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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended Annual December 31, 1998.
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period from to .
Commission File Number 000-24821
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eBay Inc.
(Exact name of registrant as specified in its charter)
Delaware 77-0430924
(I.R.S. Employer Identification
(State or Other Jurisdiction of Number)
Incorporation or Organization)
2005 Hamilton Avenue, Suite 350, San Jose, CA 95125
(Address of Principal Executive Offices, Including Zip Code)
(408) 558-7400
(Registrant's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
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Indicate by check mark whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 1, 1999 there were 120,817,222 shares of the Registrant's
Common Stock, $0.001 par value, outstanding, which is the only class of common
or voting stock of the registrant issued as of that date. The aggregate market
value of the voting stock held by non-affiliates computed by reference to the
closing price for the Common Stock as quoted by the Nasdaq Stock Market as of
March 1, 1999 was approximately $2,974,224,000.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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eBAY INC.
FORM 10-K
For the Year Ended December 31, 1998
TABLE OF CONTENTS
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Number
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PART I
ITEM 1: Business.................................................... 3
ITEM 2: Properties.................................................. 17
ITEM 3: Legal Proceedings........................................... 17
ITEM 4: Submission of Matters to a Vote of Security Holders......... 17
PART II
ITEM 5: Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 18
ITEM 6: Selected Consolidated Financial Data........................ 19
ITEM 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 20
ITEM 7A: Quantitative and Qualitative Disclosures about Market Risk.. 42
ITEM 8: Financial Statements and Supplemental Data.................. 42
ITEM 9: Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure................................... 42
PART III
ITEM 10: Directors and Executive Officers of the Registrant.......... 43
ITEM 11: Executive Compensation...................................... 47
ITEM 12: Security Ownership of Certain Beneficial Owners and
Management................................................. 52
ITEM 13: Certain Relationships and Related Party Transactions........ 54
PART IV
ITEM 14: Exhibits, Financial Statement Schedules and Reports on Form
8-K........................................................ 57
Signatures............................................................ 79
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PART I
Item 1: Business
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This Annual Report on Form 10-K 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
of Management's Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in this report. 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.
The Company
eBay Inc. ("eBay" or the "Company") 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, which was
formed as a sole proprietorship in September 1995, incorporated in California
in May 1996, and reincorporated in Delaware in April 1998, 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
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benefits in business-to-business and business-to-consumer transactions, a
significant market opportunity exists to apply these same advantages to
facilitate person-to-person trading over the Internet.
The Person-to-Person Trading Market Opportunity
The exchange of goods 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 primarily attracted
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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. 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.
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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.
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
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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 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
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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 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
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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 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>
10
<PAGE>
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 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" above.
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,
11
<PAGE>
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 relationshop 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 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.
12
<PAGE>
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 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
13
<PAGE>
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.
The Company has received in the past, and anticipates that it will receive
in the future, communications alleging that certain items listed or sold 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
14
<PAGE>
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 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."
15
<PAGE>
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.
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.
16
<PAGE>
- -------------------------------------------------------------------------------
Item 2: Properties
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
Item 3: 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 violation of a patent held. 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. eBay is also subject to certain
investigations. See "Risk Factors--Government inquiries may lead to charges or
penalties."
- -------------------------------------------------------------------------------
Item 4: Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------------------------
There were no submissions of matters to a vote of security holders during
the quarter ended December 31, 1998.
17
<PAGE>
- -------------------------------------------------------------------------------
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
- -------------------------------------------------------------------------------
Price Range of Common Stock
eBay's Common Stock has been traded on The Nasdaq Stock MarketSM under the
symbol "EBAY" since September 24, 1998. The following table sets forth the
high and low sales prices of the Company's Common Stock for the periods
indicated and are as reported on The Nasdaq Stock MarketSM:
<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
Year Ended December 31, 1998
Third Quarter (from September 24, 1998)....................... $ 18.08 $13.71
Fourth Quarter................................................ 103.75 8.42
</TABLE>
As of March 1, 1998, there were approximately 500 stockholders of record of
the Company's Common Stock, although the Company believes that there is a
significantly larger number of beneficial owners of its Common Stock.
Dividend Policy
The Company has never paid cash dividends on its stock, and anticipates
that it will continue to retain its earnings, if any, to finance the growth of
its business.
Use of Proceeds of Initial Public Offering
The effective date of the Company's first registration statement, filed on
Form S-1 under the Securities Act of 1933 (No. 333-59097) relating to the
Company's initial public offering of its Common Stock, was September 23, 1998.
A total of 12,042,825 shares of Company's Common Stock were sold at a price of
$6.00 per share to an underwriting syndicate led by Goldman, Sachs & Co.,
Donaldson, Lufkin & Jenrette Securities Corporation, BancBoston Robertson
Stephens Inc. and BT Alex. Brown Incorporated. The offering commenced on
September 24, 1998 and closed on September 29, 1998. An additional 32,175
shares of Common stock were sold on behalf of a selling stockholder as part of
the same offering. The initial public offering resulted in gross proceeds of
$72.5 million, $5.1 million of which was applied toward the underwriting
discount. Expenses related to the offering totaled approximately $1.2 million.
Net proceeds to the Company and selling stockholder were $66.1 million and
$180,000, respectively. From the time of receipt through December 31, 1998,
the proceeds were applied toward:
. Purchases and installation of machinery and equipment, $2,959,000;
. Repayment of indebtedness, $410,000; and
. Temporary investments in municipal bonds and notes, $28,114,000.
The remaining proceeds are being used as working capital or are included
within cash, cash equivalents and short-term investments.
18
<PAGE>
- -------------------------------------------------------------------------------
Item 6: 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).
19
<PAGE>
- -------------------------------------------------------------------------------
Item 7: 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;
. 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.
20
<PAGE>
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.
21
<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
report. 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).
22
<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. 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
23
<PAGE>
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
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.
24
<PAGE>
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.
25
<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 report.
<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.
26
<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 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
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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.
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 under the previous agreement 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
expected proceeds from its public offering filed with the Securities and
Exchange Commission on March 25, 1999 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.
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Year 2000 Issues
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field and cannot reliably
distinguish dates beginning on January 1, 2000 from dates prior to the year
2000. Many companies' software and computer systems may need to be upgraded or
replaced in order to correctly process dates beginning in 2000 and to comply
with the "Year 2000" requirements. The Company has reviewed its internal
programs and has determined that there are no significant Year 2000 issues
within the Company's systems or services. The Company has completed
modifications to its internal systems to attempt to ensure Year 2000
compliance. The costs of these modifications have not been material and have
involved a reallocation of internal resources rather than incremental
expenditures. Although the Company believes that its software is Year 2000
compliant, the Company may be wrong. If the Company is wrong, it could face
unexpected expenses to fix the problem or unanticipated webside outages,
either of which could 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.
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Risk Factors
The following risks should be carefully considered. 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.
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;
. 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;
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. 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 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
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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 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.
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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 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.
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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 24, 1999 we were sued by Network Engineering Software, Inc. in the
U.S. District Court for the Northern District of California for our alleged
willful and deliberate violation of a patent. The suit seeks unspecified
monetary damages as well as an injunction against our operations. It also
seeks treble damages and attorneys' fees and costs. We believe that we have
meritorious defenses against this suit and intend to vigorously defend
ourselves. We could be forced to incur material expenses during this defense,
and in the event we were to lose this suit our business would be harmed.
Other third parties have from time to time claimed and may claim in the
future that we have infringed their past, current or future technologies. We
expect that participants in our markets increasingly will be subject to
infringement claims as the number of services and competitors in our industry
segment grows. Any claim like this, whether meritorious or not, could be time-
consuming, result in costly litigation, cause service upgrade delays or
require us to enter into royalty or licensing agreements. These royalty or
licensing agreements might not be available on acceptable terms or at all. As
a result, any claim like this could harm our business.
The inability to expand our systems may limit our growth.
We seek to generate a high volume of traffic and transactions on our
service. The satisfactory performance, reliability and availability of our
website, processing systems and network infrastructure are critical to our
reputation and our ability to attract and retain large numbers of users. Our
revenues depend on the number of items listed by users, the volume of user
auctions that are successfully completed and the final prices paid for the
items listed. If the volume of traffic on our website or the number of
auctions being conducted by customers continues to increase, we will need to
expand and upgrade our technology, transaction processing systems and network
infrastructure. We may not be able to accurately project the rate or timing of
increases, if any, in the use of our service or to timely expand and upgrade
our systems and infrastructure to accommodate any increases.
We use internally developed systems to operate our service and for
transaction processing, including billing and collections processing. We must
continually improve these systems in order to accommodate the level of use of
our website. In addition, we may add new features and functionality to our
services that would result in the need to develop or license additional
technologies. Our inability to add additional software and hardware or to
upgrade our technology, transaction processing systems or network
infrastructure to accommodate increased traffic or transaction volume could
have adverse consequences. These consequences include unanticipated system
disruptions, slower response times, degradation in levels of customer support,
impaired quality of the users' experience on our service and delays in
reporting accurate financial information. Our failure to provide new features
or functionality also could result in these consequences. We may be unable to
effectively upgrade and expand our systems in a timely manner or to integrate
smoothly any newly developed or purchased technologies with our existing
systems. These difficulties could harm or limit our ability to expand our
business.
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
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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.
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
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trading prices and valuations may not be sustained. Any negative change in the
public's perception of the prospects of Internet or e-commerce companies could
depress our stock price regardless of our results. Other broad market and
industry factors may decrease the market price of our common stock, regardless
of our operating performance. Market fluctuations, as well as general
political and economic conditions such as recession or interest rate or
currency rate fluctuations, also may decrease the market price of our common
stock. In the past, following declines in the market price of a company's
securities, securities class-action litigation often has been instituted
against the company. Litigation of this type, if instituted, could result in
substantial costs and a diversion of management's attention and resources.
New and existing regulation of the Internet could harm our business.
We are subject to the same federal, state and local laws as other companies
conducting business on the Internet. Today there are relatively few laws
specifically directed towards online services. However, due to the increasing
popularity and use of the Internet and online services, it is possible that
laws and regulations will be adopted with respect to the Internet or online
services. These laws and regulations could cover issues such as online
contracts, user privacy, freedom of expression, pricing, fraud, content and
quality of products and services, taxation, advertising, intellectual property
rights and information security. Applicability to the Internet of existing
laws governing issues such as property ownership, copyrights and other
intellectual property issues, taxation, libel, obscenity and personal privacy
is uncertain. The vast majority of these laws were adopted prior to the advent
of the Internet and related technologies and, as a result, do not contemplate
or address the unique issues of the Internet and related technologies. Those
laws that do reference the Internet, such as the recently passed Digital
Millennium Copyright Act, have not yet been interpreted by the courts and
their applicability and reach are therefore uncertain. In addition, numerous
states, including the State of California, where our headquarters are located,
have regulations regarding how "auctions" may be conducted and the liability
of "auctioneers" in conducting such auctions. No legal determination has been
made with respect to the applicability of the California regulations to our
business to date and little precedent exists in this area. One or more states
may attempt to impose these regulations upon us in the future, which could
harm our business.
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
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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
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
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online commerce. Several proposals have been made at the state and local level
that would impose additional taxes on the sale of goods and services through
the Internet. These proposals, if adopted, could substantially impair the
growth of electronic commerce, and could diminish our opportunity to derive
financial benefit from our activities. The U.S. federal government recently
enacted legislation prohibiting states or other local authorities from
imposing new taxes on Internet commerce for a period of three years. This tax
moratorium will last only for a limited period and does not prohibit states or
the Internal Revenue Service from collecting taxes on our income, if any, or
from collecting taxes that are due under existing tax rules. A successful
assertion by one or more states or any foreign country that we should collect
sales or other taxes on the exchange of merchandise on our system could harm
our business.
We are dependent on key personnel.
Our future performance will be substantially dependent on the continued
services of our senior management and other key personnel. Our future
performance also will depend on our ability to retain and motivate our other
officers and key employees. We have only eight executive officers, and the
loss of the services of any of them or other key employees could harm our
business. We do not have long-term employment agreements with any of our key
personnel and we do not maintain any "key person" life insurance policies. Our
future success also will depend on our ability to attract, train, retain and
motivate other highly skilled technical, managerial, marketing and customer
support personnel. Competition for these personnel is intense, especially for
engineers and especially in the San Francisco/Bay Area, and we may be unable
to successfully attract, integrate or retain sufficiently qualified personnel.
In making employment decisions, particularly in the Internet and high-
technology industries, job candidates often consider the value of the stock
options they are to receive in connection with their employment. As a result
of the recent appreciation in our stock price, we believe that we may be
disadvantaged in competing for these employees with other companies whose
stocks have not similarly appreciated or who have not yet gone public.
Our market is intensely competitive.
The market for person-to-person trading over the Internet is new, rapidly
evolving and intensely competitive, and we expect competition to intensify in
the future. Barriers to entry are relatively low, and current and new
competitors can launch new sites at a relatively low cost using commercially
available software. We currently or potentially compete with a number of other
companies. Our direct competitors include various online person-to-person
auction services, including Yahoo! Auctions 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;
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. brand recognition;
. website convenience and accessibility;
. level of service fees; and
. quality of search tools.
Some current and many potential competitors have longer company operating
histories, larger customer bases and greater brand recognition in other
business and Internet markets than we do. Some of these competitors also have
significantly greater financial, marketing, technical and other resources.
Other online trading services may be acquired by, receive investments from or
enter into other commercial relationships with larger, well established and
well financed companies. As a result, some of our competitors with other
revenue sources may be able to devote more resources to marketing and
promotional campaigns, adopt more aggressive pricing policies and devote
substantially more resources to website and systems development than we are
able to. Increased competition may result in reduced operating margins, loss
of market share and diminished value of our brand. Some of our competitors
have offered services for free and others may do this as well. We may be
unable to compete successfully against current and future competitors.
In order to respond to changes in the competitive environment, we may, from
time to time, make pricing, service or marketing decisions or acquisitions
that could harm our business. For example, we recently implemented an
insurance program that generally insures items up to a value of $200, with a
$25 deductible, for users with a non-negative feedback rating at no cost to
the user. The financial impact of this insurance program is not yet known. New
technologies may increase the competitive pressures by enabling our
competitors to offer a lower cost service. Some Web-based applications that
direct Internet traffic to certain websites may channel users to trading
services that compete with us.
Although we have established Internet traffic arrangements with several
large online services and search engine companies, these arrangements may not
be renewed on commercially reasonable terms. Even if these arrangements are
renewed, they may not result in increased usage of our service. In addition,
companies that control access to transactions through network access or Web
browsers could promote our competitors or charge us substantial fees for
inclusion.
Our business is dependent on the development and maintenance of the web
infrastructure.
The success of our service will depend largely on the development and
maintenance of the Web infrastructure. This includes maintenance of a reliable
network backbone with the necessary speed, data capacity and security, as well
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.
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Our business is subject to online commerce security risks.
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. Our security
measures may not prevent security breaches. Our failure to prevent security
breaches could harm our business. Currently, a significant number of our users
authorize us to bill their credit card accounts directly for all transaction
fees charged by us. We rely on encryption and authentication technology
licensed from third parties to provide the security and authentication
technology to effect secure transmission of confidential information,
including customer credit card numbers. Advances in computer capabilities, new
discoveries in the field of cryptography, or other developments may result in
a compromise or breach of the technology used by us to protect customer
transaction data. Any such compromise of our security could harm our
reputation and, therefore, our business. In addition, a party who is able to
circumvent our security measures could misappropriate proprietary information
or cause interruptions in our operations. An individual recently claimed to
have misappropriated some of our confidential information by breaking into our
computer system. We may need to expend significant resources to protect
against security breaches or to address problems caused by breaches. Security
breaches like the recent one could damage our reputation and expose us to a
risk of loss or litigation and possible liability. Our insurance policies
carry low coverage limits, which may not be adequate to reimburse us for
losses caused by security breaches.
We must keep pace with rapid technological change to remain competitive.
The market in which we compete is characterized by rapidly changing
technology, evolving industry standards, frequent new service and product
introductions and enhancements and changing customer demands. These market
characteristics are worsened by the emerging nature of the Internet and the
apparent need of companies from a multitude of industries to offer Web-based
products and services. Our future success therefore will depend on our ability
to adapt to rapidly changing technologies, to adapt our services to evolving
industry standards and to continually improve the performance, features and
reliability of our service. Our failure to adapt to such changes would harm
our business. In addition, the widespread adoption of new Internet, networking
or telecommunications technologies or other technological changes could
require substantial expenditures to modify or adapt our services or
infrastructure.
We need to develop new services, features and functions in order to expand.
We plan to expand our operations by developing new or complementary
services, products or transaction formats or expanding the breadth and depth
of services. We may be unable to expand our operations in a cost-effective or
timely manner. Even if we do expand, we may not maintain or increase our
overall market acceptance. If we launch a new business or service that is not
favorably received by consumers, it could damage our reputation 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.
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Our growth will depend on our ability to develop our brand.
We believe that our historical growth has been largely attributable to word
of mouth. We have benefited from frequent and high visibility media exposure
both nationally and locally. We do not expect the frequency or quality of this
media exposure to continue. However, we believe that continuing to strengthen
our brand will be critical to achieving widespread acceptance of our service.
Promoting and positioning our brand will depend largely on the success of our
marketing efforts and our ability to provide high quality services. In order
to promote our brand, we will need to increase our marketing budget and
otherwise increase our financial commitment to creating and maintaining brand
loyalty among users. Brand promotion activities may not yield increased
revenues, and even if they do, any increased revenues may not offset the
expenses we incurred in building our brand. If we do attract new users to our
service, they may not conduct transactions over our service on a regular
basis. If we fail to promote and maintain our brand or incur substantial
expenses in an unsuccessful attempt to promote and maintain our brand, our
business would be harmed.
We may be unable to adequately protect or enforce our intellectual property
rights.
We regard the protection of our copyrights, service marks, trademarks,
trade dress and trade secrets as critical to our success. We rely on a
combination of patent, copyright, trademark, service mark and trade secret
laws and contractual restrictions to protect our proprietary rights in
products and services. We have entered into confidentiality and invention
assignment agreements with our employees and contractors, and nondisclosure
agreements with parties with which we conduct business in order to limit
access to and disclosure of our proprietary information. These contractual
arrangements and the other steps taken by us to protect our intellectual
property may not prevent misappropriation of our technology or deter
independent third-party development of similar technologies. We pursue the
registration of our trademarks and service marks in the U.S. and
internationally. Effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our services are
made available online. We have licensed in the past, and expect to license in
the future, certain of our proprietary rights, such as trademarks or
copyrighted material, to third parties. These licensees may take actions that
might diminish the value of our proprietary rights or harm our reputation. We
also rely on certain technologies that we license from third parties, such as
Oracle Corporation, Microsoft and Sun Microsystems Inc., the suppliers of key
database technology, the operating system and specific hardware components for
our service. These third-party technology licenses may not continue to be
available to us on commercially reasonable terms. The loss of this technology
could require us to obtain substitute technology of lower quality or
performance standards or at greater cost.
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"),
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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.
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Item 7A: Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------------------
Interest Rate Risk
The primary objective of eBay's investment activities is to preserve the
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, the Company maintains its
portfolio of cash equivalents and short-term investments in a variety of
securities, including both government and corporate obligations and money
market funds. As of December 31, 1998, approximately 55% of the Companys total
portfolio matures in one year or less, with the remainder maturing in less
than two years. See Note 1 of Notes to Consolidated Financial Statements.
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>
1999 2000 Total Fair 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.
Foreign Currency Risk
Currently the majority of eBay's sales and expenses are denominated in U.S.
dollars and as a result the Company has experienced no significant foreign
exchange gains and losses to date. While the Company does expect to effect
some transactions in foreign currencies during 1999, it does not anticipate
that foreign exchange gains or losses will be significant. The Company has not
engaged in foreign currency hedging activities to date.
- -------------------------------------------------------------------------------
Item 8: Financial Statements and Supplementary Data
- -------------------------------------------------------------------------------
Annual Financial Statements: See Part IV, Item 14 of this Form 10-K.
Selected Quarterly Data: See Part II, Item 7 of this Form 10-K.
- -------------------------------------------------------------------------------
Item 9: Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
- -------------------------------------------------------------------------------
None.
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- -------------------------------------------------------------------------------
PART III
Item 10: Directors and Executive Officers of the Registrant
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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 financial positions at Kenetech Corp., an
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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 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
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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 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
45
<PAGE>
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.
46
<PAGE>
- -------------------------------------------------------------------------------
Item 11: 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.
47
<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 and "--Compensation Arrangements" below and Note 10 of Notes to
Consolidated Financial Statements 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.
48
<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.
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
49
<PAGE>
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 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.
50
<PAGE>
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.
51
<PAGE>
- -------------------------------------------------------------------------------
Item 12: Security Ownership of Certain Beneficial Owners and Management
- -------------------------------------------------------------------------------
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 and (4) all executive officers and
directors as a group.
<TABLE>
<CAPTION>
Shares
Beneficially
Owned(1)
------------------
Name Number Percent
- ---- ---------- -------
<S> <C> <C>
Pierre M. Omidyar(2)....................................... 37,600,521 31.2%
Jeffrey S. Skoll(3)........................................ 22,782,246 18.9
Robert C. Kagle(4)......................................... 17,862,447 14.8
Benchmark Funds(5)......................................... 17,375,508 14.4
Margaret C. Whitman(6)..................................... 7,137,000 5.9
Steven P. Westly(7)........................................ 2,484,000 2.1
Gary F. Bengier(8)......................................... 1,575,000 1.3
Michael K. Wilson(9)....................................... 2,137,500 1.8
Scott D. Cook(10).......................................... 771,750 *
Howard D. Schultz(11)...................................... 816,750 *
All directors and executive officers as a group
(11 persons)(12).......................................... 93,212,214 77.1
</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.
(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.
(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 shares
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.
("Benchmark Capital") and 2,130,687 shares held by Benchmark Founders'
Fund, L.P. ("Benchmark Founders' Fund" collectively, the "Benchmark
Funds"). Mr. Kagle, a director of the Company, is a member of Benchmark
Capital Management Co., L.L.C., ("Benchmark Management") which is the
General Partner of Benchmark Capital and Benchmark Founders' Fund. 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) Consists of 15,244,821 shares held by Benchmark Capital and 2,130,687
shares held by Benchmark Founders' Fund. In addition to Mr. Kagle, David
M. Beirne, Bruce W. Dunlevie, Kevin R. Harvey and
52
<PAGE>
Andrew S. Rachleff are members of Benchmark management and would be deemed
to beneficially own 17,620,548 (14.6%), 17,837,154 (14.8%), 17,862,447
(14.8%), and 17,837,154 (14.8%) shares respectively, of the Company's
common stock if such shares are included with the other shares they
beneficially own. Each of Mssrs. Beirne, Dunlevie, Harvey, and Rachleff
disclaims beneficial ownership of shares held by such entities except for
his proportional interest therein. The address for theses stockholders is
c/o Benchmark Capital Management Co., L.L.C., 2480 Sand Hill Road, Suite
200, Menlo Park California, 94025.
(6) Ms. Whitman is the President and Chief Executive Officer of the Company.
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.
(7) 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.
(8) 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.
(9) 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.
(10) Includes 450,000 shares subject to an immediately exercisable option
outstanding at March 1, 1999. See "Item 11--Executive Compensation." The
address for Mr. Cook is 2550 Garcia Avenue, M.S. 2475, Mountain View,
California 94043.
(11) Mr. Schultz's shares include 450,000 shares issued to him upon exercise of
an option that were unvested as of March 1, 1999 and subject to the
Company's right of repurchase at their original purchase price of $3.11
per share. Of these 450,000 unvested shares, Mr. Schultz has transferred
337,500 shares to Maveron. An additional 321,750 shares held by Maveron or
purchased by Maveron in June 1998 will be distributed to the partners of
Maveron in a pro rata partnership distribution. 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.
(12) Includes the shares described in footnotes (2)-(4) and (6)-(11).
53
<PAGE>
- -------------------------------------------------------------------------------
Item 13: Certain Relationships and 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 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
54
<PAGE>
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 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."
55
<PAGE>
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.
56
<PAGE>
- -------------------------------------------------------------------------------
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------------
Upon written request, the Company will provide, without charge, a copy of
this Report on Form 10-K, including the consolidated financial statements,
financial statement schedules and any exhibits for the Company's most recent
fiscal year. All requests should be sent to:
eBay Inc.
Investor Relations
2005 Hamilton Ave., Suite 350
San Jose, CA 95125
(408) 558-7400
In addition, the Securities and Exchange Commission maintains a website
that provides access to all filings made electronically by the Company at
www.sec.gov. The Company's website is located at www.ebay.com. Information
contained on the Company's website is not a part of this Annual Report on Form
10-K.
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements:
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Report of Independent Accountants.................................. 59
Consolidated Balance Sheet......................................... 60
Consolidated Statement of Income................................... 61
Consolidated Statement of Stockholders' Equity..................... 62
Consolidated Statement of Cash Flows............................... 63
Notes to Consolidated Financial Statements......................... 64
</TABLE>
2. Financial Statement Schedules.
All schedules have been omitted because the information required to
be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
3. Exhibits.
The following exhibits are files as part of, or incorporated by
reference into, this Form 10-K:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
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.*
10.01 Form of Indemnity Agreement entered into by Registrant with each of
its directors and executive officers.*
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
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.*
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 No. 1 to Registrant's 1998 Directors Stock Option Plan.
21.01 List of Subsidiaries.*
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.
*** Previously filed as an Exhibit to the Form S-1 filed on March 25, 1999.
58
<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.
59
<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.
60
<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.
61
<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.
62
<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.
63
<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.
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
64
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
65
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
66
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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>
67
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
68
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The acquisition has been structured as a tax free exchange of stock,
therefore, the differences between the recognized fair values of the acquired
assets, including tangible assets, and their historical tax bases are not
deductible for tax purposes.
The following unaudited pro forma consolidated financial information
reflects the results of operations for the 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>
69
<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.
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-
70
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 and the remaining obligations under the previous contract were
cancelled. 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.
71
<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>
72
<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>
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.
73
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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
74
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
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>
75
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
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
76
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 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 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 splits.
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
77
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 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.
78
<PAGE>
- -------------------------------------------------------------------------------
SIGNATURES
- -------------------------------------------------------------------------------
In accordance with the requirements of the Securities Exchange Act, the
Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
eBAY INC.
Date: March 29, 1999
Principal Executive Officer:
/s/ Margaret C. Whitman
By: _________________________________
Margaret C. Whitman
President and Chief Executive
Officer
Principal Financial Officer and
Principal Accounting Officer:
/s/ Gary F. Benigier
By: _________________________________
Gary F. Benigier
Chief Financial Officer and Vice
President of Operations
Additional Directors:
/s/ Pierre M. Omidyar
By: _________________________________
Pierre M. Omidyar
Founder, Chairman of the Board and
Director
/s/ Scott D. Cook
By: _________________________________
Scott D. Cook
Director
/s/ Robert C. Kagle
By: _________________________________
Robert C. Kagle
Director
/s/ Howard D. Schultz
By: _________________________________
Howard D. Schultz
Director
79
<PAGE>
EXHIBIT 10.22
Amendment Number 1
To the
1998 Directors Option Plan
March 18, 1999
1. The first sentence of Section 6.3 of the 1998 Directors Stock Option Plan
(the "Plan") is hereby amended by inserting the phrase "commencing with the
Annual Meeting taking place in the year 2000" after the phrase "At each
annual meeting of the Company."
2. The Plan in all other respects shall remain unchanged by this Amendment
Number 1 (it being understood that the provisions of Section 11 of the Plan
shall be applied to the stock split that became effective on March 1, 1999).
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from eBay
Inc.'s Annual Report on Form 10-K 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>
