<PAGE>
6,500,000 Shares Filed pursuant to
Rule 424(b)(4)
eBay Inc. Registration Number
333-75009
[eBAY LOGO]
Common Stock
----------------
eBay is offering 4,250,000 shares to be sold in the offering. The selling
stockholders identified in this prospectus are offering an additional 2,250,000
shares. eBay will not receive any of the proceeds for the sale of shares by the
selling stockholders.
eBay's Common Stock is traded on the Nasdaq National Market under the symbol
"EBAY". On April 12, 1999, the last reported sale price for the Common Stock on
the Nasdaq National Market was $176.625 per share.
See "Risk Factors" beginning on page 6 to read about certain factors you
should consider before buying shares of the Common Stock.
----------------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
----------------
<TABLE>
<CAPTION>
Per Share Total
--------- --------------
<S> <C> <C>
Initial price to public.............................. $170.00 $1,105,000,000
Underwriting discount................................ $ 5.95 $ 38,675,000
Proceeds, before expenses, to eBay................... $164.05 $ 697,212,500
Proceeds, before expenses, to the selling
stockholders........................................ $164.05 $ 369,112,500
</TABLE>
The underwriters may, under certain circumstances, purchase up to an
additional 975,000 shares from the selling stockholders at the initial price to
public less the underwriting discount.
----------------
The underwriters expect to deliver the shares against payment in New York,
New York on April 16, 1999.
Goldman, Sachs & Co. Morgan Stanley Dean Witter
BancBoston Robertson Stephens
BT Alex. Brown
Donaldson, Lufkin & Jenrette
----------------
Prospectus dated April 12, 1999.
<PAGE>
[Picture of sample items available for auction by eBay users with the following
text at bottom of page: "Still searching the Internet?"]
----------------
eBay(TM), the eBay logo, SafeHarbor(TM), Up4Sale(TM) and the "World's
Personal Trading Community"(TM) are trademarks of the Company. This prospectus
also includes trade dress, trade names and trademarks of other companies. Use
or display by eBay of other parties' trademarks, trade dress or products is not
intended to and does not imply a relationship with the trademark or trade dress
owners.
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
2
<PAGE>
DESCRIPTION OF ARTWORK:
The gatefold includes a sample picture of the eBay home page with the following
caption: "Welcome to eBay! It's where millions of people have already found
success. www.ebay.com."
The following text is contained on this gatefold:
[Two page screen shot of eBay home page with textual descriptions of eBay
service attributes, surrounded by the following text flowed to both sides:]
www.ebay.com
This is the place where over six million people from more than 50 different
countries visit every month.
"The buyers set the price!"
This is the online trading community that's much more than just another internet
site. eBay has become a part of millions of people's lives.
With more than 1000 categories, and over one million items available on any
given day, eBay is the largest and most popular person-to-person trading site on
the internet. All kinds of people, from all different walks of life are turning
to eBay to find all kinds of stuff.
"That's a lot of stuff!"
Hobbyists, collectors, even those running small businesses come to eBay to buy,
sell, and sometimes just trade information with other people who share the same
passions. And a lot of them have found their own personal success trading on
eBay.
They're succeeding because they've been able to expand in ways they'd never
imagined before eBay (boundaries, countries, even distribution have become
irrelevant on eBay).
"Just the tip of the iceberg" [indicating the twelve major categories]
When you buy or sell on eBay, you're dealing directly with another individual--
and someone who knows exactly what they're searching for. And everyone in the
eBay community is encouraged to talk about what it's like to do a deal with
someone. This feedback and rating system is a very efficient way to check out
the integrity of both sellers and buyers. Ask anyone who's been here . . . A
positive eBay rating is worth its weight in gold . . . but beware . . . too
many negative ratings, and nobody in the community is going to do business
with you.
"Great to do business with. Highly recommended. Honest and quick. A+++++++++++"
You can talk to people who like the same stuff you do!! (you might even make a
friend!)
So, as we're fond of saying around here at eBay . . . What are you searching
for? A rare 1840's Wedgewood Jasperware bowl? Mark McGwire's rookie year
trading card? A little personal success?
Come to eBay for a little visit. Who knows . . . you might find even more than
you came for. Happy Hunting!
Come for a visit.
www.ebay.com
The world's personal trading community.
(C) 1999 eBay Inc. All rights reserved. Registered trademarks and brands are the
property of their respective owners.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the Common Stock being sold in this
offering and our financial statements and notes to those statements appearing
elsewhere in this prospectus. Unless otherwise indicated, all information in
this prospectus (1) reflects a three-for-one stock split of the Common Stock
effected in March 1999 and (2) assumes the Underwriters' option to purchase
additional shares in the offering will not be exercised. See "Description of
Capital Stock" and "Underwriting." References in this prospectus to "eBay,"
"we," "our," "us" and the "Company" refer to eBay Inc., its California
predecessor and its consolidated subsidiary.
This prospectus contains forward-looking statements based on our current
expectations about our company and our industry. You can identify these
forward-looking statements when you see us using words such as "expect,"
"anticipate," estimate" and other similar expressions. These forward-looking
statements involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of the factors described in the "Risk Factors" section and elsewhere in
this prospectus. We undertake no obligation to publicly update any forward-
looking statements for any reason, even if new information becomes available or
other events occur in the future.
eBay
We are the world's largest and most popular person-to-person trading
community on the Internet, based on the number of items listed, number of users
and minutes of usage per month. We pioneered online person-to-person trading.
We have developed a Web-based community in which buyers and sellers are brought
together in an efficient and entertaining auction format to buy and sell items
such as antiques, coins, collectibles, computers, memorabilia, stamps and toys.
Our service permits sellers to list items for sale, buyers to bid on items of
interest and all eBay users to browse through listed items. Our 24-hour-a-day,
seven-day-a-week service is fully automated, topically arranged, intuitive and
easy to use.
From December 31, 1997 to December 31, 1998, the number of our registered
users grew from approximately 340,000 to over 2.1 million. We hosted over 13.6
million auctions during the fourth quarter of 1998, up from 2.0 million
auctions in the fourth quarter of 1997. As of December 31, 1998, we had over
1.0 million auctions listed in more than 1,000 categories. We believe that this
critical mass of buyers, sellers and items listed for sale creates a cycle that
helps us to continue to grow our user base. Sellers are attracted to our
service as a result of the large number of potential buyers, and buyers in turn
are attracted to our service by the broad selection of goods listed. Browsers
and buyers can search auction listings for specific items or search by
category, key word, seller name, recently commenced auctions or auctions about
to end. Our auction format creates a sense of urgency among buyers to bid for
goods and creates an entertaining and compelling trading environment. We also
provide buyers and sellers a place to socialize and to discuss topics of common
interest. This compelling trading environment fosters a large and growing
commerce-oriented online community.
3
<PAGE>
Our objective is to enhance our position as the world's leading online
person-to-person trading community. Key elements of our strategy include the
following:
. growing the eBay community and strengthening our brand, both to attract
new members and to maintain the vitality of the eBay community;
. broadening our trading platform by growing existing product categories,
promoting new product categories and offering services for specific
regions;
. fostering eBay community affinity and increasing community trust and
safety through services such as user verification and insurance;
. enhancing our website features and functionality through the
introduction of personalization features such as About Me, which permits
users to create their own home page free of charge on our website, and
the Gallery, an opportunity for sellers to showcase their items as
pictures in a photo catalog;
. expanding pre- and post-trade value-added services, such as assistance
with scanning and uploading photographs of listed items, third-party
escrow services and arrangements to make shipping of purchased items
easier; and
. developing international markets by actively marketing and promoting our
website in selected countries.
We were formed as a sole proprietorship in September 1995, incorporated in
California in May 1996 and reincorporated in Delaware in April 1998. Our
principal executive offices are located at 2005 Hamilton Avenue, Suite 350, San
Jose, California 95125. Our telephone number is (408) 558-7400 and our website
is located at www.ebay.com. Information contained on our website is not a part
of this prospectus.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Shares offered by eBay.................. 4,250,000 shares
Shares offered by the selling
stockholders........................... 2,250,000 shares
Shares to be outstanding after the
offering............................... 125,092,222 shares(1)
Use of proceeds......................... For general corporate purposes,
principally working capital and
capital expenditures.
Nasdaq National Market symbol........... "EBAY"
</TABLE>
Summary Financial Information
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1997 1998
------ ------- --------
<S> <C> <C> <C>
Statement of Income Data:
Net revenues........................................... $ 372 $ 5,744 $ 47,352
Gross profit........................................... 358 4,998 40,493
Income from operations................................. 253 1,487 6,161
Net income............................................. 148 874 2,398
Net income per share(2):
Basic................................................ $ 0.02 $ 0.04 $ 0.05
Weighted average shares--basic....................... 6,375 22,313 49,895
Diluted.............................................. $ 0.00 $ 0.01 $ 0.02
Weighted average shares--diluted..................... 42,945 82,660 114,590
Supplemental Operating Data:
Number of registered users at end of period............ 41 341 2,181
Gross merchandise sales(3)............................. $7,279 $95,271 $745,395
Number of auctions listed.............................. 289 4,394 33,668
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
---------------------
Actual As Adjusted(4)
Balance Sheet Data: ------- -------------
<S> <C> <C>
Cash and cash equivalents................................ $31,790 $728,003
Short-term investments................................... 40,401 40,401
Working capital.......................................... 75,347 771,560
Total assets............................................. 92,483 788,696
Debt and leases, long-term portion....................... -- --
Total stockholders' equity............................... 84,445 780,658
</TABLE>
- --------
(1) Based on shares of Common Stock outstanding as of March 1, 1999. Excludes:
. 9,888,294 shares of Common Stock issuable upon the exercise of stock
options outstanding as of March 1, 1999 at a weighted average exercise
price of $11.14; and
. 14,408,168 shares available for future grant or issuance under the
Company's various benefit plans.
See "Capitalization," "Management--Director Compensation," "Description of
Capital Stock" and Notes 9 and 10 of Notes to Consolidated Financial
Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for a description
of the method used to compute basic and diluted net income per share.
(3) Represents the aggregate sales prices of all goods for which an auction
was successfully concluded (i.e., there was at least one bid above the
seller's specified minimum price or reserve price, whichever was higher).
(4) Adjusted to give effect to the sale of the 4,250,000 shares of Common Stock
offered by the Company hereby, at a public offering price of $170.00 per
share, after deducting the underwriting discount and estimated offering
expenses. See "Use of Proceeds" and "Capitalization."
5
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also may impair our business
operations. If any of the following risks actually occur, our business could be
harmed. In such case, the trading price of our Common Stock could decline, and
you may lose all or part of your investment.
We have a limited operating history.
Our company was formed as a sole proprietorship in September 1995 and we
incorporated in May 1996. We have only a limited operating history on which you
can base an evaluation of our business and prospects. As an online commerce
company in the early stage of development, we face increased risks,
uncertainties, expenses and difficulties. You should consider an investment in
our company in light of these risks, uncertainties, expenses and difficulties.
To address these risks and uncertainties, we must do the following:
. maintain and increase our number of registered users, items listed on
our service and completed auctions;
. maintain and grow our website and customer operations;
. continue to make trading through our service safer for users;
. maintain and enhance our brand;
. successfully execute our business and marketing strategy;
. continue to develop and upgrade our technology and information
processing systems;
. continue to enhance our service to meet the needs of a changing market;
. provide superior customer service;
. respond to competitive developments; and
. attract, integrate, retain and motivate qualified personnel.
We may be unable to accomplish one or more of these things, which could
cause our business to suffer. In addition, accomplishing one or more of these
things might be very expensive, which could harm our financial results.
Our operating results may fluctuate.
Our operating results have varied on a quarterly basis during our short
operating history. Our operating results may fluctuate significantly as a
result of a variety of factors, many of which are outside our control. Factors
that may affect our quarterly operating results include the following:
. our ability to retain an active user base, to attract new users who list
items for sale and who complete transactions through our service and to
maintain customer satisfaction;
. our ability to keep our website operational and to manage the number of
items listed on our service;
6
<PAGE>
. federal, state or local government regulation, including investigations
prompted by items improperly listed or sold by our users;
. the introduction of new sites, services and products by us or our
competitors;
. the success of our brand building and marketing campaigns;
. the level of use of the Internet and online services;
. increasing consumer acceptance of the Internet and other online services
for commerce and, in particular, the trading of products such as those
listed on our website;
. consumer confidence in the security of transactions on our website;
. our ability to upgrade and develop our systems and infrastructure to
accommodate growth;
. our ability to attract new personnel in a timely and effective manner;
. the volume of items listed on our website;
. the timing, cost and availability of advertising in traditional media
and on other websites and online services;
. the timing of marketing expenses under existing contracts;
. technical difficulties or service interruptions;
. the amount and timing of operating costs and capital expenditures
relating to expansion of our business, operations and infrastructure;
. consumer trends and popularity of some categories of collectible items;
. volume, size, timing and completion rate of trades on our website; and
. general economic conditions and economic conditions specific to the
Internet and electronic commerce industries.
Our limited operating history and the emerging nature of the markets in
which we compete make it difficult for us to forecast our revenues or earnings
accurately. We believe that period-to-period comparisons of our operating
results may not be meaningful and you should not rely upon them as an
indication of future performance. We do not have backlog, and almost all of our
net revenues each quarter come from auctions that are listed and completed
during that quarter. Our operating results in one or more future quarters may
fall below the expectations of securities analysts and investors. In that
event, the trading price of our common stock would almost certainly decline.
Our failure to manage growth could harm us.
We currently are experiencing a period of significant expansion in our
headcount, facilities and infrastructure and we anticipate that further
expansion will be required to address potential growth in our customer base and
market opportunities. This expansion has placed, and we expect it will continue
to place, a significant strain on our management, operational and financial
resources. The areas that are put under severe strain by our rate of growth
include the following:
. The Website. We must constantly add new hardware, update software and
add new engineering personnel to accommodate the increased use of our
website. If we are unable to increase the capacity of our systems at
least as fast as the growth in demand for this capacity, our website may
become unstable and may cease to operate for periods of time. We have
experienced periodic unscheduled downtime. Continued unscheduled
downtime
7
<PAGE>
could harm our business and also could discourage users of our website
and reduce future revenues.
. Customer Support. We must expand our customer support operations to
accommodate the increased number of users and transactions on our
website. If we are unable to hire and successfully train sufficient
employees or contractors in this area, users of our website may have
negative experiences and current and future revenues could suffer.
. Customer Accounts. Our revenues are dependent on prompt and accurate
billing processes. If we are unable to grow our transaction processing
abilities to accommodate the increasing number of transactions that must
be billed, our ability to collect revenue will be harmed.
We must continue to hire, train and manage new employees at a rapid rate.
The majority of our employees today have been with us less than one year and we
expect that our rate of hiring will continue at a very high pace. To manage the
expected growth of our operations and personnel, we will need to improve our
transaction processing, operational and financial systems, procedures and
controls. Our current and planned personnel, systems, procedures and controls
may not be adequate to support our future operations. We may be unable to hire,
train, retain and manage required personnel or to identify and take advantage
of existing and potential strategic relationships and market opportunities.
We may not maintain profitability.
We believe that our continued profitability and growth will depend in large
part on our ability to do the following:
. increase our brand name awareness;
. provide our customers with superior community and trading experiences;
and
. maintain sufficient transaction volume to attract buyers and sellers.
We are investing heavily in marketing and promotion, further development of
our website, technology and operating infrastructure development. We have
significant ongoing commitments in some of these areas. As a result, we may be
unable to adjust our spending rapidly enough to compensate for any unexpected
revenue shortfall, which may harm our profitability. The emergence of
competitors, many of whom are offering free auctions to users, may limit our
ability to raise user fees in response to declines in profitability or require
us to reduce our fees. In addition, we are spending in advance of anticipated
growth, which may also harm our profitability. Our growth rates are not
sustainable and we expect growth rates will decrease in the future. In view of
the rapidly evolving nature of our business and our limited operating history,
we believe that period-to-period comparisons of our operating results are not
necessarily meaningful. You should not rely upon our historical results as
indications of our future performance.
Our business may be harmed by the listing or sale by our users of illegal
items.
The law relating to the liability of providers of online services for the
activities of their users on their service is currently unsettled. We are aware
that certain goods, such as firearms, other weapons, adult material, tobacco
products, alcohol and other goods that may be subject to regulation by local,
state or federal authorities, have been listed and traded on our service. We
may be unable to prevent the sale of unlawful goods, or the sale of goods in an
unlawful manner, by users of our service, and we may be subject to civil or
criminal liability for unlawful activities carried out by users through our
service. In order to reduce our exposure to this liability, we have increased
the number of personnel reviewing potentially illegal items and may in the
future implement other protective measures that could require us to spend
substantial resources and/or to reduce revenues by
8
<PAGE>
discontinuing certain service offerings. Any costs incurred as a result of
liability or asserted liability relating to the sale of unlawful goods or the
unlawful sale of goods, could harm our business. In addition, we have received
significant media attention relating to the listing or sale of unlawful goods
on our website. A continuation of this negative publicity could damage our
reputation and diminish the value of our brand name. It also could make users
reluctant to continue to use our services.
Our business may be harmed by the listing or sale by our users of pirated
items.
We have received in the past, and we anticipate we will receive in the
future, communications alleging that certain items listed or sold through our
service by our users infringe third-party copyrights, trademarks and tradenames
or other intellectual property rights. Although we have actively sought to work
with the content community to eliminate infringing listings on our website,
some content owners have expressed the view that our efforts are insufficient.
An allegation of infringement of third-party intellectual property rights may
result in litigation against us. Any such litigation could be costly for us,
could result in increased costs of doing business through adverse judgment or
settlement, could require us to change our business practices in expensive
ways, or could otherwise harm our business.
Our business may be harmed by fraudulent activities on our website.
Our future success will depend largely upon sellers reliably delivering and
accurately representing their listed goods and buyers paying the agreed
purchase price. We do not take responsibility for delivery of payment or goods
to any user of our service. We have received in the past, and anticipate that
we will receive in the future, communications from users who did not receive
the purchase price or the goods that were to have been exchanged. While we can
suspend the accounts of users who fail to fulfill their delivery obligations to
other users, we do not have the ability to require users to make payments or
deliver goods or otherwise make users whole other than through our limited
insurance program. Other than through this program, we do not compensate users
who believe they have been defrauded by other users. We also periodically
receive complaints from buyers as to the quality of the goods purchased. Any
negative publicity generated as a result of fraudulent or deceptive conduct by
users of our service could damage our reputation and diminish the value of our
brand name. We may in the future receive additional requests from users
requesting reimbursement or threatening legal action against us if no
reimbursement is made. Any resulting litigation could be costly for us, divert
management attention, result in increased costs of doing business, lead to
adverse judgments or could otherwise harm our business.
Government inquiries may lead to charges or penalties.
On January 29, 1999, we received requests to produce certain records and
information to the federal government relating to an investigation of possible
illegal transactions in connection with our website. We have been informed that
the inquiry includes an examination of our practices with respect to these
transactions. We are fully cooperating with the inquiry. In order to protect
the investigation, the court has ordered that no further public disclosures be
made with respect to the matter at this time. Should this or any other
investigation lead to civil or criminal charges against us, we would likely be
harmed by negative publicity, the costs of litigation, the diversion of
management time and other negative effects, even if we ultimately prevail. Our
business would certainly suffer if we were not to prevail in any action like
this.
A large number of transactions occur on our website. As a result, we believe
that government regulators have received a substantial number of consumer
complaints about us which, while small as a percentage of our total
transactions, are large in aggregate numbers. As a result, we have from time to
time been contacted by various federal, state and local regulatory agencies and
been told that they have questions with respect to the adequacy of the steps we
take to protect our users from fraud. For example, the City of New York--
Department of Consumer Affairs received complaints from
9
<PAGE>
users about transactions on our website. In investigating these complaints, the
Department of Consumer Affairs requested information about us and these
transactions. We have provided the requested information. We are likely to
receive additional inquiries from regulatory agencies in the future, which may
lead to action against us. We have responded to all inquiries from regulatory
agencies by describing our current and planned antifraud efforts. If one or
more of these agencies is not satisfied with our response to current or future
inquiries, the resultant investigations and potential fines or other penalties
could harm our business.
We are subject to risks associated with information disseminated through our
service.
The law relating to the liability of online services companies for
information carried on or disseminated through their services is currently
unsettled. Claims could be made against online services companies under both
United States and foreign law for defamation, libel, invasion of privacy,
negligence, copyright or trademark infringement, or other theories based on the
nature and content of the materials disseminated through their services.
Several private lawsuits seeking to impose liability upon other online services
companies currently are pending. In addition, federal, state and foreign
legislation has been proposed that imposes liability for or prohibits the
transmission over the Internet of certain types of information. Our service
features a Feedback Forum, which includes information from users regarding
other users. Although all such feedback is generated by users and not by us, it
is possible that a claim of defamation or other injury could be made against us
for content posted in the Feedback Forum. If we become liable for information
provided by our users and carried on our service, we could be directly harmed
and we may be forced to implement new measures to reduce our exposure to this
liability. This may require us to expend substantial resources and/or to
discontinue certain service offerings. In addition, the increased attention
focused upon liability issues as a result of these lawsuits and legislative
proposals could harm our reputation or otherwise impact the growth of our
business. We carry liability insurance, but it may not be adequate to fully
compensate us if we become liable for information carried on or through our
service. Any costs incurred as a result of this liability or asserted liability
could harm our business.
We are subject to intellectual property litigation.
On March 23, 1999, we were sued by Network Engineering Software, Inc. in the
U.S. District Court for the Northern District of California for our alleged
willful and deliberate violation of a patent. The suit seeks unspecified
monetary damages as well as an injunction against our operations. It also seeks
treble damages and attorneys' fees and costs. We believe that we have
meritorious defenses against this suit and intend to vigorously defend
ourselves. We could be forced to incur material expenses during this defense
and in the event we were to lose this suit, we could be forced to pay
significant damages and an ongoing royalty and 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
10
<PAGE>
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. in Santa Clara, California. These systems and operations
are vulnerable to damage or interruption from earthquakes, floods, fires, power
loss, telecommunication failures and similar events. They are also subject to
break-ins, sabotage, intentional acts of vandalism and similar misconduct. We
do not have fully redundant systems, a formal disaster recovery plan or
alternative providers of hosting services, and we do not carry sufficient
business interruption insurance to compensate us for losses that may occur.
Despite any precautions we may take, the occurrence of a natural disaster or
other unanticipated problems at the Exodus facility could result in
interruptions in our services. In addition, the failure by Exodus to provide
our required data communications capacity could result in interruptions in our
service. Any damage to or failure of our systems could result in interruptions
in our service. Such interruptions will reduce our revenues and profits, and
our future revenues and profits will be harmed if our users believe that our
system is unreliable.
In the quarter ended December 31, 1998, we experienced longer and more
frequent system interruptions than in the first three quarters of 1998. Our
website has been interrupted for periods ranging from five minutes to three
hours. In addition to placing increased burdens on our engineering staff, these
outages create a flood of user questions and complaints that must be responded
to by our customer support personnel. If we experience frequent or persistent
system failures, our reputation and brand could be permanently harmed.
Unauthorized break-ins to our service could harm our business.
Our servers are vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions, which could lead to interruptions, delays,
loss of data or the inability to complete customer auctions. In addition,
unauthorized persons may improperly access our data. We recently experienced an
unauthorized break-in by a "hacker" who has stated that he can in the future
damage or change our system or take confidential information. Any such actions
by this or any other individual could harm us. Such actions may be very
expensive to remedy and could damage our reputation and discourage new and
existing users from using our service.
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Our stock price has been and may continue to be extremely volatile.
The trading price of our common stock has been and is likely to be extremely
volatile. Our stock price could be subject to wide fluctuations in response to
a variety of factors, including the following:
. actual or anticipated variations in our quarterly operating results;
. announcements of technological innovations or new services by us or our
competitors;
. changes in financial estimates by securities analysts;
. conditions or trends in the Internet and online commerce industries;
. the emergence of online securities trading;
. changes in the market valuations of other Internet or online service
companies;
. developments in Internet regulations;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
. unscheduled system downtime;
. additions or departures of key personnel;
. sales of our common stock or other securities in the open market; and
. other events or factors that may be beyond our control.
In addition, the trading price of Internet stocks in general, and ours in
particular, have experienced extreme price and volume fluctuations in recent
months. These fluctuations often have been unrelated or disproportionate to the
operating performance of these companies. The valuations of many Internet
stocks, including ours, are extraordinarily high based on conventional
valuation standards such as price to earnings and price to sales ratios. The
trading price of our common stock has increased enormously from the initial
public offering price. These trading prices and valuations may not be
sustained. Any negative change in the public's perception of the prospects of
Internet or e-commerce companies could depress our stock price regardless of
our results. Other broad market and industry factors may decrease the market
price of our common stock, regardless of our operating performance. Market
fluctuations, as well as general political and economic conditions such as
recession or interest rate or currency rate fluctuations, also may decrease the
market price of our common stock. In the past, following declines in the market
price of a company's securities, securities class-action litigation often has
been instituted against the company. Litigation of this type, if instituted,
could result in substantial costs and a diversion of management's attention and
resources.
New and existing regulation of the Internet could harm our business.
We are subject to the same federal, state and local laws as other companies
conducting business on the Internet. Today there are relatively few laws
specifically directed towards online services. However, due to the increasing
popularity and use of the Internet and online services, it is possible that
laws and regulations will be adopted with respect to the Internet or online
services. These laws and regulations could cover issues such as online
contracts, user privacy, freedom of expression, pricing, fraud, content and
quality of products and services, taxation, advertising, intellectual property
rights and information security. Applicability to the Internet of existing laws
governing issues such as property ownership, copyrights and other intellectual
property issues, taxation, libel, obscenity and personal privacy is uncertain.
The vast majority of these laws were adopted prior to the advent of the
Internet and related technologies and, as a result, do not contemplate or
address the unique issues of the Internet and related technologies. Those laws
that
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do reference the Internet, such as the recently passed Digital Millennium
Copyright Act, have not yet been interpreted by the courts and their
applicability and reach are therefore uncertain. In addition, numerous states,
including the State of California, where our headquarters are located, have
regulations regarding how "auctions" may be conducted and the liability of
"auctioneers" in conducting such auctions. No legal determination has been made
with respect to the applicability of the California regulations to our business
to date and little precedent exists in this area. One or more states may
attempt to impose these regulations upon us in the future, which could harm our
business.
Several states have proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission also has recently
settled a proceeding with one online service regarding the manner in which
personal information is collected from users and provided to third parties.
Changes to existing laws or the passage of new laws intended to address these
issues could directly affect the way we do business or could create uncertainty
in the marketplace. This could reduce demand for our services, increase the
cost of doing business as a result of litigation costs or increased service
delivery costs, or otherwise harm our business. In addition, because our
services are accessible worldwide, and we facilitate sales of goods to users
worldwide, foreign jurisdictions may claim that we are required to comply with
their laws. Our failure to comply with foreign laws could subject us to
penalties ranging from fines to bans on our ability to offer our services.
In the United States, companies are required to qualify as foreign
corporations in states where they are conducting business. As an Internet
company, it is unclear in which states we are actually conducting business. We
currently are qualified to do business only in California and Ohio. Our failure
to qualify as a foreign corporation in a jurisdiction where we are required to
do so could subject us to taxes and penalties for the failure to qualify and
could result in our inability to enforce contracts in those jurisdictions. Any
new legislation or regulation, or the application of laws or regulations from
jurisdictions whose laws do not currently apply to our business, could harm our
business.
Our business has been seasonal.
Our results of operations historically have been somewhat seasonal in nature
because many of our users reduce their activities on our website during the
Thanksgiving and Christmas holidays and with the onset of good weather. Our
limited operating history makes it difficult to assess the impact of these
seasonal factors or whether or not our business is susceptible to cyclical
fluctuations in the U.S. economy. In addition, our rapid growth may have
overshadowed whatever seasonal or cyclical factors might have influenced our
business to date. Seasonal or cyclical variations in our business may become
more pronounced over time and may harm our results of operations in the future.
We are dependent on the continued growth of the online person-to-person
commerce market.
The market for the sale of goods over the Internet, particularly through
person-to-person trading, is a new and emerging market. Our future revenues and
profits will be substantially dependent upon the widespread acceptance of the
Internet and online services as a medium for commerce by consumers. Rapid
growth in the use of and interest in the Web, the Internet and online services
is a recent phenomenon. This acceptance and use may not continue. Even if the
Internet is accepted, concerns about fraud, privacy and other problems may mean
that a sufficiently broad base of consumers will not adopt the Internet as a
medium of commerce. In particular, our website requires users to make publicly
available their e-mail addresses and other personal information that some
potential users may be unwilling to provide. These concerns may increase as
additional publicity over privacy issues on eBay or generally over the Internet
increase. Market acceptance for recently introduced services and products over
the Internet is highly uncertain, and there are few proven
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services and products. In order to expand our user base, we must appeal to and
acquire consumers who historically have used traditional means of commerce to
purchase goods.
There are many risks associated with international operations.
We are expanding internationally and recently launched separate home pages
dedicated to Canada and the United Kingdom. Expansion into international
markets will require management attention and resources. We have limited
experience in localizing our service to conform to local cultures, standards
and policies. We may have to compete with local companies who understand the
local market better than we do. We may not be successful in expanding into
international markets or in generating revenues from foreign operations. As we
continue to expand internationally, we are subject to risks of doing business
internationally, including the following:
. regulatory requirements that may limit or prevent the offering of our
services in local jurisdictions;
. legal uncertainty regarding liability for the listings of our users,
including less Internet friendly basic law and unique local laws;
. government-imposed limitations on the public's access to the Internet;
. difficulties in staffing and managing foreign operations;
. longer payment cycles, different accounting practices and problems in
collecting accounts receivable;
. cultural nonacceptance of online auctions;
. political instability;
. seasonal reductions in business activity;
. potentially adverse tax consequences; and
. administrative burdens in collecting local taxes, including value-added
taxes.
To the extent we expand our international operations and have additional
portions of our international revenues denominated in foreign currencies, we
also could become subject to increased difficulties in collecting accounts
receivable and risks relating to foreign currency exchange rate fluctuations.
Our business may be subject to sales and other taxes.
We do not collect sales or other similar taxes on goods sold by users
through our service. One or more states may seek to impose sales tax collection
obligations on companies such as ours that engage in or facilitate online
commerce. Several proposals have been made at the state and local level that
would impose additional taxes on the sale of goods and services through the
Internet. These proposals, if adopted, could substantially impair the growth of
electronic commerce, and could diminish our opportunity to derive financial
benefit from our activities. The U.S. federal government recently enacted
legislation prohibiting states or other local authorities from imposing new
taxes on Internet commerce for a period of three years. This tax moratorium
will last only for a limited period and does not prohibit states or the
Internal Revenue Service from collecting taxes on our income, if any, or from
collecting taxes that are due under existing tax rules. A successful assertion
by one or more states or any foreign country that we should collect sales or
other taxes on the exchange of merchandise on our system could harm our
business.
We are dependent on key personnel.
Our future performance will be substantially dependent on the continued
services of our senior management and other key personnel. Our future
performance also will depend on our ability to
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retain and motivate our other officers and key employees. We have only eight
executive officers, and the loss of the services of any of them or other key
employees could harm our business. We do not have long-term employment
agreements with any of our key personnel and we do not maintain any "key
person" life insurance policies. Our future success also will depend on our
ability to attract, train, retain and motivate other highly skilled technical,
managerial, marketing and customer support personnel. Competition for these
personnel is intense, especially for engineers and especially in the San
Francisco/Bay Area, and we may be unable to successfully attract, integrate or
retain sufficiently qualified personnel. In making employment decisions,
particularly in the Internet and high-technology industries, job candidates
often consider the value of the stock options they are to receive in connection
with their employment. As a result of the recent appreciation in our stock
price, we believe that we may be disadvantaged in competing for these employees
with other companies whose stocks have not similarly appreciated or who have
not yet gone public.
Our market is intensely competitive.
The market for person-to-person trading over the Internet is new, rapidly
evolving and intensely competitive, and we expect competition to intensify in
the future. Barriers to entry are relatively low, and current and new
competitors can launch new sites at a relatively low cost using commercially
available software. We currently or potentially compete with a number of other
companies. Our direct competitors include various online person-to-person
auction services, including Yahoo! Auctions Powered by Onsale and Excite, Inc.,
both of which are free to sellers and buyers, Auction Universe and a number of
other small services, including those that serve specialty or regional markets
such as CityAuction. We also compete indirectly with business-to-consumer
online auction services such as Onsale, First Auction, Surplus Auction and
uBid. A number of traditional auction companies, including Butterfield &
Butterfield and Sotheby's, are offering or have announced plans to create
Internet auction sites. We potentially face competition from a number of large
online communities and services that have expertise in developing online
commerce and in facilitating online person-to-person interaction. Amazon.com
recently announced the opening of Amazon.com Auctions, a service on its website
where users can buy and sell goods similar to those available on our website.
Some of these potential competitors, including America Online, Inc. ("AOL"),
Lycos, Inc. and Microsoft Corporation, currently offer business-to-consumer
trading services and classified ad services. Some of these companies also may
introduce person-to-person trading to their large user populations. Other large
companies with strong brand recognition and experience in online commerce, such
as Cendant Corporation, QVC, USA Network and large newspaper or media
companies, also may seek to compete in the online auction market. The principal
competitive factors in our market include the following:
. volume of transactions and selection of goods;
. community cohesion and interaction;
. system reliability;
. customer service;
. reliability of delivery and payment by users;
. brand recognition;
. website convenience and accessibility;
. level of service fees; and
. quality of search tools.
Some current and many potential competitors have longer company operating
histories, larger customer bases and greater brand recognition in other
business and Internet markets than we do. Some of these competitors also have
significantly greater financial, marketing, technical and other
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resources. Other online trading services may be acquired by, receive
investments from or enter into other commercial relationships with larger, well
established and well financed companies. As a result, some of our competitors
with other revenue sources may be able to devote more resources to marketing
and promotional campaigns, adopt more aggressive pricing policies and devote
substantially more resources to website and systems development than we are
able to. Increased competition may result in reduced operating margins, loss of
market share and diminished value of our brand. Some of our competitors have
offered services for free and others may do this as well. We may be unable to
compete successfully against current and future competitors.
In order to respond to changes in the competitive environment, we may, from
time to time, make pricing, service or marketing decisions or acquisitions that
could harm our business. For example, we recently implemented an insurance
program that generally insures items up to a value of $200, with a $25
deductible, for users with a non-negative feedback rating at no cost to the
user. The financial impact of this insurance program is not yet known. New
technologies may increase the competitive pressures by enabling our competitors
to offer a lower cost service. Some Web-based applications that direct Internet
traffic to certain websites may channel users to trading services that compete
with us.
Although we have established Internet traffic arrangements with several
large online services and search engine companies, these arrangements may not
be renewed on commercially reasonable terms. Even if these arrangements are
renewed, they may not result in increased usage of our service. In addition,
companies that control access to transactions through network access or Web
browsers could promote our competitors or charge us substantial fees for
inclusion.
Our business is dependent on the development and maintenance of the Web
infrastructure.
The success of our service will depend largely on the development and
maintenance of the Web infrastructure. This includes maintenance of a reliable
network backbone with the necessary speed, data capacity and security, as well
timely development of complementary products such as high speed modems, for
providing reliable Web access and services. Because global commerce and the
online exchange of information is new and evolving, we cannot predict whether
the Web will prove to be a viable commercial marketplace in the long term. The
Web has experienced, and is likely to continue to experience, significant
growth in the numbers of users and amount of traffic. If the Web continues to
experience increased numbers of users, increased frequency of use or increased
bandwidth requirements, the Web infrastructure may be unable to support the
demands placed on it. In addition, the performance of the Web may be harmed by
increased users or bandwidth requirements.
The Web has experienced a variety of outages and other delays as a result of
damage to portions of its infrastructure, and it could face outages and delays
in the future. This might include outages and delays resulting from the "Year
2000" problem. See "--Our business could be harmed by Year 2000 compliance
issues." These outages and delays could reduce the level of Web usage as well
as the level of traffic and the processing of auctions on our service. In
addition, the Web could lose its viability due to delays in the development or
adoption of new standards and protocols to handle increased levels of activity
or due to increased governmental regulation. The infrastructure and
complementary products or services necessary to make the Web a viable
commercial marketplace for the long term may not be developed successfully or
in a timely manner. Even if these products or services are developed, the Web
may not become a viable commercial marketplace for services such as those that
we offer.
Our business could be harmed by Year 2000 compliance issues.
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Beginning on January 1,
2000, these code fields will need to accept
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four-digit entries to distinguish 21st century dates from 20th century dates.
Many companies' software and/or computer systems may need to be upgraded or
replaced in order to correctly process dates beginning in 2000 and to comply
with the "Year 2000" requirements. Although we believe our own software is Year
2000 compliant, we may be wrong. If we are wrong, we could face unexpected
expenses to fix the problem or unanticipated website outages, either of which
could harm our business. We also use third-party equipment and software that
may not be Year 2000 compliant. For example, we rely on credit card companies
to collect the majority of our revenues from our users. Due to the nature of
the credit card system, some industry analysts have questioned the effect of
the year 2000 on credit card processing and billing. Failure of our credit card
vendors or other third-party equipment or software vendors to properly process
dates for the year 2000 and thereafter could require us to incur unanticipated
expenses in seeking alternative means of payment or hardware or software
replacements. It also could result in loss of revenues or unanticipated outages
of our website. Our marketing efforts are also dependent on the continued
operation of Internet portals and other Internet sites on which we advertise.
Although we have developed contingency plans with respect to collecting payment
under these circumstances, we are unable to make contingency plans if any
significant number of the computers constituting the Internet fail to properly
process dates for the year 2000 and there is a systemwide slowdown or
breakdown. Any interruption or significant degradation of Internet operations,
whether due to Year 2000 problems or otherwise, could harm our business.
Our business is subject to online commerce security risks.
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. Our security
measures may not prevent security breaches. Our failure to prevent security
breaches could harm our business. Currently, a significant number of our users
authorize us to bill their credit card accounts directly for all transaction
fees charged by us. We rely on encryption and authentication technology
licensed from third parties to provide the security and authentication
technology to effect secure transmission of confidential information, including
customer credit card numbers. Advances in computer capabilities, new
discoveries in the field of cryptography, or other developments may result in a
compromise or breach of the technology used by us to protect customer
transaction data. Any such compromise of our security could harm our reputation
and, therefore, our business. In addition, a party who is able to circumvent
our security measures could misappropriate proprietary information or cause
interruptions in our operations. An individual recently claimed to have
misappropriated some of our confidential information by breaking into our
computer system. We may need to expend significant resources to protect against
security breaches or to address problems caused by breaches. Security breaches
like the recent one could damage our reputation and expose us to a risk of loss
or litigation and possible liability. Our insurance policies carry low coverage
limits, which may not be adequate to reimburse us for losses caused by security
breaches.
We must keep pace with rapid technological change to remain competitive.
The market in which we compete is characterized by rapidly changing
technology, evolving industry standards, frequent new service and product
introductions and enhancements and changing customer demands. These market
characteristics are worsened by the emerging nature of the Internet and the
apparent need of companies from a multitude of industries to offer Web-based
products and services. Our future success therefore will depend on our ability
to adapt to rapidly changing technologies, to adapt our services to evolving
industry standards and to continually improve the performance, features and
reliability of our service. Our failure to adapt to such changes would harm our
business. In addition, the widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could require
substantial expenditures to modify or adapt our services or infrastructure.
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We need to develop new services, features and functions in order to expand.
We plan to expand our operations by developing new or complementary
services, products or transaction formats or expanding the breadth and depth of
services. We may be unable to expand our operations in a cost-effective or
timely manner. Even if we do expand, we may not maintain or increase our
overall market acceptance. If we launch a new business or service that is not
favorably received by consumers, it could damage our reputation and diminish
the value of our brand. We anticipate that future services may include pre- and
post-trade services, including the following:
. the scanning and uploading of photographs of listed items;
. authentication and appraisal;
. arrangements to facilitate shipment of products; and
. methods to facilitate buyers' payments to sellers, such as credit card
services.
We may pursue strategic relationships with third parties to provide many of
these services. By using third parties to deliver these services, we may be
unable to control the quality of these services and our ability to address
problems if any of these third parties fails to perform adequately will be
reduced. Expanding our operations in this manner also will require significant
additional expenses and development, operations and other resources and will
strain our management, financial and operational resources. The lack of market
acceptance of any new services could harm our business.
Our growth will depend on our ability to develop our brand.
We believe that our historical growth has been largely attributable to word
of mouth. We have benefited from frequent and high visibility media exposure
both nationally and locally. We do not expect the frequency or quality of this
media exposure to continue. However, we believe that continuing to strengthen
our brand will be critical to achieving widespread acceptance of our service.
Promoting and positioning our brand will depend largely on the success of our
marketing efforts and our ability to provide high quality services. In order to
promote our brand, we will need to increase our marketing budget and otherwise
increase our financial commitment to creating and maintaining brand loyalty
among users. Brand promotion activities may not yield increased revenues, and
even if they do, any increased revenues may not offset the expenses we incurred
in building our brand. If we do attract new users to our service, they may not
conduct transactions over our service on a regular basis. If we fail to promote
and maintain our brand or incur substantial expenses in an unsuccessful attempt
to promote and maintain our brand, our business would be harmed.
We may be unable to adequately protect or enforce our intellectual property
rights.
We regard the protection of our copyrights, service marks, trademarks, trade
dress and trade secrets as critical to our success. We rely on a combination of
patent, copyright, trademark, service mark and trade secret laws and
contractual restrictions to protect our proprietary rights in products and
services. We have entered into confidentiality and invention assignment
agreements with our employees and contractors, and nondisclosure agreements
with parties with which we conduct business in order to limit access to and
disclosure of our proprietary information. These contractual arrangements and
the other steps taken by us to protect our intellectual property may not
prevent misappropriation of our technology or deter independent third-party
development of similar technologies. We pursue the registration of our
trademarks and service marks in the U.S. and internationally. Effective
trademark, service mark, copyright and trade secret protection may not be
available in every country in which our services are made available online. We
have licensed in the past, and expect to license in the future, certain of our
proprietary rights, such as trademarks or copyrighted material, to third
parties. These licensees may take actions that might diminish the value of our
proprietary rights or harm our reputation. We also rely on certain technologies
that we license
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from third parties, such as Oracle Corporation, Microsoft and Sun Microsystems
Inc., the suppliers of key database technology, the operating system and
specific hardware components for our service. These third-party technology
licenses may not continue to be available to us on commercially reasonable
terms. The loss of this technology could require us to obtain substitute
technology of lower quality or performance standards or at greater cost.
Our business is subject to consumer trends.
We derive substantially all of our revenues from fees received from sellers
for listing products for sale on our service and fees received from
successfully completed auctions. Our future revenues will depend upon continued
demand for the types of goods that are listed by users of our service. The
popularity of certain categories of items, such as toys, dolls and memorabilia,
among consumers may vary over time due to perceived scarcity, subjective value,
and societal and consumer trends in general. For example, during the three
months ended December 31, 1998, we had, at times, approximately 7% of our
listings involved in "Beanie Babies." A decline in the popularity of, or demand
for, certain collectibles or other items sold through our service could reduce
the overall volume of transactions on our service, resulting in reduced
revenues. In addition, consumer "fads" may temporarily inflate the volume of
certain types of items listed on our service, placing a significant strain upon
our infrastructure and transaction capacity. These trends also may cause
significant fluctuations in our operating results from one quarter to the next.
Any decline in demand for the goods offered through our service as a result of
changes in consumer trends could harm our business.
Acquisitions could result in dilution, operating difficulties and other harmful
consequences.
If appropriate opportunities present themselves, we intend to acquire
businesses, technologies, services or products that we believe are strategic.
For example, in June 1998, we acquired Jump Incorporated, the developer and
operator of Up4Sale, an advertising-supported online trading service. Although
the integration of Jump is largely complete, the process of integrating an
acquired business, technology, service or product into our business and
operations may result in unforeseen operating difficulties and expenditures.
Integration of an acquired company also may require significant management
resources that would otherwise be available for ongoing development of our
business. Moreover, the anticipated benefits of any acquisition, including
Jump, may not be realized. We currently do not have any understandings,
commitments or agreements with respect to any other material acquisition and no
other material acquisition currently is being pursued. We may be unable to
identify, negotiate or finance future acquisitions successfully, or to
integrate successfully any acquisitions with our current business. Future
acquisitions could result in potentially dilutive issuances of equity
securities, the incurrence of debt, contingent liabilities or amortization
expenses related to goodwill and other intangible assets, any of which could
harm our business. Future acquisitions may require us to obtain additional
equity or debt financing, which may not be available on favorable terms or at
all. Even if available, this financing may be dilutive.
We are controlled by certain stockholders, executive officers and directors.
Upon completion of this offering, our executive officers and directors (and
their affiliates) will own approximately 73% of our outstanding common stock.
As a result, they may have the ability to control our company and direct our
affairs and business, including the election of directors and approval of
significant corporate transactions. This concentration of ownership may have
the effect of delaying, deferring or preventing a change in control of our
company and may make some transactions more difficult or impossible without the
support of these stockholders. Any of these events could decrease the market
price of our common stock.
A significant number of shares are eligible for sale and their sale could
depress our stock price.
Sales of substantial amounts of our common stock (including shares issued
upon the exercise of outstanding options) in the public market after this
offering could depress the market price of our
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common stock. These sales also might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate. Upon completion of this offering, we will have outstanding
125,092,222 shares of common stock (based upon shares outstanding as of March
1, 1999), assuming no exercise of the underwriters' over-allotment option. Of
these shares, the 6,500,000 shares sold in this offering are freely tradeable.
Of the remaining 118,592,222 shares, approximately 93,004,323 will be subject
to a 90-day lock-up agreement with representatives of the underwriters. Upon
expiration of these agreements, at the end of the lock-up period or earlier at
the discretion of the representatives of the underwriters, these shares are
generally freely tradeable, subject to repurchase pursuant to time-based
vesting schedules. An exception is that 13,775,508 shares held by Benchmark
Capital Partners, L.P. and Benchmark Founders' Fund, L.P. may not be sold to
the public pursuant to Rule 144 until January 2000.
Some anti-takeover provisions may affect the price of our common stock.
The Board of Directors has the authority to issue up to 5,000,000 shares of
preferred stock and to determine the preferences, rights and privileges of
those shares without any further vote or action by the stockholders. The Board
of Directors intends to recommend to our stockholders an increase in the number
of authorized shares of our common stock to 900,000,000 and shares of our
preferred stock to 10,000,000. The rights of the holders of common stock may be
harmed by the rights of the holders of any preferred stock that may be issued
in the future. Some provisions of our certificate of incorporation and bylaws
could have the effect of making it more difficult for a third party to acquire
a majority of our outstanding voting stock. These include provisions that
provide for a classified Board of Directors, prohibit stockholders from taking
action by written consent and restrict the ability of stockholders to call
special meetings. We are also subject to provisions of Delaware law that
prohibit us from engaging in any business combination with any interested
stockholder for a period of three years from the date the person became an
interested stockholder, unless certain conditions are met. This could have the
effect of delaying or preventing a change of control.
Management will have broad discretion over allocation of proceeds from this
offering.
The net proceeds to us from the sale of the 4,250,000 shares of common stock
we are offering are estimated to be approximately $696.2 million after
deducting the underwriting discount and estimated offering expenses. We
currently have no specific plans for a significant portion of our net proceeds
from this offering. Consequently, our management will have the discretion to
allocate the net proceeds to uses that stockholders may not deem desirable. We
may be unable to yield a significant return on any investment of the proceeds.
Substantially all of our proceeds from the offering will be invested in short-
term, interest-bearing, investment grade securities immediately following the
offering.
You will experience immediate and substantial dilution in the net tangible book
value of the stock you purchase.
The assumed public offering price is substantially higher than the net
tangible book value per outstanding share of common stock. Purchasers of our
common stock will incur immediate and substantial dilution of $163.77 per share
in the net tangible book value of our common stock from the public offering
price of $170.00. Additional dilution will occur upon the exercise of
outstanding options.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,250,000 shares of
Common Stock offered by the Company hereby, at a public offering price of
$170.00 per share, are estimated to be approximately $696.2 million after
deducting the underwriting discount and estimated offering expenses. The
Company expects to use the net proceeds from this offering for general
corporate purposes, including working capital. The Company may also use a
portion of the net proceeds, currently intended for general corporate purposes,
to acquire or invest in businesses, technologies, products or services that are
complementary to the Company's business. The Company has no present plans or
commitments and is not currently engaged in any negotiations with respect to
such transactions that are material. Pending such uses, the Company intends to
invest the net proceeds from this offering in short-term, interest-bearing,
investment grade securities. The Company will have significant discretion as to
the use of the net proceeds from this offering. See "Risk Factors--Management
will have broad discretion over allocation of proceeds from this offering." The
Company will not receive any proceeds from the sale of the Common Stock by the
selling stockholders. See "Principal and Selling Stockholders."
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been quoted on the Nasdaq National Market
under the symbol "EBAY" since eBay's initial public offering on September 24,
1998. Prior to such time, there was no public market for the Common Stock of
eBay. The following table sets forth, for the periods indicated, the high and
low prices per share of the Common Stock as reported on the Nasdaq National
Market.
<TABLE>
<CAPTION>
High Low
1998 ------- -------
<S> <C> <C>
Third Quarter (from September 24, 1998)................ $ 18.08 $ 13.71
Fourth Quarter......................................... 103.75 8.42
1999
First Quarter ......................................... 177.38 55.33
Second Quarter (through April 12, 1999)................ 195.00 133.125
</TABLE>
On April 12, 1999, the reported last sale price of the Common Stock on the
Nasdaq National Market was $176.625 per share. As of March 1, 1999, there were
approximately 500 stockholders of record of the Common Stock.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its capital stock
and does not anticipate paying any cash dividends in the foreseeable future.
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1998 on an actual basis and as adjusted to reflect the application
of the net proceeds from the sale of the 4,250,000 shares of Common Stock
offered by the Company hereby, at a public offering price of $170.00 per share,
after deducting the underwriting discount and estimated offering expenses (in
thousands, except share and per share data):
<TABLE>
<CAPTION>
December 31, 1998
--------------------
Actual As Adjusted
------- -----------
<S> <C> <C>
Stockholders' equity:
Preferred Stock, $0.001 par value; 5,000,000 shares
authorized; no shares issued or outstanding, actual and
as adjusted............................................ $ -- $ --
Common Stock, $0.001 par value; 195,000,000 shares
authorized; 121,760,080 issued and outstanding, actual;
125,035,080 issued and outstanding, as adjusted (1).... 121 125
Additional paid-in capital.............................. 86,265 782,473
Notes receivable from stockholders...................... (1,130) (1,130)
Unearned compensation................................... (4,139) (4,139)
Retained earnings....................................... 3,328 3,328
------- --------
Total stockholders' equity............................ 84,445 780,658
------- --------
Total capitalization................................ $84,445 $780,658
======= ========
</TABLE>
- --------
(1) Based on Common Stock outstanding as of December 31, 1998. Excludes:
. 9,246,381 shares of Common Stock issuable upon the exercise of stock
options outstanding as of December 31, 1998 at a weighted average exercise
price of $3.68; and
. 15,151,605 shares available for future grant or issuance under the
Company's various benefit plans.
Between December 31, 1998 and March 1, 1999, the Company granted options to
purchase 830,250 shares of Common Stock, cancelled 32,813 options to
purchase Common Stock and repurchased 54,000 shares of Common Stock.
Additionally, option holders exercised options to purchase 111,742 shares of
Common Stock. All option grants made subsequent to December 31, 1998 were
classified as available for future grant at December 31, 1998 and all
cancellations or repurchases made subsequent to December 31, 1998 have been
returned to the option plan as available for future grant. See
"Capitalization," "Management--Director Compensation," "Description of
Capital Stock" and Notes 9 and 10 of Notes to Consolidated Financial
Statements.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with, and are qualified by reference to, the Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
report. The consolidated statement of income data for the years ended
December 31, 1996, 1997 and 1998 and the consolidated balance sheet data at
December 31, 1997 and 1998, are derived from, and are qualified by reference
to, the audited consolidated financial statements of the Company included
elsewhere in this report.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996(1) 1997 1998
-------------------------- -------------
Consolidated Statement of Income Data: (in thousands, except per share data)
<S> <C> <C> <C>
Net revenues.......................... $ 372 $ 5,744 $ 47,352
Cost of net revenues.................. 14 746 6,859
----------- ------------ -------------
Gross profit........................ 358 4,998 40,493
----------- ------------ -------------
Operating expenses:
Sales and marketing................. 32 1,730 19,841
Product development................. 28 831 4,606
General and administrative.......... 45 950 9,080
Amortization of acquired
intangibles........................ -- -- 805
----------- ------------ -------------
Total operating expenses........... 105 3,511 34,332
----------- ------------ -------------
Income from operations................ 253 1,487 6,161
Interest and other income, net........ 1 56 869
----------- ------------ -------------
Income before income taxes............ 254 1,543 7,030
Provision for income taxes............ (106) (669) (4,632)
----------- ------------ -------------
Net income............................ $ 148 $ 874 $ 2,398
=========== ============ =============
Net income per share(2):
Basic............................... $ 0.02 $ 0.04 $ 0.05
=========== ============ =============
Weighted average shares--basic...... 6,375 22,313 49,895
=========== ============ =============
Diluted............................. $ 0.00 $ 0.01 $ 0.02
=========== ============ =============
Weighted average shares--diluted.... 42,945 82,660 114,590
=========== ============ =============
Supplemental Operating Data:
Number of registered users at end of
period............................... 41 341 2,181
Gross merchandise sales(3)............ $ 7,279 $ 95,271 $ 745,395
Number of auctions listed............. 289 4,394 33,668
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
------ -------
Consolidated Balance Sheet Data: (in thousands)
<S> <C> <C>
Cash and cash equivalents...................................... $3,723 $31,790
Short-term investments......................................... -- 40,401
Working capital................................................ 3,843 75,347
Total assets................................................... 5,619 92,483
Debt and leases, long-term portion............................. 305 --
Series B Mandatorily Redeemable Convertible Preferred Stock and
Series B warrants............................................. 3,018 --
Total stockholders' equity..................................... 1,015 84,445
</TABLE>
- --------
(1) Includes the results of operations for the Company's predecessor sole
proprietorship from September 1995 to December 1995. The sole
proprietorship had no revenues and immaterial expenses prior to January 1,
1996.
(2) See Note 1 of Notes to Consolidated Financial Statements for a description
of the method used to compute basic and diluted net income per share,
respectively.
(3) Represents the aggregate sales prices of all goods for which an auction was
successfully concluded (i.e., there was at least one bid above the seller's
specified minimum price or reserve price, whichever is higher).
23
<PAGE>
SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA
Effective June 30, 1998, eBay acquired all the outstanding shares of Jump,
the developer and operator of Up4Sale, an advertising-supported online trading
service in an auction format. The acquisition has been accounted for using the
purchase method of accounting, and accordingly the purchase price has been
allocated to the tangible and intangible assets acquired and liabilities
assumed on the basis of their respective fair values on the acquisition date.
The unaudited pro forma consolidated statement of income data reflects the
acquisition of Jump as if such acquisition had occurred on January 1, 1998. The
pro forma consolidated statement of income data is presented for informational
purposes only and may not be indicative of the results of operations had the
acquisition occurred on January 1, 1998, nor do they purport to indicate the
future results of the operations of eBay.
<TABLE>
<CAPTION>
Year Ended
December 31, 1998
---------------------
(in thousands, except
per share data)
<S> <C>
Pro Forma Consolidated Statement of Income Data:
Net revenues.............................................. $47,364
Cost of net revenues...................................... 6,987
-------
Gross Profit............................................ 40,377
-------
Operating expenses:
Sales and marketing..................................... 19,841
Product development..................................... 4,614
General and administrative.............................. 9,101
Amortization of acquired intangibles.................... 1,310
-------
Total operating expenses.............................. 34,866
-------
Income from operations.................................... 5,511
Interest and other income, net............................ 868
-------
Income before income taxes................................ 6,379
Provision for income taxes................................ (4,632)
-------
Net income ............................................... $ 1,747
=======
Pro forma net income per share (1):
Basic................................................... $ 0.02
=======
Weighted average shares--basic.......................... 88,787
=======
Diluted................................................. $ 0.01
=======
Weighted average shares--diluted........................ 129,491
=======
</TABLE>
- --------
(1) See Note C of Notes to Consolidated Pro Forma Financial Information for a
description of the method used to compute basic and diluted net income per
share.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
eBay is the world's largest and most popular person-to-person trading
community on the Internet, based on the number of items listed, number of users
and minutes of usage per month. eBay pioneered online person-to-person trading
by developing a Web-based community in which buyers and sellers are brought
together in an efficient and entertaining auction format to buy and sell
personal items such as antiques, coins, collectibles, computers, memorabilia,
stamps and toys. The eBay service permits sellers to list items for sale,
buyers to bid on items of interest and all eBay users to browse through listed
items. The Company's 24-hour-a-day, seven-day-a-week service is fully
automated, topically arranged, intuitive and easy to use.
eBay was formed as a sole proprietorship in September 1995 and operated its
online auction service under the name of "Auction Web." In order to build a
critical mass of customers, the Company offered this service without charge
until February 1996. The Company was incorporated in May 1996, but had no
employees other than the founder until July 1996 and, at December 31, 1996, had
only six employees. During its first two years, the Company attracted buyers
and sellers almost exclusively through word of mouth. In September 1997, the
Company began to target potential customers and to build and promote its brand
through online banner ads and promotions and advertisements in targeted
publications. Also in September 1997, the Company renamed its auction service
"eBay" and launched a second generation of this service with a substantially
redesigned user interface and a new robust, scalable "backend" transaction
processing architecture. The Company's total number of employees increased to
41 by December 31, 1997 and to 138 by December 31, 1998. From December 31, 1997
to December 31, 1998, the number of registered eBay users grew from
approximately 340,000 to over 2.1 million and the number of simultaneous
auctions being conducted through eBay increased from approximately 200,000 to
over 1.0 million. Total gross merchandise sales (the aggregate sales prices of
all goods for which an auction was successfully concluded) grew from
approximately $100 million in 1997 to over $740 million in 1998.
Substantially all of the Company's revenues are derived from placement and
success fees paid by sellers. The Company does not charge fees to buyers and,
to date, has chosen to sell almost no advertising on its website. Sellers pay a
nominal placement fee to list items for sale as follows:
. $0.25 for an auction with a minimum starting price of less than $10.00;
. $0.50 for a minimum starting price of $10.00 to $24.99;
. $1.00 for a minimum starting price of $25.00 to $49.99; and
. $2.00 for a minimum starting price of $50.00 or more.
By paying additional placement fees, sellers can have items featured in
various ways. Sellers can highlight their auctions by utilizing a bold font for
the auction heading for an additional fee of $2.00. Sellers with a favorable
feedback rating can have their auctions featured as "Featured Auctions" for
$99.95, which allows their items to be rotated on the eBay home page, or as
"Category Featured Auctions" for $14.95, which allows their items to be
featured within a particular eBay product category. Additionally, sellers can
add seasonal "icons" (such as a shamrock in connection with St. Patrick's Day)
next to their listing for $1.00, include a photograph of their item in the
Gallery section for $0.25 or feature their item in the Gallery section for
$19.95.
Sellers for whom a three-, five- or seven-day auction is successfully
concluded (i.e., there is at least one bid above the seller's specified minimum
or reserve price, whichever is higher) also pay a success fee for each item
sold that is equal to:
. 5% of the first $25 of the purchase price;
25
<PAGE>
. 2.5% of that portion of the purchase price from $25.01 to $1,000; and
. 1.25% of that portion of the purchase price over $1,000.
Revenues from placement fees are recognized at the time that the item is
listed; revenues related to success fees are recognized at the time that the
auction is successfully concluded. At no point during the auction process does
eBay take possession of either the item being sold or the buyer's payment for
the item. Fees to sellers are aggregated and billed on a monthly basis. A
substantial majority of customer accounts are settled by directly charging
credit card numbers provided by sellers. Provisions for estimated uncollectible
accounts and authorized credits are recorded as percentages of revenues and are
provided for at the time of revenue recognition. In certain instances,
customers will deposit funds with the Company in anticipation of future
transactions; these prepayments appear on the Company's balance sheet as
customer advances.
eBay's business model is significantly different from many existing online
auction and other electronic commerce businesses. Because individual sellers,
rather than eBay, sell the items listed, the Company has no cost of goods sold,
no procurement, carrying or shipping costs and no inventory risk. The Company's
rate of expense growth is primarily driven by increases in personnel and
expenditures for advertising and promotion. The Company intends to increase its
expenses significantly, and in particular its advertising, promotion and
personnel expenses, in an effort to maintain a high level of revenue growth.
Effective June 30, 1998, eBay acquired all of the outstanding shares of Jump
Incorporated, the developer and operator of Up4Sale, an advertising-supported
online trading service in an auction format. The acquisition was accounted for
using the purchase method of accounting, and accordingly the purchase price was
allocated to the tangible and intangible assets acquired and liabilities
assumed on the basis of their fair values on the acquisition date. The fair
value of intangible assets was determined using a combination of methods,
including replacement cost estimates for acquired research and development and
completed technology, a risk-adjusted income approach for the acquired customer
list and the amounts paid for covenants not to compete. The total purchase
price of approximately $2.3 million consisted of 428,544 shares of eBay's
common stock with an estimated fair value of approximately $2.0 million and
other acquisition related expenses of approximately $335,000, consisting
primarily of payments for non-compete agreements totaling approximately
$208,000 and legal and other professional fees. Of the total purchase price,
approximately $150,000 was allocated to in-process technology and was
immediately charged to operations as the technology had not reached
technological feasibility as of the acquisition date and had no alternative
future use. The remainder of the purchase price was allocated to net tangible
liabilities assumed ($31,000) and intangible assets, including completed
technology ($500,000), the customer list ($1.5 million), covenants not to
compete ($208,000) and goodwill ($24,000). The intangible assets are being
amortized over their estimated useful lives, which range from eight to 24
months.
The Company has operated profitably since the first quarter of 1996, when it
began charging fees for its auction service. The Company has only a limited
operating history on which to base an evaluation of its business and prospects.
eBay's prospects must be considered in light of the risks, uncertainties,
expenses and difficulties frequently encountered by companies in their early
stages of development, particularly companies in new and rapidly evolving
markets such as online commerce.
It is difficult for the Company to forecast its revenues or earnings
accurately. The Company believes that period-to-period comparisons of its
operating results may not be meaningful and should not be relied upon as an
indication of future performance. The Company does not have backlog, and almost
all of its net revenues each quarter are derived from auctions that are listed
and completed during that quarter. In order to respond to competitive
developments, the Company may from time to time make pricing, service or
marketing decisions that could harm its business. The Company's operating
results in one or more future quarters may fall below the expectations of
securities analysts and investors. In that event, the trading price of its
common stock would almost certainly decline.
26
<PAGE>
Quarterly Results of Operations
The following table sets forth, for the periods presented, certain data from
eBay's consolidated statement of income, such data as a percentage of net
revenues and certain supplemental operating data. The consolidated statement of
income data has been derived from eBay's unaudited consolidated financial
statements, which, in management's opinion, have been prepared on substantially
the same basis as the audited consolidated financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial information for the periods presented. This
information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this prospectus. The
operating results in any quarter are not necessarily indicative of the results
that may be expected for any future period.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------
Mar. 31, June 30, Sep. 30, Dec. 31, Mar. 31, June 30, Sep. 30, Dec. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands, except percentages; unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 604 $ 1,054 $ 1,459 $ 2,627 $ 5,981 $ 8,941 $ 12,935 $ 19,495
Cost of net revenues.... 33 127 253 333 630 1,106 2,103 3,020
------ ------- ------- ------- -------- -------- -------- --------
Gross profit........... 571 927 1,206 2,294 5,351 7,835 10,832 16,475
------ ------- ------- ------- -------- -------- -------- --------
Operating expenses:
Sales and marketing.... 83 129 369 1,149 2,106 2,504 5,476 9,755
Product development.... 58 151 257 365 518 1,030 1,514 1,544
General and
administrative........ 95 138 260 457 1,028 3,159 2,115 2,778
Amortization of
acquired
intangibles........... -- -- -- -- -- 150 327 328
------ ------- ------- ------- -------- -------- -------- --------
Total operating
expenses............ 236 418 886 1,971 3,652 6,843 9,432 14,405
------ ------- ------- ------- -------- -------- -------- --------
Income from operations.. 335 509 320 323 1,699 992 1,400 2,070
Interest and other
income, net............ 2 2 26 26 22 54 111 682
------ ------- ------- ------- -------- -------- -------- --------
Income before income
taxes.................. 337 511 346 349 1,721 1,046 1,511 2,752
Provision for income
taxes.................. (144) (218) (147) (160) (1,573) (979) (848) (1,232)
------ ------- ------- ------- -------- -------- -------- --------
Net income.............. $ 193 $ 293 $ 199 $ 189 $ 148 $ 67 $ 663 $ 1,520
====== ======= ======= ======= ======== ======== ======== ========
As a percentage of net revenues:
Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of net revenues.... 5.5 12.0 17.3 12.7 10.5 12.4 16.3 15.5
------ ------- ------- ------- -------- -------- -------- --------
Gross profit........... 94.5 88.0 82.7 87.3 89.5 87.6 83.7 84.5
------ ------- ------- ------- -------- -------- -------- --------
Operating expenses:
Sales and marketing.... 13.7 12.3 25.3 43.7 35.2 28.0 42.3 50.1
Product development.... 9.6 14.3 17.6 13.9 8.7 11.5 11.7 7.9
General and
administrative........ 15.7 13.1 17.9 17.4 17.2 35.3 16.4 14.2
Amortization of
acquired
intangibles........... -- -- -- -- -- 1.7 2.5 1.7
------ ------- ------- ------- -------- -------- -------- --------
Total operating
expenses............ 39.0 39.7 60.8 75.0 61.1 76.5 72.9 73.9
------ ------- ------- ------- -------- -------- -------- --------
Income from operations.. 55.5 48.3 21.9 12.3 28.4 11.1 10.8 10.6
Interest and other
income, net............ 0.3 0.2 1.8 1.0 0.4 0.6 0.9 3.5
------ ------- ------- ------- -------- -------- -------- --------
Income before income
taxes.................. 55.8 48.5 23.7 13.3 28.8 11.7 11.7 14.1
Provision for income
taxes.................. (23.8) (20.7) (10.1) (6.1) (26.3) (11.0) (6.6) (6.3)
------ ------- ------- ------- -------- -------- -------- --------
Net income.............. 32.0% 27.8% 13.6% 7.2% 2.5% 0.7% 5.1% 7.8%
====== ======= ======= ======= ======== ======== ======== ========
Supplemental operating
data:
Number of registered
users at end of
period................. 88 150 223 341 580 851 1,265 2,181
Gross merchandise sales
(1).................... $9,337 $17,630 $24,281 $44,023 $104,113 $139,633 $195,046 $306,603
Number of auctions
listed................. 443 794 1,178 1,979 4,209 6,584 9,236 13,639
</TABLE>
- --------
(1) Represents the aggregate sales prices of all goods for which an auction was
successfully concluded (i.e., there was at least one bid above the seller's
specified minimum price or reserve price, whichever is higher).
27
<PAGE>
Net Revenues
eBay's net revenues increased sequentially during each of the past eight
quarters. Substantially all of these increases resulted from growth in the
number of items of merchandise listed by sellers for auction on the Company's
website and growth in the number of auction transactions successfully
concluded. The Company did not increase the amounts of its basic placement fees
or success fees in any of the past eight quarters. Increases in fees for
specific featured placements and in average transaction size did not have a
material impact on net revenue growth. The Company's growth rates are not
sustainable and it expects growth rates will decline in the future.
Cost of Net Revenues
Cost of net revenues primarily consists of costs for customer support and
website operations, including fees for independent contractors, compensation
for customer support and website operations personnel, ISP connectivity
charges, bank processing charges for customer fees paid by credit cards,
depreciation of the equipment required for eBay's website operations,
amortization of technology acquired in the Jump acquisition in the second
quarter of 1998, and costs associated with revenue sharing agreements. The
Company's cost of net revenues increased substantially in absolute dollars, and
generally increased as a percentage of net revenues, in each of the past eight
quarters. The increases in the 1997 quarters were due primarily to increased
personnel expenses and, to a lesser extent, additional ISP connectivity charges
and increased bank processing charges.
Rapid growth in net revenues and the fixed nature of certain components of
cost of net revenues caused cost of net revenues to decline to 10.5% of net
revenues in the first quarter of 1998 from 12.7% in the fourth quarter of 1997.
In the third quarter of 1998, the Company significantly increased its customer
support personnel, website operations personnel, its use of outside
contractors, and accordingly experienced an increase in personnel-related
costs. Also in the third quarter of 1998, the Company began a significant build
up of its computer network in order to handle the increasing volume of
transactions on the eBay service resulting in increased depreciation expense as
well as increased ISP connectivity charges. All of these factors, combined with
a slowing growth rate of net revenues beginning in the second quarter of 1998,
resulted in increases in cost of net revenues as a percentage of net revenues
from 10.5% in the first quarter of 1998 and 12.4% in the second quarter of
1998, to 16.3% in the third quarter of 1998. The slight increase in the revenue
growth rate in the fourth quarter of 1998 resulted in the decrease of cost of
net revenues to 15.5% in the fourth quarter of 1998. Amortization of technology
acquired in the Jump acquisition also contributed to the absolute dollar
increase in the third and fourth quarters of 1998. The Company anticipates that
its costs of net revenues will vary, and may increase, as a percentage of net
revenues in future quarters as it expands its website operations group, website
facilities and pays royalties for software licenses to enhance the eBay
website.
Sales and Marketing
eBay's sales and marketing expenses primarily consist of compensation for
sales and marketing personnel, advertising, trade show and other promotional
costs, expenses for creative design of the eBay website and overhead costs.
Sales and marketing expenses increased substantially in absolute dollars and
generally increased as a percentage of net revenues in each of the past eight
quarters, primarily due to increases in compensation associated with additional
personnel and, in the last two quarters of 1997 and each quarter of 1998,
increases in advertising and promotional expenses.
A slower expansion of advertising and promotional expenses and an increase
in net revenues from the first quarter of 1998 to the second quarter of 1998
caused sales and marketing expenses to decrease to 28.0% of net revenues in the
second quarter of 1998. Substantial increases in advertising expenses,
including expenses associated with a marketing agreement with AOL, caused sales
and marketing expenses to increase to 42.3% of net revenues in the third
quarter of 1998.
28
<PAGE>
These increased expenses, as well as expenses associated with a national print,
broadcast and online advertising campaign, caused sales and marketing expenses
to increase to 50.1% of net revenues in the fourth quarter of 1998. The Company
expects to increase its sales and marketing expenses substantially in future
quarters, particularly for advertising and promotion, and, as a result, expects
that its sales and marketing expenses will increase in absolute dollars and
will vary as a percentage of net revenues for at least the next several
quarters. In addition, the Company is obligated to make aggregate payments to
AOL of $12.0 million over the three-year term of the marketing agreement it
entered into with AOL in August 1998, of which $4.0 million was paid and $1.7
million was expensed during 1998. In March 1999, eBay and AOL expanded the
scope of their strategic relationship. Under this new agreement, eBay will pay
AOL $75 million over the four year term of the contract. Under this agreement,
the Company's remaining payment obligations to AOL were cancelled. See Notes 6
and 11 of Notes to Consolidated Financial Statements.
Product Development
eBay's product development expenses consist primarily of compensation for
product development staff and payments to outside contractors and, to a lesser
extent, of depreciation on equipment used for development and overhead costs.
The Company expenses product development costs as they are incurred. Product
development expenses increased substantially in absolute dollars in each
quarter throughout the past eight quarters. Compensation and other personnel-
related expenses grew most rapidly on a percentage basis between the first
quarter of 1997 and the second quarter of 1997. Product development expenses
increased to 11.5% of net revenues in the second quarter of 1998 from 8.7% in
the first quarter of 1998 as the Company significantly increased its
engineering staff and the use of outside contractors, while the rate of growth
of net revenues declined. Increases in engineering staff were level with net
revenues growth in the third quarter of 1998 and, accordingly, product
development expenses as a percentage of net revenues remained relatively
constant. In the fourth quarter of 1998, product development expenses remained
relatively unchanged from the prior quarter, while net revenues grew. This
resulted in a decline in product development expenses to 7.9% of net revenues
in the fourth quarter of 1998 from 11.7% in the third quarter of 1998. The
Company expects that product development expenses will continue to increase in
absolute dollars and will vary as a percentage of net revenues in future
quarters primarily due to the addition of headcount relative to the rate of net
revenues growth.
General and Administrative
eBay's general and administrative expenses consist primarily of compensation
for personnel and, to a lesser extent, fees for outside professional advisors
and overhead costs. General and administrative expenses increased as a
percentage of net revenues in the third quarter of 1997 as personnel-related
costs increased. General and administrative expenses increased as a percentage
of net revenues to 35.3% in the second quarter of 1998 because, in that
quarter, the Company donated 321,750 shares of its common stock, with an
estimated fair value of $1.2 million, to a charitable foundation, recorded
compensation expense of $429,000 associated with purchases of restricted common
stock by its outside directors and recorded compensation expense of $403,000
associated with the grant of stock options to employees. General and
administrative expenses decreased as a percentage of net revenues to 16.4% in
the third quarter of 1998 and 14.2% in the fourth quarter of 1998 as increases
in personnel related costs and professional fees were more than offset by
increases in net revenues. The Company expects that general and administrative
expenses will continue to increase in absolute dollars in future quarters as
the Company continues to build its
29
<PAGE>
administrative staff and infrastructure, but may eventually decline as a
percentage of net revenues, and fluctuate from quarter to quarter depending on
the rate of net revenue growth.
Amortization of Acquired Intangibles
During the second quarter of 1998, eBay recognized expenses totaling
$150,000 for in-process technology assumed in the acquisition of Jump and
charged it to operations because the technology had not reached the stage of
technological feasibility at the acquisition date and had no alternative future
use. The Company recognized amortization expense of approximately $328,000 in
each of the third and fourth quarters of 1998 associated with the covenants not
to compete, customer list and goodwill assumed in the Jump acquisition.
Amortization associated with these intangible assets is anticipated to be
approximately $328,000 in each of the first three quarters of 1999, and
approximately $26,000 in each of the fourth quarter of 1999 and the first and
second quarters of 2000, assuming no additional acquisitions and no impairment
of value resulting in an acceleration of amortization. See Note 2 of Notes to
Consolidated Financial Statements.
Interest and Other Income, Net
Interest and other income, net, consists of interest earned on cash, cash
equivalents and short-term investments offset by interest expense. Interest and
other income, net, increased in absolute dollars in the third quarter of 1997,
due primarily to interest earned on the proceeds from the June 1997 sale of
Series B Preferred Stock and warrants and remained relatively constant until
the second quarter of 1998. The increase in the second quarter of 1998 was a
result of interest earned on proceeds from the May 1998 exercise of these
warrants and interest earned from loans made to employees in connection with
the exercise of their stock options. The increase in the third quarter of 1998
reflected a full quarter of these earnings. The increase in the fourth quarter
of 1998 resulted from income from investment of the proceeds from the Company's
initial public offering at the end of the third quarter of 1998. In addition,
the Company repaid all borrowings under its line of credit in the fourth
quarter of 1998.
Provision for Income Taxes
eBay's effective federal and state income tax rate was approximately 43.0%
in each quarter of 1997, 92.2% in the first two quarters of 1998 and 48.7% in
the last two quarters of 1998. The 1998 effective tax rate differed from the
combined federal and state statutory rate of approximately 41.8% as a result of
the non-deductibility of charges for stock based compensation and expenses
related to the acquisition of Jump. The variations in the quarterly 1998
effective tax rates resulted from quarterly adjustments to the estimated annual
effective tax rate based on the difference between estimated earnings and
actual earnings reported. See Note 7 of Notes to Consolidated Financial
Statements.
Stock-Based Compensation
In connection with the grant of certain stock options from May 1997 through
June 30, 1998, the Company recorded aggregate unearned compensation totaling
$6.8 million, which amount is being amortized over the four-year vesting period
of such options. Of the total unearned compensation, approximately $25,000,
$421,000, $650,000, $818,000 and $773,000 was amortized in the quarters ended
December 31, 1997 and March 31, June 30, September 30 and December 31, 1998,
respectively. The Company expects quarterly amortization of between
approximately $700,000 and $440,000 during 1999, between approximately $400,000
and $270,000 during 2000 and annual amortization of approximately $720,000
during 2001 and approximately $80,000 during 2002 related to these options.
These amortization amounts were allocated among the operational expense
categories based upon the primary activity of the related employees. See Note
10 of Notes to Consolidated Financial Statements.
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<PAGE>
Years Ended December 31, 1996, 1997 and 1998
The following table sets forth, for the periods presented, certain data from
eBay's consolidated statement of income as a percentage of net revenues. This
information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Net revenues......................................... 100.0% 100.0% 100.0%
Cost of net revenues................................. 3.8 13.0 14.5
------- ------- -------
Gross profit....................................... 96.2 87.0 85.5
------- ------- -------
Operating expenses:
Sales and marketing................................ 8.6 30.1 41.9
Product development................................ 7.5 14.5 9.7
General and administrative......................... 12.1 16.5 19.2
Amortization of acquired intangibles............... -- -- 1.7
------- ------- -------
Total operating expenses......................... 28.2 61.1 72.5
------- ------- -------
Income from operations............................... 68.0 25.9 13.0
Interest and other income, net....................... 0.3 1.0 1.9
------- ------- -------
Income before income taxes........................... 68.3 26.9 14.9
Provision for income taxes........................... (28.5) (11.7) (9.8)
------- ------- -------
Net income........................................... 39.8% 15.2% 5.1%
======= ======= =======
</TABLE>
Net Revenues
eBay's net revenues increased from $372,000 in 1996 to $5.7 million in 1997
and to $47.4 million in 1998, primarily as a result of growth in the number of
items of merchandise listed by sellers for auction on the eBay website and
growth in the number of auction transactions successfully completed. The
increase from 1996 to 1997 was, to a lesser extent, the result of small
increases in average transaction size and certain increases in the placement
fees for various forms of featured placements for listed items.
Cost of Net Revenues
Cost of net revenues increased from $14,000, or 3.8% of net revenues, in
1996 to $746,000, or 13.0% of net revenues, in 1997, and to $6.9 million, or
14.5% of net revenues, in 1998. The increases primarily resulted from the
Company's expansion of its customer support organization, increases in bank
processing charges for customer fees paid by credit cards, depreciation of the
equipment required for the eBay website operations and ISP connectivity
charges.
Sales and Marketing
eBay's sales and marketing expenses increased from $32,000, or 8.6% of net
revenues, in 1996 to $1.7 million, or 30.1% of net revenues, in 1997, and to
$19.8 million, or 41.9% of net revenues, in 1998. The increases from 1996 to
1997 primarily resulted from the building of a sales and marketing
organization, which began late in the fourth quarter of 1996, and the
commencement of significant advertising and promotional activities, which began
in the third quarter of 1997. The increases from 1997 to 1998 primarily
resulted from substantial increases in advertising and promotional expenses,
including costs associated with a national print, broadcast and online
advertising campaign and expenses associated with a marketing agreement with
AOL, both of which commenced in the second half of 1998, as well as from
continued growth in the number of sales and marketing personnel.
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<PAGE>
Product Development
eBay's product development expenses increased from $28,000, or 7.5% of net
revenues, in 1996 to $831,000, or 14.5% of net revenues, in 1997, and to $4.6
million, or 9.7% of net revenues, in 1998. The increases in absolute dollars
primarily resulted from increases in salaries, benefits and other personnel-
related expenses as the Company significantly increased the size of its
research and development staff, as well as expenses related to contractors and
consultants used to increase the product development department. These
increases were more than offset by increases in net revenues in 1998, resulting
in the decline in development expenses as a percentage of net revenues from
14.5% in 1997 to 9.7% in 1998.
General and Administrative
eBay's general and administrative expenses increased from $45,000, or 12.1%
of net revenues, in 1996 to $950,000, or 16.5% of net revenues, in 1997, and to
$9.1 million, or 19.2% of net revenues, in 1998. The increase from 1996 to 1997
primarily resulted from increases in salaries, benefits and other personnel-
related expenses and, to a lesser extent, from increases in the allowance for
doubtful accounts, fees for professional services and overhead costs. The
increase from 1997 to 1998 primarily resulted from the Company's contribution
in June 1998 of 321,750 shares of common stock with an estimated fair value of
$1.2 million to a charitable foundation. In June 1998, the Company also
recorded compensation expense of $429,000 associated with purchases of
restricted shares of common stock by the Company's outside directors. The
increase from 1997 to 1998 also resulted from the Company recording a
compensation expense of approximately $1.7 million associated with stock
options granted to employees. Increases in personnel-related expenses, the
allowance for doubtful accounts, fees for professional services and overhead
costs also contributed to the increase from 1997 to 1998.
Amortization of Acquired Intangibles
During 1998, eBay recognized expenses totaling $150,000 for in-process
technology assumed in the acquisition of Jump and charged this amount to
operations because the technology had not reached the stage of technological
feasibility at the acquisition date and had no alternative future use. The
Company also recognized amortization expense of approximately $655,000 in 1998
associated with the covenants not to compete, the customer list and goodwill
assumed in the Jump acquisition. See Note 2 of Notes to Consolidated Financial
Statements.
Interest and Other Income, Net
eBay's interest and other income, net increased from $1,000 in 1996 to
$56,000 in 1997 and to $869,000 in 1998. The increase from 1996 to 1997 was a
result of interest earned on increased cash, cash equivalents and short-term
investments, from the net proceeds of the Company's sales of preferred stock
and warrants in June 1997. The increase in 1998 from 1997 resulted from
interest earned on the net proceeds from the Company's initial public offering
in September 1998 and, to a lesser extent, interest earned on proceeds from the
exercise of warrants in May 1998 and interest earned from loans made to
employees in connection with the exercise of their stock options.
Provision for Income Taxes
eBay's effective federal and state income tax rate was 41.7% in 1996, 43.4%
in 1997 and 65.9% in 1998. The 1998 effective tax rate differed from the
combined federal and state statutory rate of approximately 41.8% as a result of
the non-deductibility of charges for stock based compensation and expenses
related to the acquisition of Jump. The variation in the effective tax rates
for 1996 and
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<PAGE>
1997 reflects differences in the deductibility of certain expenses. See Note 7
of Notes to the Consolidated Financial Statements.
Stock-Based Compensation
In connection with the grant of certain stock options from May 1997 through
June 30, 1998, eBay recorded aggregate unearned compensation totaling $6.8
million, which amount is being amortized over the four-year vesting period of
such options. Of the total unearned compensation, approximately $25,000 was
amortized in 1997 and $2.7 million was amortized in 1998. These amortization
amounts were allocated among the operational expense categories based upon the
primary activity of the related employees. See Note 10 of Notes to Consolidated
Financial Statements.
Liquidity and Capital Resources
Since eBay's inception, the Company has financed its operations primarily
from net cash generated from operating activities. The Company has acquired
additional financing from the sale of preferred stock and warrants, proceeds
from the exercise of those warrants, proceeds from the exercise of stock
options, and in September 1998, net proceeds of $66.1 million from its initial
public offering.
Net cash provided by operating activities was $113,000 in 1996, $789,000 in
1997 and $6.3 million in 1998. Net cash provided by operating activities
resulted primarily from the Company's net income before non-cash charges for
amortization of unearned compensation, the provision for doubtful accounts and
depreciation and amortization, as well as increases in various liability
categories, offset in part by increases in accounts receivable.
Net cash used in investing activities was $25,000 in 1996, $680,000 in 1997
and $49.3 million in 1998. Net cash used in investing activities in each of
1996 and 1997 was the result of purchases of property and equipment, primarily
computer equipment and furniture and fixtures. During 1998, $8.9 million in
cash was used to purchase property and equipment and $40.4 million was used to
purchase short-term investments.
Net cash provided by financing activities was $15,000 in 1996, $3.5 million
in 1997 and $71.0 million in 1998. Net cash provided by financing activities in
1996 resulted almost entirely from sales of common stock and preferred stock.
Net cash provided by financing activities in 1997 resulted primarily from the
sale of $3.0 million of preferred stock and warrants and borrowings of $545,000
against a bank line of credit. See Notes 5 and 8 of Notes to Consolidated
Financial Statements. Net cash provided by financing activities in 1998
resulted primarily from net proceeds of $66.1 million from the Company's
initial public offering in September 1998, the exercise of warrants for $2.0
million and proceeds from sales of restricted common stock in the aggregate
amount of $3.5 million. These proceeds were offset in part by principal
payments of $598,000 on a bank line of credit and equipment leases. At December
31, 1998, the principal source of liquidity for the Company was $72.2 million
of cash, cash equivalents and short-term investments.
The primary objective of eBay's investment activities is to preserve the
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, the Company maintains its portfolio
of cash equivalents and short-term investments in a variety of securities,
including both government and corporate obligations and money market funds. As
of December 31, 1998, approximately 55% of the Company's total portfolio will
mature in one year or less, with the remainder maturing in less than two years.
See Note 1 of Notes to Consolidated Financial Statements.
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<PAGE>
The following table presents the amounts of the Company's cash equivalents
and short-term investments that are subject to interest rate risk by year of
expected maturity and average interest rates as of December 31, 1998:
<TABLE>
<CAPTION>
Fair
1999 2000 Total Value
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Cash equivalents and short-term
investments............................ $34,852 $28,114 $62,966 $62,966
Average interest rates.................. 3.8% 3.5%
</TABLE>
eBay did not hold derivative financial instruments as of December 31, 1998,
and has never held such instruments in the past. In addition, eBay had no
outstanding debt as of December 31, 1998.
Currently the majority of eBay's sales and expenses are denominated in U.S.
dollars and as a result the Company has experienced no significant foreign
exchange gains and losses to date. While the Company does expect to effect some
transactions in foreign currencies during 1999, it does not expect that foreign
exchange gains or losses will be significant. The Company has not engaged in
foreign currency hedging to date.
eBay had no material commitments for capital expenditures at December 31,
1998 but expects such expenditures to be at least $14.0 million in 1999. Such
expenditures will primarily be for computer equipment, furniture and fixtures
and leasehold improvements. eBay also has total minimum lease obligations of
$25.1 million through November 2004 under certain noncancellable operating
leases. As a result of eBay's August 1998 marketing agreement with AOL, the
Company is obligated to make aggregate payments to AOL of $12.0 million over
the three-year term of the agreement. Of this amount, $4.0 million was paid in
1998, and $1.7 million was expensed, resulting in a prepaid balance of $2.3
million and remaining obligation of $8.0 million at December 31, 1998. In March
1999, eBay and AOL expanded the scope of their strategic relationship. Under
this new agreement eBay will pay AOL $75 million over the four year term of the
contract. Under this agreement, the Company's remaining payment obligations to
AOL were cancelled. See Notes 6 and 11 of Notes to Consolidated Financial
Statements.
The Company believes that its existing cash, cash equivalents and short-term
investments and any cash generated from operations together with the proceeds
from this offering will be sufficient to fund its operating activities, capital
expenditures and other obligations for the foreseeable future. However, if
during that period or thereafter the Company is not successful in generating
sufficient cash flow from operations or in raising additional capital when
required in sufficient amounts and on terms acceptable to the Company, the
Company's business could suffer. If additional funds are raised through the
issuance of equity securities, the percentage ownership of the Company's then-
current stockholders would be reduced.
Year 2000 Issues
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field and cannot reliably
distinguish dates beginning on January 1, 2000 from dates prior to the year
2000. Many companies' software and computer systems may need to be upgraded or
replaced in order to correctly process dates beginning in 2000 and to comply
with the "Year 2000" requirements. The Company has reviewed its internal
programs and has determined that there are no significant Year 2000 issues
within the Company's systems or services. The Company has completed
modifications to its internal systems to attempt to ensure Year 2000
compliance. The costs of these modifications have not been material and have
involved a reallocation of internal resources rather than incremental
expenditures. Although the Company
34
<PAGE>
believes that its software is Year 2000 compliant, the Company may be wrong. If
the Company is wrong, it could face unexpected expenses to fix the problem or
unanticipated webside outages, either of which would harm its business. The
Company uses third-party equipment and software that may not be Year 2000
compliant. For example, the Company relies on credit card companies to collect
the majority of its revenues from users. Due to the nature of the credit card
system, some industry analysts have questioned the effect of the year 2000 on
credit card processing and billing. Failure of the Company's credit card
vendors or other third-party equipment or software vendors to properly process
dates for the year 2000 and thereafter could require the Company to incur
unanticipated expenses in seeking alternative means of payment or hardware or
software replacements. It also could result in loss of revenues or
unanticipated eBay website outages. The Company's marketing efforts are also
dependent on the continued operation of Internet portals and other Internet
sites on which it advertises.
Although the Company has developed contingency plans with respect to
collecting payment under these circumstances, the Company is unable to make
contingency plans if any significant number of the computers constituting the
Internet fail to process dates properly for the year 2000 and there is a
systemwide slowdown or breakdown. The Company's business is dependent on the
continued successful operation of the Internet. Any interruption or significant
degradation of Internet operations due to Year 2000 problems could harm the
Company's business.
Recent Accounting Pronouncements
The American Institute of Certified Public Accountants issued Statement of
Position ("SOP") No. 98-1, "Software for Internal Use," which provides guidance
on accounting for the cost of computer software developed or obtained for
internal use. SOP No. 98-1 is effective for financial statements for fiscal
years beginning after December 15, 1998. The Company does not expect that the
adoption of SOP No. 98-1 will have a material impact on its financial
statements.
35
<PAGE>
BUSINESS
This prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in these forward-looking statements. Factors that may cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
The Company
eBay is the world's largest and most popular person-to-person trading
community on the Internet, based on the number of items listed, number of users
and minutes of usage per month. eBay pioneered online person-to-person trading.
The Company has developed a Web-based community in which buyers and sellers are
brought together in an efficient and entertaining auction format to buy and
sell items such as antiques, coins, collectibles, computers, memorabilia,
stamps and toys. The eBay service permits sellers to list items for sale,
buyers to bid on items of interest and all eBay users to browse through listed
items. The Company's 24-hour-a-day, seven-day-a-week service is fully
automated, topically arranged, intuitive and easy to use. From December 31,
1997 to December 31 1998, the number of registered eBay users grew from
approximately 340,000 to over 2.1 million. eBay hosted over 13.6 million
auctions during the fourth quarter of 1998, up from 2.0 million auctions in the
fourth quarter of 1997. As of December 31, 1998, the Company had over 1.0
million auctions listed in over 1,000 categories. The Company believes that
this critical mass of buyers, sellers and items listed for sale creates a cycle
that helps eBay to continue to grow its user base. Sellers are attracted to
eBay as a result of the large number of potential buyers, and buyers in turn
are attracted to eBay by the broad selection of goods listed on eBay. Browsers
and buyers can search auction listings for specific items or search by
category, key word, seller name, recently commenced auctions or auctions about
to end. eBay's auction format creates a sense of urgency among buyers to bid
for goods and creates an entertaining and compelling trading environment. eBay
also provides buyers and sellers a place to socialize and to discuss topics of
common interest. This compelling trading environment fosters a large and
growing commerce-oriented online community.
Industry Background
Growth of the Internet and Online Commerce
The Internet has emerged as a global medium enabling millions of people
worldwide to share information, communicate and conduct business
electronically. International Data Corporation ("IDC") estimates that the
number of Web users will grow from approximately 150 million worldwide in 1998
to approximately 500 million worldwide by the end of 2003.
The growing adoption of the Web represents an enormous opportunity for
businesses to conduct commerce over the Internet. IDC estimates that commerce
over the Internet will increase from approximately $40 billion worldwide in
1998 to approximately $900 billion worldwide in 2003. While companies initially
focused on facilitating and conducting transactions between businesses over the
Internet, the business-to-consumer market has also become a significant market
and is rapidly growing. These companies typically use the Internet to offer
standard products and services that can be easily described with graphics and
text and do not necessarily require physical presence for purchase, such as
books, CDs, videocassettes, automobiles, home loans, airline tickets and online
banking and stock trading. The Internet gives these companies the opportunity
to develop one-to-one relationships with customers worldwide from a central
location without having to make the significant investments required to build a
number of local retail presences or develop the printing and mailing
infrastructure associated with traditional direct marketing activities. While
companies have generally focused on applying these benefits in business-to-
business and business-to-consumer transactions, a significant market
opportunity exists to apply these same advantages to facilitate person-to-
person trading over the Internet.
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<PAGE>
The Person-to-Person Trading Market Opportunity
The exchange of goods among individuals and small dealers--person-to-person
trading--traditionally has been conducted through trading forums such as
classified advertisements, collectibles shows, garage sales and flea markets or
through intermediaries, such as auction houses. These markets are highly
inefficient for the following reasons:
. their fragmented, regional nature makes it difficult and expensive for
buyers and sellers to meet, exchange information and complete
transactions;
. they offer a limited variety and breadth of goods;
. they often have high transaction costs from intermediaries; and
. they are information inefficient, as buyers and sellers lack a reliable
and convenient means of setting prices for sales or purchases.
Despite these inefficiencies, the Company believes that the market for
traditional person-to-person trading in the U.S., based upon estimates of the
amounts spent through auctions, classified ads and on collectibles, exceeded
$100 billion in goods sold in 1998.
The Internet offers for the first time the opportunity to create a
compelling global marketplace that overcomes the inefficiencies associated with
traditional person-to-person trading while offering the benefits of Internet-
based commerce to the person-to-person trading market. An Internet-based
centralized trading place offers the following benefits:
. facilitates buyers and sellers meeting, listing items for sale,
exchanging information, interacting with each other and, ultimately,
consummating transactions;
. allows buyers and sellers to trade directly, bypassing traditional
intermediaries and lowering costs for both parties;
. is global in reach, offering buyers a significantly broader selection of
goods to purchase and providing sellers the opportunity to sell their
goods efficiently to a broader base of buyers;
. offers significant convenience, allowing trading at all hours and
providing continually updated information; and
. fosters a sense of community through direct buyer and seller
communication, thereby enabling interaction between individuals with
mutual interests.
In addition, this community orientation, facilitation of direct buyer and
seller communication and efficient access to information on a particular buyer
or seller's trading history can help alleviate the risks of anonymous trading.
As a result, there exists a significant market opportunity for an Internet-
based centralized trading place that applies the unique attributes of the
Internet to facilitate person-to-person trading.
The eBay Solution
eBay pioneered person-to-person trading of a wide range of goods over the
Internet using an efficient and entertaining auction format and has grown into
the largest and most popular person-to-person trading community on the
Internet. The core eBay service permits sellers to list items for sale, buyers
to bid for and purchase items of interest and all eBay users to browse through
listed items from any place in the world at any time. eBay offers buyers a
large selection of new and used items that can be difficult and costly to find
through traditional means. eBay also enables sellers to reach a larger number
of buyers more cost-effectively than traditional person-to-person trading
forums.
The eBay service originally was introduced in September 1995 to create an
efficient marketplace for individuals to trade with one another. Begun as a
grassroots online trading community, eBay
37
<PAGE>
primarily attracted buyers and sellers through word of mouth and by providing
buyers and sellers with a place to socialize, to discuss topics of common
interest and ultimately to trade goods with one another. The number of
categories under which eBay users list goods for auction has grown from 10,
when eBay was first introduced, to more than 1,000 as of December 31, 1998.
Categories on eBay currently include antiques, coins, collectibles, computers,
memorabilia, stamps and toys.
The principal reasons for eBay's success are the following:
Largest Online Trading Market. Unlike traditional person-to-person trading
forums, eBay has aggregated a critical mass of buyers, sellers and items listed
for sale. As a result, eBay has become the largest online person-to-person
trading market. As of December 31, 1998, eBay had over 2.1 million registered
users and offered more than 1,000 product categories with over 1.0 million
items for auction, many of which were unique or otherwise hard to find. The
Company believes that this critical mass of buyers, sellers and items listed
for sale creates a cycle that helps eBay continue to grow its user base.
Sellers are attracted to eBay as a result of the large number of potential
buyers and buyers in turn are attracted to eBay by the broad selection of goods
listed on eBay.
Compelling Trading Environment. eBay has created a distinctive trading
environment by utilizing an entertaining auction format, establishing
procedural rules and promoting community values that are designed to facilitate
trade and communications between buyers and sellers, without the need for eBay
to intervene and play a significant role in the trading process. The auction
format creates a sense of urgency among buyers to bid for goods because of the
uncertain future availability of a unique item on the website. Similarly, by
accepting multiple bids at increasing prices, its auction format provides
sellers a more efficient means of obtaining a maximum price for their products.
To date, well over 50% of auctions listed on eBay have been successfully
completed.
Trust and Safety Programs. The Company has developed a number of programs
designed to make users more comfortable with dealing with an unknown trading
partner over the Web. The Company's Feedback Forum encourages every eBay user
to provide comments and feedback on other eBay users with whom they interact
and offers user profiles that provide feedback ratings and incorporate these
comments. In addition, eBay's recently expanded SafeHarbor program provides
guidelines for trading, helps provide information to resolve user disputes,
responds to reports of misuse of the eBay service and, if necessary, warns or
suspends users who violate the terms of the Company's user agreement. The
Company's recent trust and safety initiatives, including user verifications,
insurance, integrated escrow and authentications and appraisals, are intended
to bolster eBay's reputation as a safe place to trade.
Cost-Effective, Convenient Trading. eBay allows its buyers and sellers to
bypass traditionally expensive, regionally fragmented intermediaries and
transact business on a 24-hour-a-day, seven-day-a-week basis. Because eBay
carries no inventory, sellers bypass costly traditional intermediaries, thus
allowing for lower selling costs and increasing the sellers' likelihood of
finding buyers willing to pay his or her target price. To list an item on eBay,
sellers pay only a nominal placement fee ranging from $0.25 to $2.00 and then
pay an additional success fee that steps down from 5% to 1.25% of the
transaction value only if an auction is concluded with a successful bid. As a
result, sellers for the first time can sell relatively inexpensive items which
had previously been prohibitively expensive to list through most traditional
trading forums. By allowing sellers to conveniently reach a broad range of
buyers, eBay also addresses the time-consuming, logistical inconvenience of
individual selling. Buyers have access to a broad selection of items and avoid
the need to pay expensive markups or commissions to intermediaries. Buyers are
not charged for trading through eBay. The critical mass of items listed on eBay
provides a mutual benefit for buyers and sellers to more effectively determine
an appropriate price for an item.
Strong Community Affinity. The Company believes that fostering direct
interaction between buyers and sellers with similar interests has enabled it to
create a loyal, active community of users.
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<PAGE>
eBay has introduced a variety of features and services designed to strengthen
this sense of community among eBay users. The Company facilitates
communications between buyers and sellers by offering chat rooms, bulletin
boards and customer support assistance from eBay personnel and other eBay users
and by providing "About Me" user pages and community features that are designed
to encourage consumer loyalty and repeat usage.
Intuitive User Experience. The eBay service is a fully automated, topically
arranged, intuitive and easy-to-use online service that is available on a 24-
hour-a-day, seven-day-a-week basis. Within minutes of completing a simple
online form, a seller can list items for sale on the service, and buyers can
submit bids for items quickly and easily. Buyers can easily search the hundreds
of thousands of items listed by category or specific item. During the course of
the auction, bidders are notified by email of the status of their bids on a
daily basis and are notified immediately if they are outbid. Sellers and
successful bidders are automatically notified when an auction is completed. To
assist users further, the Company offers customer support via email, staffed on
a 24-hour-a-day, seven-day-a-week basis.
eBay Strategy
The Company's objective is to build upon its position as the world's leading
online person-to-person trading community. The key elements of eBay's strategy
are:
Expand the eBay Community and Strengthen the eBay Brand. The Company
believes that building greater awareness of the eBay brand within and beyond
the eBay community is critical to expanding its user base and to maintaining
the vitality of the eBay community. Although the Company's historical growth
has been largely attributable to word of mouth, the Company has introduced
aggressive marketing efforts to build its user base and its brand name. In
October 1998, the Company launched a substantial ongoing national advertising
campaign, both in traditional media and online, that is designed to attract new
eBay users. The campaign has included advertising in targeted publications,
strategic advertising and sponsorship placements on high traffic websites, a
major radio advertising campaign and active participation in other forums such
as selected trade shows. The Company has benefited from frequent and high
visibility media exposure both nationally and locally. In August 1998, the
Company entered into a three-year marketing relationship with AOL whereby eBay
will be prominently featured in areas of AOL's proprietary service and on
AOL.com. In March 1999, the Company expanded the scope of its strategic
relationship with AOL. Under this new four year agreement, eBay will be given a
prominent presence featuring it as the preferred provider of person-to-person
trading services on AOL's proprietary services, AOL.com, Digital Cities, ICQ,
CompuServe and Netscape. The Company is focusing on reinforcing its brand
within the existing eBay community through marketing programs on the eBay
website and sales of eBay-branded merchandise. See "--Marketing."
Broaden the eBay Trading Platform. The Company intends to pursue a multi-
pronged strategy for growing the eBay platform within existing product
categories, across new product categories and regionally. The Company will
target key product categories in its user programs and marketing activities.
The Company has expanded and developed existing product categories by
introducing category-specific bulletin boards and chat rooms, integrating
category-specific content, advertising its service in targeted publications and
participating in targeted trade shows. In addition, the Company intends to
broaden the range of products offered on its trading platform by seeking to
attract new users from the general audience of Internet users and adding
product categories, content and other services or features to meet this new
user demand. In March 1999, eBay and Butterfield & Butterfield, an auction
house located in San Francisco, California, signed a nonbinding Letter of
Understanding to create a separate category of premium items on the eBay
website, whereby those items would be sourced from Butterfield & Butterfield
and other auction companies. Completion of this arrangement is subject to a
number of conditions, including the execution of a definitive agreement.
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Foster eBay Community Affinity. The Company believes that it has developed
the largest and one of the most loyal person-to-person trading communities on
the Web and that enhancing the eBay community experience will help the Company
foster further growth and a greater sense of loyalty among eBay users. The
Company seeks to maintain a critical mass of frequent buyers and sellers with a
vested interest in the eBay community so that sellers will continue to be
attracted to the service by the large number of potential buyers and buyers
will be attracted to eBay by the large number of items listed by these sellers.
The Company's recent trust and safety initiatives, including user
verifications, insurance, integrated escrow and authentications and appraisal,
are intended to bolster eBay's reputation as a safe place to trade. Consistent
with its desire to foster community, the Company has organized a charitable
fund, known as the eBay Foundation, and intends to involve the members of the
eBay community in determining to which charitable purposes the eBay
Foundation's funds will be applied. See "--The eBay Service--Community
Services."
Enhance Features and Functionality. The Company intends to update and
enhance the features and functionality of eBay frequently in order to continue
to improve the user trading experience through eBay. The Company recently
introduced personalization features such as About Me, which offers users the
opportunity to create their own personal home page free of charge on eBay. In
January 1999, the Company initiated a proprietary presentation format in the
"Antiques" category, the Gallery, which showcases auction items in a catalog of
pictures rather than text. The Company plans to introduce the Gallery to other
eBay categories in 1999. The Company intends to introduce other features, such
as new auction formats, category-specific content, the ability to search for
auction items being sold within driving distance of an identified region and
other features designed to enhance the eBay experience. The Company will
continue to provide rapid system response and transaction processing time by
investing in its infrastructure in order to accommodate additional users,
content and auctions.
Expand Value-Added Services. In order to offer an "end-to-end" person-to-
person trading service, the Company intends to provide a variety of pre- and
post-trade services to enhance the user experience. The Company intends to
introduce new services and expand current ones, such as its SafeHarbor program,
to facilitate the exchange of goods so that buyers and sellers will feel more
comfortable sending money or goods to an unknown trading partner. The Company
recently improved its Feedback Forum to distinguish between transaction-
specific feedback and general feedback, provided integrated third-party escrow
services and has announced that it intends to establish a Verified eBay User
program to encourage users to provide eBay with additional identity
verification. eBay recently implemented a free insurance program that generally
insures items up to a value of $200, with a $25 deductible, for users with a
non-negative feedback rating. The Company anticipates that future services may
include pre-trade services, such as services to facilitate scanning and
uploading of photographs of listed items and authentication and appraisal
services, and post-trade services, such as third-party escrow services,
arrangements to facilitate shipment of products and methods to facilitate
buyers' payments to sellers, such as credit card services. The Company may
pursue strategic relationships with third parties to provide many of these
value-added services. In April, eBay announced that it had entered into an
agreement with Mail Boxes Etc. and planned to enter into an agreement with
iShip.com to provide its users with integrated, online shipping information and
pickup and drop off locations. Completion of these plans is subject to certain
conditions, including negotiation of definitive agreements and successful
completion of software engineering to provide the agreed upon capabilities.
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
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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.
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.
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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 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.
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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 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."
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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>
Each category has numerous subcategories. As of December 31, 1998, eBay
offered a selection of over 1.0 million items, with the most popular items sold
on eBay being those that are relatively standardized or are well-represented
with a photo (and therefore can be evaluated to some degree without a physical
inspection), are small and easily shippable, and are relatively inexpensive. As
the eBay community grows and additional items are listed, the Company will
continue to organize auctions under additional categories to respond to the
needs of the eBay community.
Community Services. Beyond providing a convenient means of trading, eBay has
devoted substantial resources to building an online person-to-person trading
community, which the Company believes is one of the strongest on the Web. Key
components of the Company's community philosophy are maintaining an honest and
open marketplace and treating individual users with respect. The Company offers
a variety of community and support features that are designed to solidify the
growth of the eBay community and to build eBay user affinity and loyalty. eBay
facilitates email communications between buyers and sellers by offering:
. category-specific chat rooms;
. the eBay Cafe (a chat room for the entire eBay community);
. a bulletin board devoted to user feedback on new features;
. an announcements section that covers new features on eBay or other eBay
news;
. customer support boards; and
. ""items wanted" listings where users can post notices seeking specific
items.
eBay also offers My eBay, which permits users to receive a report of their
recent activity on eBay, including bidding activity, selling activity, account
balances, favorite categories and recent feedback. Users with their own Web
pages also can post link buttons from the user's page to eBay and to a list of
items the user is selling on eBay. The Company recently introduced About Me,
which offers users the opportunity to create their own personal home page free
of charge on eBay using step-by-step instructions provided by the Company. The
About Me home page can include personal information, items listed for auction,
eBay feedback ratings, images and links to other favorite sites.
In addition, in June 1998, the Company donated 321,750 shares of Common
Stock to the Community Foundation Silicon Valley, a tax-exempt donor-advised
public charity and established a fund, known as the "eBay Foundation." Through
the Community Foundation Silicon Valley, the eBay programs abroad and share
their experiences with their students. The Company solicits user suggestions
for worthwhile charities through the website.
Customer Support. The Company devotes significant resources to providing
personalized, timely customer service and support. eBay offers customer support
on a 24-hour-a-day, seven-day-a-week basis. Most customer support inquiries are
handled via email, with customer email inquiries
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typically being answered within 24 hours after submission. The Company offers
an online tutorial for new eBay users. In addition, the Company offers the
SafeHarbor program and has recently introduced or is developing a number of
trust and safety initiatives. See "--Trust and Safety Initiatives."
Marketing
eBay's marketing strategy is to promote its brand and attract buyers and
sellers to the eBay service. To attract users to its website, eBay historically
has relied primarily on word of mouth and, to a lesser extent, on distribution
or sponsorship relationships with high traffic websites. Today, the Company
employs a variety of methods to promote its brand and attract potential buyers
and sellers. Currently, eBay uses strategic purchases of online advertising to
place advertisements in areas in which it believes it can reach its target
audience. The Company also engages in a number of marketing activities in
traditional media such as advertising in print media and at trade shows and
other events. eBay also advertises in a number of targeted publications. In
October 1998, the Company launched a substantial national advertising campaign,
both in traditional media and online, that is designed to attract new eBay
users. This campaign has included print, a major radio advertising campaign,
strategic advertising and sponsorship placements on high traffic websites and
advertising in other media. The Company has benefited from frequent and high
visibility media exposure both nationally and locally. While the Company does
not expect the frequency or quality of this type of publicity to continue, the
Company does promote public relations through initiatives such as online
eBay/special event tie-ins and executive speaking engagements. In August 1998,
eBay and AOL entered into a three-year marketing agreement whereby eBay is
featured as the preferred provider of person-to-person auction services in the
"Classifieds" and "Interest" areas of AOL's proprietary service. In addition,
eBay receives placement and promotions on AOL.com, AOL's website. Over the term
of this agreement, the Company will pay AOL $12.0 million. In March 1999, the
Company expanded the scope of its strategic relationship with AOL. Under the
amended agreement, eBay will be given a prominent presence featuring it as the
preferred provider of person-to-person trading services on AOL's proprietary
services (both domestic and international), AOL.com, Digital Cities, ICQ,
CompuServe (both domestic and international) and Netscape. eBay will pay $75
million over the four year term of the contract. eBay will develop a co-branded
version of its service for each AOL property which will prominently feature
each party's brand. AOL will be entitled to all advertising revenue from the
co-branded site. eBay also engages in a number of on-site marketing programs,
including offering a variety of eBay-branded merchandise through the online
"eBay Store."
Operations and Technology
eBay has built a robust, scalable user interface and transaction processing
system that is based on internally-developed proprietary software. The eBay
system handles all aspects of the auction process, including notifying users
via email when they initially register for the service, they place a successful
bid, they are outbid, they place an item for sale and an auction ends.
Furthermore, the system sends daily status updates to any active sellers and
bidders regarding the state of their current auctions. The system maintains
user registration information, billing accounts, current auctions and
historical listings. All information is regularly archived to a data warehouse.
Complete listings of all items for sale are generated every hour. The system
updates a text-based search engine hourly with the titles and descriptions of
new items, as well as pricing and bidding updates for active items. Every time
an item is listed on the service, a listing enhancement option is selected by a
seller, or an auction closes with a bid in excess of the seller-specified
minimum bid, the system makes an entry into the seller's billing account. The
system sends electronic invoices to all sellers via email on a monthly basis.
For convenience, sellers may place a credit card account number on file
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with eBay and their account balance is billed directly. In addition to these
features, the eBay service also supports a number of community bulletin board
and chat areas where users and eBay support personnel can interact.
The Company's system has been designed around industry standard
architectures and has been designed to reduce downtime in the event of outages
or catastrophic occurrences. The eBay service provides 24-hour-a-day, seven-
day-a-week availability, subject to a short maintenance period for a few hours
during one night per week. eBay's system hardware is hosted at the Exodus
facility in Santa Clara, California, which provides redundant communications
lines and emergency power backup. The Company's system consists of Sun database
servers running Oracle relational database management systems and a suite of
Pentium-based Internet servers running on the Windows NT operating system. The
Company uses Resonate Inc.'s load balancing systems and its own redundant
servers to provide for fault tolerance. The Company has experienced periodic
system interruptions, which it believes will continue to occur from time to
time. These outages have stemmed from a variety of causes, including third-
party hardware and software problems and human error. The volume of traffic on
the Company's website and in the number of auctions being conducted by users
has been increasing continually and exponentially, requiring the Company to
expand and upgrade its technology, transaction processing systems and network
infrastructure and add new engineering personnel. The Company may be unable to
accurately project the rate or timing of increases, if any, in the use of the
eBay service or timely expand and upgrade its systems and infrastructure to
accommodate such increases in a timely manner. Any failure to expand or upgrade
its systems at least as fast as the growth in demand for capacity could cause
the website to become unstable and possibly cease to operate for periods of
time. Unscheduled downtime could harm the Company's business.
The Company uses internally developed systems to operate its service and for
transaction processing, including billing and collections processing. The
Company must continually improve these systems to accommodate the level of use
of its website. In addition, the Company may add new features and functionality
to its services that would result in the need to develop or license additional
technologies. The Company's inability to add additional software and hardware
or to upgrade its technology, transaction processing systems or network
infrastructure to accommodate increased traffic or transaction volume could
have adverse consequences. These consequences include unanticipated system
disruptions, slower response times, degradation in levels of customer support,
impaired quality of the users' experience on its service and delays in
reporting accurate financial information. The Company's failure to provide new
features or functionality also could result in these consequences. The Company
may not be able to effectively upgrade and expand its systems in a timely
manner or to integrate smoothly any newly developed or purchased technologies
with its existing systems. These difficulties could harm or limit its ability
to expand its business. See "Risk Factors--The inability to expand our systems
may limit our growth" and "--System failures could harm our business."
The Company incurred $28,000, $831,000 and $4.6 million in product
development expenses in 1996, 1997 and 1998, respectively. The Company
anticipates that it will continue to devote significant resources to product
development in the future as it adds new features and functionality to the eBay
service. The market in which the Company competes is characterized by rapidly
changing technology, evolving industry standards, frequent new service and
product announcements, introductions and enhancements and changing customer
demands. Accordingly, the Company's future success will depend on its ability
to adapt to rapidly changing technologies, to adapt its services to evolving
industry standards and to continually improve the performance, features and
reliability of its service in response to competitive service and product
offerings and evolving demands of the marketplace. The failure of the Company
to adapt to such changes would harm the Company's business. In addition, the
widespread adoption of new Internet, networking or telecommunications
technologies or other technological changes could require substantial
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expenditures by the Company to modify or adapt its services or infrastructure.
See "Risk Factors--Our failure to manage growth could harm us;" "--We must keep
pace with rapid technological change to remain competitive" and "--We need to
develop new services, features and functions in order to expand."
Competition
The market for person-to-person trading over the Internet is new, rapidly
evolving and intensely competitive, and the Company expects competition to
intensify in the future. Barriers to entry are relatively low, and current and
new competitors can launch new sites at a relatively low cost using
commercially available software. The Company currently or potentially competes
with a number of other companies. Its direct competitors include various online
person-to-person auction services, including Yahoo! Auctions Powered by Onsale
and Excite, Inc., both of which are free to sellers and buyers, Auction
Universe and a number of other small services, including those that serve
specialty or regional markets such as CityAuction. The Company also competes
indirectly with business-to-consumer online auction services such as Onsale,
First Auction, Surplus Auction and uBid. A number of traditional auction
companies, including Butterfield & Butterfield and Sotheby's, are offering or
have announced plans to create Internet auction sites. The Company potentially
faces competition from a number of large online communities and services that
have expertise in developing online commerce and in facilitating online person-
to-person interaction. Amazon.com recently announced the opening of Amazon.com
Auctions, a service on its website where users can buy and sell goods similar
to those available on eBay's website. Some of these potential competitors,
including AOL, Lycos, Inc. and Microsoft Corporation, currently offer business-
to-consumer trading services and classified ad services. Some of these
companies also may introduce person-to-person trading to their large user
populations. Other large companies with strong brand recognition and experience
in online commerce, such as Cendant Corporation, QVC, USA Network and large
newspaper or media companies, also may seek to compete in the online auction
market.
In order to respond to changes in the competitive environment, the Company
may, from time to time, make pricing, service or marketing decisions or
acquisitions that could harm its business. For example, the Company recently
implemented a free insurance program that generally insures items up to a value
of $200, with a $25 deductible, for users with a non-negative feedback rating.
The financial impact of this insurance program is not yet known. New
technologies may increase competitive pressures on the Company by enabling its
competitors to offer a lower cost service. Some Web-based applications that
direct Internet traffic to certain websites may channel users to trading
services that compete with the Company.
Although the Company has established Internet traffic arrangements with
several large online services and search engine companies, these arrangements
may not be renewed on commercially reasonable terms. Even if these arrangements
are renewed, they may not result in increased usage of the Company's service.
In addition, companies that control access to transactions through network
access or Web browsers could promote competitors of the Company or charge it
substantial fees for inclusion. See "Risk Factors-- Our market is intensely
competitive."
Intellectual Property
The Company regards the protection of its copyrights, service marks,
trademarks, trade dress and trade secrets as critical to its success. The
Company relies on a combination of patent, copyright, trademark, service mark
and trade secret laws and contractual restrictions to protect its proprietary
rights in products and services. The Company has entered into confidentiality
and invention assignment agreements with its employees and contractors, and
nondisclosure agreements with parties with which its conducts business to limit
access to and disclosure of its proprietary information. These contractual
arrangements and the other steps taken by the Company to protect its
intellectual property may not prevent misappropriation of its technology or
deter independent third-party development of similar technologies.
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The Company has received in the past, and anticipates that it will receive
in the future, communications alleging that certain items listed or sold on
eBay by its users infringe third-party copyrights, trademarks and tradenames or
other intellectual property rights. To assist the owners of such intellectual
property rights in policing and protecting their intellectual property, the
Company developed the Legal Buddy Program. The Legal Buddy Program provides
tools to content owners to detect and respond to infringement. These tools
include a soon to be introduced automated daily key word search that will
enable content owners to quickly locate potentially infringing auction items
and dedicated email accounts established solely for owners to more easily
contact eBay with regard to questionable items. Upon receipt of a written claim
of intellectual property infringement by a user, the Company removes the
offending item from the eBay website, credits the user with the listing fee
and, if not the first offense, suspends the user. Although the Company has
actively sought to work with the content community to eliminate infringing
listings on eBay, some content owners have expressed the view that the
Company's efforts are insufficient. An allegation of infringement of third-
party intellectual property rights may result in litigation against the
Company. Any such litigation could be costly for the Company, could result in
increased costs of doing business through adverse judgment or settlement, could
require the Company to change its business practices in expensive ways, or
could otherwise harm the Company's business. See "--Legal Proceedings" and
"Risk Factors--We may not be able to adequately protect or enforce our
intellectual property rights."
Issues Related to the Listing or Sale by Users of Unlawful Items
The law relating to the liability of providers of online services for the
activities of their users on their service is currently unsettled. The Company
is aware that certain goods, such as firearms, other weapons, adult material,
tobacco products, alcohol and other goods that may be subject to regulation by
local, state or federal authorities, have been listed and traded on its
service. The Company may be unable to prevent the sale of unlawful goods, or
the sale of goods in an unlawful manner, by users of its service, and the
Company may be subject to civil or criminal liability for unlawful activities
carried out by users through its service. In order to reduce its exposure to
this liability, the Company has increased the number of personnel reviewing
potentially illegal items and may in the future implement other protective
measures that could require it to spend substantial resources and/or to reduce
revenues by discontinuing certain service offerings. Any costs incurred as a
result of liability or asserted liability relating to the sale of unlawful
goods or the unlawful sale of goods could harm the Company's business. In
addition, the Company has received significant media attention relating to the
listing or sale of unlawful goods on its website. A continuation of this
negative publicity could damage the Company's reputation and diminish the value
of the eBay brand name. It could also make users reluctant to continue to use
its services. See "Risk Factors--Our business may be harmed by the listing or
sale by our users of illegal items."
Fraudulent Activities on the eBay Website
The Company's future success will depend largely upon sellers reliably
delivering and accurately representing their listed goods and buyers paying the
agreed purchase price. The Company does not take responsibility for delivery of
payment or goods to any user of the eBay service. The Company has received in
the past, and anticipates that it will receive in the future, communications
from users who did not receive the purchase price or the goods that were to
have been exchanged. While the Company can suspend the accounts of users who
fail to fulfill their delivery obligations to other users, the Company does not
have the ability to otherwise require users to make payments or deliver goods
or otherwise make users whole other than through the Company's limited
insurance program. Other than through this program, the Company does not
compensate users who believe they have been defrauded by other users. The
Company also periodically receives complaints from buyers as to the quality of
the goods purchased. Any negative publicity generated as a result of fraudulent
or deceptive conduct by users of the Company's service could damage its
reputation and diminish the
48
<PAGE>
value of its brand name. The Company may in the future receive additional
requests from users requesting reimbursement or threatening legal action
against the Company if no reimbursement is made. Any resulting litigation could
be costly for the Company, divert management attention, result in increased
costs of doing business, lead to adverse judgments or could otherwise harm its
business. See "Risk Factors--Our business may be harmed by fraudulent
activities on our website."
Government Inquiries
On January 29, 1999, the Company received requests to produce certain
records and information to the federal government relating to an investigation
of possible illegal transactions in connection with the Company's website. The
Company has been informed that the inquiry includes an examination of the
Company's practices with respect to these transactions. The Company is fully
cooperating with the inquiry. In order to protect the investigation, the court
has ordered that no further public disclosures be made with respect to the
matter at this time. Should this or any other investigation lead to civil or
criminal charges against the Company, the Company would likely be harmed by
negative publicity, the costs of litigation, the diversion of management time
and other negative effects, even if it ultimately prevails. The Company's
business would certainly suffer if it were not to prevail in any action like
this.
A large number of transactions occur on the eBay website. As a result, the
Company believes that government regulators have received a substantial number
of consumer complaints about the eBay website which, while small as a
percentage of the Company's total transactions, are large in aggregate numbers.
As a result, the Company has from time to time been contacted by various
federal, state and local regulatory agencies and been told that they have
questions with respect to the adequacy of the steps the Company takes to
protect its users from fraud. For example, the City of New York-Department of
Consumer Affairs received complaints from users about transactions on the
Company's website. In investigating these complaints, the Department of
Consumer Affairs requested information about the Company and these
transactions. The Company has provided the requested information. The Company
is likely to receive additional inquiries from regulatory agencies in the
future, which may lead to action against it. The Company has responded to all
inquiries from regulatory agencies by describing its current and planned
antifraud efforts. If one or more of these agencies is not satisfied with its
response to current or future inquiries, the resultant investigations and
potential fines or other penalties could harm its business. See "Risk Factors--
Government inquiries may lead to charges or penalties."
Privacy Policy
The Company believes that issues relating to privacy and use of personal
information relating to Internet users are becoming increasingly important as
the Internet and its commercial use grow. The Company has adopted a detailed
privacy policy that outlines how eBay uses information concerning its users and
the extent to which other registered eBay users may have access to this
information. Users must acknowledge and agree to this policy when registering
for the eBay service. The Company does not sell or rent any personally
identifiable information about its users to any third party; however, the
Company does disclose information to sellers and winning bidders that contains
the seller's and winning bidder's name, email address and telephone number. The
Company also will disclose all customer information in its possession (other
than credit card information) to a law enforcement agency or member of the
Legal Buddy Program which requests this information in connection with a civil,
criminal or regulatory investigation. The Company also uses information about
its users for internal purposes only in order to improve marketing and
promotional efforts, to analyze website usage statistically, and to improve
content, product offerings and website layout. eBay is a member of the TRUSTe
program, a non-profit independent organization that audits websites' privacy
statements and audits their adherence thereto.
49
<PAGE>
New and Existing Regulation of the Internet
The Company is subject to the same federal, state and local laws as other
companies conducting business on the Internet. Today there are relatively few
laws specifically directed towards online services. However, due to the
increasing popularity and use of the Internet and online services, it is
possible that laws and regulations will be adopted with respect to the Internet
or online services. These laws and regulations could cover issues such as
online contracts, user privacy, freedom of expression, pricing, fraud, content
and quality of products and services, taxation, advertising, intellectual
property rights and information security. Applicability to the Internet of
existing laws governing issues such as property ownership, copyrights and other
intellectual property issues, taxation, libel, obscenity and personal privacy
is uncertain. In addition, numerous states, including the State of California,
in which the Company's headquarters are located, have regulations regarding the
manner in which "auctions" may be conducted and the liability of "auctioneers"
in conducting such auctions. No legal determination has been made with respect
to the applicability of the California regulations to the Company's business to
date and little precedent exists in this area. One or more states may attempt
to impose these regulations upon the Company in the future, which could harm
the Company's business.
Several states have proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission also has recently
started a proceeding with one online service regarding the manner in which
personal information is collected from users and provided to third parties.
Changes to existing laws or the passage of new laws intended to address these
issues could directly affect the way the Company does business or could create
uncertainty in the marketplace. This could reduce demand for the services of
the Company or increase the cost of doing business as a result of litigation
costs or increased service delivery costs, or could otherwise harm the
Company's business. In addition, because the Company's services are accessible
worldwide, and the Company facilitates sales of goods to users worldwide,
foreign jurisdictions may claim that the Company is required to comply with
their laws. In some jurisdictions, the Company will be required to collect
value-added taxes on its fees. The Company's failure to comply with foreign
laws could subject it to penalties ranging from fines to bans on the Company's
ability to offer its services.
Employees
As of March 1, 1999, the Company had 179 employees. The Company has never
had a work stoppage, and no employees are represented under collective
bargaining agreements. The Company considers its relations with its employees
to be good.
Facilities
As of March 24, 1999, the Company's principal administrative, marketing and
product development facilities are located in approximately 53,000 square feet
of office space in San Jose, California under leases and subleases that expire
between December 1999 and November 30, 2004. In addition, the Company recently
entered into a lease covering approximately 103,000 square feet in two
buildings in the same office complex as its existing space. This lease expires
on November 30, 2004, with a five-year renewal option. As a result of the
Company's acquisition of Jump, the Company also has facilities in Cincinnati,
Ohio. The Company believes that its existing facilities are adequate to meet
its needs for the immediate future and that future growth can be accommodated
by leasing additional or alternative space near its current facilities.
Legal Proceedings
On March 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
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<PAGE>
violation of a patent. The suit seeks unspecified monetary damages as well as
an injunction against the Company operations. It also seeks treble damages and
attorneys' fees and costs. The Company believes that it has meritorious
defenses against this suit and intends to vigorously defend itself. The Company
could be forced to incur material expenses during this defense and in the event
it were to lose this suit, it could be forced to pay significant damages and an
ongoing royalty and its business would be harmed. eBay is also subject to
certain investigations. See "Risk Factors--Government inquiries may lead to
charges or penalties."
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<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information regarding the executive
officers and directors of the Company as of March 31, 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.
(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, an
entertainment company, most recently as Senior Vice President, Marketing,
Disney Consumer Products. Before joining Disney, Ms. Whitman was at Bain & Co.,
a consulting firm, most recently as a Vice President. Ms. Whitman currently
serves on the board of directors of Staples, Inc. Ms. Whitman holds an A.B.
degree in Economics from Princeton University and an M.B.A. degree from the
Harvard Business School.
Gary F. Bengier has served as Chief Financial Officer and Vice President
Operations of eBay since November 1997. From February 1997 to October 1997, Mr.
Bengier was Vice President and Chief Financial Officer of VXtreme, Inc. a
developer of Internet video streaming products. Prior to that time, Mr. Bengier
was Corporate Controller at Compass Design Automation, a publisher of
electronic circuit design software, from February 1993 to February 1997. Mr.
Bengier has also held senior
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<PAGE>
financial positions at Kenetech Corp., an energy services company, and Qume
Corp., a computer peripherals company, where he participated in numerous debt
and equity financing transactions. Prior to joining Qume in 1989, Mr. Bengier
spent six years at Bio-Rad Laboratories and held varied financial management
roles. Mr. Bengier also spent several years as a management consultant for
Touche Ross & Co. Mr. Bengier holds a B.B.A. degree in Computer Science and
Operations Research from Kent State University and an M.B.A. degree from the
Harvard Business School.
Michael R. Jacobson has served as eBay's Vice President, General Counsel and
Secretary since August 1998. From 1986 to August 1998, Mr. Jacobson was a
partner with the law firm of Cooley Godward LLP, specializing in securities
law, mergers and acquisitions and other transactions. Mr. Jacobson holds an
A.B. degree in Economics from Harvard College and a J.D. degree from Stanford
Law School.
Jeffrey S. Skoll has served as eBay's Vice President Strategic Planning and
Analysis since February 1998, its President from August 1996 to February 1998
and as a director from December 1996 to March 1998. From July 1995 to July
1996, Mr. Skoll served as Channel Marketing Manager for Knight-Ridder
Information Inc., an online information services company and from September
1993 to July 1995 was a student at the Stanford Graduate School of Business.
Prior to that time, Mr. Skoll was President of Skoll Engineering, a systems
consulting firm that he founded, from September 1987 to August 1993. Mr. Skoll
also co-founded Micros on the Move Ltd., a computer rentals company, as an
adjunct to Skoll Engineering in 1990. Mr. Skoll holds a B.a.S.C. degree in
Electrical Engineering from the University of Toronto and an M.B.A. degree from
the Stanford Graduate School of Business.
Brian T. Swette has served as eBay's Senior Vice President of Marketing and
International since August 1998. From 1981 to June 1998, Mr. Swette was
employed by Pepsi-Cola Beverages, a global beverage company, in various
capacities including Executive Vice President and Chief Marketing Officer--
Global Beverages from March 1996 to June 1998, Executive Vice President
Marketing--North America from September 1994 to March 1996, Senior Vice
President and General Manager of New Business from February 1992 to September
1994, Senior Vice President Marketing and Strategy--North America from 1990 to
1991, Vice President North Latin America--General Manager from 1986 to 1989,
Director of Marketing Planning and Development--Pepsi International from 1984
to 1986 and Country Manager--Brazil from 1981 to 1984. Before joining Pepsi-
Cola Beverages, Mr. Swette worked in various capacities for Procter & Gamble
from 1977 to 1981. Mr. Swette currently serves on the board of directors of J.
Crew Apparel. Mr. Swette holds a B.S. degree in Economics from Arizona State
University.
Steven P. Westly has served as eBay's Vice President Marketing and Business
Development since August 1997. From July 1996 to August 1997, Mr. Westly was
Vice President, Business Development of WhoWhere?, an Internet directory and
Web-based email company. Prior to that time, Mr. Westly was Director of Sales
for Netcom, an Internet service provider, from August 1995 to July 1996 and was
Deputy Director of Office of Economic Development, City of San Jose,
California, from April 1991 to August 1995. Before joining the Office of
Economic Development, Mr. Westly served as President of Codd and Date
International, a relational database consulting firm, from January 1990 to
March 1992 and was the Managing Director of Bridgemere Capital, an investment
banking firm, from 1987 to 1990. Mr. Westly holds a B.A. degree in History from
Stanford University and an M.B.A. degree from the Stanford Graduate School of
Business.
Michael K. Wilson has served as eBay's Senior Vice President Product
Development and Site Operations since February 1999, and Vice President Product
Development and Site Operations from January 1997 through January 1999. From
October 1995 to January 1997, Mr. Wilson was Vice President of WELL Engaged,
L.L.C., a wholly-owned subsidiary of The Well, a software company. Prior to
that time, Mr. Wilson was an engineer for daVinci Time and Space, a television
company, from February 1995 to October 1995, an engineer for eShop, a software
company, from February 1992 to August 1994 and a Director of Mainframe
Engineering for Neuron Data, an
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<PAGE>
engineering company, from 1987 to 1991. Before joining Neuron Data, Mr. Wilson
worked in several capacities at Oracle Corporation from 1983 to 1987, Chevron
from 1979 to 1983, and Macy's from 1975 to 1979.
Scott D. Cook has served as a director of eBay since June 1998. Mr. Cook is
the founder of Intuit Inc. and has been a director of Intuit, a financial
software developer, since March 1984 and its Chairman of the Board since March
1993. From March 1984 to April 1994, Mr. Cook served as President and Chief
Executive Officer of Intuit. Mr. Cook also serves on the board of directors of
Amazon.com. 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., 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, a provider of gourmet coffee,
and has been its Chairman of the Board and Chief Executive Officer since its
inception in 1985. From 1985 to June 1994, Mr. Schultz was also President of
Starbucks. Mr. Schultz was the director of Retail Operations and Marketing for
Starbucks Coffee Company, a predecessor to Starbucks from September 1982 to
December 1985 and was the Chairman of the Board, Chief Executive Officer and
President of Il Giornale Coffee Company, a predecessor to Starbucks, from
January 1986 to July 1987. Mr. Schultz is also one of two founding members of
Maveron LLC, a company providing advisory services to consumer-based
businesses, and is one of two members of a limited liability company that
serves as a general partner of its affiliated venture capital fund, Maveron
Equity Partners, L.P. (together, "Maveron").
Board Composition
eBay's Board of Directors (the "Board") is divided into three classes, Class
I, Class II and Class III, with each class serving staggered three-year terms.
The Class I directors, currently Messrs. Cook and Kagle, will stand for re-
election or election at the 1999 annual meeting of stockholders. The Class II
directors, currently Messrs. Omidyar and Schultz, will stand for re-election or
election at the 2000 annual meeting of stockholders and the Class III director,
currently Ms. Whitman, will stand for re-election or election at the 2001
annual meeting of stockholders.
Board Committees
The Audit Committee of the Board consists of Robert C. Kagle and Scott D.
Cook. The Audit Committee reviews eBay's financial statements and accounting
practices, makes recommendations to the Board regarding the selection of
independent auditors and reviews the results and scope of the audit and other
services provided by eBay's independent auditors. The Compensation Committee of
the Board consists of Robert C. Kagle and Howard D. Schultz. The Compensation
Committee makes recommendations to the Board concerning salaries and incentive
compensation for eBay's officers and employees and administers eBay's employee
benefit plans.
Compensation Committee Interlocks and Insider Participation
None of the members of the Compensation Committee of the Board was at any
time since the formation of the Company an officer or employee of the Company.
No executive officer of the
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<PAGE>
Company serves as a member of the board of directors or compensation committee
of any entity that has one or more executive officers serving on the Company's
Board or Compensation Committee.
Director Compensation
Directors of the Company do not receive cash compensation for their services
as directors but are reimbursed for their reasonable expenses for attending
Board and Board committee meetings. In June 1998, Mr. Cook and Mr. Schultz were
each granted an option to purchase 450,000 shares of Common Stock of the
Company at an exercise price of $3.11 per share in connection with their
service on the Board. These options were immediately exercisable. Prior to
exercise, Mr. Schultz assigned the beneficial interest in his option to acquire
337,500 of these shares to his affiliate, Maveron (see Mr. Schultz's biography
above). Mr. Schultz thereafter exercised his option to acquire 112,500 shares
in exchange for a full recourse 55 month promissory note for $350,000 at an
interest rate of 8% per year. Interest on the note is payable annually and the
principal is due on December 1, 2002. In addition, in June 1998, Mr. Schultz
exercised, on behalf of Maveron, the assigned portion of the option to acquire
the remaining 337,500 shares in exchange for $1.05 million in cash. The shares
of Common Stock received are subject to the Company's right of repurchase at
termination of service at a repurchase price equal to the exercise price of the
option that lapses as to 25% of the shares on the first anniversary of the date
of grant and 2.08% each full succeeding month thereafter. Also in June 1998,
Mr. Cook and Maveron each purchased an additional 321,750 shares of Common
Stock at a price of $3.11 per share for cash. The Company subsequently
concluded that the fair market value of the Company's Common Stock on the date
that the Company agreed to make the sale was $3.78 and consequently recognized
$0.67 per share, or an aggregate $429,000, as general and administrative
expense in the year ended December 31, 1998.
In July 1998, the Board adopted, and in August 1998 the Company's
stockholders approved, the Directors Plan and reserved a total of 600,000
shares of the Company's Common Stock for issuance thereunder. Members of the
Board who are not employees of the Company, or any parent, subsidiary or
affiliate of the Company, are eligible to participate in the Directors Plan.
The option grants under the Directors Plan are automatic and nondiscretionary,
and the exercise price of the options must be 100% of the fair market value of
the Common Stock on the date of grant. Each eligible director will initially be
granted an option to purchase 90,000 shares (an "Initial Grant") on the date
such director first becomes a director (the "Effective Date"). At each Annual
Meeting of the Company, each eligible director will automatically be granted an
additional option to purchase 15,000 shares if such director has served
continuously as a member of the Board since the date of such director's Initial
Grant or, if such director was ineligible to receive an Initial Grant, since
the Effective Date. In March 1999, the Board amended the Directors Plan to
provide that no such grants would be made to eligible directors at the 1999
Annual Meeting. The Board is considering other changes to the Directors Plan in
light of the proposed changes in the accounting for this type of plan. The term
of such options is ten years, provided that they will terminate seven months
following the date on which the director ceases to be a director of or a
consultant to the Company (12 months if the termination is due to death or
disability). All options granted under the Directors Plan will vest as to 25%
of the shares on the first anniversary of the date of grant and as to 2.08% of
the shares each month thereafter, provided the optionee continues as a member
of the Board or as a consultant to the Company.
55
<PAGE>
Executive Compensation
The following table shows compensation earned during fiscal 1997 and 1998 by
eBay's Chairman of the Board, Chief Executive Officer and eBay's four most
highly-compensated executive officers for fiscal 1998. These people are
referred to as the "Named Officers." Mr. Omidyar was the Chief Executive
Officer of the Company at December 31, 1997. In February 1998, Margaret C.
Whitman was hired as the Company's Chief Executive Officer. Titles shown in the
table are titles held as of December 31, 1998. The information in the table
includes salaries, bonuses, stock options granted and other miscellaneous
compensation. eBay has not granted stock appreciation rights or restricted
stock awards and has no long-term compensation benefits other than stock
options. No executive officer who held office at December 31, 1997 received
total annual compensation in excess of $100,000 in 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term and Other
Annual Compensation Compensation
--------------------------------- -----------------------
Number of
Securities
Fiscal Other Annual Underlying All Other
Name and 1998 Principal Positions Year Salary Bonus(1) Compensation(2) Options Compensation
- --------------------------------- ------ -------- -------- --------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Margaret C. Whitman...... 1998 $145,833 $100,000 $1,500 7,200,000 $34,894(3)
President and Chief 1997 -- -- -- --
Executive Officer
Pierre Omidyar........... 1998 96,000 25,000 -- --
Founder and Chairman of 1997 65,446 -- -- --
the Board
Steven P. Westly......... 1998 120,000 51,000 1,500 108,000
Vice President Marketing 1997 N/A -- -- 2,376,000
and Business Development
Gary F. Bengier.......... 1998 125,000 25,000 1,500 --
Chief Financial Officer 1997 N/A -- -- 1,575,000
and Vice President
Operations
Michael K. Wilson........ 1998 120,000 30,000 -- --
Vice President Product 1997 N/A -- -- 2,700,000
Development and Site
Operations
Jeffrey S. Skoll......... 1998 96,000 25,000 1,500 --
Vice President, 1997 N/A -- -- --
Strategic Planning and
Analysis
</TABLE>
- --------
(1) All bonuses represent amounts paid in 1999 for services rendered in 1998,
except for $26,000 of the $51,000 paid to Steven P. Westly which was paid
in 1998 for services rendered in 1998.
(2) Represents matching contributions by the Company under its 401(k) Plan.
(3) Represents a reimbursement for relocation expenses paid to Margaret C.
Whitman in 1998.
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<PAGE>
The following executive officers received grants of options in 1998 pursuant
to the 1997 Stock Option Plan (the "1997 Plan").
Option Grants During 1998
<TABLE>
<CAPTION>
Percentage
of Total
Number of Options Potential Realizable Value at
Securities Granted to Assumed Annual Rates of Stock Price
Underlying Employees Exercise Appreciation for Option Term(4)
Options during Price Per Expiration ------------------------------------
Name Granted(1) 1998(2) Share(3) Date 0% 5% 10%
- ---- ---------- ---------- --------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Margaret C. Whitman..... 7,200,000 41.7% $0.07 1/20/2008 $42,720,000 $69,888,248 $111,569,674
Steven P. Westly........ 27,000 0.2 0.07 1/20/2008 160,200 262,081 418,386
36,000 0.2 0.22 3/4/2008 208,000 343,841 552,248
27,000 0.2 0.67 4/13/2008 144,000 245,881 402,186
18,000 0.1 3.11 6/8/2008 52,000 119,921 224,124
</TABLE>
- --------
(1) Options granted in 1998 were granted under the 1997 Plan. All options
granted were immediately exercisable and were either incentive stock
options or nonqualified stock options. These options were granted by the
Board and generally vest over four years at the rate of 25% of the shares
subject to the option on the first vesting date specified in the Stock
Option Agreement and 2.08% per month thereafter. Upon certain changes in
control of the Company, this vesting schedule will accelerate as to all
shares that are then unvested. Unvested shares are subject to the Company's
right of repurchase upon termination of employment. Options expire ten
years from the date of grant. In determining the fair market value of the
Company's Common Stock on each grant date, the Board considered, among
other things, the price of arms'-length sales of the Company's Common Stock
and Series B Preferred Stock, the Company's absolute and relative levels of
revenues and other operating results, the state of the Company's website
development, the entry into the Company's market of certain potentially
significant competitors and the appreciation of stock values of a number of
generally comparable Internet companies. See "--Employee Benefit Plans" and
"--Compensation Arrangements" for a description of the material terms of
these options.
(2) Based on options granted to purchase 17,286,756 shares of Common Stock of
the Company during 1998.
(3) Options were granted at an exercise price equal to the fair market value of
the Company's Common Stock, as determined by the Board of Directors on the
date of grant.
(4) Potential realizable values are computed by multiplying the number of
shares of Common Stock subject to a given option by the initial public
offering price of $6.00 per share, assuming that the aggregate stock value
derived from that calculation compounds at the annual 0%, 5% or 10% rate
shown in the table for the entire ten-year term of the option and
subtracting from that result the aggregate option exercise price. The 5%
and 10% assumed annual rates of stock price appreciation are mandated by
the rules of the Securities and Exchange Commission and do not represent
the Company's estimate or projection of future Common Stock prices.
57
<PAGE>
The following table sets forth the number of shares acquired and the value
realized upon exercise of stock options during 1998 and the number of shares of
Common Stock subject to exercisable and unexercisable stock options held as of
December 31, 1998 by each of the Named Officers. Value at fiscal year end is
measured as the difference between the exercise price and the fair market value
at close of market on December 31, 1998, which was $80.42.
Aggregate Option Exercises in 1998 and Values at December 31, 1998
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Number of Unexercised Options at In-the-Money Options at
Shares December 31, 1998 December 31, 1998
Acquired on Value ------------------------------- -------------------------------
Name Exercise(1) Realized(2) Exercisable(#) Unexercisable(#) Exercisable($) Unexercisable($)
- ---- ----------- ----------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Margaret C. Whitman..... 7,200,000(3) $42,720,000 -- -- $ -- $ --
Steven P. Westly........ 2,484,000(4) 14,741,000 -- -- -- --
Gary F. Bengier......... 1,575,000(5) 9,397,500 -- -- -- --
Michael K. Wilson....... 1,800,000(6) 10,788,000 262,500 637,500 21,107,625 51,261,375
Jeffrey S. Skoll........ -- -- -- -- -- --
</TABLE>
- --------
(1) Except as otherwise noted, all of the shares acquired were unvested as of
December 31, 1998 and subject to the Company's right of repurchase upon
termination of employment at a price equal to the exercise price of the
option pursuant to which the shares were acquired.
(2) Based on the initial public offering price per share of $6.00, minus the
per share exercise price, multiplied by the number of shares issued upon
exercise of the option.
(3) As of December 31, 1998, 90,000 shares of the 7,200,000 shares acquired
were vested and 7,110,000 shares were unvested and subject to the Company's
right of repurchase upon termination of employment.
(4) As of December 31, 1998, 792,000 shares of the 2,484,000 shares acquired
were vested and 1,692,000 shares were unvested and subject to the Company's
right of repurchase upon termination of employment.
(5) As of December 31, 1998, 426,563 shares of the 1,575,000 shares acquired
were vested and 1,148,437 shares were unvested and subject to the Company's
right of repurchase upon termination of employment.
(6) As of December 31, 1998, 862,500 shares of the 1,800,000 shares acquired
were vested and 937,500 shares were unvested and subject to the Company's
right of repurchase upon termination of employment.
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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 per share, which he exercised in full in January
1998. The shares are subject to the Company's right to repurchase unvested
shares upon termination of employment, which right lapsed as to 393,750 shares
in September 1998 and will lapse with respect to 32,813 shares at the end of
each month thereafter.
Mr. Westly's employment offer letter of August 8, 1997 provides for an
initial annual base salary of $120,000 and a $25,000 signing bonus. Mr. Westly
was also granted immediately exercisable options to purchase 2,484,000 shares
(2,376,000 shares on employment and an additional 108,000 shares during his
first year of employment) of Common Stock at a weighted average exercise price
of $0.07 per share, which he exercised in full in January, May and June 1998
subject to the Company's right to repurchase unvested shares upon termination
of employment, which lapses at a rate of 25% of the shares originally subject
to the option on the first anniversary of his employment or the date of grant,
depending on the option, and one forty-eighth of the shares at the end of each
month thereafter. During his first year of employment, Mr. Westly received an
additional $30,000 bonus.
Mr. Wilson's employment offer letter of December 9, 1996 provides for an
initial annual base salary of $78,000. Mr. Wilson was also granted an
immediately exercisable option to purchase 1,800,000 shares of Common Stock at
an exercise price of $0.01 per share, which he exercised in full in January
1998 subject to the Company's right to repurchase unvested shares upon
termination of employment, which lapsed as to 450,000 shares in December 1997
and will lapse with respect to 37,500 shares at the end of each month
thereafter. During his first year of employment, Mr. Wilson received an
additional option to purchase 900,000 shares of Common Stock at an exercise
price of $0.03 per share.
Mr. Skoll's employment offer letter of October 16, 1996 provides for an
initial annual salary of $30,000 and a 30-day right to purchase the 30,600,000
shares of Common Stock that he currently owns subject to the Company's right of
repurchase through June 30, 2000. The right of repurchase lapsed with respect
to seven forty-eighths of the total shares purchased on February 1, 1997 and
will lapse with respect to an additional one forty-eighth of the shares on the
first day of each month thereafter. In the event of an acquisition of the
Company or other similar transaction, the right of repurchase will expire with
respect to all of the shares subject to the Company's right of repurchase.
Mr. Swette's employment offer letter of August 14, 1998 provides for an
initial annual base salary of $150,000 and a $25,000 signing bonus. Mr. Swette
was also granted an option to purchase 1,800,000 shares of Common Stock outside
of the 1997 Plan at an exercise price of $5 per share. These options vest with
respect to 450,000 shares in August 1999 and with respect to 37,500 shares
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<PAGE>
at the end of each month thereafter. In the event Mr. Swette's employment is
terminated without cause prior to August 14, 1999, such option will vest at a
rate of 37,500 shares per month from August 14, 1998 through the termination
date.
Mr. Jacobson's employment offer letter of August 20, 1998 provides for an
initial annual base salary of $150,000 and a $50,000 signing bonus. Mr.
Jacobson was also granted options to purchase an aggregate of 750,006 shares of
Common Stock under the Company's 1997 Plan at an exercise price of $5 per
share. The first option for 45,000 shares vested in full on January 24, 1999.
The second option for 705,006 shares vests with respect to 176,252 shares on
August 24, 1999 and with respect to 14,687 shares at the end of each month
thereafter (14,565 shares for September through December 1999), provided,
however, that in the event Mr. Jacobson's employment is terminated without
cause prior to August 24, 1999, such option will vest at a rate of 14,687
shares per month from August 24, 1998 through the termination date.
Indemnification of Directors and Executive Officers and Limitation of Liability
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act.
As permitted by the Delaware General Corporation Law, the Company's Amended
and Restated Certificate of Incorporation includes a provision that eliminates
the personal liability of its directors for monetary damages for breach of
fiduciary duty as a director, except for liability (1) for any breach of the
director's duty of loyalty to the Company or its stockholders, (2) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, (3) under section 174 of the Delaware General Corporation Law
(regarding unlawful dividends and stock purchases) or (4) for any transaction
from which the director derived an improper personal benefit.
As permitted by the Delaware General Corporation Law, the Company's Amended
and Restated Bylaws provide that (1) the Company is required to indemnify its
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law, subject to certain very limited exceptions, (2) the Company is
required to indemnify its other employees to the extent that it indemnifies its
officers and directors, unless otherwise required by law, its Amended and
Restated Certificate of Incorporation, its Amended and Restated Bylaws or
agreements, (3) the Company is required to advance expenses, as incurred, to
its directors and officers in connection with a legal proceeding to the fullest
extent permitted by the Delaware General Corporation Law, subject to certain
very limited exceptions, and (4) the rights conferred in the Amended and
Restated Bylaws are not exclusive.
The Company has entered into Indemnity Agreements with each of its current
directors and officers to give such directors and officers additional
contractual assurances regarding the scope of the indemnification set forth in
the Company's Amended and Restated Certificate of Incorporation and Amended and
Restated Bylaws and to provide additional procedural protections. At present,
there is no pending litigation or proceeding involving a director, officer or
employee of the Company regarding which indemnification is sought, nor is the
Company aware of any threatened litigation that may result in claims for
indemnification.
The Company has obtained directors' and officers' liability insurance.
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<PAGE>
CERTAIN RELATED PARTY TRANSACTIONS
Since inception (May 13, 1996), there has not been, nor is there currently
proposed, any transaction or series of similar transactions to which the
Company was or is to be a party in which the amount involved exceeds $60,000
and in which any director, executive officer or holder of more than 5% of the
Common Stock of the Company had or will have a direct or indirect interest
other than (1) compensation arrangements, which are described where required
under "Management," and (2) the transactions described below.
Common Stock at Formation. Pursuant to a Stock Purchase and Restriction
Agreement dated May 20, 1996, the Company sold an aggregate of 44,100,000
shares of Common Stock to Pierre M. Omidyar, the Company's founder. Mr. Omidyar
has served as a director of the Company since its inception and was the
Company's Chief Executive Officer from its inception until February 1998. In
consideration for the shares issued, Mr. Omidyar transferred to the Company
cash of $10,167 and accounts receivable valued at $4,095. Of the 44,100,000
shares, 13,500,000 were subsequently exchanged for shares of the Company's
Series A Preferred Stock as discussed below.
All of Mr. Omidyar's remaining 30,600,000 shares of Common Stock are subject
to a Stock Restriction Agreement dated December 12, 1996 between Mr. Omidyar
and the Company (the "Stock Restriction Agreement") and a Stock Restriction and
Co-Sale Agreement dated as of June 20, 1997 among Benchmark Capital Partners,
L.P. and Benchmark Founders' Fund, L.P. (collectively, the "Investors"), Pierre
Omidyar and Jeffrey Skoll (collectively, the "Founders") and the Company (the
"Co-Sale Agreement"). Under the Stock Restriction Agreement, all of the
30,600,000 shares of Common Stock are subject to the Company's right to
repurchase unvested shares if Mr. Omidyar's employment terminates. The
30,600,000 shares vested as to 10,837,503 shares on February 1, 1997 and vest
as to 637,500 shares on the first day of each month thereafter through the
close of business on September 1, 1999, at which time all of the shares will be
vested. The vesting of shares accelerates such that any unvested shares become
fully vested in the event of a sale of the Company, which includes a sale,
lease or disposition of substantially all of the Company's assets, any merger
or consolidation of the Company into another entity, or any other corporate
reorganization where the stockholders immediately prior to such event do not
retain at least 50% of the voting power of and interest in the successor entity
or any transaction or series of related transactions in which more than 50% of
the Company's voting power is transferred ("Sale of the Company"). In addition
to the foregoing, under the Co-Sale Agreement, the vesting of shares will
accelerate upon termination of employment, such that immediately prior to such
termination an additional 3,825,000 shares will become vested and not subject
to repurchase by the Company. See "Principal and Selling Stockholders."
Series A Preferred Stock and Recapitalization. In December 1996, the Company
created a class of Preferred Stock and designated 1,500,000 shares of such
Preferred Stock as Series A Preferred Stock, all of which stock the Company
issued to Mr. Omidyar in exchange for 13,500,000 shares of his Common Stock. In
June 1997, pursuant to an Anti-Dilution Agreement dated December 30, 1996
between the Company, Pierre Omidyar and Jeffrey Skoll, Mr. Omidyar's Series A
Preferred Stock holdings were increased to 1,676,475 shares. Upon completion of
the Company's initial public offering in September 1998, all of the Series A
Preferred Stock was automatically converted to 15,088,275 shares of Common
Stock.
In December 1996, pursuant to a Restricted Stock Purchase Agreement dated
December 12, 1996 between the Company and Mr. Skoll ("Restricted Stock
Agreement"), the Company sold 30,600,000 shares of its Common Stock to Mr.
Skoll at a purchase price of $0.0022 per share or an aggregate of $68,000,
which price was determined by the Board to be the fair market value of the
Common Stock. Mr. Skoll, the first full-time employee of the Company and its
President from August 1996 to February 1998, has served as the Company's Vice
President Strategic Planning and
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Analysis since February 1998. Mr. Skoll acquired the shares of Common Stock
with the proceeds from a full recourse loan governed by a Loan and Pledge
Agreement between Mr. Skoll and the Company. Under such agreement, Mr. Skoll
must repay the entire principal of the loan by December 31, 2002 and pay
interest, which accrues at the rate of 6% per year, simple interest, on the
first anniversary of the exercise date and on each subsequent anniversary until
all principal and accrued interest are paid in full. Mr. Skoll paid off the
full principal and accrued interest on the loan, $75,411, on November 2, 1998.
All of Mr. Skoll's shares of Common Stock are subject to the Restricted
Stock Agreement. Under the Restricted Stock Agreement, Mr. Skoll's shares of
Common Stock are subject to the Company's right to repurchase unvested shares
if his employment terminates. His shares vested as to 4,462,497 shares on
February 1, 1997 and vest as to 637,500 shares on the first day of each month
thereafter through the close of business on June 30, 2000, at which time all of
the shares will be vested. The vesting of shares accelerates such that any
unvested shares become fully vested in the event of a Sale of the Company. In
addition to the foregoing, under the Co-Sale Agreement, the vesting of shares
will accelerate upon termination of employment, such that immediately prior to
such termination an additional 3,825,000 shares will become vested and not
subject to repurchase by the Company. See "Principal and Selling Stockholders."
Series B Preferred Stock. In June 1997, the Company sold an aggregate of
877,374 and 122,626 shares of Series B Preferred Stock at a purchase price of
$3.00 per share and issued warrants to purchase 350,950 and 49,050 shares of
Series B Preferred Stock at an exercise price of $5.00 per share to Benchmark
Capital Partners, L.P. and Benchmark Founders' Fund, L.P., respectively, for an
aggregate purchase price of $3,000,000, which amount was paid in cash.
Benchmark Capital Partners, L.P. and Benchmark Founders' Fund, L.P. each
exercised all of their warrants in May 1998 for an aggregate purchase price of
$2,000,000, which amount was paid in cash. Upon completion of the Company's
initial public offering in September 1998, all of the Series B Preferred Stock
was automatically converted to an aggregate of 12,600,000 shares of Common
Stock. See "Principal and Selling Stockholders."
Investor Rights Agreement. In June 1997, the Company, the Investors and the
Founders entered into an Investor Rights Agreement under which the Investors
and Founders have certain registration rights with respect to their shares of
Common Stock. See "Description of Capital Stock--Registration Rights."
Officer Loans. In December 1996, as discussed above, Mr. Skoll purchased
30,600,000 shares of the Company's Common Stock for $68,000 under the terms of
a Loan and Pledge Agreement effective as of December 1996 between Mr. Skoll and
the Company. From January 1998 through June 1998, in connection with the
exercise of stock options granted under the 1996 Plan and the 1997 Plan, the
Company permitted Margaret C. Whitman, the Company's President and Chief
Executive Officer since February 1998, to purchase 7,200,000 shares of Common
Stock in exchange for a $60,000 cash payment, a $180,000 Secured Full Recourse
Promissory Note dated February 3, 1998 and a $240,000 Secured Non-Recourse
Promissory Note dated February 3, 1998; Steven P. Westly, the Company's Vice
President Marketing and Business Development since August 1997, to purchase
2,484,000 shares of Common Stock in exchange for cash payments totaling $17,920
and Secured Full Recourse Promissory Notes dated January 27, 1998, May 21,
1998, May 26, 1998 and June 26, 1998 in the amounts of $71,280, $16,200, $7,200
and $50,400, respectively; Michael K. Wilson, the Company's Vice President
Product Development and Site Operations since January 1997, to purchase
1,800,000 shares of Common Stock in exchange for a $1,000 cash payment and a
Secured Full Recourse Promissory Note dated January 28, 1998 in the amount of
$9,000 and Gary F. Bengier, the Company's Chief Financial Officer and Vice
President Operations since November 1997, to purchase 1,575,000 shares of
Common Stock in exchange for a $5,250 cash
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payment and a Secured Full Recourse Promissory Note dated January 26, 1998 in
the amount of $47,250. Each note is secured by the Common Stock purchased with
the note except for Ms. Whitman's notes which are each secured by all the
shares purchased with both the full recourse and the non-recourse notes. Each
note bears interest at the rate of 8%, compounded semi-annually. Interest on
the unpaid principal is due on December 1 of each year and the principal
balance is due in full on December 1, 2002. The maximum amount of indebtedness
during 1998 for Ms. Whitman, Mr. Westly and Mr. Wilson was $447,501, $152,629
and $9,488 respectively. Ms. Whitman, Mr. Westly, Mr. Bengier and Mr. Wilson
have paid off the full principal and accrued interest on his or her respective
notes on, respectively, January 27, 1999, December 1, 1998, December 23, 1998
and March 15, 1999. See "Principal and Selling Stockholders."
Stock to Service Provider. In connection with the recruiting of its Chief
Executive Officer, the Company engaged the services of Ramsey Beirne
Associates, Inc., an executive search firm affiliated with Benchmark Capital
Partners, L.P. and Benchmark Founders' Fund, L.P. As partial payment for its
services, on March 13, 1998 the Company issued to this firm 15,416 shares of
Series B Preferred Stock, which was valued at $6.00 per share. This stock
converted at the Company's initial public offering into 138,744 shares of
Common Stock.
eBay Foundation. In June 1998, the Company established a fund known as the
eBay Foundation, which is administered by the Community Foundation Silicon
Valley, and donated 321,750 shares of Common Stock to the Community Foundation
Silicon Valley on behalf of the eBay Foundation. The Community Foundation
Silicon Valley sold 32,175 shares of eBay Common Stock in conjunction with
eBay's initial public offering and intends to offer 33,000 shares in connection
with this offering.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's Common Stock as of March 1,
1999 by (1) each stockholder known by the Company to be the beneficial owner of
more than 5% of the Company's Common Stock, (2) each director of the Company,
(3) the Named Executive Officers, (4) all executive officers and directors as a
group and (5) the selling stockholders.
<TABLE>
<CAPTION>
Shares
Beneficially Owned Shares
Prior to Beneficially Owned
Offering(1) Shares After Offering(1)
------------------ Being ------------------
Name Number Percent Offered Number Percent
- ---- ---------- ------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
Pierre M. Omidyar(2).......... 37,600,521 31.2% 790,000 36,810,521 29.4%
Jeffrey S. Skoll(3)........... 22,782,246 18.9 421,000 22,361,246 17.9
Robert C. Kagle............... 17,862,447 14.8 88,000 17,774,447 14.2
Benchmark Funds(4)
Margaret C. Whitman(5)........ 7,137,000 5.9 211,000 6,926,000 5.5
Steven P. Westly(6)........... 2,484,000 2.1 85,000 2,399,000 1.9
Gary F. Bengier(7)............ 1,575,000 1.3 70,000 1,505,000 1.2
Michael K. Wilson(8).......... 2,137,500 1.8 85,000 2,052,500 1.6
Scott D. Cook(9).............. 771,750 * 29,292 742,458 *
Howard D. Schultz(10)......... 816,750 * -- 506,669 *
Michael R. Jacobson(11)....... 45,000 * 25,000 20,000 *
All directors and executive
officers as a group
(11 persons)(12)............. 93,212,214 77.2 1,804,292 91,097,841 72.8
David M. Beirne(13)........... 17,620,548 14.6 88,000 17,532,548 14.0
Bruce W. Dunlevie(13)......... 17,837,154 14.8 88,000 17,749,154 14.2
Kevin R. Harvey(13)........... 17,862,447 14.8 88,000 17,774,447 14.2
Andrew S. Rachleff(13)........ 17,837,154 14.8 88,000 17,749,154 14.2
Certain limited partners of
Maveron(10).................. 63,479 * 45,000 18,479 *
Community Foundation Silicon
Valley(14)................... 289,575 * 33,000 256,575 *
David Ostby................... 6,426 * 6,426 -- *
Laurie Kehler(15)............. 4,426 * 3,426 1,000 *
Kehler Charitable Remainder
Trust........................ 2,000 * 2,000 -- *
Sharon Fahrney................ 6,426 * 3,856 2,570 *
</TABLE>
- --------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Unless otherwise indicated
below, the persons and entities named in the table have sole voting and
sole investment power with respect to all shares beneficially owned,
subject to community property laws where applicable. Shares of Common
Stock subject to options that are currently exercisable or exercisable
within 60 days of March 1, 1999 are deemed to be outstanding and to be
beneficially owned by the person holding such options for the purpose of
computing the percentage ownership of such person but are not treated as
outstanding for the purpose of computing the percentage ownership of any
other person. The percentage of beneficial ownership is based on
120,817,222 shares of Common Stock outstanding as of March 1, 1999 and an
assumed 125,092,222 shares of Common Stock outstanding after the
completion of this offering.
(2) Mr. Omidyar is the Founder and Chairman of the Board of the Company. As of
March 1, 1999, 33,775,521 shares of the 37,600,521 shares he beneficially
owned were vested and 3,825,000 were unvested and subject to the Company's
right of repurchase at their original purchase price of $0.0022 per share.
See "Certain Transactions" and "Description of Capital Stock." The address
for Mr. Omidyar is 2005 Hamilton Avenue, Suite 350, San Jose, California
95125.
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(3) Mr. Skoll is the Vice President Strategic Planning and Analysis of the
Company. As of March 1, 1999, 12,582,246 shares of the 22,782,246 he
beneficially owned were vested and 10,200,000 were unvested and subject to
the Company's right of repurchase at their original purchase price of
$0.0022 per share. See "Certain Transactions" and "Description of Capital
Stock." The address for Mr. Skoll is 2005 Hamilton Avenue, Suite 350, San
Jose, California 95125.
(4) Includes 15,244,821 shares held by Benchmark Capital Partners, L.P. and
2,130,687 shares held by Benchmark Founders' Fund, L.P. (collectively, the
"Benchmark Funds"). Mr. Kagle, a director of the Company, is a Member of
Benchmark Capital Management Co., L.L.C., which is the General Partner of
Benchmark Capital Partners, L.P. and Benchmark Founders' Fund, L.P.
Mr. Kagle disclaims beneficial ownership of shares held by such entities
except for his proportional interest therein. The address for Mr. Kagle
and these entities is c/o Benchmark Capital Management Co., L.L.C., 2480
Sand Hill Road, Suite 200, Menlo Park, California 94025.
(5) Ms. Whitman is the President and Chief Executive Officer of the Company.
As of March 1, 1999, 1,710,000 shares of the 7,110,000 shares she
beneficially owned were vested and 5,400,000 shares were unvested and
subject to the Company's right of repurchase at their original purchase
price of $0.067 per share. Includes 27,000 shares held by Ms. Whitman's
husband as custodian for her two children. The address for Ms. Whitman is
2005 Hamilton Avenue, Suite 350, San Jose, California 95125.
(6) Mr. Westly is the Vice President Marketing and Business Development of the
Company. As of March 1, 1999, 898,312 shares of the 2,484,000 shares he
beneficially owned were vested and 1,585,688 shares were unvested and
subject to the Company's right of repurchase at their original purchase
price. The original purchase prices of Mr. Westly's unvested shares are:
$0.033 (1,485,000 shares); $0.067 (19,688 shares); $0.22 (36,000 shares);
$0.67 (27,000 shares); and $3.11 (18,000 shares). The address for Mr.
Westly is 2005 Hamilton Avenue, Suite 350, San Jose, California 95125.
(7) Mr. Bengier is the Chief Financial Officer and Vice President Operations
of the Company. As of March 1, 1999, 492,187 shares of the 1,575,000
shares he beneficially owned were vested and 1,082,813 shares were
unvested and subject to the Company's right of repurchase at their
original purchase price of $0.033 per share. The address for Mr. Bengier
is 2005 Hamilton Avenue, Suite 350, San Jose, California 95125.
(8) Mr. Wilson is the Senior Vice President Product Development and Site
Operations of the Company. As of March 1, 1999, 937,500 shares of the
1,800,000 shares he beneficially owned were vested and 862,500 shares were
unvested and subject to the Company's right of repurchase at their
original purchase price of $0.0057 per share. Also includes 337,500 shares
subject to options vesting within 60 days of March 1, 1999. The address
for Mr. Wilson is 2005 Hamilton Avenue, Suite 350, San Jose, California
95125.
(9) Includes 450,000 shares subject to an immediately exercisable option
outstanding at March 1, 1999. See "Management--Director Compensation." The
address for Mr. Cook is 2550 Garcia Avenue, M.S. 2475, Mountain View,
California 94043.
(10) Mr. Schultz's shares prior to the offering include (a) 321,750 shares
acquired by Maveron Equity Partners, L.P., a limited partnership in which
Mr. Schultz is a member of the general partner and (b) 450,000 shares
issued upon exercise of an option that are subject to the Company's right
of repurchase at their original purchase price of $3.11 per share. Of
these latter 450,000 shares, 337,500 shares were transferred to Maveron
related entities. Prior to the offering, the former 321,750 shares
acquired by Maveron were distributed pro rata among its limited partners,
some of which will sell an aggregate of 45,000 shares in this offering.
See "Management--Director Compensation." The address for Mr. Schultz is
2401 Utah Ave. South, Seattle, Washington, 98134. The address for Maveron
is 800 Fifth Avenue, Suite 4100, Seattle, Washington 98104.
(11) Mr. Jacobson is the Vice President, Legal Affairs, General Counsel and
Secretary of the Company. All of these shares represent a fully vested
option for such shares as of March 1,
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1999, of which a portion will be exercised and sold in connection with
this offering. The address for Mr. Jacobson is 2005 Hamilton Avenue, Suite
350, San Jose, California 95125.
(12) Includes the shares described in footnotes (2)-(11).
(13) Includes 15,244,821 shares held by Benchmark Capital Partners, L.P. and
2,130,687 shares held by Benchmark Founders' Fund, L.P. (collectively,
the "Benchmark Funds"). Messrs. Beirne, Dunlevie, Harvey and Rachleff are
each members of Benchmark Capital Management Co., L.L.C., which is the
General Partner of Benchmark Capital Partners, L.P. and Benchmark
Founders' Fund, L.P. Each of Messrs. Beirne, Dunlevie, Harvey and
Rachleff disclaims beneficial ownership of shares held by such entities
except for his proportional interest therein. The address for these
stockholders is c/o Benchmark Capital Management Co., L.L.C., 2480 Sand
Hill Road, Suite 200, Menlo Park, California 94025.
(14) In June 1998, the Company established a fund known as the eBay
Foundation, which is administered by the Community Foundation Silicon
Valley. To capitalize this foundation, the Company donated 321,750 shares
to the Community Foundation Silicon Valley (the "Foundation"), of which
32,175 shares had been sold by the Foundation as of March 1, 1999.
(15) Ms. Kehler disclaims beneficial ownership of the 2,000 shares held by the
Kehler Charitable Remainder Trust.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 195,000,000 shares
of Common Stock, $0.001 par value per share, and 5,000,000 shares of Preferred
Stock, $0.001 par value per share. The Board of Directors intends to recommend
to its stockholders an increase in the number of authorized shares of its
Common Stock to 900,000,000 and shares of its Preferred Stock to 10,000,000. As
of March 1, 1999, there were outstanding 120,817,222 shares of Common Stock
held by approximately 500 stockholders of record and options to purchase
9,888,294 shares of Common Stock.
Common Stock
Subject to preferences that may apply to shares of Preferred Stock
outstanding at the time, the holders of outstanding shares of Common Stock are
entitled to receive dividends out of assets legally available therefor at such
times and in such amounts as the Board of Directors may from time to time
determine. Each stockholder is entitled to one vote for each share of Common
Stock held on all matters submitted to a vote of stockholders. Cumulative
voting for the election of directors is not provided for in the Company's
Amended and Restated Certificate of Incorporation, which means that the holders
of a majority of the shares voted can elect all of the directors then standing
for election. The Common Stock is not entitled to preemptive rights and is not
subject to conversion or redemption. Upon a liquidation, dissolution or
winding-up of the Company, the assets legally available for distribution to
stockholders are distributable ratably among the holders of the Common Stock
and any participating Preferred Stock outstanding at that time after payment of
liquidation preferences, if any, on any outstanding Preferred Stock and payment
of other claims of creditors. Each outstanding share of Common Stock is, and
all shares of Common Stock to be outstanding upon completion of this offering
will be, fully paid and nonassessable.
Preferred Stock
The Company is authorized, subject to limitations prescribed by Delaware
law, to provide for the issuance of Preferred Stock in one or more series, to
establish from time to time the number of shares to be included in each such
series, to fix the rights, preferences and privileges of the shares of each
wholly unissued series and any qualifications, limitations or restrictions
thereon, and to increase or decrease the number of shares of any such series
(but not below the number of shares of such series then outstanding) without
any further vote or action by the stockholders. The Board may authorize the
issuance of Preferred Stock with voting or conversion rights that could
adversely affect the voting power or other rights of the holders of the Common
Stock. The issuance of Preferred Stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could,
among other things, have the effect of delaying, deferring or preventing a
change in control of the Company and may adversely affect the market price of
the Common Stock and the voting and other rights of the holders of Common
Stock. The Company has no current plans to issue any shares of Preferred Stock.
Registration Rights
Pursuant to an Investor Rights Agreement dated June 20, 1997 between the
Company, the Founders and the Investors (the "Rights Agreement"), the Founders
and the Investors have certain registration rights for the 59,171,767 and
17,774,447 shares of Common Stock, respectively, held by them after the
completion of this offering (the "Registrable Securities"), at any time. Under
the Rights Agreement, the Investors, by written request of at least two-thirds
of the holders of the Investors' Registrable Securities then outstanding, may
demand that the Company file a registration statement under the Securities Act
covering all or a portion of the Investors' Registrable Securities, provided
that, in the case of a registration on a form other than a Form S-3, the
offering is for at least 50% of the then outstanding Investors' Registrable
Securities, or in the case of a registration on a Form S-3,
67
<PAGE>
there is a reasonably anticipated aggregate offering price to the public of at
least $1,000,000. The Investors have the right to demand two registrations on a
form other than Form S-3 and not more than one Form S-3 registration in any
six-month period. These registration rights are subject to the Company's right
to delay the filing of a registration statement, not more than once in a 12-
month period, for not more than 90 days, in the case of a registration on a
form other than a Form S-3, and 60 days, in the case of a registration on a
Form S-3, after receiving the registration demand.
In addition, the Investors and Founders have certain "piggyback"
registration rights. If the Company proposes to register any of its Common
Stock under the Securities Act (other than pursuant to the Investors' demand
registration rights noted above), the Investors or Founders may require the
Company to include all or a portion of their Registrable Securities in such
registration; provided, however, that the managing underwriter, if any, of any
such offering has certain rights to limit the number of, or in the case of the
Company's initial public offering, to exclude all or a portion of the
Registrable Securities proposed to be included in such registration.
All registration expenses incurred in connection with the above
registrations would be borne by the Company. The selling Investor or Founder
would pay all underwriting discounts, selling commissions and stock transfer
taxes applicable to the sale of his or its Registrable Securities.
Demand and piggyback registration rights under the Rights Agreement
terminate with respect to each Investor or Founder, as applicable, on September
24, 2005; provided that each Investor's and Founder's rights under the Rights
Agreement will terminate earlier when such Investor or Founder may sell all of
its or his shares in a three-month period under Rule 144 under the Securities
Act.
Put/Call Options on Common Stock
In June 1997, each Founder entered into a separate Loan and Pledge Agreement
with the Investors under which he obtained a full recourse loan of $750,000, of
which $658,030 was made by Benchmark Capital Partners, L.P. and $91,970 was
made by Benchmark Founders' Fund, L.P. Each Founder secured his loan with a
pledge of 6,887,754 shares of Common Stock for an aggregate of 13,775,508
shares, of which 12,086,271 shares were pledged to Benchmark Capital Partners,
L.P. and 1,689,237 shares were pledged to Benchmark Founders' Fund, and a
security interest in such Founder's rights under the Put Option Agreement and
the Call Option Agreement each dated June 27, 1997 among the Investors and each
Founder individually. The loans are due June 27, 2002 and bear interest,
compounded annually, at a rate of 7% per annum. The loans were paid in full on
January 12, 1999 subsequent to the exercise of the call by the Benchmark Funds
under their Call Option Agreements with each Founder.
Under his Call Option Agreement, each Founder granted the Investors an
option to call all of the shares covered by the option at any time from the
date of the agreement up to June 27, 2001 at an exercise price equal to an
aggregate of $750,000 together with the aggregate amount of interest accrued
through the date of exercise under the applicable Loan and Pledge Agreement.
These call options were exercised on January 12, 1999.
Anti-Takeover Provisions
Delaware Law
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Anti-Takeover Law") regulating corporate
takeovers. The Anti-Takeover Law prevents certain Delaware corporations,
including those whose securities are listed on the Nasdaq National Market, from
engaging, under certain circumstances, in a "business combination" (which
includes a
68
<PAGE>
merger or sale of more than 10% of the corporation's assets) with any
"interested stockholder" (a stockholder who owns 15% or more of the
corporation's outstanding voting stock, as well as affiliates and associates of
any such person) for three years following the date that such stockholder
became an "interested stockholder" unless (1) the transaction that resulted in
the stockholders' becoming an "interested stockholder" was approved by the
board of directors prior to the date the "interested stockholder" attained such
status, (2) upon consummation of the transaction that resulted in the
stockholder's becoming an "interested stockholder," the "interested
stockholder" owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding those shares owned
by (a) persons who are directors and also officers and (b) employee stock plans
in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer), or (3) on or subsequent to such date the "business
combination" is approved by the board of directors and authorized at an annual
or special meeting of stockholders by the affirmative vote of at least two-
thirds of the outstanding voting stock that is not owned by the "interested
stockholder." A Delaware corporation may "opt out" of the Anti-Takeover Law
with an express provision in its original certificate of incorporation or an
express provision in its certificate or incorporation or bylaws resulting from
a stockholders' amendment approved by at least a majority of the outstanding
voting shares. The Company has not "opted out" of the provisions of the Anti-
Takeover Law. The statute could prohibit or delay mergers or other takeover or
change-in-control attempts with respect to the Company and, accordingly, may
discourage attempts to acquire the Company.
Charter and Bylaw Provisions
The Company's Amended and Restated Bylaws divide the Board into three
classes as nearly equal in size as possible with staggered three-year terms.
The classification of the Board could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of the Company. In addition, the Amended and Restated Bylaws
provide that any action required or permitted to be taken by the stockholders
of the Company at an annual meeting or a special meeting of the stockholders
may be taken only if it is properly brought before such meeting and may not be
taken by written action in lieu of a meeting. The Amended and Restated Bylaws
provide that special meetings of the stockholders may be called only by the
Chairman of the Board, the Chief Executive Officer or, if none, the President
or the Board.
The Company's Amended and Restated Certificate of Incorporation and its
Amended and Restated Bylaws provide that the Company will indemnify officers
and directors against losses that they may incur in investigations and legal
proceedings resulting from their services to the Company, which may include
services in connection with takeover defense measures. Such provisions may have
the effect of preventing changes in the management of the Company.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Company's Common Stock is
ChaseMellon Shareholder Services, L.L.C.
69
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
125,092,222 shares of Common Stock, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
the 6,500,000 shares sold in this offering will be freely tradeable without
restriction under the Securities Act unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act. Of the
remaining shares, a total of 93,004,323 shares held by existing stockholders
are subject to lock-up agreements generally providing that, with certain
limited exceptions, the stockholder will not (1) offer to sell, sell, contract
to sell, pledge or otherwise dispose of any shares of Common Stock owned of
record or beneficially prior to the offering or any securities convertible into
or exchangeable for such shares of Common Stock, (2) establish a "put
equivalent position" with respect to such Common Stock within the meaning of
Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended, or (3)
publicly announce an intention to take any of the actions set forth in (1) or
(2) for a period of 90 days following the date of the final prospectus for this
offering without the prior written consent of Goldman, Sachs & Co. acting alone
or each of the above listed representatives acting together. As a result of
these lock-up agreements, notwithstanding possible earlier eligibility for sale
under the provisions of Rules 144, 144(k) and 701, none of these shares can be
sold until 91 days after the date of the final prospectus. Beginning 91 days
after the date of the final prospectus, these shares will be eligible for sale
in the public market, subject to certain volume limitations and the expiration
of applicable holding periods under Rule 144 under the Securities Act and the
Company's right to repurchase unvested shares.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least one year (including the holding period of any prior owner except an
affiliate) would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of (1) 1% of the number of shares of
Common Stock then outstanding (which will equal approximately 1,250,000 shares
immediately after this offering) or (2) the average weekly trading volume of
the Common Stock during the four calendar weeks preceding the filing of a Form
144 with respect to such sale. Sales under Rule 144 are also subject to certain
manner of sale provisions and notice requirements and to the availability of
current public information about the Company. Under Rule 144(k), a person who
is not deemed to have been an affiliate of the Company at any time during the
three months preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years (including the holding period of any
prior owner except an affiliate), is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period requirement,
of Rule 144. Any employee, officer or director of or consultant to the Company
who purchased his or her shares pursuant to a written compensatory plan or
contract may be entitled to rely on the resale provisions of Rule 701. Rule 701
permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the holding period, public information, volume
limitation or notice provisions of Rule 144.
The Company has filed a registration statement under the Securities Act
covering a total of 24,397,986 shares of Common Stock subject to outstanding
options under the 1996 Plan, the 1997 Plan, the 1998 Plan and certain non-plan
options and reserved for issuance under the 1998 Plan, the Directors Plan and
the Purchase Plan. Accordingly, shares registered under such registration
statement are available for sale in the open market. Certain holders of shares
of Common Stock are
70
<PAGE>
also entitled to certain rights with respect to registration of such shares of
Common Stock for offer and sale to the public. See "Description of Capital
Stock--Registration Rights."
There can be no assurance that an active public market for the Common Stock
will continue after this offering. Future sales of substantial amounts of
Common Stock (including shares issued upon exercise of outstanding options) in
the public market after this offering could adversely affect market prices
prevailing from time to time and could impair the Company's ability to raise
capital through the sale of its equity securities. As described below, only a
limited number of shares will be available for sale immediately after this
offering due to certain contractual restrictions on resale. Sales of
substantial amounts of Common Stock of the Company in the public market after
the restrictions lapse could adversely affect the prevailing market price and
the ability of the Company to raise equity capital in the future.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Cooley Godward LLP, San Francisco,
California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Shearman & Sterling, Menlo Park,
California.
EXPERTS
The financial statements included in this prospectus have been audited by
PricewaterhouseCoopers LLP, independent accountants. The companies and periods
covered by these audits are indicated in the individual reports of
PricewaterhouseCoopers LLP. Such financial statements have been so included in
reliance on the reports of PricewaterhouseCoopers LLP given on the authority of
said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act
with respect to the shares of Common Stock offered hereby. This prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits thereto. The Company files annual, quarterly and special reports,
proxy statements and other information with the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits thereto.
Statements contained in this prospectus regarding the contents of any contract
or any other document to which reference is made are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. A copy of the Registration
Statement, the exhibits thereto and other information the Company has filed
with the Commission may be inspected without charge at the offices of the
Commission at Judiciary Plaza, 450 Fifth Street, Washington, D.C. 20549, and
copies of all or any part of these documents may be obtained from the Public
Reference Section of the Commission, Washington, D.C. 20549 upon the payment of
the fees prescribed by the Commission. The Commission maintains a website
(http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding registrants, such as the Company, that file
electronically with the Commission.
71
<PAGE>
eBAY INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
eBAY INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheet................................................. F-3
Consolidated Statement of Income........................................... F-4
Consolidated Statement of Stockholders' Equity............................. F-5
Consolidated Statement of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements................................. F-7
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Overview................................................................... F-24
Pro Forma Consolidated Statement of Operations............................. F-25
Notes to Pro Forma Consolidated Financial Information...................... F-26
JUMP INCORPORATED FINANCIAL STATEMENTS
Report of Independent Accountants.......................................... F-27
Balance Sheet.............................................................. F-28
Statement of Operations.................................................... F-29
Statement of Shareholder's Deficit......................................... F-30
Statement of Cash Flows.................................................... F-31
Notes to Financial Statements.............................................. F-32
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
eBay Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of eBay Inc.
and its subsidiary at December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
January 22, 1999, except for Note 11, which is as of April 1, 1999.
F-2
<PAGE>
eBAY INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 3,723 $31,790
Short-term investments......................................... -- 40,401
Accounts receivable, net....................................... 1,024 6,369
Other current assets........................................... 220 4,825
------- -------
Total current assets......................................... 4,967 83,385
Property and equipment, net...................................... 652 7,831
Intangible and other assets, net................................. -- 1,267
------- -------
$ 5,619 $92,483
======= =======
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 252 $ 1,385
Customer advances.............................................. 128 727
Income taxes payable........................................... 169 --
Debt and leases, current....................................... 258 --
Deferred tax liabilities, current.............................. -- 1,682
Other current liabilities...................................... 317 4,244
------- -------
Total current liabilities.................................... 1,124 8,038
Debt and leases, long-term....................................... 305 --
Deferred tax liabilities, long-term.............................. 157 --
------- -------
1,586 8,038
------- -------
Series B Mandatorily Redeemable Convertible
Preferred Stock and Series B warrants........................... 3,018 --
------- -------
Commitments and Contingencies (Notes 6 and 11)
Stockholders' equity:
Preferred Stock, $0.001 par value; no shares and 5,000 shares
authorized, no shares issued or outstanding .................. -- --
Series A Convertible Preferred Stock, $0.001 par value; 1,676
and no shares authorized, 1,676 and no shares issued and
outstanding................................................... 4 --
Common Stock, $0.001 par value; 180,000 and 195,000 shares
authorized, 61,200 and 120,760 shares issued and outstanding.. 61 121
Additional paid-in capital..................................... 1,441 86,265
Notes receivable from stockholders............................. (68) (1,130)
Unearned compensation.......................................... (1,399) (4,139)
Retained earnings.............................................. 976 3,328
------- -------
Total stockholders' equity................................... 1,015 84,445
------- -------
$ 5,619 $92,483
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
eBAY INC.
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December
31,
-----------------------
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
Net revenues........................................... $ 372 $5,744 $47,352
Cost of net revenues................................... 14 746 6,859
------ ------ -------
Gross profit......................................... 358 4,998 40,493
------ ------ -------
Operating expenses:
Sales and marketing.................................. 32 1,730 19,841
Product development.................................. 28 831 4,606
General and administrative........................... 45 950 9,080
Amortization of acquired intangibles................. -- -- 805
------ ------ -------
Total operating expenses........................... 105 3,511 34,332
------ ------ -------
Income from operations................................. 253 1,487 6,161
Interest and other income, net......................... 1 59 908
Interest expense....................................... -- (3) (39)
------ ------ -------
Income before income taxes............................. 254 1,543 7,030
Provision for income taxes............................. (106) (669) (4,632)
------ ------ -------
Net income............................................. $ 148 $ 874 $ 2,398
====== ====== =======
Net income per share:
Basic................................................ $ 0.02 $ 0.04 $ 0.05
====== ====== =======
Weighted average shares--basic....................... 6,375 22,313 49,895
====== ====== =======
Diluted.............................................. $ 0.00 $ 0.01 $ 0.02
====== ====== =======
Weighted average shares--diluted..................... 42,945 82,660 114,590
====== ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
eBAY INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Series A
Convertible
Preferred Notes Total
Stock Common Stock Additional Receivable Stock-
-------------- -------------- Paid-in from Unearned Retained holders'
Shares Amount Shares Amount Capital Stockholders Compensation Earnings Equity
------ ------ ------- ------ ---------- ------------ ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Common Stock
for cash and notes..... -- $ -- 61,200 $ 61 $ 17 $ (68) $ -- $ -- $ 10
Issuance of Preferred
Stock.................. 1,676 4 -- -- -- -- -- -- 4
Net income.............. -- -- -- -- -- -- -- 148 148
------ ----- ------- ---- ------- ------- ------- ------ -------
Balance at December 31,
1996................... 1,676 4 61,200 61 17 (68) -- 148 162
Accretion of Series B
Mandatorily Redeemable
Convertible Preferred
Stock to redemption
value.................. -- -- -- -- -- -- -- (46) (46)
Unearned compensation... -- -- -- -- 1,424 -- (1,424) -- --
Amortization of unearned
compensation........... -- -- -- -- -- -- 25 -- 25
Net income............. -- -- -- -- -- -- -- 874 874
------ ----- ------- ---- ------- ------- ------- ------ -------
Balance at December 31,
1997................... 1,676 4 61,200 61 1,441 (68) (1,399) 976 1,015
Accretion of Series B
Mandatorily Redeemable
Convertible Preferred
Stock to redemption
value.................. -- -- -- -- -- -- -- (46) (46)
Unearned compensation... -- -- -- -- 5,831 -- (5,831) -- --
Amortization of unearned
compensation........... -- -- -- -- -- -- 3,091 -- 3,091
Issuance of Common Stock
for cash and notes..... -- -- 18,940 20 4,569 (1,378) -- -- 3,211
Issuance of Common Stock
for acquisition of Jump
Incorporated........... -- -- 428 -- 2,000 -- -- -- 2,000
Contribution of Common
Stock to charitable
foundation............. -- -- 322 -- 1,215 -- -- -- 1,215
Issuance of Common Stock
for cash in initial
public offering, net of
offering expenses of
$6,168................. -- -- 12,043 12 66,076 -- -- -- 66,088
Conversion of Series A
and B Preferred Stock
to Common Stock in
conjunction with
initial public
offering............... (1,676) (4) 27,827 28 5,133 -- -- -- 5,157
Note repayments......... -- -- -- -- -- 316 -- -- 316
Net income.............. -- -- -- -- -- -- -- 2,398 2,398
------ ----- ------- ---- ------- ------- ------- ------ -------
Balance at December 31,
1998................... -- $ -- 120,760 $121 $86,265 $(1,130) $(4,139) $3,328 $84,445
====== ===== ======= ==== ======= ======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
eBAY INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December
31,
------------------------
1996 1997 1998
----- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 148 $ 874 $ 2,398
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts and authorized
credits.............................................. 18 343 3,323
Depreciation and amortization......................... 2 74 1,688
Amortization of unearned compensation................. -- 25 2,662
Compensation expense associated with purchases of
Common Stock by outside directors.................... -- -- 429
Charitable contribution of Common Stock............... -- -- 1,215
Series B Preferred Stock issued for services.......... -- -- 93
Acquired research and development..................... -- -- 150
Amortization of acquired intangibles.................. -- -- 1,030
Changes in assets and liabilities:
Accounts receivable.................................. (184) (1,201) (8,656)
Other current assets................................. (16) (204) (4,605)
Accounts payable..................................... 23 229 1,118
Customer advances.................................... -- 128 599
Income taxes payable................................. 50 119 (169)
Other current liabilities............................ 17 300 3,587
Deferred tax liabilities............................. 55 102 1,447
----- ------- --------
Net cash provided by operating activities........... 113 789 6,309
----- ------- --------
Cash flows from investing activities:
Purchases of property and equipment.................... (25) (680) (8,858)
Purchases of short-term investments.................... -- -- (40,401)
----- ------- --------
Net cash used in investing activities............... (25) (680) (49,259)
----- ------- --------
Cash flows from financing activities:
Proceeds from Series A Preferred Stock................. 4 -- --
Proceeds from Series B Preferred Stock and Series B
warrants.............................................. -- 2,972 2,000
Proceeds from Common Stock, net........................ 10 -- 69,299
Repayment of stockholder loans......................... -- -- 316
Proceeds from debt issuance............................ 1 545 --
Principal payments on debt and leases.................. -- (6) (598)
----- ------- --------
Net cash provided by financing activities........... 15 3,511 71,017
----- ------- --------
Net increase in cash and cash equivalents............... 103 3,620 28,067
Cash and cash equivalents at beginning of year.......... -- 103 3,723
----- ------- --------
Cash and cash equivalents at end of year................ $ 103 $ 3,723 $ 31,790
===== ======= ========
Supplemental cash flow disclosures:
Cash paid for interest................................. $ -- $ 3 $ 39
Cash paid for income taxes............................. $ 1 $ 452 $ 4,882
Non-cash investing and financing activities:
Property and equipment leases.......................... $ -- $ 23 $ --
Common Stock issued for notes receivable............... $ 68 $ -- $ 1,378
Common Stock issued for acquisition.................... $ -- $ -- $ 2,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--The Company and Summary of Significant Accounting Policies:
The Company
eBay Inc. (the "Company") was incorporated in California in May 1996 and
reincorporated in the state of Delaware in April 1998. The Company operates an
online person-to-person trading community. eBay pioneered online person-to-
person trading by developing a Web-based community in which buyers and sellers
are brought together in an auction format to trade personal items such as
antiques, coins, collectibles, computers, memorabilia, stamps and toys. The
eBay service permits sellers to list items for sale, buyers to bid on items of
interest and all eBay users to browse through listed items in a fully-
automated, topically-arranged service that is available online 24-hours-a-day,
seven-days-a-week.
Reincorporation
As a result of the reincorporation in April 1998, the Company was authorized
to issue 180,000,000 shares of $0.001 par value Common Stock and 6,000,000
shares of $0.001 par value Preferred Stock. The Board of Directors and the
stockholders subsequently amended the number of authorized shares such that the
Company was authorized to issue 195,000,000 shares of $0.001 Common Stock and
5,000,000 shares of $0.001 Preferred Stock. The Board of Directors has the
authority to issue the undesignated Preferred Stock in one or more series and
to fix the rights, preferences, privileges and restrictions thereof.
Initial public offering
On September 24, 1998, the Company completed its initial public offering of
4,025,000 shares of its Common Stock, the net proceeds of which aggregated
approximately $66.1 million. At the closing of the offering, all issued and
outstanding shares of the Company's Convertible Preferred Stock and Mandatorily
Redeemable Convertible Preferred Stock were converted into an aggregate of
27,827,019 shares of Common Stock.
Use of estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Principles of consolidation and basis of presentation
The financial statements as of December 31, 1998 and for the year then ended
are consolidated and include the accounts of the Company and its wholly owned
subsidiary. All significant intercompany balances and transactions have been
eliminated in consolidation. From September 1995 ("Inception") through May
1996, eBay operated as a sole proprietorship. The sole proprietorship
recognized no revenues and incurred no expenses during the period from
Inception to December 31, 1995. The sole proprietorship recognized net revenues
totaling $30,000 and incurred expenses totaling $14,000 during the period from
January 1, 1996 until incorporation in May 1996. The results of operations for
this period have been included in the 1996 financial statements to facilitate
presentation.
F-7
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash, cash equivalents and short-term investments
The Company considers all highly liquid investments purchased with a
maturity of three months or less at the date of acquisition to be cash
equivalents. Both cash equivalents and short-term investments are considered
available-for-sale securities and are carried at amortized cost, which
approximates fair value. The following schedule summarizes the estimated fair
value of the Company's cash, cash equivalents and short-term investments, (in
thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------- -------
<S> <C> <C>
Cash and cash equivalents:
Cash...................................................... $ 676 $ 6,397
Money market funds........................................ 3,047 2,828
Municipal bonds and notes................................. -- 19,555
Corporate securities...................................... -- 3,010
------- -------
$ 3,723 $31,790
======= =======
Short-term investments:
Municipal bonds and notes................................. $ -- $40,401
======= =======
The estimated fair value of short-term investments classified by date of
contractual maturity is as follows, (in thousands):
<CAPTION>
December 31,
---------------
1997 1998
------- -------
<S> <C> <C>
Due within one year or less................................. $ -- $12,287
Due after one year through two years........................ -- 28,114
------- -------
$ -- $40,401
======= =======
</TABLE>
Concentration of credit risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents, short-term
investments and accounts receivable. Cash, cash equivalents and short-term
investments are deposited with high credit, quality financial institutions. The
Company's accounts receivable are derived from revenue earned from customers
located in the U.S. and throughout the world and are denominated in U.S.
dollars. Accounts receivable balances are typically settled through customer
credit cards and, as a result, the majority of accounts receivable are
collected upon processing of credit card transactions. The Company maintains an
allowance for doubtful accounts receivable based upon the expected
collectibility of accounts receivable. During the years ended December 31, 1997
and 1998, no customers accounted for more than 10% of net revenues or net
accounts receivable.
Fair value of financial instruments
The Company's financial instruments, including cash, cash equivalents,
short-term investments, accounts receivable, accounts payable and capital lease
obligations are carried at cost, which approximates their fair value because of
the short-term maturity of these instruments.
F-8
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and equipment
Property and equipment are stated at historical cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the assets, generally five years or less, or the shorter of the
lease term or the estimated useful lives of the assets, if applicable.
Intangible assets
Goodwill and other intangible assets resulting from the acquisition of Jump
Incorporated ("Jump") were estimated by management to be primarily associated
with the acquired customer list, workforce and technological know how. As a
result of the rapid technological changes occurring in the Internet industry
and the intense competition for qualified Internet professionals, goodwill and
other intangible assets are amortized on a straight-line basis over the
estimated periods of benefit, which range from eight to 24 months. See Note 2--
Acquisition.
Impairment of long-lived assets
The Company evaluates the recoverability of long-lived assets in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS"). SFAS No. 121 requires recognition of impairment of long-lived assets
in the event the net book value of such assets exceeds the future undiscounted
cash flows attributable to such assets.
Revenue recognition
Revenues are derived primarily from placement fees charged for the listing
of items for auction and success fees calculated as a percentage of the final
sales transaction value. Revenues related to placement fees are recognized at
the time the item is listed, while those related to success fees are recognized
at the time that the auction is successfully concluded. An auction is
considered successfully concluded when there is at least one bid above the
seller's specified minimum price or reserve price, whichever is higher, at the
end of the auction term, which is generally three to seven days. Provisions for
doubtful accounts and authorized credits to sellers are provided at the time of
revenue recognition based upon the Company's historical experience.
Product development costs
Product development costs include expenses incurred by the Company to
develop, enhance, manage, monitor and operate the Company's website. Product
development costs are expensed as incurred.
Advertising expense
The Company recognizes advertising expenses in accordance with Statement of
Position ("SOP") 93-7 "Reporting on Advertising Costs." As such, the Company
expenses the costs of producing advertisements at the time production occurs,
and expenses the cost of communicating advertising in the period in which the
advertising space or airtime is used. Internet advertising expenses are
recognized based on the terms of the individual agreements, but generally over
the greater of the ratio of the number of impressions delivered over the total
number of contracted impressions, or a straight-line basis over the term of the
contract. Advertising expenses totaled $0, $478,000, and $12.3 million during
the years ended Decemer 31, 1996, 1997 and 1998, respectively.
F-9
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation expense is based on the
difference, if any, on the date of the grant, between the fair value of the
Company's stock and the exercise price. The Company accounts for stock issued
to non-employees in accordance with the provisions of SFAS No. 123 and the
Emerging Issues Task Force Consensus in Issue No. 96-18.
Income taxes
Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets are
based on the provisions of enacted tax law; the effects of future changes in
tax laws or rates are not anticipated. The measurement of deferred tax assets
is reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
Net income per share
The Company computes net income per share in accordance with SFAS No. 128,
"Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under
the provisions of SFAS No. 128 and SAB 98, basic net income per share is
computed by dividing the net income available to common stockholders for the
period by the weighted average number of common shares outstanding during the
period. Diluted net income per share is computed by dividing the net income for
the period by the weighted average number of common and common equivalent
shares outstanding during the period. Common equivalent shares, composed of
unvested restricted Common Stock and incremental common shares issuable upon
the exercise of stock options and warrants and upon conversion of Series A and
Series B Convertible Preferred Stock, are included in diluted net income per
share to the extent such shares are dilutive.
F-10
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth the computation of basic and diluted net
income per share for the periods indicated, (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Numerator:
Net income...................................... $ 148 $ 874 $ 2,398
Accretion of Series B Mandatorily Redeemable
Convertible Preferred Stock to redemption
value.......................................... -- (46) (46)
-------- -------- --------
Net income available to common stockholders..... $ 148 $ 828 $ 2,352
======== ======== ========
Denominator:
Weighted average shares......................... 30,600 61,200 89,473
Weighted average unvested common shares subject
to repurchase agreements....................... (24,225) (38,887) (39,578)
-------- -------- --------
Denominator for basic calculation............... 6,375 22,313 49,895
Weighted average effect of dilutive securities:
Series A Preferred Stock...................... 12,345 15,088 11,037
Series B Preferred Stock...................... -- 6,372 8,054
Series B Preferred Stock warrants............. -- -- 1,098
Unvested common shares subject to
repurchase agreements........................ 24,225 38,887 39,578
Employee stock options........................ -- -- 4,928
-------- -------- --------
Denominator for diluted calculation............. 42,945 82,660 114,590
======== ======== ========
Net income per share:
Basic........................................... $ 0.02 $ 0.04 $ 0.05
======== ======== ========
Diluted......................................... $ 0.00 $ 0.01 $ 0.02
======== ======== ========
</TABLE>
Comprehensive income
Effective January 1, 1998 the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income.
Segment information
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." The
Company identifies its operating segments based on business activities,
management responsibility and geographical location. During the years ended
December 31, 1996, 1997 and 1998, the Company operated in a single business
segment operating an online person-to-person trading community in an auction
format, primarily in the United States. Through December 31, 1998, foreign
operations have not been significant in either revenue or investment in long-
lived assets.
Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform to the current period presentation.
F-11
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent accounting pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
SOP No. 98-1, "Software for Internal Use," which provides guidance on
accounting for the cost of computer software developed or obtained for internal
use. SOP No. 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998. The Company does not expect that the
adoption of SOP No. 98-1 will have a material impact on its consolidated
financial statements.
Note 2--Acquisition:
Effective June 30, 1998, the Company acquired all the outstanding shares of
Jump, which provides a forum where Internet users can buy and sell items in an
online auction format. The acquisition has been accounted for using the
purchase method of accounting and accordingly, the purchase price has been
allocated to the tangible and intangible assets acquired and liabilities
assumed on the basis of their respective fair values on the acquisition date.
The fair value of intangible assets was determined using a combination of
methods, including replacement cost estimates for acquired research and
development and completed technology, a risk-adjusted income approach for the
acquired customer list and the amounts paid for covenants not to compete.
The total purchase price of approximately $2.3 million consisted of 428,544
shares of the Company's Common Stock with an estimated fair value of
approximately $2.0 million and other acquisition related expenses of
approximately $335,000, consisting primarily of payments for non-compete
agreements totaling approximately $208,000 and legal and other professional
fees. Of the total purchase price, approximately $150,000 was allocated to in-
process technology and was immediately charged to operations because such in-
process technology had not reached the stage of technological feasibility at
the acquisition date and had no alternative future use. The remainder of the
purchase price was allocated to net tangible liabilities assumed ($31,000) and
intangible assets, including completed technology ($500,000), customer list
($1.5 million), covenants not to compete ($208,000) and goodwill ($24,000). The
intangible assets are being amortized over their estimated useful lives of
eight to 24 months.
The acquisition has been structured as a tax free exchange of stock,
therefore, the differences between the recognized fair values of the acquired
assets, including tangible assets, and their historical tax bases are not
deductible for tax purposes.
F-12
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following unaudited pro forma consolidated financial information
reflects the results of operations for the years ended December 31, 1997 and
1998, as if the acquisition had occurred on January 1, 1997 and 1998,
respectively, and after giving effect to purchase accounting adjustments. These
pro forma results have been prepared for comparative purposes only and do not
purport to be indicative of what operating results would have been had the
acquisitions actually taken place on January 1, 1997 or 1998, and may not be
indicative of future operating results, (in thousands, except per share
amounts).
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Net revenues............................................... $ 5,755 $47,364
Income (loss) from operations.............................. (655) 5,361
Net income (loss).......................................... (1,199) 1,597
Net income (loss) per share:
Basic.................................................... $ (0.05) $ 0.02
Diluted.................................................. $ (0.05) $ 0.01
Weighted average shares:
Basic.................................................... 22,743 88,787
Diluted.................................................. 22,743 129,491
</TABLE>
Note 3--Balance Sheet Components:
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------ -------
(in thousands)
<S> <C> <C>
Accounts receivable, net:
Accounts receivable....................................... $1,385 $ 9,491
Less: Allowance for doubtful accounts..................... (308) (2,105)
Allowance for authorized credits....................... (53) (1,017)
------ -------
$1,024 $ 6,369
====== =======
Write-offs against the allowance for doubtful accounts were $0 and $562,000
in the years ended December 31, 1997 and 1998, respectively.
<CAPTION>
December 31,
---------------
1997 1998
------ -------
(in thousands)
<S> <C> <C>
Property and equipment, net:
Computer equipment........................................ $ 608 $ 8,897
Furniture and fixtures.................................... 115 585
Leasehold improvements.................................... 5 113
------ -------
728 9,595
Less: Accumulated depreciation and amortization............. (76) (1,764)
------ -------
$ 652 $ 7,831
====== =======
</TABLE>
F-13
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and equipment includes $23,000 and $0 of equipment under capital
leases at December 31, 1997 and 1998, respectively. Accumulated depreciation of
assets under capital leases totaled $7,000 and $0 at December 31, 1997 and
1998, respectively.
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------- -------
(in thousands)
<S> <C> <C>
Intangible assets, net:
Purchased technology...................................... $ -- $ 500
Covenants not to compete.................................. -- 208
Customer list............................................. -- 1,484
Goodwill.................................................. -- 24
------- -------
-- 2,216
Less: Accumulated amortization............................ -- (1,030)
------- -------
$ -- $ 1,186
======= =======
Other current liabilities:
Accrued compensation and related benefits................. $ 68 $ 978
Advertising accruals...................................... -- 1,274
Professional fees......................................... -- 451
Other accruals............................................ 249 1,541
------- -------
$ 317 $ 4,244
======= =======
</TABLE>
Note 4--Related Party Transactions:
Notes receivable from stockholders
At December 31, 1997 the Company held a note receivable from an officer of
the Company totaling $68,000. The note was full recourse, was secured by Common
Stock and bore simple interest at 6% per annum. The principal and interest on
the note was repaid in November 1998. At December 31, 1998, the Company held
notes receivable from employees, officers and a director totaling $1.1 million,
representing amounts owed to the Company from the exercise of stock options.
These full recourse notes are secured by Common Stock and bear interest at a
rate of 8% per annum. Interest is due and payable on December 1st of each year,
and the principal is due on or before December 1, 2002.
Professional services
In connection with the recruitment of its Chief Executive Officer, the
Company engaged the services of an executive search firm affiliated with a
holder of the Company's Series B Mandatorily Redeemable Convertible Preferred
Stock. During 1998, the Company paid fees for services performed of $93,000 and
issued 46,248 shares of Series B Mandatorily Redeemable Convertible Preferred
Stock with a fair value on the date earned of $93,000. The amount paid for the
services and the fair value of the shares are included in general and
administrative expenses in the consolidated statement of income for the year
ended December 31, 1998.
F-14
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5--Debt:
Line of credit
At December 31, 1997 and 1998, the Company had $545,000 and $0,
respectively, outstanding under a line of credit with a financial institution.
The line of credit provides for a revolving line, including an equipment sub-
limit facility, of up to $750,000 and expired on January 5, 1999. Under the
line of credit, the Company was required to comply with certain financial
covenants. The Company was in compliance with all such covenants at December
31, 1997 and 1998.
Note 6--Commitments:
Leases
The Company leases office space and equipment under noncancelable operating
leases with various expiration dates through the year 2004. Rent expense for
the years ended December 31, 1996, 1997, and 1998 totaled $9,000, $223,000 and
$672,000, respectively.
Future minimum lease payments under non-cancelable operating leases,
including lease commitments entered into subsequent to December 31, 1998, are
as follows, (in thousands):
<TABLE>
<CAPTION>
Year ending Operating
December 31, Leases
------------ ---------
<S> <C>
1999............................................................. $ 2,978
2000............................................................. 4,605
2001............................................................. 4,675
2002............................................................. 4,782
2003............................................................. 4,681
Thereafter....................................................... 3,330
-------
Total minimum lease payments................................... $25,051
=======
</TABLE>
Advertising
During 1998, the Company entered into a three-year marketing agreement with
America Online, Inc. ("AOL"). Under the terms of the agreement the Company will
be provided with a specific number of advertising impressions featuring it as
the preferred provider of person-to-person auction services on AOL's service.
In consideration, the Company has committed to pay $12.0 million over the
three-year term of the agreement. The Company is recognizing these fees as
sales and marketing expenses over the greater of the ratio of the number of
impressions delivered over the total number of contracted impressions, or a
straight-line basis over the term of the contract. At December 31, 1998, the
Company had paid $4.0 million to AOL, of which $1.7 million was recognized as
sales and marketing expense. In March 1999, the Company expanded the scope of
its strategic relationship with AOL. Under the amended agreement, eBay will be
given a prominent presence featuring it as the preferred provider of person-to-
person trading services on AOL's proprietary services (both domestic and
international), AOL.com, Digital Cities, ICQ, CompuServe (both domestic and
international) and Netscape. eBay will pay $75 million over the four year term
of the contract. eBay will develop a co-branded version of its service for each
AOL property which will prominently feature each party's brand. AOL will be
entitled to all advertising revenue from the co-branded site.
F-15
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7--Income Taxes:
Income before income taxes was generated entirely by domestic operations
during 1996, 1997 and 1998. The provision for income taxes consists of the
following, (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Current:
Federal.............................................. $ 40 $ 450 $2,309
State and local...................................... 11 117 877
------ ------ ------
51 567 3,186
------ ------ ------
Deferred:
Federal.............................................. 47 87 1,245
State and local...................................... 8 15 201
------ ------ ------
55 102 1,446
------ ------ ------
$ 106 $ 669 $4,632
====== ====== ======
The following is a reconciliation of the difference between the actual
provision for income taxes and the provision computed by applying the federal
statutory rate of 34% to income before income taxes, (in thousands):
<CAPTION>
Year Ended
December 31,
--------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Provision at statutory rate............................ $ 87 $ 525 $2,390
Permanent differences:
Acquisition related expenses......................... -- -- 384
Stock compensation................................... -- -- 1,051
Tax exempt interest income........................... -- -- (175)
Other................................................ -- 12 270
State taxes, net of federal benefit.................... 19 132 712
------ ------ ------
$ 106 $ 669 $4,632
====== ====== ======
</TABLE>
F-16
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences of differences between the carrying amounts of
assets and liabilities and their respective tax bases using enacted tax rates
in effect for the year in which the differences are expected to reverse.
Significant deferred tax assets and liabilities consist of the following, (in
thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Deferred tax assets:
Depreciation......................................... $ -- $ -- $ 61
State income taxes................................... -- -- 43
Amortization......................................... -- -- 17
------ ------ ------
-- -- 121
------ ------ ------
Deferred tax liabilities:
Accruals and reserves not currently deductible....... 54 154 1,724
Depreciation......................................... 1 3 --
------ ------ ------
55 157 1,724
------ ------ ------
Valuation allowance.................................... -- -- --
------ ------ ------
Net deferred tax liabilities........................... $ 55 $ 157 $1,603
====== ====== ======
</TABLE>
Note 8--Preferred Stock and Convertible Preferred Stock:
Preferred Stock
The Company is authorized, subject to limitations prescribed by Delaware
law, to provide for the issuance of Preferred Stock in one or more series, to
establish from time to time the number of shares included within each series,
to fix the rights, preferences and privileges of the shares of each wholly
unissued series and any qualifications, limitations or restrictions thereon,
and to increase or decrease the number of shares of any such series (but not
below the number of shares of such series then outstanding) without any further
vote or action by the stockholders. At December 31, 1998, there were 5,000,000
shares of Preferred Stock authorized for issuance, and no shares issued or
outstanding.
Convertible Preferred Stock
Convertible Preferred Stock prior to the initial public offering at
September 24, 1998 was composed of the following, (in thousands):
<TABLE>
<CAPTION>
Shares
---------------------- Liquidation Redemption
Authorized Outstanding Amount Amount
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Series A....................... 1,676 1,676 $1,000 $ --
Series B....................... 1,415 1,415 6,300 5,093
Undesignated................... 2,909 -- -- --
----- ----- ------ ------
6,000 3,091 $7,300 $5,093
===== ===== ====== ======
</TABLE>
F-17
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On September 24, 1998, the Company completed its initial public offering of
Common Stock. At that time, all issued and outstanding shares of the Company's
Series A and Series B Convertible Preferred Stock were converted into an
aggregate of 27,827,019 shares of Common Stock.
Warrants for Series B Mandatorily Redeemable Convertible Preferred Stock
In connection with the issuance of Series B, the Company issued warrants to
purchase 400,000 additional shares of Series B with an exercise price of $5.00
per share. In May 1998, these warrants were exercised, resulting in the
issuance of 400,000 shares of Series B in exchange for cash proceeds totaling
$2.0 million.
Note 9--Common Stock:
The Company's Certificate of Incorporation, as amended, authorizes the
Company to issue 195,000,000 shares of Common Stock. A portion of the shares
outstanding are subject to repurchase by the Company over a four-year period
from the earlier of the issuance date or employee hire date, as applicable. At
December 31, 1997 and 1998, there were 33,150,000 and 32,212,617 shares,
respectively, subject to repurchase rights at an average price of $0.01 and
$0.04, respectively, per share.
In June 1998, in connection with the appointment of two outside directors,
the Company sold an aggregate of 643,500 shares of Common Stock to two
directors and realized net proceeds of $2.0 million. The Company recognized the
$429,000 excess of the estimated fair value of the stock over the price paid by
the two directors as general and administrative expense in 1998.
At December 31, 1998, the Company had reserved 23,497,986 and 900,000 shares
of Common Stock for future issuance for the exercise of options under the stock
option plans and issuance of shares under the employee stock purchase plan,
respectively.
Note 10--Employee Benefit Plans:
401(k) Savings Plan
The Company has a savings plan that qualifies as a deferred salary
arrangement under Section 401(k) of the Internal Revenue Code (the "401(k)
Plan"). Under the Savings Plan, participating employees may defer a percentage
(not to exceed 25%) of their eligible pretax earnings up to the Internal
Revenue Service's annual contribution limit. All employees on the United States
payroll of the Company age 21 years or older are eligible to participate in the
401(k) Plan. The Company is not required to contribute to the 401(k) Plan but
in 1998 elected to match contributions up to a maximum of $1,500 per employee.
As a result, the Company contributed $97,479, which was expensed in 1998. In
1998, the Company also committed to matching future employee contributions to a
maximum of $1,500 per employee per year.
Stock option plans
In December 1996, the Company's Board of Directors adopted the 1996 Stock
Option Plan (the "1996 Plan"), and in June 1997, adopted the 1997 Stock Option
Plan (the "1997 Plan") (collectively, the "Plans"). The Plans provide for the
granting of stock options to employees and consultants of the Company. Options
granted under the Plans may be either incentive stock options ("ISO") or
nonqualified stock options ("NSO"). ISOs may be granted only to Company
employees (including officers and directors who are also employees). NSOs may
be granted to Company employees and consultants.
F-18
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In July 1998, the Board adopted, and in August 1998 the Company's
stockholders approved, the 1998 Equity Incentive Plan (the "1998 Plan") and
reserved 13,500,000 shares of Common Stock for issuance thereunder. The 1998
Plan authorized the award of options, restricted stock awards and stock bonuses
(each an "Award"). No person will be eligible to receive more than 3,000,000
shares in any calendar year pursuant to Awards under the 1998 Plan other than a
new employee of the Company who will be eligible to receive no more than
6,000,000 shares in the calendar year in which such employee commences
employment. Options granted under the 1998 Plan may be either ISOs or NSOs.
ISOs may be granted only to Company employees (including officers and directors
who are also employees). NSOs may be granted to Company employees, officers,
directors, consultants, independent contractors and advisors of the Company.
Options under the Plans may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date
of grant as determined by the Board of Directors, provided, however, that (i)
the exercise price of an ISO may not be less than 100% of the estimated fair
value of the shares on the date of grant, and (ii) the exercise price of an ISO
granted to a 10% shareholder may not be less than 110% of the estimated fair
value of the shares on the date of grant. Options under the 1996 and 1997 Plans
were exercisable immediately through June 30, 1998, subject to repurchase
rights held by the Company, which lapse over the vesting period, which is
generally four years. Options under the 1998 Plan are not immediately
exercisable and generally vest over a period of four years.
The following table summarizes activity under the Company's stock option
plans for the years ended December 31, 1996, 1997 and 1998, (shares in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1996 1997 1998
--------------- ---------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period.................... -- $ -- 675 $0.01 11,790 $0.02
Granted.................. 675 0.01 11,592 0.02 17,287 2.15
Exercised................ -- -- -- -- (19,477) 0.14
Cancelled................ -- -- (477) 0.01 (354) 1.67
--- ------ -------
Outstanding at end of
period.................... 675 0.01 11,790 0.02 9,246 3.68
=== ====== =======
Options exercisable at end
of period................. 675 11,790 0.02 370 0.03
=== ====== =======
Weighted average fair value
of
options granted during
period.................... 0.01 0.10 2.80
</TABLE>
F-19
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about fixed stock options
outstanding at December 31, 1998, (shares in thousands):
<TABLE>
<CAPTION>
Options Outstanding at Options Exercisable at
December 31, 1998 December 31, 1998
------------------------------------- --------------------------
Weighted
Range of Number of Weighted Average Average Number of Weighted
Exercise Shares Remaining Exercise Shares Average
Prices Outstanding Contractual Life Price Exercisable Exercise Price
-------- ----------- ---------------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.01 -
$ 0.22 1,302 8.8 years $ 0.04 370 $0.03
0.67 -
1.00 943 9.3 0.75 -- --
3.11 -
3.11 821 9.4 3.11 -- --
4.67 -
5.00 6,165 9.6 4.91 -- --
16.85 15 9.8 32.52 -- --
--
----- ---
9,246 9.5 3.68 370 0.03
===== ===
</TABLE>
Fair value disclosures
The Company calculated the minimum fair value of each option grant on the
date of grant using the Black-Scholes option pricing model as prescribed by
SFAS No. 123 using the following assumptions:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rates....................... 6.0% 5.9% 4.9%
Expected lives (in years)...................... 5.0 5.0 3.0
Dividend yield................................. 0% 0% 0%
Expected volatility............................ 0% 0% 80%
</TABLE>
Prior to the Company's initial public offering, the fair value of each
option grant was determined using the minimum value method. Subsequent to the
offering, the fair value was determined using the Black-Scholes model. The
compensation cost associated with the Company's stock-based compensation plans,
determined using the minimum value method prescribed by SFAS No. 123, did not
result in a material difference from the reported net income for the years
ended December 31, 1996 and 1997. The effect of compensation cost on net income
and earnings per share for the year ended December 31, 1998 is as follows, (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1998
------
<S> <C>
Net income:
As reported........................................................ $2,398
Pro forma.......................................................... $1,622
Net income per share--basic:
As reported........................................................ $ 0.05
Pro forma.......................................................... $ 0.03
Net income per share--diluted:
As reported........................................................ $ 0.02
Pro forma.......................................................... $ 0.01
</TABLE>
F-20
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1998 Employee Stock Purchase Plan
In July 1998, the Board adopted, and in August 1998 the Company's
stockholders approved, the 1998 Employee Stock Purchase Plan (the "Purchase
Plan") and reserved 900,000 shares of Common Stock for issuance thereunder. On
each January 1, the aggregate number of shares reserved for issuance under the
Purchase Plan will be increased automatically by the number of shares purchased
under the Purchase Plan in the preceding calendar year. The aggregate number of
shares reserved for issuance under the Purchase Plan shall not exceed 4,500,000
shares. The Purchase Plan became effective on September 24, 1998, the first
business day on which price quotations for the Company's Common Stock were
available on the Nasdaq National Market. Employees are generally eligible to
participate in the Purchase Plan if they are customarily employed by the
Company for more than 20 hours per week and more than five months in a calendar
year and are not (and would not become as a result of being granted an option
under the Purchase Plan) 5% stockholders of the Company. Under the Purchase
Plan, eligible employees may select a rate of payroll deduction between 2% and
10% of their W-2 cash compensation subject to certain maximum purchase
limitations. Each Offering Period has a maximum duration of two years (the
"Offering Period") and consists of four six-month Purchase Periods (each, a
"Purchase Period"), with the exception of the first Offering Period, which
began on September 24, 1998 and will end on April 30, 1999. Offering Periods
and Purchase Periods thereafter will begin on April 1 and November 1. The price
at which the Common Stock is purchased under the Purchase Plan is 85% of the
lesser of the fair market value of the Company's Common Stock on the first day
of the applicable offering period or on the last day of that purchase period.
The Purchase Plan will terminate after a period of ten years unless terminated
earlier as permitted by the Purchase Plan.
1998 Directors Stock Option Plan
In July 1998, the Board adopted, and in August 1998 the Company's
stockholders approved, the Directors Plan and reserved a total of 600,000
shares of the Company's Common Stock for issuance thereunder. Members of the
Board who are not employees of the Company, or any parent, subsidiary or
affiliate of the Company, are eligible to participate in the Directors Plan.
The option grants under the Directors Plan are automatic and nondiscretionary,
and the exercise price of the options must be 100% of the fair market value of
the Common Stock on the date of grant. Each eligible director who first becomes
a member of the Board on or after the effective date of the Registration
Statement of which this Prospectus forms a part (the "Effective Date") will
initially be granted an option to purchase 90,000 shares (an "Initial Grant")
on the date such director first becomes a director. Immediately following each
Annual Meeting of the Company, each eligible director will automatically be
granted an additional option to purchase 15,000 shares if such director has
served continuously as a member of the Board since the date of such director's
Initial Grant or, if such director was ineligible to receive an Initial Grant,
since the Effective Date. In March 1999, the Board amended the Directors Plan
to provide that no such grants would be made to eligible directors at the 1999
Annual Meeting. The Board is considering other changes to the Directors Plan in
light of the proposed changes in the accounting for this type of plan. The term
of such options is ten years, provided that they will terminate seven months
following the date the director ceases to be a director or a consultant of the
Company (twelve months if the termination is due to death or disability). All
options granted under the Directors Plan will vest as to 25% of the shares on
the first anniversary of the date of grant and as to 2.08% of the shares each
month thereafter, provided the optionee continues as a member of the Board or
as a consultant to the Company.
Unearned stock-based compensation
In connection with certain stock option grants during the years ended
December 31, 1997 and 1998, the Company recognized unearned compensation
totaling $1.4 million and $5.4 million,
F-21
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
respectively, which is being amortized over the four-year vesting periods of
the related options. Amortization expense recognized during the years ended
December 31, 1997 and 1998 totaled approximately $25,000 and $2.6 million,
respectively.
Note 11--Subsequent Events:
Stock split
During January 1999, the Company's Board of Directors approved a three-for-
one Common Stock split. Shareholders of record on February 9, 1999 received two
additional shares for every one share held on March 1, 1999. All share and per
share amounts in these consolidated financial statements and notes thereto for
all periods presented have been retroactively adjusted to reflect the stock
split.
Australian joint venture
On February 17, 1999, eBay entered into a joint venture agreement with an
Australian company, PBL Online PTY Limited (PBLO), for the formation of a
company which will provide on-line trading services to Internet users based
primarily in Australia and New Zealand (combined, the "Territory"). PBLO is
part of the Publishing & Broadcasting Limited group of companies which provide
a wide range of media services in the Territory, including magazine publishing,
television broadcasting, on-line services, broadcast programs and electronic
commerce services. The joint venture company will be based in Australia and
will combine eBay's technical and software experience, market knowledge and
reputation with PBLO's publishing, distribution, advertising and marketing
channels. Operations of the joint venture company are expected to commence
during 1999.
Contractual arrangements
On March 1, 1999, eBay commenced an insurance program for eBay users. The
program provides coverage on qualified transactions involving fraud that occurs
when a winning bidder of an auction sends money to a seller, in good faith, and
does not receive the item or does not receive the item as described in the eBay
auction. To qualify for benefits under the program, the winning bidder must be
an eBay buyer in "good standing" and the seller must be "registered" with a
Feedback Rating of zero (0) or above. eBay has entered into a contract with
Lloyd's of London to underwrite the program for an initial period of six months
at a minimum cost of $525,000.
On March 2, 1999, eBay entered into a Co-branding and Advertising Agreement
(the "Agreement") with i-Escrow, Inc. ("i-Escrow"). Under the terms of the
Agreement, i-Escrow will develop co-branded website pages which offer third
party escrow services to eBay users. Upon request by an eBay user, i-Escrow
will escrow a buyer's money until the buyer confirms that the applicable item
was physically delivered, at which time the buyer's money will be released to
the seller. eBay is committed to actively promoting these services to sellers
and high bidders upon successful completion of the auction, but does not have
control over, or ownership of, the escrowed funds. The co-branded website pages
are expected to be launched in 1999.
In March 1999, the Company expanded the scope of its strategic relationship
with AOL. Under their amended agreement, eBay will be given a prominent
presence featuring it as the preferred provider of person-to-person trading
services on AOL's proprietary services (both domestic and international),
AOL.com, Digital Cities, ICQ, CompuServe (both domestic and international) and
F-22
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Netscape. eBay will pay $75 million over the four-year term of the contract.
eBay will develop a co-branded version of its service for each AOL property
which will prominently feature each party's brand. AOL will be entitled to all
advertising revenue from the co-branded site.
Contingencies
On March 23, 1999, the Company was sued by Network Engineering Software,
Inc. in the U.S. District Court for the Northern District of California for the
Company's alleged willful and deliberate violation of a patent. The suit seeks
unspecified monetary damages as well as an injunction against the Company's
operations. It also seeks treble damages and attorneys' fees and costs. The
Company believes that it has meritorious defenses against this suit and intends
to vigorously defend itself. The Company could be forced to incur material
expenses during this defense and in the event it were to lose this suit, its
business would be harmed.
F-23
<PAGE>
eBAY INC.
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Overview
Effective June 30, 1998, eBay acquired all the outstanding shares of Jump
Incorporated ("Jump"), which provides a forum where Internet users can buy and
sell items in an online auction format. The acquisition was accounted for using
the purchase method of accounting and accordingly, the purchase price was
allocated to the tangible and intangible assets acquired and liabilities
assumed on the basis of their fair values on the acquisition date. The fair
value of intangible assets was determined using a combination of methods,
including replacement cost estimates for acquired research and development and
completed technology, a risk-adjusted income approach for the acquired customer
list and the amounts paid for covenants not to compete.
The total purchase price of approximately $2.3 million consisted of 428,544
shares of eBay's Common Stock with an estimated fair value of approximately
$2.0 million and other acquisition related expenses of approximately $335,000,
consisting primarily of payments for non-compete agreements totaling
approximately $208,000 and legal and other professional fees. Of the total
purchase price, approximately $150,000 was allocated to in-process technology
and immediately charged to operations because such in-process technology had
not reached the stage of technological feasibility at the acquisition date and
had no alternative future use. The remainder of the purchase price was
allocated to net tangible liabilities assumed ($31,000) and intangible assets,
including completed technology ($500,000), customer list ($1.5 million),
covenants not to compete ($208,000) and goodwill ($24,000). The acquired
intangible assets will be amortized over their estimated useful lives of eight
to 24 months.
The acquisition has been structured as a tax free exchange of stock,
therefore, the differences between the recognized fair values of acquired
assets, including tangible assets, and their historical tax bases are not
deductible for tax purposes.
The following unaudited pro forma consolidated financial statement of
operations gives effect to this acquisition as if it had occurred on January 1,
1998, by consolidating the results of operations of Jump for the six months
ended June 30, 1998 with the results of operations of eBay, which include the
results of Jump after June 30, 1998, for the year ended December 31, 1998.
The unaudited pro forma consolidated statement of operations are not
necessarily indicative of the operating results that would have been achieved
had the transactions been in effect as of January 1, 1998, and should not be
construed as being representative of future operating results.
The historical financial statements of eBay and Jump are included elsewhere
in this Prospectus and the unaudited pro forma consolidated financial
information presented herein should be read in conjunction with those financial
statements and related notes.
F-24
<PAGE>
eBAY, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
------------------------------------------
eBay Jump Pro
Inc. Incorporated Adjustments Forma
------- ------------ ----------- -------
<S> <C> <C> <C> <C>
Net revenues....................... $47,352 $ 12 $ -- $47,364
Cost of net revenues............... 6,859 3 125 (A) 6,987
------- ---- ----- -------
Gross profit..................... 40,493 9 (125) 40,377
------- ---- ----- -------
Operating expenses:
Sales and marketing.............. 19,841 -- -- 19,841
Product development.............. 4,606 8 -- 4,614
General and administrative....... 9,080 21 -- 9,101
Amortization of acquired
intangibles..................... 805 -- 505 (B) 1,310
------- ---- ----- -------
Total operating expenses....... 34,332 29 505 34,866
------- ---- ----- -------
Income from operations............. 6,161 (20) (630) 5,511
------- ---- ----- -------
Interest and other income, net..... 908 -- -- 908
Interest expense................... (39) (1) -- (40)
------- ---- ----- -------
Income (loss) before income taxes.. 7,030 (21) (630) 6,379
------- ---- ----- -------
Provision for income taxes......... (4,632) -- -- (4,632)
------- ---- ----- -------
Net income (loss).................. $ 2,398 $(21) $(630) $ 1,747
======= ==== ===== =======
Pro forma net income per share (C):
Basic............................ $ 0.02
=======
Weighted average shares--basic... 88,787
=======
Diluted.......................... $ 0.01
=======
Weighted average shares--
diluted......................... 129,491
=======
</TABLE>
See accompanying notes to Pro Forma Consolidated Financial Information
F-25
<PAGE>
eBAY INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(Unaudited)
The following adjustments were applied to eBay's historical financial
statements and those of Jump to arrive at the pro forma consolidated financial
information. The pro forma consolidated financial information excludes the non-
recurring charge for acquired in-process technology associated with the
acquisition, totaling $150,000.
(A) To record amortization of acquired completed technology totaling
$500,000 over the estimated period of benefit of eight months.
(B) To record amortization of: acquired customer list totaling $1.5
million over the estimated period of benefit of 15 months, covenants not to
compete totaling $208,000 over the estimated period of benefit of 24
months, and acquired goodwill totaling $24,000 over the estimated period of
benefit of 15 months.
(C) Pro forma basic net income per share for the year ended December 31,
1998 was computed using the weighted average number of common shares
outstanding. Pro forma diluted net income per share was computed using the
pro forma weighted average number of common and common equivalent shares
outstanding. Pro forma common equivalent shares, composed of unvested
restricted Common Stock and incremental common shares issuable upon the
exercise of stock options and warrants, are included in diluted net income
per share to the extent such shares are dilutive. Differences between
historical weighted average shares outstanding and pro forma weighted
average shares outstanding used to compute net income per share result from
the inclusion of shares issued in conjunction with the acquisition as if
such shares were outstanding from January 1, 1998.
F-26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Jump Incorporated
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Jump Incorporated at December 31,
1997, and the results of its operations and its cash flows for the periods then
ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Jump Incorporated's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
July 10, 1998
F-27
<PAGE>
JUMP INCORPORATED
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................. $ 1,112 $ 1,200
Accounts receivable.................................. 5,344 12,243
-------- --------
Total current assets............................... 6,456 13,443
Property and equipment, net............................ 8,997 8,668
-------- --------
$ 15,453 $ 22,111
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable..................................... $ 3,475 $ 18,148
Accrued interest on notes payable to shareholders.... 435 1,093
Notes payable to shareholders........................ 21,786 34,128
-------- --------
25,696 53,369
-------- --------
Shareholders' deficit:
Common Stock, no par value; 500 shares authorized;
300 issued and outstanding 6,900 6,900
Accumulated deficit.................................. (17,143) (38,158)
-------- --------
Total shareholders' deficit........................ (10,243) (31,258)
-------- --------
$ 15,453 $ 22,111
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
JUMP INCORPORATED
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June
1997 30, 1998
------------ -----------
(Unaudited)
<S> <C> <C>
Revenues:
Advertising.......................................... $ -- $ 12,243
Consulting services.................................. 11,344 --
-------- --------
Total revenues..................................... 11,344 12,243
-------- --------
Cost of revenues:
Advertising.......................................... -- 3,000
Consulting services.................................. 8,766 --
-------- --------
Total cost of revenues............................. 8,766 3,000
-------- --------
Gross profit........................................... 2,578 9,243
Operating expenses:
General and administrative........................... 7,314 21,223
Product development.................................. 10,410 8,377
Sales and marketing.................................. 1,562 --
-------- --------
Total operating expenses........................... 19,286 29,600
-------- --------
Loss from operations................................... (16,708) (20,357)
Interest expense....................................... (435) (658)
-------- --------
Net loss............................................... $(17,143) $(21,015)
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
JUMP INCORPORATED
STATEMENT OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock
------------- Accumulated
Shares Amount Deficit Total
------ ------ ----------- --------
<S> <C> <C> <C> <C>
Issuance of Common Stock................... 300 $6,900 $ -- $ 6,900
Net loss................................... -- -- (17,143) (17,143)
--- ------ -------- --------
Balance at December 31, 1997............... 300 6,900 (17,143) (10,243)
Net loss (Unaudited)....................... -- -- (21,015) (21,015)
--- ------ -------- --------
Balance at June 30, 1998 (Unaudited)....... 300 $6,900 $(38,158) $(31,258)
=== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
JUMP INCORPORATED
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, June 30,
1997 1998
------------ -----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(17,143) $(21,015)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 1,365 1,896
Changes in current assets and liabilities:
Accounts receivable.............................. (5,344) (6,899)
Accounts payable................................. 3,475 14,673
Accrued interest on notes payable to
shareholders.................................... 435 658
-------- --------
Net cash used in operating activities.......... (17,212) (10,687)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment.................. (10,362) (1,567)
-------- --------
Net cash used in investing activities.......... (10,362) (1,567)
-------- --------
Cash flows from financing activities:
Proceeds for issuance of Common Stock............... 6,900 --
Proceeds from notes payable to shareholders......... 21,786 12,342
-------- --------
Net cash provided by financing activities...... 28,686 12,342
-------- --------
Net increase in cash.................................. 1,112 88
Cash at beginning of period........................... -- 1,112
-------- --------
Cash at end of period................................. $ 1,112 $ 1,200
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
JUMP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
Note 1--The Company and Summary of Significant Accounting Policies:
The Company
Jump Incorporated ("Jump") was incorporated in Ohio in October 1996. Jump
provides a forum where Internet users can buy and sell items in an online
auction format.
For the period from inception (October 1996) through December 31, 1996, Jump
had no revenues and incurred expenses of less than $2,000. The results of
operations for this period have been included in the 1997 financial statements
to facilitate presentation.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Concentration of credit risk
Financial instruments that potentially subject Jump to a concentration of
credit risk consist of cash and accounts receivable. Cash is deposited with
high credit quality financial institutions. Jump's accounts receivable are
derived from revenue earned from customers located in the U.S. and are
denominated in U.S. dollars.
Jump had a single customer for the year ended December 31, 1997 that
accounted for all of the consulting revenue and accounts receivable. Jump also
had a single customer for the six months ended June 30, 1998 (unaudited) that
accounted for all of the advertising revenue and accounts receivable.
Fair value of financial instruments
Jump's financial instruments, including cash, accounts receivable, accounts
payable and accrued interest to shareholders are carried at cost, which
approximates their fair value because of the short-term maturity of these
instruments.
Property and equipment
Property and equipment are stated at historical cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, generally three years.
Product development cost
Product development costs include expenses incurred by Jump to develop,
enhance, manage, monitor and operate its Web site. Product development costs
are expensed as incurred.
Revenue recognition
Advertising revenue is derived from the sale of advertising space on Jump's
website. Advertising revenue is recognized over the period the advertisement is
displayed.
F-32
<PAGE>
JUMP INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
Consulting revenue was derived from a single time and materials agreement
and was recognized and billed as services were provided.
Income taxes
Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in Jump's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets are based on
provisions of the enacted tax law; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced,
if necessary, by the amount of any tax benefits that, based on available
evidence, are not expected to be realized.
Unaudited interim results
The accompanying interim financial statements as of June 30, 1998, and for
the six months ended June 30, 1998, are unaudited. The unaudited interim
financial statements have been prepared on the same basis as the annual
financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the Company's financial position, results of operations and its
cash flows as of June 30, 1998 and for the six months ended June 30, 1998. The
financial data and other information disclosed in these notes to financial
statements related to these periods are unaudited. The results for the six
months ended June 30, 1998 are not necessarily indicative of the results to be
expected for the year ending December 31, 1998.
Comprehensive income
Effective January 1, 1998, Jump adopted the provisions of Statement of
Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting comprehensive income
and its components in financial statements. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from nonowner
sources. Through June 30, 1998 (unaudited), Jump had not had any transactions
that were required to be reported in comprehensive income.
Recent accounting pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. The disclosures prescribed by SFAS No. 131 will be
effective for the year ending December 31, 1998. Jump has determined that it
does not have any separately reportable business segments as of June 30, 1998.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1, "Software for Internal Use," which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP No. 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. Jump does not expect that
the adoption of SOP No. 98-1 will have a material impact on its consolidated
financial statements.
F-33
<PAGE>
JUMP INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 2--Balance Sheet Components:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ -----------
(Unaudited)
<S> <C> <C>
Property and equipment,
net:
Computer equipment...... $ 10,362 $11,929
Less: Accumulated
depreciation and
amortization........... (1,365) (3,261)
-------- -------
$ 8,997 $ 8,668
======== =======
</TABLE>
There were no allowances for doubtful accounts at December 31, 1997 or June
30, 1998 (unaudited).
Note 3--Income Taxes:
No deferred provision or benefit for income taxes has been recorded as Jump
is in a net deferred tax asset position as a result of net operating losses for
which a full valuation has been provided as management believes that it is more
likely than not, based on available evidence, that the deferred tax assets will
not be realized.
At June 30, 1998, Jump has federal net operating loss carryforwards of
approximately $16,000, which expire in 2012. The income tax benefit from the
utilization of net operating loss carryforwards may be limited in certain
circumstances including, but not limited to, cumulative stock ownership changes
of more than 50% over a three year period.
Note 4--Borrowings:
Notes payable
At December 31, 1997 and June 30, 1998, notes payable consists of amounts
payable to shareholders of Jump totaling $21,786 and $34,128 (unaudited). The
notes are payable upon demand by the holders and bear simple interest from 5.6%
to 6.2% per annum.
Note 5--Acquisition by eBay Inc.
On June 30, 1998, eBay Inc. acquired all of Jump's outstanding shares of
Common Stock, at which time Jump became a wholly owned subsidiary of eBay Inc.
F-34
<PAGE>
UNDERWRITING
The Company, the selling stockholders and the underwriters for the offering
(the "Underwriters") named below have entered into an underwriting agreement
with respect to the shares being offered. Subject to certain conditions, each
Underwriter has severally agreed to purchase the number of shares indicated in
the following table. Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated,
BancBoston Robertson Stephens Inc., BT Alex. Brown Incorporated and Donaldson,
Lufkin & Jenrette Securities Corporation are the representatives of the
Underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Goldman, Sachs & Co................................................ 1,767,500
Morgan Stanley & Co. Incorporated.................................. 1,767,500
BancBoston Robertson Stephens Inc.................................. 505,000
BT Alex. Brown Incorporated........................................ 505,000
Donaldson, Lufkin & Jenrette Securities Corporation................ 505,000
Dain Rauscher Wessels,
a division of Dain Rauscher Incorporated.......................... 80,000
Hambrecht & Quist LLC.............................................. 150,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................. 150,000
NationsBanc Montgomery Securities LLC.............................. 150,000
Pacific Crest Securities........................................... 80,000
PaineWebber Incorporated........................................... 150,000
Prudential Securities Incorporated................................. 150,000
Salomon Smith Barney Inc........................................... 150,000
Volpe Brown Whelan & Company, LLC.................................. 80,000
Warburg Dillon Read LLC............................................ 150,000
Thomas Weisel Partners LLC......................................... 80,000
Wit Capital Corporation............................................ 80,000
---------
Total............................................................ 6,500,000
=========
</TABLE>
If the Underwriters sell more shares than the total number set forth in the
table above, the Underwriters have an option to buy up to an additional 975,000
shares from the selling stockholders to cover such sales. They may exercise
that option for 30 days. If any shares are purchased pursuant to this option,
the Underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the Underwriters by the selling stockholders. Such
amounts are shown assuming both no exercise and full exercise of the
Underwriters' option to purchase additional shares.
<TABLE>
<CAPTION>
Paid by the Selling Stockholders No Exercise Full Exercise
-------------------------------- ----------- -------------
<S> <C> <C>
Per Share.......................................... $ 5.95 $ 5.95
Total.............................................. $13,387,500 $19,188,750
</TABLE>
Shares sold by the Underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus and will
be eligible for trading on the Nasdaq National Market. Any shares sold by the
Underwriters to securities dealers may be sold at a discount of up to $3.57 per
share from the initial price to public. Any such securities dealers may resell
any shares purchased from the Underwriters to certain other brokers or dealers
at a discount of up to $0.10 per share from the initial price to public. If all
the shares are not sold at the initial price to public, the representatives may
change the offering price and the other selling terms.
U-1
<PAGE>
The Company and the selling stockholders have agreed with the Underwriters
not to dispose of or hedge any of their Common Stock or securities convertible
into or exchangeable for shares of Common Stock during the period from the date
of this prospectus continuing through the date 90 days after the date of this
prospectus, except with the prior written consent of the representatives. This
agreement does not apply to any existing employee benefit plans. See "Shares
Available for Future Sale" for a discussion of certain transfer restrictions.
In connection with the offering, the Underwriters may purchase and sell
shares of Common Stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the Underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the Common
Stock while the offering is in progress.
The Underwriters also may impose a penalty bid. This occurs when a
particular Underwriter repays to the Underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such Underwriter in stabilizing or short covering
transactions.
These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the Common Stock. As a result, the price of the
Common Stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
Underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
In connection with this offering, certain Underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in the Common Stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended, during the business day prior to
the pricing of the offering before the commencement of offers or sales of the
Common Stock. Passive market makers must comply with applicable volume and
price limitations and must be identified as such. In general, a passive market
maker must display its bid at a price not in excess of the highest independent
bid of such security; if all independent bids are lowered below the passive
market makers' bid, however, such bid must then be lowered when certain
purchase limits are exceeded.
The Company will pay the expenses of the Offering on behalf of the selling
stockholders, excluding underwriting discounts and commissions. The expenses of
the Offering are estimated to be approximately $1,000,000.
The Company and the selling stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act.
U-2
<PAGE>
DESCRIPTION OF ARTWORK:
[Inside back cover includes screen shots of the eBay home page as well as eBay's
Web pages for several categories of items sold on eBay--antiques, toys and
books. This page also includes pictures of sample items available for auction
by eBay users.]
At the top of the page is the following text:
Search less. Find more.
At the bottom of the page is the following text:
eBay
The world's personal trading community.
<PAGE>
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No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is an offer to sell only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 21
Price Range of Common Stock ............................................. 21
Dividend Policy.......................................................... 21
Capitalization........................................................... 22
Selected Consolidated Financial Data..................................... 23
Selected Pro Forma Consolidated Financial Data........................... 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 36
Management............................................................... 52
Certain Related Party Transactions....................................... 61
Principal and Selling Stockholders....................................... 64
Description of Capital Stock............................................. 67
Shares Eligible for Future Sale.......................................... 70
Legal Matters............................................................ 71
Experts.................................................................. 71
Additional Information................................................... 71
Index to Consolidated Financial Statements............................... F-1
Underwriting............................................................. U-1
</TABLE>
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6,500,000 Shares
eBay Inc.
Common Stock
-------------------
[LOGO OF eBAY INC. APPEARS HERE]
-------------------
Goldman, Sachs & Co.
Morgan Stanley Dean Witter
BancBoston Robertson Stephens
BT Alex. Brown
Donaldson, Lufkin & Jenrette
Representatives of the Underwriters
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