve the user trading experience through eBay. The Company recently
introduced personalization features such as About Me, which offers users the
opportunity to create their own personal home page free of charge on eBay. In
January 1999, the Company initiated a proprietary presentation format in the
"Antiques" category, the Gallery, which showcases auction items in a catalog of
pictures rather than text. The Company plans to introduce the Gallery to other
eBay categories in 1999. The Company intends to introduce other features, such
as new auction formats, category-specific content, the ability to search for
auction items being sold within driving distance of an identified region and
other features designed to enhance the eBay experience. The Company will
continue to provide rapid system response and transaction processing time by
investing in its infrastructure in order to accommodate additional users,
content and auctions.
Expand Value-Added Services. In order to offer an "end-to-end" person-to-
person trading service, the Company intends to provide a variety of pre- and
post-trade services to enhance the user experience. The Company intends to
introduce new services and expand current ones, such as its SafeHarbor program,
to facilitate the exchange of goods so that buyers and sellers will feel more
comfortable sending money or goods to an unknown trading partner. The Company
recently improved its Feedback Forum to distinguish between transaction-
specific feedback and general feedback, provided integrated third-party escrow
services and has announced that it intends to establish a Verified eBay User
program to encourage users to provide eBay with additional identity
verification. eBay recently implemented a free insurance program that generally
insures items up to a value of $200, with a $25 deductible, for users with a
non-negative feedback rating. The Company anticipates that future services may
include pre-trade services, such as services to facilitate scanning and
uploading of photographs of listed items and authentication and appraisal
services, and post-trade services, such as third-party escrow services,
arrangements to facilitate shipment of products and methods to facilitate
buyers' payments to sellers, such as credit card services. The Company may
pursue strategic relationships with third parties to provide many of these
value-added services.
Develop International Markets. The Company believes that the Internet
provides a significant opportunity for the creation of a global person-to-
person trading market. The Company intends to take advantage of this
opportunity by leveraging the eBay service and brand name internationally by
developing eBay for selected international markets and marketing and promoting
these services actively. The Company has introduced country-specific home pages
for Canada and the United Kingdom and has entered into a joint venture with a
subsidiary of one of the largest media companies in Australia and New Zealand.
The Company believes that its user base already includes users located in over
50 countries.
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The eBay Service
The eBay trading platform is a robust, Internet-based, person-to-person
centralized trading place that facilitates buying and selling of a wide variety
of items.
[DIAGRAM OF BUYING-SELLING PROCESS]
Registration. While any visitor to eBay can browse through the eBay service
and view the items listed for auction, in order to bid for an item or to list
an item for sale, buyers and sellers must first register with eBay. Users
register by completing a short online form and thereafter can immediately bid
for an item or list an item for sale. Users in Canada and the United Kingdom
may instead register through a country-specific home page.
Buying on eBay. Buyers typically enter eBay through its home page, which
contains a listing of product categories that allows for easy exploration of
current auctions. Bidders can search for specific items by browsing through a
list of auctions within a category or subcategory and then "click through" to a
detailed description for a particular item. Bidders also can search specific
categories or the entire database of auction listings using keywords to
describe the types of products in which they are interested, and eBay's search
engine will generate a list of relevant auctions with links to the detailed
descriptions. Each auction is assigned a unique identifier so that users can
easily search for and track specific auctions. Users also can search for a
particular bidder or seller by name in order to review his or her auction and
feedback history. Within each category section, eBay highlights auctions
commenced within the past 24 hours in a "New Today" section; auctions ending on
that day in an "Ending Today" section; and auctions ending within three hours
under a "Going, Going, Gone" section. Once a bidder has found an item of
interest and registered with eBay, the bidder enters the maximum amount he or
she is willing to pay at that time. In the event of competitive bids, the eBay
service automatically increases bidding in increments based upon the then
current highest bid for the item, up to the bidder's maximum price. As eBay
encourages direct interaction between buyers and sellers, bidders wishing
additional information about a listed item can access the seller's email
address and contact the seller for additional information. The Company believes
that this interaction between bidders and sellers leverages the personal, one-
on-one nature of person-to-person trading on the Web and is an important
element of the eBay experience. Once each bid is made, eBay sends a
confirmation to the bidder via email, an outbid notice to the next highest
bidders and automatically updates the item's auction status. During the course
of the auction, eBay notifies bidders of the status of their bids via email on
a daily basis and notifies them immediately after they are outbid. Bidders are
not charged for making bids or purchases through eBay.
Selling on eBay. A seller registered with eBay can list a product for
auction by completing a short online form. The seller selects a minimum price
for opening bids for the item and chooses
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whether the auction will last three, five or seven days. Additionally, a seller
may select a reserve price for an item, which is the minimum price at which the
seller is willing to sell the item and is typically higher than the minimum
price set for opening bids. The reserve price is not disclosed to bidders. A
seller can elect to sell items in individual auctions or, if he or she has
multiple identical items, can elect to hold a "Dutch Auction." For example, an
individual wishing to sell 10 identical watches could hold 10 individual
auctions or hold a Dutch Auction in which the 10 highest bidders would each
receive a watch at the same price and all lower bids would be rejected. To be
eligible to hold a Dutch auction, a seller must have a sufficiently high
feedback rating and must have been a registered seller for at least 60 days. A
seller may also specify that an auction will be a private auction. With this
format, bidders' e-mail addresses are not disclosed on the item screen or
bidding history screen.
Sellers pay a nominal placement fee to list items for sale--$0.25 for an
auction with a minimum starting price of less than $10.00, $0.50 for a minimum
starting price of $10.00 to $24.99, $1.00 for a minimum starting price of
$25.00 to $49.99 and $2.00 for a minimum starting price of $50.00 or more. By
paying incremental placement fees, sellers can have items featured in various
ways. The seller can highlight his or her auctions by utilizing a bold font for
the auction heading for an additional fee of $2.00. A seller with a favorable
feedback rating can have his or her auction featured as a "Featured Auction"
for $99.95, which allows the seller's item to be rotated on the eBay home page,
or as a "Category Featured Auction" for $14.95, which allows his or her item to
be featured within a particular eBay category. The seller can choose to place a
seasonal icon (such as a shamrock in connection with St. Patrick's Day) next to
his or her listing for $1.00. A seller can also include a description of the
product with links to the seller's website. In addition, the seller can include
a photograph in the description if the seller posts the photograph on a website
and provides eBay with the appropriate Web address. Items auctioned in the
Gallery section of the "Antiques" category are all showcased in a catalog of
pictures rather than text. A seller who uses a photograph in his or her listing
can have this photograph included in the Gallery section for $0.25 or featured
in the Gallery section for $19.95. The Company plans to introduce this
proprietary presentation format to other eBay categories in 1999. During the
course of an auction, sellers are notified of the status of their auctions on a
daily basis via email.
How Transactions are Completed. At the end of an auction period, if a bid
exceeds the minimum price and, if one is set, the reserve price, eBay
automatically notifies the buyer and seller via email and the buyer and seller
can then consummate the transaction independently of eBay. At the time of the
email notification, eBay charges the seller a success fee equal to 5% of the
first $25 of the purchase price, 2.5% of that portion of the purchase price
from $25.01 to $1,000, and 1.25% of that portion of the purchase price over
$1,000. At no point during the process does the Company take possession of
either the item being sold or the buyer's payment for the item. Rather, the
buyer and seller must independently arrange for the shipment of and payment for
the item, with the buyer typically paying for shipping. A seller can view the
buyer's feedback rating and then determine the manner of payment, such as
personal check, cashier's check or credit card, and also whether to ship the
item before or after the payment is received. Under the terms of the Company's
user agreement, if a seller receives one or more bids above the stated minimum
or reserve price, whichever is higher, the seller is obligated to complete a
transaction, although the Company has no power to force the seller or bidder to
complete the transaction other than to suspend them from using the eBay
service. In the event the buyer and seller are unable to complete the
transaction and the seller notifies eBay, eBay credits the seller the amount of
the success fee. Invoices for placement fees, additional listing fees and
success fees are sent via email to sellers on a monthly basis. Typically,
sellers have a credit card account on file with eBay and that account is
charged shortly after the invoice is sent.
Feedback Forum. eBay pioneered this feature to facilitate the establishment
of reputations within its community by encouraging individuals to record
comments about their trading partners on
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each transaction or other eBay users with whom they have interacted. Every
registered eBay user has a feedback profile containing compliments, criticisms
and other comments by users who have conducted business or interacted with the
person. A recent enhancement to the Feedback Forum permits users to
differentiate between transaction-specific feedback and general feedback. This
information is recorded in a feedback profile that includes a feedback rating
for the person and indicates comments from other eBay users who have interacted
with that person over the past seven days, the past month, the past six months
and beyond. Users who have developed positive reputations over time will have a
star symbol displayed next to their user name, which is color coded to indicate
the amount of positive feedback as compared to negative feedback received by
the user. eBay users may review a person's feedback profile to check on the
person's reputation within the eBay community before deciding to bid on an item
listed by that person or in determining how to complete the payment for and
delivery of the item.
The terms of the Company's user agreement prohibit actions that would
undermine the integrity of the Feedback Forum, such as a person's leaving
positive feedback about himself or herself through other accounts or leaving
multiple negative feedback for others through other accounts. The Feedback
Forum system has several automated features designed to detect and prevent some
forms of abuse. For example, feedback posting from the same account, positive
or negative, cannot affect a user's net feedback rating (i.e., the number of
positive postings, less the number of negative postings) by more than one
point, no matter how many comments an individual makes. Furthermore, in order
to discourage users from registering for the purpose of leaving excessive
positive or negative feedback, a user must be registered with eBay for at least
five days in order to leave feedback. Users who receive a sufficiently negative
net feedback rating have their registrations suspended and are unable to bid on
or list items for sale. The Company believes its Feedback Forum is extremely
useful in overcoming initial user hesitancy when trading over the Web as it
reduces the anonymity and uncertainty of dealing with an unknown trading
partner. See "Risk Factors--We are subject to risks associated with information
disseminated through our service."
Trust and Safety Initiatives. The Company has developed a number of programs
designed to make users more comfortable with dealing with an unknown trading
partner over the Web. In addition to the Feedback Forum, the Company offers the
SafeHarbor program, which provides guidelines for trading, helps provide
information to resolve user disputes and responds to reports of misuses of the
eBay service. The Company's SafeHarbor staff of 28 persons, including regular
employees and contractors, investigates users' complaints of possible misuse of
eBay and takes appropriate action, including issuing warnings to users or
suspending users from bidding on or listing items for sale. Some of the
complaints the SafeHarbor staff investigates include various forms of bid
manipulation, malicious posting of negative feedback and posting illegal items
for sale. The SafeHarbor staff also provides information to assist users with
disputes over the quality of the goods sold or other fraudulent activity and,
upon receipt of an officially filed, written claim of fraud from a user, will
generally suspend the offending user from eBay. Also, upon receipt of a written
claim of intellectual property infringement by the owner of the intellectual
property, the Company will remove the offending item from eBay. Users who
infringe intellectual property rights more than once are suspended. To assist
intellectual property owners, the Company is developing numerous tools,
including an automated daily key word search that will enable owners to locate
quickly potentially infringing auction items and dedicated email accounts
established solely for owners to more easily contact eBay with regard to
questionable items. In addition, the Company has increased the number of
personnel reviewing potentially illegal items. The Company's trust and safety
initiatives, including user verifications, insurance, integrated escrow and
authentications and appraisals, are intended to bolster eBay's reputation as a
safe place to trade. See "Risk Factors--Our business may be harmed by
fraudulent activities on our website."
What Can Be Purchased or Sold on eBay. The eBay service has grown from
offering 10 product categories when it was first introduced in September 1995
to offering more than 1,000
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categories as of December 31, 1998. As the number of product categories has
grown, the Company periodically organizes the categories under different
headings to reflect the major types of items currently listed. As of December
31, 1998, these product categories were organized under the following headings:
<TABLE>
<S> <C>
Antiques Jewelry, Gemstones
Books, Movies, Music Photo & Electronics
Coins & Stamps Pottery & Glass
Collectibles Sports Memorabilia
Computers Toys & Beanie Babies
Dolls, Figures Miscellaneous
</TABLE>
Each category has numerous subcategories. As of December 31, 1998, eBay
offered a selection of over 1.0 million items, with the most popular items sold
on eBay being those that are relatively standardized or are well-represented
with a photo (and therefore can be evaluated to some degree without a physical
inspection), are small and easily shippable, and are relatively inexpensive. As
the eBay community grows and additional items are listed, the Company will
continue to organize auctions under additional categories to respond to the
needs of the eBay community.
Community Services. Beyond providing a convenient means of trading, eBay has
devoted substantial resources to building an online person-to-person trading
community, which the Company believes is one of the strongest on the Web. Key
components of the Company's community philosophy are maintaining an honest and
open marketplace and treating individual users with respect. The Company offers
a variety of community and support features that are designed to solidify the
growth of the eBay community and to build eBay user affinity and loyalty. eBay
facilitates email communications between buyers and sellers by offering:
. category-specific chat rooms;
. the eBay Cafe (a chat room for the entire eBay community);
. a bulletin board devoted to user feedback on new features;
. an announcements section that covers new features on eBay or other eBay
news;
. customer support boards; and
. ""items wanted" listings where users can post notices seeking specific
items.
eBay also offers My eBay, which permits users to receive a report of their
recent activity on eBay, including bidding activity, selling activity, account
balances, favorite categories and recent feedback. Users with their own Web
pages also can post link buttons from the user's page to eBay and to a list of
items the user is selling on eBay. The Company recently introduced About Me,
which offers users the opportunity to create their own personal home page free
of charge on eBay using step-by-step instructions provided by the Company. The
About Me home page can include personal information, items listed for auction,
eBay feedback ratings, images and links to other favorite sites.
In addition, in June 1998, the Company donated 321,750 shares of Common
Stock to the Community Foundation Silicon Valley, a tax-exempt donor-advised
public charity and established a fund, known as the "eBay Foundation." Through
the Community Foundation Silicon Valley, the eBay programs abroad and share
their experiences with their students. The Company solicits user suggestions
for worthwhile charities through the website.
Customer Support. The Company devotes significant resources to providing
personalized, timely customer service and support. eBay offers customer support
on a 24-hour-a-day, seven-day-a-week basis. Most customer support inquiries are
handled via email, with customer email inquiries
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typically being answered within 24 hours after submission. The Company offers
an online tutorial for new eBay users. In addition, the Company offers the
SafeHarbor program and has recently introduced or is developing a number of
trust and safety initiatives. See "--Trust and Safety Initiatives."
Marketing
eBay's marketing strategy is to promote its brand and attract buyers and
sellers to the eBay service. To attract users to its website, eBay historically
has relied primarily on word of mouth and, to a lesser extent, on distribution
or sponsorship relationships with high traffic websites. Today, the Company
employs a variety of methods to promote its brand and attract potential buyers
and sellers. Currently, eBay uses strategic purchases of online advertising to
place advertisements in areas in which it believes it can reach its target
audience. The Company also engages in a number of marketing activities in
traditional media such as advertising in print media and at trade shows and
other events. eBay also advertises in a number of targeted publications. In
October 1998, the Company launched a substantial national advertising campaign,
both in traditional media and online, that is designed to attract new eBay
users. This campaign has included print, a major radio advertising campaign,
strategic advertising and sponsorship placements on high traffic websites and
advertising in other media. The Company has benefited from frequent and high
visibility media exposure both nationally and locally. While the Company does
not expect the frequency or quality of this type of publicity to continue, the
Company does promote public relations through initiatives such as online
eBay/special event tie-ins and executive speaking engagements. In August 1998,
eBay and AOL entered into a three-year marketing agreement whereby eBay is
featured as the preferred provider of person-to-person auction services in the
"Classifieds" and "Interest" areas of AOL's proprietary service. In addition,
eBay receives placement and promotions on AOL.com, AOL's website. Over the term
of this agreement, the Company will pay AOL $12.0 million. 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. eBay will pay $75
million over the four year term of the contract. 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 also engages in a number of on-site marketing programs,
including offering a variety of eBay-branded merchandise through the online
"eBay Store."
Operations and Technology
eBay has built a robust, scalable user interface and transaction processing
system that is based on internally-developed proprietary software. The eBay
system handles all aspects of the auction process, including notifying users
via email when they initially register for the service, they place a successful
bid, they are outbid, they place an item for sale and an auction ends.
Furthermore, the system sends daily status updates to any active sellers and
bidders regarding the state of their current auctions. The system maintains
user registration information, billing accounts, current auctions and
historical listings. All information is regularly archived to a data warehouse.
Complete listings of all items for sale are generated every hour. The system
updates a text-based search engine hourly with the titles and descriptions of
new items, as well as pricing and bidding updates for active items. Every time
an item is listed on the service, a listing enhancement option is selected by a
seller, or an auction closes with a bid in excess of the seller-specified
minimum bid, the system makes an entry into the seller's billing account. The
system sends electronic invoices to all sellers via email on a monthly basis.
For convenience, sellers may place a credit card account number on file
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with eBay and their account balance is billed directly. In addition to these
features, the eBay service also supports a number of community bulletin board
and chat areas where users and eBay support personnel can interact.
The Company's system has been designed around industry standard
architectures and has been designed to reduce downtime in the event of outages
or catastrophic occurrences. The eBay service provides 24-hour-a-day, seven-
day-a-week availability, subject to a short maintenance period for a few hours
during one night per week. eBay's system hardware is hosted at the Exodus
facility in Santa Clara, California, which provides redundant communications
lines and emergency power backup. The Company's system consists of Sun database
servers running Oracle relational database management systems and a suite of
Pentium-based Internet servers running on the Windows NT operating system. The
Company uses Resonate Inc.'s load balancing systems and its own redundant
servers to provide for fault tolerance. The Company has experienced periodic
system interruptions, which it believes will continue to occur from time to
time. These outages have stemmed from a variety of causes, including third-
party hardware and software problems and human error. The volume of traffic on
the Company's website and in the number of auctions being conducted by users
has been increasing continually and exponentially, requiring the Company to
expand and upgrade its technology, transaction processing systems and network
infrastructure and add new engineering personnel. The Company may be unable to
accurately project the rate or timing of increases, if any, in the use of the
eBay service or timely expand and upgrade its systems and infrastructure to
accommodate such increases in a timely manner. Any failure to expand or upgrade
its systems at least as fast as the growth in demand for capacity could cause
the website to become unstable and possibly cease to operate for periods of
time. Unscheduled downtime could harm the Company's business.
The Company uses internally developed systems to operate its service and for
transaction processing, including billing and collections processing. The
Company must continually improve these systems to accommodate the level of use
of its website. In addition, the Company may add new features and functionality
to its services that would result in the need to develop or license additional
technologies. The Company's inability to add additional software and hardware
or to upgrade its 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 its service and delays in
reporting accurate financial information. The Company's failure to provide new
features or functionality also could result in these consequences. The Company
may not be able to effectively upgrade and expand its systems in a timely
manner or to integrate smoothly any newly developed or purchased technologies
with its existing systems. These difficulties could harm or limit its ability
to expand its business. See "Risk Factors--The inability to expand our systems
may limit our growth" and "--System failures could harm our business."
The Company incurred $28,000, $831,000 and $4.6 million in product
development expenses in 1996, 1997 and 1998, respectively. The Company
anticipates that it will continue to devote significant resources to product
development in the future as it adds new features and functionality to the eBay
service. The market in which the Company competes is characterized by rapidly
changing technology, evolving industry standards, frequent new service and
product announcements, introductions and enhancements and changing customer
demands. Accordingly, the Company's future success will depend on its ability
to adapt to rapidly changing technologies, to adapt its services to evolving
industry standards and to continually improve the performance, features and
reliability of its service in response to competitive service and product
offerings and evolving demands of the marketplace. The failure of the Company
to adapt to such changes would harm the Company's business. In addition, the
widespread adoption of new Internet, networking or telecommunications
technologies or other technological changes could require substantial
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expenditures by the Company to modify or adapt its services or infrastructure.
See "Risk Factors--Our failure to manage growth could harm us;" "--We must keep
pace with rapid technological change to remain competitive" and "--We need to
develop new services, features and functions in order to expand."
Competition
The market for person-to-person trading over the Internet is new, rapidly
evolving and intensely competitive, and the Company expects competition to
intensify in the future. Barriers to entry are relatively low, and current and
new competitors can launch new sites at a relatively low cost using
commercially available software. The Company currently or potentially competes
with a number of other companies. Its direct competitors include various online
person-to-person auction services, including Yahoo! Auctions Powered by Onsale
and Excite, Inc., both of which are free to sellers and buyers, Auction
Universe and a number of other small services, including those that serve
specialty or regional markets such as CityAuction. The Company also competes
indirectly with business-to-consumer online auction services such as Onsale,
First Auction, Surplus Auction and uBid. A number of traditional auction
companies, including Butterfield & Butterfield and Sotheby's, are offering or
have announced plans to create Internet auction sites. The Company potentially
faces competition from a number of large online communities and services that
have expertise in developing online commerce and in facilitating online person-
to-person interaction. Some of these potential competitors, including
Amazon.com, 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.
In order to respond to changes in the competitive environment, the Company
may, from time to time, make pricing, service or marketing decisions or
acquisitions that could harm its business. For example, the Company recently
implemented a free insurance program that generally insures items up to a value
of $200, with a $25 deductible, for users with a non-negative feedback rating.
The financial impact of this insurance program is not yet known. New
technologies may increase competitive pressures on the Company by enabling its
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 the Company.
Although the Company has 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 the Company's service.
In addition, companies that control access to transactions through network
access or Web browsers could promote competitors of the Company or charge it
substantial fees for inclusion. See "Risk Factors-- Our market is intensely
competitive."
Intellectual Property
The Company regards the protection of its copyrights, service marks,
trademarks, trade dress and trade secrets as critical to its success. The
Company relies on a combination of patent, copyright, trademark, service mark
and trade secret laws and contractual restrictions to protect its proprietary
rights in products and services. The Company has entered into confidentiality
and invention assignment agreements with its employees and contractors, and
nondisclosure agreements with parties with which its conducts business to limit
access to and disclosure of its proprietary information. These contractual
arrangements and the other steps taken by the Company to protect its
intellectual property may not prevent misappropriation of its technology or
deter independent third-party development of similar technologies.
47
<PAGE>
The Company has received in the past, and anticipates that it will receive
in the future, communications alleging that certain items listed or sold on
eBay by its users infringe third-party copyrights, trademarks and tradenames or
other intellectual property rights. To assist the owners of such intellectual
property rights in policing and protecting their intellectual property, the
Company developed the Legal Buddy Program. The Legal Buddy Program provides
tools to content owners to detect and respond to infringement. These tools
include a soon to be introduced automated daily key word search that will
enable content owners to quickly locate potentially infringing auction items
and dedicated email accounts established solely for owners to more easily
contact eBay with regard to questionable items. Upon receipt of a written claim
of intellectual property infringement by a user, the Company removes the
offending item from the eBay website, credits the user with the listing fee
and, if not the first offense, suspends the user. Although the Company has
actively sought to work with the content community to eliminate infringing
listings on eBay, some content owners have expressed the view that the
Company's efforts are insufficient. An allegation of infringement of third-
party intellectual property rights may result in litigation against the
Company. Any such litigation could be costly for the Company, could result in
increased costs of doing business through adverse judgment or settlement, could
require the Company to change its business practices in expensive ways, or
could otherwise harm the Company's business. See "--Legal Proceedings" and
"Risk Factors--We may not be able to adequately protect or enforce our
intellectual property rights."
Issues Related to the Listing or Sale by Users of Unlawful Items
The law relating to the liability of providers of online services for the
activities of their users on their service is currently unsettled. The Company
is 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 its
service. The Company may be unable to prevent the sale of unlawful goods, or
the sale of goods in an unlawful manner, by users of its service, and the
Company may be subject to civil or criminal liability for unlawful activities
carried out by users through its service. In order to reduce its exposure to
this liability, the Company has increased the number of personnel reviewing
potentially illegal items and may in the future implement other protective
measures that could require it 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 the Company's business. In
addition, the Company has received significant media attention relating to the
listing or sale of unlawful goods on its website. A continuation of this
negative publicity could damage the Company's reputation and diminish the value
of the eBay brand name. It could also make users reluctant to continue to use
its services. See "Risk Factors--Our business may be harmed by the listing or
sale by our users of illegal items."
Fraudulent Activities on the eBay Website
The Company's future success will depend largely upon sellers reliably
delivering and accurately representing their listed goods and buyers paying the
agreed purchase price. The Company does not take responsibility for delivery of
payment or goods to any user of the eBay service. The Company has received in
the past, and anticipates that it will receive in the future, communications
from users who did not receive the purchase price or the goods that were to
have been exchanged. While the Company can suspend the accounts of users who
fail to fulfill their delivery obligations to other users, the Company does not
have the ability to otherwise require users to make payments or deliver goods
or otherwise make users whole other than through the Company's limited
insurance program. Other than through this program, the Company does not
compensate users who believe they have been defrauded by other users. The
Company also periodically receives 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 the Company's service could damage its
reputation and diminish the
48
<PAGE>
value of its brand name. The Company may in the future receive additional
requests from users requesting reimbursement or threatening legal action
against the Company if no reimbursement is made. Any resulting litigation could
be costly for the Company, divert management attention, result in increased
costs of doing business, lead to adverse judgments or could otherwise harm its
business. See "Risk Factors--Our business may be harmed by fraudulent
activities on our website."
Government Inquiries
On January 29, 1999, the Company received requests to produce certain
records and information to the federal government relating to an investigation
of possible illegal transactions in connection with the Company's website. The
Company has been informed that the inquiry includes an examination of the
Company's practices with respect to these transactions. The Company is 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 the Company, the Company would likely be harmed by
negative publicity, the costs of litigation, the diversion of management time
and other negative effects, even if it ultimately prevails. The Company's
business would certainly suffer if it were not to prevail in any action like
this.
A large number of transactions occur on the eBay website. As a result, the
Company believes that government regulators have received a substantial number
of consumer complaints about the eBay website which, while small as a
percentage of the Company's total transactions, are large in aggregate numbers.
As a result, the Company has 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 the Company takes to
protect its users from fraud. For example, the City of New York-Department of
Consumer Affairs received complaints from users about transactions on the
Company's website. In investigating these complaints, the Department of
Consumer Affairs requested information about the Company and these
transactions. The Company has provided the requested information. The Company
is likely to receive additional inquiries from regulatory agencies in the
future, which may lead to action against it. The Company has responded to all
inquiries from regulatory agencies by describing its current and planned
antifraud efforts. If one or more of these agencies is not satisfied with its
response to current or future inquiries, the resultant investigations and
potential fines or other penalties could harm its business. See "Risk Factors--
Government inquiries may lead to charges or penalties."
Privacy Policy
The Company believes that issues relating to privacy and use of personal
information relating to Internet users are becoming increasingly important as
the Internet and its commercial use grow. The Company has adopted a detailed
privacy policy that outlines how eBay uses information concerning its users and
the extent to which other registered eBay users may have access to this
information. Users must acknowledge and agree to this policy when registering
for the eBay service. The Company does not sell or rent any personally
identifiable information about its users to any third party; however, the
Company does disclose information to sellers and winning bidders that contains
the seller's and winning bidder's name, email address and telephone number. The
Company also will disclose all customer information in its possession (other
than credit card information) to a law enforcement agency or member of the
Legal Buddy Program which requests this information in connection with a civil,
criminal or regulatory investigation. The Company also uses information about
its users for internal purposes only in order to improve marketing and
promotional efforts, to analyze website usage statistically, and to improve
content, product offerings and website layout. eBay is a member of the TRUSTe
program, a non-profit independent organization that audits websites' privacy
statements and audits their adherence thereto.
49
<PAGE>
New and Existing Regulation of the Internet
The Company is 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. In addition, numerous states, including the State of California,
in which the Company's headquarters are located, have regulations regarding the
manner in which "auctions" may be conducted and the liability of "auctioneers"
in conducting such auctions. No legal determination has been made with respect
to the applicability of the California regulations to the Company's business to
date and little precedent exists in this area. One or more states may attempt
to impose these regulations upon the Company in the future, which could harm
the Company's business.
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
started 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 the Company does business or could create
uncertainty in the marketplace. This could reduce demand for the services of
the Company or increase the cost of doing business as a result of litigation
costs or increased service delivery costs, or could otherwise harm the
Company's business. In addition, because the Company's services are accessible
worldwide, and the Company facilitates sales of goods to users worldwide,
foreign jurisdictions may claim that the Company is required to comply with
their laws. In some jurisdictions, the Company will be required to collect
value-added taxes on its fees. The Company's failure to comply with foreign
laws could subject it to penalties ranging from fines to bans on the Company's
ability to offer its services.
Employees
As of March 1, 1999, the Company had 179 employees. The Company has never
had a work stoppage, and no employees are represented under collective
bargaining agreements. The Company considers its relations with its employees
to be good.
Facilities
As of March 24, 1999, the Company's principal administrative, marketing and
product development facilities are located in approximately 53,000 square feet
of office space in San Jose, California under leases and subleases that expire
between December 1999 and November 30, 2004. In addition, the Company recently
entered into a lease covering approximately 103,000 square feet in two
buildings in the same office complex as its existing space. This lease expires
on November 30, 2004, with a five-year renewal option. As a result of the
Company's acquisition of Jump, the Company also has facilities in Cincinnati,
Ohio. The Company believes that its existing facilities are adequate to meet
its needs for the immediate future and that future growth can be accommodated
by leasing additional or alternative space near its current facilities.
Legal Proceedings
On March 24, 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
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<PAGE>
violation of a patent. The suit seeks unspecified monetary damages as well as
an injunction against the Company 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. eBay is also subject
to certain investigations. See "Risk Factors--Government inquiries may lead to
charges or penalties."
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<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information regarding the executive
officers and directors of the Company as of March 1, 1999:
<TABLE>
<CAPTION>
Name Age Position
------------------------ --- -------------------------------------------------
<C> <C> <S>
Pierre M. Omidyar....... 31 Founder, Chairman of the Board and a director
Margaret C. Whitman..... 42 President, Chief Executive Officer and a director
Gary F. Bengier......... 44 Chief Financial Officer and Vice President
Operations
Michael R. Jacobson..... 44 Vice President, Legal Affairs, General Counsel
and Secretary
Jeffrey S. Skoll........ 34 Vice President Strategic Planning and Analysis
Brian T. Swette......... 45 Senior Vice President of Marketing and
International
Steven P. Westly........ 42 Vice President Marketing and Business Development
Michael K. Wilson....... 41 Senior Vice President Product Development and
Site Operations
Scott D. Cook (1)....... 46 Director
Robert C. Kagle (1)(2).. 43 Director
Howard D. Schultz (2)... 45 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Pierre M. Omidyar founded eBay as a sole proprietorship in September 1995.
He has been a director and Chairman of the Board since eBay's incorporation in
May 1996 and also served as its Chief Executive Officer, Chief Financial
Officer and President from inception to February 1998, November 1997 and August
1996, respectively. Prior to founding eBay, Mr. Omidyar was a developer
services engineer at General Magic, a mobile communication platform company
from December 1994 to July 1996. Mr. Omidyar co-founded Ink Development Corp.
("Ink") (later renamed eShop) in May 1991 and served as a software engineer
there from May 1991 to September 1994. Prior to co-founding Ink, Mr. Omidyar
was a developer for Claris, a subsidiary of Apple Computer, and for other
Macintosh-oriented software development companies. Mr. Omidyar holds a B.S.
degree in Computer Science from Tufts University.
Margaret C. Whitman has served as President and Chief Executive Officer of
eBay since February 1998 and a director since March 1998. From January 1997 to
February 1998, she was General Manager of the Preschool Division of Hasbro
Inc., a toy company. From February 1995 to December 1996, Ms. Whitman was
employed by FTD, Inc., a floral products company, most recently as President,
Chief Executive Officer and a director. From October 1992 to February 1995,
Ms. Whitman was employed by The Stride Rite Corporation, in various capacities,
including President, Stride Rite Children's Group and Executive Vice President,
Product Development, Marketing & Merchandising, Keds Division. From May 1989 to
October 1992, Ms. Whitman was employed by The Walt Disney Company ("Disney"),
an entertainment company, most recently as Senior Vice President, Marketing,
Disney Consumer Products. Before joining Disney, Ms. Whitman was at Bain & Co.,
a consulting firm, most recently as a Vice President. Ms. Whitman currently
serves on the board of directors of Staples, Inc. Ms. Whitman holds an A.B.
degree in Economics from Princeton University and an M.B.A. degree from the
Harvard Business School.
Gary F. Bengier has served as Chief Financial Officer and Vice President
Operations of eBay since November 1997. From February 1997 to October 1997, Mr.
Bengier was Vice President and Chief Financial Officer of VXtreme, Inc. a
developer of Internet video streaming products. Prior to that time, Mr. Bengier
was Corporate Controller at Compass Design Automation, a publisher of
electronic circuit design software, from February 1993 to February 1997. Mr.
Bengier has also held senior
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financial positions at Kenetech Corp., an energy services company, and Qume
Corp., a computer peripherals company, where he participated in numerous debt
and equity financing transactions. Prior to joining Qume in 1989, Mr. Bengier
spent six years at Bio-Rad Laboratories and held varied financial management
roles. Mr. Bengier also spent several years as a management consultant for
Touche Ross & Co. Mr. Bengier holds a B.B.A. degree in Computer Science and
Operations Research from Kent State University and an M.B.A. degree from the
Harvard Business School.
Michael R. Jacobson has served as eBay's Vice President, General Counsel and
Secretary since August 1998. From 1986 to August 1998, Mr. Jacobson was a
partner with the law firm of Cooley Godward LLP, specializing in securities
law, mergers and acquisitions and other transactions. Mr. Jacobson holds an
A.B. degree in Economics from Harvard College and a J.D. degree from Stanford
Law School.
Jeffrey S. Skoll has served as eBay's Vice President Strategic Planning and
Analysis since February 1998, its President from August 1996 to February 1998
and as a director from December 1996 to March 1998. From July 1995 to July
1996, Mr. Skoll served as Channel Marketing Manager for Knight-Ridder
Information Inc., an online information services company and from September
1993 to July 1995 was a student at the Stanford Graduate School of Business.
Prior to that time, Mr. Skoll was President of Skoll Engineering, a systems
consulting firm that he founded, from September 1987 to August 1993. Mr. Skoll
also co-founded Micros on the Move Ltd., a computer rentals company, as an
adjunct to Skoll Engineering in 1990. Mr. Skoll holds a B.a.S.C. degree in
Electrical Engineering from the University of Toronto and an M.B.A. degree from
the Stanford Graduate School of Business.
Brian T. Swette has served as eBay's Senior Vice President of Marketing and
International since August 1998. From 1981 to June 1998, Mr. Swette was
employed by Pepsi-Cola Beverages, a global beverage company, in various
capacities including Executive Vice President and Chief Marketing Officer--
Global Beverages from March 1996 to June 1998, Executive Vice President
Marketing--North America from September 1994 to March 1996, Senior Vice
President and General Manager of New Business from February 1992 to September
1994, Senior Vice President Marketing and Strategy--North America from 1990 to
1991, Vice President North Latin America--General Manager from 1986 to 1989,
Director of Marketing Planning and Development--Pepsi International from 1984
to 1986 and Country Manager--Brazil from 1981 to 1984. Before joining Pepsi-
Cola Beverages, Mr. Swette worked in various capacities for Procter & Gamble
from 1977 to 1981. Mr. Swette currently serves on the board of directors of J.
Crew Apparel. Mr. Swette holds a B.S. degree in Economics from Arizona State
University.
Steven P. Westly has served as eBay's Vice President Marketing and Business
Development since August 1997. From July 1996 to August 1997, Mr. Westly was
Vice President, Business Development of WhoWhere?, an Internet directory and
Web-based email company. Prior to that time, Mr. Westly was Director of Sales
for Netcom, an Internet service provider, from August 1995 to July 1996 and was
Deputy Director of Office of Economic Development, City of San Jose,
California, from April 1991 to August 1995. Before joining the Office of
Economic Development, Mr. Westly served as President of Codd and Date
International, a relational database consulting firm, from January 1990 to
March 1992 and was the Managing Director of Bridgemere Capital, an investment
banking firm, from 1987 to 1990. Mr. Westly holds a B.A. degree in History from
Stanford University and an M.B.A. degree from the Stanford Graduate School of
Business.
Michael K. Wilson has served as eBay's Senior Vice President Product
Development and Site Operations since February 1999, and Vice President Product
Development and Site Operations from January 1997 through January 1999. From
October 1995 to January 1997, Mr. Wilson was Vice President of WELL Engaged,
L.L.C., a wholly-owned subsidiary of The Well, a software company. Prior to
that time, Mr. Wilson was an engineer for daVinci Time and Space, a television
company, from February 1995 to October 1995, an engineer for eShop, a software
company, from February 1992 to August 1994 and a Director of Mainframe
Engineering for Neuron Data, an
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<PAGE>
engineering company, from 1987 to 1991. Before joining Neuron Data, Mr. Wilson
worked in several capacities at Oracle Corporation from 1983 to 1987, Chevron
from 1979 to 1983, and Macy's from 1975 to 1979.
Scott D. Cook has served as a director of eBay since June 1998. Mr. Cook is
the founder of Intuit Inc. ("Intuit") and has been a director of Intuit, a
financial software developer, since March 1984 and its Chairman of the Board
since March 1993. From March 1984 to April 1994, Mr. Cook served as President
and Chief Executive Officer of Intuit. Mr. Cook also serves on the board of
directors of Amazon.com and Broderbund Software, Inc. Mr. Cook holds a B.A.
degree in Economics and Mathematics from the University of Southern California
and an M.B.A. degree from the Harvard Business School.
Robert C. Kagle has served as a director of eBay since June 1997. Mr. Kagle
has been a Member of Benchmark Capital Management Co., L.L.C. ("Benchmark"),
the General Partner of Benchmark Capital Partners, L.P. and Benchmark Founders'
Fund, L.P., since its founding in May 1995. Mr. Kagle also has been a General
Partner of Technology Venture Investors since January 1984. Mr. Kagle holds a
B.S. degree in Electrical and Mechanical Engineering from the General Motors
Institute (renamed Kettering University in January 1998) and an M.B.A. degree
from the Stanford Graduate School of Business.
Howard D. Schultz has served as a director of eBay since June 1998. Mr.
Schultz is the founder of Starbucks Corporation ("Starbucks"), a provider of
gourmet coffee, and has been its Chairman of the Board and Chief Executive
Officer since its inception in 1985. From 1985 to June 1994, Mr. Schultz was
also President of Starbucks. Mr. Schultz was the director of Retail Operations
and Marketing for Starbucks Coffee Company, a predecessor to Starbucks from
September 1982 to December 1985 and was the Chairman of the Board, Chief
Executive Officer and President of Il Giornale Coffee Company, a predecessor to
Starbucks, from January 1986 to July 1987. Mr. Schultz is also one of two
founding members of Maveron LLC, a company providing advisory services to
consumer-based businesses, and is one of two members of a limited liability
company that serves as a general partner of its affiliated venture capital
fund, Maveron Equity Partners, L.P. (together, "Maveron").
Board Composition
eBay's Board of Directors (the "Board") is divided into three classes, Class
I, Class II and Class III, with each class serving staggered three-year terms.
The Class I directors, currently Messrs. Cook and Kagle, will stand for re-
election or election at the 1999 annual meeting of stockholders. The Class II
directors, currently Messrs. Omidyar and Schultz, will stand for re-election or
election at the 2000 annual meeting of stockholders and the Class III director,
currently Ms. Whitman, will stand for re-election or election at the 2001
annual meeting of stockholders.
Board Committees
The Audit Committee of the Board consists of Robert C. Kagle and Scott D.
Cook. The Audit Committee reviews eBay's financial statements and accounting
practices, makes recommendations to the Board regarding the selection of
independent auditors and reviews the results and scope of the audit and other
services provided by eBay's independent auditors. The Compensation Committee of
the Board consists of Robert C. Kagle and Howard D. Schultz. The Compensation
Committee makes recommendations to the Board concerning salaries and incentive
compensation for eBay's officers and employees and administers eBay's employee
benefit plans.
Compensation Committee Interlocks and Insider Participation
None of the members of the Compensation Committee of the Board was at any
time since the formation of the Company an officer or employee of the Company.
No executive officer of the
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<PAGE>
Company serves as a member of the board of directors or compensation committee
of any entity that has one or more executive officers serving on the Company's
Board or Compensation Committee.
Director Compensation
Directors of the Company do not receive cash compensation for their services
as directors but are reimbursed for their reasonable expenses for attending
Board and Board committee meetings. In June 1998, Mr. Cook and Mr. Schultz were
each granted an option to purchase 450,000 shares of Common Stock of the
Company at an exercise price of $3.11 per share in connection with their
service on the Board. Such options were immediately exercisable. Prior to
exercise, Mr. Schultz assigned the beneficial interest in his option to acquire
337,500 of these shares to his affiliate, Maveron (see Mr. Schultz's biography
above). Mr. Schultz thereafter exercised his option to acquire 112,500 shares
in exchange for a full recourse fifty-five month promissory note for $350,000
at an interest rate of 8% per year. Interest on the note is payable annually
and the principal is due on December 1, 2002. In addition, in June 1998, Mr.
Schultz exercised, on behalf of Maveron, the assigned portion of the option to
acquire the remaining 337,500 shares in exchange for $1.05 million in cash. The
shares of Common Stock received are subject to the Company's right of
repurchase at termination of service at a repurchase price equal to the
exercise price of the option that lapses as to 25% of the shares on the first
anniversary of the date of grant and 2.08% each full succeeding month
thereafter. Also in June 1998, Mr. Cook and Maveron each purchased an
additional 321,750 shares of Common Stock at a price of $3.11 per share for
cash. The Company subsequently concluded that the fair market value of the
Company's Common Stock on the date that the Company agreed to make the sale was
$3.78 and consequently recognized $0.67 per share, or an aggregate $429,000, as
general and administrative expense in the year ended December 31, 1998.
In July 1998, the Board adopted, and in August 1998 the Company's
stockholders approved, the Directors Plan and reserved a total of 600,000
shares of the Company's Common Stock for issuance thereunder. Members of the
Board who are not employees of the Company, or any parent, subsidiary or
affiliate of the Company, are eligible to participate in the Directors Plan.
The option grants under the Directors Plan are automatic and nondiscretionary,
and the exercise price of the options must be 100% of the fair market value of
the Common Stock on the date of grant. Each eligible director will initially be
granted an option to purchase 90,000 shares (an "Initial Grant") on the date
such director first becomes a director (the "Effective Date"). At each Annual
Meeting of the Company, each eligible director will automatically be granted an
additional option to purchase 15,000 shares if such director has served
continuously as a member of the Board since the date of such director's Initial
Grant or, if such director was ineligible to receive an Initial Grant, since
the Effective Date. In March 1999, the Board amended the Directors Plan to
provide that no such grants would be made to eligible directors at the 1999
Annual Meeting. The Board is considering other changes to the Directors Plan in
light of the proposed changes in the accounting for this type of plan. The term
of such options is ten years, provided that they will terminate seven months
following the date on which the director ceases to be a director of or a
consultant to the Company (12 months if the termination is due to death or
disability). All options granted under the Directors Plan will vest as to 25%
of the shares on the first anniversary of the date of grant and as to 2.08% of
the shares each month thereafter, provided the optionee continues as a member
of the Board or as a consultant to the Company.
55
<PAGE>
Executive Compensation
The following table shows compensation earned during fiscal 1997 and 1998 by
eBay's Chairman of the Board, Chief Executive Officer and eBay's four most
highly-compensated executive officers for fiscal 1998. These people are
referred to as the "Named Officers." Mr. Omidyar was the Chief Executive
Officer of the Company at December 31, 1997. In February 1998, Margaret C.
Whitman was hired as the Company's Chief Executive Officer. Titles shown in the
table are titles held as of December 31, 1998. The information in the table
includes salaries, bonuses, stock options granted and other miscellaneous
compensation. eBay has not granted stock appreciation rights or restricted
stock awards and has no long-term compensation benefits other than stock
options. No executive officer who held office at December 31, 1997 received
total annual compensation in excess of $100,000 in 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term and Other
Annual Compensation Compensation
--------------------------------- -----------------------
Number of
Securities
Fiscal Other Annual Underlying All Other
Name and 1998 Principal Positions Year Salary Bonus(1) Compensation(2) Options Compensation
- --------------------------------- ------ -------- -------- --------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Margaret C. Whitman...... 1998 $145,833 $100,000 $1,500 7,200,000 $34,894(3)
President and Chief 1997 -- -- -- --
Executive Officer
Pierre Omidyar........... 1998 96,000 25,000 -- --
Founder and Chairman of 1997 65,446 -- -- --
the Board
Steven P. Westly......... 1998 120,000 51,000 1,500 108,000
Vice President Marketing 1997 N/A -- -- 2,376,000
and Business Development
Gary F. Bengier.......... 1998 125,000 25,000 1,500 --
Chief Financial Officer 1997 N/A -- -- 1,575,000
and Vice President
Operations
Michael K. Wilson........ 1998 120,000 30,000 -- --
Vice President Product 1997 N/A -- -- 2,700,000
Development and Site
Operations
Jeffrey S. Skoll......... 1998 96,000 25,000 1,500 --
Vice President, 1997 N/A -- -- --
Strategic Planning and
Analysis
</TABLE>
- --------
(1) All bonuses represent amounts paid in 1999 for services rendered in 1998,
except for $26,000 of the $51,000 paid to Steven P. Westly which was paid
in 1998 for services rendered in 1998.
(2) Represents matching contributions by the Company under its 401(k) Plan.
(3) Represents a reimbursement for relocation expenses paid to Margaret C.
Whitman in 1998.
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<PAGE>
The following executive officers received grants of options in 1998 pursuant
to the 1997 Stock Option Plan (the "1997 Plan").
Option Grants During 1998
<TABLE>
<CAPTION>
Percentage
of Total
Number of Options Potential Realizable Value at
Securities Granted to Assumed Annual Rates of Stock Price
Underlying Employees Exercise Appreciation for Option Term(4)
Options during Price Per Expiration ------------------------------------
Name Granted(1) 1998(2) Share(3) Date 0% 5% 10%
- ---- ---------- ---------- --------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Margaret C. Whitman..... 7,200,000 41.7% $0.07 1/20/2008 $42,720,000 $69,888,248 $111,569,674
Steven P. Westly........ 27,000 0.2 0.07 1/20/2008 160,200 262,081 418,386
36,000 0.2 0.22 3/4/2008 208,000 343,841 552,248
27,000 0.2 0.67 4/13/2008 144,000 245,881 402,186
18,000 0.1 3.11 6/8/2008 52,000 119,921 224,124
</TABLE>
- --------
(1) Options granted in 1998 were granted under the 1997 Plan. All options
granted were immediately exercisable and were either incentive stock
options or nonqualified stock options. These options were granted by the
Board and generally vest over four years at the rate of 25% of the shares
subject to the option on the first vesting date specified in the Stock
Option Agreement and 2.08% per month thereafter. Upon certain changes in
control of the Company, this vesting schedule will accelerate as to all
shares that are then unvested. Unvested shares are subject to the Company's
right of repurchase upon termination of employment. Options expire ten
years from the date of grant. In determining the fair market value of the
Company's Common Stock on each grant date, the Board considered, among
other things, the price of arms'-length sales of the Company's Common Stock
and Series B Preferred Stock, the Company's absolute and relative levels of
revenues and other operating results, the state of the Company's website
development, the entry into the Company's market of certain potentially
significant competitors and the appreciation of stock values of a number of
generally comparable Internet companies. See "--Employee Benefit Plans" and
"--Compensation Arrangements" for a description of the material terms of
these options.
(2) Based on options granted to purchase 17,286,756 shares of Common Stock of
the Company during 1998.
(3) Options were granted at an exercise price equal to the fair market value of
the Company's Common Stock, as determined by the Board of Directors on the
date of grant.
(4) Potential realizable values are computed by multiplying the number of
shares of Common Stock subject to a given option by the initial public
offering price of $6.00 per share, assuming that the aggregate stock value
derived from that calculation compounds at the annual 0%, 5% or 10% rate
shown in the table for the entire ten-year term of the option and
subtracting from that result the aggregate option exercise price. The 5%
and 10% assumed annual rates of stock price appreciation are mandated by
the rules of the Securities and Exchange Commission and do not represent
the Company's estimate or projection of future Common Stock prices.
57
<PAGE>
The following table sets forth the number of shares acquired and the value
realized upon exercise of stock options during 1998 and the number of shares of
Common Stock subject to exercisable and unexercisable stock options held as of
December 31, 1998 by each of the Named Officers. Value at fiscal year end is
measured as the difference between the exercise price and the fair market value
at close of market on December 31, 1998, which was $80.42.
Aggregate Option Exercises in 1998 and Values at December 31, 1998
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Number of Unexercised Options at In-the-Money Options at
Shares December 31, 1998 December 31, 1998
Acquired on Value ------------------------------- -------------------------------
Name Exercise(1) Realized(2) Exercisable(#) Unexercisable(#) Exercisable($) Unexercisable($)
- ---- ----------- ----------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Margaret C. Whitman..... 7,200,000(3) $42,720,000 -- -- $ -- $ --
Steven P. Westly........ 2,484,000(4) 14,741,000 -- -- -- --
Gary F. Bengier......... 1,575,000(5) 9,397,500 -- -- -- --
Michael K. Wilson....... 1,800,000(6) 10,788,000 262,500 637,500 21,107,625 51,261,375
Jeffrey S. Skoll........ -- -- -- -- -- --
</TABLE>
- --------
(1) Except as otherwise noted, all of the shares acquired were unvested as of
December 31, 1998 and subject to the Company's right of repurchase upon
termination of employment at a price equal to the exercise price of the
option pursuant to which the shares were acquired.
(2) Based on the initial public offering price per share of $6.00, minus the
per share exercise price, multiplied by the number of shares issued upon
exercise of the option.
(3) As of December 31, 1998, 90,000 shares of the 7,200,000 shares acquired
were vested and 7,110,000 shares were unvested and subject to the Company's
right of repurchase upon termination of employment.
(4) As of December 31, 1998, 792,000 shares of the 2,484,000 shares acquired
were vested and 1,692,000 shares were unvested and subject to the Company's
right of repurchase upon termination of employment.
(5) As of December 31, 1998, 426,563 shares of the 1,575,000 shares acquired
were vested and 1,148,437 shares were unvested and subject to the Company's
right of repurchase upon termination of employment.
(6) As of December 31, 1998, 862,500 shares of the 1,800,000 shares acquired
were vested and 937,500 shares were unvested and subject to the Company's
right of repurchase upon termination of employment.
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<PAGE>
Compensation Arrangements
Ms. Whitman's employment offer letter of January 16, 1998 provides for an
initial annual base salary of $175,000 and an initial bonus of up to $100,000.
It also provides that, in the event Ms. Whitman's employment is terminated for
any reason other than cause, she will continue to receive her salary
compensation for six months and, if at the end of such period Ms. Whitman
remains unemployed, she will be eligible to receive additional salary
compensation for the lesser of six months or until she becomes employed. Ms.
Whitman was also granted an immediately exercisable option to purchase
7,200,000 shares of Common Stock. As described under "Certain Transactions," in
February 1998 Ms. Whitman exercised this option. The shares issued to her
remain subject to the Company's right to repurchase "unvested" shares upon the
termination of her employment. This right to repurchase lapsed with respect to
1,800,000 shares as of March 1, 1999 and will lapse with respect to 150,000
shares at the end of each month thereafter.
Mr. Bengier's employment offer letter of September 15, 1997 provides for an
initial annual base salary of $125,000. Mr. Bengier was also granted an
immediately exercisable option to purchase 1,575,000 shares of Common Stock at
an exercise price of $0.03, which he exercised in full in January 1998. The
shares are subject to the Company's right to repurchase unvested shares upon
termination of employment, which right lapsed as to 393,750 shares in September
1998 and will lapse with respect to 32,813 shares at the end of each month
thereafter.
Mr. Westly's employment offer letter of August 8, 1997 provides for an
initial annual base salary of $120,000 and a $25,000 signing bonus. Mr. Westly
was also granted immediately exercisable options to purchase 2,484,000 shares
(2,376,000 shares on employment and an additional 108,000 shares during his
first year of employment) of Common Stock at a weighted average exercise price
of $0.07 per share which he exercised in full in January, May and June 1998
subject to the Company's right to repurchase unvested shares upon termination
of employment, which lapses at a rate of 25% of the shares originally subject
to the option on the first anniversary of his employment or the date of grant,
depending on the option, and one forty-eighth of the shares at the end of each
month thereafter. During his first year of employment, Mr. Westly received an
additional $30,000 bonus.
Mr. Wilson's employment offer letter of December 9, 1996 provides for an
initial annual base salary of $78,000. Mr. Wilson was also granted an
immediately exercisable option to purchase 1,800,000 shares of Common Stock at
an exercise price of $0.01 per share which he exercised in full in January 1998
subject to the Company's right to repurchase unvested shares upon termination
of employment, which lapsed as to 450,000 shares in December 1997 and will
lapse with respect to 37,500 shares at the end of each month thereafter. During
his first year of employment, Mr. Wilson received an additional option to
purchase 900,000 shares of Common Stock at an exercise price of $0.03 per
share.
Mr. Skoll's employment offer letter of October 16, 1996 provides for an
initial annual salary of $30,000 and a 30-day right to purchase the 30,600,000
shares of Common Stock that he currently owns subject to the Company's right of
repurchase through June 30, 2000. The right of repurchase lapsed with respect
to seven forty-eighths of the total shares purchased on February 1, 1997 and
will lapse with respect to an additional one forty-eighth of the shares on the
first day of each month thereafter. In the event of an acquisition of the
Company or other similar transaction, the right of repurchase will expire with
respect to all of the shares subject to the Company's right of repurchase.
Mr. Swette's employment offer letter of August 14, 1998 provides for an
initial annual base salary of $150,000 and a $25,000 signing bonus. Mr. Swette
was also granted an option to purchase 1,800,000 shares of Common Stock outside
of the 1997 Plan at an exercise price of $5 per share. These options vest with
respect to 450,000 shares in August 1999 and with respect to 37,500 shares
59
<PAGE>
at the end of each month thereafter. In the event Mr. Swette's employment is
terminated without cause prior to August 14, 1999, such option will vest at a
rate of 37,500 shares per month from August 14, 1998 through the termination
date.
Mr. Jacobson's employment offer letter of August 20, 1998 provides for an
initial annual base salary of $150,000 and a $50,000 signing bonus. Mr.
Jacobson was also granted options to purchase an aggregate of 750,006 shares of
Common Stock under the Company's 1997 Plan at an exercise price of $5 per
share. The first option for 45,000 shares vested in full on January 24, 1999.
The second option for 705,006 shares vests with respect to 176,252 shares on
August 24, 1999 and with respect to 14,687 shares at the end of each month
thereafter (14,565 shares for September through December 1999), provided,
however, that in the event Mr. Jacobson's employment is terminated without
cause prior to August 24, 1999, such option will vest at a rate of 14,687
shares per month from August 24, 1998 through the termination date.
Indemnification of Directors and Executive Officers and Limitation of Liability
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act.
As permitted by the Delaware General Corporation Law, the Company's Amended
and Restated Certificate of Incorporation includes a provision that eliminates
the personal liability of its directors for monetary damages for breach of
fiduciary duty as a director, except for liability (1) for any breach of the
director's duty of loyalty to the Company or its stockholders, (2) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, (3) under section 174 of the Delaware General Corporation Law
(regarding unlawful dividends and stock purchases) or (4) for any transaction
from which the director derived an improper personal benefit.
As permitted by the Delaware General Corporation Law, the Company's Amended
and Restated Bylaws provide that (1) the Company is required to indemnify its
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law, subject to certain very limited exceptions, (2) the Company is
required to indemnify its other employees to the extent that it indemnifies its
officers and directors, unless otherwise required by law, its Amended and
Restated Certificate of Incorporation, its Amended and Restated Bylaws or
agreements, (3) the Company is required to advance expenses, as incurred, to
its directors and officers in connection with a legal proceeding to the fullest
extent permitted by the Delaware General Corporation Law, subject to certain
very limited exceptions, and (4) the rights conferred in the Amended and
Restated Bylaws are not exclusive.
The Company has entered into Indemnity Agreements with each of its current
directors and officers to give such directors and officers additional
contractual assurances regarding the scope of the indemnification set forth in
the Company's Amended and Restated Certificate of Incorporation and Amended and
Restated Bylaws and to provide additional procedural protections. At present,
there is no pending litigation or proceeding involving a director, officer or
employee of the Company regarding which indemnification is sought, nor is the
Company aware of any threatened litigation that may result in claims for
indemnification.
The Company has obtained directors' and officers' liability insurance.
60
<PAGE>
CERTAIN RELATED PARTY TRANSACTIONS
Since inception (May 13, 1996), there has not been, nor is there currently
proposed, any transaction or series of similar transactions to which the
Company was or is to be a party in which the amount involved exceeds $60,000
and in which any director, executive officer or holder of more than 5% of the
Common Stock of the Company had or will have a direct or indirect interest
other than (1) compensation arrangements, which are described where required
under "Management," and (2) the transactions described below.
Common Stock at Formation. Pursuant to a Stock Purchase and Restriction
Agreement dated May 20, 1996, the Company sold an aggregate of 44,100,000
shares of Common Stock to Pierre M. Omidyar, the Company's founder. Mr. Omidyar
has served as a director of the Company since its inception and was the
Company's Chief Executive Officer from its inception until February 1998. In
consideration for the shares issued, Mr. Omidyar transferred to the Company
cash of $10,167 and accounts receivable valued at $4,095. Of the 44,100,000
shares, 13,500,000 were subsequently exchanged for shares of the Company's
Series A Preferred Stock as discussed below.
All of Mr. Omidyar's remaining 30,600,000 shares of Common Stock are subject
to a Stock Restriction Agreement dated December 12, 1996 between Mr. Omidyar
and the Company (the "Stock Restriction Agreement") and a Stock Restriction and
Co-Sale Agreement dated as of June 20, 1997 among Benchmark Capital Partners,
L.P. and Benchmark Founders' Fund, L.P. (collectively, the "Investors"), Pierre
Omidyar and Jeffrey Skoll (collectively, the "Founders") and the Company (the
"Co-Sale Agreement"). Under the Stock Restriction Agreement, all of the
30,600,000 shares of Common Stock are subject to the Company's right to
repurchase unvested shares if Mr. Omidyar's employment terminates. The
30,600,000 shares vested as to 10,837,503 shares on February 1, 1997 and vest
as to 637,500 shares on the first day of each month thereafter through the
close of business on September 1, 1999, at which time all of the shares will be
vested. The vesting of shares accelerates such that any unvested shares become
fully vested in the event of a sale of the Company, which includes a sale,
lease or disposition of substantially all of the Company's assets, any merger
or consolidation of the Company into another entity, or any other corporate
reorganization where the stockholders immediately prior to such event do not
retain at least 50% of the voting power of and interest in the successor entity
or any transaction or series of related transactions in which more than 50% of
the Company's voting power is transferred ("Sale of the Company"). In addition
to the foregoing, under the Co-Sale Agreement, the vesting of shares will
accelerate upon termination of employment, such that immediately prior to such
termination an additional 3,825,000 shares will become vested and not subject
to repurchase by the Company. See "Principal and Selling Stockholders."
Series A Preferred Stock and Recapitalization. In December 1996, the Company
created a class of Preferred Stock and designated 1,500,000 shares of such
Preferred Stock as Series A Preferred Stock, all of which stock the Company
issued to Mr. Omidyar in exchange for 13,500,000 shares of his Common Stock. In
June 1997, pursuant to an Anti-Dilution Agreement dated December 30, 1996
between the Company, Pierre Omidyar and Jeffrey Skoll, Mr. Omidyar's Series A
Preferred Stock holdings were increased to 1,676,475 shares. Upon completion of
the Company's initial public offering in September 1998, all of the Series A
Preferred Stock was automatically converted to 15,088,275 shares of Common
Stock.
In December 1996, pursuant to a Restricted Stock Purchase Agreement dated
December 12, 1996 between the Company and Mr. Skoll ("Restricted Stock
Agreement"), the Company sold 30,600,000 shares of its Common Stock to Mr.
Skoll at a purchase price of $0.0022 per share or an aggregate of $68,000,
which price was determined by the Board to be the fair market value of the
Common Stock. Mr. Skoll, the first full-time employee of the Company and its
President from August 1996 to February 1998, has served as the Company's Vice
President Strategic Planning and
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<PAGE>
Analysis since February 1998. Mr. Skoll acquired the shares of Common Stock
with the proceeds from a full recourse loan governed by a Loan and Pledge
Agreement between Mr. Skoll and the Company. Under such agreement, Mr. Skoll
must repay the entire principal of the loan by December 31, 2002 and pay
interest, which accrues at the rate of 6% per year, simple interest, on the
first anniversary of the exercise date and on each subsequent anniversary until
all principal and accrued interest are paid in full. Mr. Skoll paid off the
full principal and accrued interest on the loan, $75,411, on November 2, 1998.
All of Mr. Skoll's shares of Common Stock are subject to the Restricted
Stock Agreement. Under the Restricted Stock Agreement, Mr. Skoll's shares of
Common Stock are subject to the Company's right to repurchase unvested shares
if his employment terminates. His shares vested as to 4,462,497 shares on
February 1, 1997 and vest as to 637,500 shares on the first day of each month
thereafter through the close of business on June 30, 2000, at which time all of
the shares will be vested. The vesting of shares accelerates such that any
unvested shares become fully vested in the event of a Sale of the Company. In
addition to the foregoing, under the Co-Sale Agreement, the vesting of shares
will accelerate upon termination of employment, such that immediately prior to
such termination an additional 3,825,000 shares will become vested and not
subject to repurchase by the Company. See "Principal and Selling Stockholders."
Series B Preferred Stock. In June 1997, the Company sold an aggregate of
877,374 and 122,626 shares of Series B Preferred Stock at a purchase price of
$3.00 per share and issued warrants to purchase 350,950 and 49,050 shares of
Series B Preferred Stock at an exercise price of $5.00 per share to Benchmark
Capital Partners, L.P. and Benchmark Founders' Fund, L.P., respectively, for an
aggregate purchase price of $3,000,000, which amount was paid in cash.
Benchmark Capital Partners, L.P. and Benchmark Founders' Fund, L.P. each
exercised all of their warrants in May 1998 for an aggregate purchase price of
$2,000,000, which amount was paid in cash. Upon completion of the Company's
initial public offering in September 1998, all of the Series B Preferred Stock
was automatically converted to an aggregate of 12,600,000 shares of Common
Stock. See "Principal and Selling Stockholders."
Investor Rights Agreement. In June 1997, the Company, the Investors and the
Founders entered into an Investor Rights Agreement under which the Investors
and Founders have certain registration rights with respect to their shares of
Common Stock. See "Description of Capital Stock--Registration Rights."
Officer Loans. In December 1996, as discussed above, Mr. Skoll purchased
30,600,000 shares of the Company's Common Stock for $68,000 under the terms of
a Loan and Pledge Agreement effective as of December 1996 between Mr. Skoll and
the Company. From January 1998 through June 1998, in connection with the
exercise of stock options granted under the 1996 Plan and the 1997 Plan, the
Company permitted Margaret C. Whitman, the Company's President and Chief
Executive Officer since February 1998, to purchase 7,200,000 shares of Common
Stock in exchange for a $60,000 cash payment, a $180,000 Secured Full Recourse
Promissory Note dated February 3, 1998 and a $240,000 Secured Non-Recourse
Promissory Note dated February 3, 1998; Steven P. Westly, the Company's Vice
President Marketing and Business Development since August 1997, to purchase
2,484,000 shares of Common Stock in exchange for cash payments totaling $17,920
and Secured Full Recourse Promissory Notes dated January 27, 1998, May 21,
1998, May 26, 1998 and June 26, 1998 in the amounts of $71,280, $16,200, $7,200
and $50,400, respectively; Michael K. Wilson, the Company's Vice President
Product Development and Site Operations since January 1997, to purchase
1,800,000 shares of Common Stock in exchange for a $1,000 cash payment and a
Secured Full Recourse Promissory Note dated January 28, 1998 in the amount of
$9,000 and Gary F. Bengier, the Company's Chief Financial Officer and Vice
President Operations since November 1997, to purchase 1,575,000 shares of
Common Stock in exchange for a $5,250 cash
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<PAGE>
payment and a Secured Full Recourse Promissory Note dated January 26, 1998 in
the amount of $47,250. Each note is secured by the Common Stock purchased with
the note except for Ms. Whitman's notes which are each secured by all the
shares purchased with both the full recourse and the non-recourse notes. Each
note bears interest at the rate of 8%, compounded semi-annually. Interest on
the unpaid principal is due on December 1 of each year and the principal
balance is due in full on December 1, 2002. The maximum amount of indebtedness
during 1998 for Ms. Whitman, Mr. Westly and Mr. Wilson was $447,501, $152,629
and $9,488 respectively. Ms. Whitman, Mr. Westly, Mr. Bengier and Mr. Wilson
have paid off the full principal and accrued interest on his or her respective
notes on, respectively, January 27, 1999, December 1, 1998, December 23, 1998
and March 15, 1999. See "Principal and Selling Stockholders."
Stock to Service Provider. In connection with the recruiting of its Chief
Executive Officer, the Company engaged the services of Ramsey Beirne
Associates, Inc., an executive search firm affiliated with Benchmark Capital
Partners, L.P. and Benchmark Founders' Fund, L.P. As partial payment for its
services, on March 13, 1998 the Company issued to this firm 15,416 shares of
Series B Preferred Stock, which was valued at $6.00 per share. This stock
converted at the Company's initial public offering into 138,744 shares of
Common Stock.
eBay Foundation. In June 1998, the Company established a fund known as the
eBay Foundation, which is administered by the Community Foundation Silicon
Valley, and donated 321,750 shares of Common Stock to the Community Foundation
Silicon Valley on behalf of the eBay Foundation. The Community Foundation
Silicon Valley sold 32,175 shares of eBay Common Stock in conjunction with
eBay's initial public offering.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's Common Stock as of March 1,
1999 by (1) each stockholder known by the Company to be the beneficial owner of
more than 5% of the Company's Common Stock, (2) each director of the Company,
(3) the Named Executive Officers, (4) all executive officers and directors as a
group and (5) the selling stockholders.
<TABLE>
<CAPTION>
Shares
Beneficially Owned Shares
Prior to Beneficially Owned
Offering(1) Shares After Offering(1)
------------------ Being ------------------
Name Number Percent Offered Number Percent
- ---- ---------- ------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
Pierre M. Omidyar(2).......... 37,600,521 31.2% 790,000 36,810,521 29.4%
Jeffrey S. Skoll(3)........... 22,782,246 18.9 421,000 22,361,246 17.9
Robert C. Kagle............... 17,862,447 14.8 88,000 17,774,447 14.2
Benchmark Funds(4)
Margaret C. Whitman(5)........ 7,137,000 5.9 211,000 6,926,000 5.5
Steven P. Westly(6)........... 2,484,000 2.1 85,000 2,399,000 1.9
Gary F. Bengier(7)............ 1,575,000 1.3 70,000 1,505,000 1.2
Michael K. Wilson(8).......... 2,137,500 1.8 85,000 2,052,500 1.6
Scott D. Cook(9).............. 771,750 * 29,292 742,458 *
Howard D. Schultz(10)......... 816,750 * -- 572,985 *
Michael R. Jacobson(11)....... 45,000 * 25,000 20,000 *
All directors and executive
officers as a group
(11 persons)(12)............. 93,212,214 77.2 1,804,292 91,164,157 72.9
David M. Beirne(13)........... 17,620,548 14.6 88,000 17,532,548 14.0
Bruce W. Dunlevie(13)......... 17,837,154 14.8 88,000 17,749,154 14.2
Kevin R. Harvey(13)........... 17,862,447 14.8 88,000 17,774,447 14.2
Andrew S. Rachleff(13)........ 17,837,154 14.8 88,000 17,749,154 14.2
Maveron(10)................... 659,250 * 45,000 337,500 *
eBay Foundation(14)........... 289,575 * 33,000 256,575 *
David Ostby................... 6,426 * 6,426 -- *
Laurie Kehler................. 6,426 * 5,426 1,000 *
Sharon Fahrney................ 6,426 * 3,856 2,570 *
</TABLE>
- --------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Unless otherwise indicated
below, the persons and entities named in the table have sole voting and
sole investment power with respect to all shares beneficially owned,
subject to community property laws where applicable. Shares of Common
Stock subject to options that are currently exercisable or exercisable
within 60 days of March 1, 1999 are deemed to be outstanding and to be
beneficially owned by the person holding such options for the purpose of
computing the percentage ownership of such person but are not treated as
outstanding for the purpose of computing the percentage ownership of any
other person. The percentage of beneficial ownership is based on
120,817,222 shares of Common Stock outstanding as of March 1, 1999 and an
assumed 125,092,222 shares of Common Stock outstanding after the
completion of this offering.
(2) Mr. Omidyar is the Founder and Chairman of the Board of the Company. As of
March 1, 1999, 33,775,521 shares of the 37,600,521 shares he beneficially
owned were vested and 3,825,000 were unvested and subject to the Company's
right of repurchase at their original purchase price of $0.0022 per share.
See "Certain Transactions" and "Description of Capital Stock." The address
for Mr. Omidyar is 2005 Hamilton Avenue, Suite 350, San Jose, California
95125.
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<PAGE>
(3) Mr. Skoll is the Vice President Strategic Planning and Analysis of the
Company. As of March 1, 1999, 12,582,246 shares of the 22,782,246 he
beneficially owned were vested and 10,200,000 were unvested and subject to
the Company's right of repurchase at their original purchase price of
$0.0022 per share. See "Certain Transactions" and "Description of Capital
Stock." The address for Mr. Skoll is 2005 Hamilton Avenue, Suite 350, San
Jose, California 95125.
(4) Includes 15,244,821 shares held by Benchmark Capital Partners, L.P. and
2,130,687 shares held by Benchmark Founders' Fund, L.P. (collectively, the
"Benchmark Funds"). Mr. Kagle, a director of the Company, is a Member of
Benchmark Capital Management Co., L.L.C., which is the General Partner of
Benchmark Capital Partners, L.P. and Benchmark Founders' Fund, L.P. Mr.
Kagle disclaims beneficial ownership of shares held by such entities
except for his proportional interest therein. The address for Mr. Kagle
and these entities is c/o Benchmark Capital Management Co., L.L.C., 2480
Sand Hill Road, Suite 200, Menlo Park, California 94025.
(5) Ms. Whitman is the President and Chief Executive Officer of the Company.
As of March 1, 1999, 1,710,000 shares of the 7,110,000 shares she
beneficially owned were vested and 5,400,000 shares were unvested and
subject to the Company's right of repurchase at their original purchase
price of $0.067 per share. Includes 27,000 shares held by Ms. Whitman's
husband as custodian for her two children. The address for Ms. Whitman is
2005 Hamilton Avenue, Suite 350, San Jose, California 95125.
(6) Mr. Westly is the Vice President Marketing and Business Development of the
Company. As of March 1, 1999, 898,312 shares of the 2,484,000 shares he
beneficially owned were vested and 1,585,688 shares were unvested and
subject to the Company's right of repurchase at their original purchase
price. The original purchase prices of Mr. Westly's unvested shares are:
$0.033 (1,485,000 shares); $0.067 (19,688 shares); $0.22 (36,000 shares);
$0.67 (27,000 shares); and $3.11 (18,000 shares). The address for Mr.
Westly is 2005 Hamilton Avenue, Suite 350, San Jose, California 95125.
(7) Mr. Bengier is the Chief Financial Officer and Vice President Operations
of the Company. As of March 1, 1999, 492,187 shares of the 1,575,000
shares he beneficially owned were vested and 1,082,813 shares were
unvested and subject to the Company's right of repurchase at their
original purchase price of $0.033 per share. The address for Mr. Bengier
is 2005 Hamilton Avenue, Suite 350, San Jose, California 95125.
(8) Mr. Wilson is the Senior Vice President Product Development and Site
Operations of the Company. As of March 1, 1999, 937,500 shares of the
1,800,000 shares he beneficially owned were vested and 862,500 shares were
unvested and subject to the Company's right of repurchase at their
original purchase price of $0.0057 per share. Also includes 337,500 shares
subject to options vesting within 60 days of March 1, 1999. The address
for Mr. Wilson is 2005 Hamilton Avenue, Suite 350, San Jose, California
95125.
(9) Includes 450,000 shares subject to an immediately exercisable option
outstanding at March 1, 1999. See "Management--Director Compensation." The
address for Mr. Cook is 2550 Garcia Avenue, M.S. 2475, Mountain View,
California 94043.
(10) Mr. Schultz's shares prior to the offering include (a) 321,750 shares
acquired by Maveron Equity Partners, L.P., a limited partnership in which
Mr. Schultz is a member of the general partner and (b) 450,000 shares
issued upon exercise of an option that are subject to the Company's right
of repurchase at their original purchase price of $3.11 per share. Of
these latter 450,000 shares, 337,500 shares were transferred to Maveron
related entities. Prior to the offering, the former 321,750 shares
acquired by Maveron will be distributed pro rata among its limited
partners, some of which will sell shares in this offering. The number of
shares reflected as beneficially owned by Mr. Schultz and Maveron after
the offering reflects this distribution of shares based on certain
valuation assumptions for the shares at the time of the distribution. See
"Management--Director Compensation." The address for Mr. Schultz is 2401
Utah Ave. South, Seattle, Washington, 98134. The address for Maveron is
800 Fifth Avenue, Suite 4100, Seattle, Washington 98104.
65
<PAGE>
(11) Mr. Jacobson is the Vice President, Legal Affairs, General Counsel and
Secretary of the Company. All of these shares represent a fully vested
option for such shares as of March 1, 1999, of which a portion will be
exercised and sold in connection with this offering. The address for Mr.
Jacobson is 2005 Hamilton Avenue, Suite 350, San Jose, California 95125.
(12) Includes the shares described in footnotes (2)-(11).
(13) Includes 15,244,821 shares held by Benchmark Capital Partners, L.P. and
2,130,687 shares held by Benchmark Founders' Fund, L.P. (collectively, the
"Benchmark Funds"). Messrs. Beirne, Dunlevie, Harvey and Rachleff are each
members of Benchmark Capital Management Co., L.L.C., which is the General
Partner of Benchmark Capital Partners, L.P. and Benchmark Founders' Fund,
L.P. Each of Messrs. Beirne, Dunlevie, Harvey and Rachleff disclaims
beneficial ownership of shares held by such entities except for his
proportional interest therein. The address for these stockholders is c/o
Benchmark Capital Management Co., L.L.C., 2480 Sand Hill Road, Suite 200,
Menlo Park, California 94025.
(14) In June 1998, the Company established a fund known as the eBay Foundation,
which is administered by the Community Foundation Silicon Valley. To
capitalize this foundation, the Company donated 321,750 shares to the
Community Foundation Silicon Valley (the "Foundation"), of which 32,175
shares had been sold by the Foundation as of March 1, 1999.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 195,000,000 shares
of Common Stock, $0.001 par value per share, and 5,000,000 shares of Preferred
Stock, $0.001 par value per share. The Board of Directors is contemplating
recommending to its stockholders an increase in the number of authorized shares
of its Common Stock to 900,000,000 and shares of its Preferred Stock to
10,000,000. As of March 1, 1999, there were outstanding 120,817,222 shares of
Common Stock held by approximately 500 stockholders of record and options to
purchase 9,888,294 shares of Common Stock.
Common Stock
Subject to preferences that may apply to shares of Preferred Stock
outstanding at the time, the holders of outstanding shares of Common Stock are
entitled to receive dividends out of assets legally available therefor at such
times and in such amounts as the Board of Directors may from time to time
determine. Each stockholder is entitled to one vote for each share of Common
Stock held on all matters submitted to a vote of stockholders. Cumulative
voting for the election of directors is not provided for in the Company's
Amended and Restated Certificate of Incorporation, which means that the holders
of a majority of the shares voted can elect all of the directors then standing
for election. The Common Stock is not entitled to preemptive rights and is not
subject to conversion or redemption. Upon a liquidation, dissolution or
winding-up of the Company, the assets legally available for distribution to
stockholders are distributable ratably among the holders of the Common Stock
and any participating Preferred Stock outstanding at that time after payment of
liquidation preferences, if any, on any outstanding Preferred Stock and payment
of other claims of creditors. Each outstanding share of Common Stock is, and
all shares of Common Stock to be outstanding upon completion of this offering
will be, fully paid and nonassessable.
Preferred Stock
The Company is authorized, subject to limitations prescribed by Delaware
law, to provide for the issuance of Preferred Stock in one or more series, to
establish from time to time the number of shares to be included in each such
series, to fix the rights, preferences and privileges of the shares of each
wholly unissued series and any qualifications, limitations or restrictions
thereon, and to increase or decrease the number of shares of any such series
(but not below the number of shares of such series then outstanding) without
any further vote or action by the stockholders. The Board may authorize the
issuance of Preferred Stock with voting or conversion rights that could
adversely affect the voting power or other rights of the holders of the Common
Stock. The issuance of Preferred Stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could,
among other things, have the effect of delaying, deferring or preventing a
change in control of the Company and may adversely affect the market price of
the Common Stock and the voting and other rights of the holders of Common
Stock. The Company has no current plans to issue any shares of Preferred Stock.
Registration Rights
Pursuant to an Investor Rights Agreement dated June 20, 1997 between the
Company, the Founders and the Investors (the "Rights Agreement"), the Founders
and the Investors have certain registration rights for the 59,171,767 and
17,774,447 shares of Common Stock, respectively, held by them after the
completion of this offering (the "Registrable Securities"), at any time. Under
the Rights Agreement, the Investors, by written request of at least two-thirds
of the holders of the Investors' Registrable Securities then outstanding, may
demand that the Company file a registration statement under the Securities Act
covering all or a portion of the Investors' Registrable Securities, provided
that, in the case of a registration on a form other than a Form S-3, the
offering is for at least 50% of the then outstanding Investors' Registrable
Securities, or in the case of a registration on a Form S-3,
67
<PAGE>
there is a reasonably anticipated aggregate offering price to the public of at
least $1,000,000. The Investors have the right to demand two registrations on a
form other than Form S-3 and not more than one Form S-3 registration in any
six-month period. These registration rights are subject to the Company's right
to delay the filing of a registration statement, not more than once in a 12-
month period, for not more than 90 days, in the case of a registration on a
form other than a Form S-3, and 60 days, in the case of a registration on a
Form S-3, after receiving the registration demand.
In addition, the Investors and Founders have certain "piggyback"
registration rights. If the Company proposes to register any of its Common
Stock under the Securities Act (other than pursuant to the Investors' demand
registration rights noted above), the Investors or Founders may require the
Company to include all or a portion of their Registrable Securities in such
registration; provided, however, that the managing underwriter, if any, of any
such offering has certain rights to limit the number of, or in the case of the
Company's initial public offering, to exclude all or a portion of the
Registrable Securities proposed to be included in such registration.
All registration expenses incurred in connection with the above
registrations would be borne by the Company. The selling Investor or Founder
would pay all underwriting discounts, selling commissions and stock transfer
taxes applicable to the sale of his or its Registrable Securities.
Demand and piggyback registration rights under the Rights Agreement
terminate with respect to each Investor or Founder, as applicable, on September
24, 2005; provided that each Investor's and Founder's rights under the Rights
Agreement will terminate earlier when such Investor or Founder may sell all of
its or his shares in a three-month period under Rule 144 under the Securities
Act.
Put/Call Options on Common Stock
In June 1997, each Founder entered into a separate Loan and Pledge Agreement
with the Investors under which he obtained a full recourse loan of $750,000, of
which $658,030 was made by Benchmark Capital Partners, L.P. and $91,970 was
made by Benchmark Founders' Fund, L.P. Each Founder secured his loan with a
pledge of 6,887,754 shares of Common Stock for an aggregate of 13,775,508
shares, of which 12,086,271 shares were pledged to Benchmark Capital Partners,
L.P. and 1,689,237 shares were pledged to Benchmark Founders' Fund, and a
security interest in such Founder's rights under the Put Option Agreement and
the Call Option Agreement each dated June 27, 1997 among the Investors and each
Founder individually. The loans are due June 27, 2002 and bear interest,
compounded annually, at a rate of 7% per annum. The loans were paid in full on
January 12, 1999 subsequent to the exercise of the call by the Benchmark Funds
under their Call Option Agreements with each Founder.
Under his Call Option Agreement, each Founder granted the Investors an
option to call all of the shares covered by the option at any time from the
date of the agreement up to June 27, 2001 at an exercise price equal to an
aggregate of $750,000 together with the aggregate amount of interest accrued
through the date of exercise under the applicable Loan and Pledge Agreement.
These call options were exercised on January 12, 1999.
Anti-Takeover Provisions
Delaware Law
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Anti-Takeover Law") regulating corporate
takeovers. The Anti-Takeover Law prevents certain Delaware corporations,
including those whose securities are listed on the Nasdaq National Market, from
engaging, under certain circumstances, in a "business combination" (which
includes a
68
<PAGE>
merger or sale of more than 10% of the corporation's assets) with any
"interested stockholder" (a stockholder who owns 15% or more of the
corporation's outstanding voting stock, as well as affiliates and associates of
any such person) for three years following the date that such stockholder
became an "interested stockholder" unless (1) the transaction that resulted in
the stockholders' becoming an "interested stockholder" was approved by the
board of directors prior to the date the "interested stockholder" attained such
status, (2) upon consummation of the transaction that resulted in the
stockholder's becoming an "interested stockholder," the "interested
stockholder" owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding those shares owned
by (a) persons who are directors and also officers and (b) employee stock plans
in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer), or (3) on or subsequent to such date the "business
combination" is approved by the board of directors and authorized at an annual
or special meeting of stockholders by the affirmative vote of at least two-
thirds of the outstanding voting stock that is not owned by the "interested
stockholder." A Delaware corporation may "opt out" of the Anti-Takeover Law
with an express provision in its original certificate of incorporation or an
express provision in its certificate or incorporation or bylaws resulting from
a stockholders' amendment approved by at least a majority of the outstanding
voting shares. The Company has not "opted out" of the provisions of the Anti-
Takeover Law. The statute could prohibit or delay mergers or other takeover or
change-in-control attempts with respect to the Company and, accordingly, may
discourage attempts to acquire the Company.
Charter and Bylaw Provisions
The Company's Amended and Restated Bylaws divide the Board into three
classes as nearly equal in size as possible with staggered three-year terms.
The classification of the Board could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of the Company. In addition, the Amended and Restated Bylaws
provide that any action required or permitted to be taken by the stockholders
of the Company at an annual meeting or a special meeting of the stockholders
may be taken only if it is properly brought before such meeting and may not be
taken by written action in lieu of a meeting. The Amended and Restated Bylaws
provide that special meetings of the stockholders may be called only by the
Chairman of the Board, the Chief Executive Officer or, if none, the President
or the Board.
The Company's Amended and Restated Certificate of Incorporation and its
Amended and Restated Bylaws provide that the Company will indemnify officers
and directors against losses that they may incur in investigations and legal
proceedings resulting from their services to the Company, which may include
services in connection with takeover defense measures. Such provisions may have
the effect of preventing changes in the management of the Company.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Company's Common Stock is
ChaseMellon Shareholder Services, L.L.C.
69
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
125,092,222 shares of Common Stock, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
the 6,500,000 shares sold in this offering will be freely tradeable without
restriction under the Securities Act unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act. Of the
remaining shares, a total of 93,004,323 shares held by existing stockholders
are subject to lock-up agreements generally providing that, with certain
limited exceptions, the stockholder will not (1) offer to sell, sell, contract
to sell, pledge or otherwise dispose of any shares of Common Stock owned of
record or beneficially prior to the offering or any securities convertible into
or exchangeable for such shares of Common Stock, (2) establish a "put
equivalent position" with respect to such Common Stock within the meaning of
Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended, or (3)
publicly announce an intention to take any of the actions set forth in (1) or
(2) for a period of 90 days following the date of the final prospectus for this
offering without the prior written consent of Goldman, Sachs & Co. acting alone
or each of the above listed representatives acting together. As a result of
these lock-up agreements, notwithstanding possible earlier eligibility for sale
under the provisions of Rules 144, 144(k) and 701, none of these shares can be
sold until 91 days after the date of the final prospectus. Beginning 91 days
after the date of the final prospectus, these shares will be eligible for sale
in the public market, subject to certain volume limitations and the expiration
of applicable holding periods under Rule 144 under the Securities Act and the
Company's right to repurchase unvested shares.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least one year (including the holding period of any prior owner except an
affiliate) would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of (1) 1% of the number of shares of
Common Stock then outstanding (which will equal approximately 1,250,000 shares
immediately after this offering) or (2) the average weekly trading volume of
the Common Stock during the four calendar weeks preceding the filing of a Form
144 with respect to such sale. Sales under Rule 144 are also subject to certain
manner of sale provisions and notice requirements and to the availability of
current public information about the Company. Under Rule 144(k), a person who
is not deemed to have been an affiliate of the Company at any time during the
three months preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years (including the holding period of any
prior owner except an affiliate), is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period requirement,
of Rule 144. Any employee, officer or director of or consultant to the Company
who purchased his or her shares pursuant to a written compensatory plan or
contract may be entitled to rely on the resale provisions of Rule 701. Rule 701
permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the holding period, public information, volume
limitation or notice provisions of Rule 144.
The Company has filed a registration statement under the Securities Act
covering a total of 24,397,986 shares of Common Stock subject to outstanding
options under the 1996 Plan, the 1997 Plan, the 1998 Plan and certain non-plan
options and reserved for issuance under the 1998 Plan, the Directors Plan and
the Purchase Plan. Accordingly, shares registered under such registration
statement are available for sale in the open market. Certain holders of shares
of Common Stock are
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<PAGE>
also entitled to certain rights with respect to registration of such shares of
Common Stock for offer and sale to the public. See "Description of Capital
Stock--Registration Rights."
There can be no assurance that an active public market for the Common Stock
will continue after this offering. Future sales of substantial amounts of
Common Stock (including shares issued upon exercise of outstanding options) in
the public market after this offering could adversely affect market prices
prevailing from time to time and could impair the Company's ability to raise
capital through the sale of its equity securities. As described below, only a
limited number of shares will be available for sale immediately after this
offering due to certain contractual restrictions on resale. Sales of
substantial amounts of Common Stock of the Company in the public market after
the restrictions lapse could adversely affect the prevailing market price and
the ability of the Company to raise equity capital in the future.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Cooley Godward LLP, San Francisco,
California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Shearman & Sterling, Menlo Park,
California.
EXPERTS
The financial statements included in this prospectus have been audited by
PricewaterhouseCoopers LLP, independent accountants. The companies and periods
covered by these audits are indicated in the individual reports of
PricewaterhouseCoopers LLP. Such financial statements have been so included in
reliance on the reports of PricewaterhouseCoopers LLP given on the authority of
said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act
with respect to the shares of Common Stock offered hereby. This prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits thereto. The Company files annual, quarterly and special reports,
proxy statements and other information with the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits thereto.
Statements contained in this prospectus regarding the contents of any contract
or any other document to which reference is made are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. A copy of the Registration
Statement, the exhibits thereto and other information the Company has filed
with the Commission may be inspected without charge at the offices of the
Commission at Judiciary Plaza, 450 Fifth Street, Washington, D.C. 20549, and
copies of all or any part of these documents may be obtained from the Public
Reference Section of the Commission, Washington, D.C. 20549 upon the payment of
the fees prescribed by the Commission. The Commission maintains a website
(http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding registrants, such as the Company, that file
electronically with the Commission.
71
<PAGE>
eBAY INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
eBAY INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheet................................................. F-3
Consolidated Statement of Income........................................... F-4
Consolidated Statement of Stockholders' Equity............................. F-5
Consolidated Statement of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements................................. F-7
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Overview................................................................... F-24
Pro Forma Consolidated Statement of Operations............................. F-25
Notes to Pro Forma Consolidated Financial Information...................... F-26
JUMP INCORPORATED FINANCIAL STATEMENTS
Report of Independent Accountants.......................................... F-27
Balance Sheet.............................................................. F-28
Statement of Operations.................................................... F-29
Statement of Shareholder's Deficit......................................... F-30
Statement of Cash Flows.................................................... F-31
Notes to Financial Statements.............................................. F-32
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
eBay Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of eBay Inc.
and its subsidiary at December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
January 22, 1999, except for Note 11, which is as of March 25, 1999.
F-2
<PAGE>
eBAY INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 3,723 $31,790
Short-term investments......................................... -- 40,401
Accounts receivable, net....................................... 1,024 6,369
Other current assets........................................... 220 4,825
------- -------
Total current assets......................................... 4,967 83,385
Property and equipment, net...................................... 652 7,831
Intangible and other assets, net................................. -- 1,267
------- -------
$ 5,619 $92,483
======= =======
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 252 $ 1,385
Customer advances.............................................. 128 727
Income taxes payable........................................... 169 --
Debt and leases, current....................................... 258 --
Deferred tax liabilities, current.............................. -- 1,682
Other current liabilities...................................... 317 4,244
------- -------
Total current liabilities.................................... 1,124 8,038
Debt and leases, long-term....................................... 305 --
Deferred tax liabilities, long-term.............................. 157 --
------- -------
1,586 8,038
------- -------
Series B Mandatorily Redeemable Convertible
Preferred Stock and Series B warrants........................... 3,018 --
------- -------
Commitments and Contingencies (Notes 6 and 11)
Stockholders' equity:
Preferred Stock, $0.001 par value; no shares and 5,000 shares
authorized, no shares issued or outstanding .................. -- --
Series A Convertible Preferred Stock, $0.001 par value; 1,676
and no shares authorized, 1,676 and no shares issued and
outstanding................................................... 4 --
Common Stock, $0.001 par value; 180,000 and 195,000 shares
authorized, 61,200 and 120,760 shares issued and outstanding.. 61 121
Additional paid-in capital..................................... 1,441 86,265
Notes receivable from stockholders............................. (68) (1,130)
Unearned compensation.......................................... (1,399) (4,139)
Retained earnings.............................................. 976 3,328
------- -------
Total stockholders' equity................................... 1,015 84,445
------- -------
$ 5,619 $92,483
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
eBAY INC.
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December
31,
-----------------------
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
Net revenues........................................... $ 372 $5,744 $47,352
Cost of net revenues................................... 14 746 6,859
------ ------ -------
Gross profit......................................... 358 4,998 40,493
------ ------ -------
Operating expenses:
Sales and marketing.................................. 32 1,730 19,841
Product development.................................. 28 831 4,606
General and administrative........................... 45 950 9,080
Amortization of acquired intangibles................. -- -- 805
------ ------ -------
Total operating expenses........................... 105 3,511 34,332
------ ------ -------
Income from operations................................. 253 1,487 6,161
Interest and other income, net......................... 1 59 908
Interest expense....................................... -- (3) (39)
------ ------ -------
Income before income taxes............................. 254 1,543 7,030
Provision for income taxes............................. (106) (669) (4,632)
------ ------ -------
Net income............................................. $ 148 $ 874 $ 2,398
====== ====== =======
Net income per share:
Basic................................................ $ 0.02 $ 0.04 $ 0.05
====== ====== =======
Weighted average shares--basic....................... 6,375 22,313 49,895
====== ====== =======
Diluted.............................................. $ 0.00 $ 0.01 $ 0.02
====== ====== =======
Weighted average shares--diluted..................... 42,945 82,660 114,590
====== ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
eBAY INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Series A
Convertible
Preferred Notes Total
Stock Common Stock Additional Receivable Stock-
-------------- -------------- Paid-in from Unearned Retained holders'
Shares Amount Shares Amount Capital Stockholders Compensation Earnings Equity
------ ------ ------- ------ ---------- ------------ ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Common Stock
for cash and notes..... -- $ -- 61,200 $ 61 $ 17 $ (68) $ -- $ -- $ 10
Issuance of Preferred
Stock.................. 1,676 4 -- -- -- -- -- -- 4
Net income.............. -- -- -- -- -- -- -- 148 148
------ ----- ------- ---- ------- ------- ------- ------ -------
Balance at December 31,
1996................... 1,676 4 61,200 61 17 (68) -- 148 162
Accretion of Series B
Mandatorily Redeemable
Convertible Preferred
Stock to redemption
value.................. -- -- -- -- -- -- -- (46) (46)
Unearned compensation... -- -- -- -- 1,424 -- (1,424) -- --
Amortization of unearned
compensation........... -- -- -- -- -- -- 25 -- 25
Net income............. -- -- -- -- -- -- -- 874 874
------ ----- ------- ---- ------- ------- ------- ------ -------
Balance at December 31,
1997................... 1,676 4 61,200 61 1,441 (68) (1,399) 976 1,015
Accretion of Series B
Mandatorily Redeemable
Convertible Preferred
Stock to redemption
value.................. -- -- -- -- -- -- -- (46) (46)
Unearned compensation... -- -- -- -- 5,831 -- (5,831) -- --
Amortization of unearned
compensation........... -- -- -- -- -- -- 3,091 -- 3,091
Issuance of Common Stock
for cash and notes..... -- -- 18,940 20 4,569 (1,378) -- -- 3,211
Issuance of Common Stock
for acquisition of Jump
Incorporated........... -- -- 428 -- 2,000 -- -- -- 2,000
Contribution of Common
Stock to charitable
foundation............. -- -- 322 -- 1,215 -- -- -- 1,215
Issuance of Common Stock
for cash in initial
public offering, net of
offering expenses of
$6,168................. -- -- 12,043 12 66,076 -- -- -- 66,088
Conversion of Series A
and B Preferred Stock
to Common Stock in
conjunction with
initial public
offering............... (1,676) (4) 27,827 28 5,133 -- -- -- 5,157
Note repayments......... -- -- -- -- -- 316 -- -- 316
Net income.............. -- -- -- -- -- -- -- 2,398 2,398
------ ----- ------- ---- ------- ------- ------- ------ -------
Balance at December 31,
1998................... -- $ -- 120,760 $121 $86,265 $(1,130) $(4,139) $3,328 $84,445
====== ===== ======= ==== ======= ======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
eBAY INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December
31,
------------------------
1996 1997 1998
----- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 148 $ 874 $ 2,398
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts and authorized
credits.............................................. 18 343 3,323
Depreciation and amortization......................... 2 74 1,688
Amortization of unearned compensation................. -- 25 2,662
Compensation expense associated with purchases of
Common Stock by outside directors.................... -- -- 429
Charitable contribution of Common Stock............... -- -- 1,215
Series B Preferred Stock issued for services.......... -- -- 93
Acquired research and development..................... -- -- 150
Amortization of acquired intangibles.................. -- -- 1,030
Changes in assets and liabilities:
Accounts receivable.................................. (184) (1,201) (8,656)
Other current assets................................. (16) (204) (4,605)
Accounts payable..................................... 23 229 1,118
Customer advances.................................... -- 128 599
Income taxes payable................................. 50 119 (169)
Other current liabilities............................ 17 300 3,587
Deferred tax liabilities............................. 55 102 1,447
----- ------- --------
Net cash provided by operating activities........... 113 789 6,309
----- ------- --------
Cash flows from investing activities:
Purchases of property and equipment.................... (25) (680) (8,858)
Purchases of short-term investments.................... -- -- (40,401)
----- ------- --------
Net cash used in investing activities............... (25) (680) (49,259)
----- ------- --------
Cash flows from financing activities:
Proceeds from Series A Preferred Stock................. 4 -- --
Proceeds from Series B Preferred Stock and Series B
warrants.............................................. -- 2,972 2,000
Proceeds from Common Stock, net........................ 10 -- 69,299
Repayment of stockholder loans......................... -- -- 316
Proceeds from debt issuance............................ 1 545 --
Principal payments on debt and leases.................. -- (6) (598)
----- ------- --------
Net cash provided by financing activities........... 15 3,511 71,017
----- ------- --------
Net increase in cash and cash equivalents............... 103 3,620 28,067
Cash and cash equivalents at beginning of year.......... -- 103 3,723
----- ------- --------
Cash and cash equivalents at end of year................ $ 103 $ 3,723 $ 31,790
===== ======= ========
Supplemental cash flow disclosures:
Cash paid for interest................................. $ -- $ 3 $ 39
Cash paid for income taxes............................. $ 1 $ 452 $ 4,882
Non-cash investing and financing activities:
Property and equipment leases.......................... $ -- $ 23 $ --
Common Stock issued for notes receivable............... $ 68 $ -- $ 1,378
Common Stock issued for acquisition.................... $ -- $ -- $ 2,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--The Company and Summary of Significant Accounting Policies:
The Company
eBay Inc. (the "Company") was incorporated in California in May 1996 and
reincorporated in the state of 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.
Reincorporation
As a result of the reincorporation in April 1998, the Company was authorized
to issue 180,000,000 shares of $0.001 par value Common Stock and 6,000,000
shares of $0.001 par value Preferred Stock. The Board of Directors and the
stockholders subsequently amended the number of authorized shares such that the
Company was authorized to issue 195,000,000 shares of $0.001 Common Stock and
5,000,000 shares of $0.001 Preferred Stock. The Board of Directors has the
authority to issue the undesignated Preferred Stock in one or more series and
to fix the rights, preferences, privileges and restrictions thereof.
Initial public offering
On September 24, 1998, the Company completed its initial public offering of
4,025,000 shares of its Common Stock, the net proceeds of which aggregated
approximately $66.1 million. At the closing of the offering, all issued and
outstanding shares of the Company's Convertible Preferred Stock and Mandatorily
Redeemable Convertible Preferred Stock were converted into an aggregate of
27,827,019 shares of Common Stock.
Use of estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Principles of consolidation and basis of presentation
The financial statements as of December 31, 1998 and for the year then ended
are consolidated and include the accounts of the Company and its wholly owned
subsidiary. All significant intercompany balances and transactions have been
eliminated in consolidation. From September 1995 ("Inception") through May
1996, eBay operated as a sole proprietorship. The sole proprietorship
recognized no revenues and incurred no expenses during the period from
Inception to December 31, 1995. The sole proprietorship recognized net revenues
totaling $30,000 and incurred expenses totaling $14,000 during the period from
January 1, 1996 until incorporation in May 1996. The results of operations for
this period have been included in the 1996 financial statements to facilitate
presentation.
F-7
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash, cash equivalents and short-term investments
The Company considers all highly liquid investments purchased with a
maturity of three months or less at the date of acquisition to be cash
equivalents. Both cash equivalents and short-term investments are considered
available-for-sale securities and are carried at amortized cost, which
approximates fair value. The following schedule summarizes the estimated fair
value of the Company's cash, cash equivalents and short-term investments, (in
thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------- -------
<S> <C> <C>
Cash and cash equivalents:
Cash...................................................... $ 676 $ 6,397
Money market funds........................................ 3,047 2,828
Municipal bonds and notes................................. -- 19,555
Corporate securities...................................... -- 3,010
------- -------
$ 3,723 $31,790
======= =======
Short-term investments:
Municipal bonds and notes................................. $ -- $40,401
======= =======
The estimated fair value of short-term investments classified by date of
contractual maturity is as follows, (in thousands):
<CAPTION>
December 31,
---------------
1997 1998
------- -------
<S> <C> <C>
Due within one year or less................................. $ -- $12,287
Due after one year through two years........................ -- 28,114
------- -------
$ -- $40,401
======= =======
</TABLE>
Concentration of credit risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents, short-term
investments and accounts receivable. Cash, cash equivalents and short-term
investments are deposited with high credit, quality financial institutions. The
Company's accounts receivable are derived from revenue earned from customers
located in the U.S. and throughout the world and are denominated in U.S.
dollars. Accounts receivable balances are typically settled through customer
credit cards and, as a result, the majority of accounts receivable are
collected upon processing of credit card transactions. The Company maintains an
allowance for doubtful accounts receivable based upon the expected
collectibility of accounts receivable. During the years ended December 31, 1997
and 1998, no customers accounted for more than 10% of net revenues or net
accounts receivable.
Fair value of financial instruments
The Company's financial instruments, including cash, cash equivalents,
short-term investments, accounts receivable, accounts payable and capital lease
obligations are carried at cost, which approximates their fair value because of
the short-term maturity of these instruments.
F-8
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and equipment
Property and equipment are stated at historical cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the assets, generally five years or less, or the shorter of the
lease term or the estimated useful lives of the assets, if applicable.
Intangible assets
Goodwill and other intangible assets resulting from the acquisition of Jump
Incorporated ("Jump") were estimated by management to be primarily associated
with the acquired customer list, workforce and technological know how. As a
result of the rapid technological changes occurring in the Internet industry
and the intense competition for qualified Internet professionals, goodwill and
other intangible assets are amortized on a straight-line basis over the
estimated periods of benefit, which range from eight to 24 months. See Note 2--
Acquisition.
Impairment of long-lived assets
The Company evaluates the recoverability of long-lived assets in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS"). SFAS No. 121 requires recognition of impairment of long-lived assets
in the event the net book value of such assets exceeds the future undiscounted
cash flows attributable to such assets.
Revenue recognition
Revenues are derived primarily from placement fees charged for the listing
of items for auction and success fees calculated as a percentage of the final
sales transaction value. Revenues related to placement fees are recognized at
the time the item is listed, while those related to success fees are recognized
at the time that the auction is successfully concluded. An auction is
considered successfully concluded when there is at least one bid above the
seller's specified minimum price or reserve price, whichever is higher, at the
end of the auction term, which is generally three to seven days. Provisions for
doubtful accounts and authorized credits to sellers are provided at the time of
revenue recognition based upon the Company's historical experience.
Product development costs
Product development costs include expenses incurred by the Company to
develop, enhance, manage, monitor and operate the Company's website. Product
development costs are expensed as incurred.
Advertising expense
The Company recognizes advertising expenses in accordance with Statement of
Position ("SOP") 93-7 "Reporting on Advertising Costs." As such, the Company
expenses the costs of producing advertisements at the time production occurs,
and expenses the cost of communicating advertising 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 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. Advertising expenses totaled $0, $478,000, and $12.3 million during
the years ended Decemer 31, 1996, 1997 and 1998, respectively.
F-9
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation expense is based on the
difference, if any, on the date of the grant, between the fair value of the
Company's stock and the exercise price. The Company accounts for stock issued
to non-employees in accordance with the provisions of SFAS No. 123 and the
Emerging Issues Task Force Consensus in Issue No. 96-18.
Income taxes
Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets are
based on the provisions of enacted tax law; the effects of future changes in
tax laws or rates are not anticipated. The measurement of deferred tax assets
is reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
Net income per share
The Company computes net income per share in accordance with SFAS No. 128,
"Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under
the provisions of SFAS No. 128 and SAB 98, basic net income per share is
computed by dividing the net income available to common stockholders for the
period by the weighted average number of common shares outstanding during the
period. Diluted net income per share is computed by dividing the net income for
the period by the weighted average number of common and common equivalent
shares outstanding during the period. Common equivalent shares, composed of
unvested restricted Common Stock and incremental common shares issuable upon
the exercise of stock options and warrants and upon conversion of Series A and
Series B Convertible Preferred Stock, are included in diluted net income per
share to the extent such shares are dilutive.
F-10
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth the computation of basic and diluted net
income per share for the periods indicated, (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Numerator:
Net income...................................... $ 148 $ 874 $ 2,398
Accretion of Series B Mandatorily Redeemable
Convertible Preferred Stock to redemption
value.......................................... -- (46) (46)
-------- -------- --------
Net income available to common stockholders..... $ 148 $ 828 $ 2,352
======== ======== ========
Denominator:
Weighted average shares......................... 30,600 61,200 89,473
Weighted average unvested common shares subject
to repurchase agreements....................... (24,225) (38,887) (39,578)
-------- -------- --------
Denominator for basic calculation............... 6,375 22,313 49,895
Weighted average effect of dilutive securities:
Series A Preferred Stock...................... 12,345 15,088 11,037
Series B Preferred Stock...................... -- 6,372 8,054
Series B Preferred Stock warrants............. -- -- 1,098
Unvested common shares subject to
repurchase agreements........................ 24,225 38,887 39,578
Employee stock options........................ -- -- 4,928
-------- -------- --------
Denominator for diluted calculation............. 42,945 82,660 114,590
======== ======== ========
Net income per share:
Basic........................................... $ 0.02 $ 0.04 $ 0.05
======== ======== ========
Diluted......................................... $ 0.00 $ 0.01 $ 0.02
======== ======== ========
</TABLE>
Comprehensive income
Effective January 1, 1998 the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income.
Segment information
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." The
Company identifies its operating segments based on business activities,
management responsibility and geographical location. During the years ended
December 31, 1996, 1997 and 1998, the Company operated in a single business
segment operating an online person-to-person trading community in an auction
format, primarily in the United States. Through December 31, 1998, foreign
operations have not been significant in either revenue or investment in long-
lived assets.
Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform to the current period presentation.
F-11
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent accounting pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
SOP No. 98-1, "Software for Internal Use," which provides guidance on
accounting for the cost of computer software developed or obtained for internal
use. SOP No. 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998. The Company does not expect that the
adoption of SOP No. 98-1 will have a material impact on its consolidated
financial statements.
Note 2--Acquisition:
Effective June 30, 1998, the Company acquired all the outstanding shares of
Jump, which provides a forum where Internet users can buy and sell items in an
online auction format. The acquisition has been accounted for using the
purchase method of accounting and accordingly, the purchase price has been
allocated to the tangible and intangible assets acquired and liabilities
assumed on the basis of their respective fair values on the acquisition date.
The fair value of intangible assets was determined using a combination of
methods, including replacement cost estimates for acquired research and
development and completed technology, a risk-adjusted income approach for the
acquired customer list and the amounts paid for covenants not to compete.
The total purchase price of approximately $2.3 million consisted of 428,544
shares of the Company's Common Stock with an estimated fair value of
approximately $2.0 million and other acquisition related expenses of
approximately $335,000, consisting primarily of payments for non-compete
agreements totaling approximately $208,000 and legal and other professional
fees. Of the total purchase price, approximately $150,000 was allocated to in-
process technology and was immediately charged to operations because such in-
process technology had not reached the stage of technological feasibility at
the acquisition date and had no alternative future use. The remainder of the
purchase price was allocated to net tangible liabilities assumed ($31,000) and
intangible assets, including completed technology ($500,000), customer list
($1.5 million), covenants not to compete ($208,000) and goodwill ($24,000). The
intangible assets are being amortized over their estimated useful lives of
eight to 24 months.
The acquisition has been structured as a tax free exchange of stock,
therefore, the differences between the recognized fair values of the acquired
assets, including tangible assets, and their historical tax bases are not
deductible for tax purposes.
F-12
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following unaudited pro forma consolidated financial information
reflects the results of operations for the years ended December 31, 1997 and
1998, as if the acquisition had occurred on January 1, 1997 and 1998,
respectively, and after giving effect to purchase accounting adjustments. These
pro forma results have been prepared for comparative purposes only and do not
purport to be indicative of what operating results would have been had the
acquisitions actually taken place on January 1, 1997 or 1998, and may not be
indicative of future operating results, (in thousands, except per share
amounts).
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Net revenues............................................... $ 5,755 $47,364
Income (loss) from operations.............................. (655) 5,361
Net income (loss).......................................... (1,199) 1,597
Net income (loss) per share:
Basic.................................................... $ (0.05) $ 0.02
Diluted.................................................. $ (0.05) $ 0.01
Weighted average shares:
Basic.................................................... 22,743 88,787
Diluted.................................................. 22,743 129,491
</TABLE>
Note 3--Balance Sheet Components:
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------ -------
(in thousands)
<S> <C> <C>
Accounts receivable, net:
Accounts receivable....................................... $1,385 $ 9,491
Less: Allowance for doubtful accounts..................... (308) (2,105)
Allowance for authorized credits....................... (53) (1,017)
------ -------
$1,024 $ 6,369
====== =======
Write-offs against the allowance for doubtful accounts were $0 and $562,000
in the years ended December 31, 1997 and 1998, respectively.
<CAPTION>
December 31,
---------------
1997 1998
------ -------
(in thousands)
<S> <C> <C>
Property and equipment, net:
Computer equipment........................................ $ 608 $ 8,897
Furniture and fixtures.................................... 115 585
Leasehold improvements.................................... 5 113
------ -------
728 9,595
Less: Accumulated depreciation and amortization............. (76) (1,764)
------ -------
$ 652 $ 7,831
====== =======
</TABLE>
F-13
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and equipment includes $23,000 and $0 of equipment under capital
leases at December 31, 1997 and 1998, respectively. Accumulated depreciation of
assets under capital leases totaled $7,000 and $0 at December 31, 1997 and
1998, respectively.
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------- -------
(in thousands)
<S> <C> <C>
Intangible assets, net:
Purchased technology...................................... $ -- $ 500
Covenants not to compete.................................. -- 208
Customer list............................................. -- 1,484
Goodwill.................................................. -- 24
------- -------
-- 2,216
Less: Accumulated amortization............................ -- (1,030)
------- -------
$ -- $ 1,186
======= =======
Other current liabilities:
Accrued compensation and related benefits................. $ 68 $ 978
Advertising accruals...................................... -- 1,274
Professional fees......................................... -- 451
Other accruals............................................ 249 1,541
------- -------
$ 317 $ 4,244
======= =======
</TABLE>
Note 4--Related Party Transactions:
Notes receivable from stockholders
At December 31, 1997 the Company held a note receivable from an officer of
the Company totaling $68,000. The note was full recourse, was secured by Common
Stock and bore simple interest at 6% per annum. The principal and interest on
the note was repaid in November 1998. At December 31, 1998, the Company held
notes receivable from employees, officers and a director totaling $1.1 million,
representing amounts owed to the Company from the exercise of stock options.
These full recourse notes are secured by Common Stock and bear interest at a
rate of 8% per annum. Interest is due and payable on December 1st of each year,
and the principal is due on or before December 1, 2002.
Professional services
In connection with the recruitment of its Chief Executive Officer, the
Company engaged the services of an executive search firm affiliated with a
holder of the Company's Series B Mandatorily Redeemable Convertible Preferred
Stock. During 1998, the Company paid fees for services performed of $93,000 and
issued 46,248 shares of Series B Mandatorily Redeemable Convertible Preferred
Stock with a fair value on the date earned of $93,000. The amount paid for the
services and the fair value of the shares are included in general and
administrative expenses in the consolidated statement of income for the year
ended December 31, 1998.
F-14
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5--Debt:
Line of credit
At December 31, 1997 and 1998, the Company had $545,000 and $0,
respectively, outstanding under a line of credit with a financial institution.
The line of credit provides for a revolving line, including an equipment sub-
limit facility, of up to $750,000 and 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, 1997 and 1998.
Note 6--Commitments:
Leases
The Company leases office space and equipment under noncancelable operating
leases with various expiration dates through the year 2004. Rent expense for
the years ended December 31, 1996, 1997, and 1998 totaled $9,000, $223,000 and
$672,000, respectively.
Future minimum lease payments under non-cancelable operating leases,
including lease commitments entered into subsequent to December 31, 1998, are
as follows, (in thousands):
<TABLE>
<CAPTION>
Year ending Operating
December 31, Leases
------------ ---------
<S> <C>
1999............................................................. $ 2,978
2000............................................................. 4,605
2001............................................................. 4,675
2002............................................................. 4,782
2003............................................................. 4,681
Thereafter....................................................... 3,330
-------
Total minimum lease payments................................... $25,051
=======
</TABLE>
Advertising
During 1998, the Company entered into a three-year marketing agreement with
America Online, Inc. ("AOL"). Under the terms of the agreement the Company will
be provided with a specific number of advertising impressions featuring it as
the preferred provider of person-to-person auction services on AOL's service.
In consideration, the Company has committed to pay $12.0 million over the
three-year term of the agreement. The Company 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 December 31, 1998, the
Company had paid $4.0 million to AOL, of which $1.7 million was recognized as
sales and marketing expense. 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. eBay will pay $75 million over the four year term
of the contract. 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.
F-15
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7--Income Taxes:
Income before income taxes was generated entirely by domestic operations
during 1996, 1997 and 1998. The provision for income taxes consists of the
following, (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Current:
Federal.............................................. $ 40 $ 450 $2,309
State and local...................................... 11 117 877
------ ------ ------
51 567 3,186
------ ------ ------
Deferred:
Federal.............................................. 47 87 1,245
State and local...................................... 8 15 201
------ ------ ------
55 102 1,446
------ ------ ------
$ 106 $ 669 $4,632
====== ====== ======
The following is a reconciliation of the difference between the actual
provision for income taxes and the provision computed by applying the federal
statutory rate of 34% to income before income taxes, (in thousands):
<CAPTION>
Year Ended
December 31,
--------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Provision at statutory rate............................ $ 87 $ 525 $2,390
Permanent differences:
Acquisition related expenses......................... -- -- 384
Stock compensation................................... -- -- 1,051
Tax exempt interest income........................... -- -- (175)
Other................................................ -- 12 270
State taxes, net of federal benefit.................... 19 132 712
------ ------ ------
$ 106 $ 669 $4,632
====== ====== ======
</TABLE>
F-16
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences of differences between the carrying amounts of
assets and liabilities and their respective tax bases using enacted tax rates
in effect for the year in which the differences are expected to reverse.
Significant deferred tax assets and liabilities consist of the following, (in
thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Deferred tax assets:
Depreciation......................................... $ -- $ -- $ 61
State income taxes................................... -- -- 43
Amortization......................................... -- -- 17
------ ------ ------
-- -- 121
------ ------ ------
Deferred tax liabilities:
Accruals and reserves not currently deductible....... 54 154 1,724
Depreciation......................................... 1 3 --
------ ------ ------
55 157 1,724
------ ------ ------
Valuation allowance.................................... -- -- --
------ ------ ------
Net deferred tax liabilities........................... $ 55 $ 157 $1,603
====== ====== ======
</TABLE>
Note 8--Preferred Stock and Convertible Preferred Stock:
Preferred Stock
The Company is authorized, subject to limitations prescribed by Delaware
law, to provide for the issuance of Preferred Stock in one or more series, to
establish from time to time the number of shares included within each series,
to fix the rights, preferences and privileges of the shares of each wholly
unissued series and any qualifications, limitations or restrictions thereon,
and to increase or decrease the number of shares of any such series (but not
below the number of shares of such series then outstanding) without any further
vote or action by the stockholders. At December 31, 1998, there were 5,000,000
shares of Preferred Stock authorized for issuance, and no shares issued or
outstanding.
Convertible Preferred Stock
Convertible Preferred Stock prior to the initial public offering at
September 24, 1998 was composed of the following, (in thousands):
<TABLE>
<CAPTION>
Shares
---------------------- Liquidation Redemption
Authorized Outstanding Amount Amount
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Series A....................... 1,676 1,676 $1,000 $ --
Series B....................... 1,415 1,415 6,300 5,093
Undesignated................... 2,909 -- -- --
----- ----- ------ ------
6,000 3,091 $7,300 $5,093
===== ===== ====== ======
</TABLE>
F-17
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On September 24, 1998, the Company completed its initial public offering of
Common Stock. At that time, all issued and outstanding shares of the Company's
Series A and Series B Convertible Preferred Stock were converted into an
aggregate of 27,827,019 shares of Common Stock.
Warrants for Series B Mandatorily Redeemable Convertible Preferred Stock
In connection with the issuance of Series B, the Company issued warrants to
purchase 400,000 additional shares of Series B with an exercise price of $5.00
per share. In May 1998, these warrants were exercised, resulting in the
issuance of 400,000 shares of Series B in exchange for cash proceeds totaling
$2.0 million.
Note 9--Common Stock:
The Company's Certificate of Incorporation, as amended, authorizes the
Company to issue 195,000,000 shares of Common Stock. A portion of the shares
outstanding are subject to repurchase by the Company over a four-year period
from the earlier of the issuance date or employee hire date, as applicable. At
December 31, 1997 and 1998, there were 33,150,000 and 32,212,617 shares,
respectively, subject to repurchase rights at an average price of $0.01 and
$0.04, respectively, per share.
In June 1998, in connection with the appointment of two outside directors,
the Company sold an aggregate of 643,500 shares of Common Stock to two
directors and realized net proceeds of $2.0 million. The Company recognized the
$429,000 excess of the estimated fair value of the stock over the price paid by
the two directors as general and administrative expense in 1998.
At December 31, 1998, the Company had reserved 23,497,986 and 900,000 shares
of Common Stock for future issuance for the exercise of options under the stock
option plans and issuance of shares under the employee stock purchase plan,
respectively.
Note 10--Employee Benefit Plans:
401(k) Savings Plan
The Company has a savings plan that qualifies as a deferred salary
arrangement under Section 401(k) of the Internal Revenue Code (the "401(k)
Plan"). Under the Savings Plan, participating employees may defer a percentage
(not to exceed 25%) of their eligible pretax earnings up to the Internal
Revenue Service's annual contribution limit. All employees on the United States
payroll of the Company age 21 years or older are eligible to participate in the
401(k) Plan. The Company is not required to contribute to the 401(k) Plan but
in 1998 elected to match contributions up to a maximum of $1,500 per employee.
As a result, the Company contributed $97,479, which was expensed in 1998. In
1998, the Company also committed to matching future employee contributions to a
maximum of $1,500 per employee per year.
Stock option plans
In December 1996, the Company's Board of Directors adopted the 1996 Stock
Option Plan (the "1996 Plan"), and in June 1997, adopted the 1997 Stock Option
Plan (the "1997 Plan") (collectively, the "Plans"). The Plans provide for the
granting of stock options to employees and consultants of the Company. Options
granted under the Plans may be either incentive stock options ("ISO") or
nonqualified stock options ("NSO"). ISOs may be granted only to Company
employees (including officers and directors who are also employees). NSOs may
be granted to Company employees and consultants.
F-18
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In July 1998, the Board adopted, and in August 1998 the Company's
stockholders approved, the 1998 Equity Incentive Plan (the "1998 Plan") and
reserved 13,500,000 shares of Common Stock for issuance thereunder. The 1998
Plan authorized the award of options, restricted stock awards and stock bonuses
(each an "Award"). No person will be eligible to receive more than 3,000,000
shares in any calendar year pursuant to Awards under the 1998 Plan other than a
new employee of the Company who will be eligible to receive no more than
6,000,000 shares in the calendar year in which such employee commences
employment. Options granted under the 1998 Plan may be either ISOs or NSOs.
ISOs may be granted only to Company employees (including officers and directors
who are also employees). NSOs may be granted to Company employees, officers,
directors, consultants, independent contractors and advisors of the Company.
Options under the Plans may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date
of grant as determined by the Board of Directors, provided, however, that (i)
the exercise price of an ISO may not be less than 100% of the estimated fair
value of the shares on the date of grant, and (ii) the exercise price of an ISO
granted to a 10% shareholder may not be less than 110% of the estimated fair
value of the shares on the date of grant. Options under the 1996 and 1997 Plans
were exercisable immediately through June 30, 1998, subject to repurchase
rights held by the Company, which lapse over the vesting period, which is
generally four years. Options under the 1998 Plan are not immediately
exercisable and generally vest over a period of four years.
The following table summarizes activity under the Company's stock option
plans for the years ended December 31, 1996, 1997 and 1998, (shares in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1996 1997 1998
--------------- ---------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period.................... -- $ -- 675 $0.01 11,790 $0.02
Granted.................. 675 0.01 11,592 0.02 17,287 2.15
Exercised................ -- -- -- -- (19,477) 0.14
Cancelled................ -- -- (477) 0.01 (354) 1.67
--- ------ -------
Outstanding at end of
period.................... 675 0.01 11,790 0.02 9,246 3.68
=== ====== =======
Options exercisable at end
of period................. 675 11,790 0.02 370 0.03
=== ====== =======
Weighted average fair value
of
options granted during
period.................... 0.01 0.10 2.80
</TABLE>
F-19
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about fixed stock options
outstanding at December 31, 1998, (shares in thousands):
<TABLE>
<CAPTION>
Options Outstanding at Options Exercisable at
December 31, 1998 December 31, 1998
------------------------------------- --------------------------
Weighted
Range of Number of Weighted Average Average Number of Weighted
Exercise Shares Remaining Exercise Shares Average
Prices Outstanding Contractual Life Price Exercisable Exercise Price
-------- ----------- ---------------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.01 -
$ 0.22 1,302 8.8 years $ 0.04 370 $0.03
0.67 -
1.00 943 9.3 0.75 -- --
3.11 -
3.11 821 9.4 3.11 -- --
4.67 -
5.00 6,165 9.6 4.91 -- --
16.85 15 9.8 32.52 -- --
--
----- ---
9,246 9.5 3.68 370 0.03
===== ===
</TABLE>
Fair value disclosures
The Company calculated the minimum fair value of each option grant on the
date of grant using the Black-Scholes option pricing model as prescribed by
SFAS No. 123 using the following assumptions:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rates....................... 6.0% 5.9% 4.9%
Expected lives (in years)...................... 5.0 5.0 3.0
Dividend yield................................. 0% 0% 0%
Expected volatility............................ 0% 0% 80%
</TABLE>
Prior to the Company's initial public offering, the fair value of each
option grant was determined using the minimum value method. Subsequent to the
offering, the fair value was determined using the Black-Scholes model. The
compensation cost associated with the Company's stock-based compensation plans,
determined using the minimum value method prescribed by SFAS No. 123, did not
result in a material difference from the reported net income for the years
ended December 31, 1996 and 1997. The effect of compensation cost on net income
and earnings per share for the year ended December 31, 1998 is as follows, (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1998
------
<S> <C>
Net income:
As reported........................................................ $2,398
Pro forma.......................................................... $1,622
Net income per share--basic:
As reported........................................................ $ 0.05
Pro forma.......................................................... $ 0.03
Net income per share--diluted:
As reported........................................................ $ 0.02
Pro forma.......................................................... $ 0.01
</TABLE>
F-20
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1998 Employee Stock Purchase Plan
In July 1998, the Board adopted, and in August 1998 the Company's
stockholders approved, the 1998 Employee Stock Purchase Plan (the "Purchase
Plan") and reserved 900,000 shares of Common Stock for issuance thereunder. On
each January 1, the aggregate number of shares reserved for issuance under the
Purchase Plan will be increased automatically by the number of shares purchased
under the Purchase Plan in the preceding calendar year. The aggregate number of
shares reserved for issuance under the Purchase Plan shall not exceed 4,500,000
shares. The Purchase Plan became effective on September 24, 1998, the first
business day on which price quotations for the Company's Common Stock were
available on the Nasdaq National Market. Employees are generally eligible to
participate in the Purchase Plan if they are customarily employed by the
Company for more than 20 hours per week and more than five months in a calendar
year and are not (and would not become as a result of being granted an option
under the Purchase Plan) 5% stockholders of the Company. Under the Purchase
Plan, eligible employees may select a rate of payroll deduction between 2% and
10% of their W-2 cash compensation subject to certain maximum purchase
limitations. Each Offering Period has a maximum duration of two years (the
"Offering Period") and consists of four six-month Purchase Periods (each, a
"Purchase Period"), with the exception of the first Offering Period, which
began on September 24, 1998 and will end on April 30, 1999. Offering Periods
and Purchase Periods thereafter will begin on April 1 and November 1. The price
at which the Common Stock is purchased under the Purchase Plan is 85% of the
lesser of the fair market value of the Company's Common Stock on the first day
of the applicable offering period or on the last day of that purchase period.
The Purchase Plan will terminate after a period of ten years unless terminated
earlier as permitted by the Purchase Plan.
1998 Directors Stock Option Plan
In July 1998, the Board adopted, and in August 1998 the Company's
stockholders approved, the Directors Plan and reserved a total of 600,000
shares of the Company's Common Stock for issuance thereunder. Members of the
Board who are not employees of the Company, or any parent, subsidiary or
affiliate of the Company, are eligible to participate in the Directors Plan.
The option grants under the Directors Plan are automatic and nondiscretionary,
and the exercise price of the options must be 100% of the fair market value of
the Common Stock on the date of grant. Each eligible director who first becomes
a member of the Board on or after the effective date of the Registration
Statement of which this Prospectus forms a part (the "Effective Date") will
initially be granted an option to purchase 90,000 shares (an "Initial Grant")
on the date such director first becomes a director. Immediately following each
Annual Meeting of the Company, each eligible director will automatically be
granted an additional option to purchase 15,000 shares if such director has
served continuously as a member of the Board since the date of such director's
Initial Grant or, if such director was ineligible to receive an Initial Grant,
since the Effective Date. In March 1999, the Board amended the Directors Plan
to provide that no such grants would be made to eligible directors at the 1999
Annual Meeting. The Board is considering other changes to the Directors Plan in
light of the proposed changes in the accounting for this type of plan. The term
of such options is ten years, provided that they will terminate seven months
following the date the director ceases to be a director or a consultant of the
Company (twelve months if the termination is due to death or disability). All
options granted under the Directors Plan will vest as to 25% of the shares on
the first anniversary of the date of grant and as to 2.08% of the shares each
month thereafter, provided the optionee continues as a member of the Board or
as a consultant to the Company.
Unearned stock-based compensation
In connection with certain stock option grants during the years ended
December 31, 1997 and 1998, the Company recognized unearned compensation
totaling $1.4 million and $5.4 million,
F-21
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
respectively, which is being amortized over the four-year vesting periods of
the related options. Amortization expense recognized during the years ended
December 31, 1997 and 1998 totaled approximately $25,000 and $2.6 million,
respectively.
Note 11--Subsequent Events:
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 consolidated financial statements and notes thereto for
all periods presented have been retroactively adjusted to reflect the stock
split.
Australian 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 which 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 of the joint venture company are expected to commence
during 1999.
Contractual arrangements
On March 1, 1999, eBay commenced an insurance program for eBay users. The
program provides coverage on qualified transactions involving 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 does not receive the item as 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.
On March 2, 1999, eBay entered into a Co-branding and Advertising Agreement
(the "Agreement") with i-Escrow, Inc. ("i-Escrow"). Under the terms of the
Agreement, i-Escrow will develop co-branded website pages which offer third
party escrow services to eBay users. Upon request by an eBay user, i-Escrow
will escrow a buyer's money until the buyer confirms that the applicable item
was physically delivered, at which time the buyer's money will be released to
the seller. eBay is committed to actively promoting these services to sellers
and high bidders upon successful completion of the auction, but does not have
control over, or ownership of, the escrowed funds. The co-branded website pages
are expected to be launched in 1999.
In March 1999, the Company expanded the scope of its strategic relationship
with AOL. Under their 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,
F-22
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CompuServe (both domestic and international) and Netscape. eBay will pay $75
million over the four-year term of the contract. 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.
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.
F-23
<PAGE>
eBAY INC.
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Overview
Effective June 30, 1998, eBay acquired all the outstanding shares of Jump
Incorporated ("Jump"), which provides a forum where Internet users can buy and
sell items in an online auction format. The acquisition was accounted for using
the purchase method of accounting and accordingly, the purchase price was
allocated to the tangible and intangible assets acquired and liabilities
assumed on the basis of their fair values on the acquisition date. The fair
value of intangible assets was determined using a combination of methods,
including replacement cost estimates for acquired research and development and
completed technology, a risk-adjusted income approach for the acquired customer
list and the amounts paid for covenants not to compete.
The total purchase price of approximately $2.3 million consisted of 428,544
shares of eBay's Common Stock with an estimated fair value of approximately
$2.0 million and other acquisition related expenses of approximately $335,000,
consisting primarily of payments for non-compete agreements totaling
approximately $208,000 and legal and other professional fees. Of the total
purchase price, approximately $150,000 was allocated to in-process technology
and immediately charged to operations because such in-process technology had
not reached the stage of technological feasibility at the acquisition date and
had no alternative future use. The remainder of the purchase price was
allocated to net tangible liabilities assumed ($31,000) and intangible assets,
including completed technology ($500,000), customer list ($1.5 million),
covenants not to compete ($208,000) and goodwill ($24,000). The acquired
intangible assets will be amortized over their estimated useful lives of eight
to 24 months.
The acquisition has been structured as a tax free exchange of stock,
therefore, the differences between the recognized fair values of acquired
assets, including tangible assets, and their historical tax bases are not
deductible for tax purposes.
The following unaudited pro forma consolidated financial statement of
operations gives effect to this acquisition as if it had occurred on January 1,
1998, by consolidating the results of operations of Jump for the six months
ended June 30, 1998 with the results of operations of eBay, which include the
results of Jump after June 30, 1998, for the year ended December 31, 1998.
The unaudited pro forma consolidated statement of operations are not
necessarily indicative of the operating results that would have been achieved
had the transactions been in effect as of January 1, 1998, and should not be
construed as being representative of future operating results.
The historical financial statements of eBay and Jump are included elsewhere
in this Prospectus and the unaudited pro forma consolidated financial
information presented herein should be read in conjunction with those financial
statements and related notes.
F-24
<PAGE>
eBAY, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
------------------------------------------
eBay Jump Pro
Inc. Incorporated Adjustments Forma
------- ------------ ----------- -------
<S> <C> <C> <C> <C>
Net revenues....................... $47,352 $ 12 $ -- $47,364
Cost of net revenues............... 6,859 3 125 (A) 6,987
------- ---- ----- -------
Gross profit..................... 40,493 9 (125) 40,377
------- ---- ----- -------
Operating expenses:
Sales and marketing.............. 19,841 -- -- 19,841
Product development.............. 4,606 8 -- 4,614
General and administrative....... 9,080 21 -- 9,101
Amortization of acquired
intangibles..................... 805 -- 505 (B) 1,310
------- ---- ----- -------
Total operating expenses....... 34,332 29 505 34,866
------- ---- ----- -------
Income from operations............. 6,161 (20) (630) 5,511
------- ---- ----- -------
Interest and other income, net..... 908 -- -- 908
Interest expense................... (39) (1) -- (40)
------- ---- ----- -------
Income (loss) before income taxes.. 7,030 (21) (630) 6,379
------- ---- ----- -------
Provision for income taxes......... (4,632) -- -- (4,632)
------- ---- ----- -------
Net income (loss).................. $ 2,398 $(21) $(630) $ 1,747
======= ==== ===== =======
Pro forma net income per share (C):
Basic............................ $ 0.02
=======
Weighted average shares--basic... 88,787
=======
Diluted.......................... $ 0.01
=======
Weighted average shares--
diluted......................... 129,491
=======
</TABLE>
See accompanying notes to Pro Forma Consolidated Financial Information
F-25
<PAGE>
eBAY INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(Unaudited)
The following adjustments were applied to eBay's historical financial
statements and those of Jump to arrive at the pro forma consolidated financial
information. The pro forma consolidated financial information excludes the non-
recurring charge for acquired in-process technology associated with the
acquisition, totaling $150,000.
(A) To record amortization of acquired completed technology totaling
$500,000 over the estimated period of benefit of eight months.
(B) To record amortization of: acquired customer list totaling $1.5
million over the estimated period of benefit of 15 months, covenants not to
compete totaling $208,000 over the estimated period of benefit of 24
months, and acquired goodwill totaling $24,000 over the estimated period of
benefit of 15 months.
(C) Pro forma basic net income per share for the year ended December 31,
1998 was computed using the weighted average number of common shares
outstanding. Pro forma diluted net income per share was computed using the
pro forma weighted average number of common and common equivalent shares
outstanding. Pro forma common equivalent shares, composed of unvested
restricted Common Stock and incremental common shares issuable upon the
exercise of stock options and warrants, are included in diluted net income
per share to the extent such shares are dilutive. Differences between
historical weighted average shares outstanding and pro forma weighted
average shares outstanding used to compute net income per share result from
the inclusion of shares issued in conjunction with the acquisition as if
such shares were outstanding from January 1, 1998.
F-26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Jump Incorporated
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Jump Incorporated at December 31,
1997, and the results of its operations and its cash flows for the periods then
ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Jump Incorporated's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
July 10, 1998
F-27
<PAGE>
JUMP INCORPORATED
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................. $ 1,112 $ 1,200
Accounts receivable.................................. 5,344 12,243
-------- --------
Total current assets............................... 6,456 13,443
Property and equipment, net............................ 8,997 8,668
-------- --------
$ 15,453 $ 22,111
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable..................................... $ 3,475 $ 18,148
Accrued interest on notes payable to shareholders.... 435 1,093
Notes payable to shareholders........................ 21,786 34,128
-------- --------
25,696 53,369
-------- --------
Shareholders' deficit:
Common Stock, no par value; 500 shares authorized;
300 issued and outstanding 6,900 6,900
Accumulated deficit.................................. (17,143) (38,158)
-------- --------
Total shareholders' deficit........................ (10,243) (31,258)
-------- --------
$ 15,453 $ 22,111
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
JUMP INCORPORATED
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June
1997 30, 1998
------------ -----------
(Unaudited)
<S> <C> <C>
Revenues:
Advertising.......................................... $ -- $ 12,243
Consulting services.................................. 11,344 --
-------- --------
Total revenues..................................... 11,344 12,243
-------- --------
Cost of revenues:
Advertising.......................................... -- 3,000
Consulting services.................................. 8,766 --
-------- --------
Total cost of revenues............................. 8,766 3,000
-------- --------
Gross profit........................................... 2,578 9,243
Operating expenses:
General and administrative........................... 7,314 21,223
Product development.................................. 10,410 8,377
Sales and marketing.................................. 1,562 --
-------- --------
Total operating expenses........................... 19,286 29,600
-------- --------
Loss from operations................................... (16,708) (20,357)
Interest expense....................................... (435) (658)
-------- --------
Net loss............................................... $(17,143) $(21,015)
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
JUMP INCORPORATED
STATEMENT OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock
------------- Accumulated
Shares Amount Deficit Total
------ ------ ----------- --------
<S> <C> <C> <C> <C>
Issuance of Common Stock................... 300 $6,900 $ -- $ 6,900
Net loss................................... -- -- (17,143) (17,143)
--- ------ -------- --------
Balance at December 31, 1997............... 300 6,900 (17,143) (10,243)
Net loss (Unaudited)....................... -- -- (21,015) (21,015)
--- ------ -------- --------
Balance at June 30, 1998 (Unaudited)....... 300 $6,900 $(38,158) $(31,258)
=== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
JUMP INCORPORATED
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, June 30,
1997 1998
------------ -----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(17,143) $(21,015)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 1,365 1,896
Changes in current assets and liabilities:
Accounts receivable.............................. (5,344) (6,899)
Accounts payable................................. 3,475 14,673
Accrued interest on notes payable to
shareholders.................................... 435 658
-------- --------
Net cash used in operating activities.......... (17,212) (10,687)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment.................. (10,362) (1,567)
-------- --------
Net cash used in investing activities.......... (10,362) (1,567)
-------- --------
Cash flows from financing activities:
Proceeds for issuance of Common Stock............... 6,900 --
Proceeds from notes payable to shareholders......... 21,786 12,342
-------- --------
Net cash provided by financing activities...... 28,686 12,342
-------- --------
Net increase in cash.................................. 1,112 88
Cash at beginning of period........................... -- 1,112
-------- --------
Cash at end of period................................. $ 1,112 $ 1,200
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
JUMP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
Note 1--The Company and Summary of Significant Accounting Policies:
The Company
Jump Incorporated ("Jump") was incorporated in Ohio in October 1996. Jump
provides a forum where Internet users can buy and sell items in an online
auction format.
For the period from inception (October 1996) through December 31, 1996, Jump
had no revenues and incurred expenses of less than $2,000. The results of
operations for this period have been included in the 1997 financial statements
to facilitate presentation.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Concentration of credit risk
Financial instruments that potentially subject Jump to a concentration of
credit risk consist of cash and accounts receivable. Cash is deposited with
high credit quality financial institutions. Jump's accounts receivable are
derived from revenue earned from customers located in the U.S. and are
denominated in U.S. dollars.
Jump had a single customer for the year ended December 31, 1997 that
accounted for all of the consulting revenue and accounts receivable. Jump also
had a single customer for the six months ended June 30, 1998 (unaudited) that
accounted for all of the advertising revenue and accounts receivable.
Fair value of financial instruments
Jump's financial instruments, including cash, accounts receivable, accounts
payable and accrued interest to shareholders are carried at cost, which
approximates their fair value because of the short-term maturity of these
instruments.
Property and equipment
Property and equipment are stated at historical cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, generally three years.
Product development cost
Product development costs include expenses incurred by Jump to develop,
enhance, manage, monitor and operate its Web site. Product development costs
are expensed as incurred.
Revenue recognition
Advertising revenue is derived from the sale of advertising space on Jump's
website. Advertising revenue is recognized over the period the advertisement is
displayed.
F-32
<PAGE>
JUMP INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
Consulting revenue was derived from a single time and materials agreement
and was recognized and billed as services were provided.
Income taxes
Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in Jump's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets are based on
provisions of the enacted tax law; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced,
if necessary, by the amount of any tax benefits that, based on available
evidence, are not expected to be realized.
Unaudited interim results
The accompanying interim financial statements as of June 30, 1998, and for
the six months ended June 30, 1998, are unaudited. The unaudited interim
financial statements have been prepared on the same basis as the annual
financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the Company's financial position, results of operations and its
cash flows as of June 30, 1998 and for the six months ended June 30, 1998. The
financial data and other information disclosed in these notes to financial
statements related to these periods are unaudited. The results for the six
months ended June 30, 1998 are not necessarily indicative of the results to be
expected for the year ending December 31, 1998.
Comprehensive income
Effective January 1, 1998, Jump adopted the provisions of Statement of
Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting comprehensive income
and its components in financial statements. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from nonowner
sources. Through June 30, 1998 (unaudited), Jump had not had any transactions
that were required to be reported in comprehensive income.
Recent accounting pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. The disclosures prescribed by SFAS No. 131 will be
effective for the year ending December 31, 1998. Jump has determined that it
does not have any separately reportable business segments as of June 30, 1998.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1, "Software for Internal Use," which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP No. 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. Jump does not expect that
the adoption of SOP No. 98-1 will have a material impact on its consolidated
financial statements.
F-33
<PAGE>
JUMP INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 2--Balance Sheet Components:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ -----------
(Unaudited)
<S> <C> <C>
Property and equipment,
net:
Computer equipment...... $ 10,362 $11,929
Less: Accumulated
depreciation and
amortization........... (1,365) (3,261)
-------- -------
$ 8,997 $ 8,668
======== =======
</TABLE>
There were no allowances for doubtful accounts at December 31, 1997 or June
30, 1998 (unaudited).
Note 3--Income Taxes:
No deferred provision or benefit for income taxes has been recorded as Jump
is in a net deferred tax asset position as a result of net operating losses for
which a full valuation has been provided as management believes that it is more
likely than not, based on available evidence, that the deferred tax assets will
not be realized.
At June 30, 1998, Jump has federal net operating loss carryforwards of
approximately $16,000, which expire in 2012. The income tax benefit from the
utilization of net operating loss carryforwards may be limited in certain
circumstances including, but not limited to, cumulative stock ownership changes
of more than 50% over a three year period.
Note 4--Borrowings:
Notes payable
At December 31, 1997 and June 30, 1998, notes payable consists of amounts
payable to shareholders of Jump totaling $21,786 and $34,128 (unaudited). The
notes are payable upon demand by the holders and bear simple interest from 5.6%
to 6.2% per annum.
Note 5--Acquisition by eBay Inc.
On June 30, 1998, eBay Inc. acquired all of Jump's outstanding shares of
Common Stock, at which time Jump became a wholly owned subsidiary of eBay Inc.
F-34
<PAGE>
UNDERWRITING
The Company, the selling stockholders and the underwriters for the offering
(the "Underwriters") named below have entered into an underwriting agreement
with respect to the shares being offered. Subject to certain conditions, each
Underwriter has severally agreed to purchase the number of shares indicated in
the following table. Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated,
BancBoston Robertson Stephens Inc., BT Alex. Brown Incorporated and Donaldson,
Lufkin & Jenrette Securities Corporation are the representatives of the
Underwriters.
<TABLE>
<CAPTION>
Number
of
Underwriters Shares
------------ ------
<S> <C>
Goldman, Sachs & Co...................................................
Morgan Stanley & Co. Incorporated.....................................
BancBoston Robertson Stephens Inc.....................................
BT Alex. Brown Incorporated...........................................
Donaldson, Lufkin & Jenrette Securities Corporation...................
-----
Total...............................................................
=====
</TABLE>
If the Underwriters sell more shares than the total number set forth in the
table above, the Underwriters have an option to buy up to an additional 975,000
shares from the selling stockholders to cover such sales. They may exercise
that option for 30 days. If any shares are purchased pursuant to this option,
the Underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the Underwriters by the selling stockholders. Such
amounts are shown assuming both no exercise and full exercise of the
Underwriters' option to purchase additional shares.
<TABLE>
<CAPTION>
Paid by the Selling Stockholders No Exercise Full Exercise
-------------------------------- ----------- -------------
<S> <C> <C>
Per Share.......................................... $ $
Total.............................................. $ $
</TABLE>
Shares sold by the Underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus and
will be eligible for trading on the Nasdaq National Market. Any shares sold by
the Underwriters to securities dealers may be sold at a discount of up to
$ per share from the initial public offering price. Any such securities
dealers may resell any shares purchased from the Underwriters to certain other
brokers or dealers at a discount of up to $ per share from the initial
public offering price. If all the shares are not sold at the initial public
offering price, the representatives may change the offering price and the other
selling terms.
The Company and the selling stockholders have agreed with the Underwriters
not to dispose of or hedge any of their Common Stock or securities convertible
into or exchangeable for shares of Common Stock during the period from the date
of this prospectus continuing through the date 90 days after the date of this
prospectus, except with the prior written consent of the representatives. This
agreement does not apply to any existing employee benefit plans. See "Shares
Available for Future Sale" for a discussion of certain transfer restrictions.
U-1
<PAGE>
In connection with the offering, the Underwriters may purchase and sell
shares of Common Stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the Underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the Common
Stock while the offering is in progress.
The Underwriters also may impose a penalty bid. This occurs when a
particular Underwriter repays to the Underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such Underwriter in stabilizing or short covering
transactions.
These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the Common Stock. As a result, the price of the
Common Stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
Underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
In connection with this offering, certain Underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in the Common Stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended, during the business day prior to
the pricing of the offering before the commencement of offers or sales of the
Common Stock. Passive market makers must comply with applicable volume and
price limitations and must be identified as such. In general, a passive market
maker must display its bid at a price not in excess of the highest independent
bid of such security; if all independent bids are lowered below the passive
market makers' bid, however, such bid must then be lowered when certain
purchase limits are exceeded.
The Company will pay the expenses of the Offering on behalf of the selling
stockholders, excluding underwriting discounts and commissions. The expenses of
the Offering are estimated to be approximately $1,000,000.
The Company and the selling stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act.
U-2
<PAGE>
DESCRIPTION OF ARTWORK:
[Inside back cover includes screen shots of the eBay home page as well as eBay's
Web pages for several categories of items sold on eBay--antiques, toys and
books. This page also includes pictures of sample items available for auction
by eBay users].
At the top of the page is the following text:
Search less. Find more.
At the bottom of the page is the following text:
eBay
The world's personal trading community.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is an offer to sell only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 21
Price Range of Common Stock ............................................. 21
Dividend Policy.......................................................... 21
Capitalization........................................................... 22
Selected Consolidated Financial Data..................................... 23
Selected Pro Forma Consolidated Financial Data........................... 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 36
Management............................................................... 52
Certain Related Party Transactions....................................... 61
Principal and Selling Stockholders....................................... 64
Description of Capital Stock............................................. 67
Shares Eligible for Future Sale.......................................... 70
Legal Matters............................................................ 71
Experts.................................................................. 71
Additional Information................................................... 71
Index to Consolidated Financial Statements............................... F-1
Underwriting............................................................. U-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
6,500,000 Shares
eBay Inc.
Common Stock
-------------------
[LOGO OF eBAY INC. APPEARS HERE]
-------------------
Goldman, Sachs & Co.
Morgan Stanley Dean Witter
BancBoston Robertson Stephens
BT Alex. Brown
Donaldson, Lufkin & Jenrette
Representatives of the Underwriters
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses to be paid by the
Company in connection with the sale of the shares of Common Stock being
registered hereby. All amounts are estimates except for the Securities and
Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............ $ 294,315
NASD filing fee................................................ 30,500
Nasdaq National Market filing fee.............................. 17,500
Accounting fees and expenses................................... 100,000
Legal fees and expenses........................................ 200,000
Printing and engraving expenses................................ 250,000
Blue sky fees and expenses..................................... 5,000
Transfer agent and registrar fees and expenses................. 10,000
Miscellaneous.................................................. 92,685
----------
Total........................................................ $1,000,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act").
As permitted by the Delaware General Corporation Law, the Registrant's
Amended and Restated Certificate of Incorporation includes a provision that
eliminates the personal liability of its directors for monetary damages for
breach of fiduciary duty as a director, except for liability (1) for any breach
of the director's duty of loyalty to the Registrant or its stockholders, (2)
for acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law, (3) under section 174 of the Delaware General
Corporation Law (regarding unlawful dividends and stock purchases) or (4) for
any transaction from which the director derived an improper personal benefit.
As permitted by the Delaware General Corporation Law, the Registrant's
Amended and Restated Bylaws provide that (1) the Registrant is required to
indemnify its directors and officers to the fullest extent permitted by the
DGCL, subject to certain very limited exceptions, (2) the Registrant is
required to advance expenses, as incurred, to its directors and officers in
connection with a legal proceeding to the fullest extent permitted by the DGCL,
subject to certain very limited exceptions and (3) the rights conferred in the
Amended and Restated Bylaws are not exclusive.
The Registrant has entered into Indemnity Agreements with each of its
current directors and officers to give such directors and officers additional
contractual assurances regarding the scope of the indemnification set forth in
the Registrant's Amended and Restated Certificate of Incorporation and Amended
and Restated Bylaws and to provide additional procedural protections. At
present, there is no pending litigation or proceeding involving a director,
officer or employee of the Registrant regarding which indemnification is
sought, nor is the Registrant aware of any threatened litigation that may
result in claims for indemnification.
II-1
<PAGE>
Reference is also made to Section 8 of the Underwriting Agreement, which
provides for the indemnification of officers, directors and controlling persons
of the Registrant against certain liabilities. The indemnification provision in
the Registrant's Amended and Restated Certificate of Incorporation, Amended and
Restated Bylaws and the Indemnity Agreements entered into between the
Registrant and each of its directors and officers may be sufficiently broad to
permit indemnification of the Registrant's directors and officers for
liabilities arising under the Securities Act.
The Registrant has obtained directors' and officers' liability insurance.
See also the undertakings set out in response to Item 17.
Reference is made to the following documents filed or incorporated by
reference as exhibits to this Registration Statement regarding relevant
indemnification provisions described above and elsewhere herein:
<TABLE>
<CAPTION>
Exhibit
Document Number
-------- ------
<S> <C>
Form of Underwriting Agreement..................................... 1.01
Registrant's Amended and Restated Certificate of Incorporation..... 3.01
Registrant's Amended and Restated Bylaws........................... 3.02
Investor Rights Agreement dated June 20, 1997...................... 4.02
Form of Indemnity Agreement........................................ 10.01
</TABLE>
II-2
<PAGE>
Item 15. Recent Sales of Unregistered Securities.
The following table sets forth information regarding all securities sold by
the Registrant (on an as-converted to Common Stock basis) since its inception
on May 13, 1996.
<TABLE>
<CAPTION>
Aggregate Purchase
Price
Date of Number of and Form of
Class of Purchasers Sale Title of Securities Securities Consideration
------------------- -------- ------------------- ---------- ------------------
<S> <C> <C> <C> <C>
Pierre M. Omidyar 5/20/96 Common Stock 44,100,000(1) $14,262 consisting of
cash of $10,167 and
accounts receivable of
$4,095 from Founder's
sole proprietorship.
Pierre M. Omidyar 12/12/96 Series A Preferred 15,088,275 In exchange for
Stock 13,500,000 of the
above listed shares of
Common Stock
Jeffrey S. Skoll 12/12/96 Common Stock 30,600,000 $68,000 Promissory
Note due December 31,
2002 with simple
interest at 6% per
year
Benchmark Capital 6/27/97 Series B Preferred 9,000,000 $3,000,000 cash
Partners, L.P. and Stock and warrants
Benchmark Founders' to purchase
Fund, L.P. 3,600,000 shares of
Series B Preferred
Stock at $0.56 per
share
Ramsey Beirne 3/13/98 Series B Preferred 138,744 In exchange for
Associates, Inc. Stock certain executive
recruiting services
provided to the
Company valued at
$92,496.
Benchmark Capital 5/7/98 Series B Preferred 3,600,000 $2,000,000 cash
Partners, L.P. and Stock (Warrant
Benchmark Founders' Exercise)
Fund, L.P.
Scott D. Cook 6/30/98 Common Stock 321,750 $1,001,000 cash
Howard D. Schultz 6/30/98 Common Stock 450,000 $1,050,000 cash and
(option exercise) $350,000 Promissory
Note due December 1,
2002 with interest at
8% per year
Maveron Equity Partners, 6/30/98 Common Stock 321,750 $1,001,000 cash
L.P.
Walter Carroll 6/30/98 Common Stock 428,544 Issued in exchange for
Thomas Duvall all of the outstanding
Robert Ratterman shares of Jump
Christopher Downie Incorporated acquired
by Registrant
Employees/optionees 1/23/98- Common Stock 19,138,741(2) $1,413,899 cash and
3/1/99 (option exercises) Promissory Notes
</TABLE>
- --------
(1) In December 1996, 13,500,000 of these shares were exchanged for shares of
Series A Preferred Stock.
(2) Of these shares, 1,327,370 have been repurchased by the Registrant for an
aggregate purchase price of $280,585.
All sales of Common Stock made pursuant to the exercise of stock options
granted under the 1996 Plan and the 1997 Plan to Registrant's officers,
directors, employees and consultants were made in reliance on Rule 701 under
the Securities Act or on Section 4(2) of the Securities Act.
All other sales were made in reliance on Section 4(2) of the Securities Act
and/or Regulation D promulgated under the Securities Act. These sales were made
without general solicitation or advertising. Each purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate the
investment and represented to the Registrant that the shares were being
acquired for investment.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1.01 Form of Underwriting Agreement.+
2.01 Agreement and Plan of Merger by and between eBay Inc., a California
corporation, and Registrant.*
2.02 Agreement and Plan of Merger and Reorganization among Registrant, Jump
Acquisition Sub, Inc., Jump Incorporated and certain shareholders of
Jump Incorporated dated as of June 30, 1998.*
3.01 Registrant's Amended and Restated Certificate of Incorporation.**
3.02 Registrant's Amended and Restated Bylaws.**
4.01 Form of Specimen Certificate for Registrant's Common Stock.*
4.02 Investor Rights Agreement, dated June 20, 1997, between the Registrant
and certain stockholders named therein.*
5.01 Opinion of Cooley Godward LLP regarding legality of the securities
being registered.
10.01 Form of Indemnity Agreement entered into by Registrant with each of
its directors and executive officers.*
10.02 Registrant's 1996 Stock Option Plan and related documents.*
10.03 Registrant's 1997 Stock Option Plan and related documents.*
10.04 Registrant's 1998 Equity Incentive Plan and related documents.*
10.05 Registrant's 1998 Directors Stock Option Plan and related documents.*
10.06 Registrant's 1998 Employee Stock Purchase Plan.*
10.07 Office Lease between Connecticut General Life Insurance Company, a
Connecticut corporation, and the Registrant dated September 30, 1996,
as amended through March 1998.*
10.08 Sublease between Information Storage Devices, Inc., a California
corporation, and Registrant dated August 4, 1997.*
10.09 Office Lease between Connecticut General Life Insurance Company, a
Connecticut corporation, and the Registrant dated April 10, 1998, as
amended June 9, 1998.*
10.10 Imperial Bank Starter Kit Loan and Security Agreement dated July 20,
1997 between Imperial Bank and Registrant.*
10.11 Intellectual Property Security Agreement dated July 20, 1997 between
Imperial Bank and Registrant.*
10.12 Exodus Communications, Inc. Internet Services and Products Agreement
and Co-Location Addendum effective as of May 1, 1997.*
10.13 License Agreement between Thunderstone Software and Registrant.*
10.14 Employment Letter Agreement dated October 16, 1996 between Jeffrey
Skoll and Registrant.*
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
10.15 Employment Letter Agreement dated December 9, 1996 between Michael
Wilson and Registrant.*
10.16 Employment Letter Agreement dated August 8, 1997 between Steven Westly
and Registrant.*
10.17 Employment Letter Agreement dated September 15, 1997 between Gary
Bengier and Registrant.*
10.18 Employment Letter Agreement dated January 16, 1998 between Margaret C.
Whitman and Registrant.*
10.19 Employment Letter Agreement dated August 14, 1998 between Brian T.
Swette and Registrant.*
10.20 Employment Letter Agreement dated August 20, 1998 between Michael R.
Jacobson and Registrant.*
10.21 Office Lease between Greylands Business Park, Phase 2, a California
General Partnership, and the Registrant, dated January 29, 1999.
10.22 Amendment to Registrant's 1998 Directors Stock Option Plan.+
21.01 List of Subsidiaries.*
23.01 Consent of Cooley Godward LLP (included in Exhibit 5.01).
23.02 Consent of PricewaterhouseCoopers LLP, independent accountants.
24.01 Power of Attorney (see Page II-7 of this Registration Statement).
27.01 Financial Data Schedule.
</TABLE>
- --------
* Previously filed as an Exhibit to the Form S-1 (No. 33-59097) filed in
connection with the Company's initial public offering.
** Previously filed as an Exhibit to the Form 10-Q filed on November 13, 1998.
+ To be filed by amendment.
(b) Financial statement schedules.
No financial statement schedules are provided because the information called
for is not required or is shown either in the consolidated financial statements
or the notes thereto.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification
II-5
<PAGE>
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Jose, State of
California, on the 23 day of March, 1999.
eBay Inc.
/s/ Margaret C. Whitman
By: _________________________________
Margaret C. Whitman
President and Chief Executive
Officer
POWER OF ATTORNEY
Each individual whose signature appears below constitutes and appoints
Margaret C. Whitman, Pierre M. Omidyar and Gary F. Bengier, and each of them,
his or her true and lawful attorneys-in-fact and agents with full power of
substitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to sign any registration
statement for the same offering covered by the Registration Statement that is
to be effective upon filing pursuant to Rule 462(b) promulgated under the
Securities Act, and all post-effective amendments thereto, and to file the
same, with all exhibits thereto and all documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or his, her or their substitute or substitutes, may
lawfully do or cause to be done or by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
Principal Executive Officer:
<S> <C> <C>
/s/ Margaret C. Whitman President and Chief March 23, 1999
____________________________________ Executive Officer and
Margaret C. Whitman Director
Principal Financial Officer and Principal Accounting Officer:
/s/ Gary F. Bengier Chief Financial Officer and March 23, 1999
____________________________________ Vice President Operations
Gary F. Bengier
Additional Directors:
/s/ Pierre M. Omidyar Chairman of the Board of March 23, 1999
____________________________________ Directors
Pierre M. Omidyar
/s/ Scott D. Cook Director March 23, 1999
____________________________________
Scott D. Cook
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert C. Kagle Director March 23, 1999
____________________________________
Robert C. Kagle
/s/ Howard D. Schultz Director March 23, 1999
____________________________________
Howard D. Schultz
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1.01 Form of Underwriting Agreement.+
2.01 Agreement and Plan of Merger by and between eBay Inc., a California
corporation, and Registrant.*
2.02 Agreement and Plan of Merger and Reorganization among Registrant, Jump
Acquisition Sub, Inc., Jump Incorporated and certain shareholders of
Jump Incorporated dated as of June 30, 1998.*
3.01 Registrant's Amended and Restated Certificate of Incorporation.**
3.02 Registrant's Amended and Restated Bylaws.**
4.01 Form of Specimen Certificate for Registrant's Common Stock.*
4.02 Investor Rights Agreement, dated June 20, 1997, between the Registrant
and certain stockholders named therein.*
5.01 Opinion of Cooley Godward LLP regarding legality of the securities
being registered.
10.01 Form of Indemnity Agreement entered into by Registrant with each of
its directors and executive officers.*
10.02 Registrant's 1996 Stock Option Plan and related documents.*
10.03 Registrant's 1997 Stock Option Plan and related documents.*
10.04 Registrant's 1998 Equity Incentive Plan and related documents.*
10.05 Registrant's 1998 Directors Stock Option Plan and related documents.*
10.06 Registrant's 1998 Employee Stock Purchase Plan.*
10.07 Office Lease between Connecticut General Life Insurance Company, a
Connecticut corporation, and the Registrant dated September 30, 1996,
as amended through March 1998.*
10.08 Sublease between Information Storage Devices, Inc., a California
corporation, and Registrant dated August 4, 1997.*
10.09 Office Lease between Connecticut General Life Insurance Company, a
Connecticut corporation, and the Registrant dated April 10, 1998, as
amended June 9, 1998.*
10.10 Imperial Bank Starter Kit Loan and Security Agreement dated July 20,
1997 between Imperial Bank and Registrant.*
10.11 Intellectual Property Security Agreement dated July 20, 1997 between
Imperial Bank and Registrant.*
10.12 Exodus Communications, Inc. Internet Services and Products Agreement
and Co-Location Addendum effective as of May 1, 1997.*
10.13 License Agreement between Thunderstone Software and Registrant.*
10.14 Employment Letter Agreement dated October 16, 1996 between Jeffrey
Skoll and Registrant.*
10.15 Employment Letter Agreement dated December 9, 1996 between Michael
Wilson and Registrant.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
10.16 Employment Letter Agreement dated August 8, 1997 between Steven Westly
and Registrant.*
10.17 Employment Letter Agreement dated September 15, 1997 between Gary
Bengier and Registrant.*
10.18 Employment Letter Agreement dated January 16, 1998 between Margaret C.
Whitman and Registrant.*
10.19 Employment Letter Agreement dated August 14, 1998 between Brian T.
Swette and Registrant.*
10.20 Employment Letter Agreement dated August 20, 1998 between Michael R.
Jacobson and Registrant.*
10.21 Office Lease between Greylands Business Park, Phase 2, a California
General Partnership, and the Registrant dated January 29, 1999.
10.22 Amendment to Registrant's 1998 Directors Stock Option Plan.+
21.01 List of Subsidiaries.*
23.01 Consent of Cooley Godward LLP (included in Exhibit 5.01).
23.02 Consent of PricewaterhouseCoopers LLP, independent accountants.
24.01 Power of Attorney (see Page II-7 of this Registration Statement).
27.01 Financial Data Schedule.
</TABLE>
- --------
* Previously filed as an Exhibit to the Form S-1 (No. 33-59097) filed in
connection with the Company's initial public offering.
** Previously filed as an Exhibit to the Form 10-Q filed on November 13, 1998.
+ To be filed by amendment.
<PAGE>
Exhibit 5.01
[Cooley Godward LLP Letterhead]
March 25, 1999
eBay Inc.
2005 Hamilton Ave.
Suite 350
San Jose, CA 95125
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by eBay Inc. (the "Company") of a Registration Statement on Form
S-1 (the "Registration Statement") with the Securities and Exchange Commission
(the "Commission") covering the underwritten public offering of up to 7,475,000
shares of common stock, including 4,250,000 shares to be sold by the Company
(the "Company Shares"), 975,000 shares for which the Underwriters have been
granted an over-allotment option, and 2,250,000 shares to be sold be certain
selling stockholders (the "Selling Stockholder Shares") (collectively, the
"Common Stock").
In connection with this opinion, we have (i) examined and relied upon the
Registration Statement and related Prospectus, the Company's Amended and
Restated Certificate of Incorporation and Amended and Restated Bylaws and the
originals or copies certified to our satisfaction of such records, documents,
certificates, memoranda and other instruments as in our judgment are necessary
or appropriate to enable us to render the opinion expressed below, and (ii)
assumed that the shares of the Common Stock will be sold by the Underwriters at
a price established by the Pricing Committee of the Company's Board of
Directors.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Selling Stockholder Shares are, or will be upon exercise of options and
payment therefor, and the Company Shares, when sold and issued in accordance
with the Registration Statement and related Prospectus, will be, validly issued,
fully paid and nonassessable.
We consent to the reference to our firm under the caption "Legal Matters" in the
Prospectus included in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
COOLEY GODWARD LLP
By: /s/ Michael J. Sullivan
___________________________
Michael J. Sullivan
<PAGE>
EXHIBIT 10.21
GREYLANDS BUSINESS PARK, PHASE 2
AND
EBAY, INC.
LEASE
SUMMARY OF LEASE
GREYLANDS BUSINESS PARK, PHASE 2
<PAGE>
1. DATE OF LEASE:
2. LANDLORD: Greylands Business Park, Phase 2
3945 Freedom Circle, Suite 640
Santa Clara, California 95054
3. TENANT: eBay, Inc.
4. PREMISES: 2125 Hamilton Avenue and
2145 Hamilton Avenue
San Jose, California
5. SQUARE FEET: 103,058 sq. ft.
6. PERMITTED USE: See paragraph 1
7. TERM: See paragraph 2
8. RENT: See paragraphs 4 and 5
9. SECURITY DEPOSIT: See paragraph 4(e)
10. PARKING SPACES PROVIDED: See paragraph 15
11. OTHER IMPORTANT PROVISIONS: Early Access (paragraph 54)
Capital Expenditures (paragraph 55)
Satellite Dish (paragraph 56)
First Right to Lease (paragraph 57)
Option to Extend Term (paragraph 58)
Tenant Improvement Allowance (paragraph 59)
Consents
Cross Default
12. EXHIBITS: Exhibit A - Premises
Exhibit B - Project
Exhibit C - Signage
Exhibit D - Tenant Work Letter
Exhibit E - Hazardous Materials Disclosure
<PAGE>
THIS SUMMARY OF LEASE IS INTENDED TO SUMMARIZE CERTAIN KEY PROVISIONS IN THE
ATTACHED LEASE. IN THE EVENT OF ANY CONFLICT OR INCONSISTENCY BETWEEN THE
PROVISIONS OF THIS SUMMARY AND THE LEASE, THE PROVISIONS OF THE LEASE SHALL
GOVERN.
<PAGE>
TABLE OF CONTENTS
ITEM PAGE
- --------------------------------------------------------------------------------
1. USE
2. TERM
3. POSSESSION
4. MONTHLY RENT
5. ADJUSTMENT OF BASIC RENT AND DIRECT EXPENSES
6. RESTRICTION ON USE
7. COMPLIANCE WITH LAWS
8. ALTERATIONS
9. REPAIR AND MAINTENANCE
10. LIENS
11. INSURANCE
12. UTILITIES AND SERVICE
13. TAXES AND OTHER CHARGES
14. ENTRY BY LANDLORD
15. COMMON AREA; PARKING
16. DAMAGE BY FIRE; CASUALTY
17. INDEMNIFICATION
18. ASSIGNMENT AND SUBLETTING
19. DEFAULT
20. LANDLORD'S RIGHT TO CURE TENANT'S DEFAULT
21. EMINENT DOMAIN
22. NOTICE AND COVENANT TO SURRENDER
23. TENANT'S QUITCLAIM
24. HOLDING OVER
25. SUBORDINATION
26. CERTIFICATE OF ESTOPPEL
27. SALE BY LANDLORD
28. ATTORNMENT TO LENDER OR THIRD PARTY
29. DEFAULT BY LANDLORD
30. [INTENTIONALLY OMITTED]
31. MEASUREMENT OF PREMISES
32. ATTORNEY FEES
33. SURRENDER
34. WAIVER
35. EASEMENTS; AIRSPACE RIGHTS
36. RULES AND REGULATIONS
37. NOTICES
38. NAME
39. GOVERNING LAW; SEVERABILITY
40. DEFINITIONS
41. TIME
42. INTEREST ON PAST DUE OBLIGATIONS; LATE CHARGE
43. ENTIRE AGREEMENT
44. AUTHORITY
45. RECORDING
46. REAL ESTATE BROKERS
47. EXHIBITS AND ATTACHMENTS
48. ENVIRONMENTAL MATTERS
49. SIGNAGE
50. SUBMISSION OF LEASE
51. PREMISES TAKEN "AS IS"
52. ADDITIONAL RENT
53. [INTENTIONALLY OMITTED]
54. EARLY ACCESS
55. CAPITAL EXPENDITURES
56. SATELLITE DISH
<PAGE>
57. FIRST RIGHT TO LEASE
58. OPTION TO EXTEND TERM
59. TENANT IMPROVEMENTS
60. CONSENTS
61. CROSS DEFAULT
<PAGE>
GREYLANDS BUSINESS PARK, PHASE 2
OFFICE LEASE
------------
THIS LEASE is made this 29th day of January 1999, by and between GREYLANDS
BUSINESS PARK, PHASE 2, a California general partnership ("Landlord"), and EBAY,
INC., a Delaware corporation ("Tenant").
W I T N E S S E T H :
Landlord leases to Tenant and Tenant leases from Landlord those certain
premises outlined in red on Exhibit A (the "Premises"), which Premises are
commonly known as 2125 Hamilton Avenue ("Building 2125") and 2145 Hamilton
Avenue ("Building 2145"), San Jose, California, which Landlord and Tenant hereby
agree consists of approximately one hundred three thousand fifty-eight (103,058)
square feet with each building consisting of approximately 51,529 square feet.
As used herein the term "Project" shall mean and include all of the land
described in Exhibit B and all the buildings, improvements, fixtures and
equipment now or hereafter situated on said land.
Tenant covenants, as a material part of the consideration of this lease, to
perform and observe each and all of the terms, covenants and conditions set
forth below, and this lease is made upon the condition of such performance and
observance.
1. USE. Subject to the restrictions contained in paragraph 6, Tenant
---
shall use the Premises for general office and research and development and other
legal uses related to the operation of Tenant's business and consistent with
operation of the Project as a first-class office/research and development
project and shall not use or permit the Premises to be used for any other
purpose.
2. TERM.
----
(a) Commencement Expiration. The term shall commence on the Lease
-----------------------
Commencement Date (defined below) and end on the Lease Expiration Date (defined
below) (unless sooner terminated as hereinafter provided). The "Lease
Commencement Date" shall be the earlier of (i) April 15, 1999, (ii) substantial
completion of the Building 2125 Tenant Improvements, or (iii) occupancy of
Building 2125 or any part thereof by Tenant and/or Tenant's employees for
purposes other than as permitted in paragraph 54 of this lease (regarding early
access). The "Lease Expiration Date" shall be the date that is (i) five (5)
years after the Building 2145 Expansion Date or (ii) five (5) years after the
Lease Commencement Date if Tenant terminates this lease as to Building 2145 as
provided in paragraph 2(b) below. For purposes of this lease, the "Building
2145 Expansion Date" shall be the date that is sixty (60) days after the date
that Landlord tenders access to Building 2145 in accordance with paragraph 54 of
this lease (regarding early access).
1.
<PAGE>
(b) Failure to Deliver Building 2145. Notwithstanding the above, if
--------------------------------
Landlord is unable to tender possession of Building 2145 to Tenant by September
2, 1999 plus the number of days of delay caused by Tenant, or by force majeure
(defined below), then Tenant as its sole remedy shall be entitled to a credit
against the monthly rent first coming due and payable under this lease in the
amount of $6,000.00 per day for each day of such delay in delivery of Building
2145 to Tenant beyond September 2, 1999 (as extended above, if applicable) and
Landlord shall not be liable to Tenant for any loss, damage or expense resulting
from Landlord's failure to deliver possession. Landlord shall not extend the
lease of Building 2145 to Symbol Technologies, Inc. ("Symbol") beyond September
1, 1999 and in the event of a holdover by Symbol beyond September 1, 1999,
Landlord shall diligently pursue its rights and remedies under the lease between
Landlord and Symbol (as permitted by law) to expedite recovery of possession of
Building 2145 by Landlord and delivery of possession thereof to Tenant as
provided herein. For purposes of this lease, the term "force majeure" shall
mean acts of God, strikes, lockouts, labor troubles, inability to procure labor
or materials, fire, accident, riot, civil commotion, laws or regulations of
general applicability, acts of any tenant or other third party (other than
Symbol Technologies, Inc.), or any cause that is not due to Landlord's
negligence or willful misconduct or any cause that is beyond Landlord's
reasonable control.
If Landlord's tender of Building 2145 is delayed beyond January 1,
2000, Tenant may terminate this lease with respect to Building 2145, by giving
written notice of termination to Landlord on or before January 5, 2000. Upon
such termination neither party shall have any further obligation to the other
with respect to Building 2145 under this lease and Tenant shall not be entitled
to any rent credit provided for above, but this lease shall continue in full
force and effect as to Building 2125.
3. POSSESSION. Tenant's inability or failure to take possession of
----------
Building 2125 when access is tendered by Landlord (including without limitation
Tenant's failure to satisfy the conditions precedent to early access specified
in paragraph 54 below) shall not delay the commencement of the term of this
lease or Tenant's obligation to pay rent. Tenant's inability or failure to take
possession of Building 2145 when access is tendered by Landlord shall not delay
the Building 2145 Expansion Date. Tenant acknowledges that Landlord shall incur
significant expenses upon the execution of this lease, even if Tenant never
takes possession of the Premises, including without limitation brokerage
commissions and fees, and legal and other professional fees. Tenant
acknowledges that all of said expenses shall be included in measuring Landlord's
damages should Tenant breach the terms of this lease.
4. MONTHLY RENT.
------------
(a) Basic Rent. Tenant shall pay to Landlord as basic rent for the
----------
Premises, in advance and subject to adjustment as provided in paragraph 5, the
sum of One Hundred Five Thousand Six Hundred Thirty-Four and 45/100 Dollars
($105,634.45) on or before the first day of the first full calendar month of the
2.
<PAGE>
term and on or before the first day of each and every successive calendar month.
Basic rent for any partial month shall be payable in advance and shall be
prorated based on the actual number of days during the lease term occurring in
such month divided by the total number of days in such month.
(b) Direct Expenses. In addition to the above basic rent and as
---------------
additional rent, commencing on the Lease Commencement Date, Tenant shall pay to
Landlord, subject to adjustment and reconciliation as provided in paragraph 5(b)
of this lease, the sum of Twenty Thousand Six Hundred Eleven and 60/100 Dollars
($20,611.60) on or before the first day of the first full calendar month of the
term and on the first day of each and every successive calendar month, said sum
representing Tenant's estimated payment of its proportionate share of direct
expenses as provided for in paragraph 5(b) of this lease. Payment for direct
expenses for any partial month shall be payable in advance and shall be prorated
based on the actual number of days during the lease term occurring in such month
divided by the total number of days in such month.
(c) Manner and Place of Payment. All payments of basic rent and
---------------------------
direct expenses shall be paid to Landlord, without deduction or offset, in
lawful money of the United States of America, at the office of Landlord at 3945
Freedom Circle, Suite 640, Santa Clara, California 95054, or to such other
person or place as Landlord may from time to time designate in writing.
(d) Advance Rent Payments.
---------------------
(1) First Month's Rent (Building 2125). Concurrently with
----------------------------------
Tenant's execution of this lease, Tenant shall deposit with Landlord the sum
of One Hundred Twenty-Six Thousand Two Hundred Forty-Six and 05/100 Dollars
($126,246.05) to be applied against the basic rent and direct expenses for the
first lease month of the term.
(2) First Month's Rent (Building 2145). Within five (5) days
----------------------------------
after the date that Landlord permits access by Tenant to Building 2145 as
provided in paragraph 54 of this lease, Tenant shall deposit with Landlord the
sum of One Hundred Twenty-Six Thousand Two Hundred Forty-Six and 05/100
Dollars ($126,246.05) to be applied against the basic rent and direct expenses
applicable to Building 2145 for the first lease month after the Building 2145
Expansion Date.
(e) Security Deposit. Concurrent with Tenant's execution of this
----------------
lease, Tenant shall deliver to Landlord an unconditional and irrevocable letter
of credit ("Letter of Credit") in the amount of Five Hundred Thousand Dollars
($500,000) to secure the faithful performance by Tenant of all of the terms,
covenants and conditions of this lease to be kept and performed by Tenant. The
Letter of Credit shall be issued by a bank (the "L-C Bank") approved by Landlord
and shall be in a form that is reasonably acceptable to Landlord. The L-C Bank
shall be a bank that accepts deposits, maintains accounts, has a local Santa
Clara County office that will negotiate a letter of credit, and the deposits of
which are insured by the Federal Deposit Insurance Corporation. Tenant shall
pay all expenses, points, or
3.
<PAGE>
fees incurred by Tenant in obtaining the Letter of Credit. The Letter of
Credit shall be available by draft at sight, subject only to receipt by the
bank of a notarized statement from Birk S. McCandless or Steven E. Sund or
other authorized representative of Landlord requesting such draw and
certifying that Landlord is entitled to make such draw in accordance with the
terms of this lease. The Letter of Credit shall by its terms expire no sooner
than September 1, 2000, provided that unless Tenant deposits with Landlord a
cash security deposit of like amount as permitted below, said Letter of Credit
shall be renewed by Tenant for successive periods of not less than one year
each to and including the date that is thirty (30) days after the Lease
Expiration Date of this lease. The bank's written renewal of the Letter of
Credit shall in each case be delivered to Landlord not less than forty-five
(45) days prior to the expiration date of the then outstanding Letter of
Credit. Tenant's failure to so deliver, renew (including specifically but not
limited to the delivery to Landlord of such renewal not less than forty-five
(45) days prior to expiration of the Letter of Credit) and maintain such
Letter of Credit, shall be a material breach of this lease unless Tenant
delivers to Landlord a cash security deposit of like amount. The amount of the
Letter of Credit shall be increased to One Million Dollars ($1,000,000) on or
before September 1, 1999 unless the following criteria are satisfied as of
August 1, 1999:
1. Tenant's Market Cap has not been less than One Billion Four
Hundred Million Dollars ($1,400,000,000) ($35/share) at any time
during the previous three quarters.
2. Tenant has at least Thirty Million Dollars ($30,000,000) of cash
or cash equivalents (which shall be deemed to include high
quality short-term investments).
If, on September 1, 2000 and on September 1 of each year thereafter, Tenant is
not in default and no event shall have occurred which with the passing of time
or the giving of notice or both would constitute a default, then upon each
annual renewal the amount of the Letter of Credit shall be reduced for the
upcoming year by $100,000 (or $200,000 if the original Letter of Credit is
increased to $1,000,000 as provided above) each year upon renewal, but in no
event shall the Letter of Credit be reduced to an amount which is less than Two
Hundred Forty-Five Thousand Two Hundred Seventy-Eight and 04/100 Dollars
($245,278.04).
If Tenant defaults in the performance of any provision of this lease
to be performed by Tenant, including, without limitation, providing, renewing
and maintaining the Letter of Credit as required above, or payment of rent or
any other amounts due Landlord under this lease, Landlord may, without prejudice
to any other remedy available to Landlord, immediately and without further
notice draw down the entire amount of the Letter of Credit to be held by
Landlord as a cash security deposit for the faithful performance by Tenant of
all of the terms, covenants and conditions of this lease to be kept and
performed by Tenant. If Tenant defaults with respect to any provision of this
lease, including, but not limited to, the default that precipitated the draw on
the Letter of Credit, Landlord may (but shall not be required to) use, apply or
retain all or any part of this security deposit
4.
<PAGE>
for the payment of any amount which Landlord may spend by reason of Tenant's
default or to compensate Landlord for any other reasonable expense, loss or
damage which Landlord may suffer by reason thereof. If any portion of said
deposit is so used as specified above, Tenant shall, within five (5) days
after written demand therefor, deposit cash with Landlord in the amount
sufficient to restore the security deposit to its original amount and Tenant's
failure to do so shall be a material breach of this lease. Landlord shall not
be required to keep this security deposit separate from its general funds and
Tenant shall not be entitled to interest on such deposit. If Tenant is not in
default at the expiration or termination of this lease, the security deposit
or any balance thereof shall be returned to Tenant within fifteen (15) days
after Tenant has vacated the Premises, subject to retention of a reasonable
amount to pay for any damages still to be determined by Landlord; provided
that the excess, if any, shall be returned to Tenant when such damages have
been finally ascertained. In the event of termination of Landlord's interest
in this lease, Landlord shall transfer said deposit to Landlord's successor in
interest, and Tenant agrees that Landlord shall thereupon be released from
liability for the return of such deposit or any accounting therefor.
(f) Application of Payments. All payments received by Landlord from
-----------------------
Tenant may be applied by Landlord in Landlord's sole discretion to the oldest
payment obligation(s) owed by Tenant to Landlord or in such other order as
Landlord determines in Landlord's sole and absolute discretion. No designation
by Tenant, either in a separate writing or on a check or money order, shall
modify this clause or have any force or effect. Notwithstanding the above,
Landlord's determination not to apply such payments to the oldest payment
obligations first as specified above shall not constitute a waiver by Landlord
with respect to Landlord's claims against Tenant for such prior payment
obligation(s) of Tenant or Landlord's right to apply future payments to such
prior payment obligation(s) of Tenant in such order as Landlord may determine in
Landlord's sole and absolute discretion.
5. ADJUSTMENT OF BASIC RENT AND DIRECT EXPENSES.
--------------------------------------------
(a) Adjustments in Basic Rent. The basic rent provided for in
-------------------------
paragraph 4(a) shall be adjusted periodically and the monthly basic rent for
each period shall be as set forth below:
From the Lease Commencement Date
through the date that is one day
prior to the Building 2145
Expansion Date $105,634.45 per month
From the Building 2145 Expansion
Date through March 14, 2000 $211,268.90 per month
From March 15, 2000 through
March 14, 2001 $217,452.38 per month
From March 15, 2001 through
March 14, 2002 $223,635.86 per month
5.
<PAGE>
From March 15, 2002 through
March 14, 2003 $230,849.92 per month
From March 15, 2003 through
March 14, 2004 $238,063.98 per month
From March 15, 2004 through
the Lease Expiration Date
(specified in paragraph 2 above) $245,278.04 per month
However, if Tenant terminates its obligation to lease Building 2145 as
provided in paragraph 2(b) above, the rent schedule for Building 2125 shall be
as follows:
From the Lease Commencement Date
through March 14, 2000 $105,634.45 per month
From March 15, 2000 through
March 14, 2001 $108,726.19 per month
From March 15, 2001 through
March 14, 2002 $111,817.93 per month
From March 15, 2002 through
March 14, 2003 $115,424.96 per month
From March 15, 2003 through
March 14, 2004 $119,031.99 per month
From March 15, 2004 through
October 31, 2004 $122,639.02 per month
(b) Adjustments to Direct Expenses. Commencing on the Lease
------------------------------
Commencement Date, Tenant's proportionate share of direct expenses of the
Project shall be twenty-two and forty-two one-hundredths percent (22.42%) and
Tenant's proportionate share of direct expenses of the Building 2125 shall be
one hundred percent (100%) and Tenant's proportionate share of direct expenses
of Building 2145 shall be zero percent (0%). Commencing on the Building 2145
Expansion Date Tenant's proportionate share of direct expenses shall be
increased to the following percentages:
Project: 44.85%
Building 2125: 100.00%
Building 2145: 100.00%
and Tenant's payment of its estimated share of direct expenses shall be
increased to Fifty-Eight Thousand Seven Hundred Forty-Three and 06/100 Dollars
($58,743.06) per month.
6.
<PAGE>
Tenant shall be required to pay to Landlord, as additional rent in
accordance with paragraph 4(b) of this lease, Tenant's proportionate share of
direct expenses for each calendar year (or portion thereof) during the term of
this lease. Tenant's estimated share of the monthly direct expenses payable by
Tenant during the calendar year in which the term commences is set forth in
paragraph 4(b) of this lease. A written estimate of Tenant's monthly share of
direct expenses for each succeeding calendar year shall be delivered to Tenant
prior to the commencement of each such succeeding calendar year (or as soon as
practicable thereafter). Tenant shall pay to Landlord in accordance with
paragraph 4(b) of this lease its monthly share of direct expenses as reasonably
estimated by Landlord. Landlord reserves the right to revise such written
estimate during a calendar year if Landlord's actual or projected direct
expenses shows an increase or decrease in excess of ten percent (10%) from that
of an earlier written estimate delivered to Tenant, and if Landlord elects to
revise the earlier estimate, Landlord shall deliver the revised estimate to
Tenant, together with an explanation of the reasons therefor, and Tenant shall
revise its payments accordingly. Statements of the actual direct expenses for
the calendar year in which the term commences and for each succeeding calendar
year (herein called "statement of actual direct expenses") shall be delivered to
Tenant within one hundred twenty (120) days following the expiration of each
such calendar year (or as soon as practicable thereafter). If the statement of
actual direct expenses for any such calendar year shows that Tenant's
proportionate share of actual direct expenses for the year is in excess of the
aggregate amount Tenant has paid as direct expenses for that calendar year,
Tenant shall pay such excess to Landlord within thirty (30) days after receipt
of the statement of actual direct expenses. If Tenant fails to pay such excess
amount due within said thirty (30) day period, Tenant shall pay an additional
ten percent (10%) of the amount due as a penalty. In the event that any
statement of actual direct expenses shall show that Tenant has paid Landlord an
aggregate amount in excess of the actual direct expenses for the preceding
calendar year and Tenant is not in default in the performance or observance of
any of the terms, covenants or conditions of this lease at the time such
statement of actual direct expenses is delivered, Landlord shall, at its option,
promptly either refund such excess to Tenant or credit the amount thereof to the
monthly direct expenses next becoming due from Tenant. The respective
obligations of Landlord and Tenant under this paragraph shall survive the
expiration or other termination of this lease. Upon written request of Tenant
made within sixty (60) days of Tenant's receipt of the statement of actual
direct expenses, Landlord shall provide to Tenant copies of documentation
reasonably available to Landlord to support the amounts set forth in such
statement.
(c) Definition of Direct Expenses. As used in this lease, "direct
-----------------------------
expenses" shall include, but not be limited to, (i) real property taxes,
assessments, and other costs identified as direct expenses in paragraph 13; (ii)
insurance premiums and other costs identified as direct expenses in paragraph
11; (iii) the cost of all utilities and services including water, gas, and sewer
charges, electricity, heat, air conditioning, refuse collection, and janitorial
services identified as direct expenses in paragraph 12; (iv) the costs of
operating and maintaining the Common Area (as defined in paragraph 15)
identified as direct
7.
<PAGE>
expenses in paragraph 15, including, but not limited to, the landscaping,
elevators, parking lots, paving, sidewalks, and security and exterminator
services; (v) the costs and expenses of maintaining and repairing the Project
identified as direct expenses in paragraph 9, including but not limited to,
mechanical, electrical, plumbing and sewage systems, windows, glazing,
gutters, downspouts, heating and ventilating and air conditioning systems,
walls, floor coverings, roofs, structural elements, exterior walls, and the
cost of maintenance contracts and supplies, materials, equipment and tools
used in connection therewith; (vi) the cost of certain alterations identified
as direct expenses in paragraph 8; (vii) amortization of such capital
improvements having a useful life greater than one year as Landlord may have
installed for the purpose of reducing operating costs and/or to comply with
all laws, rules and regulations of federal, state, county, municipal and other
governmental authorities now or hereafter in effect (the cost of such capital
improvement shall equal Tenant's proportionate share of the fraction of the
cost of such capital improvement equal to the remaining term of the lease over
the useful life of such capital improvement); (viii) wages, salaries, employee
benefits (including union benefits) and related expenses of all on-site and
off-site personnel engaged in the operation, management and maintenance of the
Project (or the building in which the Premises are located) and payroll taxes
applicable thereto and all costs incurred to maintain a management office in
or near the Project (including, without limitation, rental payments therefor
or the reasonable rental value of the space so occupied); (ix) supplies,
materials, equipment and tools used or required in connection with the
operation and maintenance of the Project; (x) licenses, permits and inspection
fees; (xi) a reasonable reserve for repairs and replacement of equipment used
in the maintenance and operation of the Project; and (xii) all other
reasonable operating costs incurred by Landlord in maintaining and operating
the Project.
(d) Exclusions from Direct Expenses. Notwithstanding anything to the
-------------------------------
contrary contained in this lease, the following shall not be included within
direct expenses:
(1) Leasing commissions, attorneys' fees, costs, disbursements,
and other expenses incurred in connection with negotiations or disputes with
tenants, or in connection with leasing, renovating, or improving space for
tenants or other occupants or prospective tenants or other occupants of the
Project.
(2) The cost of any service sold to any tenant (including
Tenant) or other occupant for which Landlord is reimbursed as an additional
charge or rental over and above the basic rent and escalations payable under
the lease with that tenant.
(3) Any depreciation on the Project.
(4) Expenses in connection with services or other benefits of a
type that are not provided to Tenant but which are provided specifically for
another tenant or occupant of the Project.
8.
<PAGE>
(5) Costs incurred due to Landlord's violation of any terms or
conditions of this lease or any other lease relating to the Project.
(6) Management fees and/or overhead profit increments paid to
Landlord's subsidiaries or affiliates for management or other services on or to
the building or for supplies or other materials to the extent that the cost of
the services, supplies, or materials exceeds the cost that would have been paid
for comparable services had the services, supplies or materials been provided by
unaffiliated parties of comparable skill, competence, stature, reputation and
reliability on a competitive basis.
(7) All interest, loan fees, and other carrying costs related to
any mortgage or deed of trust and all rental and other payable due under any
ground or underlying lease.
(8) Any compensation paid to clerks, attendants, or other persons
in commercial concessions operated by landlord.
(9) Advertising and promotional expenditures.
(10) Costs of repairs and other work occasioned by fire,
windstorm or other casualty to the extent covered by insurance.
(11) Any costs, fines or penalties incurred due to violations by
Landlord of any governmental rule or authority, this lease or any other lease in
the Project, or due to Landlord's negligence or willful misconduct.
(12) Costs for sculpture, paintings or other objects of fine art
exceeding $20,000 per item (and insurance thereon or extraordinary security in
connection therewith).
(13) Wages, salaries, or other compensation paid to any executive
employees of Landlord or to Landlord's employees above the grade of Property
Manager.
(14) The cost of correcting any building code or other violations
which were violations requiring correction prior to the Lease Commencement Date.
(15) The cost of containing, removing or otherwise remediating any
contamination of the Project (including the underlying land and ground water) by
any toxic or hazardous materials for which Tenant is not otherwise responsible
under paragraph 48 of this lease.
(16) Utilities and services applicable to the Premises and paid
directly by Tenant.
6. RESTRICTION ON USE. Tenant shall not do or permit to be done in or
------------------
about the Premises or the Project, nor bring or keep or permit to be brought or
kept
9.
<PAGE>
in or about the Premises or Project, anything which is prohibited by or will
in any way increase the existing rate of (or otherwise affect) fire or any
other insurance covering the Project or any part thereof, or any of its
contents, or will cause a cancellation of any insurance covering the Project
or any part thereof, or any of its contents. Tenant shall not do or permit to
be done anything in or about the Premises or the Project which will constitute
waste or which will in any way obstruct or interfere with the rights of other
tenants or occupants of the Project or injure or annoy them, or use or allow
the Premises to be used for any unlawful purpose, nor shall Tenant cause,
maintain or permit any nuisance in or about the Premises or the Project. No
loudspeaker or other device, system or apparatus which can be heard outside
the Premises shall be used in or at the Premises without the prior written
consent of Landlord. Tenant shall not use the Premises for sleeping, washing
clothes, cooking (except for customary office use of microwave ovens) or in
any manner that will cause or emit any objectionable odor, noise or light into
the adjoining premises or Common Area; provided that Tenant shall be permitted
to construct a cafeteria or similar food service facility (as specified in
Exhibit D-1) for use by Tenant's employees and their invitees (not the general
public). Tenant shall not do anything on the Premises that will cause damage
to the Project or the building in which the Premises are located and Tenant
shall not overload the floor capacity of the Premises or the Project. No
machinery, apparatus or other appliance shall be used or operated in or on the
Premises that will in any manner injure, vibrate or shake the Premises. No
waste materials or refuse shall be dumped upon or permitted to remain upon any
part of the Premises or outside of the building proper except in trash
containers placed inside exterior enclosures designated for that purpose by
Landlord, or inside of the building proper where designated; and no toxic or
hazardous materials shall be disposed of through the plumbing or sewage
system. No materials, supplies, equipment, finished products or semifinished
products, raw materials or articles of any nature shall be stored or permitted
to remain outside of the building proper. No retail sales shall be made on the
Premises.
7. COMPLIANCE WITH LAWS. Tenant shall, in connection with its use and
--------------------
occupation of the Premises, at its sole cost and expense, promptly observe and
comply with (i) all laws, statutes, ordinances and governmental rules,
regulations and requirements of federal, state, county, municipal and other
governmental authorities, now or hereafter in effect, which shall impose any
duty upon Landlord or Tenant with respect to the use, occupancy or alteration of
the Premises (subject to paragraph 8 below), (ii) with the requirements of any
board of fire underwriters or other similar body now or hereafter constituted
and (iii) with any direction or occupancy certificate issued pursuant to law by
any public authority; provided, however, that no such failure shall be deemed a
breach of these provisions if Tenant, immediately upon notification, commences
to remedy or rectify said failure. The judgment of any court of competent
jurisdiction or the admission of Tenant in any action against Tenant (whether or
not Landlord is a party thereto) that Tenant has violated any such law, statute,
ordinance or governmental rule, regulation, requirement, direction or provision,
shall be conclusive of that fact as between Landlord and Tenant. This lease
shall remain in full force and effect notwithstanding any loss of use or other
effect on Tenant's enjoyment of the
10.
<PAGE>
Premises by reason of any governmental laws, statutes, ordinances, rules,
regulations and requirements now or hereafter in effect.
8. ALTERATIONS. Tenant shall not make or suffer to be made any
-----------
alteration, addition or improvement to or of the Premises or any part thereof
(collectively referred to herein as "alterations") without (i) the prior written
consent of Landlord, (ii) a valid building permit issued by the appropriate
governmental authority and (iii) otherwise complying with all applicable laws,
regulations and requirements of governmental agencies having jurisdiction and
with the rules, regulations and requirements of any board of fire underwriters
or similar body. Notwithstanding the foregoing, Tenant may make non-structural
alterations costing less than Fifteen Thousand Dollars ($15,000) per project and
costing, in the aggregate less than Thirty Thousand Dollars ($30,000) in any one
lease year of the term without the prior written consent of Landlord, provided
that Tenant promptly informs Landlord in writing of the nature of the
alterations, the cost thereof and the contractor engaged or proposed to be
engaged to perform such work, and provided further that all such work complies
with clauses (ii) and (iii) above. Landlord's consent to any requested
alteration shall not create on the part of Landlord or cause Landlord to incur
any responsibility or liability for such alteration's compliance with all laws,
rules, regulations of federal, state, county, municipal and other governmental
authorities. Any alteration, and the initial Tenant Improvements (specified in
paragraph 59 herein), shall be deemed to belong to Tenant during the term of
this lease and Tenant shall have the right to finance such alterations and
initial Tenant Improvements. Upon expiration or upon termination any alteration
made by Tenant (excluding moveable furniture and trade fixtures) shall become a
part of the Premises and belong to Landlord. Without limiting the foregoing,
all heating, lighting, electrical (including all wiring, conduit, outlets,
drops, buss ducts, main and subpanels), air conditioning, partitioning, drapery,
window covering and carpet installations made by Tenant, regardless of how
attached to the Premises, together with all other alterations that have become
an integral part of the building in which the Premises are a part, shall be and
become part of the Premises and belong to Landlord upon installation and shall
not be deemed trade fixtures and, subject to Landlord's right to require removal
and restoration as specified herein, shall remain upon and be surrendered with
the Premises at the termination of the lease.
If Landlord consents to the making of any alteration by Tenant, the
same shall be made by Tenant at its sole risk, cost and expense and only after
Landlord's written approval of any contractor or person selected by Tenant for
that purpose (not to be unreasonably withheld). Tenant shall, if required by
Landlord, secure at Tenant's cost a completion and lien indemnity bond for such
work. Unless expressly waived by Landlord in writing, upon the expiration or
sooner termination of the term, Landlord may, at its sole option, require
Tenant, at Tenant's sole cost and expense, to promptly remove any such
alteration made by Tenant and designated by Landlord to be removed, repair any
damage to the Premises caused by such removal and restore the Premises to their
condition prior to Tenant's alteration. Upon Tenant's written request at the
time that Landlord's consent is requested, Landlord shall notify Tenant if
Landlord will waive its right to require removal of the
11.
<PAGE>
alteration and restoration of the Premises as specified above. Any moveable
furniture and equipment or trade fixtures remaining on the Premises at the
expiration or other termination of the term shall become the property of the
Landlord; provided, however, in addition to all other remedies available to
Landlord at law or in equity, Landlord may (i) require Tenant to remove same
or (ii) remove same at Tenant's cost, and Tenant shall be liable to Landlord
for all damages incurred by Landlord related thereto.
If during the term any alteration, addition or change of the Premises,
the Common Area or the Project is required by law, regulation, ordinance or
order of any public authority due to Tenant's particular use, occupancy or
alteration of the Premises, Tenant, at its sole cost and expense, shall promptly
make the same. If during the term any alterations, additions or changes to the
Common Area or the Project is required by law, regulation, ordinance or order of
any public or quasi-public authority, and is not due to Tenant's particular use,
occupancy or alteration of the Premises, and, in Landlord's judgment, it is
impractical for the tenants of the Project to individually make such
alterations, additions or changes, Landlord shall make such alterations,
additions or changes and the cost thereof shall be a direct expense and Tenant
shall pay its percentage share of such cost to Landlord as provided in
paragraphs 4 and 5, subject to the limitations set forth in paragraphs 5(b) and
55 herein.
9. REPAIR AND MAINTENANCE. Subject to paragraph 16, Landlord shall
----------------------
maintain and keep in good repair the Common Area and the mechanical, electrical,
plumbing and sewage systems, windows, window frames, plate glass, glazing,
elevators, gutters and downspouts, the roof, structural elements of the roof,
exterior walls, structural elements and the heating, ventilating and air
conditioning systems (unless dedicated entirely to the Premises) of the Premises
and the Project; provided, however, that Landlord shall not be required to
perform repairs made necessary by the negligence or abuse of such improvements
or property by Tenant or its employees, agents, subtenants or permitees. The
cost of all maintenance and repairs made by Landlord pursuant to this paragraph
9, including without limitation maintenance contracts and supplies, materials,
equipment and tools used in such repairs and maintenance, shall be direct
expenses and Tenant shall pay its percentage share of such costs to Landlord as
provided in paragraphs 4 and 5, subject to the limitations set forth in
paragraphs 5(b) and 55 herein.
By entry hereunder Tenant accepts the Premises as being in good and
sanitary order, condition and repair. Subject to paragraphs 16 and 21, and
excepting repairs and maintenance required by this paragraph 9 to be made by
Landlord, Tenant at its cost shall keep the Premises and every part thereof
(including the heating, ventilating and air conditioning systems dedicated
entirely to and servicing only the Premises, subject to Landlord's approval of
all contractors and that such services are performed to at least the standard of
service provided by Landlord at the Project) in good and sanitary order,
condition and repair and Tenant shall be solely responsible for the cost and
maintenance of, and electricity supplied to, any special air conditioning for
Tenant's computer facilities. Upon Landlord's request, Tenant shall provide
Landlord with copies of
12.
<PAGE>
all contracts, records, receipts, written communications, invoices and
payments made in connection with such HVAC services. If Landlord determines at
any time that such contractors or the HVAC services being provided are
unacceptable in Landlord's discretion, Landlord may terminate Tenant's right
to provide or obtain such services, in which case Landlord shall be
responsible for such services and all reasonable costs related thereto shall
be direct expenses and Tenant shall pay its percentage share of such costs to
Landlord as provided in paragraphs 4 and 5 of this lease. All contracts for
such services entered into by Tenant shall be terminable by Tenant at any time
and for any reason and Tenant shall exercise such right upon Landlord's
written request and notice that Landlord is resuming responsibility for such
services. Further, Tenant shall repair (or, at the option of Landlord,
reimburse Landlord if Landlord elects to repair) damage to improvements or
other property located on or about the Project where such repairs are made
necessary by the negligence of or abuse of such improvement or other property
by Tenant or its employees, agents, subtenants or permitees. Tenant waives all
rights and benefits under California Civil Code Sections 1932(1), 1941, and
1942 and under any similar law, statute or ordinance now or hereafter in
effect.
10. LIENS. Tenant shall keep the Premises and the Project free from any
-----
liens arising out of any work performed, materials furnished or obligations
incurred by Tenant, its agents, employees or contractors. Upon Tenant's receipt
of a preliminary twenty (20) day notice filed by a claimant pursuant to
California Civil Code Section 3097, Tenant shall immediately provide Landlord
with a copy of such notice. Should any lien be recorded against the Project,
Tenant shall give immediate notice of such lien to Landlord. In the event that
Tenant shall not, within twenty (20) days following the imposition of such lien,
cause the same to be released of record, Landlord shall have, in addition to all
other remedies provided herein and by law, the right, but no obligation, to
cause the same to be released by such means as it shall deem proper, including
payment of the claim giving rise to such lien. All sums paid by Landlord for
such purpose, and all expenses (including attorneys' fees) incurred by it in
connection therewith, shall be payable to Landlord by Tenant on demand with
interest at the rate of twelve percent (12%) per annum or the maximum rate
permitted by law, whichever is less. Landlord shall have the right at all times
to post and keep posted on the Premises any notices permitted or required by
law, or which Landlord shall deem proper for the protection of Landlord, the
Premises and the Project and any other party having an interest therein, from
mechanics' and materialmen's liens and like liens. Tenant shall give Landlord
at least ten (10) days' prior notice of the date of commencement of any
construction on the Premises in order to permit the posting of such notices. In
the event Tenant is required to post an improvement bond with a public agency in
connection with any work performed by Tenant on or to the Premises, Tenant shall
include Landlord as an additional obligee.
11. INSURANCE. Tenant, at its sole cost and expense, shall keep in force
---------
during the term (i) commercial general liability and property damage insurance
with a combined single limit of at least $4,000,000 per occurrence insuring
against personal or bodily injury to or death of persons occurring in, on or
about the Premises or Project and any and all liability of the insureds with
respect to the
13.
<PAGE>
Premises or arising out of Tenant's maintenance, use or occupancy of the
Premises and all areas appurtenant thereto, (ii) direct physical loss-special
insurance covering the leasehold improvements in the Premises and all of
Tenant's equipment, trade fixtures, appliances, furniture, furnishings, and
personal property from time to time located in, on or about the Premises, with
coverage in the amount of the full replacement cost thereof, and (iii)
Worker's Compensation Insurance as required by law, together with employer's
liability coverage with a limit of not less than $2,000,000 for bodily injury
for each accident and for bodily injury by disease for each employee. Tenant's
commercial general liability and property damage insurance and Tenant's
Workers Compensation Insurance shall be endorsed to provide that said
insurance shall not be cancelled or reduced except upon at least thirty (30)
days prior written notice to Landlord. Further, Tenant's commercial general
liability and property damage insurance shall be primary and shall be endorsed
to provide that Landlord and McCandless Management Corporation, and their
respective partners, officers, directors, lenders and employees and such other
persons or entities as reasonably directed from time to time by Landlord shall
be named as additional insureds for all liability using ISO Bureau Form
CG20111185 (or a successor form) or such other endorsement form reasonably
acceptable to Landlord; shall contain a severability of interest clause and a
cross-liability endorsement; shall be endorsed to provide that the limits and
aggregates apply per location using ISO Bureau Form CG25041185 (or a successor
form) or such other endorsement form reasonably acceptable to Landlord; and
shall be issued by an insurance company admitted to transact business in the
State of California and rated A/VIII or better in Best's Insurance Reports (or
successor report). The deductibles for all insurance required to be maintained
by Tenant hereunder shall be reasonably satisfactory to Landlord. The
commercial general liability insurance carried by Tenant shall specifically
insure the performance by Tenant of the indemnification provisions set forth
in paragraph 17 of this lease provided, however, nothing contained in this
paragraph 11 shall be construed to limit the liability of Tenant under the
indemnification provisions set forth in said paragraph 17. If Landlord or any
of the additional insureds named on any of Tenant's insurance, have other
insurance which is applicable to the covered loss on a contributing, excess or
contingent basis, the amount of the Tenant's insurance company's liability
under the policy of insurance maintained by Tenant shall not be reduced by the
existence of such other insurance. Any insurance carried by Landlord or any of
the additional insureds named on Tenant's insurance policies shall be excess
and non-contributing with the insurance so provided by Tenant.
Tenant shall, prior to the commencement of the term and at least
thirty (30) days prior to any renewal date on any insurance policy required to
be maintained by Tenant pursuant to this paragraph, provide Landlord with a
completed Certificate of Insurance, using a form acceptable in Landlord's
reasonable judgement, attaching thereto copies of all endorsements required to
be provided by Tenant under this lease. Tenant agrees to increase the coverage
or otherwise comply with changes in connection with said commercial general
liability, property damage, direct physical loss and Worker's Compensation
Insurance as Landlord or Landlord's lender may from time to time require.
14.
<PAGE>
Landlord shall obtain and keep in force a policy or policies of
insurance covering loss or damage to the Premises and Project, in the amount of
the full replacement value thereof, providing protection against those perils
included within the classification of "all risk" insurance, with increased cost
of reconstruction and contingent liability (including demolition), plus a policy
of rental income insurance in the amount of one hundred percent (100%) of twelve
(12) months' rent (including sums paid as additional rent) and such other
insurance as Landlord or Landlord's lender may from time to time require.
Landlord may, but shall not be obligated to, obtain flood and/or earthquake
insurance. Landlord shall have no liability to Tenant if Landlord elects not to
obtain flood and/or earthquake insurance. The cost of all such insurance
purchased by Landlord, plus any charges for deferred payment of premiums and the
amount of any deductible incurred upon any covered loss within the Project,
shall be direct expenses and Tenant shall pay to Landlord its percentage share
of such costs as provided in paragraphs 4(b) and 5(b). If the cost of insurance
is increased due to Tenant's use of the Premises, then Tenant shall pay to
Landlord upon demand the full cost of such increase.
Landlord and Tenant hereby mutually waive any and all rights of
recovery against one another for real or personal property loss or damage
occurring to the Premises or the Project, or any part thereof, or to any
personal property therein, from perils insured against under fire and extended
insurance and any other property insurance policies existing for the benefit of
the respective parties so long as such insurance permits waiver of liability and
contains a waiver of subrogation without additional premiums.
If Tenant does not take out and maintain insurance as required
pursuant to this paragraph 11, Landlord may, but shall not be obligated to, take
out the necessary insurance and pay the premium therefor, and Tenant shall repay
to Landlord promptly on demand, as additional rent, the amount so paid. In
addition, Landlord may recover from Tenant and Tenant agrees to pay, as
additional rent, any and all reasonable expenses (including attorney fees) and
damages which Landlord may sustain by reason of the failure of Tenant to obtain
and maintain such insurance, it being expressly declared that the expenses and
damages of Landlord shall not be limited to the amount of the premiums thereon.
12. UTILITIES AND SERVICE. Tenant shall pay for all water, gas, light,
---------------------
heat, power, electricity, telephone, trash pickup, sewer charges, janitorial and
all other services supplied to or consumed on the Premises. In the event that
any service is not separately metered or billed to the Premises, the cost of
such utility service or other service shall be a direct expense and Tenant shall
pay its percentage share of such cost to Landlord as provided in paragraph 5.
In addition, the cost of all utilities and services furnished by Landlord to the
Common Area shall be a direct expense and Tenant shall pay its percentage share
of such cost to Landlord as provided in paragraph 5.
If Tenant's use of any such utility or service is materially in excess
of the average furnished to the other tenants of the Project, and such utility
or service is not separately metered, then Tenant shall pay to Landlord upon
demand,
15.
<PAGE>
as additional rent, the full cost of such excess use, or Landlord may cause
such utility or service to be separately metered, in which case Tenant shall
pay the full cost of such utility or service and reimburse Landlord upon
demand for the cost of installing the separate meter. In the event that
Landlord charges Tenant for excess usage of utilities, Tenant shall have the
right to have the electricity for each floor separately metered, at Tenant's
cost paid in advance to Landlord, if such separate meters are practical and
reasonable in light of the amount of the excess charges and each such separate
meter shall be for an entire floor of a building occupied by Tenant.
Landlord shall not be liable for, and Tenant shall not be entitled to
any abatement or reduction of rent by reason of, the failure of any person or
entity to furnish any of the foregoing services when such failure is caused by
accident, breakage, repairs, strikes, lockouts or other labor disturbances or
labor disputes of any character, governmental moratoriums, regulations or other
governmental actions, or by any other cause, similar or dissimilar, beyond the
reasonable control of Landlord. In addition, Tenant shall not be relieved from
the performance of any covenant or agreement in this lease because of any such
failure, and no eviction of Tenant shall result from such failure.
13. TAXES AND OTHER CHARGES. All real estate taxes and assessments and
-----------------------
other taxes, fees and charges of every kind or nature, foreseen or unforeseen,
which are levied, assessed or imposed upon Landlord and/or against the Premises,
building, Common Area or Project or any part thereof by any federal, state,
county, regional, municipal or other governmental or quasi-governmental
authority or special district authority, together with any increases therein
whether resulting from increased rate and/or valuation, shall be a direct
expense and Tenant shall pay its percentage share of such costs to Landlord as
provided in paragraphs 4 and 5. By way of illustration and not limitation,
"other taxes, fees and charges" as used herein include any and all taxes payable
by Landlord (other than state and federal personal or corporate income taxes
measured by the net income of Landlord from all sources, and premium taxes),
whether or not now customary or within the contemplation of the parties hereto,
(i) upon, allocable to, or measured by the rent payable hereunder, including,
without limitation, any gross income or excise tax levied by the local, state or
federal government with respect to the receipt of such rent, (ii) upon or with
respect to the possession, leasing, operation, management, maintenance,
alteration, repair, use or occupancy by Tenant of the Premises or any part
thereof, (iii) upon or measured by the value of Tenant's personal property or
leasehold improvements located in the Premises, (iv) upon this transaction or
any document to which Tenant is a party creating or transferring an interest or
estate in the Premises, (v) upon or with respect to vehicles, parking or the
number of persons employed in, at or about the Project, and (vi) any tax,
license, franchise fee or other imposition upon Landlord which is otherwise
measured by or based in whole or in part upon the Project or any portion
thereof. If Landlord contests any such tax, fee or charge, the cost and expense
incurred by Landlord (including, but not limited to, costs of attorneys and
experts) thereby shall also be direct expenses and Tenant shall pay its
percentage share of such costs to Landlord as provided in paragraphs 4 and 5.
In the event the Premises and any improvements installed therein by Tenant
16.
<PAGE>
or Landlord are valued by the assessor disproportionately higher than those of
other tenants in the building or Project or in the event alterations or
improvements are made to the Premises, Tenant's percentage share of such taxes,
assessments, fees and/or charges shall be readjusted upward accordingly and
Tenant agrees to pay such readjusted share. Such determination shall be made by
Landlord from the respective valuations assigned in the assessor's work sheet or
such other information as may be reasonably available.
Tenant agrees to pay, before delinquency, any and all taxes levied or
assessed during the term hereof upon Tenant's equipment, furniture, fixtures and
other personal property located in the Premises, including carpeting and other
property installed by Tenant notwithstanding that such carpeting or other
property has become a part of the Premises. If any of Tenant's personal
property shall be assessed with the Project, Tenant shall pay to Landlord, as
additional rent, the amounts attributable to Tenant's personal property within
ten (10) days after receipt of a written statement from Landlord setting forth
the amount of such taxes, assessments and public charges attributable to
Tenant's personal property.
14. ENTRY BY LANDLORD. Landlord reserves, and shall at all reasonable
-----------------
times have, the right to enter the Premises following the giving of reasonable
advance notice (e.g. 24 hours notice except in case of emergency) (i) to inspect
the Premises, (ii) to supply services to be provided by Landlord hereunder,
(iii) to show the Premises to prospective purchasers, lenders or tenants and to
put 'for sale' or 'for lease' signs thereon, (iv) to post notices required or
allowed by this lease or by law, (v) to alter, improve or repair the Premises
and any portion of the Project when required by law, or necessary to fulfill its
obligations as Landlord under this or other leases in the Project, or as
otherwise permitted by Tenant, which permission shall not be unreasonably
withheld or delayed, and (vi) to erect scaffolding and other necessary
structures in or through the Premises or the Project where reasonably required
by the character of the work to be performed. Landlord shall not be liable in
any manner for any inconvenience, disturbance, loss of business, nuisance or
other damage arising from Landlord's entry and acts pursuant to this paragraph
unless caused by Landlord's gross negligence or willful misconduct and Tenant
shall not be entitled to an abatement or reduction of rent if Landlord exercises
any rights reserved in this paragraph. For each of the foregoing purposes,
Landlord shall at all times have and retain a key with which to unlock all of
the doors in, on, and about the Premises (excluding Tenant's vaults, safes and
similar areas designated in writing by Tenant in advance), and Landlord shall
have the right to use any and all means which Landlord may deem proper to open
said doors in an emergency in order to obtain entry to the Premises. Any entry
by Landlord to the Premises pursuant to this paragraph shall not under any
circumstances be construed or deemed to be a forcible or unlawful entry into or
a detainer of the Premises or an eviction, actual or constructive, of Tenant
from the Premises or any portion thereof.
15. COMMON AREA; PARKING. Subject to the terms and conditions of this
--------------------
lease and such rules and regulations as Landlord may from time to time
prescribe, Tenant and Tenant's employees and invitees shall, in common with
other occupants of
<PAGE>
the Project, and their respective employees and invitees and others entitled
to the use thereof, have the nonexclusive right to use the access roads,
parking areas and facilities within the Project provided and designated by
Landlord for the general use and convenience of the occupants of the Project,
which areas and facilities shall include, but not be limited to, common
lobbies, corridors, restrooms and showers, part or all of the Greylands
Mansion and the .37 acre parcel upon which it is located (unless the right to
use thereof by Landlord's tenants is subsequently terminated), telephone,
electrical, janitorial and mechanical rooms, elevators, stairwells, vertical
duct shafts, sidewalks, parking, refuse, landscape and plaza areas, roofs,
building exteriors, electrical, mechanical, plumbing and HVAC systems, and
storage areas, which areas and facilities are referred to herein as "Common
Area". This right shall terminate upon the termination of this lease.
Landlord reserves the right from time to time to make changes in the
shape, size, location, amount and extent of the Common Area so long as such
change does not reduce the number of Tenant's parking spaces or unreasonably
impair Tenant's access to or use of the Premises. Landlord shall also have the
right at any time to change the name, number or designation by which the Project
is commonly known. Landlord further reserves the right to promulgate such
reasonable rules and regulations relating to the use of the Common Area, and any
part thereof, as Landlord may reasonably deem appropriate for the best interests
of the occupants of the Project. The rules and regulations shall be binding
upon Tenant upon delivery of a copy of them to Tenant and Tenant shall abide by
them and cooperate in their observance. Such rules and regulations may be
amended by Landlord from time to time, with or without advance notice.
Tenant acknowledges that Landlord's right to provide its tenants with
use of the Greylands Mansion may be terminated in the future and upon such
termination the Common Area shall thereafter include no part of the Greylands
Mansion and the .37 acre parcel upon which it is located.
Commencing on the Lease Commencement Date, Tenant shall have the
nonexclusive use of one hundred ninety (190) parking spaces in the Common Area
as designated from time to time by Landlord and commencing on the Building 2145
Expansion Date, Tenant shall have the nonexclusive use of a total of three
hundred eighty-one (381) parking spaces in the Common Area as designated from
time to time by Landlord. Landlord reserves the right at its sole option to
assign and label parking spaces, but it is specifically agreed that Landlord is
not responsible for policing any such parking spaces. Tenant shall not at any
time park or permit the parking of Tenant's trucks or other vehicles, or the
trucks or other vehicles of others, adjacent to loading areas so as to interfere
in any way with the use of such areas; nor shall Tenant at any time park or
permit the parking of Tenant's vehicles or trucks, or the vehicles or trucks of
Tenant's suppliers or others, in any portion of the Common Area not designated
by Landlord for such use by Tenant. Tenant shall not park or permit any
inoperative vehicle or equipment to be parked on any portion of the Common Area.
18.
<PAGE>
Landlord shall operate, manage and maintain the Common Area. The
manner in which the Common Area shall be operated, managed and maintained and
the expenditures for such operation, management and maintenance shall be
consistent with those of a first class office complex. The cost of such
maintenance, operation and management, including but not limited to landscaping,
repair of paving, parking lots and sidewalks, the Greylands Mansion (including
interior repair and maintenance, janitorial service, furniture rental or
depreciation charges, and lease payments charged by the owner of the Greylands
Mansion), security services and salaries and employee benefits. (including union
benefits) of on-site and accounting personnel engaged in such maintenance and
operations management, shall be a direct expense and Tenant shall pay to
Landlord its percentage share of such cost as provided in paragraphs 4 and 5,
subject to the limitations described in such paragraphs.
16. DAMAGE BY FIRE; CASUALTY. In the event the Premises are damaged by
------------------------
any casualty which is covered under an insurance policy required to be
maintained by Landlord pursuant to paragraph 11, Landlord shall be entitled to
the use of all insurance proceeds and shall repair such damage as soon as
reasonably possible and this lease shall continue in full force and effect.
In the event the Premises are damaged by any casualty not covered
under an insurance policy required to be maintained pursuant to paragraph 11,
Landlord may, at Landlord's option, either (i) repair such damage, at Landlord's
expense, as soon as reasonably possible, in which event this lease shall
continue in full force and effect, or (ii) give written notice to Tenant within
thirty (30) days after the date of the occurrence of such damages of Landlord's
intention to cancel and terminate this lease as of the date of the occurrence of
the damages; provided, however, that if such damage is caused by an act or
omission of Tenant or its agent, servants or employees, then Tenant shall repair
such damage promptly at its sole cost and expense. In the event Landlord elects
to terminate this lease pursuant hereto, Tenant shall have the right within ten
(10) days after receipt of the required notice to notify Landlord in writing of
Tenant's intention to repair such damage at Tenant's expense, without
reimbursement from Landlord, in which event this lease shall continue in full
force and effect and Tenant shall proceed to make such repairs as soon as
reasonably possible. If Tenant does not give such notice within the ten (10)
day period, this lease shall be cancelled and terminated as of the date of the
occurrence of such damage. Under no circumstances shall Landlord be required to
repair any injury or damage to (by fire or other cause), or to make any
restoration or replacement of, any of Tenant's personal property, trade fixtures
or property leased from third parties, whether or not the same is attached to
the Premises.
If the Premises are totally destroyed during the term from any cause
(including any destruction required by any authorized public authority), whether
or not covered by the insurance required under paragraph 11, this lease shall
automatically terminate as of the date of such total destruction; provided,
however, that if the Premises can reasonably and lawfully be repaired or
restored within eight (8) months of the date of destruction to substantially the
condition existing prior to such destruction and if the proceeds of the
insurance payable to the
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Landlord by reason of such destruction are sufficient to pay the cost of such
repair or restoration, then the said insurance proceeds shall be so applied,
Landlord shall promptly repair and restore the Premises and this lease shall
continue, without interruption, in full force and effect. If the Premises are
totally destroyed during the last twelve (12) months of the term, Landlord may
at Landlord's option cancel and terminate this lease as of the date of
occurrence of such damage by giving written notice to Tenant of Landlord's
election to do so within thirty (30) days after the occurrence of such damage.
If the Premises are partially or totally destroyed or damaged and
Landlord or Tenant repair them pursuant to this lease, the rent payable
hereunder for the period during which such damage and repair continues shall be
abated only in proportion to the square footage of the Premises rendered
untenantable to Tenant by such damage or destruction. Tenant shall have no
claim against Landlord for any damage, loss or expense suffered by reason of any
such damage, destruction, repair or restoration, unless caused by Landlord's
gross negligence or willful misconduct. The parties waive the provisions of
California Civil Code sections 1932(2) and 1933(4) (which provisions permit the
termination of a lease upon destruction of the lease premises), and hereby agree
that the provisions of this paragraph 16 shall govern in the event of such
destruction.
17. INDEMNIFICATION. Landlord shall not be liable to Tenant and Tenant
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hereby waives all claims against Landlord for any injury to or death of any
person or damage to or destruction of property in or about the Premises or the
Project by or from any cause whatsoever except those caused by Landlord's gross
negligence or willful misconduct or the failure of Landlord to perform its
obligations under this lease where such failure has persisted for an
unreasonable period of time after notice of such failure. Without limiting the
foregoing, Landlord shall not be liable to Tenant for any injury to or death of
any person or damages to or destruction of property by reason of, or arising
from, any latent defect in the Premises or Project or the act or negligence of
any other tenant of the Project. Tenant shall promptly notify Landlord of any
defect in the Premises or Project discovered by Tenant.
Except as to injury to persons or damage to property caused by
Landlord's gross negligence, willful misconduct, or the failure by Landlord to
observe any of the terms and conditions of this lease, Tenant shall hold
Landlord harmless from and indemnify and defend Landlord against any claim,
liability, loss, damage or expense (including attorney fees) arising out of any
injury to or death of any person or damage to or destruction of property
occurring in, on or about the Premises from any cause whatsoever or on account
of the use, condition, occupational safety or occupancy of the Premises. Tenant
shall further hold Landlord harmless from and indemnify and defend Landlord
against any claim, liability, loss, damage or expense (including attorney fees)
arising (i) from Tenant's use of the Premises or from the conduct of its
business or from any activity or work done, permitted or suffered by Tenant or
its agents or employees in or about the Premises or Project, (ii) out of the
failure of Tenant to observe or comply with Tenant's obligation to observe and
comply with laws or other requirements as set forth in paragraph 7, (iii) by
reason of Tenant's use, handling, storage, or disposal of toxic or
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hazardous materials or waste, (iv) by reason of any labor or service performed
for, or materials used by or furnished to, Tenant or any contractor engaged by
Tenant with respect to the Premises, or (v) from any other act, neglect, fault
or omission of Tenant or its agents or employees.
The provisions of this paragraph 17 shall survive the expiration or
earlier termination of this lease.
18. ASSIGNMENT AND SUBLETTING
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Tenant shall not voluntarily assign, encumber or otherwise transfer
its interest in this lease or in the Premises, or sublease all or any part of
the Premises, or allow any other person or entity to occupy or use all or any
part of the Premises, without first obtaining Landlord's written consent, which
consent shall not be unreasonably withheld, and otherwise complying with the
requirements of this paragraph 18. Any assignment, encumbrance or sublease
without Landlord's consent, shall constitute a default. The proposed assignee
or subtenant is referred to herein as the "Transferee". Reasonable grounds for
denying consent to a proposed assignment or sublet include, without limitation,
any of the following:
(a) Transferee's character, reputation, credit history, or business is
not consistent with the character or quality of the Project;
(b) Transferee is either a government agency or an instrumentality of
one;
(c) Transferee's intended use of the Premises is inconsistent with the
permitted use specified in this lease or such use will materially and adversely
affect Landlord's interest;
(d) Transferee's financial condition is or may be inadequate to
support the lease obligations of Transferee under the assignment or sublease;
(e) The assignment or sublet would cause Landlord to violate another
lease or agreement to which Landlord is a party or would give another tenant in
the Project the right to cancel its lease;
(f) Transferee occupies space in the Project and such space is not
contiguous to the Premises, is negotiating with Landlord to lease space in the
Project, or has negotiated with Landlord during the six (6) months immediately
preceding notice of the proposed assignment or sublet to Landlord, provided that
Landlord has similar space available in the Project at the time of Tenant's
proposed transfer;
(g) Transferee does not intend to occupy the entire Premises and
conduct business there for a substantial portion of the term of the assignment
or sublease; or
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(h) The rent charged by Tenant to Transferee during the term of the
assignment or sublet, is less than eighty-five percent (85%) of the market rent
at that time for comparable space in the Project for a comparable term.
If Tenant desires to assign or sublet all or any portion of the
Premises, Tenant shall give Landlord written notice ("Transfer Notice") thereof,
specifying the projected commencement date of the proposed sublet or assignment
(which date shall be not less than thirty (30) days or more than ninety (90)
days after the date of Landlord's receipt of such notice), the portions of the
Premises proposed to be sublet or assigned (the "Subject Space"), a description
of any planned alterations or improvements to the Subject Space, the terms and
conditions of the proposed assignment or sublease (including the rent to be paid
by the Transferee and any and all other consideration to be given by the
Transferee), the name, address and telephone number of the Transferee, and a
detailed calculation of the Transfer Premium (defined below) (certified by
Tenant's chief financial officer) to be paid as provided below. Tenant shall
further provide Landlord with such other information concerning such Transferee
as requested by Landlord. If (i) the Subject Space for all subleases entered
into by Tenant in the aggregate consists of more than 35,000 square feet, or
(ii) the Subject Space for all subleases entered into by Tenant in the aggregate
consists of more than 20,000 square feet and the term of the proposed sublease
is greater than twenty-four (24) months or will expire during the last twelve
(12) months of this lease, then for a period of thirty (30) days after
Landlord's receipt of the Transfer Notice, Landlord shall have the option,
exercisable by delivering written notice to Tenant, to terminate this lease for
the Subject Space or for the entire building in which the Subject Space is
located as of the date specified in Landlord's written notice to Tenant, which
date shall not be less than thirty (30) days nor more than ninety (90) days
after the date of Landlord's written notice to Tenant. Landlord shall have the
right to communicate with such Transferee to discuss the terms of the proposed
assignment or sublet, to discuss and negotiate, if Landlord desires, the terms
of a direct lease between Landlord and Transferee, or any other matter and to
enter into a direct lease agreement with Transferee as provided below and
failure of Transferee to meet with Landlord and to negotiate in good faith the
terms of a direct lease with Landlord shall constitute grounds for Landlord's
refusal to consent to the proposed assignment or sublet. If Landlord
exercises its option to terminate this lease as provided in the foregoing
sentence, Landlord may, if it so elects, enter into a new lease for the building
in which the Subject Space is located or any portion thereof with the Transferee
or any other third party on such terms as Landlord and the Transferee or other
third party may agree; in such event, Tenant shall not be entitled to any
portion of the profit, if any, which Landlord may realize on account of such
termination and reletting. If Landlord exercises its option to terminate this
lease with respect to either (a) the building in which the Subject Space is
located, or (b) the Subject Space only, then Tenant shall continue to be
obligated under this lease as to the remaining space (i.e., the Premises less
the building in which the Subject Space is located or the Subject Space) and
basic rent and direct expenses payable by Tenant under this lease shall be
adjusted as follows: (i) the basic rent amount(s) specified in paragraphs 4(a)
and 5(a) of this lease shall be multiplied by a fraction, the numerator of which
is the square feet of the Premises
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retained by Tenant after Landlord's recapture and the denominator of which is
the total square feet of the Premises before Landlord's recapture; (ii)
Tenant's proportionate share of direct expenses as provided in paragraph 5(b)
of this lease shall be reduced to reflect Tenant's proportionate share based
on the square feet of the Premises retained by Tenant after Landlord's
recapture. This lease as so amended shall continue thereafter in full force
and effect. Either party may require written confirmation of the amendments to
this lease necessitated by Landlord's recapture. If Landlord recaptures the
Subject Space only, Landlord shall, at Landlord's sole expense, construct any
partitions required to segregate the Subject Space from the remaining Premises
retained by Tenant. Tenant shall, however, pay for painting, covering, or
otherwise decorating the surfaces of the partitions facing the remaining
Premises retained by Tenant.
If Landlord consents in writing to the proposed assignment or sublet,
Tenant shall be free to assign or sublet all or a portion of the Premises
subject to the following conditions: (i) any assignment or sublease shall be on
the same terms set forth in the Transfer Notice given to Landlord; (ii) no
assignment or sublease shall be valid and no assignee or subtenant shall take
possession of the Subject Space until an executed counterpart of such assignment
or sublease has been delivered to Landlord; (iii) no assignee or subtenant shall
have a further right to assign or sublet; (iv) eighty percent (80%) of any sums
or other consideration payable by Transferee to Tenant as a result of or in
connection with such assignment or sublet (except rental or other payments
received which are attributable to the amortization over the term of this lease
of (a) the cost of leasehold improvements constructed by Tenant for such
assignee or subtenant, excluding the initial tenant improvements to be
constructed in the Premises pursuant to the terms of this lease, if any, and (b)
broker fees and attorneys fees paid by Tenant in connection therewith) whether
denominated rentals or otherwise, which exceed, in the aggregate, the basic rent
and direct expenses which Tenant is obligated to pay Landlord under this lease
during the term of such assignment or sublease (prorated to reflect obligations
allocable to that portion of the Premises subject to such sublease), shall be
payable to Landlord monthly as additional rent under this lease without
affecting or reducing any other obligation of Tenant hereunder (such amounts are
referred to herein as the "Transfer Premium"); (v) no assignment or sublet shall
release Tenant of Tenant's obligation or alter the primary liability of Tenant
to pay the rent and to perform all other obligations to be performed by Tenant
hereunder; and (vi) any assignee or subtenant must expressly agree to assume and
perform all of the covenants and conditions of Tenant under this lease. Tenant
shall pay to Landlord promptly upon demand as additional rent, Landlord's actual
and reasonable attorneys' fees and other reasonable costs incurred for
reviewing, processing or documenting any requested assignment or sublease,
whether or not Landlord's consent is granted. Tenant shall not be entitled to
assign this lease or sublease all or any part of the Premises (and any attempt
to do so shall be voidable by Landlord) during any period in which Tenant is in
default under this lease.
If Tenant is a partnership, a withdrawal or change, voluntary or
involuntary or by operation of law, of any general partner or the dissolution of
the
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partnership shall be deemed an assignment of this lease subject to all the
conditions of this paragraph 18. If Tenant is a corporation any dissolution,
merger, consolidation or other reorganization of Tenant or the sale or other
transfer of a controlling percentage of the capital stock of Tenant or the sale
of more than fifty percent (50%) of the value of Tenant's assets shall be an
assignment of this lease subject to all the conditions of this paragraph 18.
The term "controlling percentage" means the ownership of, and the right to vote,
stock possessing more than 50% of the total combined voting power of all classes
of Tenant's capital stock issued, outstanding and entitled to vote. This
subparagraph of this paragraph 18 shall not apply if Tenant is a corporation the
stock of which is traded on the New York Stock Exchange, the American Stock
Exchange or NASDAQ.
The acceptance of rent by Landlord from any other person shall not be
deemed to be a waiver by Landlord of any provision hereof. Consent to one
assignment or sublet shall not be deemed consent to any subsequent assignment or
sublet. In the event of default by any assignee of Tenant or any successor of
Tenant in the performance of any of the terms hereof, Landlord may proceed
directly against Tenant without the necessity of exhausting remedies against
such assignee or successor. Landlord may consent to subsequent assignments or
sublets of this lease or amendments or modifications to this lease with
assignees of Tenant, without notifying Tenant, or any successor of Tenant, and
without obtaining its or their consent thereto and such action shall not relieve
Tenant of liability under this lease.
No interest of Tenant in this lease shall be assignable by operation
of law (including, without limitation, the transfer of this lease by testacy or
intestacy). Each of the following acts shall be considered an involuntary
assignment: (i) if Tenant is or becomes bankrupt or insolvent, makes an
assignment for the benefit of creditors or institutes a proceeding under the
Bankruptcy Act in which Tenant is the bankrupt; or, if Tenant is a partnership
or consists of more than one person or entity, if any partner of the partnership
or other person or entity is or becomes bankrupt or insolvent, or makes an
assignment for the benefit of creditors; (ii) if a writ of attachment or
execution is levied on this lease; or (iii) if, in any proceeding or action to
which Tenant is a party, a receiver is appointed with authority to take
possession of the Premises. An involuntary assignment shall constitute a
default by Tenant and Landlord shall have the right to elect to terminate this
lease, in which case this lease shall not be treated as an asset of Tenant.
Tenant immediately and irrevocably assigns to Landlord, as security
for Tenant's obligations under this lease, all rent or other consideration from
any assignment or subletting of all or a part of the Premises as permitted by
this lease, and Landlord, as assignee and as attorney-in-fact for Tenant, or a
receiver of Tenant appointed on Landlord's application, may collect such rent or
other consideration and apply it toward Tenant's obligations under this lease
and any Transferee agrees to make such payments directly to Landlord upon
Landlord's written request; provided that, until the occurrence of a default by
Tenant, Tenant shall have the right to collect such rent, subject to promptly
forwarding to Landlord any portion thereof to which Landlord is entitled
pursuant to this paragraph 18.
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Notwithstanding the above requirement that Tenant obtain the consent
of Landlord prior to any assignment or sublet, Tenant may, without obtaining the
prior consent of Landlord, assign or sublease the whole or any part of the
Premises to any corporation or other entity which controls, is controlled by, or
is under common control with Tenant ("Tenant Affiliate"), provided that (i)
Tenant shall give written notice thereof to Landlord in the manner required for
other assignments or subleases by this paragraph 18 or as soon as reasonably
possible in the event such prior notice is prohibited by law; (ii) Tenant shall
continue to be fully obligated under this lease; (iii) any such assignee or
sublessee shall expressly assume and agree to perform all the terms and
conditions of this lease to be performed by Tenant; and (iv) any such assignment
or sublet shall be subject to all other terms and conditions of this paragraph
18 pertaining to assignments and/or sublets (excepting only the requirement
concerning prior written consent of Landlord).
19. DEFAULT. The occurrence of any of the following shall constitute a
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default by Tenant and default as used in this lease shall mean: (i) failure of
Tenant to pay any rent or other sum payable hereunder when due (provided that
Landlord's right to terminate this lease for such default shall be subject to
Tenant's right to cure within three (3) days after written notice of such
default pursuant to California Code of Civil Procedure Section 1161 et seq);
(ii) abandonment of the Premises (Tenant's failure to occupy and conduct
business in the Premises for fourteen (14) consecutive days while in default of
any other provision of this lease shall be deemed an abandonment); (iii)
failure of Tenant to deliver to Landlord any instrument, assurance, financial
statement, subordination agreement or certificate of estoppel required under
this Lease within the time period specified for such performance if the failure
continues for five (5) days after written notice of the failure from Landlord to
Tenant; or (iv) failure of Tenant to perform any other obligation under this
lease if the failure to perform is not cured within thirty (30) days after
written notice thereof has been given to Tenant, except in the case of an
emergency or dangerous condition, in which case Tenant's time to perform shall
be that time period which is reasonable under the circumstances, but not more
than thirty (30) days and except in circumstances where such failure cannot be
cured within such thirty (30) day period, so long as Tenant commences such cure
within such period and diligently prosecutes such cure to completion. The
notice referred to in clauses (iii) and (iv) above shall specify the obligations
Tenant has failed to perform. No notice shall be deemed a forfeiture or
termination of this lease unless Landlord so elects in the notice. No notice
shall be required in the event of abandonment or vacation of the Premises and
Tenant has not provided Landlord with an alternate address where Tenant can be
found and Tenant accepts service of process and notices required hereunder.
In addition to the above, the occurrence of any of the following
events shall also constitute a default by Tenant: (i) Tenant fails to pay its
debts as they become due or admits in writing its inability to pay its debts, or
makes a general assignment for the benefit of creditors (for purposes of
determining whether Tenant is not paying its debts as they become due, a debt
shall be deemed overdue upon the earliest to occur of the following: thirty (30)
days from the date a
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statement therefor has been rendered; the date on which any action or
proceeding therefor is commenced; or the date on which a formal notice of
default or demand has been sent); and (ii) any financial statements given to
Landlord by Tenant, any assignee of Tenant, subtenant of Tenant, any guarantor
of Tenant, or successor in interest of Tenant (including, without limitation,
any schedule of Tenant's aged accounts payable) are materially false.
In the event of a default by Tenant, then Landlord, in addition to any
other rights and remedies of Landlord at law or in equity, shall have the right
either to terminate Tenant's right to possession of the Premises (and thereby
terminate this lease) or, from time to time and without termination of this
lease, to relet the Premises or any part thereof for the account and in the name
of Tenant for such term and on such terms and conditions as Landlord in its
reasonable discretion may deem advisable, with the right to make alterations and
repairs to the Premises.
Should Landlord elect to keep this lease in full force and effect,
Landlord shall have the right to enforce all of Landlord's rights and remedies
under this lease, including but not limited to the right to recover and to relet
the Premises and such other rights and remedies as Landlord may have under
California Civil Code Section 1951.4, which Section provides that the landlord
may continue the Lease in effect after the tenant's breach and abandonment and
recover rent as it becomes due, when the tenant has the right to sublet or
assign, subject only to reasonable limitations (or successor Code section) or
any other California statute. If Landlord relets the Premises, then Tenant
shall pay to Landlord, as soon as ascertained, the costs and expenses reasonably
incurred by Landlord in such reletting and in making alterations and repairs.
Rentals received by Landlord from such reletting shall be applied (i) to the
payment of any indebtedness due hereunder, other than basic rent and direct
expenses, from Tenant to Landlord; (ii) to the payment of the cost of any
repairs necessary to return the Premises to good condition normal wear and tear
excepted, including the cost of alterations and the cost of storing any of
Tenant's property left on the Premises at the time of reletting; and (iii) to
the payment of basic rent or direct expenses due and unpaid hereunder. The
residue, if any, shall be held by Landlord and applied in payment of future rent
or damages in the event of termination as the same may become due and payable
hereunder and the balance, if any at the end of the term of this lease, shall be
paid to Tenant. Should the basic rent and direct expenses received from time to
time from such reletting during any month be less than that agreed to be paid
during that month by Tenant hereunder then Tenant shall pay such deficiency to
Landlord. Such deficiency shall be calculated and paid monthly. No such
reletting of the Premises by Landlord shall be construed as an election on its
part to terminate this lease unless a written notice of such intention is given
to Tenant or unless the termination hereof is decreed by a court of competent
jurisdiction. Notwithstanding any such reletting without termination, Landlord
may at any time thereafter elect to terminate this lease for such previous
breach, provided it has not been cured.
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Should Landlord at any time terminate this lease for any breach, in
addition to any other remedy it may have, it shall have the immediate right of
entry and may remove all persons and property from the Premises and shall have
all the rights and remedies of a landlord provided by California Civil Code
Section 1951.2 or any successor code section. Upon such termination, in
addition to all its other rights and remedies, Landlord shall be entitled to
recover from Tenant all damages it may incur by reason of such breach, including
the cost of recovering the Premises and including (i) the worth at the time of
award of the unpaid rent which had been earned at the time of termination; (ii)
the worth at the time of award of the amount by which the unpaid rent which
would have been earned after termination until the time of award exceeds the
amount of such rental loss that Tenant proves could have been reasonably
avoided; (iii) the worth at the time of the award of the amount by which the
unpaid rent for the balance of the term after the time of award exceeds the
amount of such rental loss that Tenant proves could be reasonably avoided; (iv)
any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its obligations under this
lease or which in the ordinary course of events would be likely to result
therefrom. The "worth at the time of award" of the amounts referred to in (i)
and (ii) above is computed by allowing interest at the rate of twelve percent
(12%) per annum. The "worth at the time of award" of the amount referred to in
(iii) above shall be computed by discounting such amount at the discount rate of
the federal reserve bank of San Francisco at the time of award plus one percent
(1%). Tenant waives the provisions of Section 1179 of the California Code of
Civil Procedure (which Section allows Tenant to petition a court of competent
jurisdiction for relief against forfeiture of this lease). Property removed
from the Premises may be stored in a public or private warehouse or elsewhere at
the sole cost and expense of Tenant. In the event that Tenant shall not
immediately pay the cost of storage of such property after the same has been
stored for a period of thirty (30) days or more, Landlord may sell any or all
thereof at a public or private sale in such manner and at such times and places
that Landlord, in its sole discretion, may deem proper, without notice to or
demand upon Tenant.
20. LANDLORD'S RIGHT TO CURE TENANT'S DEFAULT. Landlord, at any time
-----------------------------------------
after Tenant commits a default, may, but shall not be obligated to, cure the
default at Tenant's cost. If Landlord at any time, by reason of Tenant's
default, pays any sum or does any act that requires the payment of any sum, the
sum paid by Landlord shall be due immediately from Tenant to Landlord and shall
bear interest at the rate of twelve percent (12%) per annum or the maximum rate
permitted by law, whichever is less, from the date the sum is paid by Landlord
until Landlord is reimbursed by Tenant. Amounts due Landlord hereunder shall be
additional rent.
21. EMINENT DOMAIN. If all or any part of the Premises shall be taken by
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any public or quasi-public authority under the power of eminent domain or
conveyance in lieu thereof, this lease shall terminate as to any portion of the
Premises so taken or conveyed on the date when title vests in the condemnor, and
Landlord shall be entitled to any payments, income, rent, award or any interest
therein whatsoever which may be paid or made in connection with such taking or
conveyance. Tenant shall have no claim against Landlord or otherwise for the
value of any unexpired
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term of this lease. Notwithstanding the foregoing, Tenant shall be entitled to
any compensation for depreciation to and cost of removal of Tenant's equipment
and fixtures and any compensation for its relocation expenses necessitated by
such taking, but in each case only to the extent the condemning authority
makes a separate award therefor or specifically identifies a portion of the
award as being therefor. Each party waives the provisions of Section 1265.130
of the California Code of Civil Procedure (which section allows either party
to petition the Superior Court to terminate this lease in the event of a
partial taking of the Premises).
If any action or proceeding is commenced for such taking of the
Premises or if Landlord is advised in writing by any entity or body having the
right of power of condemnation of its intention to condemn the Premises or more
than fifty percent (50%) of the Premises or the Project, and Landlord shall
decide to discontinue the use and operation of the Project or decide to
demolish, alter or rebuild the Project, then Landlord shall have the right to
terminate this lease by giving Tenant written notice thereof within sixty (60)
days of the earlier of the date of Landlord's receipt of such notice of
intention to condemn or the commencement of said action or proceeding. Such
termination shall be effective as of the last day of the calendar month next
following the month in which such notice is given or the date on which title
shall vest in the condemnor, whichever occurs first.
In the event of a partial taking, or conveyance in lieu thereof, of
the Premises and fifty percent (50%) or more of the number of square feet in the
Premises are taken then Tenant may terminate this lease. Any election by Tenant
to so terminate shall be by written notice given to Landlord within sixty (60)
days from the date of such taking or conveyance and shall be effective on the
last day of the calendar month next following the month in which such notice is
given or the date on which title shall vest in the condemnor, whichever occurs
first.
If a portion of the Premises is taken by power of eminent domain or
conveyance in lieu thereof and neither Landlord nor Tenant terminates this lease
as provided above then this lease shall continue in full force and effect as to
the part of the Premises not so taken or conveyed and all payments of rent shall
be apportioned as of the date of such taking or conveyance so that thereafter
the amounts to be paid by Tenant shall be in the ratio that the area of the
portion of the Premises not so taken bears to the total area of the Premises
prior to such taking.
22. NOTICE AND COVENANT TO SURRENDER. On the last day of the term or on
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the effective date of any earlier termination, Tenant shall surrender to
Landlord the Premises in as good a condition as existed as of the date of
completion of construction of the initial Tenant Improvements (subject to
Landlord's right to require removal of same as specified in the Work Letter
attached hereto as Exhibit D) and, except as otherwise provided by Landlord
pursuant to the terms of paragraph 8 of this lease, all the improvements and
alterations made to the Premises in their condition existing as of the date of
completion of construction and/or installation (normal wear and tear excepted),
with all originally painted interior walls washed or repainted if marked or
damaged, interior vinyl covered walls cleaned and repaired
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or replaced if marked or damaged, all carpets shampooed and cleaned and all
floors cleaned and waxed; all to the reasonable satisfaction of Landlord. On
or prior to the last day of the term or the effective date of any earlier
termination, Tenant shall remove all of Tenant's personal property and trade
fixtures, together with improvements or alterations that Tenant is obligated
to remove pursuant to the provisions of paragraph 8 of this lease, from the
Premises, and all such property not removed shall be deemed abandoned. In
addition, on or prior to the expiration or earlier termination of this lease,
Tenant shall remove, at Tenant's sole cost and expense, all telephone, other
communication, computer and any other cabling and wiring of any sort installed
in the space above the suspended ceiling of the Premises or anywhere else in
the Premises and shall promptly repair any damage to the suspended ceiling,
lights, light fixtures, walls and any other part of the Premises resulting
from such removal.
If the Premises are not surrendered as required in this paragraph,
Tenant shall indemnify Landlord against all loss, liability and expense
(including but not limited to, attorney fees) resulting from the failure by
Tenant in so surrendering the Premises, including, without limitation, any
claims made by any succeeding tenants. It is agreed between Landlord and Tenant
that the provisions of this paragraph shall survive termination of this lease.
23. TENANT'S QUITCLAIM. At the expiration or earlier termination of this
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lease, Tenant shall execute, acknowledge and deliver to Landlord, within ten
(10) business days after written demand from Landlord to Tenant, any quitclaim
deed or other document required to remove the cloud or encumbrance created by
this lease from the real property of which the Premises are a part. This
obligation shall survive said expiration or termination.
24. HOLDING OVER. Any holding over after the expiration or termination
------------
of this lease with the written consent of Landlord shall be construed to be a
tenancy from month-to-month at the monthly rent agreed upon by Landlord and
Tenant, but in no event less than the monthly rent payable under this lease for
the last lease month before the date of such expiration or termination. All
provisions of this lease, except (i) as modified by the preceding sentence and
(ii) those provisions pertaining to the term, expansion rights and any option to
extend, shall apply to the month-to-month tenancy.
If Tenant shall retain possession of the Premises or any part thereof
without Landlord's written consent following the expiration or sooner
termination of this lease for any reason, then Tenant shall pay to Landlord as
rent during the holdover period an amount equal to the greater of (i) two
hundred percent (200%) of the amount of the monthly rent in effect during the
last full lease month prior to the date of such expiration or termination or
(ii) one hundred fifty percent (150%) of the fair market rental (as reasonably
determined by Landlord) for the Premises. Tenant shall also indemnify and hold
Landlord harmless from any loss, liability and expense (including, but not
limited to, attorneys fees) resulting from delay by Tenant in surrendering the
Premises, including without limitation any claims made by any succeeding tenant
founded on such delay. Acceptance of rent by Landlord
29.
<PAGE>
following expiration or termination shall not constitute a renewal of this
lease, and nothing contained in this paragraph shall waive Landlord's right of
re-entry or any other right. Tenant shall be only a tenant at sufferance,
whether or not Landlord accepts any rent from Tenant, while Tenant is holding
over without Landlord's written consent.
The provisions of this paragraph 24 are in addition to, and do not
affect, Landlord's right of re-entry or other rights hereunder or provided by
law. Nothing in this paragraph 24 shall be construed as implied consent by
Landlord to any holding over by Tenant. Landlord expressly reserves the right
to require Tenant to surrender possession of the Premises to Landlord as
provided in this Lease on expiration or other termination of this Lease. The
provisions of this paragraph 24 shall not be considered to limit or constitute a
waiver of any other rights or remedies of Landlord provided in this Lease or at
law. The provisions of this paragraph 24 shall survive the expiration or early
termination of this lease.
25. SUBORDINATION. In the event Landlord's title or leasehold interest
-------------
is now or hereafter encumbered in order to secure a loan to Landlord, Tenant
shall, at the request of Landlord or the lender, execute in writing an agreement
subordinating its rights under this lease to the lien of such encumbrance, or,
if so requested, agreeing that the lien of lender's encumbrance shall be or
remain subject and subordinate to the rights of Tenant under this lease
conditioned upon Tenant's receipt of a nondisturbance agreement, in form and
substance as customary in the lending industry. Notwithstanding any such
subordination, Tenant's possession under this lease shall not be disturbed if
Tenant is not in default and so long as Tenant shall pay all amounts due
hereunder and otherwise observe and perform all provisions of this lease. In
addition, if in connection with any such loan lender shall request reasonable
modifications in this lease as a condition to such financing, Tenant will not
unreasonably withhold, delay or defer its consent thereof, provided that such
modifications do not increase the obligations of Tenant hereunder or materially
adversely affect the leasehold interest hereby created or Tenant's rights
hereunder.
26. CERTIFICATE OF ESTOPPEL. Each party shall, within five (5) business
-----------------------
days after request therefor, execute and deliver to the other party, in
recordable form, a certificate stating that the lease is unmodified and in full
force and effect, or in full force and effect as modified and stating the
modifications and certifying to its knowledge that there are no defaults under
this lease. The certificate shall also state the amount of the monthly rent,
the date to which monthly rent has been paid in advance, the amount of the
security deposit and/or prepaid monthly rent, and, if the request is made by
either party, shall include such other items as either party or its lender may
reasonably request. Failure to deliver such certificate within such time shall
constitute a conclusive acknowledgement by the party failing to deliver the
certificate that the lease is in full force and effect and has not been modified
except as may be represented by the party requesting the certificate. Any such
certificate requested by Landlord may be conclusively relied upon by any
prospective purchaser or encumbrancer of the Premises or Project. Further,
within five (5) calendar days following written
30.
<PAGE>
request made from time to time by Landlord, Tenant shall furnish to Landlord
Tenant's most recent quarterly or annual financial statements.
27. SALE BY LANDLORD. In the event the original Landlord hereunder, or
----------------
any successor owner of the Project or Premises, shall sell or convey the Project
or Premises, all liabilities and obligations on the part of the original
Landlord, or such successor owner, under this lease accruing thereafter shall
terminate, and thereupon all such liabilities and obligations shall be binding
upon the new owner. Tenant agrees to attorn to such new owner and to look
solely to such new owner for performance of any and all such liabilities and
obligations.
28. ATTORNMENT TO LENDER OR THIRD PARTY. In the event the interest of
-----------------------------------
Landlord in the land and buildings in which the Premises are located (whether
such interest of Landlord is a fee title interest or a leasehold interest) is
encumbered by deed of trust, and such interest is acquired by a lender or any
other third party through judicial foreclosure or by exercise of a power of sale
at private trustee's foreclosure sale, Tenant hereby agrees to release Landlord
of any obligation arising on or after any such foreclosure sale and to attorn to
the purchaser at any such foreclosure sale and to recognize such purchaser as
the Landlord under this lease.
29. DEFAULT BY LANDLORD. Landlord shall not be in default unless
-------------------
Landlord fails to perform obligations required of Landlord within a reasonable
time, but in no event earlier than thirty (30) days after written notice by
Tenant to Landlord and to the holder of any first mortgage or deed of trust
covering the Premises (provided Tenant has been given the address of such party)
specifying wherein Landlord has failed to perform such obligations; provided,
however, that if the nature of Landlord's obligations is such that more than
thirty (30) days are required for performance, then Landlord shall not be in
default if Landlord commences performance within such thirty (30) day period and
thereafter diligently prosecutes the same to completion.
If Landlord is in default of this lease, Tenant's sole remedy shall be
to institute suit against Landlord in a court of competent jurisdiction, and
Tenant shall have no right to offset any sums expended by Tenant as a result of
Landlord's default against future rent and other sums due and payable pursuant
to this lease. If Landlord is in default of this lease, and as a consequence
Tenant recovers a money judgment against Landlord, the judgment shall be
satisfied only out of the proceeds of sale received on execution of the judgment
and levy against the right, title and interest of Landlord in the Project of
which the Premises are a part, and out of rent or other income from such real
property receivable by Landlord or out of the consideration received by Landlord
from the sale or other disposition of all or any part of Landlord's right, title
and interest in the Project of which the Premises are a part. Neither Landlord
nor any of the partners comprising the partnership designated as Landlord shall
be personally liable for any deficiency.
30. [INTENTIONALLY OMITTED].
-----------------------
31.
<PAGE>
31. MEASUREMENT OF PREMISES. Tenant understands and agrees that any
-----------------------
reference to square footage of the Premises is approximate only and includes all
interior partitions and columns, one-half of exterior walls, and one-half of the
partitions separating the Premises from the rest of the Project, and any outside
entry overhang, if applicable. Tenant waives any claim against Landlord
regarding the accuracy of any such measurement and agrees that there shall not
be any adjustment in basic rent or direct expenses or other amounts payable
hereunder by reason of inaccuracies in such measurement.
32. ATTORNEY FEES. If either party commences an action against the other
-------------
party arising out of or in connection with this lease, the prevailing party
shall be entitled to have and recover from the losing party all expenses of
litigation, including, without limitation, travel expenses, reasonable attorney
fees, reasonable expert witness fees, trial and appellate court costs, and
deposition and transcript expenses. If either party becomes a party to any
litigation concerning this lease or concerning the Premises or the Project, by
reason of any act or omission of the other party or its authorized
representatives, the party that causes the other party to become involved in the
litigation shall be liable to the other party for all expenses of litigation,
including, without limitation, travel expenses, reasonable attorney fees,
reasonable expert witness fees, trial and appellate court costs, and deposition
and transcript expenses.
33. SURRENDER. The voluntary or other surrender of this lease or the
---------
Premises by Tenant, or a mutual cancellation of this lease, shall not work a
merger, and at the option of Landlord shall either terminate all or any existing
subleases or subtenancies or operate as an assignment to Landlord of all or any
such subleases or subtenancies.
34. WAIVER. No delay or omission in the exercise of any right or remedy
------
of Landlord on any default by Tenant shall impair such right or remedy or be
construed as a waiver. The receipt and acceptance by Landlord of delinquent
rent or other payments shall not constitute a waiver of any other default and
acceptance of partial payments shall not be construed as a waiver of the balance
of such payment due. No act or conduct of Landlord, including, without
limitation, the acceptance of keys to the Premises, shall constitute an
acceptance of the surrender of the Premises by Tenant before the expiration of
the term. Only a written notice from Landlord to Tenant shall constitute
acceptance of the surrender of the Premises and accomplish a termination of this
lease. Landlord's consent to or approval of any act by Tenant requiring
Landlord's consent or approval shall not be deemed to waive or render
unnecessary Landlord's consent to or approval of any subsequent act by Tenant.
Any waiver by Landlord of any default must be in writing and shall not be a
waiver of any other default concerning the same or any other provision of this
lease.
35. EASEMENTS; AIRSPACE RIGHTS. Landlord reserves the right to alter the
--------------------------
boundaries of the Project and grant easements and dedicate for public use
portions of the Project without Tenant's consent, provided that no such grant or
dedication shall interfere with Tenant's use of the Premises or otherwise cause
Tenant to incur
32.
<PAGE>
cost or expense. From time to time, and upon Landlord's demand,
Tenant shall execute, acknowledge and deliver to Landlord, and in accordance
with Landlord's instructions, any and all documents, instruments, maps or plats
necessary to effectuate Tenant's covenants hereunder.
This lease confers no rights either with regard to the subsurface of
the land on which the Premises are located or with regard to airspace above the
ceiling of the Premises. Tenant agrees that no diminution or shutting off of
light or view by a structure which is or may be erected (whether or not by
Landlord) on property adjacent to the building of which the Premises are a part
or to property adjacent thereto, shall in any way affect this lease, or entitle
Tenant to any reduction of rent, or result in any liability of Landlord to
Tenant.
36. RULES AND REGULATIONS. Landlord shall have the right from time to
---------------------
time to promulgate rules and regulations for the safety, care and cleanliness of
the Premises, the Project and the Common Area, or for the preservation of good
order. On delivery of a copy of such rules and regulations to Tenant, Tenant
shall comply with the rules and regulations, and a violation of any of them
shall constitute a default by Tenant under this lease. If there is a conflict
between the rules and regulations and any of the provisions of this lease, the
provisions of this lease shall prevail. Such rules and regulations may be
amended by Landlord from time to time with or without advance notice.
37. NOTICES. Except for legal process and Notice of Belief of Abandonment
-------
(pursuant to California Civil Code Section 1951.3) which may be served either as
provided by law or as provided herein, all notices, demands, requests, consents,
approvals and other communications ("Notices") which may be given or are
required to be given by either party to the other shall be in writing and shall
be deemed given to and received by the party intended to receive such Notice and
deemed sufficiently given for all purposes as follows:
(a) when personally delivered to the recipient, notice is effective on
delivery;
(b) when mailed first class to the last address of the recipient known
to the party giving notice, notice is effective on delivery;
(c) when mailed by certified mail with return receipt requested,
notice is effective on receipt if delivery is confirmed by a return receipt; or
(d) when delivered by reputable overnight courier (e.g. Federal
Express, Airborne) or other comparable service with charges prepaid or charged
to the sender's account, notice is effective on delivery if delivery is
confirmed by the courier service.
Any correctly addressed Notice that is refused, unclaimed, or
undeliverable because of an act or omission of the party to be notified shall be
deemed effective as of the first date that the Notice was refused, unclaimed, or
33.
<PAGE>
considered undeliverable by the postal authorities, messenger, or overnight
delivery service.
Prior to the commencement date, all such Notices from Landlord to
Tenant shall be served or addressed to Tenant at 2005 Hamilton Avenue, Suite
235, San Jose, California. On or after the commencement date all such Notices
from Landlord to Tenant shall be addressed to Tenant at the Premises.
All such Notices by Tenant to Landlord shall be sent to Landlord at
its offices at 3945 Freedom Circle, Suite 640, Santa Clara, California 95054.
Either party may change its address by giving the other party notice
of such change in any manner permitted by this paragraph 37.
38. NAME. Tenant shall not use the name of the Project for any purpose
----
other than as the address of the business conducted by Tenant in the Premises
without the prior written consent of Landlord.
39. GOVERNING LAW; SEVERABILITY. This lease shall in all respects be
---------------------------
governed by and construed in accordance with the laws of the State of
California. If any provision of this lease shall be held or rendered invalid,
unenforceable or ineffective for any reason whatsoever, all other provisions
hereof shall be and remain in full force and effect.
40. DEFINITIONS. As used in this lease, the following words and phrases
-----------
shall have the following meanings:
Authorized representative: any officer, agent, employee or
-------------------------
independent contractor retained or employed by either party, acting within
authority given him by that party.
Encumbrance: any deed of trust, mortgage or other written security
-----------
device or agreement affecting the Premises or the Project that constitutes
security for the payment of a debt or performance of an obligation, and the note
or obligation secured by such deed of trust, mortgage or other written security
device or agreement.
Lease month: the period of time determined by reference to the day of
-----------
the month in which the term commences and continuing to one day short of the
same numbered day in the next succeeding month; e.g., the tenth day of one month
to and including the ninth day in the next succeeding month.
Lender: the beneficiary, mortgagee or other holder of an encumbrance,
------
as defined above.
Lien: a charge imposed on the Premises by someone other than
----
Landlord, by which the Premises are made security for the performance of an act.
Most of the liens referred to in this lease are mechanic's liens.
34.
<PAGE>
Maintenance: repairs, replacement, repainting and cleaning.
-----------
Monthly rent: the sum of the monthly payments of basic rent and
------------
direct expenses.
Person: one or more human beings, or legal entities or other
------
artificial persons, including, without limitation, partnerships, corporations,
trusts, estates, associations and any combination of human being and legal
entities.
Provision: any term, agreement, covenant, condition, clause,
---------
qualification, restriction, reservation or other stipulation in the lease that
defines or otherwise controls, establishes or limits the performance required or
permitted by either party.
Rent: basic rent, direct expenses, additional rent and all other
----
amounts payable by Tenant to Landlord required by this lease or arising by
subsequent actions of the parties made pursuant to this lease.
Words used in any gender include other genders. If more than one
individual or entity comprises Tenant, the obligations imposed on each
individual or entity that comprises Tenant under this Lease are and shall be
joint and several. All provisions whether covenants or conditions, on the part
of Tenant shall be deemed to be both covenants and conditions. The paragraph
headings are for convenience of reference only and shall have no effect upon the
construction or interpretation of any provision hereof.
41. TIME. Time is of the essence of this lease and of each and all of
----
its provisions.
42. INTEREST ON PAST DUE OBLIGATIONS; LATE CHARGE. Any amount due from
---------------------------------------------
Tenant to Landlord hereunder which is not paid when due shall bear interest at
the rate of ten percent (10%) per annum from when due until paid, unless
otherwise specifically provided herein, but the payment of such interest shall
not excuse or cure any default by Tenant under this lease. In addition, Tenant
acknowledges that late payment by Tenant to Landlord of basic rent, or of
Tenant's monthly direct expenses, or of any other amount due Landlord from
Tenant, will cause Landlord to incur costs not contemplated by this lease, the
exact amount of such costs being extremely difficult and impractical to fix.
Such costs include, without limitation, processing and accounting charges, and
late charges that may be imposed on Landlord, e.g., by the terms of any
encumbrance and note secured by any encumbrance covering the Premises.
Therefore, if any such payment due from Tenant is not received in full by
Landlord when due, which payments are subject to application by Landlord as
provided in paragraph 4 of this lease; provided, however, such late charge shall
be waived by Landlord with respect to the first late payment of each calendar
year if Tenant makes full payment thereof within three (3) days following
Landlord's delivery of notice of non-receipt. Tenant shall pay to Landlord an
additional sum of five percent (5%) of the entire payment as a late charge. The
parties agree that this late charge represents a fair and reasonable estimate of
the costs that
35.
<PAGE>
Landlord will incur by reason of late payment by Tenant. Acceptance of any
late charge shall not constitute a waiver of Tenant's default with respect to
the overdue amount, nor prevent Landlord from exercising any of the other
rights and remedies available to Landlord. No notice to Tenant of failure to
pay shall be required prior to the imposition of such interest and/or late
charge, and any notice period provided for in paragraph 19 shall not affect
the imposition of such interest and/or late charge. Any interest and late
charge imposed pursuant to this paragraph shall be and constitute additional
rent payable by Tenant to Landlord.
43. ENTIRE AGREEMENT. This lease, including any exhibits and
----------------
attachments, constitutes the entire agreement between Landlord and Tenant
relative to the Premises and this lease and the exhibits and attachments may be
altered, amended or revoked only by an instrument in writing signed by both
Landlord and Tenant. Landlord and Tenant agree hereby that all prior or
contemporaneous oral agreements between and among themselves or their agents or
representatives relative to the leasing of the Premises are merged in or revoked
by this lease.
44. AUTHORITY. Each individual executing this lease on behalf of Tenant
---------
represents and warrants that (i) he/she is duly authorized to execute and
deliver this lease on behalf of Tenant and: (a) if Tenant is a corporation, such
authorization is in accordance with a duly adopted resolution of the Board of
Directors of said corporation, (b) if Tenant is a partnership, such
authorization is in accordance with the partnership agreement now in effect, and
(c) if Tenant is a limited liability company, such authorization is in
accordance with the company's governing documents; and (ii) this lease is
binding upon Tenant in accordance with its terms. Upon Landlord's request,
Tenant shall deliver to Landlord within ten (10) days after such request
evidence of the authorization specified above as Landlord may reasonably
request, including, without limitation, in the case where Tenant is a
corporation, a copy of the resolution of the Board of Directors of Tenant
authorizing the execution of this lease and naming the officers that are
authorized to execute this lease on behalf of Tenant, which copy shall be
certified by Tenant's secretary as correct and in full force and effect.
45. RECORDING. Neither Landlord nor Tenant shall record this lease or a
---------
short form memorandum hereof without the consent of the other.
46. REAL ESTATE BROKERS. Each party represents and warrants to the other
-------------------
party that it has not had dealings in any manner with any real estate broker,
finder or other person with respect to the Premises and the negotiation and
execution of this lease except Cornish & Carey and Studley Company (representing
Tenant) and McCandless Management Corporation (representing Landlord),
(collectively the "Brokers"). Except for the commissions and fees to be paid to
the Brokers as provided in this paragraph, each party shall indemnify and hold
harmless the other party from all damage, loss, liability and expense (including
attorneys' fees and related costs) arising out of or resulting from any claims
for commissions or fees that have been or may be asserted against the other
party by any broker, finder or other person with whom Tenant or Landlord,
respectively, has dealt, or purportedly has dealt, in connection with the
Premises and the negotiation and execution of this
36.
<PAGE>
lease. Landlord shall pay broker leasing commissions to the Brokers in
connection with the Premises and the negotiation and execution of this lease,
to the extent agreed to between Landlord and the Brokers. Landlord and Tenant
agree that Landlord shall not be obligated to pay any broker leasing
commissions, consulting fees, finder fees or any other fees or commissions
arising out of or relating to any extended term of this lease or to any
expansion or relocation of the Premises at any time.
47. EXHIBITS AND ATTACHMENTS. All exhibits and attachments to this lease
------------------------
are a part hereof and the terms and provisions thereof are incorporated into
this lease by this reference as though set forth herein in full.
48. ENVIRONMENTAL MATTERS.
---------------------
A. Tenant's Covenants Regarding Hazardous Materials.
------------------------------------------------
(1) Hazardous Materials Handling. Tenant, its agents, invitees,
----------------------------
employees, contractors, sublessees, assigns and/or successors shall not use,
store, dispose, release or otherwise cause to be present or permit the use,
storage, disposal, release or presence of Hazardous Materials (as defined below)
on or about the Premises or Project; except (i) as used in the operation of
Tenant's business as currently operated and specified on Exhibit E attached
hereto and in accordance with all Hazardous Materials Laws (as defined in
paragraph 48.A.(2) below) and (ii) as otherwise approved in advance by Landlord
in Landlord's discretion. As used herein "Hazardous Materials" shall mean any
petroleum or petroleum by-products, flammable explosives, asbestos, urea
formaldehyde, radioactive materials or waste and any "hazardous substance",
"hazardous waste", "hazardous materials", "toxic substance" or "toxic waste" as
those terms are defined under the provisions of the California Health and Safety
Code and/or the provisions of the Comprehensive Environmental Response,
Compensation and Liability Act (42 U.S.C. Section 9601 et seq.), as amended by
the Superfund Amendments and Reauthorization Act of 1986 (42 U.S.C. Section 9601
et seq.), or any other hazardous or toxic substance, material or waste which is
or becomes regulated by any local governmental authority, the State of
California or any agency thereof, or the United States Government or any agency
thereof.
(2) Notices. Tenant shall immediately notify Landlord in writing
-------
of: (i) any enforcement, cleanup, removal or other governmental or regulatory
action instituted, completed or threatened pursuant to any law, regulation or
ordinance relating to the industrial hygiene, environmental protection or the
use, analysis, generation, manufacture, storage, presence, disposal or
transportation of any Hazardous Materials (collectively "Hazardous Materials
Laws"); (ii) any claim made or threatened by any person against Tenant, the
Premises, Project or buildings within the Project relating to damage,
contribution, cost recovery, compensation, loss or injury resulting from or
claimed to result from any Hazardous Materials; and (iii) any reports made to
any environmental agency arising out of or in connection with any Hazardous
Materials in, on or removed from the Premises, Project or buildings within the
Project, including any complaints, notices, warnings, reports
37.
<PAGE>
or asserted violations in connection therewith. Tenant shall also supply to
Landlord as promptly as possible, and in any event within five (5) business
days after Tenant first receives or sends the same, with copies of all claims,
reports, complaints, notices, warnings or asserted violations relating in any
way to the Premises, Project or buildings within the Project or Tenant's use
thereof. Tenant shall promptly deliver to Landlord copies of hazardous waste
manifests reflecting the legal and proper disposal of all Hazardous Materials
removed from the Premises.
B. Indemnification of Landlord. Tenant shall indemnify, defend (by
---------------------------
counsel acceptable to Landlord), protect, and hold Landlord, and each of
Landlord's partners, employees, agents, attorneys, successors and assigns, free
and harmless from and against any and all claims, liabilities, penalties,
forfeitures, losses or expenses (including attorneys' fees) for death of or
injury to any person or damage to any property whatsoever (including water
tables and atmosphere), arising from or caused in whole or in part, directly or
indirectly, by (i) the presence in, on, under or about the Premises, Project or
buildings within the Project where the presence or discharge of Hazardous
Materials was caused by Tenant, (ii) Tenant's use, analysis, storage,
transportation, disposal, release, threatened release, discharge or generation
of Hazardous Materials to, in, on, under, about or from the Premises, Project or
buildings within the Project, or (iii) Tenant's failure to comply with any
Hazardous Materials Laws applicable to Tenant's use, analysis, storage,
transportation, disposal, release, threatened release, discharge or generation
of Hazardous Materials to, in, on or under the Premises or Project whether
knowingly, unknowingly, intentionally or unintentionally. Tenant's obligations
hereunder shall include, without limitation, and whether foreseeable or
unforeseeable, all costs of any required or necessary repair, cleanup or
detoxification or decontamination of the Premises, Project or buildings within
the Project, and the preparation and implementation of any closure, remedial
action or other required plans in connection therewith. In addition, Tenant
shall reimburse Landlord for (i) losses in or reductions to rental income
resulting from Tenant's use, storage or disposal of Hazardous Materials, (ii)
all reasonable costs of refitting or other alterations to the Premises, Project
or buildings within the Project required as a result of Tenant's use, storage,
or disposal of Hazardous Materials including, without limitation, alterations
reasonably required to accommodate an alternate use of the Premises, Project or
buildings within the Project, and (iii) any diminution in the fair market value
of the Premises, Project or buildings within the Project caused by Tenant's use,
storage, or disposal of Hazardous Materials. For purposes of this paragraph 48,
any acts or omissions of Tenant, or by employees, agents, assignees, contractors
or subcontractors of Tenant or others acting for or on behalf of Tenant (whether
or not they are negligent, intentional, willful or unlawful) shall be strictly
attributable to Tenant.
C. Indemnification of Tenant. Landlord shall indemnify, defend,
-------------------------
protect, and hold Tenant free and harmless from and against any and all claims,
liabilities, penalties, forfeitures, losses or expenses (including attorneys'
fees) for death of or injury to any person or damage to any property whatsoever
(including water tables and atmosphere), arising from or caused by the presence
in, on, under or about the Premises, Project or buildings within the Project
where the presence
38.
<PAGE>
or discharge of Hazardous Materials was directly caused by Landlord and
Landlord's employees, agents and contractors; provided, however, Landlord's
indemnity obligations hereunder shall not extend to matters arising out of or
caused by the acts or omission of any third party, including tenants in the
Project and their employees, agents and contractors.
D. Survival. The provisions of this paragraph 48 shall survive the
--------
expiration or earlier termination of the term of this lease.
49. SIGNAGE. Tenant shall not, without obtaining the prior written
-------
consent of Landlord, install or attach any sign or advertising material on any
part of the outside of the Premises, or on any part of the inside of the
Premises which is visible from the outside of the Premises, or in the halls,
lobbies, windows or elevators of the building in which the Premises are located
or on or about any other portion of the Common Area or Project. If Landlord
consents to the installation of any sign or other advertising material, the
location, size, design, color and other physical aspects thereof shall be
subject to Landlord's prior written approval and shall be in accordance with any
sign program applicable to the Project. Tenant shall be permitted one (1) wall
sign for each of Building 2125 and Building 2145, monument signage and
directional signage in the locations and as specified on Exhibit C attached
hereto. In addition to any other requirements of this paragraph 49, the
installation of any sign or other advertising material by or for Tenant must
comply with all applicable laws, statutes, requirements, rules, ordinances and
any C.C. & R.'s or other similar requirements. With respect to any permitted
sign installed by or for Tenant, Tenant shall maintain such sign or other
advertising material in good condition and repair and shall remove such sign or
other advertising material on the expiration or earlier termination of the term
of this lease. The cost of any permitted sign or advertising material and all
costs associated with the installation, maintenance and removal thereof shall be
paid for solely by Tenant. If Tenant fails to properly maintain or remove any
permitted sign or other advertising material, Landlord may do so at Tenant's
expense. Any cost incurred by Landlord in connection with such maintenance or
removal shall be deemed additional rent and shall be paid by Tenant to Landlord
within ten (10) days following notice from Landlord. Landlord may remove any
unpermitted sign or advertising material without notice to Tenant and the cost
of such removal shall be additional rent and shall be paid by Tenant within ten
(10) days following notice from Landlord. Landlord shall not be liable to
Tenant for any damage, loss or expense resulting from Landlord's removal of any
sign or advertising material in accordance with this paragraph 49. The
provisions of this paragraph 49 shall survive the expiration or earlier
termination of this lease.
50. SUBMISSION OF LEASE. The submission of this lease to Tenant for
-------------------
examination or signature by Tenant is not an offer to lease the Premises to
Tenant, nor an agreement by Landlord to reserve the Premises for Tenant.
Landlord will not be bound to Tenant until this lease has been duly executed and
delivered by both Landlord and Tenant.
39.
<PAGE>
51. PREMISES TAKEN "AS IS". Except as explicitly provided in this lease,
----------------------
Tenant is leasing the Premises from Landlord "as is" in their condition existing
as of the date hereof. Landlord shall have no obligation to alter or improve
the Premises, except that Landlord shall approve the installation of 2 4"
conduits between the two buildings (subject to approval of the method of
entering the building(s) and boring under the sidewalks); Landlord will approve
the installation of an emergency back-up generator on a pad approximately 8 feet
x 8 feet, subject to Landlord's approval of the specific location, appearance
and screening. Tenant agrees to build a wood enclosure/trellis around the pad
to match the existing enclosures in the Park, all subject to the City's
approval. Any uninterruptable power source system required by Tenant shall be
located inside the building. In addition, Landlord shall perform all repairs
necessary to ensure the building systems including, but not limited to HVAC,
electrical, plumbing, parking lot and roof membrane are in good operating
condition and repair, prior to occupancy.
52. ADDITIONAL RENT. All costs, charges, fees, penalties, interest and
---------------
any other payments (including Tenant's reimbursement to Landlord of costs
incurred by Landlord) which Tenant is required to make to Landlord pursuant to
the terms and conditions of this lease and any amendments to this lease shall be
and constitute additional rent payable by Tenant to Landlord when due as
specified in this lease and any amendments to this lease.
53. [INTENTIONALLY OMITTED].
-----------------------
54. EARLY ACCESS. Landlord shall provide Tenant with access to (i)
------------
Building 2125 prior to the commencement of the term upon execution and delivery
of this lease and (ii) to Building 2145 (when such space is vacated by the
existing tenant and Landlord has possession) prior to the Building 2145
Expansion Date, but only for purposes of installing Tenant's telephone and
telecommunication systems and data cabling and construction of the Tenant
Improvements and furniture and fixtures in accordance with paragraph 59 below.
Tenant's access to Building 2125 and Building 2145, respectively, pursuant to
this paragraph shall be subject to all the terms and conditions of this lease,
including, without limitation, the insurance obligations specified in paragraph
11. As a condition precedent to Tenant's right to such access, Tenant shall
provide Landlord with proof that Tenant has satisfied said insurance
requirements.
55. CAPITAL EXPENDITURES. Notwithstanding anything to the contrary in
--------------------
this lease, (i) as to any required capital expenditure to the Premises having a
useful life of more than one year, which exceeds $50,000 and which is not
required by reason of Tenant's specific use, occupancy or alteration of the
Premises, Landlord shall make such capital expenditure and Tenant shall pay to
Landlord, as additional rent and in equal monthly installments over the
remaining term of this lease, the fraction of the cost of such capital
expenditure equal to the remaining term of this lease over the useful life of
such capital expenditure; (ii) as to any required capital expenditure to the
common area having a useful life of more than one year, which exceeds $50,000
and which is not required by Tenant's specific use, occupancy or alteration of
the Premises, the cost thereof shall be included within direct
<PAGE>
expenses and amortized over no less than three (3) years and Tenant shall pay
its proportionate share thereof; and (iii) as to any required capital
expenditure to the common area having a useful life of more than one year,
which exceeds $500,000 and which is not required by Tenant's specific use,
occupancy or alteration of the Premises, the cost thereof shall be included
within direct expenses and amortized ratably over the useful life of such
capital expenditure and Tenant shall pay its proportionate share thereof.
56. SATELLITE DISH. Landlord acknowledges that Tenant may desire in the
--------------
future to place a satellite dish on the roof of Building 2125 and Landlord is
willing to permit Tenant to install same on the following terms and conditions:
(a) Tenant shall be responsible for and shall pay all costs related to
the installation, maintenance, repair, removal and restoration applicable to
such installation or related thereto.
(b) The installation shall be deemed an alteration to the Premises,
subject to all the terms, provisions and conditions specified in paragraph 8 of
this lease, including, without limitation, Landlord's approval of the contractor
and method of installation;
(c) Installation rights hereunder shall be limited to one (1)
satellite dish, not to exceed three (3) feet in diameter and shall be located
where specified by Landlord and shall be positioned so that it will not be
visible above the parapet walls;
(d) Use of the satellite dish shall be for Tenant's exclusive use;
(e) Tenant shall have access to the roof for the limited purposes
specified in this paragraph 56 and as required to fulfill its obligations to
maintain the HVAC systems and for no other purposes;
(f) Rights under this paragraph are Tenant's exclusive rights and are
not assignable to any third party, including any assignee or subtenant, except
to a Tenant Affiliate as defined in Paragraph 18 of this lease; and
(g) Tenant shall pay to Landlord the sum of Five Hundred Dollars
($500.00) per month as additional rent for the rights granted under this
paragraph 56.
57. FIRST RIGHT TO LEASE. Landlord hereby grants to Tenant the first
--------------------
right to lease that certain space in the buildings located at 1550 S. Bascom
Avenue and 2105 Hamilton Avenue, San Jose, California (the "FRL Space"), subject
to the following terms and conditions:
(a) Upon the FRL Space or any portion thereof consisting of not less
than 8,000 square feet of contiguous space (the "Offered Space") becoming
available for leasing at any time during the first four (4) years of the initial
lease term,
41.
<PAGE>
prior to leasing the Offered Space to any third party Landlord shall notify
Tenant in writing of the availability for lease of the Offered Space and such
notice shall set forth the terms and conditions, including, but not limited
to, basic rent [which shall be at the then "market rate" as defined in
paragraph 58(c) of this lease as determined by Landlord (with no right to
arbitrate) for such space for the term specified in the Offer (which term
shall expire not sooner than twelve (12) months and not later than eighteen
(18) months after the Lease Expiration Date specified in paragraph 2 of this
lease], under which Landlord will lease the Offered Space to Tenant ("Offer").
(b) Tenant shall have fifteen (15) days from the date of the Offer to
deliver to Landlord its written unconditional and irrevocable acceptance of the
Offer. If Tenant accepts the Offer, an amendment to this lease or a new lease
covering the Offered Space and incorporating said terms and conditions shall
promptly be executed. If a new lease is executed with Tenant covering the
Offered Space such new lease shall provide that any default under this lease
will also constitute a default under such new lease and Tenant agrees that any
default by it under such new lease will also constitute a default under this
lease. In the event Tenant rejects the Offer, or does not answer within the
specified time, or fails for any reason (unless such failure is due to the
default or delay of Landlord) to execute such amendment or new lease within
fifteen (15) business days of Tenant's acceptance of the Offer, Landlord shall
thereafter be free to negotiate with any number of third parties and to lease
(without further obligation to Tenant) the Offered Space upon any terms and
conditions (whether more or less favorable) that Landlord and such third party
may agree (provided that the rent under the third-party lease shall not be less
than ninety percent (90%) of the rent specified in the Offer). If during the
initial lease term the Offered Space again becomes available for lease to
prospective tenants other than the existing tenant (or its successors,
affiliates or assigns), then this first right to lease shall again apply.
(c) This first right to lease shall be subordinate to any existing
rights of refusal, rights of expansion, options to extend or renew, and other
rights contained in leases (or amendments to leases) executed prior to the date
of this lease. In addition, this first right to lease shall not apply and
Tenant shall have no rights hereunder in the event any tenant (or its successors
or assigns) that now or hereafter occupies all or any portion of the FRL Space
desires to extend, renew or otherwise modify its lease (but not expand its
premises except as specified in the first sentence of this paragraph 56(c)
above) and Landlord shall be free to extend, renew or modify such lease without
notice to Tenant.
(d) This first right to lease shall be void and of no force and effect
and shall confer no rights on Tenant during any period in which Tenant is in
default under this lease.
(e) Notwithstanding anything in this paragraph to the contrary,
Tenant's exercise of this first right to lease shall be subject to Landlord's
review and approval of Tenant's financial condition (including, without
limitation, Tenant's net worth, current ratio and working capital reserves) at
the time Tenant
42.
<PAGE>
exercises this first right to lease and notwithstanding Tenant's rights
hereunder Landlord shall have no obligation to lease the Offered Space to
Tenant unless Tenant's financial condition at the time of acceptance of the
Offer is acceptable to Landlord, in Landlord's reasonable business discretion.
(f) All rights granted to Tenant pursuant to this paragraph are
personal to Tenant and may not be transferred or assigned.
58. OPTION TO EXTEND TERM. Landlord grants to Tenant the option to extend
---------------------
the term for one period of five (5) years (the "Extended Term") following the
expiration of the initial term set forth in paragraph 2 ("Initial Term") under
all the provisions of this lease except for the amount of the basic rent. The
basic rent for the Extended Term shall be adjusted to the market rate (as
defined in paragraph (c) below); provided that in no event shall the basic rent
for the Extended Term be less than the basic rent in effect at the expiration of
the Initial Term. This option is further subject to the following terms and
conditions:
(a) Tenant must deliver its irrevocable written notice of Tenant's
exercise of this option to Landlord not less than six (6) lease months, nor more
than twelve (12) lease months, prior to the expiration of the Initial Term.
Time is of the essence with respect to the time period during which Tenant must
deliver to Landlord its written notice of exercise and, therefore, if Tenant
fails to give Landlord its irrevocable written notice of its exercise of this
option within the time period provided above then this option shall expire and
be of no further force or effect.
(b) The parties shall have thirty (30) days from the date Landlord
receives Tenant's notice of exercise in which to agree on the amount
constituting the market rate. If Landlord and Tenant agree on the amount of the
market rate, they shall immediately execute an amendment to this lease setting
forth the expiration date of the Extended Term and the amount of the basic rent
to be paid by Tenant during the Extended Term. If Landlord and Tenant are
unable to agree on the amount of the market rate within such time period, then,
at the request of either party, the market rate shall be determined in the
following manner: (i) within ten (10) days of the request of either party,
Landlord and Tenant shall each select a licensed real estate broker with not
less than five (5) years experience in the business of commercial leasing of
property of the same type and use and in the same geographic area, as the
Premises; (ii) within fifteen (15) days of their appointment, such two real
estate brokers shall select a third broker who is similarly qualified; (iii)
within thirty (30) days from the appointment of the third broker, the three
brokers so selected shall, acting as a board of arbitrators, then determine the
amount of the market rate, basing their determination on standard procedures and
tests normally employed in determining market rates and applying the factors
included within the definition of market rate set forth in subparagraph (c)
below. The decision of the majority of said brokers shall be final and binding
upon the parties hereto. If a majority of the brokers are unable to agree on
the market rate within the stipulated period of time, the three opinions of the
market rate shall be added together and their total divided by three; the
resulting quotient
43.
<PAGE>
shall be the market rate. If, however, the low opinion and/or the high opinion
are/is more than 15% lower and/or higher than the middle opinion, the low
opinion and/or the high opinion, as the case may be, shall be disregarded. If
only one opinion is disregarded, the remaining two opinions shall be added
together and their total divided by two and the resulting quotient shall be
the market rate. If both the low opinion and the high opinion are disregarded
as stated in this paragraph, the middle opinion shall be the market rate. If a
party does not appoint a qualified broker within the required time period, the
broker appointed by the other party shall be the sole broker and shall
determine the market rate. If the two brokers appointed by the parties are
unable to agree on the third broker, either of the parties to the lease, by
giving ten (10) days' notice to the other party, can apply to the then
president of the county real estate board of the county in which the Premises
are located, or to the presiding judge of the superior court of that county,
for the selection of a third broker who meets the qualifications stated in
this paragraph. Each party shall pay the expenses and charges of the brokers
appointed by it and the parties shall pay the expenses and charges of the
third broker in equal shares. When the market rate has been so determined,
Landlord and Tenant shall immediately execute an amendment to this lease
stating the basic rent for the Extended Term.
(c) As used herein, the "market rate" shall be the monthly rent then
obtained for five (5) year leases of comparable terms for premises in the
Project and in buildings and/or projects within the same geographical area of
similar type, identity, quality and location as the Project and shall take into
account rental concessions and rental CPI or other increases and tenant
improvement/remodel allowances being offered in the market at that time for
lease renewals.
(d) Direct expenses shall continue to be determined and payable as
provided in paragraphs 4 and 5 of this lease.
(e) Tenant shall not assign or otherwise transfer this option or any
interest therein and any attempt to do so shall render this option null and
void. Tenant shall have no right to extend the term beyond the Extended Term.
If Tenant is in default under this lease at the date of delivery of Tenant's
notice of exercise to Landlord, then such notice shall be of no effect and this
lease shall expire at the end of the Initial Term; if Tenant is in default under
this lease on the last day of the Initial Term, then Landlord may in its sole
discretion elect to have Tenant's exercise of this option be of no effect, in
which case this lease shall expire at the end of the Initial Term.
(f) All rights granted to Tenant pursuant to this paragraph are
personal to Tenant and may not be transferred or assigned.
59. TENANT IMPROVEMENTS. Improvements to the Premises shall be constructed
-------------------
and installed in accordance with the plans and specifications, and other terms
and conditions set forth in Exhibit D to this lease, the contents of which are
incorporated herein and made a part hereof by this reference. The improvements
shall be constructed and installed at the expense of Landlord and/or Tenant as
set
44.
<PAGE>
forth in Exhibit D to this lease and in each case shall be performed in a
diligent and workmanlike manner.
Landlord represents that all upgrades required to be made to the
Common Areas by governmental authority as of the date of execution of this lease
in order to comply with the Americans With Disabilities Act have been completed.
Any ADA mandated upgrades associated with the construction of the initial Tenant
Improvements in the Premises which are required by the City of San Jose to
obtain a building permit for the construction of the initial Tenant Improvements
in the Premises shall be included with the tenant improvement construction and
the cost of such upgrades to the extent they exceed the cost of tenant
improvements that would otherwise be constructed by Tenant shall be paid for by
Landlord. In order to determine the specific amount which is allocable to such
upgrades and to be paid by Landlord (the "Landlord ADA Cost"), which shall be
added to the Allowance specified above in this paragraph 59. Landlord's
representatives shall meet with Tenant's Architect and Contractor to agree on
the scope of work, breakout of the subcontractor's bids, calculation and
allocation of costs and related matters. Landlord will not be required to pay
for cosmetic upgrades, new fixtures, or general remodel expenses beyond the
existing quality or finish level. Landlord will eliminate the electric water
coolers (which do not meet ADA, but are not required by code) and patch the
walls ready for tenant paint or other finish.
60. CONSENTS. Notwithstanding anything to the contrary contained in this
--------
lease, in the event Landlord shall have failed to respond to Tenant's request
for consent or approval within ten (10) days (or such shorter time expressly
stated in this lease) of such request, Landlord shall be deemed to have denied
the requested consent or approval.
61. CROSS DEFAULT. In the event that Tenant leases any other space in the
-------------
Project from Landlord, it is hereby agreed that, at Landlord's option, any
default by Tenant under this lease shall constitute a default by Tenant under
such other leases and any default by Tenant under such other leases shall
constitute a default by Tenant under this lease.
IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this
lease on the date first above written.
45.
<PAGE>
Landlord: Tenant:
- -------- ------
GREYLANDS BUSINESS PARK, PHASE 2, EBAY, INC.,
a California general partnership a California corporation
By: McCandless Group (GR-2),
a California general
partnership, a General By: Margaret C. Whitman
Partner __________________________
Name: /s/ Margaret C. Whitman
________________________
Title: President
By: /s/ Birk S. McCandless
____________________________ -----------------------
Birk S. McCandless, as
Trustee under the Birk S. Date: January 29, 1999
McCandless and Mary ________________________
McCandless Inter Vivos Trust
Agreement dated February 17, By: Michael R. Jacobson
1982, a General Partner __________________________
Name: /s/ Michael R. Jacobson
________________________
By: Connecticut General Life Title: Secretary
Insurance Company, a -----------------------
Connecticut Corporation,
a General Partner Date: January 29, 1999
________________________
By: CIGNA Investments, Inc.,
a Delaware corporation
By: /s/ John G. Eisele
_____________________
Name: John G. Eisele
___________________
Title: Managing Director
__________________
Date: February 3, 1999
___________________
46.
<PAGE>
EXHIBIT A
---------
PREMISES
--------
Exhibit A
---------
pg.1 -First floor plans for Greylands Business Park
2125 Hamilton Avenue, San Jose
pg.2 -Second floor plans for Greylands Business Park
2125 Hamilton Avenue, San Jose
pg.3 -First floor plans for Greylands Business Park
2145 Hamilton Avenue, San Jose
pg.4 -Second floor plans for Greylands Business Park
2145 Hamilton Avenue, San Jose
47.
<PAGE>
EXHIBIT B
---------
PROJECT
-------
Exhibit B
---------
Drawing showing overhead view of entire Greylands Business Park, Phase
2.
48.
<PAGE>
EXHIBIT C
---------
SIGNAGE
-------
Exhibit C
---------
pg.1 Drawing showing use of (E) monument sign for eBay logo + lobby direction
pg.2 Drawing showing location of new larger eBay signage - street side
pg.3 Drawing showing use of (E) monument sign to identify building (also
departments or lobby direction).
pg.4 Drawing showing building + monument sign.
49.
<PAGE>
EXHIBIT D
---------
TENANT WORK LETTER
------------------
THIS WORK LETTER AGREEMENT (hereinafter sometimes referred to as "Tenant
Work Letter", "Exhibit D" or "this Agreement") is attached to and forms a part
of that certain lease ("Lease") by and between GREYLANDS BUSINESS PARK, PHASE 2,
a California general partnership ("Landlord"), and EBAY, INC., a Delaware
corporation ("Tenant"), pursuant to which Landlord leases to Tenant those
certain premises located at 2125 Hamilton Avenue ("Building 2125") and 2145
Hamilton Avenue ("Building 2145"), San Jose, California, which Landlord and
Tenant hereby agree consists of approximately one hundred three thousand fifty-
eight (103,058) square feet with each building consisting of approximately
51,529 square feet. All capitalized terms used herein shall have the meaning
ascribed to them in the Lease unless otherwise defined below. The Premises
shall be improved in accordance with the following terms and conditions:
SECTION 1
[INTENTIONALLY OMITTED]
SECTION 2
TENANT IMPROVEMENTS
2.1 Tenant Improvement Allowance. Tenant shall be entitled to
(i) a one-time tenant improvement allowance of up to One Million Two Hundred
Thirty-Six Thousand Six Hundred Ninety-Six Dollars ($1,236,696) (the "Building
2125 Allowance") to pay for a portion of the cost of tenant improvements which
are permanently affixed to Building 2125 ("Building 2125 Tenant Improvements")
and installed in the Premises by Tenant during the first one hundred eighty
(180) days after Landlord provides access to Building 2125 to Tenant in
accordance with Section 54 of the Lease entitled "Early Access", subject to
force majeure and the terms and conditions specified below, and (ii) a one-time
tenant improvement allowance of up to One Million Two Hundred Thirty-Six
Thousand Six Hundred Ninety-Six Dollars ($1,236,696) (the "Building 2145
Allowance") to pay for a portion of the cost of tenant improvements which are
permanently affixed to Building 2145 ("Building 2145 Tenant Improvements") and
installed in the Premises by Tenant during the first two hundred forty (240)
days after Landlord provides Tenant with early access to Building 2145 as
provided in paragraph 54 of the Lease, subject to force majeure and the terms
and conditions specified below. The Building 2125 Tenant Improvements and the
Building 2145 Tenant Improvements are collectively referred to as the "Tenant
Improvements". The Tenant Improvement Allowances may also be used to pay for
security systems, data cabling, architect and engineering fees, permit fees, but
not furniture or equipment. Each building shall be considered as a separate and
distinct construction project and the terms and conditions specified herein
shall be applied to each as separate construction projects with separate
allowances (as specified above). Tenant shall not be obligated to remove the
initial tenant improvements constructed by Tenant and approved by Landlord and
determined by Landlord to be standard tenant improvements consistent with the
quality and nature of the Project, meeting the minimum Specifications (defined
in Section 2.3 below) and providing an open office environment for no less than
65% of each floor of each building, which determination shall be made by
Landlord at the time Landlord gives its approval of the Final Space Plan
(defined in Section 3.2 below). In no event shall Landlord be obligated to make
disbursements pursuant to this Tenant Work Letter in a total amount which
exceeds the Tenant Improvement Allowance.
1
<PAGE>
2.2 Disbursement of the Tenant Improvement Allowance.
2.2.1 Tenant Improvement Allowance Items. Except as otherwise set
forth in this Tenant Work Letter, the Tenant Improvement Allowance shall be
disbursed by Landlord only for the following items and costs (collectively the
"Tenant Improvement Allowance Items"):
2.2.1.1 Payment of the fees of the "Architect" and the "Engineers,"
as those terms are defined in Section 3.1 of this Tenant Work Letter, which fees
shall, notwithstanding anything to the contrary contained in this Tenant Work
Letter, not exceed an aggregate amount equal to $2.50 per square foot of the
Premises;
2.2.1.2 The payment of plan check, permit, permit expediter and
license fees relating to construction of the Tenant Improvements;
2.2.1.3 The cost of construction of the Tenant Improvements,
including, without limitation, testing and inspection costs, freight elevator
usage, utility usage, parking charges and trash removal costs, and contractors'
fees and general conditions;
2.2.1.4 The cost of any changes to the Construction Drawings or
Tenant Improvements required by Code;
2.2.1.5 All other reasonable costs to be reasonably expended by
Landlord in connection with the construction of the Tenant Improvements.
2.2.2 Disbursement of Tenant Improvement Allowance. During the
construction of the Tenant Improvements, Landlord shall make monthly
disbursements of the Tenant Improvement Allowance for Tenant Improvement
Allowance Items for the benefit of Tenant and shall authorize the release of
monies for the benefit of Tenant as follows.
2.2.2.1 Monthly Disbursements. On or before the fifth day of each
calendar month during the construction of the Tenant Improvements (or such other
date as Landlord and Tenant may agree), Tenant shall deliver to Landlord: (i) a
request for payment
2
<PAGE>
of the "Contractor," as that term is defined in Section 4.1 of this Tenant Work
Letter, approved by Tenant, in a form to be provided by Landlord, showing the
schedule, by trade, of percentage of completion of the Tenant Improvements in
the Premises, detailing the portion of the work completed and the portion not
completed; (ii) invoices from all of "Tenant's Agents," as that term is defined
in Section 4.1.2 of this Tenant Work Letter, for labor rendered and materials
delivered to the Premises; (iii) executed mechanic's lien releases from all of
Tenant's Agents which shall comply with the appropriate provisions, as
reasonably determined by Landlord, of California Civil Code Section 3262(d);
(iv) evidence of payment by Tenant of Tenant's Proportionate Share of the costs
for all prior monthly disbursements and (v) all other information reasonably
requested by Landlord. Tenant's request for payment shall be deemed Tenant's
acceptance and approval of the work furnished and/or the materials supplied as
set forth in Tenant's payment request. Thereafter, Landlord shall deliver a
check to Tenant made jointly payable to Contractor and Tenant in payment of the
lesser of: (A) Landlord's Proportionate Share of that portion of the Final Costs
(defined in section 4.2.1 below) incurred for the work completed to date as set
forth in this Section 2.2.2.1, above, less a ten percent (10%) retention, except
that no retention is required for the costs and fees of the Architect, (the
aggregate amount of such retentions to be known as the "Final Retention"), and
(B) the balance of any remaining available portion of the Tenant Improvement
Allowance (not including the Final Retention), provided that Landlord does not
dispute any request for payment based on non-compliance of any work with the
"Approved Working Drawings," as that term is defined in Section 3.4 below, or
due to any substandard work, or for any other valid reason. "Landlord's
Proportionate Share" means with respect to each Building Allowance, the
percentage which is equal to $1,236,696 divided by the Final Costs (as defined
in Section 4.2.1 below) for Building 2125 and Building 2145 respectively, as
adjusted from time to time to reflect changes in the Final Costs, if any.
"Tenant's Proportionate Share" is equal to the remainder obtained by subtracting
Landlord's Proportionate Share from 100% (e.g., if Landlord's Proportionate
Share is 75%, then Tenant's Proportionate Share is 25%). Landlord's payment of
such amounts shall not be deemed Landlord's approval or acceptance of the work
furnished or materials supplied as set forth in Tenant's payment request.
2.2.2.2 Final Retention. Subject to the provisions of this Tenant
Work Letter, a check for the Final Retention payable jointly to Tenant and
Contractor shall be delivered by Landlord to Tenant following the completion of
construction of the Premises, provided that (i) Tenant delivers to Landlord
properly executed mechanics lien releases in compliance with both California
Civil Code Section 3262(d)(2) and either Section 3262(d)(3) or Section
3262(d)(4), (ii) Landlord has reasonably determined that no substandard work
exists which adversely affects the mechanical, electrical, plumbing, heating,
ventilating and air conditioning, life-safety or other systems of the Building,
the curtain wall of the Building, the structure or exterior appearance of the
Building, or any other tenant's use of such other tenant's leased premises in
the Project and (iii) Architect delivers to Landlord a certificate, in a form
reasonably
3
<PAGE>
acceptable to Landlord, certifying that the construction of the Tenant
Improvements in the Premises has been substantially completed.
2.2.2.3 Other Terms. Landlord shall only be obligated to make
disbursements from the Tenant Improvement Allowance to the extent costs are
incurred by Tenant for Tenant Improvement Allowance Items.
2.3 Standard Tenant Improvements. Landlord has established specifications
(the "Specifications") for the building standard layout and components to be
used in the construction of the Tenant Improvements in the Premises. The
Specifications are set forth in Exhibit D-1 attached hereto. The quality of
Tenant Improvements shall be equal to or of greater quality than the quality of
the Specifications, provided that the Tenant Improvements shall comply with
certain Specifications as reasonably designated by Landlord. Any items for
which specifications are not provided shall be consistent with the
specifications for such items as generally existing in the Project and in
accordance with law.
SECTION 3
CONSTRUCTION DRAWINGS
3.1 Selection of Drawings. Tenant shall retain Robinson, Mills & Williams
as the architect/space planner approved by Landlord (the "Architect") to prepare
the Construction Drawings. Tenant shall retain the engineering consultants
approved by Landlord (the "Engineers") to prepare all plans and engineering
working drawings relating to the structural, mechanical, electrical, plumbing,
HVAC, lifesafety, and sprinkler work in the Premises. The plans and drawings to
be prepared by Architect and the Engineers hereunder shall be known collectively
as the "Construction Drawings." All Construction Drawings shall comply with the
drawing format and specifications reasonably determined by Landlord, and shall
be subject to Landlord's approval (not to be unreasonably withheld, conditioned
or delayed), which Construction Drawings shall contain the information listed on
Schedule 1, attached hereto. Tenant and Architect shall verify, in the field,
the dimensions and conditions as shown on the relevant portions of the base
building plans, and Tenant and Architect shall be solely responsible for the
same, and Landlord shall have no responsibility in connection therewith.
Landlord's review of the Construction Drawings as set forth in this Section 3,
shall be for its sole purpose and shall not imply Landlord's review of the same,
or obligate Landlord to review the same, for quality, design, Code compliance or
other like matters. Accordingly, notwithstanding that any Construction Drawings
are reviewed by Landlord or its space planner, architect, engineers and
consultants, and notwithstanding any advice or assistance which may be rendered
to Tenant by Landlord or Landlord's space planner, architect, engineers, and
consultants, Landlord shall have no liability whatsoever in connection therewith
and shall not be responsible for any omissions or errors contained in the
Construction Drawings, and Tenant's waiver and indemnity set forth in Section 17
of the Lease shall specifically apply to the Construction Drawings.
4
<PAGE>
3.2 Final Space Plan. Tenant shall supply Landlord with four (4) copies
signed by Tenant of its final space plan for the Premises before any
architectural working drawings or engineering drawings have been commenced. The
final space plan (the "Final Space Plan") shall include a layout and designation
of all offices, rooms and other partitioning, their intended use, and equipment
to be contained therein and shall conform to the Specifications attached hereto
as Exhibit D-1. Landlord may request clarification or more specific drawings for
special use items not included in the Final Space Plan. Landlord shall advise
Tenant within five (5) business days after Landlord's receipt of the Final Space
Plan for the Premises if the same is unsatisfactory or incomplete in any respect
in Landlord's reasonable judgment. If Tenant is so advised, Tenant shall
promptly cause the Final Space Plan to be revised to correct any deficiencies or
other matters Landlord may reasonably require.
3.3 Final Working Drawings. After the Final Space Plan has been approved
by Landlord, Tenant shall supply the Engineers with a complete listing of
standard and non-standard equipment and specifications, including, without
limitation, B.T.U. calculations, electrical requirements and special electrical
receptacle requirements for the Premises, to enable the Engineers and the
Architect to complete the "Final Working Drawings" (as that term is defined
below) in the manner as set forth below. Upon the approval of the Final Space
Plan by Landlord and Tenant, Tenant shall promptly cause the Architect and the
Engineers to complete the architectural and engineering drawings for the
Premises, and Architect shall compile a fully coordinated set of architectural,
structural, mechanical, electrical and plumbing working drawings in a form which
is complete to allow subcontractors to bid on the work and to obtain all
applicable permits (collectively, the "Final Working Drawings") and shall submit
the same to Landlord for Landlord's approval. Tenant shall supply Landlord with
four (4) copies signed by Tenant of such Final Working Drawings. Landlord shall
advise Tenant within four (4) business days after Landlord's receipt of the
Final Working Drawings for the Premises if the same is unsatisfactory or
incomplete in any respect. If Tenant is so advised, Tenant shall immediately
revise the Final Working Drawings in accordance with such review and any
disapproval of Landlord in connection therewith.
3.4 Approved Working Drawings. The Final Working Drawings shall be
approved by Landlord and the City of San Jose (the "Approved Working Drawings").
Tenant shall obtain Landlord's approval of the Final Working Drawings prior to
the commencement of construction of the Tenant Improvements by Tenant. If
Tenant commences any construction prior to obtaining City approval, such work
shall be done at Tenant's sole risk and any additional costs incurred in the
event the City requires changes shall be Tenant's sole cost and expense. After
approval by Landlord of the Final Working Drawings, Tenant shall submit the same
to the City of San Jose for all applicable building permits. Tenant hereby
agrees that neither Landlord nor Landlord's consultants shall be responsible for
obtaining any building permit or certificate of occupancy for the Premises and
that obtaining the same shall be Tenant's responsibility; provided, however,
that Landlord shall cooperate
5
<PAGE>
with Tenant in executing permit applications and performing other ministerial
acts reasonably necessary to enable Tenant to obtain any such permit or
certificate of occupancy. No changes, modifications or alterations in the
Approved Working Drawings may be made without the prior written consent of
Landlord, which consent may not be unreasonably withheld, conditioned or
delayed.
SECTION 4
CONSTRUCTION OF THE TENANT IMPROVEMENTS
4.1 Tenant's Selection of Contractors.
4.1.1 The Contractor. A general contractor shall be retained by
Tenant to construct the Tenant Improvements. Such general contractor
("Contractor") shall be selected by Tenant from a list of general contractors
supplied by Landlord, and Tenant shall deliver to Landlord notice of its
selection of the Contractor upon such selection. Landlord hereby approves
Rudolph & Sletten as the Contractor.
4.1.2 Tenant's Agents. All subcontractors, laborers, materialmen, and
suppliers used by Tenant (such subcontractors, laborers, materialmen, and
suppliers, and the Contractor to be known collectively as "Tenant's Agents")
must be approved in writing by Landlord, which approval shall not be
unreasonably withheld, conditioned or delayed. If Landlord does not approve any
of Tenant's proposed subcontractors, laborers, materialmen or suppliers, Tenant
shall submit other proposed subcontractors, laborers, materialmen or suppliers
for Landlord's written approval. Notwithstanding the foregoing, Tenant shall
retain subcontractors designated by Landlord in connection with any structural,
mechanical, electrical, plumbing or heating, air-conditioning or ventilation
work to be performed in the Premises.
4.2 Construction of Tenant Improvements by Tenant's Agents.
4.2.1 Construction Contract; Cost Budget. Prior to Tenant's execution
of the construction contract and general conditions with Contractor (the
"Contract"), Tenant shall submit the Contract to Landlord for its approval,
which approval shall not be unreasonably withheld, conditioned or delayed. Prior
to the commencement of the construction of the Tenant Improvements, and after
Tenant has accepted all bids for the Tenant Improvements, Tenant shall provide
Landlord with a detailed breakdown, by trade, of the final costs to be incurred
or which have been incurred, as set forth more particularly in Sections 2.2.1.1
through 2.2.1.8, above, in connection with the design and construction of the
Tenant Improvements to be performed by or at the direction of Tenant or the
Contractor, which costs form a basis for the amount of the Contract (the "Final
Costs"). Landlord and Tenant shall each pay their proportionate share of the
Final Costs as provided in Section 2.2.2 above. In the event that, after the
Final Costs have been delivered by Tenant to Landlord, the costs relating to the
design and construction of the Tenant Improvements shall change, any additional
costs necessary to such design and construction in excess of the applicable
Tenant Improvement Allowance, shall be
6
<PAGE>
paid by Tenant out of its own funds, but Tenant shall continue to provide
Landlord with the documents described in Sections 2.2.2.1 (i), (ii), (iii), (iv)
and (v) of this Tenant Work Letter, above, for Landlord's approval (not to be
unreasonably withheld, conditioned or delayed), and Landlord and Tenant shall
continue to pay their Proportionate Share of the Final Costs as adjusted to
reflect such change prior to Tenant paying such costs.
4.2.2 Tenant's Agents.
4.2.2.1 Landlord's General Conditions for Tenant's Agents and Tenant
Improvement Work. Tenant's and Tenant's Agent's construction of the Tenant
Improvements shall comply with the following: (i) the Tenant Improvements shall
be constructed in strict accordance with the Approved Working Drawings as may be
amended in accordance with this Tenant Work Letter; (ii) Tenant's Agents shall
submit schedules of all work relating to the Tenant's Improvements to Contractor
and Contractor shall, within five (5) business days of receipt thereof, inform
Tenant's Agents of any changes which are reasonably necessary thereto, and
Tenant's Agents shall adhere to such corrected schedule; and (iii) Tenant shall
abide by all reasonable rules made by Landlord's Building manager with respect
to the use of freight, loading dock and service elevators, storage of materials,
coordination of work with the contractors of other tenants, and any other matter
in connection with this Tenant Work Letter, including, without limitation, the
construction of the Tenant Improvements.
4.2.2.2 Indemnity. Tenant's indemnity of Landlord as set forth in
paragraph 17 of the Lease shall also apply with respect to any and all costs,
losses, damages, injuries and liabilities related in any way to any act or
omission of Tenant or Tenant's Agents, or anyone directly or indirectly employed
by any of them, or in connection with Tenant's non-payment of any amount arising
out of the Tenant Improvements and/or Tenant's disapproval of all or any portion
of any request for payment. Such indemnity by Tenant, as set forth in paragraph
17 of the Lease, shall also apply with respect to any and all costs, losses,
damages, injuries and liabilities related in any way to Landlord's performance
of any ministerial acts reasonably necessary (i) to permit Tenant to complete
the Tenant Improvements, and (ii) to enable Tenant to obtain any building permit
or certificate of occupancy for the Premises.
4.2.2.3 Requirements of Tenant's Agents. Each of Tenant's Agents
shall guarantee to Tenant and for the benefit of Landlord that the portion of
the Tenant Improvements for which it is responsible shall be free from any
defects in workmanship and materials for a period of not less than one (1) year
from the date of completion thereof. Each of Tenant's Agents shall be
responsible for the replacement or repair, without additional charge, of all
work done or furnished in accordance with its contract that shall become
defective within one (1) year after the later to occur of (i) completion of the
work performed by such contractor or subcontractors and (ii) the Lease
Commencement Date. The correction of such work shall include, without additional
charge, all additional expenses and damages incurred in connection with such
7
<PAGE>
removal or replacement of all or any part of the Tenant Improvements, and/or the
Building and/or common areas that may be damaged or disturbed thereby. All such
warranties or guarantees as to materials or workmanship of or with respect to
the Tenant Improvements shall be contained in the Contract or subcontract and
shall be written such that such guarantees or warranties shall inure to the
benefit of both Landlord and Tenant, as their respective interests may appear,
and can be directly enforced by either. Tenant covenants to give to Landlord any
assignment or other assurances which may be necessary to effect such right of
direct enforcement.
4.2.2.4 Insurance Requirements.
4.2.2.4.1 General Coverages. All of Tenant's Agents shall carry
worker's compensation insurance covering all of their respective employees, and
shall also carry public liability insurance, including property damage, all with
limits, in form and with companies as are required to be carried by Tenant as
set forth in paragraph 11 of the Lease.
4.2.2.4.2 Special Coverages. Tenant shall carry "Builder's All Risk"
insurance in an amount approved by Landlord covering the construction of the
Tenant Improvements, and such other insurance as Landlord may reasonably
require, it being understood and agreed that the Tenant Improvements shall be
insured by Tenant pursuant to paragraph 11 of the Lease immediately upon
completion thereof. Such insurance shall be in amounts and shall include such
extended coverage endorsements as may be reasonably required by Landlord
including, but not limited to, the requirement that all of Tenant's Agents shall
carry excess liability and Products and Completed Operation Coverage insurance,
each in amounts not less than $500,000 per incident, $1,000,000 in aggregate,
and in form and with companies as are required to be carried by Tenant as set
forth in paragraph 11 of the Lease.
4.2.2.4.3 General Terms. Certificates for all insurance carried
pursuant to this Section 4.2.2.4 shall be delivered to Landlord before the
commencement of construction of the Tenant Improvements and before the
Contractor's equipment is moved onto the site. All such policies of insurance
must contain a provision that the company writing said policy will give Landlord
thirty (30) days' prior written notice of any cancellation or lapse of the
effective date or any reduction in the amounts of such insurance. In the event
that the Tenant Improvements are damaged by any cause during the course of the
construction thereof, Tenant shall immediately repair the same at Tenant's sole
cost and expense. Tenant's Agents shall maintain all of the foregoing insurance
coverage in force until the Tenant Improvements are fully completed and accepted
by Landlord, except for any Products and Completed Operation Coverage insurance
required by Landlord, which is to be maintained following completion of the work
and acceptance by Landlord and Tenant as follows: (a) for two (2) years for any
work related to the roof or roof penetrations and repairs, and (b) for one (1)
year as to all other work. All policies carried under this Section 4.2.2.4
shall insure Landlord and Tenant, as their interests may appear, as well as
Contractor and Tenant's Agents. All insurance, except Workers' Compensation,
maintained by Tenant's
<PAGE>
Agents shall preclude subrogation claims by the insurer against anyone insured
thereunder. Such insurance shall provide that it is primary insurance as
respects the Landlord and that any other insurance maintained by Landlord is
excess and noncontributing with the insurance required hereunder. The
requirements for the foregoing insurance shall not derogate from the provisions
for indemnification of Landlord by Tenant under Section 4.2.2.2 of this Tenant
Work Letter. Landlord may, in its reasonable discretion, require Tenant to
obtain a lien and completion bond or some alternate form of security
satisfactory to Landlord in an amount sufficient to ensure the lien-free
completion of the Tenant Improvements and naming Landlord as a co-obligee.
4.2.3 Governmental Compliance. The Tenant Improvements shall comply
in all respects with the following: (i) the Code and other state, federal, city
or quasi-governmental laws, codes, ordinances and regulations, as each may apply
according to the rulings of the controlling public official, agent or other
person; (ii) applicable standards of the American Insurance Association
(formerly, the National Board of Fire Underwriters) and the National Electrical
Code; and (iii) building material manufacturer's specifications.
4.2.4 Inspection by Landlord. Landlord shall have the right to
inspect the Tenant Improvements at all times provided Landlord does not
unreasonably interfere in the construction of the Tenant Improvements and
provided further however, that Landlord's failure to inspect the Tenant
Improvements shall in no event constitute a waiver of any of Landlord's rights
hereunder nor shall Landlord's inspection of the Tenant Improvements constitute
Landlord's approval of the same. Should Landlord reasonably disapprove any
portion of the Tenant Improvements, Landlord shall notify Tenant in writing of
such disapproval and shall specify the items disapproved. Any defects or
deviations in, and/or disapproval by Landlord of, the Tenant Improvements shall
be rectified by Tenant at no expense to Landlord, provided however, that in the
event Landlord determines that a defect or deviation exists or disapproves of
any matter in connection with any portion of the Tenant Improvements and such
defect, deviation or matter might adversely affect the mechanical, electrical,
plumbing, heating, ventilating and air-conditioning or life-safety systems of
the Building, the structure or exterior appearance of the Building and Tenant
shall have failed to correct (or to commence and diligently pursue correction
of) any such defect, deviation and/or matter within a reasonable time (but not
more than five [5] days) following Tenant's receipt of Landlord's written notice
of Landlord's intent to take corrective action, Landlord may take such action as
Landlord reasonably deems necessary, at Tenant's expense and without incurring
any liability on Landlord's part, to correct any such defect, deviation and/or
matter, including, without limitation, causing the cessation of performance of
the construction of the Tenant Improvements until such time as the defect,
deviation and/or matter is corrected to Landlord's reasonable satisfaction.
4.2.5 Meetings. Commencing upon the execution of the Lease, Tenant
shall hold weekly meetings at a reasonable time,
9
<PAGE>
with the Architect and the Contractor regarding the progress of the preparation
of Construction Drawings and the construction of the Tenant Improvements, which
meetings shall be held at a location agreed upon by Landlord and Tenant, and
Landlord and/or its agents shall receive prior notice of, and shall have the
right to attend, all such meetings, and, upon Landlord's request, certain of
Tenant's Agents shall attend such meetings. In addition, minutes shall be taken
at all such meetings, a copy of which minutes shall be promptly delivered to
Landlord. One such meeting each month shall include the review of Contractor's
current request for payment.
4.3 Notice of Completion; Copy of Record Set of Plans. Within ten (10)
days after completion of construction of the Tenant Improvements, Tenant shall
cause a Notice of Completion to be recorded in the office of the Recorder of the
County of Santa Clara in accordance with Section 3093 of the Civil Code of the
State of California or any successor statute, and shall furnish a copy thereof
to Landlord upon such recordation. If Tenant fails to do so, Landlord may
execute and file the same on behalf of Tenant as Tenant's agent for such
purpose, at Tenant's sole cost and expense. At the conclusion of construction,
(i) Tenant shall cause the Architect and Contractor (A) to update the Approved
Working Drawings as necessary to reflect all changes made to the Approved
Working Drawings during the course of construction, (B) to certify to the best
of their knowledge that the "record-set" of mylar as-built drawings are true and
correct, which certification shall survive the expiration or termination of the
Lease, and (C) to deliver to Landlord two (2) sets of copies of such record set
of drawings within ninety (90) days following issuance of a certificate of
occupancy for the Premises, and (ii) Tenant shall deliver to Landlord a copy of
all warranties, guaranties, and operating manuals and information relating to
the improvements, equipment, and systems in the Premises.
SECTION 5
MISCELLANEOUS
5.1 Tenant's Representative. Tenant has designated Robert Perales as its
sole representative with respect to the matters set forth in this Tenant Work
Letter, who, until further notice to Landlord, shall have full authority and
responsibility to act on behalf of the Tenant as required in this Tenant Work
Letter.
5.2 Landlord's Representative. Landlord has designated Steve Sund as its
sole representatives with respect to the matters set forth in this Tenant Work
Letter, who, until further notice to Tenant, shall have full authority and
responsibility to act on behalf of the Landlord as required in this Tenant Work
Letter.
5.3 Time of the Essence in This Tenant Work Letter. Unless otherwise
indicated, all references herein to a "number of days" shall mean and refer to
calendar days. If any item requiring approval is timely reasonably disapproved
by Landlord, the procedure for preparation of the document and approval thereof
shall be repeated until the document is reasonably approved by Landlord. Any
approval required hereunder shall not be
10
<PAGE>
unreasonably withheld, conditioned or delayed.
5.4 Tenant's Lease Default. Notwithstanding any provision to the contrary
contained in the Lease, if an event of default as described in paragraph 19 of
the Lease or this Tenant Work Letter has occurred at any time on or before the
Substantial Completion of the Premises, then (i) in addition to all other rights
and remedies granted to Landlord pursuant to the Lease, Landlord shall have the
right to withhold payment of all or any portion of the Tenant Improvement
Allowance and/or Landlord may cause Contractor to cease the construction of the
Premises (in which case, Tenant shall be responsible for any delay in the
substantial completion of the Premises caused by such work stoppage), and (ii)
all other obligations of Landlord under the terms of this Tenant Work Letter
shall be forgiven until such time as such default is cured pursuant to the terms
of the Lease (in which case, Tenant shall be responsible for any delay in the
substantial completion of the Premises caused by such inaction by Landlord).
5.5 Tenant's Agents. All subcontractors, laborers, materialmen, and
suppliers retained directly by Tenant shall conduct their activities in and
around the Premises and the Project in a harmonious relationship with all other
subcontractors, laborers, materialmen and suppliers at the Premises and Project,
and, if necessary, Tenant shall employ union labor to achieve such harmonious
relations.
5.6 Hazardous Materials. If the construction of the Tenant Improvements or
Tenant's move into the Premises will involve the use of or disturb hazardous
materials or substances existing in the Premises, Tenant shall comply with
Landlord's rules and regulations concerning such hazardous materials or
substances.
5.7 Designation of Tenant's Property. If any portion of Tenant
Improvements is paid for by Tenant as provided herein, as soon as possible after
commencement of the Lease Landlord and Tenant shall designate as "Tenant's
Property" Tenant Improvements having a cost approximately equal to Tenant's
Proportionate Share of the Final Costs paid by Tenant; provided, however, the
parties shall not designate the ceilings, walls, doors, floor coverings and
window coverings as Tenant's Property. Property designated as Tenant's Property
under the terms of this Section 5.7 may be removed from the Premises at any time
by Tenant (subject to Tenant's obligation to repair and restore the Premises
upon removal of alterations as provided in paragraph 8 of the Lease), and Tenant
shall be entitled to all investment tax credit, depreciation, and other tax
attributes relating to ownership of such property. In determining which Tenant
Improvements will be designated as Tenant's Property, the parties shall confer
in good faith and shall give preference to those Tenant Improvements which are
most readily removable from the Premises and which shall have the greatest
utility for Tenant outside of the Premises. At the expiration or sooner
termination of the Lease, all Tenant Improvements designated as Tenant's
Property under this Section 5.7 shall be surrendered to Landlord in accordance
with the terms of the Lease, except as otherwise required to be removed by
Landlord in accordance with paragraph 8 of the Lease.
11
<PAGE>
EXHIBIT D-1
Tenant Improvement Specifications
Floor Plans Showing:
1. Location and type of all partitions.
2. Location and type of all doors. Indicate hardware and provide keying
schedule.
3. Location and type of glass partitions, windows, and doors. Indicate
framing and reference full-height partitions.
4. Locations of telephone equipment room.
5. Critical dimensions necessary for construction, with indication of
required clearances.
6. Location and types of all electrical items: outlets, switches,
telephone outlets and lighting.
7. Location and type of equipment that will require special electrical
requirements. Provide manufacturers' specifications for use and operation,
including heat output.
8. Location, weight per square foot, and description of any heavy
equipment or filing system.
9. Requirements for special air-conditioning or ventilation.
10. Location and type of plumbing.
11. Location and type of kitchen equipment.
12. Location, type and color of floor covering, wall covering, paint and
finishes.
13. Location of generator and pad, the installation of which has already
been approved by Landlord.
Details Showing
1. All millwork with verified dimensions of all equipment to be built in.
2. Corridor entrance.
3. Bracing or support of special walls, glass partitions, etc., if
desired. If not included with the plans, Tenant's engineer will design all
support or bracing required at Tenant's expense.
Additional Information
1. Provide Landlord with Title 24 energy calculations.
EXHIBIT D-1 (continued)
12
<PAGE>
Tenant Improvement Specifications: (To be attached)
13
Attachment is a set of drawings showing the floorplans for 2125 Hamilton Avenue,
San Jose.
<PAGE>
EXHIBIT E
---------
HAZARDOUS MATERIALS DISCLOSURE
------------------------------
In addition to any Hazardous Materials used in the operation of Tenant's
business as currently conducted, Tenant may use such Hazardous Materials as are
typically used in connection with the installation, maintenance, repair,
operation and replacement of a generator powered by diesel or other fuel.
<PAGE>
EXHIBIT 23.02
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our reports dated January 22, 1999,
except for Note 11, which is as of March 25, 1999, relating to the financial
statements of eBay Inc. and July 10, 1998, relating to the financial
statements of Jump Incorporated, which appears in such Prospectus. We also
consent to the references to us under the headings "Experts" and "Selected
Consolidated Financial Data" in such Prospectus. However, it should be noted
that PricewaterhouseCoopers LLP has not prepared or certified such "Selected
Consolidated Financial Data."
PricewaterhouseCoopers LLP
San Jose, California
March 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from eBay
Inc.'s prospectus on Form S-1 for the period ended December 31, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 DEC-31-1998
<CASH> 3,723 31,790
<SECURITIES> 0 40,401
<RECEIVABLES> 1,385 9,491
<ALLOWANCES> (361) (3,122)
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,967 83,385
<PP&E> 728 9,595
<DEPRECIATION> (76) (1,764)
<TOTAL-ASSETS> 5,619 92,483
<CURRENT-LIABILITIES> 1,124 8,038
<BONDS> 0 0
3,018 0
4 0
<COMMON> 61 121
<OTHER-SE> 950 84,324
<TOTAL-LIABILITY-AND-EQUITY> 5,619 92,483
<SALES> 0 0
<TOTAL-REVENUES> 5,744 47,352
<CGS> 0 0
<TOTAL-COSTS> 746 6,859
<OTHER-EXPENSES> 3,511 34,332
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3 39
<INCOME-PRETAX> 1,543 7,030
<INCOME-TAX> 669 4,632
<INCOME-CONTINUING> 874 2,398
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 874 2,398
<EPS-PRIMARY> 0.04 0.05
<EPS-DILUTED> 0.01 0.02
</TABLE>
